Kirkland's Looks Dull With Higher Operating & Promotion Costs

Kirkland's, Inc. (NASDAQ:KIRK) has been in troubled waters for a while, thanks to higher operating and promotional costs. Consequently, this retailer of home decor products has been reporting losses for quite some time. These headwinds were sufficient to mar investors’ optimism on the Zacks Rank #5 (Strong Sell) stock that lost close to 13.4% in a year, while the industry declined 5%.

Factors Affecting Kirkland

Since Kirkland’s operates in an extremely consumer-driven environment, changes in spending habits adversely impact its performance. In fact, such a headwind weighed upon the company during the fourth quarter of fiscal 2017. While Kirkland’s began the fourth quarter on an impressive note, it witnessed a slowdown in store traffic in the latter half due to rapid changes in consumers’ shopping patterns during the holiday season. This in turn, compelled the company to undertake greater-than-anticipated promotional activities which dented merchandise margins, thereby pressurizing the bottom line.

Apart from this, Kirkland’s has been incurring higher operating expenses for several quarters due to increase in store occupancy costs. Incidentally, during the fourth quarter of fiscal 2017, store occupancy expenses rose 35 basis points (bps) as a percentage of sales. Also, the company has been struggling with surging outbound freight costs. It witnessed an 85 bps increase in outbound freight costs (including e-commerce shipping) as a percentage of sales, while it also incurred greater central distribution expenses.

The company’s dismal past performance has caused the Zacks Consensus Estimate for earnings for first-quarter fiscal 2018 to witness a downtrend.

Any Scope of a Turnaround?

While the bottom line has been a concern for Kirkland’s, the company’s top line has been improving year over year for nine straight quarters. The company has been gaining from efforts to enhance merchandise assortments, develop e-commerce business and constant store additions. These factors fueled Kirkland’s sales in fourth-quarter fiscal 2017, wherein net sales increased year over year, courtesy of solid comps. Notably, comps (including e-commerce) on a comparable 13-week basis rose 2% in the fourth quarter. Comps were backed by solid e-commerce sales, strength in California and Colorado store sales as well as greater average ticket that compensated for the soft traffic.

Additionally, the company has been making several investments like rationalizing SKUs, undertaking repairs at various categories and enhancing pricing as well as mix to enhance overall business efficiency.

While Kirkland’s initiatives to improve sales bode well, it is yet to be seen if growth plans can counter the aforementioned hurdles and revive the stock.

Unsure About Kirkland’s? Check These Solid Retail Bets

Macy's, Inc. (NYSE:M) , which boasts a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 8.5 %. It came up with a positive earnings surprise of 0.3% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here..

Burlington Stores, Inc. (NYSE:BURL) , carrying a Zacks Rank #2 (Buy), delivered an average positive earnings surprise of almost 15% in the trailing four quarters and has a long-term earnings growth rate of 18.6%.

Dollar General Corporation (NYSE:DG) , also carrying a Zacks Rank #2, has an impressive long-term earnings growth rate of 14.6%.

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