Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - KIRKLAND'S, INC | kirk-ex322_7.htm |
EX-32.1 - EX-32.1 - KIRKLAND'S, INC | kirk-ex321_6.htm |
EX-31.2 - EX-31.2 - KIRKLAND'S, INC | kirk-ex312_8.htm |
EX-31.1 - EX-31.1 - KIRKLAND'S, INC | kirk-ex311_9.htm |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended August 1, 2020
or
☐ |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______to ______.
Commission file number: 000-49885
Kirkland’s, Inc.
(Exact name of registrant as specified in its charter)
Tennessee |
62-1287151 |
(State or other jurisdiction of |
(IRS Employer Identification No.) |
incorporation or organization) |
|
|
|
5310 Maryland Way |
|
Brentwood, Tennessee |
37027 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (615) 872-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock |
KIRK |
NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☒ |
Smaller reporting company |
|
☒ |
|
|
|
Emerging growth company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 14,248,104 shares outstanding as of August 28, 2020.
|
|
Page |
|
|
|
3 |
||
3 |
||
|
3 |
|
|
4 |
|
|
5 |
|
|
6 |
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 |
|
22 |
||
22 |
||
|
|
|
23 |
||
23 |
||
23 |
||
24 |
||
25 |
||
|
|
|
|
26 |
2
PART I - FINANCIAL INFORMATION
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
|
August 1, |
|
|
February 1, |
|
|
August 3, |
|
|||
|
|
2020 |
|
|
2020 |
|
|
2019 |
|
|||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
27,565 |
|
|
$ |
30,132 |
|
|
$ |
14,650 |
|
Inventories, net |
|
|
77,078 |
|
|
|
94,674 |
|
|
|
108,233 |
|
Income taxes receivable |
|
|
6,162 |
|
|
|
243 |
|
|
|
465 |
|
Prepaid expenses and other current assets |
|
|
8,467 |
|
|
|
6,462 |
|
|
|
8,197 |
|
Total current assets |
|
|
119,272 |
|
|
|
131,511 |
|
|
|
131,545 |
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment |
|
|
20,732 |
|
|
|
21,390 |
|
|
|
21,575 |
|
Furniture and fixtures |
|
|
74,716 |
|
|
|
80,622 |
|
|
|
81,184 |
|
Leasehold improvements |
|
|
113,086 |
|
|
|
123,022 |
|
|
|
126,812 |
|
Computer software and hardware |
|
|
81,931 |
|
|
|
73,984 |
|
|
|
72,121 |
|
Projects in progress |
|
|
2,730 |
|
|
|
6,862 |
|
|
|
10,791 |
|
Property and equipment, gross |
|
|
293,195 |
|
|
|
305,880 |
|
|
|
312,483 |
|
Accumulated depreciation |
|
|
(220,519 |
) |
|
|
(223,017 |
) |
|
|
(209,917 |
) |
Property and equipment, net |
|
|
72,676 |
|
|
|
82,863 |
|
|
|
102,566 |
|
Operating lease right-of-use assets |
|
|
165,393 |
|
|
|
200,067 |
|
|
|
219,648 |
|
Deferred income taxes |
|
|
— |
|
|
|
1,525 |
|
|
|
9,010 |
|
Other assets |
|
|
5,925 |
|
|
|
6,476 |
|
|
|
6,229 |
|
Total assets |
|
$ |
363,266 |
|
|
$ |
422,442 |
|
|
$ |
468,998 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
36,890 |
|
|
$ |
59,513 |
|
|
$ |
60,537 |
|
Accrued expenses |
|
|
29,056 |
|
|
|
28,773 |
|
|
|
24,646 |
|
Operating lease liabilities |
|
|
49,034 |
|
|
|
53,154 |
|
|
|
53,561 |
|
Total current liabilities |
|
|
114,980 |
|
|
|
141,440 |
|
|
|
138,744 |
|
Operating lease liabilities |
|
|
180,180 |
|
|
|
195,736 |
|
|
|
218,700 |
|
Other liabilities |
|
|
7,294 |
|
|
|
8,311 |
|
|
|
9,148 |
|
Total liabilities |
|
|
302,454 |
|
|
|
345,487 |
|
|
|
366,592 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at August 1, 2020, February 1, 2020, and August 3, 2019, respectively |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock, no par value; 100,000,000 shares authorized; 14,240,081; 13,955,826; and 13,961,029 shares issued and outstanding at August 1, 2020, February 1, 2020, and August 3, 2019, respectively |
|
|
173,543 |
|
|
|
172,885 |
|
|
|
170,869 |
|
Accumulated deficit |
|
|
(112,731 |
) |
|
|
(95,930 |
) |
|
|
(68,463 |
) |
Total shareholders’ equity |
|
|
60,812 |
|
|
|
76,955 |
|
|
|
102,406 |
