UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 30, 2022
or
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______to ______.
Commission file number: 000-49885
Kirkland’s, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
62-1287151
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
5310 Maryland Way
Brentwood, Tennessee
37027
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (615) 872-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
KIRK
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 12,754,368 shares outstanding as of August 23, 2022.
Table of Contents
KIRKLAND’S, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of July 30, 2022, January 29, 2022 and July 31, 2021
Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and 26-week periods ended July 30, 2022 and July 31, 2021
4
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the 26-week periods ended July 30, 2022 and July 31, 2021
5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26-week periods ended July 30, 2022 and July 31, 2021
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
Item 4.
Controls and Procedures
21
PART II
OTHER INFORMATION
22
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
SIGNATURES
23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
July 30,
January 29,
July 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
10,330
25,003
45,248
Inventories, net
141,702
114,029
92,017
Prepaid expenses and other current assets
7,273
10,537
8,779
Total current assets
159,305
149,569
146,044
Property and equipment:
Equipment
19,953
20,043
20,367
Furniture and fixtures
68,653
69,823
71,584
Leasehold improvements
106,109
106,065
107,993
Computer software and hardware
78,886
77,311
80,647
Projects in progress
3,835
3,366
2,666
Property and equipment, gross
277,436
276,608
283,257
Accumulated depreciation
(231,502
)
(226,611
(226,925
Property and equipment, net
45,934
49,997
56,332
Operating lease right-of-use assets
140,310
124,684
136,381
Other assets
7,891
6,939
6,368
Total assets
353,440
331,189
345,125
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
61,569
62,535
50,890
Accrued expenses
27,636
30,811
30,895
Operating lease liabilities
40,801
41,268
42,772
Total current liabilities
130,006
134,614
124,557
123,426
111,021
129,985
Revolving line of credit
55,000
—
Other liabilities
4,897
4,428
5,981
Total liabilities
313,329
250,063
260,523
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 30, 2022, January 29, 2022, and July 31, 2021, respectively
Common stock, no par value; 100,000,000 shares authorized; 12,754,368; 12,631,347; and 13,805,130 shares issued and outstanding at July 30, 2022, January 29, 2022, and July 31, 2021, respectively
174,654
175,856
175,090
Accumulated deficit
(134,543
(94,730
(90,488
Total shareholders’ equity
40,111
81,126
84,602
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
13-Week Period Ended
26-Week Period Ended
Net sales
102,101
114,790
205,386
238,359
Cost of sales
83,576
75,092
158,569
158,406
Gross profit
18,525
39,698
46,817
79,953
Operating expenses:
Compensation and benefits
21,507
21,664
42,399
40,777
Other operating expenses
17,222
16,181
34,020
33,656
Depreciation (exclusive of depreciation included in cost of sales)
1,596
1,630
3,293
3,243
Total operating expenses
40,325
39,475
79,712
77,676
Operating (loss) income
(21,800
223
(32,895
2,277
Interest expense
366
76
522
161
Other income
(83
(75
(155
(Loss) income before income taxes
(22,083
222
(33,262
2,271
Income tax expense (benefit)
3,622
(404
298
(74
Net (loss) income
(25,705
626
(33,560
2,345
(Loss) earnings per share:
Basic
(2.02
0.04
(2.65
0.16
Diluted
0.15
Weighted average shares outstanding:
12,740
14,163
12,653
14,229
15,161
15,298
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Accumulated
TotalShareholders’
Shares
Amount
Deficit
Equity
Balance at January 29, 2022
12,631,347
Exercise of stock options
2,705
16
Restricted stock issued
797,849
Net share settlement of stock options and restricted stock units
(224,320
(2,375
Stock-based compensation expense
548
Repurchase and retirement of common stock
(479,966
(6,253
Net loss
(7,855
Balance at April 30, 2022
12,727,615
174,045
(108,838
65,207
28,574
Net share settlement of restricted stock units
(1,821
(8
617
Balance at July 30, 2022
12,754,368
Balance at January 30, 2021
14,292,250
174,391
(79,469
94,922
10,669
52
30,087
(11,339
(257
232
(47,350
(1,356
Net income
1,719
Balance at May 1, 2021
14,274,317
174,418
(79,106
95,312
20,168
94
79,775
(7,582
(73
651
(561,548
(12,008
Net Income
Balance at July 31, 2021
13,805,130
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization of property and equipment
8,837
10,486
Amortization of debt issue costs
46
Asset impairment
228
310
Loss on disposal of property and equipment
183
1,165
883
Changes in assets and liabilities:
(27,673
(29,934
3,489
111
(1,165
(4,619
(1,264
(4,648
Income taxes receivable
(2,136
(2,523
Operating lease assets and liabilities
(3,840
(9,837
Other assets and liabilities
(377
(779
Net cash used in operating activities
(56,067
(38,154
Cash flows from investing activities:
Proceeds from sale of property and equipment
33
15
Capital expenditures
(5,019
(3,402
Net cash used in investing activities
(4,986
(3,387
Cash flows from financing activities:
Borrowings on revolving line of credit
Cash used in net share settlement of stock options and restricted stock units
(2,383
(330
Proceeds received from employee stock option exercises
146
(13,364
Net cash provided by (used in) financing activities
46,380
(13,548
Cash and cash equivalents:
Net decrease
(14,673
(55,089
Beginning of the period
100,337
End of the period
Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment
1,502
732
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – Description of Business and Basis of Presentation
Nature of Business — Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating 356 stores in 35 states as of July 30, 2022, as well as an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand.
