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Kirkland's (KIRK) Down More Than 30% on Q3 Loss, Soft Sales

Zacks Equity Research

Kirkland's, Inc. KIRK reported third-quarter fiscal 2019 results, with earnings and revenues declining year over year for the third consecutive time. Moreover, management slashed its bottom-line guidance for fiscal 2019.

The company’s dismal performance and trimmed view for the fiscal dampened investors’ sentiments. Shares of Kirkland's were down 31.4% during the trading session on Dec 5. We note that shares of the company have plunged 55.9% in the past six months compared with the industry’s rise of 26.3%.



Quarter in Details

The Brentwood, TN-based company posted adjusted loss of 58 cents per share compared with the prior-year quarter’s loss of 13 cents. Lower sales were a drag on the quarterly performance.

Kirkland’s net sales amounted to $144.9 million, down 6.2% from the prior-year quarter’s figure. Comparable store sales or comps (including e-commerce) fell 6.4% against an increase of 1.4% in the year-ago quarter. Comps were affected by lower store sales, stemming from dismal store traffic. These were partially offset by enhanced e-commerce sales.

Comps included e-commerce revenue growth of nearly 25.9%. During the quarter, e-commerce revenues amounted to nearly $23.5 million. The upside can be attributed to increased online traffic and conversion. These improvements were slightly countered by lower average ticket.

Costs & Margins

The home decor retailer’s gross profit plunged nearly 14% year over year to $40.1 million. Gross margin contracted 250 basis points (bps) to 27.7%. The downside was caused by a reduction of 360 bps in merchandise margins to 51.8%, stemming from a decline in product margin. Additionally, distribution centre and store occupancy cost deleverage exerted pressure on gross margin.

Operating loss in the quarter was $14.2 million, wider than a loss of $3.6 million in the prior-year quarter.

Store Updates

During the third quarter, Kirkland’s opened one store, taking the total count to 432 stores as of Nov 3, 2019.

Other Financial Details

Kirkland's exited the quarter with cash and cash equivalents of $4.2 million and $25 million of borrowings. Further, net shareholders' equity was at $80.6 million.

Cash used in operating activities amounted to $62.4 million for 39-week period ended Nov 2, 2019. The company’s capital expenditures totaled $12.8 million year to date.  

Guidance

For fiscal 2019, management now expects adjusted loss per share in the range of $1.75-$2.00 compared with the previous guidance of a loss of $1.25-$1.5. The revised view takes into account the persistent pressure on revenues and gross margin for a while.

To counter the current challenges, the company is undertaking initiatives to improve merchandising, omnichannel as well as infrastructural capabilities. The company has also identified several store-closure opportunities, which are likely to reduce store costs.

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