##### 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 30,
    2010oro

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(State or other jurisdiction
    of
    incorporation or organization)

62-1287151(I.R.S. Employer
    Identification No.)2501 McGavock Pike, Suite 1000, Nashville, TN(Address of principal
    executive offices)

37214(Zip Code)   Registrants telephone number, including area code:
 (615) 872-4800
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of each class

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
  Regulation S-T o 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 StatementsPART IItem 1.

Business


3Item 1A.

Risk Factors


11Item 2.

Properties


18Item 3.

Legal Proceedings


19Item 4.

Reserved


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.

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


33PART IVItem 15.

Exhibits and Financial Statements


34Reports of Independent Registered Public
    Accounting Firm


35Consolidated Balance Sheets as of
    January 30, 2010, and January 31, 2009


37Consolidated Statements of Income for the
    52 weeks ended January 30, 2010 and January 31,
    2009


38Consolidated Statements of Changes in
    Shareholders Equity for the 52 weeks ended
    January 30, 2010 and January 31, 2009


39Consolidated Statements of Cash Flows for the
    52 weeks ended January 30, 2010 and January 31,
    2009


40Notes to Consolidated Financial Statements


41Exhibits


53Signatures


55Index 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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##### Table of Contents



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.
  Growth
    Strategy
  Opening new stores.
    Merchandising
  Merchandising strategy.
      make-up
 4




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Product assortment.
    % of Net SalesMerchandise Category

Fiscal 2009


Fiscal 2008


Fiscal 2007Wall Décor (including framed art, mirrors, metal and other
    wall ornaments)


31
%


32
%


31
%Decorative Accessories


14



13



13Candles and Accessories


9



11



11Accent Furniture


9



9



8Holiday


7



7



8Lamps


7



8



6Gifts


6



4



5Other (including housewares, picture frames and other
    miscellaneous items)


6



4



4Textiles


5



5



6Floral


4



4



3Garden


2



3



5Total


100
%


100
%


100
%   Value to customer.
  Store
    Operations
  General. 12-20
 5




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Formats.
  Visual merchandising.
    Personnel recruitment and training. and/or
  Compensation and incentives.
  Real
    Estate
  Strategy.
  Site selection.
 6




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Fiscal


Fiscal


Fiscal


Fiscal


Fiscal2009


2008


2007


2006


2005MallStores open at beginning of period


91



121



168



210



241Store openings














1



Store closings


(25
)


(30
)


(47
)


(43
)


(31
)Stores open at end of period


66



91



121



168



210Off-MallStores open at beginning of period


208



214



181



137



79Store openings


18



3



35



48



59Store closings


(13
)


(9
)


(2
)


(4
)


(1
)Stores open at end of period


213



208



214



181



137TotalStores open at beginning of period


299



335



349



347



320Store openings


18



3



35



49



59Store closings


(38
)


(39
)


(49
)


(47
)


(32
)Stores open at end of period


279



299



335



349



347   Buying
    and Inventory Management
  Merchandise sourcing and product
    development.
  U.S.-based
 7




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Planning and allocation.
    Distribution
    and Logistics
        Internet
  brick-and-mortar
 8




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www.kirklands.com Form 10-K.
  Information
    Systems
  look-up
      Marketing
  e-mail
     9




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Trademarks
    ® ® ® ® ® ® tm
  Competition
        Employees
    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
 10




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http://www.kirklands.com,
  Executive
    Officers of Kirklands
    Robert E. Alderson,
  W. Michael Madden,
  Michelle R. Graul,
    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.
  If We
    Do Not Generate Sufficient Cash Flow, We May Not Be Able to
    Implement Our Growth Strategy.
   11




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If We
    Are Unable to Profitably Open and Operate New Stores, We May Not
    Be Able to Adequately Execute Our Growth Strategy, Resulting in
    a Decrease in Net Sales and Net Income.
      
