Kirkland's Up to Fair Value

Kirkland’s, Inc. (KIRK - Analyst Report) reported better-than-expected results for the second quarter, beating on both the top and bottom lines. The company continues its turnaround efforts, and that is producing in better comp-store sales and profit margins. As a result, we are increasing our estimates for 2008 and 2009. Even so, these estimate increases are due to higher profit margins and not stronger sales trends. The positive comps are due to the company closing its worst-performing stores.

While we applaud the company’s efforts to increase margins and boost cash flow, we think the stock will remain range bound until the company can begin to produce solid sales growth while maintaining those higher margins. Unfortunately, we do not expect Kirkland’s sales trends to improve until the macro headwinds, which are pressuring consumer discretionary spending, improve. Until then, we believe it is prudent to remain on the sidelines. We maintain our Hold rating on the shares.

The home furnishings industry is struggling and valuations of stocks in this industry are depressed across the board. That said Kirkland’s trades on par with its industry peers on price-to-book, price-to-sales, and price-to-cash flow ratios. What’s more, the stock is trading at 13.7x our 2008 EPS estimate and 12.9x our 2009 EPS estimate. We think this represents a fair value when compared to the company’s expected earnings growth rate of 10%. Our target price is $2.50 or about 14x our 2009 EPS estimate.

Read the full analyst report on KIRK