KIRK Maintained at Underperform

We are maintaining our Underperform rating on Kirkland’s Inc. (KIRK - Analyst Report) on the back of lower comparative sales reported in first quarter 2012. The company also lowered its earnings guidance for the first quarter of 2012, which is scheduled to be reported on May 18, 2012.

First Quarter Guidance Down on Dismal Same-Store Sales

On May 3, 2012, Kirkland’s reported a 1.2% decline in comparable-store sales for the thirteen-weeks ended April 28, 2012 compared with an 8.4% decline in the prior-year period.

Based on the same-store sales results, Kirkland’s lowered its earnings guidance for the first quarter 2012 to 8 cents - 10 cents per diluted share from its prior guidance of 11 cents - 14 cents. The Zacks Consensus Estimate is pegged at 10 cents per share.

Kirkland’s comparable-store sales also slipped 1.3% for the nine-week period ended March 31, 2012 compared with a decline of 8.9% in the prior-year period.

However, close competitors of Kirkland’s like The TJX Companies Inc. (TJX - Analyst Report), an off-price apparel and home fashions retailer, reported an 8% increase in consolidated comparable store sales for the thirteen-weeks ended April 28, 2012. Ross Stores Inc. (ROST - Snapshot Report), another close competitor of Kirkland’s, performed strongly in the first quarter ended April 28, 2012. Same store sales grew 9% over the prior-year period.

Our Recommendation

Kirkland's maintains a lean inventory and depends a lot on a large number of vendors for its supply of merchandise. However, this has inherent risks as the vendors may not be able to supply goods within the stipulated time. Moreover, discontinuation of an agreement with a vendor may result in disruption of supply and it may take time to establish relations with another vendor.

Inflation is posing a major problem for the company. The cost of cotton has jumped significantly during the past two years due to supply shortage. Low cotton crop yield due to unfavorable weather, work stoppages and market speculation has pulled up cotton prices recently.

Moreover, high gas prices in the U.S. have added to the company’s woes. Outbound freight costs increased 40 basis points during fourth quarter of 2011 on the back of higher diesel fuel costs, as well as shipping and packaging costs.

We currently have an Underperform recommendation on Kirkland’s. The stock carries a Zacks #5 Rank (a short-term Strong Sell rating).