General
We are a specialty retailer of home décor and gifts in the United States, operating 404 stores in 36 states as of January 28,
2017, as well as an
e-Commerce
enabled website, www.kirklands.com. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items,
lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout
the year suitable for gift-giving. In addition, we use innovative design and packaging to market home décor items as gifts. We provide our customers an engaging shopping experience characterized by a diverse, ever-changing merchandise
selection reflecting current styles at prices which provide discernible value. This combination of ever-changing and stylish merchandise, value pricing and a stimulating online and store experience has led to our emergence as a leader in home
décor and enabled us to develop a strong customer base.
Business Strategy
Our goal is to be the leading specialty retailer of home décor and accessories in each of our markets. We believe the following elements
of our business strategy both differentiate us from our competitors and position us for growth:
Product mix differentiation.
While
our stores contain items covering a broad range of complementary product categories, we emphasize traditionally-styled, quality merchandise within each category, striving to combine steady-selling, everyday core items with
trend-appropriate fashion and seasonal items. Our buyers work closely with our merchandise vendors to identify and develop stylish products that appeal to a broad base of customers while reflecting the latest trends. These products are often
proprietary, the result of the development and collaboration between our buyers and our vendors. 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 customers. For these reasons, we believe our buying process yields a merchandise assortment that is differentiated from our competition. We also test-market products where appropriate and monitor individual item sales, which enables
us to identify and quickly reorder bestselling items in order to maximize sales.
Ever-changing merchandise mix.
We
believe our ever-changing merchandise mix creates an inviting store environment, encouraging strong customer loyalty and frequent return visits to our stores. The merchandise in our stores is traditionally-styled for broad market appeal, yet it
reflects an understanding of our customers desire for fashion and novelty. Our information systems permit close tracking of individual item sales, enabling us to react quickly to both fast-selling and slow-moving items. Accordingly, our
inventory turns rapidly and we actively change our merchandise assortment 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 store experience.
Through our
in-store
visual
presentation, marketing and promotions, and customer service, we seek to make customers feel welcome and at home. Our merchandise presentation effort is geared toward helping our customers visualize our products in their own homes and
inspire decorating and gift-giving ideas. We creatively group complementary merchandise throughout the store. We believe this cross-category merchandising encourages customers to browse for longer periods of time, promoting
add-on
sales. We adjust our visual presentation frequently to take advantage of sales trends, enhance our ever-changing merchandise mix, and support our promotional strategies. Our store associates support this
environment through their engagement with our customers, knowledge of our products, and passion for customer service.
Strong value
proposition.
Our customers regularly experience the satisfaction of paying noticeably less for items similar to those sold by other retail stores or through other retail channels. This strategy of providing a combination of style, quality
and value is an important element in making Kirklands a destination store. While we carry some items in our stores that sell for several hundred dollars, most items sell for under $20 and are perceived by our customers as very affordable home
décor, accessories 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 different geographic regions and market sizes. The flexibility of our
concept enables us to select the most promising real estate opportunities that meet requisite economic and demographic criteria within the target markets where our customers live and shop. In addition to our stores, we sell
direct-to-customer
(DTC) and facilitate orders for
in-store
pickup (ISP) through our website at
www.kirklands.com. We view our
e-Commerce
channel as a crucial part of our overall business strategy, allowing us to introduce our concept to new customers and complement our
brick-and-mortar
business for a true omni-channel brand experience.
4
Brick-and-mortar
store growth.
With only 404 stores in
36 states as of the end of fiscal 2016, we view expansion of our physical store locations as an opportunity for growth. During fiscal 2017, we expect to increase our total retail square footage by approximately 2% to 3%. We will focus on infill
opportunities in some of our core markets, as well as expansion opportunities in under-penetrated markets in the United States such as the
Mid-Atlantic
states, the Midwest, portions of the Northeast, and
California. We expect to open 25 to 30 new locations during fiscal 2017, and expect to close approximately 20 locations. The new store openings during fiscal 2017 are expected to be weighted towards the second and third quarters of the year, while
closings during fiscal 2017 are expected to be weighted towards the first half of the year. Longer-term, we see an opportunity for meaningful annual square footage growth in both existing and new markets.
e-Commerce
growth.
As customers increasingly turn to the web for their shopping, we expect our
e-Commerce
channel to provide another growth opportunity. We are continuing to capture additional market share by attracting new customers via the website. We launched third-party drop shipping in fiscal 2015 to
give our customers a wider assortment of product offerings. We plan on continued expansion of our third-party drop shipping product offerings in fiscal 2017. Additionally, we are continuing to use the
e-Commerce
channel to enrich the
brick-and-mortar
store experience, and have plans to improve our ship to store options to
support the blending of the channels into one omni-channel experience. For fiscal 2016, our
e-Commerce
channel accounted for approximately $47.3 million in revenue, or about 8.0% of our total revenue, a
22.4% increase over fiscal 2015. We expect our
e-Commerce
business to continue to grow at a pace greater than
brick-and-mortar
for the foreseeable future, with an interim goal of 10% of the overall business.
Merchandising
Merchandising strategy.
Our merchandising strategy is to (i) offer unique, distinctive and often exclusive, quality home
décor products and gifts at affordable prices representing great value to our customers, (ii) maintain a breadth of productive merchandise categories, (iii) provide a carefully edited selection of core items within targeted
categories, (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 and encourages frequent store visits.
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 product margin information helps us to maximize the productivity of successful
products and categories, and minimize the accumulation of slow-moving inventory. The composition of our merchandise assortment is relatively consistent across the chain. We address regional differences where applicable by tailoring inventories to
geographic considerations by reviewing specific store sales results in selected categories and classes of product. Our flexible store design and display fixtures allow us to adjust our selling space as needed to capitalize on sales trends.
