KIRKLAND'S, INC (Form: 10-Q, Received: 06/11/2015 17:04:03)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 2, 2015,

¨	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 incorporation or organization)		(IRS Employer Identification No.)

5310 Maryland Way Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (615) 872-4800

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 x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

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 — 17,294,788 shares outstanding as of June 4, 2015.

KIRKLAND’S, INC.

TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION:

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of May 2, 2015 (unaudited), January 31, 2015, and May 3, 2014 (unaudited)		3

Condensed Consolidated Statements of Income for the 13-week periods ended May 2, 2015 and May 3, 2014 (unaudited)		4

Condensed Consolidated Statement of Shareholders’ Equity for the 13-week period ended May 2, 2015 (unaudited)		5

Condensed Consolidated Statements of Cash Flows for the 13-week periods ended May 2, 2015 and May 3, 2014 (unaudited)		6

Notes to Condensed Consolidated Financial Statements (unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

Item 3. Quantitative and Qualitative Disclosures About Market Risk		14

Item 4. Controls and Procedures		14

PART II — OTHER INFORMATION:

Item 1. Legal Proceedings		15

Item 1A. Risk Factors		15

Item 2. Unregistered Sales of Equity Securities and use of Proceeds		15

Item 6. Exhibits		16

SIGNATURES		17

EXHIBIT 10.1

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

EXHIBIT 32.2

EXHIBIT 101

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	May 2, 2015 (Unaudited)			January 31, 2015			May 3, 2014 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	93,437		$	99,138		$	82,418
Inventories, net		58,291			55,775			50,702
Deferred income taxes		3,614			3,538			2,857
Prepaid expenses and other current assets		8,343			8,878			8,595

Total current assets		163,685			167,329			144,572
Property and equipment, net		88,433			90,992			82,768
Other assets		2,283			2,166			2,028

Total assets	$	254,401		$	260,487		$	229,368

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,072		$	24,705		$	19,465
Income taxes payable		191			5,648			866
Accrued expenses		24,655			27,027			22,870

Total current liabilities		50,918			57,380			43,201
Deferred rent		41,057			41,995			39,435
Non-current deferred income taxes		4,049			4,138			3,239
Other liabilities		5,960			5,912			5,495

Total liabilities		101,984			109,425			91,370

Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at May 2, 2015, January 31, 2015, or May 3, 2014, respectively		—			—			—
Common stock, no par value; 100,000,000 shares authorized; 17,248,267; 17,127,875; and 17,309,423 shares issued and outstanding at May 2, 2015, January 31, 2015, and May 3, 2014, respectively		159,584			159,015			156,907
Accumulated deficit		(7,167	)		(7,953	)		(18,909	)

Total shareholders’ equity		152,417			151,062			137,998

Total liabilities and shareholders’ equity	$	254,401		$	260,487		$	229,368

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

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)


	13-Week Period Ended
	May 2, 2015			May 3, 2014
Net sales	$	118,310		$	108,255
Cost of sales (exclusive of depreciation as shown below)		70,647			65,653

Gross profit		47,663			42,602
Operating expenses:
Compensation and benefits		23,213			21,279
Other operating expenses		15,124			13,664
Depreciation		5,229			4,300

Total operating expenses		43,566			39,243

Operating income		4,097			3,359
Interest expense, net		70			69
Other income, net		(55	)		(82	)

Income before income taxes		4,082			3,372
Income tax expense		1,553			1,317

Net income	$	2,529		$	2,055

Earnings per share:
Basic	$	0.15		$	0.12

Diluted	$	0.14		$	0.12

Weighted average shares for basic earnings per share:		17,238			17,308
Effect of dilutive stock equivalents		567			517

Adjusted weighted average shares for diluted earnings per share		17,805			17,825

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

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)


	Common Stock						Accumulated			Total Shareholders’
	Shares			Amount			Deficit			Equity
Balance at January 31, 2015		17,127,875		$	159,015		$	(7,953	)	$	151,062
Exercise of employee stock options and employee stock purchases		413,335			74			—			74
Tax benefit from exercise of stock options		—			815			—			815
Net share settlement of stock options and restricted stock units		(248,197	)		(1,556	)		—			(1,556	)
Issuance of restricted stock		30,000			—			—			—
Stock-based compensation expense		—			1,236			—			1,236
Repurchase and retirement of common stock		(74,746	)		—			(1,743	)		(1,743	)
Net income		—			—			2,529			2,529

Balance at May 2, 2015		17,248,267		$	159,584		$	(7,167	)	$	152,417

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

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	13-Week Period Ended
	May 2, 2015			May 3, 2014
Cash flows from operating activities:
Net income	$	2,529		$	2,055
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation of property and equipment		5,229			4,300
Amortization of landlord construction allowances		(1,546	)		(1,456	)
Amortization of debt issue costs		19			19
Loss on disposal of property and equipment		5			191
Cash received for landlord construction allowances		2,460			2,234
Stock-based compensation expense		1,236			637
Excess tax benefits from exercise of stock options and restricted stock		(815	)		—
Deferred income taxes		(165	)		(178	)
Changes in assets and liabilities:
Inventories, net		(2,516	)		1,935
Prepaid expenses and other current assets		(1,461	)		25
Other noncurrent assets		(136	)		(209	)
Accounts payable		1,367			(3,637	)
Income taxes receivable / payable		(4,653	)		(5,076	)
Accrued expenses and other current and noncurrent liabilities		(2,169	)		(619	)

Net cash (used in) provided by operating activities		(616	)		221

Cash flows from investing activities:
Capital expenditures		(2,675	)		(6,930	)

Net cash used in investing activities		(2,675	)		(6,930	)

Cash flows from financing activities:
Excess tax benefits from exercise of stock options and restricted stock		815			—
Cash used in net share settlement of stock options and restricted stock		(1,556	)		—
Employee stock purchases		74			77
Repurchase and retirement of common stock		(1,743	)		—

Net cash (used in) provided by financing activities		(2,410	)		77

Cash and cash equivalents:
Net decrease		(5,701	)		(6,632	)
Beginning of the period		99,138			89,050

End of the period	$	93,437		$	82,418

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

KIRKLAND’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor and gifts with 342 stores in 35 states as of May 2, 2015. 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., Kirkland’s Texas, LLC, and Kirklands.com, LLC. All intercompany accounts and transactions have been eliminated.

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 with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. 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 Securities and Exchange Commission on April 14, 2015.

It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end. In addition, because of seasonality factors, the results of the Company’s operations for the 13-week period ended May 2, 2015 are not indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year.

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.

Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to impairment assessments on long-lived assets, asset retirement obligations, inventory reserves, self-insurance reserves, income tax liabilities, stock-based compensation, employee bonus accruals, gift card breakage, sales return reserves, customer loyalty program accruals and contingent liabilities.

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 13-week period ended May 2, 2015, the Company recorded an income tax expense of 38.0% of pre-tax income. In the prior year period, the Company recorded an income tax expense of 39.1% of pre-tax income.

