Kirkland's Loses 27% in 3 Months, High Costs a Major Hurdle
Kirkland's, Inc.’s KIRK shares have been on losing grounds, lately. Shares of this Zacks Rank #4 (Sell) company have plunged 27% in the past three months compared with the industry’s decline of 5.2%. Well, this retailer of home decor products has been biting the bullet due to comparable store sales (comps) decline, higher operating expenses and gross margin weakness.
Higher Costs a Worry for Kirkland's
Persistent weakness in gross margin is one of the major deterrents for Kirkland's performance. Gross margin has been dismal primarily due to higher cost of sales. Well, gross margin plummeted 140 basis points (bps) during the second quarter of fiscal 2018, preceded by a decline of 50 bps during the first quarter. Moreover, gross margin declines of 130 bps and 160 bps were witnessed during the fourth and the third quarters of fiscal 2017, respectively.
Additionally, Kirkland’s has been incurring higher store occupancy costs for a while. This was also witnessed in second-quarter fiscal 2018. Besides this, the company recorded a 65 bps increase in outbound freight costs (including e-commerce shipping) as a percentage of sales, thanks to greater e-commerce penetration. The quarter also saw a rise in inbound freight costs and central distribution expenses.
Comps Trend Reverses in Q2
To make matters worse, the company’s comps declined 3.9% in the second quarter, against a 1.2% rise in the year-ago quarter. We note that comps, which were sturdy in the preceding periods, bore the brunt of low store traffic resulting in lesser transactions for the second quarter. Further, comps were negatively impacted by lack of relevance and newness in product assortments.
Can Efforts Revive Performance
On the bright side, Kirkland’s has been focusing on enhancing e-commerce business. Incidentally, the company has redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution. These efforts have been yielding, evident from strong e-commerce momentum witnessed of late. Going ahead, the company is likely to continue expanding third-party partnerships, improve ‘buy online and pick up in store’ capability and further refine fulfillment processes. In addition to this, the company is on track with broadening its store base. These factors fueled Kirkland’s sales in second-quarter fiscal 2018. In fact, Kirkland’s sales have been improving year over year for eleven straight quarters now.
Although Kirkland’s efforts to boost sales look impressive, we are cautious about the company’s profitability, due to the aforementioned factors that have been marring performance. That said, we prefer to maintain safe distance from this stock for the time being. Meanwhile investors may consider the following stocks from the same sector.
Looking for More Promising Retail Stocks? Check These
Urban Outfitters URBN, with a Zacks Rank #1 (Strong Buy), has long-term earnings per share (EPS) growth rate of 12%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Burlington Stores, Inc BURL, carrying a Zacks Rank #2 (Buy), has long-term EPS growth rate of 20.2%.
Target Corporation TGT, with a long-term EPS growth rate of 6.7%, also carries a Zacks Rank #2.
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