After delivering negative earnings surprise for two consecutive quarters, Kirkland's, Inc. KIRK surprised investors with first-quarter fiscal 2018 results. Both top and bottom lines improved year over year and surpassed the Zacks Consensus Estimate, courtesy of robust sales-driving efforts and efficient cost management. Markedly, shares of the company gained 16.2% on the solid outcome. Quarter in Detail Kirkland's, Inc. Price, Consensus and EPS Surprise
Kirkland's, Inc. Price, Consensus and EPS Surprise | Kirkland's, Inc. Quote
This Brentwood, TN-based company posted adjusted breakeven earnings for the first quarter, which fared better than the Zacks Consensus Estimate as well as the year-ago period loss of 9 cents.
Kirkland's net sales for the 13-week period ended May 5, 2018, came in at $142.5 million, reflecting a 7.2% rise from $132.8 million recorded in the 13-week period ended Apr 29, 2017. Also, net sales came ahead of the consensus mark of $140 million. Comparable store sales (including e-commerce) rose 1.4% in the first quarter, better than 3.8% drop witnessed in the same period a year ago.
Comps were backed by solid e-commerce sales that surged 39%. Also, greater average ticket and increased conversions at Kirkland's brick and mortar stores more than offset reduced traffic, thereby aiding comps growth.
Notably, e-commerce sales jumped to $17.3 million year over year and represented about 12% of Kirkland's total revenue. This was backed by robust improvements in website traffic and conversion. Further, sales from third-party drop-ship strategy provided an impetus to e-commerce revenues. Clearly, the company's constant focus on enhancing omni-channel business and online product range is reaping results.
In fact, these efforts have helped this Zacks Rank #3 (Hold) stock rally about 41.1% in a year, outpacing the industry 's growth of 7.2%.
Costs & Margins
The home decor retailer's gross profit increased 5.8% year over year to $45.3 million. However, gross margin (including depreciation of store and distribution center facilities) contracted 50 basis points to 31.8%.
Nonetheless, merchandise margins rose 35 bps to 56%, driven by continued gains from increased IMU and prudent promotions, somewhat negated by elevated inbound freight costs. Outbound freight costs (including e-commerce shipping) grew 65 bps as a percentage of sales, mainly due to greater e-commerce penetration.
Additionally, the company incurred greater store occupancy expenses, which rose 15 bps as a percentage of sales. Also, central distribution expenses escalated 5 bps.
Operating costs improved 110 bps to 31.7% of sales, on the back of e-commerce expense leverage. Adjusted EBITDA increased $2.4 million year over year to $6.5 million in the first quarter.
During the first quarter, Kirkland's introduced 10 stores and shuttered three down, taking the total count to 425 stores at the end of the quarter.
Management intends to open 10-15 new stores in fiscal 2018, with nearly half in the second and third quarters each.
Other Financial Details
Kirkland's exited the quarter with cash and cash equivalents of $58.2 million and no long-term debt or borrowings. Further, net shareholders' equity as of May 5, 2018 came in at $137.4 million.
During the quarter, Kirkland used cash flow from operating activities of approximately $8 million. Capital expenditures during the quarter amounted to $11.1 million. Also, Kirkland's bought back 316,000 shares at an average price of $9.42 million during the first quarter and has buybacks worth less than $6 million remaining under its current program.
For fiscal 2018, the company anticipates capital expenditures to be in line with the year-ago period, including investments in e-commerce and supply-chain enhancements.
Fiscal 2018 Guidance
Management remains impressed with its first-quarter performance, which was driven by e-commerce growth, improved product margins, disciplined cost management and efforts to improve customer experience. Going forward, Kirkland's remains on track to solidify its e-commerce operations. The company intends to extend its vendor direct shopping, enrich assortments and improve mobile experience.
All said, management reiterated its guidance for fiscal 2018 and envisions earnings per share to come in a band of 50 cents to 60 cents, which includes costs related to CEO transition. The Zacks Consensus Estimate of 49 cents for fiscal 2018 is pegged slightly lower and is likely to witness upward revisions.
Also, management stated that it expects each quarter (other than the second quarter) in the fiscal to deliver year-over-year bottom-line growth. The second quarter earnings growth is likely to be impacted by a one-time adjustment that boosted results in the year-ago period. Excluding this, second quarter earnings is anticipated to be nearly in line with the year-ago period.
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