    Maintain or obtain adequate capital resources for leasehold
    improvements, fixtures and inventory on acceptable terms, or at
    all;
    locate and obtain favorable store sites and negotiate acceptable
    lease terms;
    construct or refurbish store sites;
    obtain and distribute adequate product supplies to our stores;
    maintain adequate warehousing and distribution capability at
    acceptable costs;
    hire, train and retain skilled managers and personnel; and
    continue to upgrade our information and other operating systems
    to control the anticipated growth and expanded operations.      and/or
 12




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Our
    Performance May be Affected by General Economic Conditions and
    the Recent Global Financial Crisis.
          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.
   13




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Our
    Comparable Store Net Sales Fluctuate Due to a Variety of
    Factors.
    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.
    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.
   14




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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.
   15




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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.
    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.   16




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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.
       17




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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.
    If We
    Fail to Maintain an Effective System of Internal Control, We May
    Not be Able to Accurately Report Our Financial
    Results.
    Item 2.
    Properties      15-year
 18




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Alabama


16Arizona


12Arkansas


7California


11Delaware


1Florida


37Georgia


16Illinois


6Indiana


5Iowa


1Kansas


2Kentucky


8Louisiana


10Maryland


4Michigan


3Minnesota


4Mississippi


10Missouri


5Nevada


2New York


7North Carolina


17Ohio


8Oklahoma


4Pennsylvania


4South Carolina


5Tennessee


13Texas


51Virginia


8Wisconsin


2Total


279   Item 3.
    Legal
    Proceedings    Item 4.
    Reserved   19




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##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity and Related Shareholder
    Matters    Fiscal 2009

Fiscal 2008High

Low

High

LowFirst Quarter

$
7.00


$
2.65


$
1.80


$
0.73Second Quarter

$
14.42


$
5.74


$
2.90


$
1.75Third Quarter

$
15.40


$
11.18


$
2.70


$
1.74Fourth Quarter

$
18.95


$
12.68


$
3.05


$
1.86   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
  40-year
 20




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Overview
    of Key Financial Measures
            21




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##### Table of Contents



Fiscal Year2009

2008Total revenue growth


3.8
%


(1.4
)%Comparable store sales growth(1)


8.4
%


3.6
%Average total revenue per store (in thousands)(2)

$
1,360


$
1,218Average total revenue per square foot(3)

$
224


$
210Merchandise margin as a percentage of total revenue(4)


55.4
%


51.2
%Gross profit as a percentage of total revenue


41.5
%


34.2
%Compensation and benefits as a percentage of total revenue


17.6
%


17.8
%Other operating expenses as a percentage of total revenue


8.8
%


9.1
%GAAP earnings per share

$
1.71


$
0.47Adjusted earnings per share(5)

$
1.42


$
0.30Inventory yield(6)


396.5
%


297.0
%Return on assets (ROA)(7)


23.7
%


7.5
%Return on equity (ROE)(8)


49.1
%


19.6
%     (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 total revenues 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)
    
    Adjusted earnings per share excludes adjustments to the
    valuation allowance for deferred tax assets and certain income
    tax credits related to prior periods. Please see the table on
    page 25 for more information on these adjustments.(6)
    
    Inventory yield is defined as gross profit divided by average
    inventory for each of the preceding four quarters.(7)
    
    Return on assets equals net income divided by average total
    assets.(8)
    
    Return on equity equals net income divided by average total
    shareholders equity.  Strategic
    Areas of Emphasis
   22




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As of

As ofJanuary 30,

January 31,2010

2009Number of Stores


279



299Square footage


1,694,364



1,740,992Average square footage per store


6,073



5,823   www.kirklands.com
      Fiscal
    2009 Compared to Fiscal 2008
  Results of operations.
  Fiscal 2009


Fiscal 2008


Change$


%


$


%


$


%Net sales

$
405,676



99.9
%

$
390,640



99.8
%

$
15,036



3.8
%Gift card breakage revenue


518



0.1
%


637



0.2
%


(119
)