|
Total liabilities and shareholders’ equity |
|
$ |
363,266 |
|
|
$ |
422,442 |
|
|
$ |
468,998 |
|
The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
|
|
August 1, |
|
|
August 3, |
|
|
August 1, |
|
|
August 3, |
|
||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
Net sales |
|
$ |
124,722 |
|
|
$ |
119,885 |
|
|
$ |
201,969 |
|
|
$ |
249,533 |
|
Cost of sales |
|
|
89,002 |
|
|
|
88,536 |
|
|
|
156,013 |
|
|
|
171,992 |
|
Cost of sales related to merchandise purchased from related party vendor |
|
|
— |
|
|
|
4,776 |
|
|
|
— |
|
|
|
14,749 |
|
Cost of sales |
|
|
89,002 |
|
|
|
93,312 |
|
|
|
156,013 |
|
|
|
186,741 |
|
Gross profit |
|
|
35,720 |
|
|
|
26,573 |
|
|
|
45,956 |
|
|
|
62,792 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
20,236 |
|
|
|
27,162 |
|
|
|
38,814 |
|
|
|
54,218 |
|
Other operating expenses |
|
|
13,594 |
|
|
|
16,656 |
|
|
|
28,161 |
|
|
|
34,790 |
|
Depreciation (exclusive of depreciation included in cost of sales) |
|
|
1,569 |
|
|
|
1,736 |
|
|
|
3,070 |
|
|
|
3,575 |
|
Asset impairment |
|
|
5,666 |
|
|
|
1,981 |
|
|
|
8,850 |
|
|
|
3,859 |
|
Total operating expenses |
|
|
41,065 |
|
|
|
47,535 |
|
|
|
78,895 |
|
|
|
96,442 |
|
Operating loss |
|
|
(5,345 |
) |
|
|
(20,962 |
) |
|
|
(32,939 |
) |
|
|
(33,650 |
) |
Interest expense |
|
|
169 |
|
|
|
68 |
|
|
|
389 |
|
|
|
138 |
|
Other income |
|
|
(66 |
) |
|
|
(226 |
) |
|
|
(186 |
) |
|
|
(554 |
) |
Loss before income taxes |
|
|
(5,448 |
) |
|
|
(20,804 |
) |
|
|
(33,142 |
) |
|
|
(33,234 |
) |
Income tax expense (benefit) |
|
|
3,915 |
|
|
|
(3,684 |
) |
|
|
(16,341 |
) |
|
|
(7,193 |
) |
Net loss |
|
$ |
(9,363 |
) |
|
$ |
(17,120 |
) |
|
$ |
(16,801 |
) |
|
$ |
(26,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.66 |
) |
|
$ |
(1.21 |
) |
|
$ |
(1.20 |
) |
|
$ |
(1.83 |
) |
Diluted |
|
$ |
(0.66 |
) |
|
$ |
(1.21 |
) |
|
$ |
(1.20 |
) |
|
$ |
(1.83 |
) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
14,123 |
|
|
|
14,110 |
|
|
|
14,057 |
|
|
|
14,241 |
|
Diluted |
|
|
14,123 |
|
|
|
14,110 |
|
|
|
14,057 |
|
|
|
14,241 |
|
The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share data)
|
|
Common Stock |
|
|
Accumulated |
|
|
Total Shareholders’ |
|
|||||||
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Equity |
|
||||
Balance at February 1, 2020 |
|
|
13,955,826 |
|
|
$ |
172,885 |
|
|
$ |
(95,930 |
) |
|
$ |
76,955 |
|
Employee stock purchases |
|
|
34,999 |
|
|
|
35 |
|
|
|
— |
|
|
|
35 |
|
Restricted stock units vested |
|
|
32,341 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Net share settlement of restricted stock |
|
|
(8,663 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
307 |
|
|
|
— |
|
|
|
307 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(7,438 |
) |
|
|
(7,438 |
) |
Balance at May 2, 2020 |
|
|
14,014,503 |
|
|
|
173,219 |
|
|
|
(103,368 |
) |
|
|
69,851 |
|
Restricted stock units vested |
|
|
230,688 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net share settlement of restricted stock |
|
|
(5,110 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
329 |
|
|
|
— |
|
|
|
329 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(9,363 |
) |
|
|
(9,363 |
) |
Balance at August 1, 2020 |
|
|
14,240,081 |
|
|
$ |
173,543 |
|
|
$ |
(112,731 |
) |
|
$ |
60,812 |
|
|
|
Common Stock |
|
|
Accumulated |
|
|
Total Shareholders’ |
|
|||||||
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Equity |
|
||||
Balance at February 2, 2019 |
|
|
14,504,824 |
|
|
$ |
169,477 |
|
|
$ |
(38,677 |
) |
|
$ |
130,800 |
|
Cumulative effect of change in accounting principle |
|
|
— |
|
|
|
— |
|
|
|
(331 |
) |
|
|
(331 |
) |
Employee stock purchases |
|
|
6,880 |
|
|
|
68 |
|
|
|
— |
|
|
|
68 |
|
Stock-based compensation expense |
|
|
— |
|
|
|
560 |
|
|
|
— |
|
|
|
560 |
|
