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Weak Store Traffic and Gross Margin Dims Kirkland's Prospects

Zacks Equity Research

Kirkland's, Inc. KIRK is navigating on rough seas, thanks to sluggish store traffic and gross margin trends. This Zacks Rank #5 (Strong Sell) stock lost nearly 13% in the past three months, against the industry’s  rise of 6.1%. Let’s take a closer look at the aspects that are tarnishing the image of this furnishing and home-decor products player.

Weak Store Traffic Drags Down Comps

Kirkland’s is facing adverse impacts from low traffic in its brick-and-mortar stores as more customers are resorting to online buying. 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 earlier projection of flat to up 1%.



Gross Margin Continue to Disappoint

Kirkland’s gross margin has been declining for a while. The metric 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%, stemming 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.

Wrapping Up

Unimpressive results in fiscal first quarter along with expectation of soft sales, high tariffs and weak gross margin trends in fiscal second quarter have compelled management to curtail earnings view for fiscal 2019. Although the company is undertaking initiatives such as cost minimization and product expansion, they are yet to bear significant impacts on performance.

Down with Kirkland's? Check These 3 Retail Picks

Children's Place PLCE has long-term earnings per share (EPS) growth rate of 8% and flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Walmart WMT, with a Zacks Rank #2 (Buy), has long-term EPS growth of 4.7%.

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

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