(18.7
)%Total revenue


406,194



100.0
%


391,277



100.0
%


14,917



3.8
%Cost of sales


237,688



58.5
%


257,286



65.8
%


(19,598
)


(7.6
)%Gross profit


168,506



41.5
%


133,991



34.2
%


34,515



25.8
%Operating expenses:Compensation and benefits


71,300



17.6
%


69,508



17.8
%


1,792



2.6
%Other operating expenses


35,763



8.8
%


35,721



9.1
%


43



0.1
%Impairment charge






0.0
%


352



0.1
%


(352
)


(100.0
)%Depreciation and amortization


14,505



3.6
%


18,741



4.8
%


(4,236
)


(22.6
)%Operating income


46,938



11.6
%


9,669



2.5
%


37,269



385.4
%Interest expense, net


209



0.1
%


50



0.0
%


159



318.0
%Other income, net


(256
)


(0.1
)%


(469
)


(0.1
)%


213



(45.4
)%Income before income taxes


46,985



11.6
%


10,088



2.6
%


36,897



365.8
%Income tax provision


12,415



3.1
%


783



0.2
%


11,632



1485.6
%Net income

$
34,570



8.5
%

$
9,305



2.4
%

$
25,265



271.5
%  23




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Net sales.
  Gross profit.
  Compensation and benefits.
  Other operating expenses.
  Depreciation and amortization.
  Income tax expense.
  Net income.
 24




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Reconciliation
    of Non-GAAP Measures
    Reconciliation of Non-GAAP Financial Information
  52 Weeks EndedJanuary 30,


January 31,2010


2009(Dollars in thousands, except per share amounts)Net incomeNet income in accordance with GAAP

$
34,570


$
9,305Adjustments to the valuation allowance for deferred tax assets
    and certain income tax credits related to prior periods

$
(5,881
)

$
(3,376
)Adjusted net income

$
28,689


$
5,929Diluted earnings per shareDiluted EPS in accordance with GAAP

$
1.71


$
0.47Adjustments to the valuation allowance for deferred tax assets
    and certain income tax credits related to prior periods

$
(0.29
)

$
(0.17
)Adjusted diluted earnings per share

$
1.42


$
0.30   Liquidity
    and Capital Resources
    Cash flows from operating activities.
  Cash flows from investing activities.
 25




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Cash flows from financing activities.
  Revolving credit facility. 60-day 60-day
      Off-Balance
    Sheet Arrangements
    Seasonality
    and Quarterly Results
   26




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##### Table of Contents



Fiscal 2009 Quarter EndedMay 2,

August 1,

October 31,

January 30,2009

2009

2009

2010Total revenue

$
83,320


$
87,688


$
92,389


$
142,797Gross profit


32,108



33,473



37,930



64,995Operating income


4,028



4,776



7,643



30,491Net income(1)


3,478



3,444



5,570



22,078Earnings per share:Basic


0.18



0.18



0.28



1.12Diluted


0.17



0.17



0.27



1.08Stores open at end of period


292



291



296



279Comparable store net sales increase


5.2
%


6.1
%


11.3
%


10.2
%   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


26,699



27,618



28,344



51,330Operating income (loss)


(2,825
)


(1,736
)


(1,521
)


15,751Net income (loss)(2)


(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


325



324



321



279Comparable store net sales increase


4.3
%


2.8
%


1.2
%


5.3
%     (1)
    
    As a result of positive operating performance throughout fiscal
    2009, we were able to reverse the remaining $5.4 million of
    valuation allowance against our deferred tax assets.(2)
    
    As a result of our positive operating performance in fiscal
    2008, we were able to reverse $3.4 million of the valuation
    allowance against our deferred tax assets during the quarter
    ended January 31, 2009.  Inflation
   27




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Critical
    Accounting Policies and Estimates
    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 28




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##### Table of Contents



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.  
    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
   29




