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Kirkland's (KIRK) Q1 Earnings & Sales Miss, FY17 View Intact

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Kirkland's, Inc. (KIRK - Free Report) posted weaker-than-expected results in first-quarter fiscal 2017 following which its shares fell 9.9% on May 23. After delivering positive earnings surprises of 50% and 12.5% in third and fourth quarters of fiscal 2016, respectively, the company posted a negative surprise of 125% in the first quarter.

Kirkland's, Inc. Price, Consensus and EPS Surprise

Kirkland's, Inc. Price, Consensus and EPS Surprise | Kirkland's, Inc. Quote

The company reported adjusted loss of 9 cents that was wider than the Zacks Consensus Estimate of a loss of 4 cents. The reported figure was also down from adjusted earnings of 6 cents in the prior-year quarter. We note that the quarter was impacted by the higher cost of sales and operating expenses coupled with lower comparable store sales (comps).

Quarter in Detail

Kirkland's recorded net sales of $132.8 million that grew 2.3% year over year, due to increase in the number of store count. However, it marginally lagged the Zacks Consensus Estimate of $133.9 million. In fact, the company’s sales have missed the Zacks Consensus Estimate in four of the past seven quarters that includes the reported quarter and met the same in the remaining three. Further, eCommerce revenues surged 32% year over year and contributed $13 million to total sales in the quarter.

Including online sales, comps declined 3.8% versus 0.5% rise registered in the prior-year period. Kirkland’s has been witnessing low traffic over the past few months, especially in Texas, where it has a large footprint. Moreover, a tough retail environment is also hurting the company’s sales.

Gross profit fell 3.8% to $47.6 million in the quarter due to higher cost of sales. Also, the company recorded operating loss of $2.3 million compared to operating income of $1.5 million in the prior-year quarter. Further, Kirkland’s has been incurring higher operating expenses due to increase in store occupancy costs. The higher costs resulted from increased shipping and packaging expenses that have pressurized margins in the past few quarters.

Concurrent with the earnings release, Kirkland's announced that its Vice President and Chief Financial Officer, Adam Holland, has resigned to assume a similar responsibility in the healthcare industry. He will maintain his current role till Jun 14.  Moving ahead, its Controller, Nicole Strain, will assume the role of the Interim Chief Financial Officer.

We note that shares of Kirkland’s have plunged over 44% year to date compared with the Zacks categorized Retail – Home Furnishings industry’s decline of 5.2%. The industry is currently placed at bottom 8% of the Zacks Classified industries (235 out of 256). In fact, Kirkland’s forms part of the Retail-Wholesale sector that is currently placed at the bottom 38% of the Zacks Classified sectors (10 out of 16).



Store Update

The company introduced eight stores while shuttered 11 stores in the quarter, taking the total store count to 401 at the end of the quarter.

Moving ahead, management expects to open more stores in the fiscal second and third quarters, while store closures will happen in the first half of the year. The company intends to inaugurate 25 to 30 new stores and intends to close 20 stores in fiscal 2017. Additionally, it targets to achieve 2–3% square footage during the year.

Other Financial Details

Kirkland's exited the quarter with cash and cash equivalents of $59.8 million compared with $63.9 million in the previous quarter. Deferred rent and other long-term liabilities were $62.4 million compared with $61.4 million in the previous quarter. Further, net shareholders' equity as of Apr 29, came in at $133.3 million versus $133.8 million as of Jan 28.

Fiscal 2017 Guidance

Kirkland’s reiterated its fiscal 2017 earnings outlook (issued on Mar 10) and continues to expect the same in the band of 50–65 cents per share. The guidance is lower than the year-ago earnings per share of 68 cents, however the Zacks Consensus Estimate of 55 cents for fiscal 2017 is pegged within the guided range. Moreover, the company expects earnings to be lower in the first half of the fiscal year.

Further, management predicts sales to increase 6–8% over 2016 sales. In fact, the guidance reflects the additional week in the retail calendar for the full year. This sales guidance assumes comps in the band of slightly negative to slightly positive excluding the effect of the additional week of sales.

The company expects to incur capital expenditures between $23–$27 million in fiscal 2017, versus $32 million incurred in fiscal 2016. This is expected to be backed by store openings along with continued investments in omni-channels.

Zacks Rank & Stocks to Consider

Currently, Kirkland's carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader Retail-Wholesale sector include Aaron's, Inc. (AAN - Free Report) , Best Buy Co., Inc. (BBY - Free Report) and Burlington Stores, Inc. (BURL - Free Report) .

Aaron's has posted an average beat of 10.6% in the past four quarters and increased 41.9% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy carries a Zacks Rank #2 (Buy) and has surged 57.8% in the past one year. Also, it has a long-term earnings growth rate of 10.8%.

Burlington Stores, a Zacks Rank #2 stock has jumped 56.6% in the past one year. Also, it has a long-term earnings growth rate of 15.9%.

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