Note 3 — Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during each period presented, which excludes non-vested restricted stock units. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable periods using the treasury stock method. Diluted earnings per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted earnings per share, because to do so would have been antidilutive, were 0 and 414,000 shares for the 13-week periods ended May 2, 2015, and May 3, 2014, respectively.

Note 4 — Commitments and Contingencies

The Company is party to pending legal proceedings and claims. 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 these proceedings and any claims in excess of insurance coverage will have a material effect on the financial condition, operating results or cash flows of the Company.

Note 5 — 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.

No stock options or restricted stock units were granted during the 13-week period ended May 2, 2015. Total stock-based compensation expense (a component of compensation and benefits) was $1.2 million for the 13-week period ended May 2, 2015, compared to $637,000 for the comparable prior year period. Included in the 13-week period ended May 2, 2015 is $600,000 of stock-based compensation expense that resulted from the accelerated vesting of stock options and restricted stock units upon the retirement of the Company’s former Chief Executive Officer. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no other material changes in the assumptions used to compute compensation expense during the current quarter.

Note 6 — Related Party Transactions

In July 2009, the Company entered into an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal is the spouse of the Company’s Vice President of Merchandising. During the 13-week periods ended May 2, 2015 and May 3, 2014, purchases from this vendor totaled approximately $7.1 million, or 12.7% of total merchandise purchases, and $5.7 million, or 12.1% of merchandise purchases, respectively. Included in cost of sales for the 13-week periods ended May 2, 2015 and May 3, 2014 were $6.4 million and $5.8 million, respectively, related to this vendor. Payable amounts outstanding to this vendor were approximately $2.9 million and $1.3 million as of May 2, 2015 and May 3, 2014, respectively. The Company’s payable terms with this vendor are consistent with the terms offered by other vendors in the ordinary course of business.

Note 7 — Stock Repurchase Program

On May 22, 2014, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $30 million of the Company’s outstanding common stock from time to time until May 2016. Through May 2, 2015, the Company repurchased and retired approximately 343,000 shares of common stock at an aggregate cost of approximately $6.5 million under this repurchase plan. As of May 2, 2015, the Company had $23.5 million remaining under the Board of Director’s current authorization to repurchase its common stock. Subsequent to May 2, 2015, the Company has repurchased and retired approximately 22,000 shares of common stock at an aggregate cost of $531,000.

Note 8 — New Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers.” Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. ASU 2014-09 also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This update will be effective for the Company at the beginning of its fiscal 2018 year. The Company is still evaluating the impact the adoption of ASU 2014-09 will have on its consolidated financial statements.

Note 9 — Subsequent Event

On May 21, 2015, the Company announced that its Board of Directors authorized a special cash dividend of $1.50 per share on its common stock. The special dividend will be paid on June 19, 2015 to stockholders of record as of the close of business on June 5, 2015.

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 Form 10-Q and in our Annual Report on Form 10-K, filed April 14, 2015. 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”.

General

We are a specialty retailer of home décor and gifts in the United States, operating 342 stores in 35 states as of May 2, 2015, as well as an e-Commerce enabled website, www.kirklands.com. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. In addition, we use innovative design and packaging to market home décor items as gifts. We provide our predominantly female customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection reflecting current styles at prices which provide discernible value. This combination of ever-changing and stylish merchandise, value pricing and a stimulating store experience has led to our emergence as a leader in home décor and enabled us to develop a strong customer franchise.

During the 13-week period ended May 2, 2015, we opened one new store and closed three stores. The following table summarizes our stores and square footage under lease:


	As of May 2, 2015		As of May 3, 2014
Number of stores		342		324
Square footage		2,586,644		2,435,259
Average square footage per store		7,563		7,516

13-Week Period Ended May 2, 2015 Compared to the 13-Week Period Ended May 3, 2014

Results of operations. The table below sets forth selected results of our operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:


	13-Week Period Ended
	May 2, 2015						May 3, 2014						Change
	$			%			$			%			$		%
Net sales	$	118,310			100.0	%	$	108,255			100.0	%	$	10,055		9.3	%
Cost of sales		70,647			59.7	%		65,653			60.6	%		4,994		7.6	%

Gross profit		47,663			40.3	%		42,602			39.4	%		5,061		11.9	%
Operating expenses:
Compensation and benefits		23,213			19.6	%		21,279			19.7	%		1,934		9.1	%
Other operating expenses		15,124			12.8	%		13,664			12.6	%		1,460		10.7	%
Depreciation		5,229			4.4	%		4,300			4.0	%		929		21.6	%

Total operating expenses		43,566			36.8	%		39,243			36.3	%		4,323		11.0	%

Operating income		4,097			3.5	%		3,359			3.1	%		738		22.0	%
Interest expense, net		70			0.1	%		69			0.1	%		1		1.4	%
Other income, net		(55	)		0.0	%		(82	)		(0.1	%)		27		(32.9	%)

Income before income taxes		4,082			3.4	%		3,372			3.1	%		710		21.1	%
Income tax expense		1,553			1.3	%		1,317			1.2	%		236		17.9	%

Net income	$	2,529			2.1	%	$	2,055			1.9	%	$	474		23.1	%

Net sales. Net sales increased 9.3% to $118.3 million for the first fiscal quarter of 2015 compared to $108.3 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $6.9 million. An increase in comparable store sales, including e-Commerce sales, of 3.0%, contributed an increase over the prior year quarter of $3.1 million. Comparable store sales, including e-Commerce sales, increased 5.0% in the prior year period. For the first fiscal quarter of 2015, the e-Commerce business was up 42.9% versus the prior year period, accompanied by an increase in comparable store sales at brick-and-mortar stores of 1.0%. For brick-and-mortar stores, the comparable store sales increase was primarily due to an increase in the number of transactions, while the average ticket remained flat. The increase in transactions resulted from an increase in conversion, partially offset by a slight decrease in traffic. The e-Commerce business benefited from an increase in website traffic coupled with an increase in conversion, slightly offset by a decrease in order size. The merchandise categories contributing most to the comparable store sales increase were textiles, fragrance and housewares.

Gross profit . Gross profit as a percentage of net sales increased from 39.4% in the first quarter of 2014 to 40.3% in the first quarter of 2015. The overall increase in gross profit margin was primarily due to higher merchandise margins. Merchandise margin increased from 55.9% in the first quarter of fiscal 2014 to 56.4% in the first quarter of fiscal 2015. The increase in merchandise margin was primarily due to a year-over-year reduction in markdowns and promotional activity. Merchandise margin is calculated as net sales minus product cost of sales (including inbound freight) and inventory shrinkage. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. Outbound freight costs decreased as a percentage of sales, primarily due to a shift in our e-Commerce business to more in-store-pickup sales which carry a lower fulfillment cost for the Company. Our central distribution costs decreased as a percent of sales due to comparable store sales leverage. Store occupancy costs as a percentage of net sales were flat in the first quarter of 2015 as compared to the prior year period.

