##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES AND EXCHANGE ACT OF 1934For the fiscal year ended
    January 31, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES AND EXCHANGE ACT OF 1934For 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)

(I.R.S. Employer
    Identification No.)431 Smith Lane, Jackson, Tennessee

38301(Address of principal executive
    offices)

(Zip Code)   Registrants telephone number, including area code:
 (731) 988-3600
 Securities registered pursuant to Section 12(b) of the
    Act:
  Title of each class

Name of Each Exchange on Which RegisteredCommon Stock, no par value per share

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 (None)
  o þ
  o þ
  þ o
  þ o
    Regulation S-K Form 10-K Form 10-K. o
  12b-2
  Large accelerated filer o

Accelerated filer o

Non-accelerated filero
    (Do not check if a smaller reporting company)

Smaller reporting company þ   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





TABLE OF
    CONTENTS
  FORM 10-K
   
 PageForward-Looking Statements


2PART IItem 1.

Business


3Item 1A.

Risk Factors


11Item 2.

Properties


18Item 3.

Legal Proceedings


19Item 4.

Submission of Matters to a Vote of Security
    Holders


19PART IIItem 5.

Market for Registrants Common Equity and
    Related Shareholder Matters


20Item 6.

Selected Financial Data


20Item 7.

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


20Item 7A.

Quantitative and Qualitative Disclosure About
    Market Risk


30Item 8.

Financial Statements and Supplementary Data


30Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


30Item 9A(T).

Controls and Procedures


31Item 9B.

Other Information


31PART IIIItem 10.

Directors and Executive Officers of the
    Registrant


32Item 11.

Executive Compensation


32Item 12.

Security Ownership of Certain Beneficial Owners
    and Management


32Item 13.

Certain Relationships and Related Transactions


32Item 14.

Principal Accounting Fees and Services


32PART IVItem 15.

Exhibits, Financial Statements, Schedules and
    Reports on
    Form 8-K


33Report of Independent Registered Public
    Accounting Firm


34Consolidated Balance Sheets as of
    January 31, 2009, and February 2, 2008


35Consolidated Statements of Operations for the
    52 weeks ended January 31, 2009 and February 2,
    2008


36Consolidated Statements of Changes in
    Shareholders Equity for the 52 weeks ended
    January 31, 2009, and February 2, 2008


37Consolidated Statements of Cash Flows for the
    52 weeks ended January 31, 2009 and February 2,
    2008


38Notes to Consolidated Financial Statements


39Exhibits


51Signatures


53Index of Exhibits Filed with this Annual Report on
    Form 10-KEX-23.1EX-31.1EX-31.2EX-32.1EX-32.2   1




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FORWARD-LOOKING
    STATEMENTS  Form 10-K Form 10-K, Form 10-K
  Form 10-K
  Form 10-K
 2




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PART I  Item 1.
    Business  General
    Business
    Strategy
    Item-focused merchandising.
  Ever-changing merchandise mix.
  Stimulating visual presentation.
  Strong value proposition.
 3




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Broad market appeal.
  Store
    Development Strategy
        Merchandising
  Merchandising strategy. fresh-to-market
   4




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make-up
    Product assortment.
    % of Net SalesMerchandise Category

Fiscal 2008


Fiscal 2007


Fiscal 2006Wall Décor (including framed art, mirrors, metal and other
    wall ornaments)


32
%


31
%


29
%Decorative Accessories


13



13



12Candles


11



11



11Accent Furniture


9



8



8Holiday


7



8



7Lamps


8



6



8Textiles


5



6



8Gifts


4



5



2Other (including housewares, picture frames and other
    miscellaneous items)


4



4



5Floral


4



3



5Garden


3



5



5Total


100
%


100
%


100
%  5




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Value to customer.
  Store
    Operations
  General.
  Formats.
  Visual merchandising.
    Personnel recruitment and training. and/or
  Compensation and incentives.
 6




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Real
    Estate
  Strategy.
  Site selection.
      Fiscal


Fiscal


Fiscal


Fiscal


Fiscal2008


2007


2006


2005


2004MallStores open at beginning of period


121



168



210



241



245Store openings










1







10Store closings


(30
)


(47
)


(43
)


(31
)


(14
)Stores open at end of period


91



121



168



210



241Off-MallStores open at beginning of period


214



181



137



79



35Store openings


3



35



48



59



44Store closings


(9
)


(2
)


(4
)


(1
)


Stores open at end of period


208



214



181



137



79TotalStores open at beginning of period


335



349



347



320



280Store openings


3



35



49



59



54Store closings


(39
)


