Kirkland’s Plummets As Freight And Traffic Ding Results
Just when we thought the mall-based retailers were about to come back Kirkland’s (NASDAQ: KIRK) delivered a less-than-stunning report that confirms freight issues are still plaguing the market. The news sparked what we can only describe as a knee-jerk reaction that has shares down more than 25%. As disappointing as the results and outlook are, they don’t warrant the amount of decline that we’re seeing. Short-interest, by the way, is very high in this stock and probably has something to do with the price action. Sitting at 20% going into the report, short-action of this nature is more than enough to overwhelm such a small market. What this means is that shares are being pushed to an extreme low that will lead to a sharp rebound in early 2022.
Kirkland's Rebranding Is On Track
Kirkland’s didn’t have a horrible quarter, just one marred by supply chain hiccups, rising freight costs, and irregular traffic that resulted in weaker than expected revenue. The revenue of $143.6 million not only missed the consensus by 170 basis points, but it also fell versus last year where most other retailers have been able to post gains. Revenue was impacted by a 3.1% decline in store count compounded by a 0.7% decline in comp sales that was offset by eCommerce. eCommerce, a central theme in the transformation story, grew 7.3% versus last year’s strong comps.
Moving down the report, the company experienced some margin pressure that left gross margin down 140 basis points and operating margin down 270 basis points from last year. As for earnings, the GAAP $0.51 is down $0.32 from last year and missed the Marketbeat.com consensus by a nickel. The key takeaway, however, is that cash flow remains strong enough to support operations, buy back shares, and maintain a strong balance sheet.
The information that has shares moving lower, however, is the guidance which is worse than expected. The company is expecting the YOY decline in revenue to come in the high single-digit range in Q4 which is an acceleration from the previous period. The full-year guidance is equally bad with revenue declines and freight issues expected to cut deeply into expected results. Regardless, the company is expecting a 50% YOY increase which should sustain buybacks.
Rebranding Efforts Underway At Kirkland's
Kirkland's has begun the work of rebranding which is slated to take effect during the first quarter of 2022. The company is rebranding to Kirkland’s Home with a specific emphasis on eCommerce and the omnichannel experience. These efforts should help boost brand awareness, revenue, and earnings providing an opportunity for outperformance in the first half of 2022 if not in the 4th quarter of this year. The company is planning to grow eCommerce to over 50% of net revenue which is a target we think is reachable. Home and lifestyle brand Williams-Sonoma has achieved eCommerce sales greater than 70% of the net.
The Technical Outlook: The Shorts Are In Control Of Kirkland's
The shorts are definitely in control of Kirkland’s stock price now it would be wise to wait before jumping into the stock. While the new price of $14.40 is a steal, the market may move lower before it moves higher. We expect to see some volatility in the near to mid-term in this market but a bottom should begin to form soon. When that happens it will be time to start buying some of these shares.
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