Kirkland’s (KIRK) Q3 Loss Widens Y/Y, Earnings View Trimmed
Kirkland’s, Inc. KIRK posted third-quarter fiscal 2017 results, wherein the company reported a wider-than-anticipated loss that also compared unfavorably with the year-ago period. Moreover, management narrowed its earnings outlook for fiscal 2017. Nonetheless, sales remained strong, backed by the company’s e-commerce and merchandise enhancement initiatives, also making management optimistic about the holiday season performance.
Shares of the company gained 2.1% on Nov 21. However, this Zacks Rank #4 (Sell) company, which has been reporting a loss for three straight quarters now, has slumped 15.6% year to date as against the industry’s growth of 4.3%.
Quarter in Detail
This Brentwood, TN-based company reported adjusted loss of 10 cents per share which was wider than the Zacks Consensus Estimate of a loss of 9 cents. Also, the reported figure was wider than the adjusted loss of 5 cents in the prior-year quarter. Including the impact of hurricanes Harvey and Irma, Kirkland’s loss came in at 15 cents per share.
Kirkland’s recorded net sales of about $145 million that increased 4.9% year over year, courtesy of strong contributions from new stores, robust e-commerce growth and effective marketing initiatives. Sales also exceeded the Zacks Consensus Estimate of $143 million.
Including e-commerce sales, comparable store sales (comps) inched up 0.7%, as against a 2.3% drop witnessed in the prior-year quarter. However, comps were also hurt by the impact of hurricanes, excluding which, it jumped 2%. Comps in the third quarter were backed by improvements in conversion and average ticket.
We also note that Kirkland’s merchandise enhancements have been yielding positive results, despite persistent decline in traffic amid a tough retail environment. In fact, the company had a positive conversion rate for the fifth consecutive quarter, which along with higher average ticket helped to offset the mid-single digit drop in store traffic.
Further, e-commerce sales remained robust, surging 40% year over year on the back of the company’s constant focus on enhancing omni-channel business, online product range and fulfilment operations. E-commerce revenues contributed $15.3 million to total sales in the quarter, thus representing 11% of the top line. This was backed by robust improvements in website traffic and average order value. Further, sales from third-party drop-ship strategy boosted e-commerce revenues.
The home decor retailer’s gross profit remained nearly flat year over year at $50.5 million. However, gross margin declined 160 basis points to 34.9%. While merchandise margins improved 25 bps, it was countered by unfavorable mix of third-party drop-ship revenues. Also, we believe that the gross margin continued to be impacted by a promotional environment.
Also, the company recorded operating loss of $3.8 million, wider than the prior-year loss of $1.6 million. This could be accountable to higher depreciation and operating expenses, which resulted from escalated labor and advertising costs. Additionally, the company incurred greater store occupancy expenses, as a percentage of sales. Also, the company witnessed higher outbound freight costs (including e-commerce shipping) and elevated central distribution expenses, which were impacted by supply chain hurdles.
The company introduced 10 stores and shuttered one in the quarter, taking the total store count to 415.
For fiscal 2017, management intends to open 31 new stores and close 16 stores, with a goal of attaining square footage improvement of 5%.
Other Financial Details
Kirkland’s exited the quarter with cash and cash equivalents of $27.9 million and deferred rent and other long-term liabilities of $64.1 million. Further, net shareholders’ equity as of Oct 28, came in at $127.8 million.
During the first three quarters of fiscal 2017, Kirkland used cash flow from operating activities of $12.3 million. Capital expenditures amounted to $23.6 million on a year-to-date basis.
For fiscal 2017, the company anticipates capital expenditures to range between $27 million and $29 million, mainly owing to store openings and constant investments in omni-channel capacities and supply chain efficiencies. Also, the renewed capital expenditure outlook includes impacts of rebuilding expenses associated with hurricanes and greater store count.
Kirkland’s bought back 19,000 shares at an average price of $11.52 million during the third quarter.
Fiscal 2017 Guidance
Management remains pleased with its third-quarter performance, which was driven by efforts to control SKU’s, enhance assortments and optimize promotional activities. The company remains particularly impressed with the comps growth despite bearing the brunt of hurricanes. The company further stated that it began the fourth quarter on a solid note, with its holiday season assortments and marketing efforts in place. With its holiday season plans gaining traction, it remains optimistic about its fourth quarter prospects.
Kirkland’s now anticipates net sales growth at the higher end of its previously forecasted range of 6-8%, reflecting the impact of the 53rd week. Also, this guidance is based on comps growth in a range of flat to 2% rise. Earlier, management projected comps growth in a range of slightly negative to slightly positive.
However, Kirkland’s narrowed its earnings guidance range, owing to hurricanes, supply chain disruptions and higher expected tax rate. Management now envisions fiscal 2017 earnings to be 50-60 cents per share, in comparison with the old guidance range of 50-65 cents per share. Tax rate is now anticipated to be 41%, as compared with 38% expected earlier. The Zacks Consensus Estimate of 55 cents for fiscal 2017 is pegged within the guided range.
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