Compensation and benefits. Compensation and benefits expenses at the store level decreased as a percentage of net sales for the first quarter of fiscal 2015 as compared to the first quarter of 2014 due to comparable store sales leverage. At the corporate level, the compensation and benefits ratio was higher in the first quarter of 2015 as compared to the prior year period primarily due to $600,000 of stock-based compensation expense that resulted from the accelerated vesting of stock options and restricted stock units upon the retirement of our former Chief Executive Officer.

Other operating expenses . Other operating expenses increased as a percentage of sales versus the prior year period. At the store level, advertising expense decreased in dollars and as a percent of sales compared to the prior year period. At the corporate level, professional fees and corporate-office rent increased in dollars and as a percent of sales compared to the prior year period.

Depreciation. The increase in depreciation as a percentage of sales reflects an increase in capital expenditures in recent fiscal years and the implementation of major technology upgrades.

Income tax expense. We recorded income tax expense of approximately $1.5 million, or 38.0% of pre-tax income during the first quarter of fiscal 2015, compared to a tax expense of approximately $1.3 million, or 39.1% of pre-tax income, in the prior year quarter.

Net income and earnings per share. As a result of the foregoing, we reported net income of $2.5 million, or $0.14 per diluted share, for the first quarter of fiscal 2015 as compared to net income of $2.1 million, or $0.12 per diluted share, for the first quarter of fiscal 2014.

Liquidity and Capital Resources

Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the early portion of the fourth quarter of each fiscal year. Capital expenditures primarily relate to new store openings; existing store expansions, remodels or relocations; and purchases of equipment or information technology assets for our stores, distribution facilities and corporate headquarters. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our credit facility.

Cash flows from operating activities. Net cash used in operating activities was approximately $616,000 for the first quarter of fiscal 2015, compared to net cash provided by operating activities of $221,000 for the first quarter of 2014. Cash flows from operating activities depend heavily on operating performance, changes in working capital and the timing and amount of payments for income taxes. The change in the amount of cash used in operations as compared to the prior year period was primarily the result of higher incentive bonus payouts in the first quarter of 2015.

Cash flows from investing activities. Net cash used in investing activities for the first quarter of fiscal 2015 consisted of $2.7 million in capital expenditures as compared to $6.9 million in capital expenditures for the prior year period. The capital expenditures in the current year period related to technology investments in our stores and e-Commerce site, improvements to our supply chain, investments in existing stores, as well as the opening of one new store during the period. Capital expenditures in the prior year period related primarily to the opening of seven new stores and information technology assets. We expect that capital expenditures for all of fiscal 2015 will be approximately $27 to $29 million, primarily to fund the leasehold improvements of new stores, make improvements in our information technology infrastructure and multi-channel capabilities, and maintain our investments in existing stores and our distribution center.

Cash flows from financing activities. Net cash used in financing activities was approximately $2.4 million for the first quarter of fiscal 2015, and was primarily related to the repurchase and retirement of common stock and cash used in net share settlement of stock options and restricted stock, partially offset by tax benefits related to the exercise of employee stock options and vesting of restricted stock units. Net cash provided by financing activities was approximately $77,000 for the first quarter of fiscal 2014 and related to employee stock purchases.

Revolving credit facility. On August 19, 2011, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent and collateral agent, and the lenders named therein (the “Lenders”), replacing our prior credit agreement entered into in 2004. The Credit Agreement increased our senior secured revolving credit facility from $45 million to $50 million and extended the maturity date to August 2016. Borrowings under the facility bear interest at an annual rate equal to LIBOR plus a margin ranging from 175 to 225 basis points with no LIBOR floor. Additionally, a fee of 0.375% per annum is assessed on the unused portion of the facility.

Pursuant to the Credit Agreement, borrowings are subject to certain customary 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 Agreement 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.

Also on August 19, 2011, we entered into an Amended and Restated Security Agreement with our Lenders. Pursuant to the Security Agreement, we pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of our assets to secure the payment and performance of the obligations under the Credit Agreement.

As of May 2, 2015, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $37.6 million available for borrowing.

At May 2, 2015, our balance of cash and cash equivalents was approximately $93.4 million. We do not anticipate any borrowings under the credit facility during fiscal 2015. We believe that the combination of our cash balances and cash flow from operations will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months.

Share Repurchase Authorization. On May 22, 2014, we announced that our Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $30 million of our outstanding common stock until May 2016. Through May 2, 2015, we repurchased and retired approximately 343,000 shares of common stock at an aggregate cost of approximately $6.5 million under this repurchase plan. As of May 2, 2015, we had $23.5 million remaining under our Board of Director’s current authorization to repurchase our common stock. Subsequent to May 2, 2015, we have repurchased and retired approximately 22,000 shares of common stock at an aggregate cost of $531,000.

Special Cash Dividend. On May 21, 2015, the Company announced that its Board of Directors authorized a special cash dividend of $1.50 per share on its common stock. The special dividend will be paid on June 19, 2015 to stockholders of record as of the close of business on June 5, 2015.

Related Party Transactions

In July 2009, we entered into an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal is the spouse of our Vice President of Merchandising. During the 13-week periods ended May 2, 2015 and May 3, 2014, purchases from this vendor totaled approximately $7.1 million, or 12.7% of total merchandise purchases, and $5.7 million, or 12.1% of merchandise purchases, respectively. Included in cost of sales for the 13-week periods ended May 2, 2015 and May 3, 2014 were $6.4 million and $5.8 million, respectively, related to this vendor. Payable amounts outstanding to this vendor were approximately $2.9 million and $1.3 million as of May 2, 2015 and May 3, 2014, respectively. Our payable terms with this vendor are consistent with the terms offered by other vendors in the ordinary course of business.

Significant Contractual Obligations and Commercial Commitments

Construction commitments

The Company had commitments for new store construction projects totaling approximately $742,000 at May 2, 2015.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal 2015. Refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, for a summary of our critical accounting policies.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The following information is provided pursuant to the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q are “forward-looking statements” made pursuant to these provisions. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “should,” “likely to,” “forecasts,” “strategy,” “goal,” “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects,” and similar expressions, may identify such forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from the results projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The factors listed below under the heading “Risk Factors” and in the other sections of this Form 10-Q provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.

These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

We caution readers that the following important factors, among others, have in the past, in some cases, affected and could in the future affect our actual results of operations and cause our actual results to differ materially from the results expressed in any forward-looking statements made by us or on our behalf.

•

If We Do Not Generate Sufficient Cash Flow, We May Not Be Able to Implement Our Growth Strategy.

•

If We Are Unable to Profitably Open and Operate New Stores at a Rate that Exceeds Planned Store Closings, We May Not Be Able to Adequately Execute Our Growth Strategy, Resulting in a Decrease in Net Sales and Net Income.

•

Our Success Depends Upon our Marketing, Advertising and Promotional Efforts. If We are Unable to Implement them Successfully, or if Our Competitors Market, Advertise or Promote More Effectively than We Do, Our Revenue May Be Adversely Affected.

•

We May Not Be Able to Successfully Anticipate Consumer Trends and Our Failure to Do So May Lead to Loss of Consumer Acceptance of Our Products Resulting in Reduced Net Sales.

