UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 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 – 14,255,596 shares outstanding as of November 27, 2020.

 

 


KIRKLAND’S, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2020, February 1, 2020 and November 2, 2019

3

 

Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and 39-week periods ended October 31, 2020 and November 2, 2019

4

 

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the 13-week and 39-week periods ended October 31, 2020 and November 2, 2019

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39-week periods ended October 31, 2020 and November 2, 2019

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

 

 

 

PART II

OTHER INFORMATION

23

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 6.

Exhibits

25

 

 

 

SIGNATURES

 

26

2


Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

 

 

 

October 31,

 

 

February 1,

 

 

November 2,

 

 

 

2020

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,189

 

 

$

30,132

 

 

$

4,202

 

Inventories, net

 

 

83,874

 

 

 

94,674

 

 

 

140,222

 

Income taxes receivable

 

 

5,441

 

 

 

243

 

 

 

547

 

Prepaid expenses and other current assets

 

 

9,586

 

 

 

6,462

 

 

 

7,870

 

Total current assets

 

 

136,090

 

 

 

131,511

 

 

 

152,841

 

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

 

20,583

 

 

 

21,390

 

 

 

21,524

 

Furniture and fixtures

 

 

74,121

 

 

 

80,622

 

 

 

80,869

 

Leasehold improvements

 

 

111,155

 

 

 

123,022

 

 

 

125,294

 

Computer software and hardware

 

 

78,636

 

 

 

73,984

 

 

 

73,311

 

Projects in progress

 

 

1,382

 

 

 

6,862

 

 

 

11,815

 

Property and equipment, gross

 

 

285,877

 

 

 

305,880

 

 

 

312,813

 

Accumulated depreciation

 

 

(217,737

)

 

 

(223,017

)

 

 

(216,717

)

Property and equipment, net

 

 

68,140

 

 

 

82,863

 

 

 

96,096

 

Operating lease right-of-use assets

 

 

156,924

 

 

 

200,067

 

 

 

210,213

 

Deferred income taxes

 

 

 

 

 

1,525

 

 

 

944

 

Other assets

 

 

5,831

 

 

 

6,476

 

 

 

6,283

 

Total assets

 

$

366,985

 

 

$

422,442

 

 

$

466,377

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

53,339

 

 

$

59,513

 

 

$

68,395

 

Accrued expenses

 

 

27,037

 

 

 

28,773

 

 

 

23,527

 

Operating lease liabilities

 

 

46,015

 

 

 

53,154

 

 

 

53,210

 

Total current liabilities

 

 

126,391

 

 

 

141,440

 

 

 

145,132

 

Operating lease liabilities

 

 

159,030

 

 

 

195,736

 

 

 

206,789

 

Revolving line of credit

 

 

 

 

 

 

 

 

25,000

 

Other liabilities

 

 

8,147

 

 

 

8,311

 

 

 

8,883

 

Total liabilities

 

 

293,568

 

 

 

345,487

 

 

 

385,804

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2020, February 1, 2020, and November 2, 2019, respectively

 

 

 

 

 

 

 

 

 

Common stock, no par value; 100,000,000 shares authorized; 14,255,596; 13,955,826; and 13,897,530 shares issued and outstanding at October 31, 2020, February 1, 2020, and November 2, 2019, respectively

 

 

173,792

 

 

 

172,885

 

 

 

171,585

 

Accumulated deficit

 

 

(100,375

)

 

 

(95,930

)

 

 

(91,012

)

Total shareholders’ equity

 

 

73,417

 

 

 

76,955

 

 

 

80,573

 

Total liabilities and shareholders’ equity

 

$

366,985

 

 

$

422,442

 

 

$

466,377

 

 

The accompanying notes are an integral part of these financial statements.

3


Table of Contents

 

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 31,

 

 

November 2,

 

 

October 31,

 

 

November 2,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

146,609

 

 

$

144,936

 

 

$

348,578

 

 

$

394,469

 

Cost of sales

 

 

93,738

 

 

 

104,800

 

 

 

249,751

 

 

 

276,792

 

Cost of sales related to merchandise purchased from related party vendor

 

 

 

 

 

 

 

 

 

 

 

14,749

 

Cost of sales

 

 

93,738

 

 

 

104,800

 

 

 

249,751

 

 

 

291,541

 

Gross profit

 

 

52,871

 

 

 

40,136

 

 

 

98,827

 

 

 

102,928

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

21,343

 

 

 

29,115

 

 

 

60,157

 

 

 

83,333

 

Other operating expenses

 

 

16,682

 

 

 

20,208

 

 

 

44,843

 

 

 

54,998

 

Depreciation (exclusive of depreciation included in cost of sales)

 

 

1,613

 

 

 

1,602

 

 

 

4,683

 

 

 

5,177

 

Asset impairment

 

 

177

 

 

 

3,392

 

 

 

9,027

 

 

 

7,251

 

Total operating expenses

 

 

39,815

 

 

 

54,317

 

 