Our average store generally carries approximately 5,200 Stock Keeping Units (SKUs). Online we carry approximately 4,100 SKUs, of
which 1,400 are exclusively online. We regularly monitor the sell-through on each item; therefore, the number and
make-up
of our active SKUs is continuously changing based on changes in selling trends. We
purchase merchandise from approximately 200 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 the opportunity to
improve our net sales and gross margin.
Product assortment.
Our major merchandise categories include wall décor, art,
mirrors, lamps, decorative accessories, accent furniture, textiles, fragrance and accessories, frames, housewares, impulse and personal accessories, outdoor living, and artificial floral products. Our stores also offer an extensive assortment of
holiday merchandise, as well as items carried throughout the year suitable for gift-giving.
5
The following table presents the percentage of net sales contributed by our major merchandise
categories over the last three fiscal years:
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% of Net Sales
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|
Merchandise Category
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
Fiscal 2014
|
|
Holiday
|
|
|
14
|
%
|
|
|
13
|
%
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|
|
12
|
%
|
Art
|
|
|
12
|
|
|
|
14
|
|
|
|
14
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|
Wall Décor
|
|
|
11
|
|
|
|
11
|
|
|
|
11
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|
Accent Furniture
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|
|
10
|
|
|
|
9
|
|
|
|
10
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|
Fragrance and Accessories
|
|
|
9
|
|
|
|
9
|
|
|
|
8
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|
Mirrors
|
|
|
7
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|
|
|
7
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|
|
|
7
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|
Textiles
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7
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7
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7
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|
Lamps
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6
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6
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7
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|
Decorative Accessories
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6
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|
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6
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|
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7
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|
Housewares
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5
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5
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4
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Impulse
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3
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2
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2
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Floral
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3
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3
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3
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Frames
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2
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3
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3
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Clocks
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2
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2
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1
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|
Personal Accessories
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2
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|
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2
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2
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|
Outdoor Living
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1
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1
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2
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Total
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|
|
100
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%
|
|
|
100
|
%
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|
|
100
|
%
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|
|
|
|
|
|
|
|
|
Value proposition.
We continually strive to increase the perceived value of Kirklands
products to our customers through our distinctive merchandising, carefully coordinated
in-store
signage, visual presentation and product packaging. Our shoppers regularly experience the satisfaction of paying
noticeably less for items similar to those sold by other retail stores, through catalogs, or on the Internet. Our stores typically have two major semi-annual sale events, one in January and one in July. We also use temporary promotions throughout
the year featuring specific items or categories of merchandise. 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.
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.
Approximately 84% of our total purchases are from
importers of merchandise manufactured primarily in China and other South-Asian countries, 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.
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, by operating district, and for the total Company. We also continually monitor recent selling history within each store by category,
classification and item to properly allocate future purchases to maximize sales and gross margin.
Each of our stores is internally
classified for merchandising purposes based on certain criteria including sales volume, size, location and historical performance. Although our stores carry similar merchandise, the variety and depth of products in a given store may vary depending
on the stores rank and classification. Where applicable, inventory purchases and allocation are also tailored based on regional or demographic differences between stores in selected categories.
Store Operations
General.
In
addition to corporate management and three Regional Directors, approximately 30 Multi-Unit Managers (who generally have responsibility for an average of 14 stores within a geographic district) manage store operations. A Store Manager and one to
three Assistant Managers manage individual stores. The Store Manager is responsible for the
day-to-day
operation of the store,
6
including sales, customer service, merchandise display, human resource functions and store security. A typical store operates seven days a week with an average of 12 to 16 employees,
including a combination of full and part-time employees, depending on the volume of the store and the season. Additional part-time employees are typically hired to assist with increased traffic and sales volume in the fourth quarter of the calendar
year.
Merchandise presentation.
Merchandise is generally displayed according to guidelines and directives given to each store
from the Merchandise Presentation team with input from Store Operations. This procedure promotes somewhat uniform display standards throughout the chain depending upon store configuration. 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 merchandise presentation standards. Our Merchandise Presentation team provides Store Managers with recommended directives such as photographs,
diagrams and placement guides. Augmenting this centralized approach, each Store Manager has flexibility to creatively highlight those products that are expected to have the greatest appeal to local shoppers. 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 employees. In particular, our success depends on our ability to promote and/or recruit qualified Multi-Unit and Store Managers and maintain
quality full-time and part-time employees. Multi-Unit Managers are primarily responsible for recruiting new Store Managers. Store Managers are responsible for the hiring and training of new associates, assisted where appropriate by a Human Resources
Manager. We constantly look for motivated and talented people to promote from within Kirklands, in addition to recruiting outside Kirklands. All employees are trained utilizing the K University training program. Store
Managers train at a designated training store where they work directly with a qualified Training Store Manager. Multi-Unit Managers onboard at our Corporate office in addition to spending time with designated Senior Multi-Unit Manager
Trainers.
Compensation and incentives.
Multi-Unit and Store Managers are compensated with a base salary plus periodic bonuses
based on performance. 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 dominant retail properties that are convenient and attractive to our target 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 and Atlanta, Georgia; middle markets such as Nashville, Tennessee and Kansas City, Missouri; and smaller markets such as Palmdale, California and Amarillo, Texas. As we execute our store growth strategy, we are focused
on infill opportunities in some of our existing markets as well as expansion opportunities in under-penetrated markets in the United States such as the
Mid-Atlantic
states, the Midwest, portions of the
Northeast, and California to provide us with the unit growth to achieve our goals.
Formats.