Repurchase and retirement of common stock |
|
|
(287,056 |
) |
|
|
— |
|
|
|
(2,368 |
) |
|
|
(2,368 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(8,921 |
) |
|
|
(8,921 |
) |
Balance at May 4, 2019 |
|
|
14,224,648 |
|
|
|
170,105 |
|
|
|
(50,297 |
) |
|
|
119,808 |
|
Employee stock purchases |
|
|
22,354 |
|
|
|
77 |
|
|
|
— |
|
|
|
77 |
|
Restricted stock units vested |
|
|
70,725 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net share settlement of restricted stock |
|
|
(10,792 |
) |
|
|
(44 |
) |
|
|
— |
|
|
|
(44 |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
731 |
|
|
|
— |
|
|
|
731 |
|
Repurchase and retirement of common stock |
|
|
(345,906 |
) |
|
|
— |
|
|
|
(1,046 |
) |
|
|
(1,046 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(17,120 |
) |
|
|
(17,120 |
) |
Balance at August 3, 2019 |
|
|
13,961,029 |
|
|
$ |
170,869 |
|
|
$ |
(68,463 |
) |
|
$ |
102,406 |
|
The accompanying notes are an integral part of these financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
26 Weeks Ended |
|
|||||
|
|
August 1, |
|
|
August 3, |
|
||
|
|
2020 |
|
|
2019 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(16,801 |
) |
|
$ |
(26,041 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation of property and equipment |
|
|
11,986 |
|
|
|
14,295 |
|
Amortization of debt issue costs |
|
|
48 |
|
|
|
27 |
|
Asset impairment |
|
|
8,850 |
|
|
|
3,859 |
|
Cumulative effect of change in accounting principle |
|
|
— |
|
|
|
(331 |
) |
(Gain) loss on disposal of property and equipment |
|
|
(28 |
) |
|
|
139 |
|
Stock-based compensation expense |
|
|
636 |
|
|
|
1,291 |
|
Deferred income taxes |
|
|
1,525 |
|
|
|
(7,307 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Inventories, net |
|
|
17,596 |
|
|
|
(23,799 |
) |
Prepaid expenses and other current assets |
|
|
(2,005 |
) |
|
|
2,116 |
|
Accounts payable |
|
|
(21,608 |
) |
|
|
19,438 |
|
Accounts payable to related party vendor |
|
|
— |
|
|
|
(8,166 |
) |
Accrued expenses |
|
|
315 |
|
|
|
(2,428 |
) |
Income taxes receivable |
|
|
(5,951 |
) |
|
|
(959 |
) |
Operating lease assets and liabilities |
|
|
8,683 |
|
|
|
(4,295 |
) |
Other assets and liabilities |
|
|
(414 |
) |
|
|
635 |
|
Net cash provided by (used in) operating activities |
|
|
2,832 |
|
|
|
(31,526 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
154 |
|
|
|
— |
|
Capital expenditures |
|
|
(5,560 |
) |
|
|
(8,457 |
) |
Net cash used in investing activities |
|
|
(5,406 |
) |
|
|
(8,457 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings on revolving line of credit |
|
|
40,000 |
|
|
|
— |
|
Repayments on revolving line of credit |
|
|
(40,000 |
) |
|
|
— |
|
Refinancing costs |
|
|
(15 |
) |
|
|
— |
|
Cash used in net share settlement of restricted stock |
|
|
(13 |
) |
|
|
(44 |
) |
Employee stock purchases |
|
|
35 |
|
|
|
145 |
|
Repurchase and retirement of common stock |
|
|
— |
|
|
|
(3,414 |
) |
Net cash provided by (used in) financing activities |
|
|
7 |
|
|
|
(3,313 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net decrease |
|
|
(2,567 |
) |
|
|
(43,296 |
) |
Beginning of the period |
|
|
30,132 |
|
|
|
57,946 |
|
End of the period |
|
$ |
27,565 |
|
|
$ |
14,650 |
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Non-cash accruals for purchases of property and equipment |
|
$ |
838 |
|
|
$ |
2,367 |
|
Operating lease assets and liabilities recognized upon adoption of ASC 842 |
|
|
— |
|
|
|
295,240 |
|
The accompanying notes are an integral part of these financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Description of Business and Basis of Presentation
Nature of Business - Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating 387 stores in 35 states as of August 1, 2020, as well as an e-commerce enabled website, www.kirklands.com.