---



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Stock-based compensation Form 10-K,
      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.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
    Managements
    Report on Internal Control Over Financial Reporting
  15d- Internal Control  Integrated Framework Form 10-K.
  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


1,702,372


$
7.77



1,070,257Equity compensation plans not approved by security holders










Total


1,702,372


$
7.77



1,070,257   Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence     32




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Item 14.
    Principal
    Accounting Fees and Services   33




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

35Consolidated Balance Sheets as of
    January 30, 2010 and January 31, 2009

37Consolidated Statements of Income for the 52
    Weeks Ended January 30, 2010 and January 31, 2009

38Consolidated Statements of Shareholders
    Equity for the 52 Weeks Ended January 30, 2010 and
    January 31, 2009

39Consolidated Statements of Cash Flows for the 52
    Weeks Ended January 30, 2010 and January 31, 2009

40Notes to Consolidated Financial Statements

41  34




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                
    35




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
    36




---



##### Table of Contents



KIRKLANDS,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  January 30, 2010


January 31, 2009(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
76,412


$
36,445Inventories, net


39,355



38,686Deferred income taxes


3,552



1,831Prepaid expenses and other current assets


4,331



4,360Total current assets


123,650



81,322Property and equipment, net


36,856



41,826Non-current deferred income taxes


4,395



2,998Other assets


640



618Total assets

$
165,541


$
126,764LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
15,589


$
13,501Income taxes payable


7,087



5,349Accrued expenses


25,402



24,981Total current liabilities


48,078



43,831Deferred rent


25,399



27,534Other liabilities


3,579



3,048Total liabilities


77,056



74,413Commitments and contingencies (Note 8)






Shareholders equity:Preferred stock, no par value, 10,000,000 shares
    authorized; no shares issued or outstanding at January 30,
    2010, and January 31, 2009






Common stock, no par value, 100,000,000 shares authorized;
    19,749,148 and 19,653,270 shares issued and outstanding at
    January 30, 2010, and January 31, 2009, respectively


143,374



141,810Accumulated deficit


(54,889
)


(89,459
)Total shareholders equity


88,485



52,351Total liabilities and shareholders equity

$
165,541


$
126,764    37




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##### Table of Contents



KIRKLANDS,
    INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
  52 Weeks EndedJanuary 30,


January 31,2010


2009(In thousands, except per share data)Net sales

$
405,676


$
390,640Gift card breakage revenue


518



637Total revenue


406,194



391,277Cost of sales (exclusive of depreciation as shown below)


237,688



257,286Gross profit


168,506



133,991Operating expenses:Compensation and benefits


71,300



69,508Other operating expenses


35,763



35,721Impairment charges






352Depreciation


14,505



18,741Total operating expenses


121,568



124,322Operating income


46,938



9,669Interest expense


209



123Interest income






(73
)Other income, net


(256
)


(469
)Income before income taxes


46,985



10,088Income tax expense


12,415



783Net income

$
34,570


$
9,305Earnings per share:Basic

$
1.76


$
0.47Diluted

$
1.71


$
0.47Weighted average shares for basic earnings per share


19,696



19,628Effect of dilutive stock equivalents


553



63Adjusted weighted average shares for diluted earnings per share


20,249



19,691    38




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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 2, 2008


19,585,093


$
141,334


$
(98,764
)

$
42,570Exercise of stock options and employee stock purchases


68,177



103







103Stock-based compensation expense






373







373Net income










9,305



9,305Balance at January 31, 2009


19,653,270



141,810



(89,459
)


52,351Exercise of stock options and employee stock purchases


95,878



241







241Stock-based compensation expense






1,323







1,323Net income










34,570



34,570Balance at January 30, 2010


19,749,148


$
143,374


$
(54,889
)

$
88,485    39




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##### Table of Contents



KIRKLANDS,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  52 Weeks EndedJanuary 30,


