Kirkland's Future Financial Performance Remains Unclear

Jul.18.14 | About: Kirkland's, Inc. (KIRK)

Summary

Kirkland’s Inc. announced slightly improved financial performance for its first quarter in 2014 as compared the same quarter last year.

The financial performance of the company is weaker as compared to the competitors which are Bed Bath & Beyond and The TJX Companies, Inc.

Considering the decline in the company’s market performance over the past six months and less than impressive financial performance, Kirkland’s shares are a ‘hold’.

Kirkland's Inc. (NASDAQ:KIRK) is a specialty retailer of home décor with 324 stores across 35 U.S. states. Recently, significant fluctuation has been observed in Kirkland's share price which makes it difficult to assess whether the shares of the company will remain viable for investment in the future. The two factors that can bring Kirkland's financial performance back to its full strength are sales and profitability. However, fewer than expected sales by the company have driven down profits, and this declining financial performance is being reflected in the market price of shares of the company. A brief review is provided below of the financial performance of Kirkland's and its performance against its competitors.

Kirkland's Financial Performance

The financial performance of Kirkland's Inc. for the first quarter of 2014 has been slightly better when compared to the first quarter of 2013. For the period ended May 3, 2014, the company announced an increase of 6.9% in net sales, which increased to $108.3 million compared to $101.2 million for the same quarter in the previous financial year. In the first quarter of 2014, Kirkland's opened 7 stores and also closed another 7 stores, which resulted in the total number of stores remaining at 324.

The net income reported by the company was $2.1 million or $0.12 per diluted share for the Q1 2014. Both the total net income and net income per diluted share are slightly better when compared to the same figures for the same quarter last year, when the net income was $1.8 million and net income per diluted share was $0.10.

Although the financial performance of Kirkland's for Q1 2014 has improved in comparison with its financial performance for Q1 2013, it is significantly lower when compared to the immediately preceding quarter which ended on February 1, 2014. Although the decline in Q1 2014 compared to Q4 2013 can be attributed to the seasonal rise in sales during holidays in December, the extent of decline is too large to be ignored, and it has had a visible impact on the share price of the company. The revenue of the company in the immediately preceding quarter was $156.7 million, which declined to $108.25 million in Q1 2014. Similarly, total net income in the previous quarter was $12.33 million, which declined significantly to $2.06 in Q1 2014.

Figure 1 represents the financial performance of the company over the past five quarters.

Figure 1: Trend of Profitability of Kirkland's

Click to enlarge

(Source: Yahoo! Finance)

It can be observed from the chart that the revenue of the company has remained relatively stable in comparison to the first three quarters on the chart. However, a significant decline can be seen immediately following the fourth quarter.

Kirkland's Performance against Competitors

The two main competitors of Kirkland's Inc. are Bed Bath & Beyond (NASDAQ:BBBY), and The TJX Companies (NYSE:TJX) Inc. When compared to the financial performance of Kirkland's, both Bed Bath & Beyond and The TJX Companies have better profitability ratios. The net profit margin of Kirkland's for the quarter ended in May 2014 is 1.90%, while the same ratio for BBBY is 7.04% and for TJX it is 7%. It can be said that Kirkland's performance against its competitors is not commendable, which may weaken the prospects of the company's market performance even further.

Regarding the market performance, it can be said the decline in market prices of shares has been observed throughout the industry, as a downward trend can be witnessed in shares of BBBY and TJX alongside Kirkland's. In the past six months, the largest decline was faced by BBBY, which declined 25.55%, while the second largest decline was observed in the market price of Kirland's, which fell 19.6% in the past six months, and the share price of TJX declined by 15.19%. Figure 2 represents the comparative trends in the market prices of shares of the three companies:

Figure 2: Trend of Market Prices

Click to enlarge

(Source: Google Finance)

The figure clearly presents that BBBY has witnessed the steepest decline immediately after December, and it has not been able to regain its position. Despite facing a lesser decline, a similar case can be witnessed in the trends of TJX and KIRK, as these companies have also not been able to reach their 6-month highs again. This industry-wide decline can also be linked with the spike in sales and profits during the holiday season resulting in the development of profitable prospects for the company, which are reflected in its market price. Following the holiday season, the sales and profits decline along with the fall in the market price.

After the analysis of the financial performance of the company, its performance against its major competitors and its market performance, in my opinion, investors should hold the shares in Kirkland's. The reason behind this recommendation is that the future of Kirkland's profitability is still uncertain. Although the company managed higher revenue when compared to the same quarter in the previous year, the growth is not sufficient to inhibit confidence among investors to buy further shares of the company. This can also be reflected in the declining market performance of the company's shares.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.