Description

Kirklands is worth $40, double today's quote. KIRK trades at 9.7x 2010 EPS, and 7.6x 2011 EPS after taking out net debt/cash. 

EPS multiple is half that of comparables, yet top-line growth over the next 5 years will be double that of comps, 20%/year on average.

This is a quality company with a good niche in home décor retail.  Pre-tax ROIC >100%.

What is KIRK?

Kirkland's sells low-cost home furnishings and accents in the $10-$25 range.  These items are semi-disposable because people may go for a look for a year, then add or subtract new accents, unlike furniture which can last forever.  It is not as tied to economic growth as investors may initially think because people can always afford a $20 accent while they may put off a $700 sofa.

KIRK finds designs it likes, gets China to make it cheaper (30-40% cheaper than a Pier One for comparable stuff), and then turns inventory over quickly. It doesn't have to pay for in-house designers, just buyers.  Inventory turns are near 10x, vs. 3-6 for furniture and home décor. 

Kirk's store base is underpenetrated.  Management thinks it can triple the store base from 280 to 800+.  With stores under 6,000 square feet, KIRK can put several stores in the same market, but in many areas it servers stores are 15-20 miles apart. 

Kirk's cash returns on opening a new store is about a year, due to landlord's helping to foot the capital bill.  Therefore, the growth won't be very capital intensive as KIRK goes from 280 stores today and adds 40 stores per year, with the new stores being a little larger than the average current store.

Why cheap:

1)      Unknown on Wall Street

2)      Large recent rise makes people think they missed the boat

3)      Nobody on Wall Street shops here

4)      Margins may look unsustainable

5)      Insider Selling

KIRK is not at all followed by Wall Street.  Of the two analysts that follow it, one makes no effort to know KIRK because the rest of her stocks are BBBY-types (large and in different industries).  Furniture and home décor stocks with similar market caps have 3-5 analysts.

The holders list is a "whos who" of quant funds with almost no fundamental guys.  Since the sell-side has habitually underestimated earnings, I believe this contributes to the current stock price.  I am 20% and 32% above the street for CY 2010 and 2011.

EBIT margins in the early to mid 1990s were mid teens.  It dropped to below 10% as the company doubled in size.  Today, we're near 12%, the highest since 1998.  Still, when people see margins go from negative to above 10%, they may get worried.

My house is decorated with some Kirkland's stuff.  But, it's cheaper, very traditional, and middle-class while women-type stuff.  Wall Streeters don't shop here.  I would bet that many people covering this stock have never been to a store.

Selling: Carl Kirkland, a director, has been selling shares since $7. He bought over 3 million shares at $2, and is selling the shares to donate the money to charity, live life, etc.  He is old and isn't actively involved with the corporation.  The CEO and CFO, both buyers at $2, haven't sold but a small fraction of their large holdings.

Why new write-up?

When I wrote this up at $3.73, I said the stock was worth$20.  Well, I think I was wrong, it's worth $40. 

While comparables aren't ideal, the best comps such as PIR, WSM, TUES, HVT, etc all trade 15-18x 2011 earnings, around double that of KIRK.  And, KIRK will grow much faster. 

Also, KIRK's business model is better than it was a few years ago, which explains why margins could be higher than previously thought, in the 12-15% range I believe.  KIRK previously did mostly mall stores.  Mall stores are more expensive, and they are poor for selling some of KIRK's bulky items, such as mirrors and large home décor items.  Imagine carrying a 30 lb mirror around the mall!  So, it was higher rent for lower potential sales in the mall. 

Other

I've probably made 25 KIRK store visits over the last 18 months, to at least 6 stores.  I shop there because my wife likes it and its low price.  I've got a KIRK credit card, clip their coupons, and follow their sales.  Therefore, I feel the current merchandise resonates with the current shoppers because I've seen their merchandise, good and bad, for a while.

This write-up is not complex, and the estimates I put forth could be easily come to by just reading the last conference call.  I know this company better than any other right now, so I'm not worried about holding the bag or what other people know that I don't.

Catalyst

Beat CY 2010 earnings estimates by 20%