Kirkland's Pullback Creates Opportunity for Investors to go Shopping

Sometimes in life there are second chances. When it comes to stock trading this is often the case when a strong stock pulls back towards its 50-day moving average.

Shares of home furnishing retailer Kirkland's (NASDAQ:KIRK) appear to be bouncing back as quickly as they declined - and investors may want to hop on board ahead of this week's earnings report.

The stock climbed as high as $13.58 on August 21^st capping a massive rally two-month rally that was sparked by a June 22^nd surge. On this day, Kirkland's soared 74% to $3.54 in extremely heavy volume. More than 15.6 million shares traded hands which was 19x the stock's 90-day average volume and by far the heaviest daily trading volume the company has ever seen in its 18-year trading history.

That level of volume was the first sign that there was more to come. Most traders felt they missed the boat, but Kirkland's was just getting started. It went on to add another $10 to its share price and post one of the most surprising year-to-date U.S. stock performances of 2020.  

Why is Kirkland's Stock Going Up?

The summer surge came after an extended drought which saw Kirkland's stock price descend from nearly $30 in June 2015 to a low of $0.56 during the March 2020 pandemic drop. The company had turned in a rash of disappointing quarterly results and amid a heavy debt burden was struggling to stay relevant in the post-Amazon retail world.

The pandemic has since spurred an unexpected turnaround. Homebound consumers have embraced the company's expanded portfolio of lamps, accent rugs, and other home furnishings. Home renovation and redecorating have suddenly become a hot trend - and one that few saw coming.

Shoppers were quick to adopt Kirkland's up-and-coming online platform. E-commerce sales nearly doubled in the first two months since physical stores were closed. Curbside pickup at most locations and an expanded delivery service helped the company not only stay alive but thrive during shelter-in-place restrictions.

Now on the comeback trail, the question is: can the turnaround continue? Since stores have reopened, customer traffic has been strong. Kirkland's has been one of the many retailers that have benefitted from people putting their stimulus checks and unemployment benefits to work on home furnishings.

Can Kirkland's Continue to Grow?

Although stores are now open, online traffic remains a key cog in the turnaround story. Management has noted that a good portion of its online traffic has come from first-time customers. This is an encouraging sign that should be supportive of the continued expansion of Kirkland's customer base.

The company appeals to a broad customer demographic that makes it an attractive one-stop shopping destination for all things home décor. There is something for high-income earners and budget-conscious consumers alike at Kirkland's 400-plus locations across 36 states. The product assortment has recently expanded to include new furniture and tabletop offerings and more budget-friendly products are on the way.

Cost control initiatives are also behind the transformation. Management has aggressively set out to lower marketing expenses, limit store deliveries, and operate an efficient supply chain to bolster its bottom line.

It is also being more selective about its promotional activity in focusing on giving customers more "margin-friendly" offers. However, while this strategy is driving margin improvement, a higher mix of lower-margin online sales is a threat to profitability. But if Kirkland's can capitalize on its emerging online growth while simultaneously expanding margins, the comeback show should go on.

Is Kirkland's a Buy Ahead of Earnings?

In a matter of 4 -days through August 27^th, Kirkland's stock sunk like a stone. Technical analysts may have noted that a bit of a shooting star candlestick formed on August 21^st when the price closed significantly below its peak for the day at $12.20. This was a bearish top reversal formation that signaled a near-term downturn may be ahead.

Indeed it was. Kirkland's shed more than half its market value and dipped as low as $6.01. It got close to but didn't quite touch its 50-day moving average. Traders were too anxious to take advantage of the overdone selloff as nothing had changed in terms of the company's transformation story.

The heavy bout of profit taking has been followed by convincing buying activity that suggests the bulls remain in control. The four-day selloff has been matched by a sharp four-day recovery that has seen the stock recoup about half its recent losses in above average trading volume.

But it still sits $4 off its peak. Any weakness may be a great chance to hop aboard the Kirkland's comeback express.

Where the stock heads from here will largely be dictated by the market's reaction to the second quarter report which takes place before the market open on September 3rd. It's hard to say what Kirkland's results will be let alone the results of any retailer in this unusual economic environment. So, should investors jump in before the announcement or wait to see how things shake out on the third?

Expect a big move one way or the other for this suddenly volatile, charged-up stock. If the trading days leading up to the second quarter report are any indication, investors are betting it will go well. And if the stock can clear the resistance level at $10.56, it may be off to the races again.