We operate stores in a variety of
off-mall
venues and enclosed malls. As of January 28, 2017, we operated 27 stores in enclosed malls, of which 16 were outward-facing, and 377 stores in
off-mall
venues.
Off-mall
stores included 333 in power strip centers and lifestyle centers, 14 in outlet centers and 30 freestanding locations. The average size of the new stores we opened in
fiscal 2016 was approximately 8,200 square feet, and we currently expect our fiscal 2017 new stores to be primarily in
off-mall
shopping centers of similar average size.
Site selection.
Our site selection strategy is to locate our stores in venues which are destinations for large numbers of shoppers
and which reinforce our 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
co-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.
The following table provides a history of our store openings and closings for the last five fiscal years:
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Fiscal
2016
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Fiscal
2015
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|
Fiscal
2014
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Fiscal
2013
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Fiscal
2012
|
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Stores open at beginning of period
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376
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344
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324
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323
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309
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Store openings
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42
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43
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34
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24
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42
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Store closings
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|
(14
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)
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|
(11
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)
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|
|
(14
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)
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|
|
(23
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)
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|
|
(28
|
)
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|
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|
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Stores open at end of period
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|
404
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|
|
|
376
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|
|
|
344
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|
|
|
324
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|
|
|
323
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|
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7
Distribution and Logistics
We have implemented a comprehensive approach to the management of our merchandise supply chain. This approach encompasses all parts of the
supply chain, from the manufacturer overseas to the store selling floor. Our 771,000 square-foot distribution center in Jackson, Tennessee has a warehouse management system and material handling equipment that streamline the flow of goods within the
distribution center. To support our
e-Commerce
growth, we entered into a three-year lease in March 2015 for an additional 303,000 square-foot facility in Jackson, Tennessee which began serving as the
fulfillment center for
e-Commerce
in March 2016. We continue to evaluate the impact of our omni-channel strategies on our business, and are currently implementing enhancements to our supply chain
infrastructure and warehouse management system to support our store unit growth and
e-Commerce
goals.
In fiscal 2016, we implemented a new west coast distribution operation, which provides for better flow of merchandise through our supply chain
network. By virtue of this operation, we also gain control of inventory earlier, which expands our options for future store and
e-Commerce
fulfillment capabilities.
We currently utilize third-party carriers to transport merchandise from our distribution center to our stores. Approximately 97% of our stores
utilize direct, full truckload deliveries, which results in lower distribution costs and allows our field personnel to better schedule store associates for the receiving process. The optimal delivery method for a given store depends on the
stores sales volume, square footage, geographic location and other factors.
Information Systems
We have invested considerable resources in our management information systems to manage the purchase, pricing and distribution of our
merchandise, improve our operating efficiencies and support online operations. Our key management information systems include a merchandise management system,
point-of-sale
system, an
e-Commerce
platform, an
e-Commerce
order management system, a
warehouse management system, a financial system and a labor management tool. Our merchandise management system provides us with tools to manage aspects of our merchandise assortment and integrates all merchandising and inventory management
applications including inventory tracking, purchase order management, merchandise financial planning, allocation, and replenishment and sales audit and ultimately interfaces with our financial system.
We continue to evaluate and improve the functionality of our systems to maximize their effectiveness. Such efforts include ongoing hardware
and software evaluations, refreshes and upgrades to support optimal software configurations and application performance. We plan to continue to invest in information technology and implement efficiency-driving system enhancements. We
continue to strengthen the security of our information systems and invest in technology to support store, distribution facility and omni-channel expansion. These efforts are directed toward improving business processes, maintaining secure,
efficient and stable systems, and enabling the continued growth and success of our business.
Marketing
Although our overall marketing efforts encompass various techniques, in recent years, we have had a significant focus on
e-mail
communication. We now manage a database of approximately 3.2 million active
e-mail
addresses that have been provided by our customers, primarily through
in-store
collection processes and various contests and initiatives designed to drive
e-mail
sign-ups.
We use this database to
communicate frequently with our loyal customer base about new products,
in-store
events and special offers. We are continuously evaluating other forms of advertising as we seek to further enhance the
visibility of our products and our brands. Our marketing efforts inside the store emphasize signage, store and window banners, displays and other techniques to attract customers and provide an exciting shopping experience. The growth of our
e-Commerce
business has also increased our investment in online marketing channels such as paid search and affiliate marketing.
We have a customer loyalty program, K Club, which allows us to reward customers based on dollars spent on eligible purchases with certificates
towards future purchases. In addition to the K Club, we provide our customers with the option to utilize 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. Customers using the Kirklands private-label credit card visit our stores and purchase merchandise more frequently, as well as spend more money per visit, than our customers not using the card.
Internet and Social Media
We believe the
Internet offers opportunities to complement our
brick-and-mortar
stores, increase sales and increase consumer brand awareness of our products. Our website at
www.kirklands.com provides our customers with the ability to purchase Kirklands merchandise online and have it delivered directly to their homes or their nearest Kirklands store. Customers may also use the website as a resource to locate
a store, preview our merchandise, join our K Club loyalty program, apply for a Kirklands credit card, and purchase gift cards online. We are also very active in social media and maintain a presence on Facebook, Twitter, Pinterest and
Instagram.
8
The information contained or incorporated in our website is not a part of this
Form 10-K.
Trademarks
All of our stores operate under the names Kirklands, Kirklands Home, Kirklands Home
Outlet, Kirklands Outlet, and The Kirkland Collection.