 

118,710

 

 

 

150,759

 

Operating income (loss)

 

 

13,056

 

 

 

(14,181

)

 

 

(19,883

)

 

 

(47,831

)

Interest expense

 

 

95

 

 

 

169

 

 

 

484

 

 

 

307

 

Other income

 

 

(86

)

 

 

(158

)

 

 

(272

)

 

 

(712

)

Income (loss) before income taxes

 

 

13,047

 

 

 

(14,192

)

 

 

(20,095

)

 

 

(47,426

)

Income tax expense (benefit)

 

 

691

 

 

 

8,114

 

 

 

(15,650

)

 

 

921

 

Net income (loss)

 

$

12,356

 

 

$

(22,306

)

 

$

(4,445

)

 

$

(48,347

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.87

 

 

$

(1.61

)

 

$

(0.31

)

 

$

(3.42

)

Diluted

 

$

0.82

 

 

$

(1.61

)

 

$

(0.31

)

 

$

(3.42

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,249

 

 

 

13,867

 

 

 

14,121

 

 

 

14,116

 

Diluted

 

 

15,075

 

 

 

13,867

 

 

 

14,121

 

 

 

14,116

 

 

The accompanying notes are an integral part of these financial statements.

4


Table of Contents

 

KIRKLAND’S, INC.

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 units

 

 

(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 units

 

 

(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

 

Exercise of stock options

 

 

1,464

 

 

 

12

 

 

 

 

 

 

12

 

Restricted stock units vested

 

 

18,575

 

 

 

 

 

 

 

 

 

 

Net share settlement of restricted stock units

 

 

(4,524

)

 

 

(39

)

 

 

 

 

 

(39

)

Stock-based compensation expense

 

 

 

 

 

276

 

 

 

 

 

 

276

 

Net income

 

 

 

 

 

 

 

 

12,356

 

 

 

12,356

 

Balance at October 31, 2020

 

 

14,255,596

 

 

$

173,792

 

 

$

(100,375

)

 

$

73,417

 

 

 

 

 

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 units

 

 

(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

 

Employee stock purchases

 

 

36,453

 

 

 

45

 

 

 

 

 

 

45

 

Restricted stock units vested

 

 

98,298

 

 

 

 

 

 

 

 

 

 

Net share settlement of restricted stock units

 

 

(23,937

)

 

 

(33

)

 

 

 

 

 

(33

)

Stock-based compensation expense

 

 

 

 

 

704

 

 

 

 

 

 

704

 

Repurchase and retirement of common stock

 

 

(174,313

)

 

 

 

 

 

(243

)

 

 

(243

)

Net loss

 

 

 

 

 

 

 

 

(22,306

)

 

 

(22,306

)

Balance at November 2, 2019

 

 

13,897,530

 

 

$

171,585

 

 

$

(91,012

)

 

$

80,573

 

 

The accompanying notes are an integral part of these financial statements.

5


Table of Contents

 

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

39-Week Period Ended

 

 

 

October 31,

 

 

November 2,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,445

)

 

$

(48,347

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

17,810

 

 

 

21,156

 

Amortization of debt issue costs

 

 

70

 

 

 

41

 

Asset impairment

 

 

9,027

 

 

 

7,251

 

Cumulative effect of change in accounting principle

 

 

 

 

 

(331

)

Loss on disposal of property and equipment

 

 

104

 

 

 

150

 

Stock-based compensation expense

 

 

912

 

 

 

1,995

 

Deferred income taxes

 

 

1,525

 

 

 

759

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Inventories, net

 

 

10,800

 

 

 

(55,788

)

Prepaid expenses and other current assets

 

 

(3,124

)

 

 

2,443

 

Accounts payable

 

 

(4,735

)

 

 

27,845

 

Accounts payable to related party vendor

 

 

 

 

 

(8,166

)

Accrued expenses

 

 

(1,704

)

 

 

(3,547

)

Income taxes receivable

 

 

(5,230

)

 

 

(1,041

)

Operating lease assets and liabilities

 

 

(7,091

)

 

 

(7,161

)

Other assets and liabilities

 

 

570

 

 

 

300

 

Net cash provided by (used in) operating activities

 

 

14,489

 

 

 

(62,441

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

168

 

 

 

 

Capital expenditures

 

 

(7,580

)

 

 

(12,759

)

Net cash used in investing activities

 

 

(7,412

)

 

 

(12,759

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on revolving line of credit

 

 

40,000

 

 

 

25,000

 

Repayments on revolving line of credit

 

 

(40,000

)

 

 

 

Refinancing costs

 

 

(15

)

 

 

 

Cash used in net share settlement of restricted stock units

 

 

(52

)

 

 

(77

)

Proceeds received from employees exercising stock options

 

 

12

 

 

 

 

Employee stock purchases

 

 

35

 

 

 

190

 

Repurchase and retirement of common stock

 

 

 

 

 

(3,657

)

Net cash (used in) provided by financing activities

 

 

(20

)

 

 

21,456

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Net increase (decrease)

 

 

7,057

 

 

 

(53,744

)

Beginning of the period

 

 

30,132

 

 

 

57,946

 

End of the period

 

$

37,189

 

 

$

4,202

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Non-cash accruals for purchases of property and equipment

 

$

414

 

 

$

1,818

 

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


Table of Contents

 

KIRKLAND’S, INC.

