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Why Is Kirkland's (KIRK) Down 37.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Kirkland's (KIRK - Free Report) . Shares have lost about 37.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Kirkland's 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 drivers.

Kirkland's Posts Q4 Earnings Miss, Soft Sales

Kirkland's released fourth-quarter fiscal 2018 results, with earnings improving year over year but missing the Zacks Consensus Estimate. Further, the top line was dismal due to weakness in store traffic. Also, sluggish merchandise margins as well as central distribution and higher occupancy costs dented the quarterly results.

Quarter in Details

The company posted earnings of 95 cents per share, up nearly 20.3% from 79 cents in the prior-year quarter. However, the figure lagged the Zacks Consensus Estimate by a penny.

Kirkland’s net sales amounted to $216.1 million, down 3.8% from the prior-year quarter’s tally. The year-over-year comparison was impacted by an additional week during the fourth quarter of fiscal 2017. Net sales were in line with the Zacks Consensus Estimate.

On a comparable 13-week basis, comparable store sales or comps (including e-commerce) fell 3.3%, against 2% rise witnessed a year ago. Decline in store traffic was somewhat compensated by enhanced conversions.

Revenues from e-commerce improved nearly 15% to reach $25.1 million. The upside was backed by increased online traffic. Further, sales from third-party drop-ship channel continued to boost e-commerce revenues.

Costs & Margins

The home decor retailer’s gross profit declined 6.1% year over year to $74.3 million. Gross margin contracted close to 80 basis points (bps) to 34.4%. This was driven by a reduction of 40 bps in merchandise margins, to reach 52.6%. The downside 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.

Operating income in the quarter was almost $19.1 million, down roughly 9.5%.

Store Updates

During the fourth quarter, Kirkland’s introduced three stores and completed seven store closures, taking the total count to 428 stores as on Feb 2, 2019.

Other Financial Details

Kirkland's exited the quarter with cash and cash equivalents of $57.9 million and no long-term debt or borrowings. Further, net shareholders' equity as of Feb 2, 2019 came in at $130.8 million.

At the end of fiscal 2018, Kirkland’s cash flow from operating activities amounted to $22.3 million.

Also, the company bought back 569,000 shares during the fourth quarter. It has returned almost $15.7 million through share buybacks in fiscal 2018. At the end of the fiscal year, the company had almost $3.7 million remaining under the authorized share repurchase plan.

Fiscal 2019 Guidance

Management expects net sales for 2019 in the range of flat to an increase of 2%. Comps are expected in the bracket of flat to up 1%, backed by advancement in e-commerce. Additionally, it expects sales in the first half to be challenged by persistent weakness in brick-and-mortar traffic and core assortments. Further, earnings per share for fiscal 2019 is expected to come in the range of 15-30 cents

Capital expenditure in the fiscal are expected in the band of $21-$23 million. Management also unveiled certain key strategies for fiscal 2019. These include expansion of product categories, improvement of omni-channel operations and focus on efforts to minimize costs.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -343.75% due to these changes.

VGM Scores

At this time, Kirkland's has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Kirkland's has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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