Principles of consolidation - The condensed consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries, Kirkland’s Stores, Inc., Kirkland’s DC, Inc., and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.
Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are presented in accordance with the requirements of Form 10-Q and pursuant to the reporting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on April 10, 2020.
Novel coronavirus (“COVID-19”) - The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which has negatively affected the Company’s business operations. As a result, if the pandemic persists or worsens, accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant, although the potential effects cannot be estimated at this time.
On March 19, 2020, the Company closed all of its retail store locations in response to the COVID-19 pandemic. The Company took a number of actions to mitigate the impact of the decreased sales due to the COVID-19 related store closures including:
|
• |
Cancelled orders and delayed merchandise receipts to manage inventory levels, and extended payment terms with product and non-product vendors to improve working capital. |
|
• |
After paying all store team members during the first two weeks of the closure, furloughed all part-time store employees and temporarily reduced the pay of full-time managers and key employees. |
|
• |
Permanently reduced corporate costs including permanent labor reductions, reduced marketing spend and lower corporate headquarters rent. |
|
• |
Permanently reduced distribution center indirect labor and furloughed a portion of direct distribution center labor, while further reducing hours to match demand. |
|
• |
Significantly reduced transportation expenses with limited deliveries to stores and the delay/reduction of inbound freight receipts. |
|
• |
Borrowed $40 million on its $75 million revolving credit facility. |
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carry backs to offset 100% of taxable income for taxable years beginning before 2021. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company received $12.3 million in federal tax refunds under the CARES Act for previous year filings during the 13-week period ended August 1, 2020. The CARES Act also provides for an employee retention payroll tax credit for employers subject to closures due to COVID-19. In addition, the CARES Act permits delayed payment of the employer-portion of social security taxes. The delay applies to social security taxes due on wages paid between the date of enactment of the CARES Act and January 1, 2021 with half of the delayed payroll taxes due by December 31, 2021 and the other half due by December 31, 2022. The Company pursued all relevant measures under the CARES Act during the 13 and 26-week periods ended August 1, 2020, including net operating loss carry backs, wage credits and payroll tax deferrals in order to improve liquidity. We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued.
During the 13-week period ended August 1, 2020, the Company repaid the $40 million that was borrowed under the revolving credit facility. The Company’s stores started offering contactless curbside pickup and then reopened to customer traffic throughout the period taking local restrictions into account. Stores first opened with restricted operating hours and limited staffing with store merchandise deliveries from the distribution centers resuming. The impact of COVID-19 and the related CARES Act have materially impacted the Company’s results of operations for the 13 and 26-week periods ended August 1, 2020.
7
The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on customer confidence and spending, all of which are highly uncertain.
Seasonality - The results of the Company’s operations for the 13 and 26-week periods ended August 1, 2020 are not indicative of the results to be expected for any other interim period or for the entire fiscal year due to seasonality factors.
Fiscal year - The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. Accordingly, fiscal 2020 represents the 52 weeks ending on January 30, 2021 and fiscal 2019 represented the 52 weeks ended on February 1, 2020.
Use of estimates - The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end.
Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments of long-lived assets, inventory reserves, self-insurance reserves and income taxes.
Gift cards - The Company uses the redemption recognition method to account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In these circumstances, to the extent the Company determines there is no requirement for remitting card balances to government agencies under unclaimed property laws, such amounts are recognized in the condensed consolidated statements of operations as a component of net sales.
