February 09, 2015 Kirkland s Inc (KIRK-NASDAQ) Current Recommendation Prior Recommendation Neutral Date of Last Change 02/09/2015 Current Price (02/06/15) $25.66 Target Price $31.00 OUTPERFORM SUMMARY We upgrade Kirkland s from Neutral to Outperform based on better-than-expected third-quarter fiscal 2014 results. Kirkland s earnings of $0.07 per share beat the Zacks Consensus Estimate as well as the year-ago quarter figure of $0.03. Sales of $117.1 million also beat the Zacks Consensus Estimate by 1.9% and grew 34% from the year-ago results on the back of higher e=commerce business and strong comps Kirkland s is also optimistic about the future and therefore raised its fiscal 2014 earnings guidance. Moreover, the growing e-commerce business of the company and its aggressive store opening program are encouraging. Growing homebuilding sector backed by lower interest rates has been building expectations of strong sales in the coming quarters. SUMMARY DATA 52-Week High $25.71 52-Week Low $15.26 One-Year Return (%) 44.32 Beta 1.96 Average Daily Volume (sh) 138,353 Shares Outstanding (mil) 17 Market Capitalization ($mil) $440 Short Interest Ratio (days) 9.75 Institutional Ownership (%) 84 Insider Ownership (%) 18 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 3.5 Earnings Per Share (%) -13.8 Dividend (%) N/A using TTM EPS 31.3 using 2016 Estimate 21.4 using 2017 Estimate 18.1 Zacks Rank *: Short Term 1 3 months outlook 1 - Strong Buy * Definition / Disclosure on last page Risk Level * Average, Type of Stock Small-Blend Industry Retail-Home Frn Zacks Industry Rank * 14 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2014 101 A 97 A 106 A 156 A 461 A 2015 108 A 103 A 117 A 178 E 515 E 2016 119 E 115 E 128 E 194 E 555 E 2017 615 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2014 $0.10 A -$0.03 A $0.06 A $0.69 A $0.82 A 2015 $0.12 A -$0.06 A $0.07 A $0.86 E $0.99 E 2016 $0.14 E -$0.03 E $0.10 E $0.98 E $1.20 E 2017 $1.41 E Projected EPS Growth - Next 5 Years % 20 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Nashville, TN and founded in 1966, Kirkland's, Inc. is a leading specialty retailer of home décor products in the United States. The company sells framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. The company's stores also offer holiday merchandise as well as throughout-the-year gifts. The company operates through its stores under the names of Kirkland s, Kirkland s Home, Kirkland s Home Outlet, Kirkland s Outlet and The Kirkland Collection. The company also operates online through its website www.kirklands.com. REASONS TO BUY Better-than-Expected Third-Quarter 2014 Results: Kirkland s third-quarter 2014 earnings of $0.07 per share increased from $0.06 reported a year ago backed by higher margins. Earnings also beat the Zacks Consensus Estimate of $0.03 as well as management s expectation of $0.02 on the back of strong traffic at its stores over the past few months, which boosted comps. Net sales climbed 10.4% to $117.2 million from $106.1 million in the year-ago quarter due to strong online sales, which shot up 38% from the year-ago level. Kirkland s Raises Fiscal Guidance, Estimates Move Up: Gradual recovery in economic growth, lower gasoline prices and slightly better job market compelled management to raise the guidance for 2014. Kirkland s expects earnings per share in the range of $0.90 $0.97 per share up from the $0.87 $0.97 range. The company also raised the sales growth range to 4.5 5.5% from 3 4% to reflect the positive effects of its improved marketing efforts as well a recovering homebuilding sector. For fiscal 2014, Kirkland expects merchandise margins to improve from the prior year, driven by an improved mix, continued management of promotional activity and reduced inbound freight costs. Further, the company s expense control will offset the increased investments in marketing and e-commerce. Growing e-commerce Business: Kirkland s is focused on upgrading its information system to maintain growth and momentum in its e-commerce business. The company plans to redesign and leverage the rollout of new information systems to improve online purchase and planning execution. The company remains focused on improvising its brands and merchandising process to spur revenue growth. The initiatives have already started to bear fruit as the company s e-commerce channel met management s expectations of strong gains in categories like housewares, floral, clocks and decorative accessories over the past four quarters. Moreover, the company has increased its online Stock Keeping Unit to almost 5,000 units, doubling up from the prior-year quarter level. Kirkland s e- Commerce initiative has resulted in driving additional traffic to its stores through the site with over 40% of the online purchases being shipped to stores for customer pickup. Aggressive Store Expansion Plans Ahead: Kirkland s is geared to increase the number of stores in 2015 to boost sales. Moreover, the company plans to expand further into southeast Texas, Florida and southwest California. It plans to achieve 10% square footage growth at its stores by fiscal 2015- end. Moreover, it is closing its smaller underperforming stores in the malls and expects to open bigger off-mall stores at popular locations. This strategy of shifting the stores toward more prominent places is likely to boost sales. Equity Research KIRK Page 2
