In this article I will be analyzing and valuing Kirkland's (KIRK). I will also be comparing margins between KIRK and some of its competitors to see how good KIRK stacks up and decide if it looks to be a good buy now.
Kirkland's is a specialty retailer of home décor and gifts in the United States, operating 299 stores in 30 states as of January 28, 2012. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. Description taken from its website here.
These valuations are done by me, using my estimates, and are not a recommendation to buy any of the stocks mentioned. Do your own homework.
All numbers are in millions of US dollars, except per share information, unless otherwise noted. Valuations were done using KIRK's 2011 10K, and 2012 first quarter 10Q. Valuations were done on July 19th 2012. Its reports can be viewed here.
|Assets:||Book Value:||Reproduction Value:|
|Cash and Cash Equivalents||73.2||73.2|
|Deferred Income Tax||1.7||0|
|Prepaid Expenses and Other CA||8.1||2|
|Total Current Assets||130.5||98.95|
Total number of shares are 18.2
- 128.95/18.2=$7.09 per share.
Normally I would use this estimate of value as my base case since I am an extremely conservative investor. After honing, and learning some new valuation techniques I have found that almost every company I evaluate is selling for quite a bit more than its reproduction value.
Stating that I will be using one of the below estimates of intrinsic value as my base case.
EBIT and net cash valuation:
Cash, cash equivalents, and short term investments=73.2
Total number of shares=18.2
Total current liabilities=38.6
Cash, cash equivalents, and short term investments-total current liabilities=34.6
- 34.6/18.2=$1.90 in net cash per share.
KIRK has a trailing twelve month EBIT of 30.57-5.2+3.2=28.57.
5X, 8X, 11X, and 14X EBIT+cash, cash equivalents, and short term investments:
- 5X=216.05/18.2=$11.87 per share.
- 8X=301.76/18.2=$16.58 per share.
- 11X=387.47/18.2=$21.29 per share
- 14X=474.58/18.2=$26.00 per share.
Market cap is 192.83
Enterprise value is 122.4
From this valuation I like that they have positive net cash per share and that they have a very low EV/EBIT, even in comparison to their competitors, which we will get to later. From this valuation I would use either the 8X or 11X EBIT as my estimate of intrinsic value. Both of which make KIRK pretty undervalued as it now sits at $10.30 per share.
These next three valuations are some of the new techniques I have been working on.
Revenue and EBIT valuation:
This valuation is using trailing twelve month numbers.
Trailing twelve month revenue=98-94+430=434
Average 6 year EBIT percentage:4.1%
Estimated EBIT of 17.79
Assumed fair value multiple of EBIT: 8X
Estimated fair value of enterprise value of KIRK: 142.32
Cash, cash equivalents, and short term investments: 73.2
Total Debt: 0
Estimated fair value of common equity: 215.52
Number of shares of 18.2
$11.84 per share.
Base case estimate of value.
My low case estimate was $8.95 per share, and my moderate to high case was $14.82 per share. Using this estimate of intrinsic value KIRK still appears to be undervalued.
Book value and P/B valuation:
Book Value: 117.57
Tangible book value: 117.57
Industry P/B ratio: 3.22
Industry multiple implied fair value: 378.58 ($20.80 per share.
Assumed multiple as a % of industry multiple: 75% (2.42 X the multiple of Tangible book)
Estimated fair value of common equity of KIRK: 283.94
Number of shares: 18.2
$15.60 per share.
Base estimate of intrinsic value.
My low case estimate of value was $10.40 per share, and my high estimate was $20.80 per share. Again, KIRK looks to be very undervalued.
KIRK is currently selling at an EV/EBIT of 4.28. The average EV/EBIT ratio of its main competitors is 7.55, I will get back to the competitors in a bit.
If KIRK was selling at the industry average EV/EBIT ratio of 7.55, it would be worth $18.69 per share. Again, very undervalued.