Principles of consolidation — The condensed consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries, Kirkland’s Stores, Inc., Kirkland’s DC, Inc., and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.
Basis of presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and pursuant to the reporting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 25, 2022.
Macroeconomic conditions — Economic disruption, inflation, uncertainty, volatility and the COVID-19 pandemic have affected the Company’s business operations. As a result, if these conditions persist and/or worsen, the Company’s accounting estimates and assumptions could be impacted in subsequent periods, and it is reasonably possible such changes could be significant.
Seasonality — The results of the Company’s operations for the 13-week and 26-week periods ended July 30, 2022 are not indicative of the results to be expected for any other interim period or for the entire fiscal year due to seasonality factors.
Fiscal year — The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. Accordingly, fiscal 2022 represents the 52 weeks ending on January 28, 2023 and fiscal 2021 represents the 52 weeks ended on January 29, 2022.
Use of estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end.
Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments on long-lived assets, inventory reserves, self-insurance reserves and deferred tax asset valuation allowances.
Note 2 – Revenue Recognition
Net sales — Net sales includes the sale of merchandise, net of returns, shipping revenue, gift card breakage revenue and revenue earned from our private label credit card program and excludes sales taxes.
Sales returns reserve — The Company reduces net sales and estimates a liability for sales returns based on historical return trends, and the Company believes that its estimate for sales returns is a reasonably accurate reflection of future returns associated with past sales. However, as with any estimate, refund activity may vary from estimated amounts. The Company had a liability of approximately $1.4 million, $1.4 million and $1.5 million reserved for sales returns at July 30, 2022, January 29, 2022 and July 31, 2021, respectively, included in accrued expenses on the condensed consolidated balance sheets. The related sales return reserve products recovery asset included in prepaid expenses and other current assets on the condensed consolidated balance sheets was approximately $742,000, $697,000 and $666,000 at July 30, 2022, January 29, 2022, and July 31, 2021, respectively.
Deferred e-commerce revenue —The Company recognizes revenue at the time of sale of merchandise to customers in its stores. E-commerce revenue is recorded at the estimated time of delivery to the customer. If the Company receives payment before completion of its customer obligations, the revenue is deferred until the customer takes possession of the merchandise and the sale is complete. Deferred revenue related to e-commerce orders that have been shipped but not estimated to be received by customers included in accrued expenses on the condensed consolidated balance sheets was approximately $1.2 million, $1.0 million and $1.0 million at July 30, 2022,
January 29, 2022 and July 31, 2021, respectively. The related contract assets, reflected in inventory on the condensed consolidated balance sheets, totaled approximately $656,000, $518,000 and $448,000 at July 30, 2022, January 29, 2022 and July 31, 2021, respectively.
Gift cards — Gift card sales are recognized as revenue when tendered for payment. While the Company honors all gift cards presented for payment, the Company determines the likelihood of redemption to be remote for certain gift card balances due to long periods of inactivity. The Company uses the redemption recognition method to account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In these circumstances, to the extent the Company determines there is no requirement for remitting unredeemed card balances to government agencies under unclaimed property laws, such amounts are recognized in the condensed consolidated statements of operations as a component of net sales.
The table below sets forth selected gift card liability information (in thousands) for the periods indicated:
July 30, 2022
January 29, 2022
July 31, 2021
Gift card liability, net of estimated breakage (included in accrued expenses)
13,981
14,761
12,802
The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:
Gift card breakage revenue (included in net sales)
191
195
393
411
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period
1,572
1,411
3,157
3,357
Customer loyalty program — The Company has a loyalty program called the K-club that allows members to receive points based on qualifying purchases that are converted into certificates that may be redeemed on future purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer under ASC 606 Revenue from Contracts with Customers. The related loyalty program deferred revenue included in accrued expenses on the condensed consolidated balance sheets was approximately $1.0 million, $1.3 million and $825,000 at July 30, 2022, January 29, 2022 and July 31, 2021, respectively.
Note 3 – Income Taxes
For the 13-week periods ended July 30, 2022 and July 31, 2021, the Company recorded income tax expense of approximately $3.6 million, or 16.4% of the loss before income taxes, and a tax benefit of approximately $404,000, or 182.0% of income before income taxes, respectively. The change in income taxes for the 13-week period ended July 30, 2022, compared to the prior year period, was primarily due to the federal net operating loss carry-forward now projected by the Company for fiscal 2022, which is fully offset by a valuation allowance. This change in estimate caused the reversal of the tax benefit recorded in the first quarter of fiscal 2022.
