We reaffirm our Neutral recommendation on
) following its first-quarter fiscal 2013 results, wherein modest
revenue growth was offset by higher cost of sales and operating
Why the Reiteration?
On May 23, Kirkland's Inc. delivered first-quarter fiscal 2013
results where earnings remained flat year over year. However,
earnings exceeded both the Zacks Consensus Estimate and
management's expectation on the back of the company's strategic
initiatives to improve sales.
Kirkland's managed to post modest net sales gains of 3.5%
backed by its growing e-commerce business and increased marketing
spend. Although comparable store sales at brick and mortar stores
declined by 3.1% year over year, due to lower transaction,
e-commerce sales shot up by 19.1% year over year during the
However, higher cost of sales pressurized margins and led to a
gross margin contraction of 41 basis points in the quarter. In
fact, Kirkland's is facing higher operating expense due to rising
inbound freight cost and store occupancy cost for several past
quarters. The higher outbound freight cost reflects an increase
in shipping and packaging costs associated with the company's
Moreover, the company has been experiencing a decline in
comparable store sales for the past three years. The recent
trends show that although customer traffic has increased,
comparative sales and transactions have declined as customers
leave the store without purchasing anything.
However, management has taken several initiatives to improve
its comps for the coming quarters. Kirkland's has recently ramped
up its marketing and promotional activity (advertising campaigns
and loyalty credit card programs) to boost sales. Although such
promotional campaigns have decreased merchandise margins, it is
expected to drive earnings over the long term.
Kirkland's has recently started closing its smaller
underperforming stores in the malls and is opening bigger
off-mall stores in popular places. This strategy of shifting the
stores toward more prominent regions is expected to boost sales
in the coming quarters.
Overall, we remain impressed with the company's initiatives to
improve its top line. Management narrowed its fiscal 2013
earnings guidance range, which reflects the strategic initiatives
taken up by the company.
Other Stock to Consider
Kirkland's currently carries a Zacks Rank #3 (Hold). Other
consumer staples stocks worth considering are
Nash Finch Company
United Natural Foods Inc
Fairway Group Holdings Corporation
). While Nash Finch carries a Zacks Rank #1 (Strong Buy), United
Natural and Fairway Group carry a Zacks Rank #2 (Buy).
FAIRWAY GROUP (FWM): Free Stock Analysis
KIRKLANDS INC (KIRK): Free Stock Analysis
NASH FINCH CO (NAFC): Free Stock Analysis
UTD NATURAL FDS (UNFI): Free Stock Analysis
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