Kirkland's Reports Third Quarter Results

NASHVILLE, Tenn.--(BUSINESS WIRE)--Kirkland’s, Inc. (NASDAQ: KIRK) today reported financial results for the 13-week and 39-week periods ended October 30, 2010.

Net sales for the 13-week period ended October 30, 2010, increased 0.4% to $92.7 million compared with $92.4 million for the 13-week period ended October 31, 2009. Comparable store sales for the third quarter of fiscal 2010 decreased 2.4% compared with an increase of 11.3% in the prior-year period. The Company opened 15 stores and closed 5 stores during the quarter to end the period with 296 stores.

Net sales for the 39-week period ended October 30, 2010, increased 4.7% to $275.7 million compared with $263.4 million for the 39-week period ended October 31, 2009. Comparable store sales for the 39 weeks ended October 30, 2010, increased 3.5% compared with an increase of 7.6% in the prior-year period. The Company opened 28 stores and closed 11 stores during the 39-week period.

The Company reported net income of $2.3 million, or $0.11 per diluted share, for the third quarter of fiscal 2010 compared with net income of $5.8 million, or $0.27 per diluted share ($0.23 per diluted share adjusted), for the third quarter of fiscal 2009. Income tax expense for the third quarter of fiscal 2009 included a benefit of approximately $1.0 million, or $0.04 per diluted share, related to the reversal of a portion of the valuation allowance on the Company’s deferred tax assets established in prior periods.

For the 39-week period, the Company reported net income of $12.0 million, or $0.59 per diluted share, compared with net income of $12.5 million, or $0.62 per diluted share ($0.49 per diluted share adjusted), in the prior-year period. Income tax expense for the comparable 39-week period in fiscal 2009 included a benefit of approximately $2.6 million, or $0.13 per diluted share, related to the reversal of a portion of the valuation allowance on the Company’s deferred tax assets established in prior periods.

As discussed in previous quarters, the Company believes that presenting adjusted net income and earnings per share for its 2009 periods to reflect normalized tax rates is instrumental in judging the Company’s performance for fiscal 2010 and future periods when the Company is expected to incur a higher effective tax rate. See “Reconciliation of Non-GAAP Financial Information” below.

Robert Alderson, Kirkland’s President and Chief Executive Officer, said, “Our new store class is on schedule, and we are pleased that we will open 38 stores, which is in the upper range of our target. Importantly, we will return to net store growth during the fourth quarter. Early results suggest that this year’s class of new stores will be as strong as last year’s class. Kirkland’s balance sheet remains solid as we ended the quarter in line with our inventory target, and we continue to be a strong cash generator with significant free cash flow expected in 2010. However, the tough comparison to last year’s record earnings and robust comparable store sales, as well as the higher in-bound freight costs that we have previously discussed, presented difficult challenges. Traffic counts remained strong, but in a few of our key categories, our assortments did not convert customers at sufficient rates to achieve a comparable store sales increase for the quarter. We understand where the challenges and opportunities lie in our merchandise, and we are taking steps to achieve more consistent performance across all product categories for fiscal 2011.”

Updated Fourth Quarter and Fiscal 2010 Performance Goals

Store Growth:	At quarter end, the Company operated 296 stores compared with 279 stores at the beginning of fiscal 2010 and 299 stores at the beginning of fiscal 2009. The Company expects to open an additional 10 stores early in the fourth quarter, which is in the higher end of its previous projection of 7 to 12 new stores in the fourth quarter. The Company also expects to close 5 to 8 stores in the fourth quarter. For fiscal 2011, the Company is targeting net store unit growth of approximately 10% and net square footage growth of approximately 15%.
Net Sales:	The Company expects total sales for fiscal 2010 to increase in the range of 2% to 4% compared with fiscal 2009, which would imply a mid-to-high single-digit decrease in comparable store sales for the fourth quarter of fiscal 2010, offset by a sales lift provided by the net increase in the store base.
Margins:	The Company expects operating margin in fiscal 2010 to be below fiscal 2009 levels by approximately 100 to 150 basis points due to increases in overseas and inbound freight costs and higher markdown rates, partially offset by the benefit from lower occupancy costs and the strong performance of new store openings.
Earnings:	The Company expects to report earnings of $0.66 to $0.70 per diluted share in the fourth quarter of fiscal 2010 compared with adjusted diluted earnings per share of $0.92 a year ago, which would equate to fiscal 2010 earnings of $1.25 to $1.29 per diluted share compared with adjusted diluted earnings per share of $1.42 in fiscal 2009. The Company expects its effective tax rate for fiscal 2010 to be approximately 39% compared with 26.4% in fiscal 2009.
Cash Flow:	The Company expects to generate positive cash flow in fiscal 2010 and fully fund its new store growth and technology improvements through cash generated from operations. Year end cash balances are expected to be in the range of $85 million. Capital expenditures are estimated to range between $24 million and $26 million for fiscal 2010.

Investor Conference Call and Web Simulcast

Kirkland’s will host a conference call today, at 11:00 a.m. ET to discuss its results of operations for the third quarter of fiscal 2010. The number to call for the interactive teleconference is [phone]. A replay of the conference call will be available through Friday, November 26, 2010, by dialing [phone] and entering the confirmation number, 21477421.

