Osmium Partners Believes Kirkland’s is Materially Undervalued and Urges its Board to Start a Strategic Review
$KIRK
Osmium Believes a Strategic Buyer Would Pay $7+ per Share for Kirkland’s
Osmium Urges Kirkland’s to Hold an Investor Day Before June 26, 2024
Dear Kirkland’s Board Members,
As the largest shareholder, Osmium believes that Kirkland’s share price trades at a material discount to what a strategic buyer would pay for the company. The management team at Kirkland’s, a well-known brand with a 50-year heritage, recently guided to full-year positive EBITDA for the first time in several years. Consequently, we believe the company is materially undervalued at 0.05x sales, or more than $35 in sales per share, including more than $9 in e-commerce sales per share. In addition, we believe a strategic alternative or partnership could create material equity value by leveraging Kirkland’s 330 brick-and-mortar retail stores to accelerate growth by cross-selling since management has implied nearly 40% incremental EBITDA margins. Shareholders witnessed the power of these margins for the fiscal year ending in January 2022, when Kirkland's generated approximately $50 million in EBITDA on approximately $560 million in revenue, and the share price cracked $27. Lastly, we believe a modest 1%+ same-store sales (SSS) comps and a 3-year growth plan based on opening 15 new stores annually (~$4.5M annual cost) and in strong markets Kirkland’s left during Covid and the southeast, where it has strong brand recognition, customer demand, and robust e-commerce business, would put Kirkland’s back on track to generate these numbers. As of January 2024, Kirkland’s has approximately a $75 million inventory and $34 million asset-based borrowing against it.
We Believe Kirkland’s Offers 5 Key Benefits to a Strategic Buyer
Omni-Channel Retailer: approximately $470 million in revenue, including approximately $120 million in e-commerce revenue.
Physical Retail Scale: approximately 2.7 million square feet of selling space across 330 stores (approximately 10,000 sq ft per store).
High Incremental Margins: EBITDA profitable business with nearly 40% incremental EBITDA margins (we believe a strategic buyer can achieve $50 million in EBITDA and $560 million in revenue over the next three years with a 5% CAGR growth rate).
E-commerce Returns: Ability to more efficiently manage returns for e-commerce-only retailers, which is a considerable source of losses.
Large Unit Volumes: large-scale and well-known value brand with 7 million customer transactions annually and a large social media following.
A Potential Value Creation Plan
Best-in-class retailer Five Below (FIVE) is valued at 2.5x sales with a growth model based on annual 3% SSS comps and low-teens new store openings. We believe Kirkland’s brand power - 7 million yearly consumer transactions, 4 million strong customer loyalty program, $120 million e-commerce business, and 1 million+ followers across Facebook and Instagram – could drive new store openings annually with 1%+ SSS to help accelerate a return to $560 million in revenue and $50 million in EBITDA, which, if achieved, could re-rate the share price back to $27 based on a seven multiple of EBITDA. We also believe Kirkland’s physical store footprint is a uniquely valuable asset to pure-play e-commerce retailers such as Wayfair (W) and Beyond (BYON), which need an omnichannel strategy to manage returns more efficiently. According to industry experts, returns are approximately 15% of sales, which can create a negative 30% EBITDA margin. Currently, 75% of home furnishings are purchased in physical retail stores, and 25% are purchased online. In our opinion, Kirkland’s physical retail stores offer attractive white space opportunities since roughly 10-15% of the competition has liquidated over the last several years.
A Potential Return Profile for a Strategic Buyer
Based on Kirkland’s 2024 trajectory, we believe a strategic buyer paying $7 per share or $90 million could achieve a 57% IRR over three years by adding 45 new stores (1-3% SSS comps) and growing the top line by 5% to generate $560 million in revenue which would generate $50 million in EBITDA based on Kirkland’s near 40% incremental EBITDA margins. Put another way, we believe an acquirer could potentially generate a $350 million exit. In addition, Kirkland’s business model is capital efficient, achieving 25% ROE in 2022, and we believe its 10,000 square foot stores are the optimal size to maximize $1.4 million in revenue per store and 12%+ EBITDA margins vs. the current $1.1 million in revenue per store. Increasing revenue per store to $1.4 million from $1.1 million across 330 stores could result in $100 million in incremental revenue, which we believe would be especially valuable to a portfolio of brands for both public and private companies and private equity firms.
Why Now? Suppliers of Capital Coming out of Hibernation
We believe now is the time to explore strategic alternatives as the market is turning for the industry, and suppliers of capital are coming out of hibernation. Wayfair is up 100% off its low, Arhaus (ARHS) is up 100% off its low, Restoration Hardware (RH) is up 100% off its low, William Sonoma (WSM) is up 200% off its low, Nordstrom (JWN) and Macy’s (M) have go-private offers, and Hibbett (HIBB) was acquired for $1.1 billion last month. We believe the gap between Kirkland’s public and private market value is far too wide, and we need to see more evidence that the board is exploring all options to close this gap. We estimate that a strategic alternative would reduce Kirkland’s public market costs by approximately $4 million, which is 15% of its current $25 million market cap. Given Kirkland’s market cap, the favorable capital market conditions, and our firm belief the company holds significant strategic value for public and private companies and private equity, we expect the board to do what is in the best interest of shareholders and explore strategic alternatives in earnest.
Mr. Wilson Orr, Chairman of the Board
After serving nearly three decades on Kirkland’s board, Mr. Orr, on June 26, 2024, will ask shareholders to support him as Chairman for three more years; however, since the IPO in 2002, Kirkland’s shares have deteriorated by 87%. We urge Mr. Orr to direct management to release an investor presentation with a clear and comprehensive plan to drive equity value and host an investor day before June 26, 2024.
Sincerely,
John H. Lewis
Managing Partner
Osmium Partners
Source:
https://www.sec.gov/Archives/edgar/data/1056285/000114036124027490/ef20029984_ex3.htm