Kirkland's Stock Up 13% Since Q1 Results: Can Momentum Stay?

Kirkland's, Inc. (NASDAQ:KIRK) has been on the rise with its shares rallying close to 40% in the past three months, comfortably surpassing the industry’s 14.1% upside. Well, this specialty retailer of home decor products garnered further momentum, when it reported solid results for the first quarter of fiscal 2018. Markedly, Kirkland's shares have gained about 13% in just six trading sessions, following the quarterly outcome.

Let’s take a look at the factors that have been driving this Zacks Rank #3 (Hold) stock and see if it can sustain the robust momentum amid cost hurdles.

Impressive Q1

After delivering negative earnings surprise for two consecutive quarters, Kirkland's surprised investors with first-quarter fiscal 2018 results. The top and the bottom line improved year over year and surpassed the Zacks Consensus Estimate, courtesy of robust sales-driving efforts and efficient cost management. Coming to numbers, the company posted adjusted breakeven earnings, which fared better than the Zacks Consensus Estimate as well as the year-ago quarter’s loss of 9 cents. Kirkland’s net sales came in at $142.5 million, up 7.2% year over year and better than the consensus mark of $140 million.

Also, comparable store sales (comps) rose 1.4% on the back of solid e-commerce sales, greater average ticket and increased conversions at Kirkland’s brick and mortar stores, which countered soft traffic. Management remains impressed with its first-quarter performance and remains on track to solidify e-commerce operations. The company intends to extend its vendor direct shopping, enrich assortments and improve mobile experience.

Robust Sales Trend

Notably, Kirkland’s sales have been improving year over year for ten straight quarters now. The company has been gaining from its efforts to enhance merchandise assortments, develop e-commerce business and constant store additions. Prior to the first quarter, Kirkland’s comps increased 2%, 0.7%, 1.2% during the fourth, third and second quarters of fiscal 2017, respectively. This indicates that the company’s efforts to drive sales have been yielding and inflicting positive response from consumers toward its product assortments. Management remains committed toward making efforts to attract more customers — both online and in stores.

Focus on Store Expansions & E-Commerce Growth

Kirkland’s is closing the smaller underperforming stores in the malls. It expects to open bigger off-mall stores at popular locations, which are likely to boost sales. During the first quarter, Kirkland’s introduced 10 stores, while shutting three. For fiscal 2018, management intends to open 10-15 new stores. Also, Kirkland’s has been strongly focused on enhancing its e-commerce business to resonate with the changing consumer trends. Incidentally, the company has redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution. These efforts have been yielding significant results, as evident from the strong e-commerce momentum witnessed, of late.

Increased Operating Costs Pose Worries

Kirkland’s has been incurring higher store occupancy costs for a while now. This was also witnessed in first-quarter fiscal 2018, wherein store occupancy expenses rose 15 bps as a percentage of sales. Also, the company witnessed a 65-bps increase in outbound freight costs (including e-commerce shipping) as a percentage of sales, thanks to greater e-commerce penetration. The quarter also saw a rise in inbound freight costs and central distribution expenses. Moreover, Kirkland’s gross margin has been declining for a while, essentially due to higher cost of sales.

The persistent of such factors is likely to dent the company’s profitability and hurt performance in the forthcoming periods. Nevertheless, we expect Kirkland’s constant sales endeavors and efficient inventory management to help the company offset these hurdles and attain greater heights.

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