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Kirkland's Plummets on Q3 Loss, View Cut on Poor Traffic

Kirkland's, Inc. 's KIRK share price decreased 32.91% on Nov 19 after it announced worse-than-expected third-quarter fiscal 2015 results and cut its full year guidance.

This Brentwood, TN-based company reported third quarter adjusted loss of 4 cents per share, which compared unfavorably with the Zacks Consensus Estimate of earnings of 4 cents as well as a profit of 7 cents earned in the year-ago quarter, due to higher operating expenses in e-commerce and lower merchandise margins.

Kirkland's Inc. (KIRK) - Earnings Surprise | FindTheCompany

Quarter in Detail

The home décor retailer's net sales increased 10.3% to $129.2 million from $117.2 million in the year-ago quarter backed by strong online sales. The fall seasonal merchandise performed well and e-commerce revenues also exceeded the company's expectations in the quarter. Sales, however, marginally missed the Zacks Consensus Estimate of $131 million by 1.4% but exceeded the company's guided range of $115 million to $116 million. The retail environment was challenging in the third quarter particularly in October, primarily due to softer-than-expected traffic.

Including online sales, comparable store sales went up 1.8%, much lower than 6.3% increase in the previous year, due to soft traffic. The company witnessed weakness in Texas, where the company has the highest concentration of stores. Comp sales growth was lower than management's expectation of 5%-7% growth.

Brick and mortar comparable store sales were down 1%. This was driven by a 3% increase in conversion but offset by a 3% traffic decline, resulting in flat transactions.

E-commerce revenues were $9.6 million, up 38% over the prior-year quarter and accounted for approximately 7% of total sales during the third quarter. In the third quarter last year, e-commerce had constituted 6% of total sales. Online sales added 2.5% to consolidated comps in the third quarter.

Gross profit increased 5.1% year over year to $48.1 million backed by higher revenues. On a year-over-year basis, gross margin decreased 180 basis points (bps) to 37.2% of sales due to lower merchandising margins, primarily due to an increase in promotional activity to stimulate traffic and manage inventory levels, as well as higher supply chain costs.

The company reported operating loss of $0.93 million as against a profit of $1.97 million in the year-ago period due to higher operating expenses in the e-commerce business. The company is also witnessing pressure on operating expenses as it plans to get the majority of stores open for the holiday selling season.

Kirkland's opened 21 stores and closed two stores, bringing the total number of stores to 370 at the end of the third quarter.

Fourth-Quarter Fiscal 2015 Guidance

Kirkland's expects fourth quarter earnings in the range of 88 cents to 95 cents per share.

Net sales are expected between $197 million and $200 million. Comparable store sales are expected to be flat to up 2%. The company expects to open 11 stores and close 6 stores. This represents an 11% increase in total stores opened by Thanksgiving compared with the last year.

For the fourth quarter, the company expects a decline in year-over-year gross profit margin. Operating expenses are expected to increase in the quarter due to the increase in the number of stores.

Lowered Fiscal 2015 Guidance

Kirkland's has lowered its sales and earnings guidance as the company assumes challenging traffic to persist.

Kirkland's lowered its fiscal 2015 earnings per share guidance to a range of 89 cents to 96 cents from $1.16-$1.23 expected previously. The new guidance excludes 2 cents per share charge related to the retirement of the company's previous CEO.

Kirkland's has also lowered its sales growth projection to 10% to 11%, compared with the previous range of 11% to 12% year over year. The guidance reflects a 2% to 3% improvement in comps compared with 3% to 5% comps growth expected previously.

For the full year, the company expects a modest decline in its operating margin due to lower merchandise margins and higher supply chain costs.

The company intends to open 42 stores while closing 11 stores.

Kirkland's carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the home furnishing industry are Restoration Hardware Holdings, Inc. RH and Tempur Sealy International Inc. TPX . While Restoration Hardware sports a Zacks Rank #1 (Strong Buy), Tempur Sealy holds a Zacks Rank #2 (Buy). A company worth considering in the broader retail sector is Burlington Stores, Inc. BURL , holding a Zacks Rank #2.

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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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