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Kirkland's (KIRK) Q3 Earnings: Escalated Costs Remain a Worry

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Kirkland's, Inc. (KIRK - Free Report) is slated to release third-quarter fiscal 2018 results on Nov 29. This home products retailer has posted negative earnings surprise in three out of the trailing four quarters. Let’s see what’s in store for the company this time around.

Kirkland's, Inc. Price and EPS Surprise

Kirkland's, Inc. Price and EPS Surprise | Kirkland's, Inc. Quote

What to Expect?

The Zacks Consensus Estimate has remained stable in the past 30 days at a loss of 14 cents, which is wider than a loss of 10 cents per share reported in the year-ago quarter. Nonetheless, the consensus mark for revenues is $153 million, reflecting 5.5% growth from the year-ago quarter.

Elevated Costs a Worry

Kirkland’s has been incurring higher store occupancy costs for a while now. This was also witnessed in second-quarter fiscal 2018. Also, the company witnessed a 65 basis point (bp) increase in outbound freight costs (including e-commerce shipping) as a percentage of sales, thanks to greater e-commerce penetration. The quarter also saw a rise in inbound freight costs and central distribution expenses. Also, Kirkland’s gross margin has been declining for a while now, essentially due to higher cost of sales. Well, gross margin plummeted 140 bps during the second quarter of fiscal 2018. This was preceded by a decline of 50 bps in the first quarter. Moreover, gross margin declined of 130 bps and 160 bps during the fourth and third quarters of fiscal 2017, respectively.

The persistent drop in gross margins combined with high operating expenses remains a considerable threat to the company’s profitability. These factors also caused Kirkland’s to post an adjusted loss of 40 cents per share in the second quarter, which was wider than the prior-year quarter’s loss of 34 cents.

Will Sales Drivers Offer Adequate Respite?

Nevertheless, Kirkland’s sales have been improving year over year for eleven straight quarters now. The company has been gaining from its efforts to develop e-commerce business and constant store additions (discussed below). These factors fueled Kirkland’s sales in second-quarter fiscal 2018, wherein net sales increased 1.7% year over year. Well, management is committed toward making efforts to attract more customers — both online and in stores.

Notably, Kirkland’s has been taking various strides to resonate with the changing consumer trends. Incidentally, the company redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution. These efforts have been yielding significant results, evident from the strong e-commerce momentum witnessed of late. Notably, e-commerce sales grew 15% to $17.1 million year over year and represented about 12.8% of Kirkland’s total sales during the second quarter of fiscal 2018. This was backed by robust improvements in website traffic and average ticket. Further, sales from third-party drop-ship strategy provided an impetus to e-commerce revenues during the quarter. The company is expected to continue expanding its third-party partnerships, improving its ‘buy online and pick up in store’ initiative and further refining its fulfillment processes. Management has been progressing strongly with augmenting efficiency across the e-commerce fulfillment center.

With regard to store expansions, Kirkland’s is closing the smaller underperforming stores in malls and expects to open bigger off-mall stores at popular locations, which are likely to boost sales. During the second quarter, Kirkland’s introduced six stores, while shutting five. For third-quarter fiscal 2018, management intends to open nine new stores. While these factors bode well, sluggish traffic remains a concern. Evidently, comparable store sales declined 3.9% in the second quarter, due to low store traffic resulting in lower transactions, which were somewhat compensated by improved average ticket. Further, comps were negatively impacted by lack of relevance and newness in product assortments.

What the Zacks Model Unveils

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

Though Kirkland'scarries a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks Poised to Beat Earnings Estimates

RH (RH - Free Report) has an Earnings ESP of +1.65% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco Wholesale Corporation (COST - Free Report) has an Earnings ESP of +3.09% and a Zacks Rank #3.

Zumiez Inc. (ZUMZ - Free Report) has an Earnings ESP of +0.69% and a Zacks Rank #3.

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