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Will Kirkland's Sustain the Turnaround?

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On Jun 5, 2014, we issued an updated research report on Kirkland’s Inc. (KIRK - Free Report) .

The home furnishing retailer reported first-quarter fiscal 2014 results on May 23. Kirkland’s’ first-quarter fiscal 2014 earnings per share of 12 cents increased 20.0% from the year-ago results and beat the Zacks Consensus Estimate. Profit was driven by higher sales and comps. Earnings also beat management’s guidance range of 10 to 12 cents.

Net sales of $108.0 million also improved year over year and beat the Zacks Consensus Estimate by 6.9% and 2.2%, respectively, backed by higher-than-expected comps. Although traffic remained negative at 1% for the first quarter, it represents a big improvement from the previous four quarters.

Kirkland’s expects the business momentum to continue and issued an optimistic outlook for the second quarter of fiscal 2014. The company expects net sales in the range of $104 to $105 million, up 7% to 8% from the prior-year level. Comps are expected to increase in the range of 3% to 4% versus a decrease of 0.2% in the prior-year quarter.

Overall, we are encouraged with Kirkland’s’ long-term fundamentals. The company remains focused on re-vamping its brands and merchandising process and expand its e-Commerce business to spur revenue growth. Moreover, the company regularly upgrades its information system to maintain growth and momentum in its e-Commerce business.

The initiatives have already started to yield results as its e-Commerce channel has been meeting management’s expectations of strong gains in categories like housewares, floral, clocks and decorative accessories for the past three quarters. Moreover, the company has been able to manage its inventory at desired level and lower its markdown rate by upgrading its merchandise.

However, the slowdown in the home building sector could affect the demand for the company’s home furnishing products in the next few quarters. Moreover, continued slag in consumer spending in the U.S. due to a slowdown in the economy may cause headwinds in the coming quarters.

Key Picks from the Sector

Kirkland’s carries a Zacks Rank #2 (Buy). Other stocks to consider in the retail sector include Citi Trends Inc. , Foot Locker Inc. (FL - Free Report) and American Apparel Inc. . While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker and American Apparel have the same Zacks Rank as Kirkland’s.

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