Executive Summary / Key Takeaways

• Kirkland's Home is undergoing a significant transformation, pivoting from a single-brand home décor retailer to a multi-brand omni-channel player, leveraging a strategic partnership with Beyond, Inc. (BYON).
• Recent financial performance shows progress in the core Kirkland's Home brand turnaround, with five consecutive quarters of positive comparable store sales growth in brick-and-mortar, though overall sales and profitability remain challenged by macroeconomic headwinds and e-commerce weakness.
• The strategic partnership with Beyond provides crucial liquidity, enables a capital-light store conversion strategy for Bed Bath & Beyond Home and Overstock brands, and offers potential synergies in e-commerce and customer engagement.
• Significant liquidity challenges persist, highlighted by a going concern qualification from auditors and a violation of debt covenants, necessitating waivers from lenders and a disciplined approach to cash flow management, particularly amidst tariff uncertainties.
• The long-term vision targets $600 million in revenue and mid-to-high single-digit adjusted EBITDA margins by fiscal 2028, contingent on successful execution of the multi-brand strategy, operational efficiencies, and navigating the current challenging retail and macroeconomic environment.

A Retailer in Transition: From Home Décor Niche to Multi-Brand Ambition

Founded in 1966, Kirkland's, Inc. has long been a familiar name in the U.S. home décor and furnishings market, operating a network of physical stores and an e-commerce platform under the Kirkland's Home brand. The company carved out a niche by offering a curated, affordable selection of home goods, aiming to provide value and inspirational design ideas. Over the years, its store footprint has evolved, reflecting strategic adjustments to the changing retail landscape, including a trend of net store closures, ending fiscal 2024 with 317 locations.

The retail environment for home furnishings is intensely competitive, pitting Kirkland's against a diverse group of players ranging from specialty stores like HomeGoods (operated by TJX Companies (TJX)) and World Market, to department stores, discount retailers like Walmart (WMT) and Target (TGT), and formidable online giants like Amazon (AMZN) and Wayfair (W). Many of these competitors, particularly the larger ones like TJX, Wayfair, and Williams-Sonoma (WSM), possess substantially greater financial, marketing, and technological resources.

Comparing Kirkland's positioning, its strength has historically resided in its physical store experience and value pricing, appealing to a budget-conscious customer base. However, it has faced challenges keeping pace with the rapid advancements and scale efficiencies of online-focused competitors like Wayfair and Amazon, particularly in e-commerce fulfillment speed and digital marketing sophistication. While Kirkland's brick-and-mortar presence offers a tangible shopping experience that online pure-plays cannot replicate, it also incurs higher fixed costs (like store occupancy) and exposes the company to declining foot traffic trends.

Kirkland's technology infrastructure, while supporting core retail functions like merchandise management, point-of-sale, e-commerce, and warehouse management, is primarily focused on operational enablement rather than being a unique, differentiated moat in itself. Despite lacking proprietary, quantifiable technology differentiators, the company has invested in IT to manage purchasing, pricing, distribution, and enhance omni-channel capabilities, including upgrades to its warehouse management system and strengthening cybersecurity. Recent efforts include implementing a new pricing tool for e-commerce and planning a 2025 replatform to improve the online customer experience and operational efficiency. However, compared to digitally native competitors like Wayfair, whose advanced data analytics and logistics technology enable significantly faster order processing and delivery, Kirkland's faces inherent inefficiencies in its current digital stack, which impacts its e-commerce profitability and competitiveness. The strategic intent behind planned technology enhancements is to bridge this gap, improve conversion, and create a more seamless omni-channel experience, leveraging expertise gained through partnerships.

A pivotal moment in the company's recent history and strategic direction occurred on October 21, 2024, with the announcement of a strategic partnership with Beyond, Inc. This collaboration is designed to leverage the respective strengths of both companies to drive growth and create value. Critically, this partnership included a financing component that provided Kirkland's with much-needed liquidity and signaled a transformative shift towards a multi-brand strategy.

The Turnaround Effort and Recent Performance

Over the past year and a half, Kirkland's has been intently focused on a turnaround strategy centered on three key initiatives: re-engaging the core customer, refocusing the product assortment, and strengthening omni-channel capabilities. This involved rebalancing the value proposition in fiscal 2024, moderating growth in high-ticket categories like furniture and emphasizing value home accents, seasonal décor, and gifts.

Recent financial results reflect the early impacts of these efforts amidst a challenging macroeconomic backdrop characterized by inflationary pressures, high interest rates, and cautious consumer spending, particularly in the home sector.