(49
)


(47
)


(32
)


(14
)Stores open at end of period


299



335



349



347



320  7




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Buying
    and Inventory Management
  Merchandise sourcing and product
    development.
  U.S.-based
  Planning and allocation.
    Distribution
    and Logistics
       8




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Internet
  brick-and-mortar Form 10-K.
  Information
    Systems
  look-up
      Marketing
  e-mail
 9




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Trademarks
    ® ® ® ® ® ® tm
  Competition
        Employees
   10




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Availability
    of SEC Reports
  Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330. http://www.sec.gov. Form 10-K, Form 10-Q Form 8-K http://www.kirklands.com,
  Executive
    Officers of Kirklands
    Robert E. Alderson,
  W. Michael Madden, Manager-Assurance
    Item 1A.
    Risk
    Factors  Investing in our common stock involves risk. You should
    carefully consider the following risks, as well as the other
    information contained in this
    10-K,
    including our consolidated financial statements and the related
    notes, before investing in our common stock.
  Our
    performance may be affected by general economic conditions and
    the current global financial crisis.
     11




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A
    Prolonged Economic Downturn Could Result in Reduced Net Sales
    and Profitability.
    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.
    The
    Market Price for Our Common Stock Might Be Volatile and Could
    Result in a Decline in the Value of Your
    Investment.
   12




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Our
    Comparable Store Net Sales Fluctuate Due to a Variety of
    Factors.
    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.
    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.
     13




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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.
     14




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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.
    We May
    Experience Significant Variations in Our Quarterly
    Results.
    The
    Agreement Governing Our Debt Places Certain Reporting and
    Consent Requirements on Us Which May Affect Our Ability to
    Operate Our Business in Accordance with Our Business and
    Strategy.
    
    incur additional indebtedness;
    create liens;
    pay dividends or make other distributions;
    make investments;
    sell assets;
    enter into transactions with affiliates;
    repurchase capital stock; and
    enter into certain mergers and consolidations.   15




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We Are
    Highly Dependent on Customer Traffic in Malls and Shopping
    Centers, and Any Reduction in the Overall Level of Traffic Could
    Reduce Our Net Sales and Increase Our Sales and Marketing
    Expenses.
    Our
    Hardware and Software Systems Are Vulnerable to Damage that
    Could Harm Our Business.
    
    fire, flood and other natural disasters;
    power loss, computer systems failures, internet and
    telecommunications or data network failure, operator negligence,
    improper operation by or supervision of employees, physical and
    electronic loss of data or security breaches, misappropriation
    and similar events; and
    computer viruses.    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.
   16




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Concentration
    of Ownership among Our Existing Directors, Executive Officers,
    and Their Affiliates May Prevent New Investors from Influencing
    Significant Corporate Decisions.
    Our
    ability to use our Net Operating Loss Carryforwards in the
    future may be limited, which could have an adverse impact on our
    tax liabilities.
     17




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Item 2.
    Properties  10-year
    15-year
 18




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##### Table of Contents



Alabama


17Arizona


12Arkansas


7California


11Colorado


1Connecticut


2Delaware


1Florida


39Georgia


16Illinois


7Indiana


7Iowa


1Kansas


2Kentucky


8Louisiana


9Maryland


5Massachusetts


2Michigan


3Minnesota


4Mississippi


10Missouri


6Nevada


2New Jersey


2New York


7North Carolina


18Ohio


8Oklahoma


3Pennsylvania


7South Carolina


6Tennessee


14Texas


48Utah


1Virginia


10Wisconsin


3Total


299   Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   19




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PART II  Item 5.
    Market
    for Registrants Common Equity and Related Shareholder
    Matters    Fiscal 2008


Fiscal 2007High


Low


High


LowFirst Quarter

$
1.80


$
0.73


$
5.68


$
4.50Second Quarter

$
2.90


$
1.75


$
5.24


$
2.20Third Quarter

$
2.70


$
1.74


$
2.13


$
0.95Fourth Quarter

$
3.05


$
1.86


$
1.11


$
0.58   Dividend
    Policy
    Item 6.
    Selected
    Financial Data    Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K. Form 10-K
    Introduction
     20




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Overview
    of Key Financial Measures
         21




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Fiscal Year2008


2007Net sales growth


(1.3
)%


(10.7
)%Comparable store sales growth(1)


3.6
%


(13.3
)%Average net sales per store (in thousands)(2)

$
1,218


$
1,126Average net sales per square foot(3)

