Description

We think Kirk is a a business that has a reasonable shot at a 4-5x return based on 8-9x our normalized and likely forward ev/fcf multiple or giving  1x ecommerce multiple revenue which is growing at approximately +100% or $12.50 per share and total revenue per share is approximately $40 per share. KIRK is valued at approximately 0.08x of revenue and under 2x EV/FCF or less as compared to HOME at 1x of sales and W at 2.0x sales. Note I only included market cap plus balance sheet debt excluding leases (more on this later re: Kirk as they have outs on leases based on revenue). KIRK has an impressive ecommerce business that scaled from 2014 of $25 million to $100 million in 2019 and likely $175-200 million this year.  It is unusual to find a company that has generated $27.00 per share in operating cash flow from 2009-2020 or 10x the current market cap, while guiding to a net cash position, with a rapidly growing ecommerce segment and improving profitability trends. Even their bank is willing to extend a revolver that will be untapped shortly that is over $5.00 per share or +70% from current share price. We think Kirkland’s business model is more valuable than ever with a heavy e-commerce business, far lower capex, and an extraordinarily low valuation. Kirkland’s goal is to get this to 50/50 ecommerce/offline in the coming years. We think Kirk can generate $1.50 in free cash flow per share assuming OCF margins of 6% (down -1.2% from 12 year average of 7.2%) and CAPEX about 2% of revenue down from around 4-5%. We think KIRK can get back to 35% gross margins from a very depressed 25% now. This is likely as KIRK will be closing stores 50-75 stores (decreasing CAPEX), and growing ecommerce which has better margins, as well as less competition from Pier1 and Tuesday Morning. Kirkland’s had $32 million in cash $23 million for an income tax receivable and revolver debt of $40 million. 

Re Kirkland Leases: key points ability to break leases and variable rents as % of sales. 

"Our leases typically provide for 5- to 10-year initial terms, many with the ability for us (or the landlord) to terminate the lease at specified points during the term if net sales at the leased premises do not reach a certain annual level. Many of our leases provide for payment of percentage rent (i.e., a percentage of net sales in excess of a specified level), and the rate of increase in key ancillary charges is generally capped. As current leases expire, we believe we have the option to obtain favorable lease renewals for present store locations or obtain new leases for equivalent or better locations in the same general area. To date, we have not experienced unusual difficulty in either renewing or extending leases for existing locations or securing leases for suitable locations for new stores."

-2019 Annual report

We have heard very strong reviews from our channel checks on Kirkland's ecommerce business. I suggest taking a look at https://www.kirklands.com/

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·       Vacations and autos spend is lagging and heading to outdoor living, home décor, furniture.

·         We think going forward KIRK could get to a 6% ocf margin with a 2% of revenue equating to CAPEX, if this happens KIRK should generate $1.50 a share in free cash flow and at an 8x multiple the stock would be worth $12.00 vs. $2.90 today.

·         CEO, CFO, Chairman, and several other directors bought stock in June (5 insiders in total bought stock in the open market) 

·         Why is Kirkland’s so Cheap?

·         No sell side analyst coverage, big transformation with new CEO and CFO over last 20 and 12 months.

·         Last 10 years gone from 296 stores to peak 430 stores. Over the last 10 years stores cost in Capex approximately $100 million, OCF $395 million total CAPEX $290 million, $100 million to buybacks and a special dividend (4x the market cap)

·         Why it will get better: closing stores probably 50-100 (reduces CAPEX), largely built out CAPEX on ecommerce, CAPEX $10-13 million going forward vs. $20-30 million in the past.

·         We believe KIRK can get GM back to 35% and OCF margins to 6% with revenue in the $550 million range which implies about $33 million in OCF. Kirk has hit $50 million twice in the last 10 years.

·         I highly suggest reading the Seeking Alpha interview: https://seekingalpha.com/article/4355961-exclusive-conversation-kirklands-ceo-steve-woody-woodward

CEO June 4^th:

“Now in closing, let me spend a few moments on 4 reasons why we're confident about the direction of our business for the balance of the year.

First, we took the opportunity to right size the company and make it nimbler than it's ever been. That capability was on display very early on and in the pandemic when we were one of the first in the country to stand up contactless curbside pickup to great success.

Second, we have less store-based competition. With the ongoing liquidation of Pier 1 and last week's announcement of Tuesday Morning's bankruptcy and the closing of 1/3 of their stores, we're seeing a significant amount of our stores lose competition within their markets.

Third, we entered the pandemic with strong trends in the stores and online, and those accelerated online while the stores were closed, and the trends have returned in both channels since the stores begun reopening.

Fourth, our online business is being fueled by margin-friendly promotion and first-time shoppers. Collectively, these 4 factors have had a positive effect on our results to date in the second quarter. While there is much work ahead of us to continue to translate this confidence and nimbleness into sustained results, we believe we have a more favorable environment in which to operate and innovate going forward.

We started 2020 with tremendous momentum from the significant year of transformation achieved in 2019. The key priorities we outlined a few months ago continue to guide us for 2020 and beyond and provide the foundation for the confidence we have in our business for the balance of the year.

We also set a goal to improve omnichannel via website enhancements, incremental digital spend and expanded online assortment. We also want an in-store experience that closely is aligned with our omnichannel capabilities. Based on the strong e-commerce sales before, during and after the pandemic, especially in fiscal May, I believe e-commerce will remain a key driver of our overall business strategy. With Buy Online, Pick Up in Store now in place in all of our stores and the improvements we've already completed in our supply chain with the replacement of our distribution center with 3 more efficient hubs operating by third quarter, we can support that growth with better speed and profitability.

Additionally, we will utilize our hard-won leaner infrastructure to be nimbler in our response to changes in customer preferences and buying behaviors. These last few months have brought us closer to the customer. They've told us, and as a result, beared out so far that they've missed Kirkland's, and they're really, really leaned into the stores they like. And lastly, we'll continue to preserve our capital to invest in the business. Nicole will describe in a moment the extensive measures we took to keep us on track for our year-end goal of no debt and positive cash. “

 DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time.

Catalyst

Catalysts:

We think the KIRK business model is more valuable than ever with lower CAPEX, closing underperforming stores, rapid ecommerce growth, and soon to be a net cash position...

Yet....KIRK is valued at only 0.08x revenue and is a massive outlier to public peers in the 1-2x range of sales 

If revenue hits 50% ecommerce and 50% offline we believe the business will be worth far more than 0.08x of revenue (currently approx. 30% ecommerce)

ecommerce sales continue to grow +100% and will make up nearly 30% of total revenue 

Home Décor, Outdoor & Indoor Furniture heavy consumer purchases at expense of vacations and autos

Kirkland builds a net cash position with a $30 million market cap and $550 million in sales

Kirk hits 6% OCF margins w 2% Capex as % of revenue and generates $1.50 in free cash flow