For the 26-week periods ended July 30, 2022 and July 31, 2021, the Company recorded income tax expense of $298,000, or 0.9% of the loss before income taxes, and an income tax benefit of $74,000, or 3.3% of income before income taxes, respectively. Income taxes for the 26-week periods ended July 30, 2022 and July 31, 2021 were minimal due to valuation allowances against deferred tax assets.
8
Income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate to (loss) income before income taxes. A reconciliation of income tax expense (benefit) at the statutory federal income tax rate to the amount provided is as follows (in thousands):
Tax at federal statutory rate
(4,637
47
(6,985
477
State income taxes, net of federal benefit
(12
1
(466
66
Tax credits
(181
(2
(126
(6
Executive compensation
205
116
Stock based compensation programs
117
(415
(553
(517
Valuation allowance
8,092
(36
8,307
(110
Other
38
The Company recognizes deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities, including net operating loss carry forwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more than the net amount recorded. Any change in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such determination is made. As of July 30, 2022 and July 31, 2021, the Company recorded a full valuation allowance against deferred tax assets.
Note 4 – (Loss) Earnings Per Share
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares outstanding during each period presented. Diluted (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable periods using the treasury stock method. Diluted (loss) earnings per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted (loss) earnings per share, because to do so would have been antidilutive, were approximately 471,000 shares and 83,000 shares for the 13-week periods ended July 30, 2022 and July 31, 2021, respectively, and 630,000 shares and 123,000 shares for the 26-week periods ended July 30, 2022 and July 31, 2021, respectively.
Note 5 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value because of their short maturities.
The Company measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific assumptions, including forecasts of projected financial information that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents (Level 2 input) to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant (Level 2 input) to quantify fair value for other long-lived assets.
9
Note 6 – Commitments and Contingencies
The Company was named as a defendant in a putative class action filed in April 2017 in the United States District Court for the Western District of Pennsylvania, Gennock v. Kirkland’s, Inc. The complaint alleged that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number on customers’ receipts and sought statutory and punitive damages and attorneys’ fees and costs. On October 21, 2019, the District Court dismissed the matter and ruled that the Plaintiffs did not have standing based on the Third Circuit’s recent decision in Kamal v. J. Crew Group, Inc., 918 F.3d 102 (3d. Cir. 2019). Following the dismissal in federal court, on October 25, 2019, the plaintiffs filed a Praecipe to Transfer the case to Pennsylvania state court, and on August 20, 2020, the court ruled that the plaintiffs have standing. The Company appealed that ruling, and on April 27, 2022, the Superior Court of Pennsylvania granted the Company’s petition for permission to appeal. On August 4, 2022, the Company filed its Appellate Brief with the Superior Court of Pennsylvania. The Company continues to believe that the case is without merit and intends to continue to vigorously defend itself against the allegations. The matter is covered by insurance, and the Company does not believe that the case will have a material adverse effect on its consolidated financial condition, operating results or cash flows.
The Company was named as a defendant in a putative class action filed in May 2018 in the Superior Court of California, Miles v. Kirkland’s Stores, Inc. The case has been removed to United States District Court for the Central District of California. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations and seeks unpaid wages, statutory and civil penalties, monetary damages and injunctive relief. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. On March 22, 2022, the District Court denied the plaintiff’s motion to certify in its entirety, and on May 26, 2022, the Ninth Circuit granted the plaintiff’s petition for permission to appeal. The Court has stayed the entire case pending the appeal. The Company continues to believe the case is without merit and intends to vigorously defend itself against the allegations.
The Company was named as a defendant in a putative class action filed on August 23, 2022 in the United States District Court for the Southern District of New York, Sicard v. Kirkland’s Stores, Inc. The complaint alleges, on behalf of Sicard and all other hourly store employees based in New York, that Kirkland’s violated New York Labor Law Section 191 by failing to pay him and the putative class members their wages within seven calendar days after the end of the week in which those wages were earned, rather than on a bi-weekly basis. The Company believes the case is without merit and intends to vigorously defend itself against the allegations.
The Company is also party to other pending legal proceedings and claims that arise in the normal course of business. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company’s management is of the opinion that it is unlikely that such proceedings and any claims in excess of insurance coverage will have a material effect on its consolidated financial condition, operating results or cash flows.