•

We May Not Be Able to Successfully Respond to Technological Change, Our Website Could Become Obsolete and Our Financial Results and Conditions Could be Adversely Affected.

•

Inventory Loss and Theft and the Inability to Anticipate Inventory Needs may Result in Reduced Net Sales.

•

Inability to Successfully Develop and Maintain a Relevant and Reliable Multichannel Experience for Our Customers Could Adversely Affect Our Sales, Results of Operations and Reputation.

•

Our Results Could be Negatively Impacted if our Merchandise Offering Suffers a Substantial Impediment to its Reputation Due to Real or Perceived Quality Issues.

•

We Face an Extremely Competitive Specialty Retail Business Market, and Such Competition Could Result in a Reduction of Our Prices and a Loss of Our Market Share.

•

Weather Conditions Could Adversely Affect Our Sales and/or Profitability by Affecting Consumer Shopping Patterns.

•

We are Exposed to the Risk of Natural Disasters, Pandemic Outbreaks, Global Political Events, War and Terrorism That Could Disrupt Our Business and Result in Lower Sales, Increased Operating Costs and Capital Expenditures.

•

Our Performance May be Affected by General Economic Conditions.

•

Our Profitability is Vulnerable to Inflation and Cost Increases.

•

Our Business Is Highly Seasonal and Our Fourth Quarter Contributes a Disproportionate Amount of Our Net Sales, Net Income and Cash Flow, and Any Factors Negatively Impacting Us During Our Fourth Quarter Could Reduce Our Net Sales, Net Income and Cash Flow, Leaving Us with Excess Inventory and Making It More Difficult for Us to Finance Our Capital Requirements.

•

Failure to Control Merchandise Returns Could Negatively Impact the Business.

•

We May Experience Significant Variations in Our Quarterly Results.

•

Our Comparable Store Net Sales Fluctuate Due to a Variety of Factors.

•

Our Freight Costs and thus Our Cost of Goods Sold are Impacted by Changes in Fuel Prices.

•

New Legal Requirements Could Adversely Affect Our Operating Results.

•

New Regulations Related to Conflict Minerals Could Adversely Impact Our Business.

•

Litigation May Adversely Affect Our Business, Financial Condition, Results of Operations or Liquidity.

•

Product Liability Claims Could Adversely Affect Our Reputation.

•

If We Fail to Protect Our Brand Name, Competitors May Adopt Trade Names that Dilute the Value of Our Brand Name.

•

Failure to Protect the Integrity and Security of Individually Identifiable Data of Our Customers and Employees Could Expose Us to Litigation and Damage Our Reputation; The Expansion of Our e-Commerce Business Has Inherent Cybersecurity Risks That May Result in Business Disruptions.

•

Our Hardware and Software Systems Are Vulnerable to Damage that Could Harm Our Business.

•

We Depend on a Number of Vendors to Supply Our Merchandise, and Any Delay in Merchandise Deliveries from Certain Vendors May Lead to a Decline in Inventory Which Could Result in a Loss of Net Sales.

•

We Are Dependent on Foreign Imports for a Significant Portion of Our Merchandise, and Any Changes in the Trading Relations and Conditions Between the United States and the Relevant Foreign Countries May Lead to a Decline in Inventory Resulting in a Decline in Net Sales, or an Increase in the Cost of Sales Resulting in Reduced Gross Profit.

•

Our Success Is Highly Dependent on Our Planning and Control Processes and Our Supply Chain, and Any Disruption in or Failure to Continue to Improve These Processes May Result in a Loss of Net Sales and Net Income.

•

We Depend on Key Personnel, and, if We Lose the Services of Any Member of Our Senior Management Team, We May Not Be Able to Run Our Business Effectively.

•

Our Charter and Bylaw Provisions and Certain Provisions of Tennessee Law May Make It Difficult in Some Respects to Cause a Change in Control of Kirkland’s and Replace Incumbent Management.

•

Concentration of Ownership among Our Existing Directors, Executive Officers, and Their Affiliates May Prevent New Investors from Influencing Significant Corporate Decisions.

•

If We Fail to Maintain an Effective System of Internal Control, We May Not be Able to Accurately Report Our Financial Results.

•

The Market Price for Our Common Stock Might Be Volatile and Could Result in a Decline in the Value of Your Investment.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. There have been no material changes in the market risk factors from those disclosed in the Company’s Form 10-K for the year ended January 31, 2015.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures . Both our President and Chief Executive Officer and Vice President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) have concluded that as of May 2, 2015 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal controls over financial reporting . There have been no changes in internal controls over financial reporting identified in connection with the foregoing evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company is party to pending legal proceedings and claims. 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 these proceedings and claims in excess of insurance coverage will have a material effect on the financial condition, operating results or cash flows of the Company.

ITEM 1A.

RISK FACTORS

In addition to factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” in Part I — Item 2 of this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Shares of common stock repurchased by the Company during the first quarter of fiscal 2015, ending May 2, 2015, were as follows:

Issuer Repurchases of Equity Securities


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in 000s)
February 1, 2015 to February 28, 2015		8,735	$	23.95		8,735	$	24,987
March 1, 2015 to April 4, 2015		23,671	$	23.27		23,671	$	24,437
April 5, 2015 to May 2, 2015		42,340	$	23.16		42,340	$	23,456

Total		74,746	$	23.29		74,746	$	23,456

On May 22, 2014, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $30 million of the Company’s outstanding common stock from time to time until May 2016. Through May 2, 2015, the Company repurchased and retired a total of approximately 343,000 shares at an aggregate cost of $6.5 million under this repurchase plan. Subsequent to May 2, 2015, the Company has repurchased and retired approximately 22,000 shares of common stock at an aggregate cost of $531,000.

ITEM 6.

EXHIBITS

(a) Exhibits.


Exhibit No.		Description of Document

10.1		Distribution Center Lease Agreement dated March 6, 2015 by and between Kirkland’s, Inc. and Hollingsworth Capital Partners – Tennessee, LLC

31.1		Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)

31.2		Certification of the Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

32.1		Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2		Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101		Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended May 2, 2015, furnished in XBRL (eXtensible Business Reporting Language))

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


						KIRKLAND’S, INC.

Date: June 11, 2015						/s/ W. Michael Madden
						W. Michael Madden
						President and Chief Executive Officer

Date: June 11, 2015						/s/ Adam C. Holland
						Adam C. Holland
						Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description of Document

10.1		Distribution Center Lease Agreement dated March 6, 2015 by and between Kirkland’s, Inc. and Hollingsworth Capital Partners – Tennessee, LLC

31.1		Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)

31.2		Certification of the Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)

32.1		Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2		Certification of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101		Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended May 2, 2015, furnished in XBRL (eXtensible Business Reporting Language))

EXHIBIT 10.1

LEASE AGREEMENT

THIS LEASE AGREEMENT is made and entered into this 6th day of March, 2015 (“Effective Date”), by and between HOLLINGSWORTH CAPITAL PARTNERS - TENNESSEE, LLC, a Tennessee limited liability company, whose address is Two Centre Plaza, Clinton, Tennessee 37716, (hereinafter referred to as “Landlord”), and KIRKLANDS, INC., whose address is 5310 Maryland Way, Brentwood, TN 37027 (hereinafter referred to as “Tenant”).

