Business Overview and History
Kirkland's, Inc. (KIRK) is a specialty retailer of home décor and furnishings, operating a network of stores across the United States. The company has navigated a challenging macroeconomic environment, marked by inflationary pressures, rising interest rates, and shifts in consumer spending behavior. However, Kirkland's has demonstrated resilience, implementing strategic initiatives to reposition its brand, strengthen its omnichannel capabilities, and forge key partnerships to drive long-term growth.
Kirkland's was founded in 1966 as a single store in Jackson, Tennessee, selling various home decor items. The company steadily grew over the following decades, expanding into multiple locations across the United States. By the early 2000s, Kirkland's had established itself as a specialty retailer of home furnishings and décor, offering an assortment of merchandise including furniture, mirrors, rugs, lighting, textiles, gifts and other items.
In the late 2000s, Kirkland's faced challenges during the Great Recession as consumer spending on discretionary home goods declined. The company responded by closing underperforming stores and focusing on cost-cutting measures to weather the economic downturn. In the 2010s, Kirkland's expanded its e-commerce presence to complement its brick-and-mortar store network, investing in enhancing its omnichannel capabilities and refining its product assortment to better meet evolving customer preferences.
The early 2020s brought further headwinds, including the impact of the COVID-19 pandemic, supply chain disruptions, and broader macroeconomic factors affecting the home furnishings industry. Kirkland's navigated these challenges by streamlining operations, reducing costs, and adapting its strategies to the changing retail landscape.
Today, Kirkland's operates a total of 325 stores in 35 states, as well as an e-commerce website at Kirklands.com. The company's core focus has been on providing its customers with a curated selection of affordable, stylish home décor and furnishings, complemented by inspirational design ideas. Over the years, Kirkland's has evolved its business model to adapt to changing consumer preferences and market dynamics.
In the face of a challenging macroeconomic environment, Kirkland's has taken proactive steps to streamline its operations and enhance its financial position. In the second quarter of fiscal 2024, the company implemented a series of cost-saving initiatives, including reductions in corporate overhead, store payroll, marketing, and technology expenses. These actions are expected to deliver approximately $6 million in annualized pre-tax savings, which will help to improve Kirkland's profitability and liquidity.
Financials and Liquidity
As of the end of the second quarter of fiscal 2024, Kirkland's reported total assets of $250.57 million and total liabilities of $247.45 million, resulting in a net debt position of $30.20 million. The company's current ratio stood at 0.78, indicating a relatively tight liquidity position. However, Kirkland's has taken steps to bolster its financial flexibility, including the expansion of its revolving credit facility to $90 million and the addition of a $12 million first-in, last-out (FILO) term loan.
In the second quarter of fiscal 2024, Kirkland's reported net sales of $86.3 million, a 3.6% decrease compared to the prior-year period. The company's comparable sales declined 1.7%, driven by a decline in the average ticket and e-commerce traffic, partially offset by an increase in store traffic and omnichannel conversion. Gross profit margin improved by 100 basis points to 20.5%, primarily due to favorable merchandise margin, outbound freight costs, and depreciation expense. Adjusted EBITDA for the quarter was a loss of $10.2 million, an improvement of $3.3 million compared to the prior-year period.
For the most recent fiscal year (2024), Kirkland's reported revenue of $468.69 million, a net loss of $27.75 million, operating cash flow of -$14.48 million, and free cash flow of -$19.26 million. In the most recent quarter (Q2 2024), revenue was $86.29 million, with a net loss of $14.50 million. Operating cash flow for the quarter was -$12.73 million, and free cash flow was -$13.16 million. Year-over-year, revenue decreased by 3.6%, while net income improved by 25.1%.
The company's liquidity position shows a debt-to-equity ratio of -5.07, with cash on hand of $4.46 million. Kirkland's has a $90 million senior secured revolving credit facility and a $12 million first-in, last-out term loan. As of Q2 2024, they had $52.7 million outstanding on the revolver and $10 million outstanding on the term loan, leaving $7.9 million available. The current ratio stands at 0.88, and the quick ratio is 0.11, indicating potential liquidity challenges.
Strategic Initiatives and Partnerships
To navigate the evolving retail landscape, Kirkland's has implemented several strategic initiatives focused on re-engaging its core customer base, refocusing its product assortment, and strengthening its omnichannel capabilities.
1. Re-engaging Core Customers: Kirkland's has seen a 39% reactivation of lapsed customers over the past 12 months, driven by its focus on seasonally relevant, high-value décor. The company has also enhanced its loyalty program, Cake Love, with the reintroduction of a birthday reward, and has continued to grow its SMS subscriber base to over 1.2 million.
2. Refocusing Product Assortment: Kirkland's has increased the frequency of new product launches in key categories such as floral, decorative accessories, and highly seasonal micro-collections. This strategy has helped the company drive improved inventory turns and customer engagement.
3. Strengthening Omnichannel Capabilities: While the company's e-commerce channel has faced challenges, Kirkland's has been actively working on its long-term digital strategy, including the implementation of a new pricing tool to better analyze the marketplace. The company remains committed to a unified omnichannel experience that meets its customers' evolving preferences.
In a significant development, Kirkland's recently announced a strategic partnership with Beyond, Inc. (BYON), the owner of Bed Bath & Beyond, Overstock, and other online retail brands. Under this agreement, Kirkland's will have the exclusive rights to operate new, smaller Bed Bath & Beyond stores, leveraging its expertise in home décor and furnishings to help revitalize the Bed Bath & Beyond brand. Beyond's $25 million investment in Kirkland's, including a convertible loan, underscores the potential of this partnership to drive sustainable, profitable growth for both companies.
Risks and Challenges
Kirkland's faces several risks and challenges in the current environment, including:
1. Ongoing Macroeconomic Pressures: The company's performance continues to be impacted by inflationary pressures, rising interest rates, and shifts in consumer spending behavior, particularly in higher-ticket categories.
2. Competitive Landscape: Kirkland's operates in a highly competitive home décor and furnishings industry, with both traditional and e-commerce-based competitors vying for market share.
3. Execution of Strategic Initiatives: The successful implementation of Kirkland's strategic initiatives, such as the Bed Bath & Beyond partnership and its omnichannel transformation, will be crucial to the company's long-term growth and profitability.
Outlook and Conclusion
Despite the challenges facing the retail industry, Kirkland's has demonstrated its ability to adapt and evolve its business model. The company's strategic initiatives, including the partnership with Beyond, Inc., position Kirkland's for potential long-term growth and value creation. As Kirkland's continues to navigate the dynamic market environment, investors will closely monitor the company's ability to execute on its plans, drive customer engagement, and capitalize on emerging opportunities in the home décor and furnishings space.
While Kirkland's is not providing specific guidance for upcoming quarters due to the ongoing review of strategic alternatives, management has expressed optimism about performance in the second half of the fiscal year. The company expects continued improvement in sales compared to the first half, driven by their assortment shift to faster-turning categories and focus on promotional effectiveness and inventory clearance. The promotional environment in Q3 is expected to be relatively consistent with Q2, with slightly more pressure related to freight costs.
Kirkland's believes it is positioned to achieve positive adjusted EBITDA in fiscal 2024 after two years of losses. Looking further ahead, the company has set a long-term goal of reaching $600 million in revenue and an adjusted EBITDA margin in the mid to high single-digit range by the end of fiscal 2028. However, investors should remain cautious given the ongoing challenges in the current retail environment and the company's recent financial performance.