Description

Americans have an aggregate net worth of $150 trillion dollars of which approximately 30% or $40 trillion-plus is in their homes, home goods/furnishing are CAPEX for the home to the tune of over $450 billion per year (according to Wayfair’s 10K). The furniture segment alone has a fairly predictable consumption pattern with per capita US spending ranging from  2008 $390 and 2020 $534 (home goods are more predictable than larger ticket furniture). Home furnishings/goods are one of the last industries that are really a late-stage adopter to digital (going from 20% to likely 50% over the next 2 years). We believe the three biggest beneficiaries (as measured by ROE) of this trend are RH, WSM, and KIRK. These digitally transformed businesses are far more attractive than Pre-COVID to current: RH has gone from 7% EBITDA margins to 28-30%, WSM is going from 10% to 20%+ operating margins, and KIRK which has invested heavily ($80 million in digital) is now riding the similar improved margin wave. These improved digitally transformed models are eliminating a lot of cost from their supply chains and offering the customers a much wider selection and effectively taking high margin market share (direct sourcing, e-commerce, less touching inventory, less physical square footage). This shows up in the w ROE’s of RH +110% ROE, WSM +70%, and KIRK +50%.

WSM ROE: 

RH ROE: 

KIRK ROE: 

We believe Kirkland’s has the potential to +100% ROE, but they will need to stay very aggressive on their share repurchases (currently +50%), with a sub 3x multiple of EBITDA-CAPEX, has a rock-solid balance sheet with year end cash guided to 30% of market cap, and has the opportunity to more than double EBITDA-CAPEX per share over the next 27 months ($7-10.00 per share range on a $21 stock). If KIRK doesn’t buyback any more stock than the 15% this year, then just piles up cash on their balance sheet by Jan 2024 we think cash would end up at $18-20 per share or if they do use all excess cash and the stock stays here they could buy back close to the entire shares outstanding (W/O debt).  If a hybrid approach is assumed (depending on share price and execution) and KIRK repurchases 4.5 million shares by Jan 2024 KIRK would have roughly $13+ in cash per share, $9-10 in FCF per share and we believe likely something like $100 share price (5x).

It’s worth reading…Craig-Hallum Sell-Side update on KIRK from September 2021 post-earnings titled: “The Future Is So Bright We Gotta Wear Shades. Margin Gains Coming Despite Freight Costs. Raising Price Target To $40.”

KIRK Adjusted EBITDA of $7-9+ per share 1-2 years vs. roughly $4.00 for the current year

(note: Adjusted EBITDA has converted to OCF at roughly 92% since 2010 and CAPEX should be 2% of Revenue, also Adjusted EBITDA should be closer to 98% to OCF after the next two quarters given WC dynamics) 

1. As we look ahead, we firmly believe that Kirkland’s is well-positioned to execute on our long-term vision for the company. We’ve created an efficient organization with an appropriate cost structure and the necessary capabilities to be nimble in these uncertain times. As we continue to build out our omnichannel platform and focus heavily on new customer acquisition, we will be supported by a strong financial foundation that has us set up to succeed. Based on our progress to date, we are increasing our 1- to 2-year target to gross profit margins in the mid-to high-30% range, EBITDA margins in the low- to the mid-double-digit range, and operating income margins in the high single digits. We expect these targets to be driven by top-line growth, fueled by an increase in our average ticket, new customer acquisition strategies, lowering our freight rates, continued direct sourcing benefits, overall efficiencies in supply chain operations, and continued disciplined cost control. We look forward to continuing to share updates along the way and achieving both our near-term and longer-term outlook.” – September 2021 KIRK earnings call

2. If 1 is correct and revenue is approximately $600 million a 15% EBITDA margin implies roughly $90 million with ZERO revenue growth with a share count of 13.5 million and likely by Jan 2022 12 million given repurchase or $7-8.00 per share

3. Industry margins are increasing with post COVID business strategies WSM “ "We see a clear path to beating our previous revenue and profitability targets and we are raising our full year revenue outlook again, with revenue growth now expected to be in the high teens to low twenties and operating margins now expected to be in the range of 16% to 17%. Given our increased optimism, we now expect to achieve our long-term goal of $10 billion in revenues in 2024, one year faster than previously expected, and with higher profitability, which will now be at or above our increased FY21 operating margin." -WSM Earnings August 25^th 2021

4. Industry leader RH is pushing 28-30% EBITDA margins, WSM 20% EBITDA margins, and we think that KIRK will ultimately hit 20% EBITDA margins (they are most comparable to WSM subsidiary West Elm).