Note 7 – Stock-Based Compensation
The Company maintains equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights to employees, non-employee directors and consultants. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no material changes in the assumptions used to compute compensation expense during the current year. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations)
Restricted stock units granted
119,400
33,152
359,800
152,815
During the 13-week and 26-week periods ended July 30, 2022 and July 31, 2021, the Company also granted performance-based restricted stock units (“PSUs”) that are subject to the achievement of specified performance goals over a specified performance period. The performance metrics for the PSUs are earnings before interest, taxes, depreciation and amortization (“EBITDA”) compared to target EBITDA and also include a relative shareholder return modifier. The Company currently estimates that no shares will be issued with respect to the PSUs granted in fiscal 2021 or 2022.
10
Note 8 – Share Repurchase Plan
On December 3, 2020, September 2, 2021, and January 6, 2022, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of the Company’s outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of July 30, 2022, the Company had approximately $26.3 million remaining under the current share repurchase plan. The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:
Shares repurchased and retired
561,548
479,966
608,898
Share repurchase cost
12,008
6,253
13,364
Note 9 – Senior Credit Facility
On December 6, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, collateral agent and lender. The Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of December 2024. Advances under the Credit Agreement bear interest at an annual rate equal to the London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the lender on the unused portion of the credit facility is 25 basis points per annum.
Borrowings under the Credit Agreement are subject to certain conditions, and the Credit Agreement contains customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and certain events under the Employee Retirement Income Security Act of 1974 (“ERISA”). Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the Credit Agreement is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.
The Company is subject to a Second Amended and Restated Security Agreement (the “Security Agreement”) with its lender. Pursuant to the Security Agreement, the Company pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to secure the payment and performance of the obligations under the Credit Agreement.
As of July 30, 2022, the Company was in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were $55.0 million in outstanding borrowings and no letters of credit outstanding with approximately $20.0 million available for borrowing as of July 30, 2022.
11
Note 10 – New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates, and, particularly, the risk of cessation of the LIBOR related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements and related disclosures.
Note 11 — Subsequent Event
Subsequent to July 30, 2022, the Company borrowed an additional $5.0 million under the Credit Agreement.
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the 13-week and 26-week periods ended July 30, 2022 and July 31, 2021. For a comparison of our results of operations for the 52-week periods ended January 29, 2022 and January 30, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, filed with the SEC on March 25, 2022. This discussion should be read with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Except for historical information contained herein, certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements deal with potential future circumstances and developments and are, accordingly, forward-looking in nature. You are cautioned that such forward-looking statements, which may be identified by words such as “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “seek,” “may,” “could,” “strategy,” and similar expressions, involve known and unknown risks and uncertainties, which may cause our actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, risks associated with the Company's liquidity including cash flows from operations and the amount of borrowings under the secured revolving credit facility, the Company’s actual and anticipated progress towards its short-term and long-term objectives including its brand transformation strategy, the timing of normalized macroeconomic conditions from the impacts of global geopolitical unrest and the COVID-19 pandemic on the Company’s revenues, inventory and supply chain, the effectiveness of the Company’s marketing campaigns, risks related to changes in U.S. policy related to imported merchandise, particularly with regard to the impact of tariffs on goods imported from China and strategies undertaken to mitigate such impact, the Company’s ability to retain its senior management team, continued volatility in the price of the Company’s common stock, the competitive environment in the home décor industry in general and in our specific market areas, inflation, fluctuations in cost and availability of inventory, interruptions in supply chain and distribution systems, including our e-commerce systems and channels, the ability to control employment and other operating costs, availability of suitable retail locations and other growth opportunities, disruptions in information technology systems including the potential for security breaches of our information or our customers’ information, seasonal fluctuations in consumer spending, and economic conditions in general. Those and other risks are more fully described in our filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed on March 25, 2022 and subsequent reports. Forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof. Any changes in assumptions or factors on which such statements are based could produce materially different results. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Overview
We are a specialty retailer of home furnishings in the United States. As of July 30, 2022, we operated a total of 356 stores in 35 states, as well as an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand. We provide our customers with an engaging shopping experience characterized by a curated, affordable selection of home furnishings along with inspirational design ideas. This combination of quality and stylish merchandise, value pricing and a stimulating online and store experience allows our customers to furnish their home at a great value.
Macroeconomic Conditions
Economic disruption, inflation, uncertainty, volatility and the COVID-19 pandemic have affected the Company’s business operations. We continue to closely monitor the impact of these macroeconomic conditions on all facets of our business, which includes the impact on our employees, customers, suppliers, vendors, business partners and supply chain networks. While the duration and extent of these conditions and their impact on the global economy remains uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows will continue to be materially impacted.
There are numerous uncertainties surrounding macroeconomic conditions and their impact on the economy and our business, as further described in “Item 1A. Risk Factors” of our 2021 Annual Report on Form 10-K for the fiscal year ended January 29, 2022, which
makes it difficult to predict the impact on our business, financial position, or results of operations in fiscal 2022 and beyond. We cannot predict these uncertainties, or the corresponding impacts on our business, at this time.