The table below sets forth selected gift card liability information (in thousands) included in accrued expenses in the condensed consolidated balance sheets for the periods indicated:
|
|
August 1, 2020 |
|
|
February 1, 2020 |
|
|
August 3, 2019 |
|
|||
Gift card liability, net of estimated breakage |
|
$ |
12,169 |
|
|
$ |
13,128 |
|
|
$ |
11,705 |
|
The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:
|
13-Week Period Ended |
|
|
26-Week Period Ended |
|
||||||||||
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
Gift card breakage revenue |
$ |
190 |
|
|
$ |
252 |
|
|
$ |
347 |
|
|
$ |
531 |
|
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period |
|
1,569 |
|
|
|
2,130 |
|
|
|
2,962 |
|
|
|
4,210 |
|
Nasdaq Delisting Notice - On April 24, 2020, the Company received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) notifying it that, for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Select Market, referred to as the minimum bid price rule. In accordance with Nasdaq Listing Rules, the Company had an initial period of 180 calendar days to regain compliance. On June 10, 2020, the Company received a letter from the Listing Qualifications Department of Nasdaq stating that the Company’s common stock had a closing bid price of $1.00 per share or greater for 10 consecutive days from May 26, 2020 to June 9, 2020. Accordingly, the Company has regained compliance with the Nasdaq Listing Rules, and this matter is now closed.
Note 2 - Income Taxes
An estimate of the annual effective tax rate is used at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. However, for the 13 week period ended May 2, 2020, the Company determined that the annual effective tax rate could not be reliably estimated due to operational uncertainties related to COVID-19; therefore, the actual effective tax rate for the period was deemed to be the best estimate of the annual effective tax rate. For the 26-week period ended August 1, 2020, the Company was able to estimate an annual effective tax rate due to less operational uncertainties related to COVID-19.
8
For the 13-week periods ended August 1, 2020 and August 3, 2019, the Company recorded income tax expense of 71.9% and an income tax benefit of 17.7% of the loss before income taxes, respectively. For the 26-week periods ended August 1, 2020 and August 3, 2019, the Company recorded an income tax benefit of 49.3% and 21.6% of the loss before income taxes, respectively. The change in income taxes for the 13-week period ended August 1, 2020, compared to the prior year period, was primarily due to the change from performing the tax provision under the discrete method based on no annual forecast in the first 13 weeks of fiscal 2020 compared to using the annual effective tax rate method for the 26-week period ended August 1, 2020. The Company also did not yet have a full deferred tax asset valuation allowance in the second 13 weeks of fiscal 2019. The increase in the income tax rate for the 26-week period ended August 1, 2020, compared to the prior year period, was primarily due to a $12.3 million income tax benefit related to the carryback of the 2019 federal net operating loss to prior periods pursuant to the CARES Act, a $2.3 million income tax benefit related to the carryback of the projected fiscal 2020 loss to years with a 35% statutory tax rate, partially offset by $5.9 million due to the valuation allowance against deferred tax assets.
The Company recognizes deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities, including net operating loss carry forwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more than the net amount recorded. Any change in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such determination is made.
Note 3 - Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding during each period presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable periods using the treasury stock method. Diluted loss per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted loss per share, because to do so would have been antidilutive, were approximately 1.5 million shares and 1.7 million shares for the 13-week periods ended August 1, 2020 and August 3, 2019, respectively, and 1.4 million shares and 1.6 million shares for the 26-week periods ended August 1, 2020 and August 3, 2019.
Note 4 - Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value because of their short maturities.
The Company maintains The Executive Non-Qualified Excess Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is funded, and the Company invests participant deferrals into trust assets, which are invested in a variety of mutual funds that are Level 1 inputs. The plan assets and plan liabilities are adjusted to fair value on a recurring basis. The Board of Directors approved the termination of the Deferred Compensation Plan effective September 6, 2019. Any remaining balances in the Deferred Compensation Plan will be paid out one year from the effective date. Deferred Compensation Plan assets and liabilities were approximately $1.7 million, $1.9 million and $1.7 million as of August 1, 2020, February 1, 2020 and August 3, 2019, respectively, and were recorded in other assets and other liabilities in the condensed consolidated balance sheets as of February 1, 2020 and August 3, 2019 and in prepaid expenses and other current assets and accrued expenses as of August 1, 2020.
The Company measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific assumptions that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. See Note 10 to the condensed consolidated financial statements for further discussion.