WITNESSETH:

1. Demise of Building . Landlord hereby leases to Tenant, and Tenant leases and accepts the Building located at 40 Carl Kirkland Drive, Jackson, Tennessee, and containing approximately 303,000 leasable square feet (the “Building”) on the diagram attached hereto as Exhibit A and incorporated herein by reference. The term “Building,” for the purposes of this Lease, shall mean the entire development called 40 Carl Kirkland Drive, including the parking facilities, green space and other external grounds and facilities, and the like on the property shown on the diagram attached hereto as Exhibit A , and the Building are a portion of the Building. The Building contains approximately 303,000 square feet of leaseable space.

2. Intentionally omitted.

3. Delivery and Acceptance of Building . The Building shall be delivered to Tenant on or before one hundred and twenty (120) days after the Effective Date (the “Commencement Date”). Tenant shall have limited access to the building at least thirty (30) days prior to the Commencement Date for any purposes of preparing the facility for occupancy by Tenant knowing that such access and occupancy may not be exclusive as previous tenants may be vacating the Building, and, during such time, Tenant shall not pay Minimum or Additional Rent but will pay the cost of utilities consumed.

4. Condition of the Building . At no cost to Tenant and before the Commencement Date, Landlord agrees to paint, re-tile and/or re-carpet the offices, the break room and the restrooms located in the front corner next to the front offices. At no cost to Tenant and before the Commencement Date, Landlord further agrees to repair all damaged ceiling tiles and to install sixteen 240 Volt battery charging outlets without cost to Tenant. Landlord will provide all building systems, including HVAC, dock levelers, dock doors, lighting, sprinkler systems, electric systems, plumbing fixtures and connections, and other systems for operation of the building (the “Building Systems”) in good working condition on the Commencement Date and warrants that the Building Systems shall remain in good working order for the period four (4) months after the Commencement Date, except to the extent the Building Systems are damaged by the negligence or misconduct of the Tenant. Tenant shall be provided the opportunity to inspect the Building Systems on or prior to the Commencement Date and provide Landlord with a punch list of problems with the working order of the Building Systems for the Landlord to correct with reasonable diligence and urgency. After the first anniversary of the Commencement Date and thereafter throughout Base Term, the maintenance of, repairs to, and replacement of the Building Systems shall be governed by Section 17 of this Lease.

5. Base Term . The base term of this Lease shall be for a period of Three (3) years (the “Base Term”) commencing on the Commencement Date hereinafter defined and ending on the third anniversary of the Commencement Date. The term “Lease Year” means the twelve (12) month period beginning on the Commencement Date, and each twelve (12) month period thereafter.

6. Option Term . At Tenant’s election, Tenant may provide Landlord written notice no less than six (6) months prior to the expiration of the Base Term of Tenant’s intent to extend the Base Term, under the same conditions of the Lease, for an additional term two (2) years. For the avoidance of doubt, Minimum Rent shall remain at the same rate as the Minimum Rent during Base Term.

7. Minimum Rent . Tenant shall pay to Landlord as minimum rent Seven Hundred Fifty- Seven Thousand Five Hundred Dollars ($757,500.00) per year (“Minimum Rent”), which amount is equal to $2.50 per leasable square foot within the Building. Beginning on Commencement Date, Tenant shall begin paying to Landlord the Minimum Rent due. Throughout the Term, Tenant shall pay to Landlord Minimum Rent for monthly installments, in advance, in amounts equal to 1/12 of the annual Minimum Rent then in effect, on the first day of each month for each Lease Year, at the address for Landlord stated above, without demand, set- off or deduction, except as otherwise provided in this Lease. Any holding over after the expiration of this Lease without the objection of Landlord shall be a tenancy from month to month at One Hundred Twenty Five Percent (125%) of the monthly Minimum Rent in effect at the end of the Term. Any holding over after the expiration of this Lease with the objection of Landlord shall be deemed to be a tenancy at will at hereunder shall be made to Landlord in advance on the first day of each month at the address for Landlord One Hundred Fifty Percent (150%) of the monthly Minimum Rent in effect at the end of the Term.

8. Security Deposit . Intentionally Omitted.

9. Additional Rent . Beginning upon the Commencement Date, all charges, costs and expenses which Tenant is required to pay under this Lease in addition to Minimum Rent, together with all interest and penalties that may accrue thereon in the event of Tenant’s failure to pay such amounts, and all damages, costs and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant’s part to comply with the term of this Lease, shall be deemed to be additional rent hereunder (hereinafter “Additional Rent”). Unless otherwise stated herein, Tenant shall pay Landlord all undisputed Additional Rent within thirty (30) days of written demand. If Tenant fails to pay any amount of Additional Rent when due, Landlord shall have all the rights and remedies with respect thereto as Landlord has for the nonpayment of Minimum Rent. As used throughout this Lease, the term “Tenant’s Pro Rata Share” means the percentage that the leasable square footage of the Building bears to the square footage of all leaseable space in the Building. As of the date of this Lease, Tenant’s Pro Rata Share is One Hundred Percent (100%).

10. Intentionally Omitted.

11. Taxes . Landlord agrees to pay each year the annual taxes (“Taxes”) due for the land and improvements constituting the Building. Taxes shall include all taxes and assessments

(special or otherwise) levied against the Building (land, buildings, and improvements) by any taxing authority having jurisdiction over the Building. Beginning upon the Commencement Date, and on a monthly basis thereafter, Tenant shall pay Landlord, as Additional Rent, one twelfth (1/12) of the estimated amount of Tenant’s Pro Rata Share of such Taxes for the upcoming calendar year. After January 1 of each year, but before June 30 of each year, Landlord will notify Tenant whether Tenant has overpaid or underpaid its Pro Rata Share of the Taxes. Any deficit shall be payable by Tenant within thirty (30) days of Tenant’s receipt of notice by Landlord, or any surplus shall be refunded to Tenant within thirty (30) days of such notice, as may be appropriate in each case. The 2015 estimate for Taxes is $0.26 per square foot. Landlord shall immediately notify Tenant of any notice from any governmental authority of an increase in Taxes and in any event such notice shall be provided to Tenant in time for Tenant to protest and/or appeal any such adjustment in Taxes, which Landlord hereby consents to and authorizes such right, and Landlord agrees to cooperate with Tenant in any such protest or appeal.

