Stock Pick of the Week: Buy Kirkland’s Inc. (KIRK)- Very Attractive Rating

There is only one retail company on January’s Most Attrac­tive Stocks list: Kirkland’s Inc. (KIRK). KIRK is also one of the best performing stocks in the S&P 1500 since the Lehman bankruptcy. Given our value focus, it is rare that high-flying performers like KIRK make the Most Attractive Stocks list.

KIRK is rare for other reasons, too. Compared to competitors like Bed Bath and Beyond (BBBY), Target (TGT), and Macy’s (M), KIRK is much more profitable and is the only firm with a top-quintile return on invested capital (ROIC) of 17.3%. Few retailers in the history of our database have ever achieved such high returns on invested capital.

As most of our readers know, a high ROIC alone will not get a stock on our Most Attractive Stocks list. The valuation of the stock must be very cheap as well. And KIRK fits the bill nicely with a price-to-economic book value ratio of 0.5, which means the current stock price ($13.25) implies the company’s profits will permanently decline by 50%. In other words, the valuation not only implies no future growth, it implies a perpetual 50% reduction in profits. Market expectations are set­ting the future-profit-growth bar quite low for this stock.

As shown in our free report on KIRK, the company’s eco­nomic earn­ings are growing at a faster rate (+1,538%) than reported accounting earnings (+272%). Also during the last fiscal year, KIRK generated $32.2mm in free cash flow, which represents 12.4% of the company’s enterprise value.

KIRK gets our “very attractive” stock rating because the business is throwing off a lot of cash, showing strong growth in profits while its valuation implies profits will decline permanently by 50%.

KIRK fits the risk/reward pro­file of a great stock to buy.

For details on what causes the dif­fer­ence between eco­nomic ver­sus account­ing prof­its, see Appen­dix 3 on page 10 of our report on KIRK during the last fiscal year. See Appen­dix 4 to learn how KIRK increased net operating profit after tax (NOPAT) on meager revenue growth and increased its NOPAT mar­gin from 6.3% to 9.7%. KIRK’s ROIC (detailed in Appendix 7) rose from 9.9% to 17.3%. KIRK’s invested cap­i­tal grew more slowly than revenues; so invested cap­i­tal turns rose from 1.57x to 1.59x during the last fiscal year.

Note: Stock pick of the week is updated every Tuesday.

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