Kirkland's (KIRK) Up 8% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Kirkland's (KIRK). Shares have added about 8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kirkland's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Kirkland's Q2 Loss Wider than Expected, Sales Up Y/Y

Kirkland's, Inc. (KIRK) released second-quarter fiscal 2018 results, with the top and the bottom line missing the Zacks Consensus Estimate. The company’s second-quarter performance remained dismal, thanks to lower comps along with higher freight, store occupancy and distribution costs. Nevertheless, sales improved year over year, courtesy of increased store count and e-commerce.

Quarter in Details

The Brentwood, TN-based company posted adjusted loss of 40 cents per share compared with the prior-year quarter’s loss of 34 cents. The quarterly figure was also wider than the Zacks Consensus Estimate of a loss of 37 cents.

Kirkland’s net sales came in at $133.9 million, reflecting a 1.7% rise from the prior-year quarter’s tally. The top line gained from improved store count as well as a 15% rise in e-commerce. However, net sales fell short of the consensus mark of $135.4 million.

Comparable store sales declined 3.9% in the second quarter, against a 1.2% rise in the prior-year quarter. Comps bore the brunt of low store traffic resulting in lower transactions, which was somewhat compensated by improved average ticket. Further, comps were negatively impacted by lack of relevance and newness in product assortments.

Notably, e-commerce sales jumped to $17.1 million and represented about 12.8% of Kirkland’s total revenues. This was backed by robust improvements in website traffic and average ticket. Further, sales from third-party drop-ship strategy provided an impetus to e-commerce revenues. Clearly, the company’s constant focus on enhancing omni-channel business and online product range is reaping results.

Costs & Margins

The home decor retailer’s gross profit declined 8.2% year over year to $36.8 million. Also, gross margin contracted 140 basis points (bps) to 27.5%.

Merchandise margins rose 50 bps to 53.2%, driven by continued gains from increased IMU and prudent promotions, somewhat negated by product shrink and damages as well as inbound freight costs. Outbound freight costs (including e-commerce shipping) also grew 65 bps as a percentage of sales, primarily owing to greater e-commerce penetration and rate pressures for transportation to stores. Additionally, the company incurred greater store occupancy and central distribution expenses. Operating loss in the quarter was almost $9 million.
 
Store Updates

During the second quarter, Kirkland’s introduced six stores, while shuttering five and taking the total count to 426 stores as of Aug 4, 2018. Going ahead, management intends to open nearly nine stores in the third quarter of fiscal 2018.

Other Financial Details

Kirkland's exited the quarter with cash and cash equivalents of $35.4 million and no long-term debt or borrowings. Further, net shareholders' equity as of Aug 4, 2018 came in at $130.1 million.

Kirkland used cash flow from operating activities of approximately $22.5 million, year to date. Also, Kirkland’s bought back 77,000 shares during the second quarter and has buybacks worth $5.6 million remaining under its current program.

Fiscal 2018 Guidance

Management is on track with making prudent investments to continue driving sales along with maintaining strict control over expenses and enhancing supply chain efficiency. 

That said, management reiterated guidance for fiscal 2018 and envisions earnings per share between 50 cents and 60 cents.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

At this time, Kirkland's has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kirkland's has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Kirkland's, Inc. (KIRK) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research