January 31,2010


2009(In thousands)Cash flows from operating activities:Net income

$
34,570


$
9,305Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation of property and equipment


14,505



18,741Amortization of tenant allowance


(7,991
)


(9,016
)Amortization of debt issue costs


27



27Impairment charge






352Stock-based compensation expense


1,323



373Loss on disposal of property and equipment


711



1,123Deferred income taxes


(3,118
)


(4,510
)Changes in assets and liabilities:Inventories, net


(669
)


2,560Prepaid expenses and other current assets


29



3,608Other noncurrent assets


(49
)


161Accounts payable


2,088



(2,285
)Income taxes payable


1,738



8,249Accrued expenses and other current and noncurrent liabilities


6,808



874Net cash provided by operating activities


49,972



29,562Cash flows from investing activities:Proceeds from sale of property and equipment


67



3,700Capital expenditures


(10,313
)


(2,740
)Net cash provided by (used in) investing activities


(10,246
)


960Cash flows from financing activities:Exercise of stock options and employee stock purchases


241



103Net cash provided by financing activities


241



103Cash and cash equivalents:Net increase


39,967



30,625Beginning of the year


36,445



5,820End of the year

$
76,412


$
36,445Supplemental cash flow information:Interest paid

$
91


$
92Income taxes paid (refunded)

$
13,610


$
(2,879
)    40




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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 equivalents
  Cost of sales and inventory valuation
  Vendor allowances 
 41




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property and equipment
  Asset retirement obligations
  Impairment of long-lived assets
  Insurance reserves
  Customer loyalty program
  Deferred rent
 42




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Revenue recognition
    Compensation and benefits
  Stock-based compensation
  Other operating expenses
  Preopening expenses
  Advertising expenses
  Income taxes
 43




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Sales and Use Taxes
  Use of estimates
  Fair value of financial instruments
  Earnings per share
  Comprehensive income
 44




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Operating segments
  Note 2 
    Property
    and Equipment    January 30,


January 31,2010


2009Equipment

$
27,041


$
26,680Furniture and fixtures


39,484



40,910Leasehold improvements


55,277



57,302Projects in progress


1,856



317123,658



125,209Less: accumulated depreciation


86,802



83,383$
36,856


$
41,826   Note 3 
    Accrued
    Expenses    January 30,


January 31,2010


2009Salaries and wages

$
6,911


$
5,659Gift cards and store credits


5,413



5,239Sales taxes


2,325



1,829Deferred rent


6,557



7,125Other


4,196



5,129$
25,402


$
24,981  45




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 4 
    Income
    Taxes    52 Weeks EndedJanuary 30,


January 31,2010


2009CurrentFederal

$
13,203


$
5,172State


2,330



121DeferredFederal


2,227



(648
)State


92



(486
)Change in valuation allowance


(5,437
)


(3,376
)$
12,415


$
783     52 Weeks EndedJanuary 30,


January 31,2010


2009Tax at federal statutory rate

$
16,445


$
3,531State income taxes (net of federal benefit)


1,782



565Change in valuation allowance


(5,437
)


(3,376
)Other


(375
)


63Income tax expense

$
12,415


$
783  46




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    January 30,


January 31,2010


2009Deferred tax assets:Net operating loss and carryforwards

$



$
2,167Accruals


3,964



3,664Inventory valuation


220



279Deferred rent and other


5,115



5,222Total gross deferred tax assets


9,299



11,332Less: Valuation allowance






(5,437
)Total net deferred tax assets


9,299



5,895Deferred tax liabilities:Depreciation


(1,109
)


(833
)Prepaid assets


(243
)


(233
)Total deferred tax liabilities


(1,352
)