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 381 stores in 35 states as of October 31, 2020, as well as an e-commerce 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 39-week periods ended October 31, 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, and the Company’s stores started offering contactless curbside pickup and then reopened to in-store customer traffic throughout the second period consistent with applicable federal, state and local regulations and restrictions. Stores initially reopened with restricted operating hours and limited staffing with store merchandise deliveries from the distribution centers gradually resuming. During the 13-week period ended October 31, 2020, the Company’s sales improved with increased e-commerce demand, and stores generally increased their operating hours, staffing and merchandise deliveries. The increased sales combined with the reduced merchandise receipts led to inventory shortages in key categories.

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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 remain highly uncertain.

Seasonality - The results of the Company’s operations for the 13 and 39-week periods ended October 31, 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:

 

 

 

October 31, 2020

 

 

February 1, 2020

 

 

November 2, 2019

 

Gift card liability, net of estimated breakage

 

$

11,915

 

 

$

13,128

 

 

$

11,187

 

 

The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:

 

 

13-Week Period Ended

 

 

39-Week Period Ended

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Gift card breakage revenue

$

208

 

 

$

243

 

 

$

555

 

 

$

774

 

Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period

 

1,724

 

 

 

1,814

 

 

 

4,220

 

 

 

5,349

 

 

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. For the 39-week period ended October 31, 2020, the Company was not able to use the estimated annual effective tax rate due to an inability to reliably estimate the annual effective tax rate; therefore, the actual effective tax rate for the period was used.

For the 13-week periods ended October 31, 2020 and November 2, 2019, the Company recorded income tax expense of 5.3% and 57.2% of the income (loss) before income taxes, respectively. For the 39-week periods ended October 31, 2020 and November 2, 2019, the Company recorded an income tax benefit of 77.9% and income tax expense of 1.9% of the loss before income taxes, respectively. The change in income taxes for the 13-week period ended October 31, 2020, compared to the prior year period, was primarily due to using the discrete method in the current period compared to using the estimated annual effective tax rate method along with recording a valuation allowance against deferred tax assets in the prior year period. The change in the income tax rate for the 39-week period ended October 31, 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 $2.0 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 $3.0 million due to the valuation allowance against deferred tax assets compared to recording a $11.3 million valuation allowance against deferred tax assets in the prior year period.

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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 – Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period presented. Diluted earnings (loss) per share is computed by dividing net income (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 earnings (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 earnings (loss) per share, because to do so would have been antidilutive, were approximately 1.2 million shares and 1.6 million shares for the 13-week periods ended October 31, 2020 and November 2, 2019, respectively, and 1.4 million shares and 1.6 million shares for the 39-week periods ended October 31, 2020 and November 2, 2019, respectively.

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 maintained The Executive Non-Qualified Excess Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan was funded, and the Company invested participant deferrals into trust assets, which were invested in a variety of mutual funds that were Level 1 inputs. The plan assets and plan liabilities were adjusted to fair value on a recurring basis. The Board of Directors approved the termination of the Deferred Compensation Plan effective September 6, 2019, and all remaining balances in the Deferred Compensation Plan were paid out during the 13-week period ended October 31, 2020. Deferred Compensation Plan assets and liabilities were approximately $1.9 million and $1.8 million as of February 1, 2020 and November 2, 2019, respectively, and were recorded in other assets and other liabilities in the condensed consolidated balance sheets.

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.

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 has filed a petition for allowance of appeal with the Pennsylvania Supreme 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.

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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 currently set for November 8, 2021. 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 April 9, 2021, 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

 

 

39-Week Period Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations)

 

$

276

 

 

$

704

 

 

$

912

 

 

$

1,995

 

Stock options granted

 

 

 

 

 

74,468

 

 

 

 

 

 

504,961

 

Restricted stock units granted

 

 

 

 

 

42,424

 

 

 

1,050,421

 

 

 

501,141

 

 

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

 

 

39-Week Period Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Related Party Vendor:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

$

 

 

$

 

 

$

 

 

$

19,577

 

Purchases as a percent of total merchandise purchases

 

 

%

 

 

%

 

 

%

 

 

9.4

%

 

Note 8 - Share Repurchase Plan

On September 24, 2018, the Company announced that its Board of Directors authorized a share 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 price, regulatory limitations and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of October 31, 2020, the Company had approximately $21,000 remaining under the current share repurchase plan. The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

 

 

 

13-Week Period Ended

 

 

39-Week Period Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Shares repurchased and retired

 

 

 

 

 

174,313

 

 

 

 

 

 

807,275

 

Share repurchase cost

 

$