We have downgraded our recommendation on Kirkland's, Inc. (KIRK) to Underperform from Neutral following the company's second-quarter 2011 results, which posted a loss of $0.02 per share compared with earnings of $0.16 in the prior-year period. Kirkland's also missed the Zacks Consensus Estimate earnings of $0.02 per share as cost of sales grew coupled with increased operating expenses.
The company however anticipates total sales and margins to be sequentially higher but may be offset by the impact from higher expenses related to store openings. Consequently, Kirkland's expects sales and earnings in third-quarter 2011 to be similar to those reported in second-quarter 2011.
Moreover, we believe that the current business trends and the uncertain economic outlook in the U.S. will negatively impact the company's future performance. Our six-month target price of $9.50 per share equates to about 12.2x our earnings estimate for 2012. With no cash dividend, the target price implies an expected total return of negative 8.3% over that period.
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