It has been about a month since the last earnings report for Kirkland's, Inc. (KIRK - Free Report) . Shares have added about 9.3% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is KIRK due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Kirkland's Q4 Earnings Decline Y/Y, Guides for FY18
Kirkland's posted fourth-quarter fiscal 2017 results. The company reported earnings of 79 cents per share which plunged 12.2% year over year and fell short of the Zacks Consensus Estimate of 89 cents. Results were on par with management’s update provided in February, wherein it highlighted the unfavorable impact of consumers’ everchanging shopping patterns — leading to a tough retail environment marked by intense promotional activities.
Nonetheless, the company has been making several investments like improving merchandise assortments, rationalizing SKUs, undertaking repairs at various categories and enhancing pricing and mix to enhance overall execution. These efforts are reaping benefits, as evident from Kirkland’s impressive comparable store sales (comps) and sales for the fourth quarter.
Kirkland’s net sales for the 14-week period ended Feb 3, 2018 came in at $224.6 million, reflecting a 10.5% rise from $203.2 million recorded in the 13-week period ended Jan 28, 2017. Net sales almost came in line with the consensus mark of $225 million. Notably, net sales in the fourth quarter of fiscal 2017 includes nearly $10 million from the extra week. Excluding this, comparable store sales (including e-commerce) on a comparable 13-week basis rose 2% in the fourth quarter — better than a 4.6% drop witnessed in the same year-ago period.
Comps were backed by solid e-commerce sales, strength in California and Colorado store sales and greater average ticket that compensated for the soft traffic. Further, sales in the quarter were backed by a robust start to the holiday quarter, thanks to a sturdy November and Black Friday weekend. The company generated particularly strong sales of seasonal décor, while its e-commerce sales also remained solid —depicting a surge of 30% year over year.
Further, e-commerce sales remained robust, surging to $22.6 million year over year and representing about 10% of Kirkland’s top line. This came on the back of the company’s constant focus on enhancing omni-channel business, online product range and fulfilment operations. This was backed by robust improvements in website traffic and average order value. Further, sales from third-party drop-ship strategy provided an impetus to e-commerce revenues.
Costs & Margins
While Kirkland’s began the fourth quarter on a superb note, it witnessed a slowdown in store traffic in the latter half — given consumers’ accelerated changes in shopping patterns during the holiday season. This, in turn compelled the company to undertake greater-than-anticipated promotional activities which weighed on merchandise margins — thereby pressurizing the bottom line.
The home decor retailer’s gross profit increased 6.7% year over year to $79.1 million. However, gross margin declined 130 basis points to 35.2%. Well, merchandise margins fell 30 bps to 53.1% owing to unfavorable mix of third-party drop-ship revenues and heightened promotional activities. This was partly compensated by gains from increased IMU and initiatives to remove stacking of coupon offers.
Additionally, the company incurred greater store occupancy expenses, which rose 35 bps as a percentage of sales. Also, the company witnessed an 85 bps increase in higher outbound freight costs (including e-commerce shipping) as a percentage of sales, while it also incurred greater central distribution expenses. Operating costs jumped 60 bps to 25% of sales. Consequently, operating income declined 8.2% to nearly $21.1 million, with the operating margin shrinking 190 bps to 9.4%.
During fiscal 2017, Kirkland’s introduced 31 stores while shutting 17. This included five store openings and two closures undertaken in the fourth quarter.
For fiscal 2018, management intends to open 20-25 new stores and close 10-15 stores.
Other Financial Details
Kirkland's exited the quarter with cash and cash equivalents of $80.2 million and no long-term debt or borrowings. Further, net shareholders' equity as of Feb 3, 2018 came in at $140.8 million.
During fiscal 2017, Kirkland generated cash flow from operating activities of $45.1 million. Capital expenditures during the fiscal amounted to $28.4 million. Also, Kirkland’s bought back 33,000 shares at an average price of $11.70 million during the fourth quarter and remains on track to continue with share buy backs in fiscal 2018.
For fiscal 2018, the company anticipates capital expenditures to be between $26 million and $29 million, owing to greater investments in e-commerce and supply-chain enhancements.
Fiscal 2018 Guidance
Kirkland’s remains focused on taking steps to enhance operating efficiency and curtail operating costs. The company also expects to gain from its ongoing efforts to mend underperforming categories and enrich customers’ experience further. In this regard, Kirkland’s is on track to allocate capital to enhance its e-commerce network in fiscal 2018. Also, the company remains committed toward making several experiments to attract more customers — both online and in stores.
Kirkland’s anticipates net sales in fiscal 2018 to advance in a range of 3-5%, thanks to increased store count and contributions from e-commerce sales. Also, this guidance is based on comps growth in a range of 1-2%.
Finally, Kirkland’s envisions earnings per share to come in a band of 50 cents to 60 cents. This is partly attributable to the recent tax reforms, owing to which — tax rate for fiscal 2018 is anticipated to be 24%, sharply down from 46% in fiscal 2017. The Zacks Consensus Estimate of 47 cents for fiscal 2018 is pegged much lower and is likely to witness upward revisions.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. There has been one revision higher for the current quarter.
At this time, KIRK has a strong Growth Score of A and a grade with the same score on the momentum front. The stock was also allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is equally suitable for value, growth, and momentum investors.
Estimates have been trending upward for the stock and the magnitude of this revision looks promising. Notably, KIRK has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.