5. KIRK expects a 50/50 mix of e-commerce and retail sales which CAPEX in the 2% of sales range.

    6. If KIRK hits this trajectory it is not hard to see how the multiple can expand off a 3x current year EBITDA-CAPEX #

    7. Therefore, to quote the CFO from September earnings call w the stock at $21: “And that will be dictated by where our stock price is. I mean, if our stock     price remains as significantly undervalued as we believe it is now, then we will be much more aggressive on -- or continue to be aggressive on our buyback.”

Our estimates:

• Jan 2022: $3.50 per share adjusted EBITDA in Jan ’22 $585 at 12% EBITDA (last year 2H20 Adjusted EBITDA was $52 million, w $77 million in 2H inventory, this year $92 million we think $60 million + in 2H adjusted EBITDA vs. Company is guiding to generating $80 million in cash flow for 2h21)

• Jan 2023 $6 per share in Jan 2023 $615 @13.5% EBITDA margins

• Jan 2024 $8 per share in Jan 2024 $650 at 16% EBITDA margins

• Therefore: Jan 2022 $7.00 in cash + estimated $5 in FCF generation Jan 2023 + estimated $7 in FCF generation Jan 2024 = estimated $19.00 in net cash per share assuming no share repurchased (or KIRK could repurchase 90% of the outstanding shares w/o debt)  

Furniture: Kirk is making a major push into furniture: To date, KIRK has been successful the hard way selling tons of low AUR items and now is moving upstream into a one-stop home goods/furniture retailer. Why this matters: “If we can bolster our offerings in both furniture and outdoor product categories, we believe this will enable us to drive profitable growth across all 4 quarters, moving beyond our traditional seasonality and dependency on harvest and Christmas holidays to drive growth for the whole year.” -September 2021 earnings call

In 2Q21: KIRK disclosed furniture AUR was +26% to $197. In the current quarter: KIRK just added sofas, sectionals in price points of $599-1200. When you marry large unit volume growth with higher price points (many times the current AUR) one-stop-shop home furnishing/goods retailer we think the top line could really grow.

Kirk has guided to generating $70+ million in cash flow ($5+ per share) in 2H21 (CFO said on September call Jan 2022 cash to be $80-90 million and $40 million share repurchases announced in 2021, with mid-single-digit comps, $92 million in inventory, better margins, and record 4Q holiday spending….KIRK could beat this number potentially 2H20 Kirk generated $75 million in cash flow: "we anticipate year-over-year earnings growth despite absorbing significant incremental freight costs." -September 2021 re 2H21. 

Kirkland’s has a strong southwest and southeastern customer base. The company is 50 years old with a simple motto: “Bring Home Happiness.” The company has #1 customer loyalty card according to Newsweek’s survey w/ 15 million customers who have signed up (source: https://www.prnewswire.com/news-releases/newsweek-ranks-kirklands-loyalty-program-no-1-among-us-home-decor-retailers-301237066.html)

Kirkland’s has roughly 1.2 million followers on Instagram and 1.5 million likes on FB. Wayfair has about 1.6 million followers on Instagram and 7.8 million likes on FB.

Kirkland’s website is worth a look: https://www.kirklands.com/

Kirk competes in a large and fragmented market with well under 1% of the industry revenue, we believe KIRK has the ability to take market share going forward: 

 “We compete in the large, growing and highly fragmented home furnishings and décor market. Unlike other big box retail categories (e.g., office supplies, home improvement and electronics) where the top retailers hold a significant share of the overall market, the top three retailers in the home décor and furnishings category make up less than 25% of the market share. We believe we are uniquely positioned in the market, focused on providing.” -At Home 2020 10K

“We estimate today the annual U.S. market for home goods is approximately $450 billion, of which approximately 20% is sold online by our estimates. According to data released by the U.S. Census Bureau, there are approximately 99 million households in the U.S. with annual incomes between $25,000 and $250,000. Moreover, we believe there are approximately 193 million individuals between the ages of 20 and 64 in the U.S., many of whom are accustomed to purchasing goods online. As younger generations age, start new families and move into new homes, we expect online sales of home goods to increase. In addition, we believe the online home goods market will further grow as older generations of consumers become increasingly comfortable purchasing online. Including our presence in Canada and Western Europe, we believe we have more than doubled the size of our total addressable market”. -Wayfair 2020 10K

Unusual Technical Trade?

