Strained Margins Likely To Hurt Kirkland's (KIRK) Q4 Earnings

Kirkland's, Inc. (NASDAQ:KIRK) is slated to report fourth-quarter fiscal 2017 results on Mar 16, before the market opens. This retailer of home décor products has a mixed record of bottom-line surprises in the trailing four quarters.

Recently, the company posted impressive sales results for fourth-quarter and 2017. Though the company has been delivering solid top-line performance for quite some time, it has been reeling under dismal margins stemming from higher operating and promotional costs.

Bearing these aspects in mind, let’s delve into how things are shaping up for the upcoming announcement.

Effective Strategies Continue Aiding Sales

Kirkland’s fourth-quarter and 2017 sales results marked a steady improvement from the year-ago period. Notably, net sales for the fourth quarter of fiscal 2017 were $224.6 million, up 10.5% from the year-ago quarter. The top-line performance gained from a robust start to the holiday season, owing to a sturdy November and Black Friday weekend. The company generated strong sales of seasonal décor, while its e-commerce sales also remained solid — depicting a surge of 30% year over year. Notably, net sales for the fourth quarter include nearly $10 million from the extra week as well. Excluding this, comparable store sales (including e-commerce) on a 13-week basis rose 2% in the fourth quarter — better than the 4.6% drop witnessed in the year-ago quarter.

Moving on, net sales for 2017 advanced 6.7% to $634.1 million. The upside can be attributed to benefits from the additional week in the fourth quarter, store additions and strong e-commerce business. Additionally, comps (including e-commerce) climbed 0.3% against a fall of 2.9% a year ago.

We note that Kirkland’s merchandise enhancement efforts have been positively impacting store sales for a while. This, combined with effective marketing initiatives and favorable contributions from the company’s new stores, have been driving the top line. Also, Kirkland’s is focused on enhancing e-commerce business. To this end, the company has redesigned and leveraged the rollout of new information systems to improve online purchase and planning execution.

Further, Kirkland’s ‘The special order program’ allows customers to choose from various styles of seats and benches that are not usually offered in its stores. The launch of third-party drop shipping in fiscal 2015 also gave customers a wider assortment of product offerings. Further, sales from third-party drop-ship strategy boosted e-commerce revenues in the third quarter. Going ahead, we expect that such dedicated endeavors will continue favoring the company’s top-line results in 2018.

Kirkland's, Inc. Price, Consensus and EPS Surprise

Kirkland's, Inc. Price, Consensus and EPS Surprise | Kirkland's, Inc. Quote

Dismal Margins to Weigh on Results

While Kirkland’s began the fourth quarter on a superb note, it witnessed a slowdown in store traffic in the latter half — considering consumers’ accelerated changes in shopping patterns during the holiday season. This, in turn, compelled the company to undertake greater-than-anticipated promotional activities which weighed on merchandise margins — thereby pressurizing the bottom line.

Well, Kirkland’s bottom-line performance has been unimpressive for a while, thanks to rising operating costs, stemming from an increase in store occupancy costs. Moreover, during the third quarter of fiscal 2017, the company witnessed higher outbound freight costs (including e-commerce shipping) and elevated central distribution expenses, which were affected by supply chain hurdles. In fact, unfavorable mix of third-party drop-ship revenues also dented Kirkland’s gross margin in the preceding quarter.

While the sales picture looks positive for Kirkland’s, we are somewhat cautious about its bottom-line performance in the to-be-reported quarter.

What Picture Does Estimates Provide?

Considering the aforementioned headwinds, management envisions earnings for 2017 in a range of 32-34 cents per share, including a nearly 4 cents adverse impact from charges related to tax reforms. Earlier, management projected earnings in the band of 50-60 cents.

As a result of narrowed earnings view, the Zacks Consensus Estimate also went down 10 cents over the past 30 days and is currently pegged at 38 cents, slightly above the company’s expectation. The Zacks Consensus Estimate for the fourth quarter declined 10 cents in the same time frame to reach 85 cents. The consensus mark for the quarter under review and 2017 depict a fall of 5.6% and 44%, respectively from the year-ago reported figures.

A Look at the Zacks Model

To top it, our proven model shows that Kirkland’s is not likely to beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Kirkland’s Earnings ESP of 0.00% combined with the company’s Zacks Rank #4 (Sell) makes us less confident about an earnings surprise.

Stocks With Favorable Combination

Here are some companies which, according to our model, have the right combination of elements to deliver an earnings beat.

The Children's Place, Inc. (NASDAQ:PLCE) has an Earnings ESP of +0.48% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Burlington Stores, Inc. (NYSE:BURL) has an Earnings ESP of +4.08% and a Zacks Rank #2.

Zumiez Inc. (NASDAQ:ZUMZ) has an Earnings ESP of +0.56% and a Zacks Rank #3.

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