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Why Is Kirkland's (KIRK) Up 20.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Kirkland's (KIRK). Shares have added about 20.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kirkland's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Kirkland's Posts Q2 Loss, Sales Lag Estimates

Kirkland's released second-quarter fiscal 2019 results, wherein it posted adjusted loss of $1.05 per share compared with the prior-year quarter’s loss of 41 cents. The bottom line was wider than the Zacks Consensus Estimate of a loss of 67 cents. Lower sales were a drag on the quarterly performance.

Kirkland’s net sales amounted to $119.9 million, down 10.5% from the prior-year quarter’s figure. The top line missed the Zacks Consensus Estimate of $126 million.

Comparable store sales or comps (including e-commerce) fell 11.2% compared with a decline of 3.9% in the year-ago quarter. Comps were affected by lower store sales, stemming from dismal store traffic and average ticket. These were partially offset by enhanced e-commerce sales.

Comps included e-commerce revenue growth of nearly 21.5%. During the quarter, e-commerce revenues amounted to nearly $20.6 million. The upside can be attributed to increased online traffic and conversion. These improvements were partially countered by lower average ticket.

Costs & Margins

The home decor retailer’s gross profit plunged nearly 27.8% year over year to $26.6 million. Gross margin contracted 530 basis points (bps) to 22.2%. The downside was caused by a reduction of 130 bps in merchandise margins to reach 51.9%, stemming from a decline in product margin. Additionally, distribution center and store occupancy costs deleverage were a drag on gross margin.

Operating loss in the quarter was almost $21 million, wider than a loss of $9 million in the prior-year quarter.

Store Updates

During the second quarter, Kirkland’s opened and closed one store each, taking the total count to 431 stores as of Aug 3, 2019.

Other Financial Details

Kirkland's exited the quarter with cash and cash equivalents of $14.7 million and no long-term debt or borrowings. Further, net shareholders' equity was at $102.4 million.

Cash used in operating activities amounted to $31.5 million for the first six months of fiscal 2019. The company’s capital expenditures totaled $8.5 million year to date.  

Also, the company bought back 346,000 shares during the second quarter. The company expects to exhaust its exiting share repurchase plan authorization by the end of the third quarter.

Guidance

For fiscal 2019, management expects loss in the range of $1.25-$1.50. This compares unfavorably with the earlier view of earnings in the range of flat to 15 cents. The revised view takes into consideration uncertainties related to exposure to tariffs and benefits from supply chain, costs as well as merchandising efforts. Moreover, the view reflects dismal performance witnessed in the first half of fiscal 2019 as well as the current sales and margin trends.

To counter the current challenges, the company is undertaking actions to improve merchandising, omnichannel as well as infrastructural capabilities. This includes efforts such as prudent innovations, optimization of spending through realignment of supply chain as well as augmentation of digital operations and ancillary operations related to e-commerce. The company has also identified several store-closure opportunities, which are likely to aid in the reduction of store costs.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -157.14% due to these changes.

VGM Scores

At this time, Kirkland's has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Kirkland's has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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