13.5 million shares outstanding

3.5 million short

1.5 million shares left on repurchase

Jan 2022: KIRK should have $85 million net cash and likely another 2 million share repurchase? 

So shares to buy: potentially 5 million (shorts/company), and potentially 7 million over the next 12 months total on 13.5 million outstanding shares at a sub 3x EBITDA-CAPEX, 50% ROE, and 40% of the company in net cash!

Thus, between share repurchases and short-covering = 5/13.5 or roughly 40% w/ the potential outstanding shares. 

Retail sales this fall will likely be the best on record: Record Holidays Sales are forecasted for 2021: +7-9% and e-commerce should be +11-15% yr/yr

https://www2.deloitte.com/us/en/pages/about-deloitte/articles/press-releases/deloitte-holiday-retail-sales-expected-increase-seven-to-nine-percent.htm

KIRK should be ideally positioned with a large selection of inventory that they ordered 4 months early this year, and 35% online and 65% offline business mix.

NET NET: $45 in sales per share ($15 are e-commerce), guiding to mid-teens Adjusted EBITDA margins over the next 1-2 years (currently 10% now), CAPEX should stay 2% of sales, @ 2x sales the stock is worth $90 vs. the current $21. KIRK has a rock-solid balance sheet with w/year-end cash of approximately 30% of the market cap and 50% + ROE. 

We really think highly of both the CFO and CEO FWIW.  The CEO on Sept call " We're a much leaner organization with a more efficient cost structure and a strong focus on delivering relevant product offerings that are both stylish and affordable. As we begin to ramp up our customer acquisition efforts and better showcase the company Kirkland's is today, I firmly believe we'll achieve the financial goals we've laid out. I want to thank all of our stakeholders for their support in getting us this far, and I could not be more excited for the future for this company." 

 DISCLAIMER: This does not constitute a recommendation or offer to buy or sell this stock. We are short shares of the company, and we may buy shares or sell shares at any time without notice. The statements herein are the beliefs and opinions of the author. In addition, the statements herein are provided for informational purposes only. Furthermore, the graphics/charts are provided for illustrative purposes only and should not be relied on to make an investment decision. The author makes no representation or warranties to this work. 

Catalyst

• Earnings 1^st week of December
• Current 3Q and 4Q21: guided to $5.00 in 2H21 cash flow per share (25-30% of the market cap)
• Expanding margins to mid-teens Adjusted EBITDA on $600 million implies +$90 million or $7-8 per share in cash flow (+100% without any revenue growth, we expect revenue to grow)
• Adjusted EBITDA since 2009 has converted to operating cash flow at 98% and CAPEX is 2% of sales targets imply mid-teens FCF margins over 1-2 years
• The company could pile up $19.00 in a share in cash per share w/o bank debt by Jan 2024 on $21 stock
• FCF power of $7.00-$8.00 to a ton more depending on how aggressively the company repurchases stock 
• Deloitte sees strongest holiday season on record +7-9% yr/yr and ecommerce +12-15% to $1.3 trillion
• Aggressive share repurchases + Expanding margins+ 3x EBITDA + $7.00 in cash by Jan 2022…30% of outstanding shares short being to cover?
• ROE Rank #1 RH @ 110% #2 WSM @ 67% and #3 KIRK at +50% (KIRK should be able to exceed 100% ROE over the next 12 months if they hit their targets and buy back stock)
• A +100% ROE should lead to higher than a sub 3x multiple of EBITDA especially with a net cash position, 15% FCF margins, top-line growth, and 35-40% of revenue e-commerce.