RISKS Difficult Consumer Spending Environment: Kirkland s has been facing a difficult retail environment as consumers are reducing their discretionary spending. RECENT NEWS Kirkland's Beats on Third-Quarter Revenues & Earnings; Ups View Nov 22, 2014 Kirkland's third-quarter 2014 earnings of $0.07 per share went up by 16.6% from $0.06 reported a year ago backed by higher margins. Earnings also beat the Zacks Consensus Estimate of $0.03 per share. Results also beat management s expectation of $0.02 per share backed by strong traffic at its stores over the past few months, which boosted comps. Quarter in Detail Kirkland s net sales climbed 10.4% to $117.2 million from $106.1 million in the year-ago quarter due to strong online sales, which shot up 38% from the year-ago level. Sales beat the Zacks Consensus Estimate of $104.0 million. Including online sales, Kirkland s comps increased 6.3%, better than 4.9% decline in the prior-year period backed by higher traffic and 4% improvement in conversion rates. The increase in the average ticket resulted from an increase in items per transaction partially offset by a decrease in the average retail price. Comparable store sales at brick and mortar stores went up 3.7% backed by increase in the average ticket and transactions. Strong comps in the State of Florida boosted sales. Strong sales of merchandise like mirrors, wall decor, textiles and house wares were offset by a decline in the sales of art, frames and floral. On a year-over-year basis, gross margin inflated 30 basis points to 39% of sales from 38.7% in the prior year due to the improvement in merchandise margin. During the quarter, the company opened 9 stores while closing 3 and bringing the total store count to 323 at the end of third-quarter 2014. Approximately, 89% of the total shops were located at off-mall locations and the rest in enclosed malls. Balance Sheet Kirkland's exited the quarter with cash and cash equivalents of $56.6 million compared with $68.5 million in the prior quarter. Deferred rent and other long-term liabilities were $46.3 million compared with $44.9 million in the last quarter. Fourth-Quarter Fiscal 2014 Guidance For fourth quarter of fiscal 2014, Kirkland s expects earnings in the range of $0.77 to $0.84. Net sales are expected to be between $172 million and $175 million. Kirkland s expects to open 11 stores while closing 4 in the upcoming quarter. Equity Research KIRK Page 3
Fiscal 2014 Guidance Following better-than-expected third-quarter results, management raised the earnings guidance range to $0.90 $0.97 per share from $0.87 $0.97 for the fiscal year. Kirkland s raised its fiscal 2014 sales guidance to 4.5 5.5% from 3 4%. The guidance reflects improved marketing efforts taken up by the company. For the fiscal year, Kirkland s expects merchandise margin to improve from the prior year, driven by an improved mix and lower markdowns on general merchandise. VALUATION Kirkland s current trailing 12-month earnings multiple is 28.8x, representing a discount of 55.6% to the industry average of 64.9x. Over the last five years, Kirkland s shares have traded in the range of 7.0x to 28.8x trailing 12-month earnings. Based on 2014 earnings estimate of $1.20, the stock is trading at 21.5x, representing a discount of 3.8% to the industry average of 21.5x. At the end of the third quarter of 2014, the P/B multiple of the stock was approximately 3.0x, a 46.4% discount to the industry average of 5.6x. Our target price of $31.00 is based on approximately 25.8x our 2014 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low KIRKLANDS INC (KIRK) 21.5 18.2 17.5 18.0 31.4 28.8 7.0 Industry Average 20.7 17.3 17.9 25.4 25.9 64.9 16.2 S&P 500 16.4 15.4 10.7 15.0 18.9 19.4 12.0 HAVERTY FURNIT (HVT) 18.1 15.5 17.5 10.6 20.4 208.0 16.8 ETHAN ALLEN INT (ETH) 17.8 14.5 13.1 13.1 18.0 109.1 14.5 TTM is trailing 12 months; F1 is 2016 and F2 is 2017, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA KIRKLANDS INC (KIRK) 3.0 4.7 1.5 10.7 0.0 0.0 11.2 Industry Average 5.6 5.6 5.6 25.2 1.4 0.8 16.0 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research KIRK Page 4
Earnings Surprise and Estimate Revision History Equity Research KIRK Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of KIRK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.5%, Neutral - 77.0%, Underperform 6.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research KIRK Page 6