12. Property Insurance. Landlord agrees to pay each year the premiums charged for fire and extended coverage insurance on the improvements in the Building (including loss of rents coverage covering loss of rental income during a period of restoration after a casualty) (“Insurance”). Beginning upon the Commencement Date, and on a monthly basis thereafter, Tenant shall pay Landlord, as Additional Rent, one twelfth (1/12) of the estimated amount of Tenant’s Pro Rata Share of such Insurance for the upcoming calendar year. After January 1 of each year, but before June 30 of each year, Landlord will notify Tenant whether Tenant has overpaid or underpaid its Pro Rata Share of the Insurance. Any deficit shall be payable by Tenant within thirty (30) days of Tenant’s receipt of notice by Landlord, or any surplus shall be refunded to Tenant within thirty (30) days of such notice, as may be appropriate in each case. The 2015 estimate for Insurance is $0.03 per square foot. Tenant shall have the right upon reasonable notice to conduct an audit of Landlord’s records related to the Insurance, and Landlord agrees to reasonably cooperate with Tenant’s exercise of such rights.

13. Triple Net Lease . This Lease is intended to be a 100% “triple net” lease in favor of Landlord and shall be reasonably construed to give effect to such intention with the exception being those Landlord replacement responsibilities as specifically set forth in this Lease.

14. Use of Building . Tenant shall comply with all rules, regulations, and laws of any governmental authority with respect to the use and occupancy of the Building.

15. Utilities . Tenant shall pay, directly to the vendors, for Tenant’s telephone, electricity, gas, sewer, and water services that are used on or attributable to the Building. Tenant shall be responsible for all other services to the Building. In no event shall Landlord be liable for any interruption or failure in the supply of any utilities to the Building or Common Areas, unless to the extent such interruption or failure is caused by Landlord’s gross negligence or misconduct.

16. Signs . Tenant agrees to maintain such signs or advertising matter in good condition and repair. All signs shall comply with applicable governmental restrictions and the prompt compliance therewith shall be the responsibility of Tenant.

17. Maintenance, Repair, and Replacement .

a. By Tenant . Subject to compliance with Landlord’s obligations in Section 4, Tenant shall perform ordinary maintenance on the Building and keep the Building in good repair, including, without limitation, the HVAC systems, electrical systems, all doors, windows, plate glass, fixtures, walls, floors and ceilings, sprinkler systems, light fixtures and bulbs, utilities services and meters applicable to the Building, all installations made by Tenant, and all other maintenance and replacements not specifically the responsibility of the Landlord in Section 17(b) below. Tenant will not permit accumulation of any debris on the roof of the Building, will not in any manner cut or drive nails into or otherwise puncture the roof of the Building, and will be responsible for any damage caused to the roof by any acts of Tenant, its agents, employees or contractors. Tenant shall maintain the Building in a clean, sanitary and safe condition and in accordance with all requirements of law affecting the Building, and all rules adopted by Landlord. Tenant shall not after notice burden, over use, use incorrectly, or otherwise damage or diminish any systems or facilities in the Building. If Tenant neglects to commence and to complete repairs promptly and adequately, Landlord may, but shall not be required to, make and complete said repairs and Tenant shall pay the costs thereof to Landlord as Additional Rent upon demand with 5% (Five percent) premium for administration and time of management.

b. By Landlord . Landlord shall be responsible at its expense for capital repairs for and replacement of the foundation, the structural members contained inside or outside the Building, exterior walls and the roof.

18. Tenant’s Alterations . Tenant shall not alter the Building (except for repairs), and shall not install any fixtures or equipment, which affect the Building without the prior written approval of Landlord, which may be withheld or denied in Landlord’s sole and absolute discretion.

19. Liens . If Tenant makes any alterations or improvements in the Building, Tenant must pay for the same when made. Tenant may not charge the interest of Landlord in the Building with a mechanic’s lien or encumbrance of any kind. If a lien is threatened by any contractor or supplier, or in the event of the filing of a notice of any such lien, Tenant will promptly pay the same or have the lien discharged of record, by bond or otherwise, within thirty (30) days from the date of written notice from Landlord. If Tenant fails to pay, discharge or bond such lien within such time, Landlord shall have the right but not the obligation of paying the same or any portion thereof and the amounts so paid, including attorneys’ fees and expenses incurred in connection therewith with interest at the maximum rate permitted by law, shall be deemed to be Additional Rent due from Tenant to Landlord upon demand.

20. Surrender of Building . At the termination of this Lease, Tenant shall deliver the Building in the same condition as received by it on the Commencement Date (subject to the removals hereinafter required), reasonable wear and tear and casualty damage excepted, and shall surrender all keys for the Building to Landlord and shall inform Landlord of all combination locks, if any, in the Building. All alterations, additions, or improvements made on the Building by the Tenant shall become and be the property of the Landlord upon the termination of this Lease, and shall remain and be surrendered with the Building as a part thereof upon the termination of this Lease by default or otherwise. During the last thirty (30) days prior to the termination of this Lease, Tenant shall remove all its trade fixtures, and any other installations or improvements required by Landlord and shall repair any damage to the Building

caused by removal of such items. Tenant’s obligation to observe or perform this covenant shall survive the expiration or other termination of this Lease. Any items remaining in the Building at the conclusion of this Lease shall be deemed abandoned for all purposes and shall become the property of Landlord and Landlord may dispose of the same without liability of any nature.

21. Indemnity . Tenant shall indemnify and hold Landlord harmless from and against all and any liability and expense of any kind, including attorneys’ fees, arising from the assertion by a third party of claims for injuries or damages to persons or property in, on or about the Building to the extent arising out of or resulting in any way from any act or omission of Tenant, its agents, invitees, servants and employees, in the use of the Building. Landlord shall indemnify and hold Tenant harmless from and against all and any liability and expense of any kind, including attorneys’ fees, arising from the assertion by a third party of claims for injuries or damages to persons or property in, on or about the Building to the extent arising out of or resulting in any way from any act or omission of Landlord, its agents, invitees, servants and employees.

22. Notice of Claim or Suit . The indemnified party shall promptly and timely notify indemnifying party of any claim, action, proceeding or suit instituted or threatened against the indemnified party. The indemnifying party shall have the right to control the defense of any such claim with the reasonable cooperation of the indemnified party, and to make a cash settlement of any such claim up to an amount equivalent to the indemnifying party’s liability under this Lease; provided, that the indemnified party may participate in the defense of any such claim with counsel of its choosing at its expense.

23. Tenant’s Insurance .

a. Forms of Insurance . Tenant shall maintain at its expense at all times the following forms of insurance:

Commercial General Liability Coverage on the Building in an amount not less than One Million and No/100 Dollars ($1,000,000.00) combined single limit each occurrence for bodily injury and property damage with so-called “umbrella coverage” with a limit of no less than Five Million and No/100 Dollars ($5,000,000) in aggregate;

ii.

