It has been about a month since the last earnings report for Kirkland's, Inc. (KIRK - Free Report) . Shares have lost about 8% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is KIRK due for a breakout? 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 catalysts.
Kirkland's Q1 Earnings & Sales Top
After delivering negative earnings surprise for two consecutive quarters, Kirkland's surprised investors with first-quarter fiscal 2018 results. The top and the bottom line improved year over year and surpassed the Zacks Consensus Estimate, courtesy of robust sales-driving efforts and efficient cost management.
Quarter in Details
The company posted adjusted breakeven earnings for the first quarter, which fared better than the Zacks Consensus Estimate as well as the year-ago quarter’s loss of 9 cents. Kirkland’s net sales for the 13-week period ended May 5, 2018, came in at $142.5 million, up 7.2% from $132.8 million recorded in the 13-week period ended Apr 29, 2017. Also, net sales came ahead of the consensus mark of $140 million. Comparable store sales (including e-commerce) rose 1.4% in the first quarter, better than 3.8% drop witnessed in the same period a year ago.
Comps were backed by solid e-commerce sales that surged 39%. Also, greater average ticket and increased conversions at Kirkland’s brick and mortar stores offset reduced traffic, thereby aiding comps growth.
Notably, e-commerce sales jumped to $17.3 million year over year and represented about 12% of Kirkland’s total revenues. This was backed by robust improvements in website traffic and conversion. Further, sales from third-party drop-ship strategy provided an impetus to e-commerce revenues. Clearly, the company’s constant focus on enhancing omni-channel business and online product range is reaping results.
Costs & Margins
The home decor retailer’s gross profit increased 5.8% year over year to $45.3 million. However, gross margin (including depreciation of store and distribution center facilities) contracted 50 bps to 31.8%.
Nonetheless, merchandise margins rose 35 bps to 56%, driven by continued gains from increased IMU and prudent promotions, somewhat negated by elevated inbound freight costs. Outbound freight costs (including e-commerce shipping) grew 65 bps as a percentage of sales, mainly due to greater e-commerce penetration.
Additionally, the company incurred greater store occupancy expenses, which rose 15 bps as a percentage of sales. Also, central distribution expenses escalated 5 bps.
Operating costs improved 110 bps to 31.7% of sales, on the back of e-commerce expense leverage. Adjusted EBITDA increased $2.4 million year over year to $6.5 million in the first quarter.
During the first quarter, Kirkland’s introduced 10 stores and shuttered three, taking the total count to 425 stores at the end of the quarter.
Management intends to open 10-15 new stores in fiscal 2018, with nearly half in the second and third quarters each.
Other Financial Details
Kirkland's exited the quarter with cash and cash equivalents of $58.2 million and no long-term debt or borrowings. Further, net shareholders' equity as of May 5, 2018 came in at $137.4 million.
During the quarter, Kirkland used cash flow from operating activities of approximately $8 million. Capital expenditures during the quarter amounted to $11.1 million. Also, Kirkland’s bought back 316,000 shares at an average price of $9.42 million during the first quarter and has buybacks worth less than $6 million remaining under its current program.
For fiscal 2018, the company anticipates capital expenditures in line with the year-ago period’s level, including investments in e-commerce and supply-chain enhancements.
Fiscal 2018 Guidance
Management remains impressed with its first-quarter performance, which was driven by e-commerce growth, improved product margins, disciplined cost management and efforts to improve customer experience. Going forward, Kirkland’s is on track to solidify e-commerce operations. The company intends to extend its vendor direct shopping, enrich assortments and improve mobile experience.
All said, management reiterated its guidance for fiscal 2018 and envisions earnings per share to come in a band of 50 cents to 60 cents, which includes costs related to CEO transition.
Also, management stated that it expects each quarter (other than the second quarter) in the fiscal to deliver year-over-year bottom-line growth. The second quarter earnings growth is likely to be impacted by a one-time adjustment that boosted results in the year-ago period. Excluding this, second quarter earnings is anticipated to be nearly in line with the year-ago quarter’s tally.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
At this time, KIRK has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, KIRK has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.