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Can Robust Sales Aid Kirkland's (KIRK) This Earnings Season?

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Kirkland's, Inc (KIRK - Free Report) is slated to report first-quarter fiscal 2018 results on May 31, before the market opens. This retailer of home decor products has been benefiting from impressive top-line performance, buoyed by efforts to enhance merchandise assortments, develop e-commerce business and increase store counts. On the flip side, higher operating expenses combined with promotional costs have been a drag. With these aspects in mind, let’s delve into how things are shaping up for the upcoming quarterly results.

Efforts to Drive Sales Bode Well

Kirkland’s sales have been improving year over year for nine straight quarters now, courtesy of its well-chalked endeavors. Notably, the company has been making several investments for improving merchandise assortments, rationalizing SKUs, undertaking repairs at various categories as well as enhancing pricing and mix to augment overall execution.

Further, Kirkland's gains from a robust e-commerce business. Notably, the company redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution. Additionally, third-party drop shipping is providing customers a wider assortment of product offerings. These efforts have been yielding significant results, evident from the strong e-commerce momentum witnessed of late. In fourth-quarter fiscal 2017, e-commerce sales surged 30% year over year and represented about 10% of Kirkland’s top line. In the near term, the company is expected to continue expanding its third-party partnerships, improve ‘buy online pick up in store’ capability and refine fulfillment processes to boost the profits from the Ship to Home business.

Kirkland's also undertakes frequent store openings to support top-line growth. In this respect, the company resorts to the strategy of opening stores at popular locations, while shuttering smaller underperforming stores.

Going ahead, management is committed toward making several experiments to attract more customers — online and in stores. That said, Kirkland’s anticipates net sales in fiscal 2018 to advance 3-5%, owing to increased store count and contributions from e-commerce sales. Also, the guidance is based on comps growth of 1-2%. Well, such positive top-line view for the fiscal combined with the company’s constant efforts to bolster sales raises the possibility of the company to deliver solid performance in the impending quarter. Incidentally, analysts polled by Zacks project sales to rise almost 5.4% during first-quarter 2018 to reach $140.1 million.

Kirkland's, Inc. Price, Consensus and EPS Surprise

 

Unimpressive Bottom-Line Picture

While the sales picture looks positive for Kirkland’s, we are somewhat cautious about its bottom-line performance in the to-be-reported quarter. Higher promotional spending, stemming from consumers’ accelerated changes in shopping patterns has been weighing on Kirkland’s bottom line, as witnessed during the latter half of the fourth quarter. Apart from this, higher store occupancy costs and outbound freight costs have marred profits. These factors led to a surge of 60 basis points (bps) in operating costs during the fourth quarter, while operating margin contracted 190 bps.

Needless to say, higher operating expenses are a considerable threat to Kirkland’s profitability. We note that the company has delivered negative bottom-line surprise in three out of the past four quarters. The bottom line has portrayed an unimpressive run in the past eight consecutive quarters. In fact, the company reported a loss in five of them. To top it, the Zacks Consensus Estimate for the first quarter is currently pegged at a loss of 9 cents, remaining flat with the prior-year quarter’s loss figure. This estimate has been stable over the last 30 days.

Wrapping it up, while Kirkland’s initiatives to improve sales are encouraging, it is yet to be seen if such growth plans can offset lingering challenges pertaining to rising operating expenses. That said, lets take a look at what the Zacks Model reveals about Kirkland’s upcoming quarterly release.

Zacks Model

Our proven model does not show that Kirkland’s is likely to beat estimates this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Kirkland’s carries a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks With Favorable Combinations

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Dollar General Corporation (DG - Free Report) has an Earnings ESP of +0.95% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ulta Beauty Inc (ULTA - Free Report) has an Earnings ESP of +0.46% and a Zacks Rank #2.

Abercrombie & Fitch Company (ANF - Free Report) has an Earnings ESP of +1.54% and a Zacks Rank #3.

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