Kirkland's Reports In-Line 1Q

Kirkland’s Inc.’s(KIRK - Analyst Report) first quarter of fiscal 2012 earnings of 10 cents a share were in line with the Zacks Consensus Estimate. However, it fell well short of the year-ago quarter’s earnings of 15 cents per share.

Quarterly earnings declined due to weaker margin on the back of high inflation in the economy.

Quarter in Detail

Kirkland’s net sales went up 3.6% year over year to $97.8 million from $94.4 million in the year-ago quarter. Sales, however, missed Zacks Consensus Estimate of $99.0 million. Consolidated comparable store sales declined 1.2% compared with an 8.4% decrease in the year-ago quarter.

Comparable store sales fell due to a 5% decline in transactions backed by a decline in conversion rate in its stores. Increase in sales of art, mirrors, outdoor living and furniture were offset by declines in decorative accessories, wall decor and lamps.

The company opened 5 stores and closed 17 stores during the first quarter of 2012, bringing the total number of stores to 297 at the end of the quarter.

On a year-over-year basis, gross profit went up to $38.5 million compared with $38.1 million in the year-ago quarter. Gross margin contracted 100 basis points to 39.3% on the back of higher occupancy cost, outbound freight cost as well as central distribution cost partially offset by lower inbound freight costs on inventory compared with the year-ago quarter. Operating income during the first quarter of 2012 declined to $3.2 million, as against an operating income of $5.2 million in the year-ago quarter.

Other Financial Update

Kirkland’s exited the quarter with cash and cash equivalents of $73.2 million compared with $83.1 million in the prior quarter. Deferred rent and other long-term liabilities stood at $38.6 million compared with $38.4 million in the prior quarter.

Kirkland used $2.7 million of cash for operating activities compared with $2.1 million of cash provided in the year-ago quarter. It used $4.2 million for investing activities compared with $3.1 million in the year-ago quarter and $3.1 million for financing activities compared with $0.07 million of cash provided in the year-ago quarter.

During the quarter, the company repurchased 2.2 million shares worth $3.2 million at an average price of $14.6 per share.

Guidance

Based on the first quarter results, the company expects earnings per share for fiscal 2012 in the range of 87 cents to 97 cents. Kirkland's expects to open approximately 40 to 45 new stores in fiscal 2012, representing square footage growth of 8% to 10%.

Kirkland’s expects total sales growth in fiscal 2012 in the range of 7% to 9% compared with fiscal 2011.

For the second quarter of 2012, the company expects earnings in the range of 7 cents to 11 cents per diluted share. Net sales are expected to be $94 million to $96 million.

During the second quarter, the company undertook promotional activity to help change customer’s response towards its stores. However, the company continued to witness weak margins and comparable store trends in the early part of the second quarter. The company expects comparable sales to remain flat or decline up to 3% during the quarter.

Kirkland’s closely competes The TJX Companies Inc. (TJX - Analyst Report) and Ross Stores Inc. (ROST - Snapshot Report). Currently, we have a long-term Underperform recommendation on Kirkland’s, which carries a Zacks #5 Rank (short term Strong Sell rating).