We currently maintain an Underperform rating on Kirklands’s Inc. (KIRK). Although the company’s healthy balance sheet supports its investment to bring about a better merchandise mix in its stores, the company’s susceptibility to the global economic downturn — coupled with stiff competition — severely undermines the company’s future growth prospects and profitability.
The market for home décor and gifts is highly competitive. Kirkland’s primarily competes with specialty stores, department stores, discount stores, and catalog and Internet retailers that carry merchandise in one or more categories that Kirkland’s does. Competing retailers include Bed, Bath & Beyond (BBBY), Pier 1 Imports (PIR) and Williams-Sonoma (WSM).
The challenging global economic environment, declining real estate value, reduced lending by banks, solvency concerns of major financial institutions, increase in unemployment levels and significant volatility in the global financial markets have negatively impacted the level of consumer spending for discretionary items. Over this period of recession, Kirkland’s also experienced a significant slowdown in customer traffic, which affected its revenues and margins.
The company’s sales are also highly dependent on its ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. Any slackness in doing so would spoil the company’s image with its customers thereby reducing customer traffic which in turn would finally affect revenues and margins.
However, Kirkland’s ever-changing merchandise mix and method of display encourage frequent return visits to its stores, thereby by increasing strong customer loyalty. The merchandise is traditionally-styled for broad market appeal, reflecting an understanding of the customer’s desire for fashion and newness.
Further, the company’s sound information systems permit close tracking of individual item sales, enabling it to react quickly to both fast-selling and slow-moving items. Accordingly, the company actively changes its merchandise throughout the year in response to market trends, sales results and changes in seasons. In addition, the company also strategically increases selling space devoted to gifts and seasonal merchandise in advance of holidays.
The company currently holds Zacks #4 Rank which translates into a short term Sell rating.
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