Key Financial Measures
Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, net of returns, shipping revenue associated with e-commerce sales, gift card breakage revenue, revenue earned from our private label credit card program and excludes sales taxes. Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components, including: landed product cost (including inbound freight), damages, inventory shrinkage, store occupancy costs (including rent and depreciation of leasehold improvements and other property and equipment), outbound freight costs to stores, e-commerce shipping expenses and central distribution costs (including operational costs and depreciation of leasehold improvements and other property and equipment). Product and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed. Accordingly, gross profit expressed as a percentage of net sales can be influenced by many factors including overall sales performance.
We use comparable sales to measure sales increases and decreases from stores that have been open for at least 13 full fiscal months, including our online sales. We remove closed stores from our comparable sales calculation the day after the stores close. Relocated stores remain in our comparable sales calculation. E-commerce sales, including shipping revenue, are included in comparable sales. Increases in comparable sales are an important factor in maintaining or increasing our profitability.
Operating expenses, including the costs of operating our stores and corporate headquarters, are also an important component of our operating performance. Compensation and benefits comprise the majority of our operating expenses. Operating expenses contain fixed and variable costs, and managing the operating expense ratio (operating expenses expressed as a percentage of net sales) is an important focus of management as we seek to increase our overall profitability. Operating expenses include cash costs as well as non-cash costs, such as depreciation and amortization associated with omni-channel technology, corporate property and equipment, and impairment of long-lived assets. Because many operating expenses are fixed costs, and because operating costs tend to rise over time, increases in comparable sales typically are necessary to prevent meaningful increases in the operating expense ratio. Operating expenses can also include certain costs that are of a one-time or non-recurring nature. While these costs must be considered to fully understand our operating performance, we typically identify such costs separately where significant in the consolidated statements of operations so that we can evaluate comparable expense data across different periods.
Store Rationalization
Our store rationalization strategy includes refreshing mid and high-performing stores and exiting or relocating low-performing stores to better locations. We are prioritizing sustained improvement in overall profitability and developing a future state plan for infrastructure that complements our omni-channel concept and improves the customer experience. We anticipate additional store closures and limited store openings as we execute our store rationalization strategy over the next several years. We believe our ideal store count should be approximately 350 stores.
The following table summarizes our store openings and closings during the periods indicated:
New store openings
Permanent store closures
Store relocations
Decrease in store units
(1.1
)%
(0.3
(1.4
The following table summarizes our open stores and square footage under lease as of the dates indicated:
Number of stores
356
369
Square footage
2,852,601
2,955,827
Average square footage per store
8,013
8,010
14
13-Week Period Ended July 30, 2022 Compared to the 13-Week Period Ended July 31, 2021
Results of operations. The table below sets forth selected results of our operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
Change
%
100.0
(12,689
(11.1
81.9
65.4
8,484
11.3
18.1
34.6
(21,173
(53.3
21.1
18.9
(157
(0.7
16.9
14.1
1,041
6.4
Depreciation (exclusive of depreciationincluded in cost of sales)
1.5
1.4
(34
(2.1
39.5
34.4
850
2.2
(21.4
0.2
(22,023
(9,875.8
0.3
0.1
290
381.6
(0.1
10.7
(21.6
(22,305
(10,047.3
3.6
4,026
(996.5
(25.2
0.5
(26,331
(4,206.2
Net sales. Net sales decreased 11.1% to $102.1 million for the second 13 weeks of fiscal 2022 compared to $114.8 million for the prior year period. Comparable sales, including e-commerce sales, decreased 8.6%, or $9.5 million, for the second 13 weeks of fiscal 2022 compared to the prior year period. Comparable sales, including e-commerce sales, decreased 5.2% in the prior year period. For the second 13 weeks of fiscal 2022, e-commerce comparable sales decreased 9.1% compared to the prior year period. The decreases in comparable sales are driven by lower traffic and conversion, partially offset by an increase in average ticket.
Gross profit. Gross profit as a percentage of net sales decreased 1,650 basis points from 34.6% in the second 13 weeks of fiscal 2021 to 18.1% in the second 13 weeks of fiscal 2022. The overall decrease in gross profit margin was due to unfavorable landed product margin, store occupancy costs, outbound freight costs, distribution center costs, other cost of sales, including inventory shrinkage and damages, and ecommerce shipping costs. Landed product margin decreased approximately 1,070 basis points from 59.8% in the second 13 weeks of fiscal 2021 to 49.1% in the second 13 weeks of fiscal 2022, mainly due to the impact of discounting product to move through inventory. Store occupancy and depreciation costs increased approximately 170 basis points as a percentage of net sales due to the sales deleverage on these fixed costs. Outbound freight costs increased approximately 160 basis points as a percentage of net sales due primarily to rate and fuel inflation and increased routes to move more inventory. Distribution center costs increased approximately 150 basis points as a percentage of net sales due to increased temporary labor costs and reduced productivity from higher inventory levels and additional offsite inventory storage locations. Other cost of sales, including inventory shrinkage and damages, increased approximately 90 basis points mainly as a result of increased inventory shrinkage due to the higher inventory levels. E-commerce shipping costs remained relatively flat at a 10 basis points increase as a percentage of net sales.
Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 220 basis points from 18.9% in the second 13 weeks of fiscal 2021 to 21.1% in the second 13 weeks of fiscal 2022 primarily due to sales deleverage.
Other operating expenses. Other operating expenses as a percentage of net sales increased approximately 280 basis points from 14.1% in the second 13 weeks of fiscal 2021 to 16.9% in the second 13 weeks of fiscal 2022. The increase as a percentage of net sales
was primarily related to the decline in net sales, which deleveraged advertising expenses and other fixed costs along with increased insurance expenses.
Income tax expense (benefit). We recorded income tax expense of approximately $3.6 million, or 16.4% of the loss before income taxes, during the second 13 weeks of fiscal 2022, compared to an income tax benefit of approximately $404,000 or 182.0% of income before income taxes, during the prior year period. The change in the tax rate for the second 13 weeks of fiscal 2022 compared to the prior period was primarily due to the federal net operating loss carryforward now projected by the Company for fiscal 2022, which is fully offset by a valuation allowance. This change in estimate caused the reversal of the tax benefit recorded in the first quarter of fiscal 2022.
Net (loss) income and (loss) earnings per share. We reported net loss of $25.7 million, or $2.02 per diluted share, for the second 13 weeks of fiscal 2022 as compared to net income of $0.6 million, or $0.04 per diluted share, for the second 13 weeks of fiscal 2021.
26-Week Period Ended July 30, 2022 Compared to the 26-Week Period Ended July 31, 2021
(32,973
(13.8
77.2
66.5
163
22.8
33.5
(33,136
(41.4
20.6
17.1
1,622
4.0
16.6
364
1.1
1.6
1.3
50
38.8
32.5
2,036
2.6
(16.0
1.0
(35,172
(1,544.7
361
224.2
(16.2
(35,533
(1,564.6
-
372
(502.7
(16.3
(35,905
(1,531.1
Net sales. Net sales decreased 13.8% to $205.4 million for the first 26 weeks of fiscal 2022 compared to $238.4 million for the prior year period. Comparable sales, including e-commerce sales, decreased 12.4%, or $28.7 million for the first 26 weeks of fiscal 2022 compared to the prior year period. Comparable sales, including e-commerce sales, increased 24.6% in the prior year period. For the first 26 weeks of fiscal 2022, e-commerce comparable sales decreased 16.9%. The decreases in comparable sales is primarily due to a decrease in traffic and conversion in stores and online, partially offset by an increase in average ticket.
Gross profit. Gross profit as a percentage of net sales decreased 1,070 basis points from 33.5% in the first 26 weeks of fiscal 2021 to 22.8% in the first 26 weeks of fiscal 2022. The overall decrease in gross profit margin was due to unfavorable landed product margin, store occupancy costs, other cost of sales, including inventory shrinkage and damages, distribution center costs and store outbound freight costs, slightly offset by favorable e-commerce shipping expenses. Landed product margin decreased approximately 570 basis points from 58.6% in the first 26 weeks of fiscal 2021 to 52.9% in the first 26 weeks of fiscal 2022 mainly due to the impact of discounting product to move through inventory, as well as increased incremental inbound freight costs. Store occupancy and depreciation costs increased approximately 210 basis points as a percentage of net sales due to the sales deleverage on these fixed costs. Other cost of sales, including inventory shrinkage and damages, increased approximately 110 basis points due to increased inventory shrinkage and damages due to the higher inventory levels. Distribution center costs increased approximately 100 basis points as a percentage of net sales due to higher temporary labor costs and reduced productivity from higher inventory levels and implementation of a new warehouse management system. Outbound freight costs increased approximately 90 basis points as a percentage of net sales primarily due to rate and fuel inflation and increased routes to move more inventory. E-commerce shipping costs remained relatively flat at a 10 basis point decrease as a percentage of net sales.
Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 350 basis points from 17.1% in the first 26 weeks of fiscal 2021 to 20.6% in the first 26 weeks of fiscal 2022 primarily due to the deleverage of store and corporate payroll expenses along with higher payroll and employee benefits expenses, partially offset by lower corporate bonus expenses.
Other operating expenses. Other operating expenses as a percentage of net sales increased approximately 250 basis points from 14.1% in the first 26 weeks of fiscal 2021 to 16.6% for the first 26 weeks of fiscal 2022. The increase as a percentage of net sales was primarily related to the decline in net sales, which deleveraged advertising expenses and other fixed costs.
Income tax expense (benefit). We recorded income tax expense of approximately $298,000, or 0.9% of the loss before income taxes, during the first 26 weeks of fiscal 2022 compared to income tax benefit of $74,000, or 3.3% of income before income taxes, during the prior year period. Income taxes for the 26-week periods ended July 30, 2022 and July 31, 2021 were minimal due to valuation allowances against deferred tax assets.