$
210


$
204Merchandise margins as a percentage of net sales(4)


51.2
%


47.7
%Gross profit as a percentage of total revenue


34.5
%


28.7
%Compensation and benefits as a percentage of net sales


17.8
%


18.5
%Other operating expenses as a percentage of net sales


9.4
%


10.7
%Inventory yield(5)


297.0
%


226.0
%Return on assets (ROA)(6)


7.3
%


(21.2
)%     (1)
    
    Comparable store sales are calculated by including new stores on
    the first day of the month following the 13th full fiscal month
    of sales.(2)
    
    Calculated using net sales of all stores open at both the
    beginning and the end of the period indicated.(3)
    
    Calculated using the gross square footage of all stores open at
    both the beginning and the end of the period. Gross square
    footage includes the storage, receiving and office space that
    generally occupies approximately 30% of total store space.(4)
    
    Merchandise margin is calculated as net sales minus product cost
    of sales and inventory shrinkage. Merchandise margin excludes
    outbound freight, store occupancy and central distribution costs.(5)
    
    Inventory yield is defined as gross profit divided by average
    inventory for each of the preceding four quarters.(6)
    
    Return on assets equals net income divided by total assets.  Strategic
    Areas of Emphasis
       22




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As of


As ofJanuary 31,


February 2,2009


2008Mall


Off-Mall


Total


Mall


Off-Mall


TotalNumber of Stores


91



208



299



121



214



335Square footage


429,296



1,311,696



1,740,992



581,930



1,345,891



1,927,821Average square footage per store


4,718



6,306



5,823



4,809



6,289



5,755   For the Fiscal Year Ended


For the Fiscal Year EndedJanuary 31, 2009


February 2, 2008Mall


Off-Mall


Total


Mall


Off-Mall


TotalAverage net sales per store (in thousands)(1)

$
1,075


$
1,282


$
1,218


$
994


$
1,216


$
1,126Average net sales per square
    foot(1)(2)

$
228


$
204


$
210


$
211


$
200


$
204     (1)
    
    Calculated using net sales of all stores open at both the
    beginning and the end of the period indicated.(2)
    
    The increase in net sales per square foot from fiscal 2007 to
    2008 was due to the comparable store sales increase.   23




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Fiscal
    2008 Compared to Fiscal 2007
  Results of operations.
  Fiscal 2008


Fiscal 2007


Change$


%


$


%


$


%Net sales

$
390,640



99.8
%

$
395,929



99.8
%

$
(5,289
)


(1.3
)%Gift certificate and gift card breakage revenue


637



0.2
%


772



0.2
%


(135
)


(17.5
)%Total revenue


391,277



100.0
%


396,701



100.0
%


(5,424
)


(1.4
)%Cost of sales


256,228



65.5
%


283,040



71.3
%


(26,812
)


(9.5
)%Gross profit


135,049



34.5
%


113,661



28.7
%


21,388



18.8
%Operating expenses:Compensation and benefits


69,508



17.8
%


73,392



18.5
%


(3,884
)


(5.3
)%Other operating expenses


36,779



9.4
%


42,363



10.7
%


(5,584
)


(13.2
)%Impairment charges


352



0.1
%


3,453



0.9
%


(3,101
)


(89.8
)%Depreciation and amortization


18,741



4.8
%


20,391



5.1
%


(1,650
)


(8.1
)%Operating income (loss)


9,669



2.5
%


(25,938
)


(6.5
)%


35,607



(137.3
)%Interest expense, net


50



0.0
%


440



0.1
%


(390
)


(88.6
)%Other income, net


(469
)


(0.1
)%


(112
)


0.0
%


(357
)


318.8
%Income (loss) before income taxes


10,088



2.6
%


(26,266
)


(6.6
)%


36,354



(138.4
)%Income tax provision (benefit)


783



0.2
%


(360
)


(0.1
)%


(1,143
)


317.5
%Net income (loss)

$
9,305



2.4
%

$
(25,906
)


(6.5
)%

$
35,211



(135.9
)%   Net sales.
  Gross profit. direct-to-store
 24




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Compensation and benefits.
  Other operating expenses.
  Impairment charges.
  Depreciation and amortization.
  Interest expense, net.
  Income tax provision (benefit).
   25




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Net income (loss).
  Liquidity
    and Capital Resources
    Cash flows from operating activities.
  Cash flows from investing activities.
  Cash flows from financing activities.
 26




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Revolving credit facility. 60-day 60-day
      Off-Balance
    Sheet Arrangements
    Seasonality
    and Quarterly Results
     27