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, KIRKLANDS
®
, THE KIRKLAND COLLECTION
®
, KIRKLANDS OUTLET
®
, KIRKLANDS HOME
®
, MARKET AND VINE
tm
and LOVE THE POSSIBILITIES, LOVE THE PRICE
®
. These marks have
historically been 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 and gifts is highly competitive. Accordingly, we compete against a diverse group of retailers, including specialty stores, department stores, discount stores, catalog and Internet-based retailers, which sell similar lines of merchandise
to those carried by us. Some of our main competitors include HomeGoods, Bed, Bath & Beyond, Cost Plus World Market, Hobby Lobby, Pier 1 Imports, Target, Ebay, Amazon and Wayfair. 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 product assortment is generally more limited. We
believe that the principal competitive factors influencing our business are merchandise selection, price, customer service, visual appeal of the merchandise and the store, and the convenience of our store locations. The number of companies offering
a selection of home décor products that overlaps generally with our product assortment has increased over the last 10 to 15 years. 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 shopping 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 Item 1A of this Form
10-K,
captioned Risk Factors.
Employees
We employed approximately
7,900 employees as of January 28, 2017. The number of employees fluctuates with seasonal needs. None of our employees are covered by a collective bargaining agreement. We believe that we maintain a positive relationship with our employees.
Seasonality
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.
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 Securities Exchange Commission (SEC). Members of the public may read and copy materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., 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 amendments to those documents 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., 5310 Maryland Way, Brentwood, Tennessee 37027.
9
Executive Officers of Kirklands
The name, age and position of each of our executive officers as of March 31, 2017 are as follows:
W.
Michael Madden,
47, has been a Director of Kirklands and President and Chief Executive Officer since
February 2015. Prior to his appointment as Chief Executive Officer, Mr. Madden served as President and Chief Operating Officer since August 2014. He also served as Senior Vice President and Chief Financial Officer from January 2008 to July
2014, Vice President and Chief Financial Officer from May 2006 to December 2007, and Vice President of Finance from May 2005 to April 2006. From July 2000 to May 2005, he served as Director of Finance. Prior to joining Kirklands,
Mr. Madden served as Assistant Controller with Trammell Crow Company, a real estate development, investment, and operations 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.
Michael Cairnes
, 57, has been Executive Vice President and Chief Operating Officer since November 2016. Prior to his appointment as
Chief Operating Officer, Mr. Cairnes was with Michaels Stores, where he served concurrently as President of its Aarons Brothers retail business, since 2015, and President of its Artistree framing business, since 2007. Prior to
Michaels, Mr. Cairnes held senior leadership positions at Brushstrokes, a publisher of art canvases, and Larson-Juhl, a manufacturer of home décor products. He also has served as a board and strategy advisor to Bain Capital and
Blackstone.
Michelle R. Graul,
51, has been Executive Vice President of Stores and Real Estate since November 2016. Prior to her
appointment as Executive Vice President of Stores and Real Estate, Mrs. Graul served as Executive Vice President of Stores and Merchandising from August 2014 to November 2016, Senior Vice President of Human Resources and Stores from January
2010 to August 2014, Senior Vice President of Human Resources from August 2008 to December 2009, and Vice President of Human Resources from March 2005 to July 2008. Prior to joining Kirklands, Mrs. Graul was employed with Pier 1 Imports
and served in various positions of increasing responsibility over 13 years culminating as Zone Human Resources Director. Prior to joining Pier 1 Imports, Mrs. Graul had positions with four other retailers serving in various store
operational roles and as a buyer.
Adam C. Holland
, 38, has been Vice President and Chief Financial Officer since February 2015.
Prior to his appointment as Vice President and Chief Financial Officer, Mr. Holland served as Chief Accounting Officer from August 2014 to January 2015 and Vice President of Finance from August 2008 to July 2014. He also served as Director of
Finance from June 2006 to July 2008 and Manager of Financial Reporting from May 2005 to June 2006. Prior to joining Kirklands, Mr. Holland served as Manager of Corporate Accounting with Walter Industries, Inc., a holding company that
owned home building, natural resources development, and industrial manufacturing companies, and prior to that was a senior auditor with Ernst & Young LLP.
No family relationships exist among any of the above-listed executive 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 executive 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 risks described below and the other information contained in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes before investing in
our common stock. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. These risks are not the only risks we face. Our business, financial condition, results of
operations or liquidity could also be adversely affected by additional factors that apply to all companies generally or by risks not currently known to us or that we currently view to be immaterial. We can provide no assurance and make no
representation that our risk mitigation efforts, although we believe they are reasonable, will be successful.
Risks Related to
Strategy and Strategy Execution
If We Do Not Generate Sufficient Cash Flow, We May Not Be Able to Implement Our Growth Strategy.
The rate of our expansion will depend on, among other factors, 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. The cost of opening new stores, expanding, remodeling and relocating existing stores which is part of our growth strategy may increase in
the future compared to historical costs. There can be no assurance that our business will generate adequate cash flow 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. 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. 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.
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If We Are Unable to Profitably Open and Operate New Stores at a Rate that Exceeds Planned Store Closings,
We May Not Be Able to Adequately Execute Our Growth Strategy, Resulting in a Decrease in Net Sales and Net Income.
A key element
of our growth strategy is to open new stores, both in existing markets and in new geographic markets that we select based on customer data and demographics. Our future operating results will depend to a substantial extent on whether we are able to
continue to open and operate new stores successfully at a rate that exceeds our planned store closings.
Our ability to open new stores and to expand,
remodel and relocate existing stores depends on a number of factors, including the prevailing conditions in the commercial real estate market and our ability to:
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locate and obtain favorable store sites and negotiate acceptable lease terms;
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construct or refurbish store sites;
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obtain and distribute adequate product supplies to our stores;
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maintain adequate warehousing and distribution capability at acceptable costs;
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hire, train and retain skilled managers and personnel; and
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continue to upgrade our information and other operating systems to control the anticipated growth and expanded operations.