9
Note 5 - Commitments and Contingencies
The Company was named as a defendant in a putative class action filed in April 2017 in the United States District Court for the Western District of Pennsylvania, Gennock v. Kirkland’s, Inc. The complaint alleged that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number on customers’ receipts. On October 21, 2019, the District Court dismissed the matter and ruled that the Plaintiffs did not have standing based on the Third Circuit’s recent decision in Kamal v. J. Crew Group, Inc., 918 F.3d 102 (3d. Cir. 2019). Following the dismissal in federal court, on October 25, 2019, the Plaintiffs filed a Praecipe to Transfer the case to Pennsylvania state court, and on August 20, 2020, the court ruled that the Plaintiffs have standing. However, the court also certified the standing issue for an interlocutory appeal, and the Company intends to file a petition with the Pennsylvania Superior Court. The Company continues to believe that the case is without merit and intends to continue to vigorously defend itself against the allegations. The matter is covered by insurance, and the Company does not believe that the case will have a material adverse effect on its consolidated financial condition, operating results or cash flows.
The Company has been named as a defendant in a putative class action filed in May 2018 in the Superior Court of California, Miles v. Kirkland’s Stores, Inc. The case has been removed to Federal Court, Central District of California, and trial is not yet set. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. The parties are currently engaging in discovery, and the Plaintiff has until November 9, 2020, to file for class certification. The Company believes the case is without merit and intends to vigorously defend itself against the allegations.
The Company is also party to other pending legal proceedings and claims that arise in the normal course of business. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company’s management is of the opinion that it is unlikely that such proceedings and any claims in excess of insurance coverage will have a material effect on its consolidated financial condition, operating results or cash flows.
Note 6 - Stock-Based Compensation
The Company maintains equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights to employees, non-employee directors and consultants. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no material changes in the assumptions used to compute compensation expense during the current year. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:
|
|
13-Week Period Ended |
|
|
26-Week Period Ended |
|
||||||||||
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations) |
|
$ |
329 |
|
|
$ |
731 |
|
|
$ |
636 |
|
|
$ |
1,291 |
|
Stock options granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
430,493 |
|
Restricted stock units granted |
|
|
70,000 |
|
|
|
243,472 |
|
|
|
1,050,421 |
|
|
|
458,717 |
|
Note 7 - Related Party Transactions
The Company had an agreement with a related party vendor to purchase merchandise inventory. The vendor was considered a related party for financial reporting purposes because its principal owner is the spouse of the Company’s former Vice President of Product Development and Trend. As of June 14, 2019, the vendor is no longer a related party. The table below sets forth selected results related to this vendor, for the time period that the vendor was a related party, in dollars (in thousands) and percentages for the periods indicated:
|
|
13-Week Period Ended |
|
|
26-Week Period Ended |
|
||||||||||
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
Related Party Vendor: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
$ |
— |
|
|
$ |
6,177 |
|
|
$ |
— |
|
|
$ |
19,577 |
|
Purchases as a percent of total merchandise purchases |
|
|
— |
% |
|
|
9.2 |
% |
|
|
— |
% |
|
|
16.0 |
% |
10
Note 8 - Stock Repurchase Plan
On September 24, 2018, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. Repurchases of shares will be made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases will be based on a variety of factors, including stock acquisition price, regulatory limitations and other market and economic factors. The stock repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of August 1, 2020, the Company had approximately $21,000 remaining under the current stock repurchase plan. The table below sets forth selected stock repurchase plan information (in thousands, except share amounts) for the periods indicated:
|
|
13-Week Period Ended |
|
|
26-Week Period Ended |
|
||||||||||
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
Shares repurchased and retired |
|
|
— |
|
|
|
345,906 |
|
|
|
— |
|
|
|
632,962 |
|
Share repurchase cost |
|
$ |
— |
|
|
$ |
1,046 |
|
|
$ |
— |
|
|
$ |
3,414 |
|
Note 9 - Senior Credit Facility
On December 6, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with Bank of America, N.A. as administrative agent and collateral agent, and lender. The 2019 Credit Agreement replaced the Company’s Amended and Restated Credit Agreement dated as of August 19, 2011, as amended by that Joinder and First Amendment to Amended and Restated Credit Agreement dates as of February 26, 2016 (the “2016 Credit Agreement”) and, together with the 2019 Credit Agreement, the (“Credit Agreements”). Like the 2016 Credit Agreement, the 2019 Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million and a $25 million incremental accordion feature. The 2019 Credit Agreement contains substantially similar terms and conditions as the 2016 Credit Agreement, and extended its maturity date to December 2024. The 2016 Credit Agreement was scheduled to expire in February 2021. Advances under the Credit Agreements bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the lender on the unused portion of the credit facility is 25 basis points per annum.
Borrowings under the Credit Agreements are subject to certain conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreements may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.
The Company is subject to a Second Amended and Restated Security Agreement (the “Security Agreement”) with its lender. Pursuant to the Security Agreement, the Company pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to secure the payment and performance of the obligations under the Credit Agreements.