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Fiscal 2008 Quarter EndedMay 3,


August 2,


November 1,


January 31,2008


2008


2008


2009Total revenue

$
84,077


$
87,684


$
85,878


$
133,638Gross profit


26,908



27,869



28,625



51,647Operating income (loss)


(2,825
)


(1,736
)


(1,521
)


15,751Net income (loss)(1)


(2,552
)


(1,694
)


(1,471
)


15,022Earnings (loss) per share:Basic


(0.13
)


(0.09
)


(0.07
)


0.76Diluted


(0.13
)


(0.09
)


(0.07
)


0.76Stores open at end of period


338



347



354



299Comparable store net sales increase


4.3
%


2.8
%


1.2
%


5.3
%   Fiscal 2007 Quarter EndedMay 5,


August 4,


November 3,


February 2,2007


2007


2007


2008Total revenue

$
82,314


$
87,359


$
88,743


$
138,285Gross profit


22,231



23,811



24,763



42,856Operating income (loss)(2)


(12,698
)


(9,799
)


(8,631
)


5,190Net income (loss)(1)


(7,499
)


(9,246
)


(10,650
)


1,489Earnings (loss) per share:Basic


(0.38
)


(0.47
)


(0.55
)


0.08Diluted


(0.38
)


(0.47
)


(0.55
)


0.08Stores open at end of period


338



347



354



335Comparable store net sales decrease


(18.8
)%


(10.5
)%


(12.1
)%


(12.6
)%     (1)
    
    As a result of our operating performance, we made adjustments to
    record valuation allowance against our deferred tax assets in
    the amounts of $2.8 million in the quarter ended
    August 4, 2007 and $5.4 million in the quarter ended
    February 2, 2008. As a result of our operating performance
    in 2008, we were able to reverse $3.4 million of the
    valuation allowance during the quarter ended January 31,
    2009.(2)
    
    During the third quarter of fiscal 2007, we incurred a charge
    totaling approximately $965,000 related to separation costs
    associated with a restructuring of corporate personnel. During
    the first, second and fourth quarters of fiscal 2007, we
    incurred non-cash charges related to the impairment of fixed
    assets related to certain underperforming stores in the pre-tax
    amount of approximately $273,000, $540,000, and $1,259,000,
    respectively. During the fourth quarter of fiscal 2007, we
    incurred a goodwill impairment charge of approximately
    $1.4 million.  Inflation
   28




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Recent
    Accounting Pronouncements
    Critical
    Accounting Policies and Estimates
    Cost of sales (excluding depreciation) and inventory
    valuation
  Impairments 
  Depreciation
  
    We utilize the straight-line method of depreciation and a
    variety of depreciable lives. Furniture, fixtures and equipment
    are generally depreciated over 5 years. Computer software
    and equipment is depreciated over 3-7 years. Leasehold
    improvements are amortized over the shorter of the useful lives
    of the assets or the original non-cancelable lease term. Our
    lease terms typically range from 5 to 10 years. 29




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
    To the extent we replace or dispose of fixtures or equipment
    prior to the end of its assigned depreciable life, we could
    realize a loss or gain on the disposition. To the extent our
    assets are used beyond their assigned depreciable life, no
    depreciation expense is being realized. We reassess the
    depreciable lives in an effort to reduce the risk of significant
    losses or gains arising from either the disposition of our
    assets or the utilization of assets with no depreciation charges.  Insurance reserves
  Income taxes
  Stock options
    Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K.
  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure   30




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Item 9A(T).
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
    Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f). Internal
    Control  Integrated Framework
    Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information   31




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PART III  Item 10.
    Directors,
    Executive Officers, and Corporate Governance  Form 10-K,
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters    Equity
    Compensation Plan Information
  (c)Number of securities(a)


(b)


remaining available forNumber of securities to


Weighted-average


future issuance underbe issued upon exercise


exercise price of


equity compensation plansof outstanding options,


Outstanding options,


(excluding securitiesPlan category

warrants and rights


warrants and rights


reflected in column (a))Equity compensation plans approved by security holders


1,179,403


$
6.44



1,689,104Equity compensation plans not approved by security holders


N/A



N/A



N/ATotal


1,179,403


$
6.44



1,689,104   Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence      Item 14.
    Principal
    Accounting Fees and Services   32




---



##### 



PART IV  Item 15.
    Exhibits,
    Financial Statements, and Reports on
    Form 8-K  Financial Statements
  Form 10-K.
   