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There also can be no assurance that we will be able to open, expand, remodel and relocate stores at the anticipated rate, if at all.
Furthermore, there is no assurance that new stores that we open will generate net sales levels necessary to achieve store-level profitability. New stores that we open in our existing markets may draw customers away from our existing stores resulting
in lower net sales growth compared to stores opened in new markets.
Every year we decide to close certain stores based on a number of
factors, including but not limited to planned location of new stores nearby, excessive rent or other operating cost increases, inadequate profitability, short term leases, or the landlords ability to replace us with another tenant at more
favorable terms to the landlord. Store closings have the effect of reducing net sales. We may choose to close underperforming stores before lease expiration and incur termination costs associated with those closings. If we are not able to open new
stores at a pace that exceeds the closing of existing stores we may not achieve our planned revenue growth.
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 well known and where we are less familiar with the
target customer, 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 a sufficient number of qualified Multi-Unit Managers, Store Managers and sales associates to support the expected growth in the number of our stores. In addition, the time and effort
required to train and supervise a large number of new managers and associates may divert resources from our existing stores and adversely affect our operating and financial performance.
Our Success Depends Upon our Marketing, Advertising and Promotional Efforts. If We are Unable to Implement them Successfully, or if Our Competitors
Market, Advertise or Promote More Effectively than We Do, Our Revenue May Be Adversely Affected.
We use marketing and promotional
programs to attract customers to our stores and to encourage purchases by our customers. We use various media for our promotional efforts, including print, database marketing, email communications and other electronic communications such as paid
search advertising and online social networks. If we fail to choose the appropriate medium for our efforts, or fail to implement and execute new marketing opportunities, our competitors may be able to attract some of our customers.
If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, if our
advertising and promotions become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise competitive insight, we could experience a material adverse
effect on our results of operations. A failure to sufficiently innovate, develop customer relationship initiatives, or maintain adequate and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
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. While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. Our
product introductions and product
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improvements, along with our other marketplace initiatives, are designed to capitalize on consumer trends. In order to remain successful, we must anticipate and react to these trends and develop
new products or processes to address them. 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 May Not Be Able to Successfully Respond to Technological Change, Our Website Could Become Obsolete and Our Financial Results and Conditions Could be
Adversely Affected.
We maintain a corporate website through which we market and sell our products to customers and publicize
Company information to customers, investors and other constituencies. Maintenance of our website requires substantial development and maintenance efforts, and entails significant technical and business risks. To remain competitive, we must continue
to enhance and improve the responsiveness, functionality and features of our website. The sale of products through
e-Commerce
is characterized by rapid technological change, the emergence of new industry
standards and practices and changes in customer requirements and preferences. Therefore, we may be required to license emerging technologies, enhance our existing website, develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective customers, and adapt to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Our ability to remain technologically
competitive may require substantial expenditures and lead time, and our failure to do so may harm our business and results of operations.
Risks Related to Profitability
Inventory Loss and Theft and the Inability to Anticipate Inventory Needs may Result in Reduced Net Sales.
We are subject to the risk of inventory loss and theft. We have experienced inventory shrinkage in the past, and we cannot assure
that incidences of inventory loss and theft will decrease in the future or that the measures we are taking will effectively reduce the problem of inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing
business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our financial condition could be affected adversely.
Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient
inventory levels to meet our customers demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict
customer trends or purchasing actions, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. Though we attempt to reduce these risks, we cannot assure you that we will
continue to be successful in our inventory management, which may negatively impact our cash flows and results of operations.
Inability to
Successfully Develop and Maintain a Relevant and Reliable Omni-channel Experience for Our Customers Could Adversely Affect Our Sales, Results of Operations and Reputation.
Our business has evolved from an
in-store
experience to interactions with customers across multiple
channels
(in-store,
online, mobile and social media, among others). Our customers are using computers, tablets, mobile phones and other devices to shop on our website and provide feedback and public commentary
about all aspects of our business. Omni-channel retailing is rapidly evolving, and we must keep pace with changing customer expectations and new developments and technology investments by our competitors.
Successful operation of our
e-Commerce
initiatives are dependent on our ability to maintain
uninterrupted availability of the Companys website and supporting applications, adequate inventory levels, timely fulfillment of customer orders, and accurate shipping of undamaged products. In addition, the Companys call center must
maintain a high standard of customer care. Failure to successfully manage this process may negatively impact sales, result in the loss of customers, and damage our reputation.
If we are unable to attract and retain team members or contract with third parties having the specialized skills needed to support our
omni-channel efforts, implement improvements to our customer-facing technology in a timely manner, or provide a convenient and consistent experience for our customers regardless of the ultimate sales channel, our ability to compete and our results
of operations could be adversely affected. In addition, if www.kirklands.com and our other customer-facing technology systems do not appeal to our customers or reliably function as designed, we may experience a loss of customer confidence, lost
sales or be exposed to fraudulent purchases, which, if significant, could adversely affect our reputation and results of operations.
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Our Results Could be Negatively Impacted if our Merchandise Offering Suffers a Substantial Impediment to
its Reputation Due to Real or Perceived Quality Issues.
Maintaining, promoting and growing our merchandise offering will depend
largely on the success of our design, merchandising, and marketing efforts and our ability to provide a consistent, high quality customer experience. If we fail to achieve these objectives, our public image and reputation could be tarnished by
negative publicity.