Workmen’s compensation insurance covering all persons employed in connection with any and all employees and agents of Tenant with respect to whom death or bodily injury claims could be asserted against Landlord or Tenant as required by applicable law;

b. Delivery of Policies . Tenant shall deliver to Landlord certificates evidencing such insurance, naming Landlord and Landlord’s mortgagee as an additional insured, which shall declare that the insurer may not cancel the same without giving Landlord and Landlord’s lender written notice of its intention so to do at least thirty (30) days in advance. All public liability and property damage policies shall contain a provision that Landlord, although named as an insured, shall nevertheless be entitled to recover under such policies for any loss to the extent occasioned to Landlord by reason of negligence of Tenant. Within thirty (30) days after demand therefor by Landlord, Tenant shall provide evidence of Tenant’s compliance with Landlord’s request for increased coverage.

c. Failure to Procure Insurance . In the event Tenant shall fail to procure insurance required under this Lease, and fails to maintain the same in force continuously during the Term, Landlord shall be entitled to procure the same and Tenant shall immediately reimburse Landlord for such premium expense as Additional Rent hereunder.

d. Increase in Fire Insurance Premium . Tenant agrees not to keep upon the Building anything that may be prohibited by the standard form of fire insurance policy.

e. Property of Tenant . Tenant’s property on the Building shall be at the sole risk and hazard of Tenant. Landlord shall not be liable or responsible for any loss of or damage to Tenant or Tenant’s property, or have any responsibility to insure any personal property or fixtures belonging to Tenant.

f. Waiver of Subrogation . If any property owned by Tenant and located on the Building is damaged or destroyed by an insured peril, Landlord shall not have any liability to Tenant, nor to any insurer of Tenant, for such damage or destruction, except to the extent such damage or destruction is due to Landlord’s gross negligence or intentional misconduct. Both parties shall require all policies of risk insurance carried by it on its property on the Building to contain a provision in and by which the insurer that shall waive its rights of subrogation against the other party.

24. Destruction of the Building . If the Building is totally destroyed by fire or any other casualty, then Landlord or Tenant shall have the option to terminate this Lease by giving Tenant written notice within thirty (30) days after such destruction, and any unearned rent shall be apportioned and returned to Tenant. If Landlord or Tenant does not elect to cancel this Lease, then the same shall remain in full force and effect and Landlord shall proceed with all reasonable diligence to repair the Building. In the event of such restoration or repair, Landlord shall expend such sums as required to repair or restore the building to the condition it was in immediately prior to the date of the destruction. If Landlord elects to repair or rebuild the Building as herein provided, Landlord’s obligation hereunder shall be limited to that work specifically designated herein as being Landlord’s responsibility. Tenant shall repair or replace its merchandise, trade fixtures, furnishings, and equipment. A just and proportionate part of the rent payable by Tenant, to the extent that such damage or destruction renders the Building untenantable, shall abate from the date of such damage or destruction until the Building are repaired. Notwithstanding anything contained herein to the contrary, the obligation of Landlord with respect to repairing or rebuilding the Building is subject to the prior right of Landlord’s lender to receive insurance proceeds as a result of a fire or other casualty, with any obligation of Landlord to be limited to the extent insurance proceeds are received by Landlord for such repair or rebuilding.

25. Assignment and Subletting . Tenant shall have the right to sublease or assign, subject to Landlord’s approval of subtenant or assignee, which approval shall not be unreasonably withheld, if such assignee is comparable in financial quality and will not use the Building for a purpose not permitted under this Lease. Tenant shall also have the right to sublease or assign,

without Landlord’s approval, to any affiliate or to any entity succeeding to the business conducted at the Building or to any entity which is owned or controlled by Tenant or which owns or controls Tenant provided Tenant is not released from obligations of the Lease.

26. Default and Remedies

a. Events of Default . The occurrence of any of the following shall be an Event of Default:

i) Failure by Tenant to pay in full any rent payment or other sum payable hereunder within ten (10) days after written notice of nonpayment to Tenant by Landlord;

ii) Failure by Tenant to perform of any of the terms or conditions of this Lease, other than the payment of money, of for a period of thirty (30) days after written notice thereof to Tenant by Landlord;

iii) The insolvency of Tenant or the filing by Tenant of a voluntary petition in bankruptcy or for any other relief under the Bankruptcy Act, as amended, or under any other insolvency act, law, rule or regulation, state or federal, now or hereafter existing; the application by Tenant for, or the appointment with Tenant’s consent or acquiescence of, a receiver or trustee of Tenant, or for all or a substantial part of the property of Tenant; the making by Tenant of any general assignment for the benefit of creditors of Tenant; or the inability of Tenant, or the admission of Tenant of the inability thereof, to pay the debts of Tenant as such mature;

iv) The filing of any involuntary petition against Tenant in bankruptcy or for any other relief under the Bankruptcy Act, as amended, or under any other insolvency act, law, rule or regulation, state or federal, now or hereafter existing; the involuntary appointment of a receiver or trustee of Tenant or for all or a substantial part of the property of Tenant; or the issuance of attachment, execution or other similar process against any substantial part of the property of Tenant, and the continuation of any of the foregoing for a period of ninety (90) days undismissed, unbonded, or undischarged; or

b. Remedies . Whenever any Event of Default shall have occurred, Landlord may, to the extent permitted by law, take any one or more of the following remedial steps.

i) Landlord may, at its option, declare all installments of Minimum Rent for the remainder of the Term to be immediately due and payable, whereupon the same shall become immediately due and payable.

ii) Landlord may re-enter and take possession of the Building without terminating this Lease, and sublease the Building for the account of Tenant, holding Tenant liable for the difference in the rent and other amounts actually paid by the sublessee and the rents and other amounts payable by Tenant hereunder.

iii) Landlord may terminate this Lease, exclude Tenant from possession of the Building, and use its best efforts to lease the same to another for the account of Tenant, holding Tenant liable for all rent and other amounts payable by Tenant hereunder.

iv) Landlord may take whatever action is available to Landlord at law or in equity, and in connection with such actions, recover any or all damages to Landlord for Tenant’s violation or breach of this Lease.

c. No Remedy Exclusive . No remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other available remedy. No delay or omission by Landlord to exercise any right or power accruing upon any default of Tenant shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised by Landlord at any time, from time to time and as often as may be deemed expedient.

d. Waiver of Jury Trial . Tenant waives all rights to a trial by jury in any legal proceeding brought either by Tenant or Landlord arising out of the construction, interpretation, or enforcement of any term or provision of this Lease.

e. Attorneys’ Fees and Expenses; Late Fees . If either party engages legal counsel for the enforcement of any of the terms of this Lease, whether for suit or other legal services required to secure compliance on the part of the other party, the prevailing party in any such enforcement action shall pay the other party, upon demand, said legal fees and any other expenses incurred by such prevailing party, including, without limitation, court costs, and the reasonable fees and expenses of attorneys and paralegals, court reporters, appraisers, consultants and other experts consulted by such party. Tenant shall also pay Landlord a late fee of Five percent (5%) of any rent payment received more than Five (5) days after the due date thereof

f. Waiver . Waiver by either party of any Event of Default triggered by the other party shall not be construed as a waiver of any subsequent or different default. In case of a breach by one party, the other party nevertheless may accept from the defaulting any payment or payments hereunder without in any way waiving the non-defaulting party’s rights hereunder.