  Report of Independent Registered Public
    Accounting Firm

34Consolidated Balance Sheets as of
    January 31, 2009 and February 2, 2008

35Consolidated Statements of Operations for the 52
    Weeks Ended January 31, 2009 and February 2, 2008

36Consolidated Statements of Shareholders
    Equity for the 52 Weeks Ended January 31, 2009 and
    February 2, 2008

37Consolidated Statements of Cash Flows for the 52
    Weeks Ended January 31, 2009 and February 2, 2008

38Notes to Consolidated Financial Statements

39   33




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REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            
    34




---



##### Table of Contents



KIRKLANDS,
    INC.



CONSOLIDATED
    BALANCE SHEETS  January 31, 2009


February 2, 2008(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
36,445


$
5,820Inventories, net


38,686



41,246Income tax receivable






2,900Prepaid expenses and other current assets


6,191



7,968Total current assets


81,322



57,934Property and equipment, net


41,826



63,002Other assets


3,616



1,196Total assets

$
126,764


$
122,132LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
13,501


$
15,786Income taxes payable


5,349



Accrued expenses


24,981



25,566Total current liabilities


43,831



41,352Deferred rent


27,534



34,460Other liabilities


3,048



3,750Total liabilities


74,413



79,562Commitments and contingencies (Note 8)






Shareholders equity:Preferred stock, no par value, 10,000,000 shares
    authorized; no shares issued or outstanding at January 31,
    2009, and February 2, 2008






Common stock, no par value, 100,000,000 shares authorized;
    19,653,270 and 19,585,093 shares issued and outstanding at
    January 31, 2009, and February 2, 2008, respectively


141,810



141,334Accumulated deficit


(89,459
)


(98,764
)Total shareholders equity


52,351



42,570Total liabilities and shareholders equity

$
126,764


$
122,132    35




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##### Table of Contents



KIRKLANDS,
    INC.



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year EndedJanuary 31,


February 2,2009


2008(52 Weeks)


(52 Weeks)(In thousands, except per share data)Net sales

$
390,640


$
395,929Gift certificate and gift card breakage revenue


637



772Total revenue


391,277



396,701Cost of sales (exclusive of depreciation as shown below)


256,228



283,040Gross profit


135,049



113,661Operating expenses:Compensation and benefits


69,508



73,392Other operating expenses


36,779



42,363Impairment charges


352



3,453Depreciation of property and equipment


18,741



20,391Total operating expenses


125,380



139,599Operating income (loss)


9,669



(25,938
)Interest expense


123



644Interest income


(73
)


(204
)Other income, net


(469
)


(112
)Income (loss) before income taxes


10,088



(26,266
)Income tax provision (benefit)


783



(360
)Net income (loss)

$
9,305


$
(25,906
)Earnings (loss) per share:Basic

$
0.47


$
(1.33
)Diluted

$
0.47


$
(1.33
)Weighted average shares for basic earnings (loss) per share


19,628



19,516Effect of dilutive stock equivalents


63



Adjusted weighted average shares for diluted earnings (loss) per
    share


19,691



19,516    36




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##### Table of Contents



KIRKLANDS,
    INC.



CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY  TotalCommon Stock


Accumulated


ShareholdersShares


Amount


Deficit


Equity(In thousands, except share data)Balance at February 3, 2007


19,627,065


$
140,761


$
(72,779
)

$
67,982Cumulative effect of change in accounting principle










(79
)


(79
)Exercise of stock options and employee stock purchases


108,028



171







171Tax benefit from exercise of stock options






15







15Restricted stock forfeited


(150,000
)










Stock compensation expense






387







387Net loss










(25,906
)


(25,906
)Balance at February 2, 2008


19,585,093



141,334



(98,764
)


42,570Employee stock purchases


68,177



103







103Stock compensation expense






373







373Net income










9,305



9,305Balance at January 31, 2009


19,653,270


$
141,810


$
(89,459
)

$
52,351    37




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##### Table of Contents



KIRKLANDS,
    INC.



