Kirkland's: Earnings Good, Growth Ahead

| About: Kirkland's, Inc. (KIRK)

Kirkland’s Inc (KIRK) reported strong results for the fourth quarter and full fiscal 2009. Quarterly earnings were 92 cents, which were well above the Zacks Consensus Estimate of 81 cents. Earnings were up 56% year-over-year. For fiscal 2009, earnings were $1.42 per share compared to earnings of 30 cents in fiscal 2008.

Net sales for the quarter increased 6.9% year-over-year to $142.8 million compared to $133.6 million in the prior-year period. Comparable store sales for the quarter increased 10.2% versus an increase of 5.3% in the year-ago quarter.

Gross margins for the quarter expanded 708 basis points (bps) to 45.7% versus 38.7% in the comparable prior-year quarter. The operating margin also expanded 956 bps to 21.4% from 11.8% in the prior-year quarter.

At the end of fiscal 2009, the company had cash and cash equivalents of $76 million compared to $36 million in fiscal 2008. Furthermore, the company ended the year with no debt burden.

During the fourth quarter, the company opened 3 stores and closed 20 stores. At year-end, the company had 279 stores compared with 299 stores at the beginning of fiscal 2009 and 335 stores at the beginning of fiscal 2008.

Company Guidance

Concurrent with the earnings release, management provided guidance for fiscal 2010. The company expects total annual sales to increase in the range of 5% to 8% compared to fiscal 2009.

Kirkland’s is targeting incremental operating margin gains in fiscal 2010. The company expects to drive this operating margin improvement with its improving merchandise assortment, better occupancy cost leverage, focus on controlling corporate costs, productivity increases from investments in systems and a consistently efficient distribution infrastructure. The company expects to leverage expenses with comparable store sales increases of approximately 3%.

For fiscal 2010, the company’s total reported net income and EPS are expected to decline in due to the significant increase in the tax rate. The effective tax rate in fiscal 2010 is expected to be in the range of 39% to 40% compared to 26.4% in fiscal 2009.

Furthermore, the company expects to generate positive cash flow in fiscal 2010 and fully fund its new store growth and technology improvements. Capital expenditures are expected to be in the range of $25 million and $28 million in fiscal 2010.

For fiscal 2010, the company expects to return to net store growth. Kirkland’s expects to open 30 to 40 new stores and close 15 to 20 stores in 2010. For 2011, the company anticipates net store unit growth of approximately 10% and net square footage growth of approximately 15%.