Kirkland's, Inc. (KIRK - Free Report) is sailing on rough seas, thanks to pressures from rising costs as well as unimpressive store traffic trends. Well, such factors have weighed on this Zacks rank #4 (Sell) stock that has plummeted 34.6% in the past three months, against the industry’s rise of 6.5%. Let’s delve deeper.
Dismal Store Traffic Dents Top Line
Kirkland’s is witnessing low traffic in the brick-and-mortar stores as more customers are resorting to online purchases. Such headwinds have weighed on comparable store sales or comps performance during the fourth quarter of fiscal 2018. On a comparable 13-week basis, comps (including e-commerce) fell 3.3%, against 2% rise in the year-ago quarter. Also, during the quarter, the company witnessed a 3.8% decline in the top line. Going ahead, management expects sales in the first half of fiscal 2019 to face persistent weakness in brick-and-mortar traffic and core assortments.
Rising Costs Impact Profitability
Kirkland’s gross margin has been declining for a while. Well, the metric plummeted 80 basis points (bps) during the fourth quarter of fiscal 2018. The downside was caused by a reduction of 40 bps in merchandise margins, which stemmed from higher inbound freight costs and a decline in product margins. Additionally, store occupancy and central distribution costs deleverage were a drag on gross margin. We note that gross margin witnessed declines of 120 bps, 140 bps and 50 bps in the third, the second and the first quarters of fiscal 2018, respectively. Persistent drop in gross margins is a considerable threat to the company’s profitability.
Can Efforts Aid a Revival?
Clearly, the aforementioned factors combined with stiff competition in the retail space are major concerns for the company. Nevertheless, Kirkland’s is focusing on expanding e-commerce sales through improved information systems and growth in third-party drop-ship channel. It is also striving to improve the ‘buy online and pick up in store’ capability and further refine fulfillment processes. Apart from these, the company is undertaking cost minimization endeavors such as direct sourcing and optimizing supply chain operations. Let’s wait and see if such efforts bear fruit and help uplift investors sentiments in the forthcoming periods.
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