Kirkland's to Underperform

We have currently downgraded our long-term recommendation on Kirkland’s Inc. (KIRK - Analyst Report) to Underperform from Neutral following the company’s second-quarter 2011 results, which posted a loss of 2 cents per share compared with earnings of 16 cents in the prior-year period.

Kirkland’s also missed the Zacks Consensus Estimate earnings of 2 cents per share as cost of sales surged coupled with increased operating expenses.

The company, however, anticipates total sales and margins to be sequentially higher but may be offset by the impact from higher expenses related to store openings. Consequently, Kirkland's expects sales and earnings in third-quarter 2011 to be similar to those reported in second-quarter 2011.

The global economic environment has been challenging for the past couple of years. Declining real estate value, reduced lending by banks, solvency concerns of major financial institutions, increase in unemployment levels and significant volatility in the global financial markets have negatively impacted the level of consumer spending for discretionary items.

Over this period of sluggishness, Kirkland’s also experienced a significant slowdown in customer traffic, which affected its revenues and margins.

Further, the company’s sales are also highly dependent on its ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. Any sluggishness in doing so would spoil the company’s image with its customers; thereby reducing customer traffic, which in turn, would finally affect its revenues and margins.

Above all, the market for home décor and gifts is highly competitive. Kirkland’s primarily competes with specialty stores, department stores, discount stores, and catalog and Internet retailers that carry merchandise in one or more categories. The company’s prime competitors include Bed, Bath & Beyond Inc. (BBBY - Analyst Report), Pier 1 Imports Inc. (PIR - Snapshot Report) and Williams-Sonoma Inc. (WSM - Snapshot Report).

Kirkland’s is a leading specialty retailer of home décor in the United States. The company's stores present a broad selection of distinctive merchandise, including framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. The company's stores also offer an extensive assortment of holiday merchandise, as well as items carried throughout the year suitable for giving as gifts.

Kirkland’s currently has a Zacks #5 Rank, implying a short-term Strong Sell rating on the stock.