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Kirkland's Down More Than 85% YTD: Will the Bad Spell Stay?

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Kirkland's, Inc. is in hot waters, which has led to its unimpressive run on the bourses. This Zacks Rank #5 (Strong Sell) stock has plunged almost 86% on a year-to-date basis against the industry’s growth of 27.3%. The decline can be accountable to escalated expenses and soft traffic, which weighed on the company’s performance in the second quarter of fiscal 2019.

Let’s take a closer look at the factors acting as barriers in Kirkland's path.

What’s Weighing on Kirkland's Performance?

Kirkland’s is witnessing low traffic and average ticket in its brick-and-mortar stores, as more customers are resorting to online shopping. Such headwinds weighed on the comparable store sales (comps) performance during the second quarter of fiscal 2019. During the quarter, comps (including e-commerce) fell 11.2% against a 3.9% rise in the year-ago quarter. Continued sluggishness in comps is dampening the company’s top and bottom-line performance. In the quarter, the top line declined 10.5%. Moreover, the company posted an adjusted loss of $1.05 per share compared with the prior-year quarter’s loss of 41 cents.

This apart, Kirkland’s gross margin has been declining for a while. The gross margin contracted 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 decline in product margin. Additionally, distribution center and store occupancy costs deleverage were a drag on gross margin.

Notably, the gross margin shrank 390 bps in the first quarter, preceded by 80 bps, 120 bps, 140 bps and 50 bps contraction in the fourth, third, second and first quarters of fiscal 2018, respectively. A persistent drop in the metric is a considerable threat to the company’s profitability.

Owing to such downsides, management curtailed its guidance for fiscal 2019, when it reported second-quarter results. It expects a loss per share of $1.25-$1.50. This compares unfavorably with the earlier earnings view of flat to 15 cents. The revised view takes into consideration uncertainties related to exposure to tariffs and certain other costs. Moreover, the view reflects the dismal performance witnessed by the company in the first half of fiscal 2019, and the current sales and margin trends.

While the company is undertaking several initiatives, we are yet to see if these can completely offset the aforementioned hurdles. Until then, investors can count on promising better-ranked retail stocks.

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