If our merchandise offerings do not meet applicable safety standards or customer expectations regarding safety, we
could experience lost sales and increased costs and be exposed to legal and reputational risk. All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety
standards. Events that give rise to actual, potential or perceived product safety concerns with respect to our products could expose us to government enforcement action or private litigation and result in costly product recalls and other
liabilities. In addition, negative customer perceptions regarding the safety of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and
costly for us to regain customer confidence.
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 a highly competitive market. We compete against
a diverse group of retailers, including specialty stores, department stores, discount stores, catalog and Internet-based retailers, which sell similar lines of merchandise to those carried by us. Our competitors, many of which are larger and have
substantially greater financial and other resources than us, include HomeGoods, Bed, Bath & Beyond, Cost Plus World Market, Hobby Lobby, Pier 1 Imports, Target, Ebay, Amazon and Wayfair. Our
brick-and-mortar
stores and our www.kirklands.com website also compete with the ever-increasing number of Internet retail websites offering home décor and gift merchandise. The availability
of home décor and gift merchandise from various competitors on the Internet could result in increased price competition as our customers are more readily able to comparison shop, which could reduce our sales, prices and margins and adversely
affect our results of operations.
Competitors may have greater financial, distribution, logistics, marketing and other resources
available to them and may be able to adapt to changes in customer requirements more quickly, devote greater resources to the design, sourcing, distribution, marketing and sale of their products, generate greater national brand recognition or adopt
more aggressive pricing policies. Our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing different distribution channels than we do. If we are unable to overcome these potential
competitive disadvantages, such factors could have an adverse effect on our business, financial condition and results of operations.
Weather
Conditions Could Adversely Affect Our Sales and/or Profitability by Affecting Consumer Shopping Patterns.
Our operating results
may be adversely affected by severe or unexpected weather conditions. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures, may disrupt our business and may adversely affect
our ability to sell and distribute products. Frequent or unusual snow, ice or rain storms or extended periods of unseasonable temperatures in our markets could adversely affect our performance by affecting customer shopping patterns or diminishing
demand for seasonal merchandise. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of our inventory and thereby reduce our sales and
profitability.
We are Exposed to the Risk of Natural Disasters, Pandemic Outbreaks, Global Political Events, War and Terrorism That Could Disrupt
Our Business and Result in Lower Sales, Increased Operating Costs and Capital Expenditures.
Our headquarters, store locations,
distribution center and warehouses, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. In addition, we operate
in markets that may be susceptible to pandemic outbreaks, war, terrorist acts or disruptive global political events, such as civil unrest in countries in which our vendors are located or products are manufactured. Our business may be harmed if our
ability to sell and distribute products is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our net sales, properties or operations. Such events could result in physical damage to one
or more of our properties, the temporary closure of some or all of our stores or distribution center, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of
goods to our distribution center or stores, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, which increase the cost of doing business. These events also can have indirect
consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or combination thereof, could adversely affect our operations.
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Our Performance May be Affected by General Economic Conditions.
Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending. Some of the factors that have had,
and may in the future have, an impact on discretionary consumer spending include national or global economic downturns, an increase in consumer debt (and a corresponding decrease in the availability of affordable consumer credit), reductions in net
worth based on recent severe market declines, softness in the residential real estate and mortgage markets, changes in taxation, increases in fuel and energy prices, fluctuation in interest rates, low consumer confidence and other macroeconomic
factors.
Specialty retail is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of home
décor and gifts tend to be highly correlated with cycles in consumers disposable income and trends in the housing market. A weak retail environment could impact customer traffic in our stores and also adversely affect our net sales.
Because of the seasonality of our business, economic downturns, increased sourcing costs, or scarcity in equipment 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. As purchases of home décor items may decline during recessionary periods, a prolonged recession, including any related decrease in consumers disposable incomes, may have a material adverse effect on our business,
financial condition and results of operations.
Should credit markets tighten or turmoil in the financial markets develop, our ability to
access funds, refinance our existing indebtedness, enter into agreements for new indebtedness or obtain funding through the issuance of our securities would be adversely impacted.
The impact of any such credit crisis or market turmoil on our major suppliers cannot be accurately predicted. The inability of key suppliers
to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver our merchandise. Worsening economic conditions could also result in difficulties for financial institutions (including bank failures) and other parties
with whom we do business, which could potentially impair our ability to access financing under existing arrangements or to otherwise recover amounts as they become due under our other contractual arrangements.
Our Profitability is Vulnerable to Inflation and Cost Increases.
Future increases in costs such as the cost of merchandise, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our
profitability. These cost increases may be the result of inflationary pressures that could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices, wage rates and lease and utility costs, may
increase our cost of goods sold or operating expenses. Competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products and therefore reduce our profitability.
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. 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.
Failure to Control Merchandise Returns Could Negatively Impact the Business.
We have established a provision for estimated merchandise returns based upon historical experience and other known factors. If actual returns
are greater than those projected by management, additional reductions of revenue could be recorded in the future. Also, to the extent that returned merchandise is damaged, we may not receive full retail value from the resale of the returned
merchandise. Introductions of new merchandise, changes in merchandise mix, associate selling behavior, merchandise quality issues, changes to our return policy,
e-Commerce
return behavior, changes in consumer
confidence, or other competitive and general economic conditions may cause actual returns to exceed the provision for estimated merchandise returns. An increase in merchandise returns that exceeds our current provision could negatively impact the
business and financial results.
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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. Consequently, comparisons between quarters are not
necessarily meaningful and the results for any quarter are not necessarily indicative of future results.
Our Comparable Store Net Sales Fluctuate
Due to a Variety of Factors.
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 historically experienced fluctuations,
including declines in some fiscal periods. Our comparable store net sales may not increase from quarter to quarter, or 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.