A live broadcast of Kirkland’s quarterly conference call will be available online at the Company’s website www.kirklands.com under Investor Relations or http://www.videonewswire.com/event.asp?id=73992 on November 19, 2010, beginning at 11:00 a.m. ET. The online replay will follow shortly after the call and continue for one year.

Reconciliation of Non-GAAP Information

This release includes certain financial information not derived in accordance with generally accepted accounting principles (“GAAP”). The non-GAAP measures are “adjusted net income” and “adjusted diluted earnings per share” and are equal to net income, and diluted earnings per share excluding adjustments to the Company’s valuation allowance for deferred tax assets and certain income tax credits related to prior periods. Management uses these measures to focus on normalized operations, and believes that it is useful to investors because it enables them to perform more meaningful comparisons of past, present and future operating results. The Company believes that using this information, along with the corresponding GAAP measures, provides for a more complete analysis of the results of operations by quarter. Net income and earnings per share are the most directly comparable GAAP measures. Below is a reconciliation of the non-GAAP measures to their most comparable GAAP measures:

Reconciliation of Non-GAAP Financial Information
	13 Weeks Ended	39 Weeks Ended	13 Weeks Ended	52 Weeks Ended
(dollars in thousands, except per share amounts)	October 31, 2009	October 31, 2009	January 30, 2010	January 30, 2010
Net income
Net income in accordance with GAAP	$5,570	$12,492	$22,078	$34,570
Adjustments to the valuation allowance for deferred tax assets and certain income tax credits related to prior periods	($954)	($2,562)	($3,319)	($5,881)
Adjusted net income	$4,616	$9,930	$18,759	$28,689
Diluted earnings per share
Diluted EPS in accordance with GAAP	$0.27	$0.62	$1.08	$1.71
Adjustments to the valuation allowance for deferred tax assets and certain income tax credits related to prior periods	($0.04)	($0.13)	($0.16)	($0.29)
Adjusted diluted earnings per share	$0.23	$0.49	$0.92	$1.42

Kirkland’s, Inc. was founded in 1966 and is a specialty retailer of home décor in the United States. Although originally focused in the Southeast, the Company has grown beyond that region and currently operates 299 stores in 29 states. The Company’s stores present a broad selection of distinctive merchandise, including framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. The Company's stores also offer an extensive assortment of gifts, as well as seasonal merchandise. More information can be found at www.kirklands.com.

Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland’s actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, the competitive environment in the home décor industry in general and in Kirkland’s specific market areas, inflation, product availability and growth opportunities, seasonal fluctuations, and economic conditions in general. Those and other risks are more fully described in Kirkland’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed on April 15, 2010. Kirkland’s disclaims any obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
	13-Week Period Ended
	October 30,		October 31,
	2010		2009
Net sales	$	92,725	$	92,389
Cost of sales		56,732		54,458
Gross profit		35,993		37,931
Operating expenses:
Operating expenses		29,081		26,757
Depreciation		3,146		3,531
Operating income		3,766		7,643
Other income, net		29		7
Income before income taxes		3,795		7,650
Income tax expense		1,516		2,080
Net income	$	2,279	$	5,570
Earnings per share:
Basic	$	0.11	$	0.28
Diluted	$	0.11	$	0.27
Shares used to calculate earnings per share:
Basic		19,889		19,708
Diluted		20,522		20,333

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
	39-Week Period Ended
	October 30,		October 31,
	2010		2009
Net sales	$	275,694	$	263,397
Cost of sales		164,243		159,885
Gross profit		111,451		103,512
Operating expenses:
Operating expenses		82,374		76,048
Depreciation		9,294		11,017
Operating income		19,783		16,447
Other income, net		148		73
Income before income taxes		19,931		16,520
Income tax expense		7,882		4,028
Net income	$	12,049	$	12,492
Earnings per share:
Basic	$	0.61	$	0.63
Diluted	$	0.59	$	0.62
Shares used to calculate earnings per share:
Basic		19,839		19,684
Diluted		20,588		20,181

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
	October 30,		January 30,		October 31,
	2010		2010		2009
ASSETS
Current assets:
Cash and cash equivalents	$	58,831	$	76,412	$	37,017
Inventories, net		56,851		39,355		53,701
Deferred income taxes		4,013		3,552		1,816
Other current assets		11,653		4,331		8,327
Total current assets		131,348		123,650		100,861
Property and equipment, net		45,125		36,856		38,505
Non-current deferred income taxes		3,656		4,395		2,963
Other assets		684		640		641
Total assets	$	180,813	$	165,541	$	142,970
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	25,923	$	15,589	$	24,899
Income taxes payable		-		7,087		-
Other current liabilities		21,625		25,402		22,619
Total current liabilities		47,548		48,078		47,518
Deferred rent and other long-term liabilities		30,332		28,978		29,481
Total liabilities		77,880		77,056		76,999
Net shareholders' equity		102,933		88,485		65,971
Total liabilities and shareholders' equity	$	180,813	$	165,541	$	142,970

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
	39 Week Period Ended
	October 30,			October 31,
	2010			2009
Net cash provided by (used in):
Operating activities	$	(320	)	$	8,332
Investing activities		(17,810	)		(7,946	)
Financing activities		549			186
Cash and cash equivalents:
Net increase (decrease)		(17,581	)		572
Beginning of the period		76,412			36,445
End of the period	$	58,831		$	37,017