As of August 1, 2020, the Company was in compliance with the covenants in the 2019 Credit Agreement. Under the 2019 Credit Agreement, there were no outstanding borrowings and $1,750,000 in letters of credit outstanding, with approximately $51.4 million available for borrowing, as of August 1, 2020.
Note 10 - Impairments
The Company evaluates the recoverability of the carrying amounts of long-lived assets when events or changes in circumstances dictate that their carrying values may not be recoverable. This review includes the evaluation of individual under-performing retail stores and assessing the recoverability of the carrying value of the assets related to the stores. Future cash flows are projected for the remaining lease life. If the estimated future cash flows are less than the carrying value of the assets, the Company records an impairment charge equal to the difference between the assets’ fair value and carrying value. The fair value is estimated using a discounted cash flow approach considering such factors as future sales levels, gross margins, changes in rent and other expenses as well as the overall operating environment specific to that store. The amount of the impairment charge is allocated proportionately to all assets in the asset group with no asset written down below its individual fair value.
11
In connection with the adoption of the new lease accounting standard at the beginning of fiscal 2019, the Company reviewed its store portfolio for possible impairment, as the new right-of-use assets were included as part of the long-lived asset group that was evaluated for impairment. As of the beginning of fiscal 2019, the Company recorded an adjustment to increase the opening balance of accumulated deficit by approximately $0.3 million for the cumulative effect of the adoption of ASC 842 for right-of-use assets at six of the impaired stores.
During the 13-week periods ended August 1, 2020 and August 3, 2019, the Company recorded an impairment charge of approximately $5.2 million and $0.5 million for right-of-use asset impairment at 17 stores and 2 stores, respectively. The Company also recorded an impairment charge totaling approximately $0.5 million and $1.5 million for the 13-week periods ended August 1, 2020 and August 3, 2019, respectively, for leasehold improvements, fixtures and equipment at 4 stores and 3 stores, respectively, for which the carrying values exceed the respective fair values for these assets. The total impairment charge, net of tax, for the 13-week periods ended August 1, 2020 and August 3, 2019 was $4.4 million and $1.6 million, respectively.
During the 26-week periods ended August 1, 2020 and August 3, 2019, the Company recorded an impairment charge of approximately $6.3 million and $0.5 million for right-of-use asset impairment at 23 stores and 2 stores, respectively. The Company also recorded an impairment charge totaling approximately $2.6 million and $3.4 million for the 26-week periods ended August 1, 2020 and August 3, 2019, respectively, for leasehold improvements, fixtures and equipment at 20 stores and 11 stores, respectively, for which the carrying values exceed the respective fair values for these assets. The total impairment charge, net of tax, for the 26-week periods ended August 1, 2020 and August 3, 2019 was $6.8 million and $3.0 million, respectively.
Note 11 - New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” The amendments in this ASU simplify the accounting for income taxes by removing specific exceptions included in Topic 740, introducing simplifications and making technical corrections. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance in the second quarter of fiscal 2020. For the 26-week period ended August 1, 2020, the pretax loss was greater than the forecasted pretax loss for the year, which historically resulted in a calculation that limited the tax benefit that could be recorded. The adoption of ASU 2019-12 provided the Company an exception to this methodology. The adoption of this guidance did not have any other material impact on the Company’s condensed consolidated financial statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR) related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements and related disclosures.
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the condensed consolidated financial statements and notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the SEC on April 10, 2020 (the “Annual Report”). The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” and under Part II, Item 1A - “Risk Factors”.
Introduction
We are a specialty retailer of home décor in the United States, operating 387 stores in 35 states as of August 1, 2020, as well as an e-commerce enabled website, www.kirklands.com. Our stores present a curated selection of distinctive merchandise, including holiday décor, furniture, wall décor, art, textiles, mirrors, fragrances, lamps and other home decorating items. Our stores offer an extensive assortment of holiday merchandise during seasonal periods. We provide our customers an engaging shopping experience characterized by casual, comfortable merchandise with a southern feel and a modern flair at a discernible value. This combination of quality and stylish merchandise, value pricing and a stimulating online and store experience has led us to develop a loyal customer base.
Impact of COVID-19 Pandemic on our Business
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation measures have led to adverse impacts on the U.S. and global economies. From a more macro-economic perspective, there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact; the extent and duration of social distancing and the adoption of shelter-in-place orders; and the ongoing impact of COVID-19 on business and economic activity.