Our Freight Costs and thus Our Cost of Goods Sold are Impacted by Changes in Fuel Prices.
Our freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight costs with respect to both
inbound freight from vendors to our distribution center and outbound freight from our distribution center to our stores. Increased fuel prices or surcharges may increase freight costs and thereby increase our cost of goods sold.
Risks Related to New Legislation, Regulation and Litigation
New Tax Policies Could Adversely Affect Our Operating Results
Proposed changes to the corporate tax code by the new Presidential Administration and Congress could have a significant impact on our
profitability. Specifically, the proposed Border Adjusted Tax, which is designed to encourage companies like ours not to sell imported goods, could eliminate all or part of the deduction for the cost of goods sold if those goods were
imported. Since most of our merchandise is purchased through vendors in the United States who import the merchandise from foreign countries, the proposed Border Adjusted Tax could have a profound negative effect on us. These proposed tax changes
might also provide a significant advantage to our competitors in the home décor industry that sell primarily domestically-produced goods. There is some chance that the proposed tax changes could result in the strengthening of the U.S. dollar
thereby offsetting the impact of
non-deductibility
of cost of goods sold by making imports less expensive, but there is a risk that currency valuation adjustments could lag significantly after the adoption of
any new tax legislation. Companies like ours could raise the prices of their products to offset the impact of the tax changes, but our industry is highly competitive and customers tend to be price sensitive. The impact of proposed tax legislation
cannot be determined with certainty at this time.
New Legal Requirements Could Adversely Affect Our Operating Results.
Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costs in complying with these laws and
regulations. We are exposed to the risk that federal, state or local legislation may negatively impact our operations. Changes in product regulations (including changes in labeling or disclosure requirements), federal or state wage requirements,
employee rights (including changes in the process for our employees to join a union), health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax laws could
adversely impact our ability to achieve our financial targets. Changes in other regulatory areas, such as consumer credit, privacy and information security, or environmental regulation may result in significant added expenses or may require
extensive system and operating changes that may be difficult to implement and/or could materially increase our costs of doing business. Untimely compliance or noncompliance with applicable laws and regulations may subject us to legal risk, including
government enforcement action, significant fines and penalties and class action litigation, as well as reputational damage, which could adversely affect our results of operations.
Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas
(GHG) emissions. If domestic or international laws or regulations were expanded to require GHG emission reporting or reduction by us or our third-party manufacturers, or if we engage third-party contract manufacturers in countries that
have existing GHG emission reporting or reduction laws or regulations, we would need to expend financial and other resources to comply with such regulations and/or to monitor our third-party manufacturers compliance with such regulations. In
addition, we cannot control the actions of our third-party manufacturers or the publics perceptions of them, nor can we assure that these manufacturers will conduct their businesses using climate change proactive or sustainable practices.
Violations of climate change laws or regulations by third parties with whom we do business could result in negative public perception of us and/or delays in shipments and receipt of goods, and could subject us to fines or other penalties, any of
which could restrict our business activities, increase our operating expenses or cause our sales to decline.
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The costs and other effects of new legal requirements cannot be determined with certainty.
Additional laws may directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients or water, any of which could impact our business and financial results. In addition, our efforts to comply with new
legislation or regulations may increase our costs.
Litigation May Adversely Affect Our Business, Financial Condition, Results of Operations or
Liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property
rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation means. The outcome of litigation, particularly class action lawsuits, regulatory
actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may
remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our consolidated financial statements as a whole or may negatively affect our
operating results if changes to our business operation are required. The cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our
business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.
Product Liability Claims Could Adversely Affect Our Reputation.
Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers
or penalties from government agencies relating to allegations that the products sold by us are misbranded, contain contaminants or impermissible ingredients, provide inadequate instructions regarding their use or misuse, or include inadequate
warnings concerning flammability or interactions with other substances. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other
agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products must comply with applicable product and safety laws. We generally seek contractual indemnification and insurance
coverage from our suppliers. However, if we do not have adequate insurance or contractual indemnification available, such claims could have a material adverse effect on our business, financial condition and results of operation. Our ability to
obtain indemnification from foreign suppliers may be hindered by the manufacturers lack of understanding of United States product liability or other laws, which may make it more likely that we be required to respond to claims or complaints
from customers as if we were the manufacturer of the products. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase as
well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
If We Fail to Protect Our Brand Name, Competitors May Adopt Trade Names that Dilute the Value of Our Brand Name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able
to successfully enforce our trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition and could cause customer confusion, which
could, in turn, adversely affect our sales and profitability.
Risks Related to Dependence on Technology
Failure to Protect the Integrity and Security of Individually Identifiable Data of Our Customers and Employees Could Expose Us to Litigation and Damage
Our Reputation; The Expansion of Our
e-Commerce
Business Has Inherent Cybersecurity Risks That May Result in Business Disruptions.
We receive and maintain certain personal information about our customers and employees in the ordinary course of business. Our use of this
information is regulated at the international, federal and state levels, as well as by certain third-parties with whom we contract for such services. If our security and information systems are compromised or our business associates fail to comply
with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as operations, results of operations, and financial condition and could result in
litigation or the imposition of penalties. As privacy and information security laws and regulations change, we may incur additional costs to ensure we remain in compliance. Our business requires collection of large volumes of internal and customer
data, including credit card numbers and other personally identifiable information of our customers in various information systems and those of our service providers. The integrity and protection of customer, employee, and company data is critical to
us. If that data is inaccurate or incomplete, we or the store managers could make faulty decisions. Customers and employees also have a high expectation that we and our service providers will adequately protect their personal information. The
regulatory environment surrounding information, security and privacy is also
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increasingly demanding. Our existing systems may be unable to satisfy changing regulatory requirements and employee and customer expectations, or may require significant additional investments or
time to do so. Despite implementation of various measures designed to protect our information systems and records, including those we maintain with our service providers, we or the store managers may be subject to security breaches, system failures,
viruses, operator error or inadvertent releases of data. A significant theft, loss, or fraudulent use of customer, employee, or company data maintained by us or by a service provider or failure to comply with the various United States and
international laws and regulations applicable to the protection of such data or with Payment Card Industry data security standards, could adversely impact our reputation and could result in remedial and other expenses, fines, or litigation. A breach
in the security of our information systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits.