Net (loss) income and (loss) earnings per share. We reported net loss of $33.6 million, or a loss of $2.65 per diluted share, for the first 26 weeks of fiscal 2022 as compared to net income of $2.3 million, or earnings of $0.15 per diluted share, for the first 26 weeks of fiscal 2021.
Non-GAAP Financial Measures
To supplement our unaudited consolidated condensed financial statements presented in accordance with GAAP, we provide certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted operating (loss) income, adjusted net (loss) income and adjusted diluted (loss) earnings per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP financial measures. We use these non-GAAP financial measures internally in analyzing our financial results and believe that they provide useful information to analysts and investors, as a supplement to GAAP financial measures, in evaluating our operational performance.
We define EBITDA as net income or loss before interest, provision for income tax, and depreciation and amortization, adjusted EBITDA as EBITDA with non-GAAP adjustments and adjusted operating (loss) income as operating (loss) income with non-GAAP adjustments. We define adjusted net (loss) income and adjusted diluted (loss) earnings per share by adjusting the applicable GAAP financial measures for non-GAAP adjustments.
Non-GAAP financial measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may differ from similar measures reported by other companies. Each non-GAAP financial measure has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.
17
The following table shows a reconciliation of operating (loss) income to EBITDA, adjusted EBITDA and adjusted operating (loss) income for the 13-week and 26-week periods ended July 30, 2022 and July 31, 2021 and a reconciliation of net (loss) income and diluted (loss) earnings per share to adjusted net (loss) income and adjusted diluted (loss) earnings per share for the 13-week and 26-week periods ended July 30, 2022 and July 31, 2021:
Depreciation and amortization
4,338
5,214
EBITDA
(17,462
5,437
(24,058
12,763
Non-GAAP adjustments:
Total adjustments in cost of sales(1)
(162
(1,017
(1,506
Asset impairment(2)
Stock-based compensation expense(3)
Severance charges(4)
379
291
Total adjustments in operating expenses
1,211
662
1,772
1,484
Total non-GAAP adjustments
1,049
(355
1,818
(22
Adjusted EBITDA
(16,413
5,082
(22,240
12,741
Adjusted operating (loss) income
(20,751
(132
(31,077
2,255
Non-GAAP adjustments, net of tax:
(120
(771
35
(1,139
177
234
Stock-based compensation expense, including tax impact(3)
609
78
348
150
284
293
220
1,070
87
818
604
Tax valuation allowance(5)
Total non-GAAP adjustments, net of tax
9,042
(720
9,160
(645
Adjusted net (loss) income
(16,663
(94
(24,400
1,700
Diluted (loss) earnings per share
Adjusted diluted (loss) earnings per share
(1.31
(0.01
(1.93
0.11
Diluted weighted average shares outstanding
Adjusted diluted weighted average shares outstanding
Liquidity and Capital Resources
Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the early portion of the fourth quarter of each fiscal year. Capital expenditures primarily relate to technology and omni-channel projects, distribution center and supply chain enhancements, new or relocated stores and existing store refreshes, remodels and maintenance. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our revolving credit facility. In fiscal 2022, we funded our increased inventory levels with borrowings on the revolving credit facility. We expect to sell through excess inventory levels in the second half of the year during our holiday and harvest seasons, which should drive cash flow and reduce borrowings.
18
Cash flows from operating activities. Net cash used in operating activities was approximately $56.1 million and $38.2 million during the first 26 weeks of fiscal 2022 and the first 26 weeks of fiscal 2021, respectively. Cash flows from operating activities depend heavily on operating performance, changes in working capital and the timing and amount of payments for income taxes. The increase in the amount of cash used in operations as compared to the prior year period was mainly due to a decline in operating performance and increased inventory levels.
Cash flows from investing activities. Net cash used in investing activities for the first 26 weeks of fiscal 2022 consisted mainly of $5.0 million in capital expenditures as compared to $3.4 million in capital expenditures for the prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:
Technology and omni-channel projects
2,448
1,565
Existing stores
1,632
200
Distribution center and supply chain enhancements
656
785
New and relocated stores
208
675
Corporate
75
Total capital expenditures
5,019
3,402
The capital expenditures in the current year period related primarily to technology and omni-channel projects, the remodel and maintenance of existing stores and distribution center and supply chain enhancements. Capital expenditures in the prior year period related primarily to technology and omni-channel projects, and distribution center and supply chain enhancements, as well as the opening of two new stores and one relocated store during the period.