For fiscal year 2024, net sales decreased by 5.8% to $441.4 million, down from $468.7 million in fiscal 2023. This decline was attributed primarily to a non-comparable sales decrease ($18.1 million) resulting from store closures and one less week in the fiscal year, compounded by a consolidated comparable sales decrease of 2.0% on a 52-week basis.

Breaking down the comparable sales performance reveals divergent trends across channels:

• Store Channel: Demonstrated resilience with positive comparable store sales growth for five consecutive quarters, including +2.8% in Q1 2024, +1.8% in Q2 2024, +1.6% in Q3 2024, and +1.6% in Q4 2024 (on a 13-week shifted basis). This growth was driven by increases in store traffic and conversion, reflecting the impact of marketing and merchandising strategies aimed at the core customer.
• E-commerce Channel: Continued to be a significant headwind, with comparable sales declining -19.1% in Q1 2024, -10.6% in Q2 2024, -14.9% in Q3 2024, and -7.9% in Q4 2024. E-commerce sales represented 23.5% of net sales in fiscal 2024, down from 25.8% in fiscal 2023. This weakness was largely attributed to declines in higher-ticket drop-ship business and challenges in driving e-commerce traffic, despite some improvements in conversion and units sold in 2024.

From a profitability standpoint, Kirkland's saw some improvement in fiscal 2024, albeit still reporting a net loss. Gross profit margin improved by 50 basis points to 27.6% of net sales in fiscal 2024, up from 27.1% in fiscal 2023. This was driven by favorable outbound freight costs (down ~90 bps as a % of sales due to reduced routes and lower rates) and distribution center costs (down ~40 bps due to efficiency and facility closures), partially offset by higher store occupancy costs (up ~60 bps due to sales deleverage) and a slight decrease in merchandise margin (down ~40 bps to 53.7% due to increased promotion and higher inbound freight).

Operating loss improved to $14.0 million in fiscal 2024, compared to $24.4 million in fiscal 2023. The company reported a net loss of $23.1 million, or $1.77 per diluted share, in fiscal 2024, an improvement from a net loss of $27.8 million, or $2.16 per diluted share, in fiscal 2023. Adjusted EBITDA showed a $6 million year-over-year improvement in fiscal 2024, reflecting the impact of cost reduction initiatives implemented throughout the year, including reductions in corporate overhead, store payroll, marketing, and third-party technology expenses.

Despite these operational improvements and cost controls, the company's liquidity position remains a critical concern. Kirkland's ended fiscal 2024 with $3.8 million in cash and cash equivalents and significant outstanding debt ($43.0 million under its revolving credit facility and $17.0 million to Beyond). As of May 2, 2025, available borrowing capacity under the revolving credit facility was minimal ($29,000), constrained by the borrowing base calculation and required excess availability covenants.

The Beyond Partnership: A Catalyst for Multi-Brand Growth

The strategic partnership with Beyond is central to Kirkland's future vision and investment thesis. Beyond's investment of $25 million ($17 million in debt, $8 million in equity) provided crucial capital, used in part to repay existing debt and reduce revolving credit borrowings. The conversion of the $8.5 million Convertible Term Loan into equity at $1.85 per share, along with the $8 million equity purchase, resulted in Beyond owning approximately 40% of Kirkland's outstanding common stock as of February 5, 2025.

Beyond the financial infusion, the partnership unlocks new strategic avenues. The Trademark License Agreement grants Kirkland's the exclusive right to operate small format, neighborhood brick-and-mortar stores and shops-within-a-shop under licensed Beyond brands (Bed Bath & Beyond, Buy Buy Baby, Overstock). This marks a significant pivot towards a multi-brand strategy, leveraging Kirkland's expertise in store operations, merchandising, and supply chain across a broader portfolio.

Management has articulated a vision for these new brands, emphasizing a capital-light store conversion strategy within existing or new real estate. The Bed Bath & Beyond Home concept is envisioned as a "sister brand" to Kirkland's Home, utilizing existing inventory and infrastructure with simple storefront conversions to capitalize on the iconic BB&B name. These stores are expected to feature a differentiated assortment, expanding categories like bedroom and bathroom while reducing lower-turning items, aiming for more consistent foot traffic, improved inventory turns, and increased productivity compared to current Kirkland's Home locations. The Overstock brand is seen as an opportunity for a dedicated off-price concept, serving as a channel for liquidating returns and selling excess inventory, with expectations for significantly higher revenue per store than existing Kirkland's Home locations.

