Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Kirkland’s Inc (KIRK) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Kirkland’s, Inc. is a specialty retailer of home decor and gifts in the United States. The Company’s merchandise categories include wall decor, art, mirrors, lamps, decorative accessories, accent furniture, textiles, fragrance and accessories, frames, housewares, impulse and personal accessories, outdoor living and artificial floral products. The Company’s stores also offer a range of holiday merchandise during seasonal periods, as well as items carried throughout the year suitable for gift-giving. The Company’s average stores generally carry approximately 4,700 Stock Keeping Units (SKUs). The Company’s stores operate under various names, such as Kirkland’s, Kirkland’s Home, Kirkland’s Home Outlet, Kirkland’s Outlet and The Kirkland Collection. It operates approximately 380 stores in over 30 states, as well as an e-commerce enabled Website, www.kirklands.com. Its stores’ locations include Texas, Florida, California, Georgia, North Carolina, Alabama, Arizona, Virginia and Ohio.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of KIRK – February 2017
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $190,870,895 | Fail | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.79 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 197.65% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 14.48 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.57 | Pass | |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 1.79 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.00 | Pass | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 4. Dividend Record | Currently Pays Dividend | Fail | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Fail | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $0.81 |
| MG Growth Estimate | -3.18% |
| MG Value | $1.73 |
| Opinion | Overvalued |
| MG Grade | D |
| MG Value based on 3% Growth | $11.72 |
| MG Value based on 0% Growth | $6.87 |
| Market Implied Growth Rate | 2.99% |
| Current Price | $11.70 |
| % of Intrinsic Value | 676.30% |
Kirkland’s, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.03 in 2013 to an estimated $0.81 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.99% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Kirkland’s, Inc. revealed the company was trading above its Graham Number of $9.95. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 14.48, which was below the industry average of 50.09, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.09.
Kirkland’s, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $0.09 |
| Graham Number | $9.95 |
| PEmg | 14.48 |
| Current Ratio | 1.79 |
| PB Ratio | 1.57 |
| Current Dividend | $0.00 |
| Dividend Yield | 0.00% |
| Number of Consecutive Years of Dividend Growth | 0 |
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Most Recent Balance Sheet Figures
| Balance Sheet Information | 10/1/2016 |
| Total Current Assets | $147,752,000 |
| Total Current Liabilities | $82,387,000 |
| Long-Term Debt | $0 |
| Total Assets | $264,820,000 |
| Intangible Assets | $0 |
| Total Liabilities | $146,269,000 |
| Shares Outstanding (Diluted Average) | 15,897,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $0.59 |
| Jan2016 | $0.94 |
| Jan2015 | $1.00 |
| Jan2014 | $0.82 |
| Jan2013 | $0.77 |
| Jan2012 | $0.95 |
| Jan2011 | $1.28 |
| Jan2010 | $1.71 |
| Jan2009 | $0.47 |
| Jan2008 | -$1.33 |
| Jan2007 | -$0.01 |
| Jan2006 | $0.01 |
| Jan2005 | $0.34 |
| Jan2004 | $0.92 |
| Jan2003 | $0.69 |
| Jan2002 | -$0.60 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $0.81 |
| Jan2016 | $0.91 |
| Jan2015 | $0.92 |
| Jan2014 | $0.95 |
| Jan2013 | $1.03 |
| Jan2012 | $0.97 |
| Jan2011 | $0.80 |
| Jan2010 | $0.43 |
| Jan2009 | -$0.18 |
| Jan2008 | -$0.34 |
| Jan2007 | $0.24 |
| Jan2006 | $0.33 |
| Jan2005 | $0.42 |
| Jan2004 | $0.37 |
| Jan2003 | $0.07 |
| Jan2002 | -$0.20 |
Recommended Reading:
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
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