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Operating Costs Likely to Hurt Kirkland’s (KIRK) Q3 Earnings


Kirkland's, Inc. KIRK is slated to report third-quarter fiscal 2017 results on Nov 21, before the market opens.

We expect the company to gain from its expanding e-commerce business. However, rising operating expenses stemming from business expansion efforts is likely to dent the company’s margins in the upcoming quarterly release.

Notably, the company’s bottom line has lagged the Zacks Consensus Estimate in three of the trailing four quarters, with an average miss of 12.1%.

Let’s look into some factors that are likely to impact the third-quarter performance of this specialty retailer of home decor products.

What to Expect?

The Zacks Consensus Estimate for the third quarter is pegged at a loss of 7 cents per share, which is wider than the year-ago loss of 5 cents. Further, the consensus estimate has widened by a penny in the past 30 days.

Nevertheless, analysts polled by Zacks expect revenues of $144.2 million, improving 4.3% from the prior-year period.

Kirkland's, Inc. Price, Consensus and EPS Surprise

Factors Impacting the Quarter

Kirkland’s has been struggling with increased store occupancy costs, due to aggressive store expansion strategies. This has led to higher operating expenses in the last few quarters. Such headwinds are well reflected in the company’s price performance. The stock has declined 12.9% in the past year, as against the industry’s rally of 4.4%.

Higher costs can also be attributed to increased shipping, store payroll, advertising and packaging costs. Such expenditures are likely to hurt the company’s bottom-line performance. Further, costs associated with Kirkland’s supply-chain and omni-channel expansions may mar the bottom line in the to-be-reported quarter.

However, Kirkland’s has been closing smaller and underperforming stores in malls to reduce costs and enhance efficiency. Additionally, the company plans to open bigger off-mall stores at popular locations, which are likely to boost sales. Incidentally, Kirkland’s intends to inaugurate 25-30 stores and close 20 in fiscal 2017. Furthermore, the company is on track with its initiatives to improve merchandise margins.

Kirkland’s has also been gaining from sturdy growth in e-commerce platform. Management expects e-commerce business to grow at a greater pace than its brick-and-mortar stores and contribute significantly to top-line growth. In order to support the momentum of its online business, Kirkland’s has rolled out several new information systems to improve online purchasing and planning.

Although Kirkland’s has been taking several initiatives to revive performance, we believe it will take time for the company to offset rising costs.

What Does the Zacks Model Unveil?

Our proven model does not show that Kirkland's is likely to beat estimates this quarter. This is because a stock needs to have a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) as well as a positive Earnings ESP for this to happen.

Although Kirkland carries a Zacks Rank #3, its Earnings ESP of 0.00% makes surprise prediction difficult. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With Favorable Combinations

Here are some companies which, according to our model, have the right combination of elements to deliver earnings beat.

Zumiez Inc ZUMZ has an Earnings ESP of +0.69% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar Tree, Inc. DLTR has an Earnings ESP of +2.20% and a Zacks Rank #2.

PVH Corp. PVH has an Earnings ESP of +0.10% and carries a Zacks Rank #3.

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