Cash flows from financing activities. During the first 26 weeks of fiscal 2022, net cash provided by financing activities was $46.4 million, as we borrowed $55.0 million under our revolving credit facility, which was partially offset by the repurchase and retirement of our common stock pursuant to our share repurchase plan of $6.3 million and $2.4 million of cash used in net share settlement of stock options and restricted stock units. The increased borrowings on the revolving credit facility are due to the elevated inventory levels because of the lower than anticipated sales. As the Company sells through the existing inventory and sales increase due to the seasonality of the business, the borrowings should decrease in the fourth quarter of fiscal 2022. During the first 26 weeks of fiscal 2021, net cash used in financing activities was approximately $13.5 million primarily related to the repurchase and retirement of our common stock pursuant to our share repurchase plan of $13.4 million.
Senior credit facility. On December 6, 2019, we entered into the Credit Agreement with Bank of America, N.A. as administrative agent, collateral agent and lender. The Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of December 2024. Advances under the Credit Agreement bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the lender on the unused portion of the credit facility is 25 basis points per annum.
Borrowings under the Credit Agreement are subject to certain conditions, contains customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the Credit Agreement is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.
We are subject to a Second Amended and Restated Security Agreement (“Security Agreement”) with our lender. Pursuant to the Security Agreement, we pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of our assets to secure the payment and performance of the obligations under the Credit Agreement.
As of July 30, 2022, we were in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were approximately $55.0 million of outstanding borrowings and no letters of credit outstanding with approximately $20.0 million available for borrowing as of July 30, 2022. Subsequent to July 30, 2022, we borrowed an additional $5.0 million under the Credit Agreement.
19
As of July 30, 2022, our balance of cash and cash equivalents was approximately $10.3 million. We believe that the combination of our cash balances, cash flow from operations and availability under our Credit Agreement will be sufficient to fund our planned capital expenditures and working capital requirements through the end of fiscal 2022 and over the next several fiscal years.
Share repurchase plan. On December 3, 2020, September 2, 2021 and January 6, 2022, we announced that our Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of our outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and we may terminate the repurchase plans at any time. As of July 30, 2022, we had approximately $26.3 million remaining under the current share repurchase plan.
The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:
Critical Accounting Policies and Estimates
During the 13-week period ended July 30, 2022, we made a change in estimate related to income taxes due to the federal net operating loss carry-forward now projected by the Company for fiscal 2022, which caused the reversal of the tax benefit recorded in the 13-week period ended April 30, 2022. There have been no other material changes to our critical accounting policies or estimates during the 26-week period ended July 30, 2022. Refer to our Annual Report for a summary of our critical accounting policies and a discussion of the critical accounting estimates and assumptions impacting our consolidated financial statements.
New Accounting Pronouncements
See Note 10 – New Accounting Pronouncements in the condensed consolidated financial statements for accounting pronouncements not yet adopted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of July 30, 2022, we had $55.0 million in outstanding borrowings under our Credit Agreement. As of July 31, 2021, we had no outstanding borrowings under our Credit Agreement. We borrowed $55.0 million under our Credit Agreement during the first 26 weeks of fiscal 2022, and we had no borrowings or repayments under our Credit Agreement during the first 26 weeks of fiscal 2021. Subsequent to July 30, 2022, we borrowed an additional $5 million under our Credit Agreement. We are exposed to interest rate changes, primarily as a result of borrowings under our Credit Agreement, as discussed in Note 9 — Senior Credit Facility in the notes to the condensed consolidated financial statements, which bear interest based on variable rates. A 1% increase or decrease in the interest rate on borrowings under our revolving credit facility at our recent borrowing levels would not have a material impact to our results of operations.
We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we may purchase investments not guaranteed by the Federal Deposit Insurance Company. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished.
We were not engaged in any foreign exchange contracts, hedges, interest rate swaps, derivatives or other financial instruments with significant market risk as of July 30, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Both our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), after the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) was performed by management with the participation of our Chief Executive Officer and Chief Financial Officer, have concluded that, as of July 30, 2022, our disclosure controls and procedures were effective as of the end of the period covered by this report.
Change in internal controls over financial reporting. There have been no changes in internal control over financial reporting that have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of the Company’s legal proceedings, refer to Note 6 — Commitments and Contingencies in the notes to the condensed consolidated financial statements.
ITEM 1A. RISK FACTORS
The risk factors described in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022, should be carefully considered together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes to our risk factors as previously disclosed in the Annual Report. The risks described in this report and in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Repurchases of Equity Securities
There were no shares of common stock repurchased by the Company during the 13-week period ended July 30, 2022. As of July 30, 2022, the Company had approximately $26.3 million remaining under the current share repurchase plan.
On December 3, 2020, September 2, 2021 and January 6, 2022, we announced that our Board of Directors authorized share repurchase plans providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of our outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulator limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and we may terminate the repurchase plans at any time.
ITEM 6. EXHIBITS
Exhibit
No.
Description of Document
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: August 30, 2022
/s/ Steve C. Woodward
Steve C. Woodward
President and Chief Executive Officer, and Director
/s/ Nicole A. Strain
Nicole A. Strain
Executive Vice President, Chief Operating Officer and Chief Financial Officer