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Kirkland's (KIRK) Grapples with Weak Traffic & Rising Costs

Zacks Equity Research

Sluggish store traffic and rising costs have made matters difficult for Kirkland's, Inc. KIRK. Well, this Zacks Rank #5 (Strong Sell) company’s shares have plunged 68% in the past three months compared with the industry's decline of 1.5%. Let’s take a closer look at the aspects that are dampening this furnishing and home-decor products player’s performance.

Stores Losing Traffic

Kirkland’s is witnessing sluggish traffic in its brick-and-mortar stores as more customers are resorting to online purchase. Such headwinds have weighed on comparable store sales or comps performance during the first quarter of fiscal 2019. During the quarter, comps (including e-commerce) fell 10.7% against 1.4% rise in the year-ago quarter.

Persistent sluggishness in comps is dampening the company’s top- and the bottom-line performances. In the first quarter, it witnessed a 9% decline in the top line. Moreover, the company posted adjusted loss of 53 cents per share, against break-even earnings in the prior-year quarter.

Management expects sales in the first half of fiscal 2019 to be challenged by weakness in brick-and-mortar traffic and core assortments. This is likely to exert pressure on fiscal second-quarter performance. For fiscal 2019, the company expects comps to decline in the low-to-mid single digit range compared with the previous projection of flat to up 1%.

High Costs Hurt Gross Margin

Kirkland’s gross margin has been declining for a while. The metric has plummeted 390 basis points (bps) during the first quarter. The downside was caused by a reduction of 130 bps in merchandise margins to 54.7%, which stemmed from higher inbound freight costs and a decline in product margins. Additionally, store occupancy and central distribution costs deleverage dented gross margin.

We note that gross margin witnessed declines of 80 bps, 120 bps, 140 bps and 50 bps in the fourth, the third, the second and the first quarters of fiscal 2018, respectively. Persistent drop in gross margins is a considerable threat to the company’s profitability.

Final Thoughts

Expectation of persistent weakness in store sales along with high tariffs and weak gross margin trends have compelled management to curtail earnings view for fiscal 2019. The company expects earnings in the range of flat to 15 cents for fiscal 2019 compared with the previous view of earnings in the range of 15-30 cents. Although the company is undertaking initiatives such as cost minimization and product expansion, they are yet to yield positively and revive the company’s lost sheen.

Done With Kirkland's? Check These 3 Retail Picks

Dollar General Corp. DG has long-term earnings per share (EPS) growth rate of 10.9% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

L Brands LB, with a Zacks Rank #2 (Buy), has long-term EPS growth of 11%.

The TJX Companies TJX, with long-term EPS growth rate of 10.9%, carries a Zacks Rank #2.

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