In fiscal 2025, Kirkland's plans to begin executing this multi-brand strategy, including opening or converting locations to these new banners, while also closing 15 to 20 underperforming Kirkland's Home stores to improve overall profitability. A Nashville location has been identified as the first Bed Bath & Beyond Home conversion, and four initial Overstock locations are planned. While pilot stores for the traditional Bed Bath & Beyond and BuyBuy Baby concepts are still planned, the immediate focus is on the capital-light conversions.

The partnership also includes a Collaboration Agreement, outlining ongoing operational arrangements and fees (a quarterly fee of 0.25% of revenue starting Q1 FY25 and an incentive fee of 1.5% of incremental e-commerce revenue growth). Management believes this collaboration, including leveraging Beyond's e-commerce expertise for the planned replatform and potential synergies in customer data and loyalty programs, can accelerate progress towards their long-term goals.

Outlook, Risks, and the Path Forward

Despite the strategic potential of the Beyond partnership and the operational improvements in the core Kirkland's Home store channel, the company faces significant near-term challenges, particularly regarding liquidity and the macroeconomic environment.

Management is currently unable to provide formal financial guidance due to the difficulty in forecasting visibility, citing evolving tariff policies (specifically the 145% tariff rate on Chinese goods, which impacts ~70% of their sourcing in FY24), general uncertainty around trade policy, and the unpredictable consumer landscape. While actively working to mitigate tariff impacts through resourcing, vendor negotiations, and price increases, the wide range of potential outcomes makes forecasting difficult.

The soft start to fiscal 2025 (February impacted by weather/sentiment, recent softness after a relatively flat March-April in stores, and continued e-commerce headwinds) underscores the ongoing demand challenges.

Critically, the company's independent registered public accounting firm's report for FY24 included a qualification regarding Kirkland's ability to continue as a going concern. This assessment is based on recurring losses, a working capital deficiency, and insufficient projected liquidity in the near term, particularly under current tariff policies. This conclusion results in a violation of affirmative covenants under both the revolving credit facility and the Beyond Credit Agreement. While the company is actively seeking waivers from its lenders and is in discussions for an additional $5 million term loan expansion from Beyond to support working capital and store conversions, there is no assurance these will be obtained. Failure to secure waivers could lead lenders to accelerate debt repayment and terminate commitments, potentially forcing a Chapter 11 filing.

This precarious liquidity situation and the uncertainty surrounding tariffs and consumer demand represent significant risks to the investment thesis. The ability to execute the strategic initiatives, including the multi-brand store conversions and e-commerce enhancements, is heavily dependent on securing adequate capital and generating positive cash flow from operations, which has not been the case recently (net cash used in operating activities was $19.3 million in FY24).

However, management maintains a long-term vision, targeting $600 million in revenue and a return to mid-to-high single-digit adjusted EBITDA margins by the end of fiscal 2028. This outlook is predicated on achieving comparable sales growth to return stores to historical average volumes ($1.4 million), enhancing the e-commerce channel, targeted new store growth (timing dependent on capital), and maintaining operational discipline and supply chain efficiencies. The Beyond partnership is seen as a potential accelerator for this long-term trajectory.

Other risks include intense competition (particularly from larger, more technologically advanced players), dependence on foreign imports and vendors, supply chain disruptions, the ability to attract and retain qualified personnel in a competitive labor market, and the inherent seasonality of the business (with heavy reliance on the fourth quarter).

Conclusion

Kirkland's, Inc. stands at a critical juncture, attempting to engineer a turnaround and transform its business model through a strategic partnership with Beyond. The company has demonstrated some success in revitalizing its core brick-and-mortar channel and improving operational efficiency, leading to better adjusted EBITDA in fiscal 2024. The pivot to a multi-brand strategy, leveraging the Bed Bath & Beyond Home and Overstock names through capital-light conversions, presents a compelling opportunity to drive future growth and improve store productivity by capitalizing on established brand recognition and optimizing inventory utilization.

However, the path forward is fraught with significant challenges, most notably the substantial doubt about the company's ability to continue as a going concern, the violation of debt covenants, and the need to secure waivers and additional financing. The volatile macroeconomic environment, particularly the impact of tariffs and uncertain consumer spending, further complicates the outlook. The investment thesis hinges on Kirkland's ability to successfully navigate these immediate liquidity and market headwinds, execute its multi-brand strategy effectively, and realize the planned operational efficiencies and partnership synergies to return to sustainable profitability and achieve its long-term financial targets. Investors should closely monitor the company's progress in securing necessary financing, managing inventory and costs amidst tariff pressures, and the initial performance of the new store concepts as key indicators of its potential to emerge from this transition period on stronger footing.