27. Eminent Domain . If a portion of the Building shall be taken for public improvements or otherwise under the exercise of the right of eminent domain, and the Building shall continue to be reasonably suitable for the use which is herein authorized (as determined by Landlord), then the rental herein provided shall be reduced from the date of such taking in direct proportion to the reduction in usefulness of the Building. If the Building, or a part thereof, sufficient to render the Building wholly unfit for the use herein authorized (as determined by Landlord), shall be condemned or acquired in the exercise of the right of eminent domain, either party shall have the right, to terminate and cancel this Lease on thirty (30) days’ prior written notice to the other, such notice to be given within sixty (60) days of the date of the taking, and Tenant shall be liable only for rents and other charges accrued and earned to the date of surrender of possession of the Building to Landlord and for the performance of other obligations maturing prior to said date. Tenant shall not be entitled to participate in or receive any part of the damages or award which may be paid to or awarded Landlord by reason of a taking except where said award shall provide for moving or other reimbursable expenses for Tenant under applicable statute.

28. Hazardous Substances . The term “Hazardous Substances” means all hazardous and toxic substances included under or regulated by any local, state or federal law, rule or regulation pertaining to environmental regulation, contamination or clean-up (collectively “Environmental Laws”). Tenant shall keep no Hazardous Substances in or upon the Building except in compliance with all Environmental Laws. Tenant shall immediately notify Landlord should Tenant become aware of (i) any environmental problem or liability involving Hazardous Substances with respect to the Building, or (ii) any lien, action, or notice under any filed or delivered under any Environmental Law. To the extent that the presence of any Hazardous Substances introduced at on the Building by Tenant, Tenant’s agents, or Tenant’s invitees (“Tenant Hazardous Substances”) requires any response action to clean up the Building, Tenant shall, at Tenant’s own cost and expense, take all actions as shall be necessary for the clean-up of the Building required by any Environmental Law. All costs, including damages, claims, and expenses (including attorney’s fees) which are necessarily incurred by Landlord related to the presence of such Tenant Hazardous Substances shall be paid by Tenant to Landlord as reasonably incurred within ten (10) days after notice from Landlord itemizing the amounts incurred. Tenant shall pay any fines, charges, fees, expenses, costs of clean-up, or response costs arising from any Tenant Hazardous Substances under Environmental Law and shall indemnify and hold Landlord harmless therefrom in accordance with Section 22 of this Lease.

29. Subordination . Tenant hereby subordinates all of its interest under this Lease to the lien of any deed of trust or mortgage now or hereafter in force against the Building. Tenant agrees to execute any such documents as may be reasonably required by the holder (“Mortgagee”) of any such deed of trust or mortgage now or hereafter in force against the Building to effect any subordination or consummate funding requirements; provided, that any such Mortgagee shall expressly agree in such instrument to not disturb the tenancy of Tenant in accordance with the terms of the Lease.

30. Estoppel Certificate . Tenant agrees to execute and deliver to Landlord within twenty (20) days from date of request such estoppel certificates as may be required by Landlord or the lender of Landlord in connection with this Lease. If Tenant fails or refuses to furnish such certificate within the time provided, Landlord and any third party may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as agreed to in writing and mutually-executed by Landlord and Tenant, (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord, (iii) that not more than one month’s Rent has been paid in advance, (iv) that Landlord is not in default under this Lease, and (v) that the Lease is binding and valid in all respects. In such event, Tenant shall be estopped from denying the truth of such matters.

31. Landlord’s Right of Entry . Subject to reasonable advance notice from Landlord and to Tenant’s reasonable safety and security procedures regarding the Building, Landlord may, at all reasonable times, enter the Building to inspect and examine the same, and to show the same to prospective purchasers or tenants, and to make such repairs, alterations, or additions as Landlord may deem necessary or desirable. Tenant shall provide Landlord with a key to the Building, which Landlord may use in accordance with this Paragraph. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any responsibility whatsoever for the care, maintenance or repair of the Building, except as otherwise herein specifically provided.

32. Quiet Enjoyment . Tenant shall peaceably occupy and enjoy the Building so long as this Lease remains in force, subject to the specific provisions of this Lease.

33. Notices . Any notice hereunder shall be deposited in the certified mail of the United States of America, return receipt requested, and shall be deemed to have been served on the date of such depositing. All notices shall be addressed to the parties as specified above or at such other address as the parties may from time to time designate in the manner provided in this Section.

34. Amendments . All amendments to this Lease shall be in writing and executed by the parties or their respective successors in interest.

35. Integration . The parties have incorporated in this Lease their entire understanding, and neither has made or relied upon any representations, warranties, promises, covenants, or undertakings other than as expressly set forth herein.

36. No Partnership . Landlord is not in any way a partner or joint venturer with Tenant.

37. Partial Invalidity . If any provision of this Lease shall be deemed unenforceable, the remainder of this Lease shall not be affected. Each provision of this Lease shall be valid and be enforceable to the fullest extent permitted by law.

38. Successors . This Lease shall bind and inure to the benefit of the legal representatives, successors and assigns of each of the parties, except that no assignment or subletting by Tenant without the written consent of Landlord shall vest any right in the assignee or sublessee of Tenant, except that Landlord’s consent shall not be required for an assignment by Tenant to its parent or subsidiary, or to an entity that merges with Tenant or acquires all or substantially all of Tenant’s assets, as long as Tenant remains fully-obligated, as guarantor or directly to the terms of this Lease.

39. Governing Law . This Lease shall be governed by the laws of Tennessee.

40. Broker’s Commissions . Each party represents and warrants to the other that it has not dealt with any real estate broker, finder or other person with respect to this Lease in any manner, except Binswanger and CB Richard Ellis Memphis, LLC. Each party shall indemnify and hold the other party harmless from any and all damages resulting from claims that may be asserted against the other party by any other broker, finder or other person (including, without limitation, any substitute or replacement broker claiming to have been engaged by indemnifying party in the future), claiming to have dealt with the indemnifying party in connection with this Lease or any amendment or extension hereto, or which may result in Tenant leasing other or enlarged space from Landlord. The provisions of this paragraph shall survive the termination of this Lease.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and date first above written.


	LANDLORD:

2.	HOLLINGSWORTH CAPITAL PARTNERS - TENNESSEE, LLC

	By:	/s/ Trey Hollingsworth

	Print Name: Trey Hollingsworth

	Title: Managing Partner

	TENANT:

3.	KIRKLANDS, INC.

	By:	/s/ W. Michael Madden



				Print Name:		W. Michael Madden



				Title:		President and Chief Executive Officer

EXHIBIT 31.1

CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER

I, W. Michael Madden, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Kirkland’s, Inc. (“registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 31.2

CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

I, Adam C. Holland, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Kirkland’s, Inc. (“registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Kirkland’s, Inc. (the “Company”) on Form 10-Q for the first quarter ended May 2, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Michael Madden, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ W. Michael Madden

President and Chief Executive Officer

June 11, 2015

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Kirkland’s, Inc. (the “Company”) on Form 10-Q for the first quarter ended May 2, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Adam C. Holland, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Adam C. Holland

Vice President and Chief Financial Officer

June 11, 2015

Date: June 11, 2015

/s/ W. Michael Madden

W. Michael Madden

President and Chief Executive Officer