(1,066
)Net deferred tax assets

$
7,947


$
4,829         52 Weeks EndedJanuary 30,


January 31,2010


2009(In thousands)Balance at the beginning of the year

$
667


$
690Additions based on tax positions related to the current year






Additions for tax positions of prior years


186



121Reductions for tax positions of prior years






Reductions due to settlements






Reductions due to lapse of the statute of limitations






(144
)Balance at the end of the year

$
853


$
667    47




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 5 
    Senior
    Credit Facility  60-day 60-day
    Note 6 
    Long-Term
    Leases      Note 7 
    Employee
    Benefit Plans  Stock-based compensation
 48




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##### Table of Contents



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


285,428



4.9


$
1.77



235,426


$
1.72$6.26 - $11.75


965,000



8.0


$
8.87



367,500


$
8.81$14.58 - $18.55


67,500



3.4


$
17.44



67,500


$
17.44Total


1,317,928



7.1


$
7.77



670,426


$
7.19   in-the-money
 49




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##### Table of Contents



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


AverageOptions


Exercise PriceBalance 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 granted


630,000



8.88Options exercised


(82,309
)


4.37Options forfeited


(22,500
)


4.37Balance at January 30, 2010


1,317,928


$
7.77Options Exercisable As of:January 30, 2010


670,426


$
7.19January 31, 2009


680,648


$
7.13     52 Weeks EndedJanuary 30, 2010


January 31, 2009Expected price volatility


0.63



0.61Risk-free interest rate


3.3
%


3.7
%Expected life


5.9 years



5.8 yearsForfeiture rate


5
%


5
%Dividend yield


0
%


0
%   Expected price volatility 
  Risk-free interest rate 
  Expected lives 
 50




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##### Table of Contents



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


Fair ValueNon-vested at February 2, 2008





$
Granted


400,000



823,200Vested






Forfeited


(13,334
)


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


386,666


$
796,132Granted






Vested






Forfeited


(2,222
)


(4,511
)Non-vested at January 30, 2010


384,444


$
791,621   Employee Stock Purchase Plan
  401(k) Savings Plan 
 51




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##### Table of Contents



KIRKLANDS,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Deferred Compensation Plan
  Note 8 
    Commitments
    and Contingencies        Note 9 
    Related
    Party Transactions   52




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##### Table of Contents



Exhibits:
 (b)Exhibits.



The following is a list of exhibits filed as part of this annual
    report on
    Form 10-K.
    For exhibits incorporated by reference, the location of the
    exhibit in the Companys previous filing is indicated in
    parentheses. 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*



Employee Stock Purchase Plan (Exhibit 10.12 to Amendment No. 4
    to our registration statement on Form S-1 filed on July 10,
    2002, Registration No. 333-86746)10
.8+*



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
.9+*



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



Executive Non-Qualified Excess Plan (Exhibit 10.19 to our Annual
    Report on Form 10-K for the year ended January 29, 2005)10
.11+



Compensation Policy for Non-employee Directors10
.12*



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
.14+*



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
.15*



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) 53




---



##### Table of Contents



ExhibitNumber



Description10
.16*



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)10
.17+*



Severance Rights Agreement by and between Kirklands and W.
    Michael Madden dated April 11, 2008 (Exhibit 99.1 to our Form
    8-K/A dated April 14, 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. 54




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##### Table of Contents



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the
    Securities and Exchange Act of 1934, the registrant has duly
    caused this report to be signed on its behalf by the
    undersigned, thereunto duly authorized.



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 15, 2010/s/  W.
    Michael MaddenW.
    Michael Madden

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

April 15, 2010/s/  Carl
    KirklandCarl
    Kirkland

Director

April 15, 2010/s/  Steven
    J. CollinsSteven
    J. Collins

Director

April 15, 2010/s/  Miles
    KirklandMiles
    Kirkland

Director

April 15, 2010/s/  R.
    Wilson Orr, IIIR.
    Wilson Orr, III

Director

April 15, 2010/s/  Ralph
    T. ParksRalph
    T. Parks

Director

April 15, 2010/s/  Murray
    M. SpainMurray
    M. Spain

Director

April 15, 2010  55




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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