Left for dead by most investors after a dismal 2019, Kirkland's (NASDAQ:KIRK) has lifted itself off the ground and skyrocketed 665% this year. The Tennessee-based specialty retailer of home décor has been one of the biggest success stories to come out of the pandemic emerging as a significant beneficiary of the stay-at-home consumer.
Like Lowe's and Home Depot, the company has witnessed a surge in demand as people have turned toward home renovation and redecoration in recent months. Although the company's bottom line is decorated in red and profitability likely in the distance, an unlikely turnaround appears to be in the making.
What is Driving Growth at Kirkland's?
Kirkland's has been around for more than 50 years. Its retail footprint originated in the Southeast, but today encompasses over 400 locations across 36 states. The stores offer a range of home furnishings such as lamps, accent rugs, mirrors, artwork, and garden accessories. Its customer demographic is broad and most prominently includes women, high-income households, and "category enthusiasts".
The company closed all its stores on March 19th but remained open for home delivery and curbside pickup service at approximately three-fourths of its stores. These sales channels were quickly adopted by customers and have contributed greatly to the surprising resurgence.
Kirkland's e-commerce revenue has grown every year since its inception. Its online storefront has been a significant reason behind the rebound. The company has used focused offers and promotions to lure shoppers to its website. In the first two months since closing its physical stores, online sales nearly doubled to $23.7 million. Much of the online traffic has been driven by first-time customers which bodes well for the continued expansion of the customer base.
Management has also tackled the expense side of the equation. Since the onset of the pandemic, early steps taken to furlough workers, reduce management pay, limit store deliveries, defer or waive rent, and lower marketing outlays, put the company in a favorable position to improve its bottom-line performance.
Kirkland's stores began reopening in mid-May and customer traffic has been strong. Budget-conscious customers armed with stimulus checks have taken to Kirkland's newly expanded merchandise assortment to spruce up their homes. Demand has picked up quickly and margins have improved as the company has introduced more "margin-friendly" offers.
Kirkland's is also benefitting from the reduced store-based competition. Some national home furnishing retailers and mom-and-pop shops have been forced to call it quits due to online competition and the impact of the pandemic. This has left a large group of home décor enthusiasts looking for a new shopping destination. Other competitors have stayed afloat but have not had the same success with online sales. The sale of home décor retailer Pier 1 Imports was recently approved in bankruptcy court and the new owners have announced plans to launch an e-commerce presence later this month.
How is Kirkland's Financial Strength?
Despite the recent ascent of its stock, Kirkland's has plenty of work to do to improve its fundamentals. Revenue remains below where it was in 2016 and asset turnover has been decreasing. The closure of underperforming stores may improve performance relative to its asset base.
Although it has recently improved, the gross margin remains at a depressed level after hovering above 30% up until late 2018. This partly relates to the higher mix of online sales which typically involve lower margin products. So, the company's ability to balance online sales growth while improving profitability will be a key theme to watch.
After operating free of long-term debt for years, Kirkland's recently drew down $40 million from its revolving credit facility to strengthen its capital position in the uncertain economic environment. On the plus side this has given it a healthier liquidity position with which can help it survive and pursue growth initiatives. However, it saddled the company with a hefty long-term debt burden which accounts for 77% of its capital structure.
Is Kirkland's a good stock to buy?
With most having missed out on the huge Kirkland's rally, investors may be wondering what can drive continued growth. For starters, management has embarked on a plan to aggressively manage its costs and grow its e-commerce business. It plans to increase delivery options, re-launch its loyalty program, and extend credit options to customers. It also plans to further expand its product assortment building upon its latest tabletop and furniture additions with other margin-enhancing merchandise.
These efforts have the potential to strengthen its existing customer relationships and drive new customer acquisition. They could also lead to a much-needed stabilization of its gross margin.
Kirkland's has an improving competitive position in the $40 billion U.S. home décor market. While its financial statement quality has much room for improvement, the company may be in the early stages of a remarkable, multi-year recovery.
If the stock ever decides to take a breather, investors may want to pounce. Kirkland's has some serious wind at its back and could be a lucrative, albeit aggressive, way to decorate a growth-oriented portfolio.
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Many major cities will be feeling the ripple effects of the Covid-19 pandemic for years. However, there is ample evidence that shows the pandemic may be coming to an end. The number of new cases is dropping. The number of those getting vaccinated is rising. And even in the cities with the most restrictive mitigation measures, the slow process of reopening is beginning.
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Many economists are optimistic that travel may begin to look more normal by the summer of this year. And the global economy may deliver 6.4% GDP growth this year. With that in mind, the hotel chains with the best fundamentals and the broadest footprint will be in the best position as the economy reopens.
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