Sturdy Comps Favor Kirkland's, Escalated Costs a Concern
With rising comparable store sales (comps) aided by steadily growing e-commerce operations and effective merchandising efforts, Kirkland's, Inc. KIRK has been performing impressively. Such factors have enabled the company to deliver year over year top-line growth for 10 straight quarters now. On the flip side, the company continues to face declining gross margins as well as higher store occupancy and freight costs. Let’s analyze all the aspects of the story of this renowned home decor retailer.
Arrows in Kirkland’s Quiver
Kirkland’s has been strategically expanding its store base, by closing smaller underperforming stores and opening bigger off-mall stores at popular locations that are likely to boost sales. During the first quarter, Kirkland’s introduced 10 stores while shutting three. In fiscal 2018, management intends to open 10-15 stores, with nearly half in the second and third quarters each.
Further, Kirkland’s has been strongly focused on enhancing e-commerce business. The company has been taking various strides to adapt to changing consumer trends. These efforts have been yielding, evident from the strong e-commerce momentum witnessed of late. To sustain online sales growth, the company undertakes efforts such as expanding third-party partnerships, improve ‘buy online pick up in store’ capability and refine fulfillment processes to increase the profitability of the Ship to Home business. Additionally, the company has redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution.
Kirkland’s has also undertaken several initiatives to improve merchandise and lower inventory levels. Moreover, management is impressed with its SKU rationalization plans. Also, the fall in SKU count has enhanced in-stock levels along with increasing clarity of presentations on the sales floor.
We expect such well-spun sales-driving efforts to continue bolstering Kirkland’s comps, which have been rising for more than a year now. Incidentally, Kirkland’s comps during first-quarter fiscal 2018, (including e-commerce) rose 1.4%, against 3.8% drop witnessed in the year-ago period. Comps were backed by solid e-commerce sales that surged 39%. Also, greater average ticket and increased conversions at Kirkland’s brick and mortar stores more than offset low traffic, which aided comps growth. We also note that comps increased 2%, 0.7%, 1.2% during fourth, third and second quarters of fiscal 2017, respectively. This sustained growth indicates that the company’s efforts to ramp up sales have been yielding and attracting positive response from consumers toward product assortments.
Well, Kirkland’s robust initiatives boosts investors’ optimism in this Zacks Rank #3 (Hold) stock. The company’s shares have gained 25.2% in the past year compared with the industry’s rise of 15.5%.
Can Efforts Offset Rising Costs
Kirkland’s has been incurring higher store occupancy costs for a while now. In fact, during the first quarter, store occupancy expenses rose 15 basis points (bps) as a percentage of sales. Also, the company witnessed a 65 bps increase in outbound freight costs (including e-commerce shipping) as a percentage of sales. During the quarter, the company saw a rise in inbound freight costs and central distribution expenses. Additionally, higher cost of sales has been dampening gross margin performance for a while. Persistence of such headwinds is likely to dent the company’s profits in the forthcoming periods.
Nevertheless, we expect that Kirkland’s well-knit strategic plans to boost sales will generate substantial cover to mitigate the aforementioned cost hurdles. That said, we expect the company to continue in investors good books.
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