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year EndedJanuary 31,


February 2,2009


2008(52 Weeks)


(52 Weeks)(In thousands)Cash flows from operating activities:Net income (loss)

$
9,305


$
(25,906
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation of property and equipment


18,741



20,391Amortization of landlord construction allowance


(9,016
)


(6,790
)Amortization of debt issue costs


27



22Impairment of long-lived assets and goodwill


352



3,453Cumulative effect of change in accounting principle






(79
)Stock compensation expense


373



387Loss on disposal of property and equipment


1,123



611Deferred income taxes


(4,510
)


960Changes in assets and liabilities:Inventories


2,560



3,544Prepaid expenses and other current assets


3,608



(2,569
)Other assets


161



(206
)Accounts payable


(2,285
)


(4,786
)Income taxes receivable/payable


8,249



(3,881
)Accrued expenses and other noncurrent liabilities


874



9,970Net cash provided by (used in) operating activities


29,562



(4,879
)Cash flows from investing activities:Proceeds from sale of property and equipment


3,700



73Capital expenditures


(2,740
)


(14,835
)Net cash provided by (used in) investing activities


960



(14,762
)Cash flows from financing activities:Borrowings on revolving line of credit






253,684Repayments on revolving line of credit






(253,684
)Exercise of stock options and employee stock purchases


103



171Debt issue costs






(68
)Net cash provided by financing activities


103



103Cash and cash equivalents:Net increase (decrease)

$
30,625


$
(19,538
)Beginning of the year


5,820



25,358End of the year

$
36,445


$
5,820Supplemental cash flow information:Interest paid

$
92


$
501Income taxes (refunded) paid

$
(2,879
)

$
2,460    38




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##### Table of Contents



KIRKLANDS,
    INC.



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  Note 1 
    Description
    of Business and Significant Accounting Policies        Fiscal year
  Cash and cash equivalents
  Cost of sales and inventory valuation
  Vendor allowances  No. 02-16, (EITF 02-16), EITF 02-16
  Prepaid expenses and other current assets
 39




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property and equipment
  Impairment of long-lived assets
  Goodwill Goodwill
    and Other Intangible Assets
  Insurance reserves
  Customer loyalty program
  Deferred rent
 40




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Revenue recognition
    Compensation and benefits multi-unit
  Stock options
 41




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other operating expenses
  Preopening expenses
  Advertising expenses
  Other income, net
  Income Taxes
      Sales and use taxes
 42




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Use of estimates
  Fair value of financial instruments
  Earnings per share
  Comprehensive income
  Operating segments
  Recent accounting pronouncements
  Note 2 
    Property
    and Equipment    January 31,


February 2,2009


2008Land

$



$
402Buildings






3,481Equipment


26,680



27,001Furniture and fixtures


40,910



45,016Leasehold improvements


57,302



61,644Projects in progress


317



419125,209



137,963Less: accumulated depreciation


83,383



74,961$
41,826


$
63,002  43




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 3 
    Accrued
    Expenses    January 31,


February 2,2009


2008Salaries and wages

$
5,659


$
3,643Gift certificates and store credits


5,239



6,480Sales taxes


1,829



2,143Deferred rent


7,125



8,989Other


5,129



4,311$
24,981


$
25,566   Note 4 
    Income
    Taxes    52 Weeks


52 WeeksEnded


EndedJanuary 31,


February 2,2009


2008CurrentFederal

$
5,172


$
(1,898
)State


121



578DeferredFederal


(648
)


(6,118
)State


(486
)


(1,090
)Change in valuation allowance


(3,376
)


8,168$
783


$
(360
)     52 Weeks


52 WeeksEnded


EndedJanuary 31,


February 2,2009


2008Tax at federal statutory rate

$
3,531


$
(9,193
)State income taxes (net of federal benefit)


565



(512
)Goodwill impairment






483Change in valuation allowance


(3,376
)


8,168Other


63



694Income tax benefit

$
783


$
(360
)    44




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        January 31,


February 2,2009


2008Deferred tax assets:Net operating loss and carryforwards

$
2,167


$
4,273Accruals


3,664



2,583Inventory valuation


279



376Deferred rent and other


5,222



4,693Total gross deferred tax assets


11,332



11,925Less: Valuation allowance


(5,437
)


(8,168
)Total net deferred tax assets


5,895



3,757Deferred tax liabilities:Depreciation


(833
)


(3,476
)Prepaid assets


(233
)


(281
)Net deferred tax (liability)


(1,066
)


(3,757
)Total net deferred taxes

$
4,829


$
        45




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    January 31,


February 2,2009


2008Balance at the beginning of the year

$
690


$
198Additions based on tax positions related to the current year






Additions for tax positions of prior years


121



492Reductions for tax positions of prior years






Settlements






Lapse of the statute of limitations


(144
)


Balance at the end of the year

$
667


$
690     Note 5 
    Senior
    Credit Facility  60-day 60-day
    Note 6 
    Long-Term
    Leases   46




