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Kirkland's Looks Tarnished on Weak Traffic & High Costs

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Weak store traffic and rising costs have made matters tough for Kirkland's, Inc. . This home decor products company’s shares have plunged nearly 32% in the past three months against the industry’s rise of 15.6%. Let’s take a closer look at the aspects that are hurting this Zacks Rank #5 (Strong Sell) company.

Receding Traffic is a Hurdle

Kirkland’s is facing adverse impacts from low traffic and average ticket in its brick-and-mortar stores as more customers are resorting to online purchase. Such headwinds exerted pressure on comparable store sales or comps performance in the second quarter of fiscal 2019. During the quarter, comps (including e-commerce) fell 11.2% against 3.9% rise in the year-ago quarter.

Persistent sluggishness in comps is dampening the company’s top- and the bottom-line performances. In the second quarter, it witnessed 10.5% decline in the top line. Moreover, the company posted adjusted loss of $1.05 per share. Soft store traffic trends are likely to persist in the forthcoming periods and dent the company’s performance.

Rising Costs

Kirkland’s gross margin has been declining for a while and plummeted 530 basis points (bps) to 22.2% in the second quarter. The downside was caused by a reduction of 130 bps in merchandise margins to reach 51.9%, stemming from a fall in product margin. Additionally, distribution center and store occupancy costs deleverage were a drag on gross margin.

We note that gross margin witnessed declines of 390 bps in the first quarter, preceded by contractions of 80 bps, 120 bps, 140 bps and 50 bps in the fourth, the third, the second and the first quarter of fiscal 2018, respectively. Persistent drop in gross margin is a considerable threat to the company’s profitability.

Unimpressive View

For fiscal 2019, management expects loss in the range of $1.25-$1.50. This compares unfavorably with the earlier view of earnings in the range of flat to 15 cents. The revised view takes into consideration uncertainties related to exposure to tariffs and certain other costs. Moreover, the outlook reflects dismal performance witnessed in the first half of fiscal 2019 as well as the current sales and margin trends.

Well, these downsides have been more than enough to keep Kirkland’s in the red zone. Although the company is undertaking initiatives such as cost minimization and product expansion, they are yet to yield and revive the company’s lost sheen.

Done With Kirkland's? Check These 3 Retail Picks

Burlington Stores (BURL - Free Report) has long-term earnings per share (EPS) growth rate of 15.9% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Office Depot (ODP - Free Report) , with a Zacks Rank #2, has long-term EPS growth of 11.1%.

Target Corporation (TGT - Free Report) , with long-term EPS growth rate of 7.1%, carries a Zacks Rank #2.

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