KIRK - Kirkland's: Growth And Margin Pressures Remain

Summary

• Kirkland's revenue continues to be under pressure due to lower demand and negative comparable sales.
• Decreasing economies of scale and rising input costs put pressure on profitability.
• A high level of inventory creates additional risks.

Introduction

While Kirkland's ( KIRK ) shares have risen +11.8% YTD, in my personal opinion, investors should wait for the next period's results before making a buying decision. First, the company continues to experience negative comparable sales and lower revenue. Second, declining economies of scale and rising input costs are putting pressure on operating margins. In addition, the high level of inventories creates additional liquidity risks in future periods. Thus, the company can increase its debt load and increase interest expenses.

Quick survey of Q3 results

On December 2, the company published financial and operating results for the 3rd quarter , which turned out to be weaker than investors expected.

Also, I would like to draw attention to the following topics in operational and financial reporting:

First, despite some improvement in comparable sales, the indicator is still in the negative zone. In addition, management's recent announcement confirms that we are likely to see continued pressure in Q4 due to weak consumer activity and reduced store traffic.

Secondly, the level of inventories continues to remain at historically high levels, which may have a negative impact on operating margins.

Despite all of the above, management continues to remain optimistic about its own prospects in 2023. Management is confident that 2023 will be a year of stabilization and normalization of the company's operating and financial activities. The CEO of the company also noted an increase in the share of furniture (% of sales).

Projection

According to my forecasts, in the next quarter the company will continue to face pressure on financial performance. So, in my personal opinion, we will see revenue decrease by about 5% to 167 bn. $. In addition, I expect the trend for the recovery of the gross margin to continue, which should support the operating margin. However, I do not expect a significant reduction in operating expenses, based on historical data and comments from management. Thus, in my personal opinion, reporting for the next period will continue to look weak.

Margin: rising inflation, rising gas and freight prices may lead to a decrease in the operating profitability of the business.

Macro: tightening of macro policy may continue to have a negative impact on the dynamics of consumer spending in the furniture segment due to a decrease in real disposable income and a decrease in consumer confidence of the population. Thus, the company's revenue may continue to be under pressure in the following periods.

Debt: high inventories and high leverage can lead to the need to increase debt, which in turn can increase interest costs

Competition: increased competition could lead to lower market share, slower revenue growth and lower operating margins

Drivers

Macro: a recovery in consumer income and consumer confidence could have a positive impact on revenue growth rates in the coming periods.

Margin: decrease in inflation, normalization of freight prices and increase in end-user prices could support the operating margin of the business.

Conclusion

While I like the company and its business model, in my personal opinion, now is not the best time to go long. Firstly, despite the statements of management, we did not see a significant improvement in the level of inventories on the balance sheet. Second, the company continues to experience declining revenue and operating margins. On the other hand, management continues to sound confident and put forward positive messages for 2023. I believe that it is necessary to wait for the results for the next quarters in order to make a decision on the purchase of the company's shares.

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