Certain aspects of the business, particularly our website, heavily depend on consumers entrusting personal financial information to be
transmitted securely over public networks. We have experienced increasing
e-Commerce
sales over the past several years, which increases our exposure to cybersecurity risks. We invest considerable resources in
protecting the personal information of our customers but are still subject to the risks of security breaches and cyber incidents resulting in unauthorized access to stored personal information. Any breach of our cybersecurity measures could result
in violation of privacy laws, potential litigation, and a loss of confidence in our security measures, all of which could have a negative impact on our financial results and our reputation. In addition, a privacy breach could cause us to incur
significant costs to restore the integrity of our system and could result in significant costs in government penalties and private litigation.
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;
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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
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computer viruses and malicious attacks and security breaches.
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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. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our
ability to manage inventories or process customer transactions, which could adversely affect our results of operations.
We also rely
heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors to
maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers
or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner. In addition, costs
and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.
Risks Associated with Vendors and Distribution
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.
Any disruption in the supply or increase in pricing of our merchandise could
negatively impact our ability to achieve anticipated operating results. We purchase our products from approximately 200 vendors with which we have no long-term purchase commitments or exclusivity contracts. 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. In addition, a period of unfavorable financial performance may make it difficult for some of our vendors to arrange for the financing or factoring of their orders with manufacturers, which could
result in our inability to obtain desired merchandise from those vendors.
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Our largest vendor is deemed to be a related party because its principal owner is the spouse of
the Companys Vice President of Merchandising. During fiscal 2016, the Companys purchases from this related party vendor totaled approximately $44.7 million, or 17.6% of total merchandise purchases. While this relationship
has been approved by the Companys Audit Committee, any disruption in the relationship could negatively impact our ability to achieve anticipated operating results.
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.
Most of our merchandise is purchased through vendors in the United States who import the merchandise from foreign
countries, primarily China. 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 trading status with the United States for a particular foreign country, work stoppages, delays in shipments, first cost price
increases, freight cost increases, exchange rate fluctuations, terrorism, war, economic uncertainties (including inflation, foreign government regulations and political unrest), trade restrictions (including the United States imposing antidumping or
countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices) and other factors relating to foreign trade, including costs and uncertainties associated with efforts to identify and disclose
sources of conflict minerals used in products that the Company causes to be manufactured and potential sell-through difficulties and reputational damage that may be associated with the inability of the Company to determine that such
products are classified as DRC conflict-free. 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.
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, such disruptions or delays may adversely affect our results of operations unless and until
alternative supply arrangements can 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. In addition, recent increases in energy prices have resulted, and are expected to continue to result, in increased merchandise and freight costs, which cannot readily be offset through higher prices because of competitive factors.
A significant portion of the distribution of products to our stores is coordinated through our distribution facility in Jackson, Tennessee. We
have also recently opened an
e-Commerce
distribution center, also in Jackson, Tennessee. We depend on the orderly operation of these receiving and distribution facilities, which rely on adherence to shipping
schedules and effective management. We are also currently exploring alternative distribution methods and from time to time we make significant upgrades to our warehouse management software. If these changes or upgrades do not go smoothly, then we
could face significant disruptions with our distribution process. In addition, we cannot assure that events beyond our control, such as disruptions due to fire or other catastrophic
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events, labor disagreements or shipping problems, will not result in delays in the delivery of merchandise to our stores. We also cannot guarantee that our insurance will be sufficient, or that
insurance proceeds will be timely paid to us, in the event our distribution center is shut down for any reason. Any significant disruption in the operations of our distribution facilities would have a material adverse effect on our ability to
maintain proper inventory levels in our stores and satisfy our
e-Commerce
customers, which could result in a loss of net sales and net income.
Risks Related to Company Governance and Ownership
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.
Our charter and bylaws contain certain corporate governance provisions that may make it more difficult to challenge management, deter and
inhibit unsolicited changes in control of Kirklands and 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, which include the Investor Protection Act, the Business Combination Act and the Tennessee
Greenmail Act, 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.
If We Fail to Maintain an Effective System of Internal Control, We May Not be
Able to Accurately Report Our Financial Results.
As a public company, we are required to document and test our internal controls
over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the
effectiveness of our internal control over financial reporting. As a result, we may incur substantial expenses to test our systems, to make any necessary improvements, and to hire additional personnel.
We maintain a system of internal control over financial reporting, but there are limitations inherent in internal control systems. If we are
unable to maintain adequate and effective internal control over financial reporting, our financial reporting could be adversely affected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs.
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If our management is unable to certify the effectiveness of our internal controls or if our
independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory
scrutiny and a loss of public confidence, which could harm our business and cause a decline in our common stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to
accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also
jeopardize our continued listing on The NASDAQ Stock Market LLC or any other stock exchange on which our common stock may be listed. Delisting of our common stock on any exchange could reduce the liquidity of the market for our common stock, which
could reduce the price of our common stock and increase the volatility of our common stock price.
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.