There is only one retail company on January’s Most Attractive Stocks list: Kirkland’s Inc. (KIRK). KIRK is also one of the best performing stocks in the S&P 1500 since the Lehman bankruptcy. Given our value focus, it is rare that high-flying performers like KIRK make the Most Attractive Stocks list.
KIRK is rare for other reasons, too. Compared to competitors like Bed Bath and Beyond (BBBY), Target (TGT), and Macy’s (M), KIRK is much more profitable and is the only firm with a top-quintile return on invested capital (ROIC) of 17.3%. Few retailers in the history of our database have ever achieved such high returns on invested capital.
As most of our readers know, a high ROIC alone will not get a stock on our Most Attractive Stocks list. The valuation of the stock must be very cheap as well. And KIRK fits the bill nicely with a price-to-economic book value ratio of 0.5, which means the current stock price ($13.25) implies the company’s profits will permanently decline by 50%. In other words, the valuation not only implies no future growth, it implies a perpetual 50% reduction in profits. Market expectations are setting the future-profit-growth bar quite low for this stock.
The company’s economic earnings are growing at a faster rate (+1,538%) than reported accounting earnings (+272%). Also, during the last fiscal year, KIRK generated $32.2mm in free cash flow, which represents 12.4% of the company’s enterprise value.
KIRK gets our “very attractive” stock rating because the business is throwing off a lot of cash, showing strong growth in profits while its valuation implies profits will decline permanently by 50%.
KIRK fits the risk/reward profile of a great stock to buy. It increased net operating profit after tax (NOPAT) on meager revenue growth and increased its NOPAT margin from 6.3% to 9.7%. KIRK’s ROIC rose from 9.9% to 17.3%. KIRK’s invested capital grew more slowly than revenues, so invested capital turns rose from 1.57x to 1.59x during the last fiscal year.