Kirkland's Cheer Store & E-commerce Growth, High Costs a Woe

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Kirkland's, Inc.KIRK well-knit strategic endeavors to boost sales have been yielding positively, evident from consistent year-over-year improvement in top line for almost nine straight quarters. The company has been gaining from its efforts to enhance merchandise assortments, develop e-commerce business and constant store additions.

Such robust initiatives combined with a positive sales view boosts investors' optimism in this Zacks Rank #3 (Hold) stock. The company's shares have gained 15.3% in the past three months compared with the industry 's rise of 1.9%.

In spite of such upsides, Kirkland's struggles with weak bottom-line performance, primarily stemming from higher operating costs.

That said, let's get a closer glimpse of these factors impacting the performance this retailer of home decor products.

Initiatives to Drive Sales Bode Well

Kirkland's effective merchandising efforts has been one of the factors boosting store sales. Additionally, rationalizing SKUs, undertaking repairs at various categories and enhancing pricing as well as mix to enhance overall execution also benefit performance. Notably, these factors combined with solid comps drove fourth-quarter fiscal 2017 net sales.

Further, Kirkland's gains from a robust e-commerce business. Incidentally, the company redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution. 'The special order program' also enables customers to choose from various styles of seats and benches that are not offered usually in its stores.

Additionally, the launch of third-party drop shipping in fiscal 2015 gave customers a wider assortment of product offerings. These efforts have been yielding significant results, evident from the strong e-commerce momentum witnessed of late. In fourth-quarter fiscal 2017, e-commerce sales surged 30% year over year and represented about 10% of Kirkland's top line.

This came on the back of constant focus on enhancing omni-channel business, online product range and fulfilment operations. In the near term, the company is expected to continue expanding its third-party partnerships, improve 'buy online pick up in store' capability and refine its fulfillment processes to increase the profitability of the Ship to Home business.

Kirkland's also undertakes frequent store openings to support its top-line growth. In this respect, the company resorts to the strategy of opening stores at popular locations, while shuttering smaller underperforming stores. During fiscal 2017, Kirkland's opened 31 stores while shutting 17. This included five store openings and two closures in the fourth quarter. For fiscal 2018, management intends to open 20-25 new stores and close 10-15 stores.

Going ahead, management is committed toward making several experiments to attract more customers - online and in stores. That said, Kirkland's anticipates net sales in fiscal 2018 to advance 3-5%, owing to increased store count and contributions from e-commerce sales. Also, this guidance is based on comps growth of 1-2%.

Higher Costs a Concern

Higher promotional spending, stemming from consumers' accelerated changes in shopping patterns has been weighing on Kirkland's bottom line, as witnessed during the latter half of the fourth quarter. Apart from this, higher store occupancy costs and outbound freight costs have also been a drag on profitability.

These factors led to a surge of 60 basis points (bps) in operating costs during the fourth quarter, while operating margin shrank 190 bps. Persistence of higher operating expenses is a considerable threat to Kirkland's profitability in the forthcoming periods. While Kirkland's initiatives to improve sales are encouraging, it is yet to be seen if such growth plans can counter ongoing hurdles.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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