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 7 
    Employee
    Benefit Plans  Stock options
        Options OutstandingWeighted AverageRemaining





Options ExercisableNumber


Contractual


Weighted Average


Number


Weighted AverageRange of Exercise Prices

of Shares


Life (In Years)


Exercise Price


of Shares


Exercise Price$1.29 - $4.25


342,737



5.8


$
1.85



242,737


$
1.91$6.26 - $11.75


382,500



6.7


$
8.61



370,411


$
8.68$14.58 - $18.55


67,500



4.4


$
17.44



67,500


$
17.44Total


792,737



6.1


$
6.44



680,648


$
7.13    47




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      WeightedNumber of


AverageOptions


Exercise PriceBalance at February 3, 2007


951,139


$
7.88Options granted


70,000


$
4.54Options exercised


(15,112
)

$
1.72Options forfeited


(167,457
)

$
6.46Balance at February 2, 2008


838,570


$
8.00Options granted


130,000


$
2.08Options exercised






Options forfeited


(175,833
)

$
10.65Balance at January 31, 2009


792,737


$
6.44Options Exercisable As of:January 31, 2009


680,648


$
7.13February 2, 2008


752,731


$
8.25     2008


2007Expected price volatility


0.61



0.44Risk-free interest rate


3.7
%


4.7
%Expected life


5.8 years



5.5 yearsForfeiture rate


5
%


5
%Dividend yield


0
%


0
%   Expected price volatility 
  Risk-free interest rate 
 48




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Expected lives 
  Forfeiture rate 
  Dividend yield 
    Restricted stock 
  Restricted stock units (RSUs) 
    Weighted AverageGrant DateShares


Fair ValueNon-vested at February 2, 2008





$
Granted


400,000



823,200Vested






Cancelled


(13,334
)


(27,068
)Non-vested at January 31, 2009


386,666


$
796,132   Employee Stock Purchase Plan
 49




---



##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  401(k) Savings Plan 
  Deferred Compensation Plan
  Note 8 
    Commitments
    and Contingencies     50




---



##### Table of Contents



Exhibits
  Exhibits.
  Form 10-K.
  ExhibitNumber



Description3
.1*



Amended and Restated Charter of Kirklands, Inc.
    (Exhibit 3.1 to our Annual Report on
    Form 10-K
    for the year ended February 1, 2003) (the 2002
    Form 10-K)3
.2*



Amended and Restated Bylaws of Kirklands, Inc.
    (Exhibit 3.2 to our Current Report on
    Form 8-K
    dated March 31, 2006)4
.1*



Form of Specimen Stock Certificate (Exhibit 4.1 to
    Amendment No. 1 to our registration statement on
    Form S-1
    filed on June 5, 2002, Registration
    No. 333-86746
    (Amendment No. 1 to 2002
    Form S-1))10
.1*



Loan and Security Agreement, dated as of October 4, 2004,
    by and among Kirklands, Inc., Kirklands Stores, Inc.
    and kirklands.com, inc., Fleet Retail Group, Inc., as Agent, and
    the Financial Institutions Party Thereto From Time to Time as
    Lenders (Exhibit 10.1 to our Current Report on
    Form 8-K
    dated October 8, 2004)10
.2*



Amended and Restated Registration Rights Agreement dated as of
    April 15, 2002, by and among Kirkland Holdings L.L.C.,
    Kirklands, Inc., SSM Venture Partners, L.P., Joseph R.
    Hyde III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland
    Equity Partners, L.P., R-H Capital Partners, L.P., TCW/Kirkland
    Equity Partners, L.P., Capital Resource Lenders II, L.P., Allied
    Capital Corporation, The Marlborough Capital Investment Fund,
    L.P., Capital Trust Investments, Ltd., Global Private
    Equity II Limited Partnership, Advent Direct Investment
    Program Limited Partnership, Advent Partners Limited
    Partnership, Carl Kirkland, Robert E. Kirkland, Robert E.
    Alderson, The Amy Katherine Alderson Trust, The Allison Leigh
    Alderson Trust, The Carl T. Kirkland Grantor Retained Annuity
    Trust 2001-1
    and Steven Collins (Exhibit 10.2 to Amendment No. 1 to
    2002
    Form S-1)10
.3+*



Employment Agreement by and between Kirklands and Robert
    E. Alderson dated June 1, 2002, (Exhibit No. 10.6
    to Amendment No. 1 to 2002
    Form S-1)10
.4+*



