Avondale analyst: Kirkland's could become private-equity target

Local researcher sees back-end investments paying off in coming years

Kirkland's could produce years worth of rising margins thanks to recent investments in its systems, a local analyst says — before adding that the home goods retailer could as a result catch the eye of a private-equity firm.

In taking over Avondale Partners' coverage of Kirkland's from Jeff Black, Mark Montagna last week wrote that Kirkland's could grow its earnings per share by more than 60 percent in the next few years because of improvements in its back-end operations.

"Systems have enabled placing the proper merchandise in stores in more optimal quantities," Montagna wrote, adding that the company can add up to 80 basis points to its operating margins via better merchandising and expense leverage. For 2015, he sees Kirkland's earning $1.24 per share from an estimated $1.00 per share this year.

Based on his longer-term EPS goal of $1.63, Montagna said a private-equity buyer could pay $23 for Kirkland's, which he rates at 'market outperform.' At about 2:30 p.m. Wednesday, shares of Kirkland's (Ticker: KIRK) down about 1 percent at $18.84. So far this year, they're down 20 percent.

Kirkland's CFO Mike Madden did not return a call for comment on Montagna's thesis.

As to why shareholders — including Kirkland insiders, who own more than 18 percent of the company — would sell to a PE bidder rather than stick around to see the company's profits push up its share price, Montagna told the Post it would be all about avoiding the risk that Kirkland's doesn't execute to a level that would let it reach its potential.

"Let's say they had 500 bp of EBIT growth ahead and a private-equity firm paid for what would imply another 200 bp of growth with 300 to go," Montagna wrote in an email. "Almost all shareholders would take such a deal. The immediate payback on your investment in [percentage] terms would be huge."