When it looks like a duck, walks like a duck, and quacks like a duck, sometimes it's just a duck.
Don't get me wrong. I like ducks. But as a value investor, I am looking for a golden goose in duck's clothing. Unfortunately, I don't think that's the case with home decor retailer Kirkland's (Nasdaq: KIRK ) .
You can get all of its third-quarter numbers from our Fool by Numbers, except a synopsis of the cash flow statement, which was not included in the release. I'll give you the quick fly-by to set the stage: sales were up slightly, profits were down slightly, and the company is seeing few transactions.
The first two things aren't unexpected as Kirkland's, like fellow competitors Pier 1 (NYSE: PIR ) , Williams-Sonoma (NYSE: WSM ) , Bombay Company (NYSE: BBA ) , Tuesday Morning (Nasdaq: TUES ) , and Cost Plus (Nasdaq: CPWM ) , has been experiencing a slowdown. For Kirkland's, the problems have been fewer customers coming through the door making fewer transactions, although those customers' average ticket is higher this quarter. Fewer customers buying less stuff resulted in negative same-store sales of 6.7% compared to a decline of only 3.4% in last year's quarter.
The company is also in the process of closing stores. It opened 17 this quarter and closed three. For the nine-month period it has opened 36 stores and closed 27. Next quarter, as certain leases expire, the company plans to open 13 more stores and close 20. Closing underperforming stores is Foolish because it cuts down on destructive uses of capital. But it also means that the concepts may be losing legs. If that many stores need to be closed, what does it say about the health of the company? It's not healthy, that's what.
Although it was good to see gross margins expand for the quarter, the trend is still down. Gross margins have been falling for a few years now and management expects the tough environment to continue to make it difficult not to use promotions and markdowns to move merchandise.
So Kirkland's is facing decreasing customer traffic, fewer transactions, lots of store closings, and a difficult shopping environment. As I said at the beginning, if it looks like a duck, walks like a duck, and quacks like a duck, sometimes it's a duck. And try as I might to find the golden goose under those ruffled feathers, I just can't see it yet.
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Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He is currently ranked 84 out of 13,678 players in The Motley Fool CAPS rating service. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.
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