The COVID-19 pandemic has impacted our business operations and results of operations for the first 26 weeks of fiscal 2020 as described in more detail below, due to decreased customer traffic and retail store closures. The evolving COVID-19 pandemic could continue to have an adverse impact on our results of operations and liquidity; the operations of our suppliers, vendors and customers; and on our employees as a result of quarantines, facility closures, and travel and logistics restrictions. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows will continue to be materially impacted.
On March 19, 2020, the Company closed all of its retail store locations in response to the COVID-19 pandemic. The Company took a number of actions to mitigate the impact of the decreased sales due to the COVID-19 related store closures including:
|
• |
Canceled orders and delayed merchandise receipts to manage inventory levels, and extended payment terms with product and non-product vendors to improve working capital. |
|
• |
After paying all store team members during the first two weeks of the closure, furloughed all part-time store employees and temporarily reduced the pay of full-time managers and key employees. |
|
• |
Permanently reduced corporate costs including permanent labor reductions, reduced marketing spend and lower corporate headquarters rent. |
|
• |
Permanently reduced distribution center indirect labor and furloughed a portion of direct distribution center labor, while further reducing hours to match demand. |
|
• |
Significantly reduced transportation expenses with limited deliveries to stores and the delay/reduction of inbound freight receipts. |
|
• |
Borrowed $40 million on its $75 million revolving credit facility. |
13
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carry backs to offset 100% of taxable income for taxable years beginning before 2021. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also provides for an employee retention payroll tax credit for employers subject to closures due to COVID-19. In addition, the CARES Act permits delayed payment of the employer-portion of social security taxes. The delay applies to social security taxes due on wages paid between the date of enactment of the CARES Act and January 1, 2021 with half of the delayed payroll taxes due by December 31, 2021 and the other half due by December 31, 2022. The Company pursued all relevant measures under the CARES Act during the 26-week period ended August 1, 2020 including net operating loss carry backs, wage credits and payroll tax deferrals in order to improve liquidity.
As of June 4, 2020, our stores have reopened to customer traffic. The impact of COVID-19 and the related CARES Act have materially impacted the Company’s results of operations for the 26-week period ended August 1, 2020.
There are numerous uncertainties surrounding the crisis and its impact on our business, as further described in Part II Item 1A – Risk Factors, which make it difficult to predict the impact on our business, financial position, or results of operations for the remainder of fiscal 2020 and beyond.
OVERVIEW OF KEY FINANCIAL MEASURES
Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, net of returns, shipping revenue associated with e-commerce sales, and gift card breakage revenue and excludes sales taxes. We use comparable store sales to measure sales increases or decreases from stores that have been open for at least 13 full fiscal months. Prior to fiscal 2020, stores closed during the year are included in the comparable store sales calculation only for the full fiscal months of the year the stores were open. In fiscal 2020, we changed our comparable sales calculation to remove closed stores from the calculation the day after the store closes. Relocated stores are removed from the comparable store base when the existing store closes, and the new replacement store is added into the comparable store sales calculation after 13 full fiscal months of activity. E-commerce store sales, including shipping revenue, are included in consolidated comparable store sales. Increases in comparable store sales are an important factor in maintaining or increasing the profitability of existing stores.
Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components including: product cost of sales (including inbound freight, damages and inventory shrinkage), store occupancy costs (including rent and depreciation of leasehold improvements and other property and equipment), outbound freight costs (including e-commerce shipping) and central distribution costs (including operational costs and depreciation of leasehold improvements and other property and equipment). Product and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed. Accordingly, gross profit expressed as a percentage of net sales can be influenced by many factors including overall sales performance.
Store Optimization
As part of our store optimization strategy, which includes exiting unprofitable stores and shrinking the store base over the next several years, we closed 45 store locations in the 26-week period ended August 1, 2020, and we do not plan to open any new stores in fiscal 2020. We are prioritizing sustained improvement in overall profitability and developing a future state plan for infrastructure that complements our omni-channel concept and improves the customer experience. We anticipate additional store closures as we execute our store optimization strategy over the next several years.
The following table summarizes our store openings and closings during the periods indicated:
|
|
13-Week Period Ended |
|
|
26-Week Period Ended |
|
||||||||||
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||||
New store openings |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
4 |
|
Permanent store closures |
|
|
18 |
|
|
|
1 |
|
|
|
45 |
|
|
|
1 |
|
(Decrease) increase in store units |
|
|
(4.4 |
)% |
|
|
— |
% |
|
|
(10.4 |
)% |
|
|
0.7 |
% |
The following table summarizes our open stores and square footage under lease:
|
|
August 1, 2020 |
|
|
August 3, 2019 |
|
||
Number of stores |