After five valuations, KIRK appears to be very undervalued except by the very low case estimates of intrinsic values. Now I am going to check out their competitors margins and see how KIRK stacks up that way.
|Williams-Sonoma (WSM)||Gordmans (GMAN)||Bed Bath and Beyond (BBBY)||Pier 1 (PIR)||Kirkland's||Industry Avg (Most recent qtr)|
|ROIC (5yr average)||12.07%||33.44%||19.98%||5.92%||12.72%||16.83%|
|FCF/Sales (5yr average)||5.64%||2.25%||7.57%||1.86%||3.71%||4.21%|
The first thing that jumped out at me about this table was Gordmans (GMAN) gigantic margins and insider ownership. The margins are a little bit skewed though because they only go back 4 years instead of the 5 for the others, which take the other companies back farther into the recession.
The second thing was the ROIC margins that were surprisingly high to me. I was expecting them to be lower since all of these companies depend on discretionary spending from consumers, which supposedly dropped quite a bit during the recession.
The third thing was the FCF/Sales margin numbers, anything over 5% is very good. Gordmans numbers again are a bit skewed since they only have four years of data. However, two of the companies still had margins over 5%, even through the recession, and the average is at 4.2%.
The fourth thing is that KIRK is selling at about half the P/B value of the rest of the companies.
KIRK has total contractual liabilities of $335 million coming due over the next 5 years.
One thing you can definitely tell from looking at the margins is that Kirkland's and Pier 1 seem to be the most effected by the cyclical nature of spending that is accompanied by this industry. William-Sonoma (WSM), and Bed, Bath, and Beyond (BBBY) seem to be more resilient as the margins did not drop nearly as much in the recession. With GMAN again not being as effected as much because its numbers only go back 4 years.
- By almost all of the valuations I did they look to be pretty undervalued.
- KIRK keeps its inventory levels pretty low, meaning they can change out products faster if they aren't selling well or order more if they have something that is selling well.
- They have positive net cash.
- They have been repurchasing shares over the past several years and are authorized to purchase more. Since 2009 KIRK has reduced its share count by about 2 million shares.
- Insider ownership of 15.3%.
- The consumer industry it is in, is highly cyclical and KIRK appears to be more effected than some of its competitors. So if there is another economic crisis, which looks entirely possible, KIRK could struggle again.
- It leases almost 100% of its properties, and a lot of the leases are still for the long term: $45.2 due in 2012, $42 due in 2013, $38.3 due in 2014, $35 due in 2015, $28.5 due in 2016, and a total of $83.4 due thereafter.
- It only has one major distribution facility that is located in Tennessee. If there is some kind of natural disaster that hits the distribution center or the surrounding area, KIRK could be crippled for a while.
- KIRK gets most of its items made in China, whose economy looks like it is slowing down and could affect KIRK.
- KIRK has some strict covenants in place to prevent a takeover of any kind.
Kirkland's Potential catalysts:
- At this time I do not really see a potential catalyst to unlock the value of the shares.
- Since it does not own its own properties KIRK could not sell those to unlock the value of the company.
- While KIRK's stock is owned by some small cap value investing funds, with my research I did not find them to be activists investors.
- In my opinion a BBBY and KIRK merger looks like it could be a good thing, but KIRK has some very strict anti-buyout covenants that might prevent something like that from happening.
With all of the above stated, I am going to be using the book value and P/B valuation as my base case estimate of intrinsic value. If KIRK gets its own P/B up to 75% of the industry P/B, it would be worth $15.60 per share. Current share price is $10.70 per share, leaving an upside potential of 69% and about a 31% margin of safety if I were to buy now.
Normally with all of the above stated and KIRK meeting my minimum 30% margin of safety I would be a buyer. However, I will not be buying at this time due to two reasons mainly:
- 1) Since KIRK is a very cyclical company, I would want a bigger margin of safety of at least 50%.
- 2) Another reason I would want at least a 50% margin of safety is because 95% of its suppliers are in China, whose economy looks like its slowing down at best, and at worst looks like it might crash completely, which would affect KIRK quite a bit.
When and if KIRK gets to a 50% margin of safety and/or I see some kind of catalyst, such as an activist investor getting involved that could unlock the value of the company, I would have no hesitations buying at that time.