Amendment to Employment Agreement by and between
    Kirklands, Inc. and Robert E. Alderson dated
    March 31, 2004 (Exhibit 10.2 to our Quarterly Report
    on
    Form 10-Q
    for the quarter ended May 1, 2004)10
.5+*



1996 Executive Incentive and Non-Qualified Stock Option Plan, as
    amended through April 17, 2002 (Exhibit 10.10 to our
    registration statement on
    Form S-1
    filed on April 23, 2002, Registration
    No. 333-86746
    (the 2002
    Form S-1))10
.6+*



2002 Equity Incentive Plan (Exhibit 10.11 to Amendment
    No. 1 to 2002
    Form S-1)10
.7+*



Form of Non-Qualified Stock Option Award Agreement for Director
    Grants (Exhibit 10.1 to our Quarterly Report on
    Form 10-Q
    for the quarter ended October 30, 2004 (October 2004
    Form 10-Q))10
.8+*



Form of Incentive Stock Option Agreement (Exhibit 10.2 to
    the October 2004
    Form 10-Q)10
.9+*



Executive Non-Qualified Excess Plan (Exhibit 10.19 to our
    Annual Report on
    Form 10-K
    for the year ended January 29, 2005)10
.10+*



Compensation Policy for Non-employee Directors (Exhibit 10.11 to
    our Annual Report on Form
    10-K for the
    year ended February 2, 2008)10
.11*



First Amendment to Kirklands, Inc. 2002 Equity Incentive
    Plan effective March 17, 2006 (Exhibit 99.2 to our
    Current Report on
    Form 8-K
    dated March 22, 2006 (the March 22, 2006
    Form 8-K))10
.12+*



Severance Rights Agreement by and between Kirklands and
    Robert E. Alderson dated May 30, 2006 (Exhibit 10.1 to
    our Quarterly Report on
    Form 10-Q
    for the quarter ended July 29, 2006)10
.13*



Office Lease Agreement dated March 1, 2007 by and between
    Kirklands and Two Rivers Corporate Centre, L.P.
    (Exhibit 10.1 to our Current Report on
    Form 8-K
    dated March 1, 2007)10
.14*



First Amendment to Loan and Security Agreement dated as of
    August 6, 2007, by and among Kirklands, Inc.,
    Kirklands Stores, Inc. and kirklands.com, inc., Fleet
    Retail Group, Inc., as Agent, and the Financial Institutions
    Party Thereto From Time to Time as Lenders (Exhibit 10.1 to
    our Current Report on
    Form 8-K
    dated August 10, 2007) 51




---



##### Table of Contents



ExhibitNumber



Description10
.15+*



Severance Rights Agreement by and between Kirklands and W.
    Michael Madden dated April 11, 2008 (Exhibit 99.1 to
    Amendment No. 1 to our
    Form 8-K
    dated April 15, 2008)21
.1*



Subsidiaries of Kirklands (Exhibit 21 to the 2002
    Form S-1)23
.1



Consent of Ernst & Young LLP31
.1



Certification of the President and Chief Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31
.2



Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32
.1



Certification of the President and Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32
.2



Certification of the Senior Vice President and Chief Financial
    Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Incorporated by reference.+
    
    Management contract or compensatory plan or arrangement. 52




---



##### Table of Contents



SIGNATURES    Kirklands, Inc.
  By:
    /s/  Robert
    E. Alderson   President and Chief Executive Officer
      Signature

Title

Date/s/  Robert
    E. AldersonRobert
    E. Alderson

President and Chief Executive Officer, and Director (Principal
    Executive Officer)

April 17, 2009/s/  W.
    Michael MaddenW.
    Michael Madden

Senior Vice President and Chief Financial Officer (Principal
    Financial Officer)

April 17, 2009/s/  Carl
    KirklandCarl
    Kirkland

Director

April 17, 2009/s/  Steven
    J. CollinsSteven
    J. Collins

Director

April 17, 2009/s/  Miles
    KirklandMiles
    Kirkland

Director

April 17, 2009/s/  R.
    Wilson Orr, IIIR.
    Wilson Orr, III

Director

April 17, 2009/s/  Ralph
    T. ParksRalph
    T. Parks

Director

April 17, 2009/s/  Murray
    M. SpainMurray
    M. Spain

Director

April 17, 2009  53




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##### Table of Contents



KIRKLANDS,
    INC.
  INDEX
    OF EXHIBITS FILED WITH THIS ANNUAL REPORT ON
    10-K
  ExhibitNumber

Description23
.1

Consent of Ernst & Young LLP.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 Senior 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 135032
.2

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