What happened

Shares of furniture retailer Kirkland's (NASDAQ:KIRK) fell out of bed on Thursday, dropping a massive 30% in early trading. Driving the decline was the company's pre-market release of third-quarter 2021 earnings. Investors were not happy with the numbers and were likely even less pleased with the company's outlook for the rest of 2021.

So what

Kirkland's reported sales of $143.6 million in the third quarter of 2021, down 2% from the same period in 2020. Notably, comparable-store sales were lower by 0.7%, a figure that includes a 7.3% increase in e-commerce sales. So its physical stores performed pretty badly during the quarter.

Gross profit margin dropped 1.4 percentage points as the company faced supply chain headwinds, notably in shipping. This was no small issue, as the company noted that gross margin would have improved if it hadn't faced those rising shipping costs. Adjusted earnings per share (EPS) came in at $0.51, compared to $0.66 in the third quarter of 2020.

A person looking at a line crashing through the floor beneath them.

Image source: Getty Images.

Wall Street consensus was for EPS of $0.56 and sales of $146 million or so. Those missed analyst estimates were one reason for the dour mood today, but not the only reason. Kirkland's noted that sales weakness continued into November, the first month of the company's fiscal fourth quarter, and that supply chain issues remain a notable headwind. Given these problems, management lowered its guidance for the final quarter of the year and is now calling for sales and earnings to decline compared to the year-ago fourth quarter of 2020. So it's no wonder investors were dumping the stock.

Now what

To understand the big picture here, you need to go back to the start of 2020. As working from home took off due to the pandemic, so did Kirkland's stock (it was up more than 1,000% in 2020). Sales improved in the final three quarters of 2020, but it's not unusual for the second half of the company's year to be seasonally strong. The only odd quarter was the second, but it still looks like investors believed that Kirkland's was benefiting from the pandemic's impact on the economy and not a seasonally normal sales uptick.

As 2021 has continued, however, the company's sales haven't lived up to that pandemic story. The third quarter is clear evidence of that, and the warning about the fourth quarter is confirmation that Kirkland's isn't hitting on all cylinders right now. Given that backdrop, it's hardly shocking that the retailer's stock cratered today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.