Kirkland's Q2 2026 Earnings Call: Contradictions Emerge on E-commerce Strategy, Tariff Impacts, and Sourcing Shifts

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 16, 2025

Financials Results

• Revenue: $75.8M, down 12.2% YOY (vs $86.3M prior year)
• EPS: Adjusted loss per share of $0.90, improved from $1.11 prior year; GAAP net loss $19.4M vs $14.5M prior year
• Gross Margin: 16.3%, down 410 bps YOY (20.4% prior year) driven by liquidation (130 bps), tornado-related write-offs (100 bps), and tariffs (30 bps)

Guidance:

• Expect continued liquidation of non-go-forward inventory in H2 to fund/store conversions
• No additional significant tornado-related expenses anticipated in H2
• Tariff headwind ~100 bps to gross margin in Q3; limited impact in Q4
• Accelerating Bed Bath & Beyond Home conversions; 4 more Nashville-area openings in ~6 weeks
• Plan to convert virtually all stores over 24 months; per-store CapEx < $100k
• Placed buys for 30 conversions in Q1 2026; targeting broad back-to-campus push in 2026
• E-commerce to remain pressured; focus on brick-and-mortar and BOPIS for profitability
• Exploring wholesale for Kirkland’s Home; first buybuy BABY store expected in 2026

Business Commentary:

• Retail Transformation and Partnership:
• Kirkland's Inc. announced a partnership with Bed Bath & Beyond, which included opening its first store in Brentwood and planning for conversions of all existing Kirkland's Home stores.

• The partnership aims to leverage the Bed Bath & Beyond name and infrastructure for a capital-light transformation, with each conversion expected to cost less than $100,000 in CapEx.

• Impact of Disruptions on Financial Performance:

• The company reported net sales of $75.8 million for Q2, down from $86.3 million in the prior year quarter, driven by a 9.7% decline in comparable sales.

• The decline was attributed to disruptions at the Jackson, Tennessee distribution center following a tornado and ongoing strategic liquidation of inventory for Bed Bath & Beyond conversions.

• E-commerce Challenges:

• Kirkland's experienced a 38.5% decrease in e-commerce comparable sales during Q2.

• The drop was primarily due to disruptions at the distribution center and purposeful liquidation efforts to optimize inventory for the Bed Bath & Beyond conversion.

• Tariff and Inventory Management:

• Kirkland's faced marginal pressure in Q2 due to 30 basis points of additional tariff costs, which is expected to increase to 100 basis points in Q3.

• The company is strategically managing inventory by liquidating non-go-forward categories and restructuring stores in anticipation of Bed Bath & Beyond conversions.

• Leadership and Financial Expertise:

• Andrea Courtois joined as CFO in July, bringing more than 20 years of financial expertise in planning, analysis, and inventory management.
• Her appointment underscores the company's commitment to long-term growth through strategic financial management and inventory optimization in support of the ongoing transformation.

Sentiment Analysis:

• Net sales fell to $75.8M from $86.3M; gross margin declined 410 bps to 16.3% on liquidation, tornado, and tariffs. Management expects continued liquidation and Q3 tariff pressure. However, the first Bed Bath & Beyond Home store exceeded expectations with strong traffic, new customers, and sales, prompting an accelerated conversion plan with low per-store CapEx and 30 conversions bought for Q1 2026.

Q&A:

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): What were actual conversion costs for Brentwood and how are post-opening trends developing?
  Response: Brentwood cost ~$30k (well below the <$100k target); traffic, new customer acquisition, and sales are running above a Kirkland’s baseline with strong lifts in bedroom and kitchen.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): Of the 300+ locations, how many will be converted versus closed over the next 24 months?
  Response: About 25 closures at January 2026 lease expirations; expect 250–275 existing stores to remain and convert, with opportunistic additions, particularly in the Northeast.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): How should we think about store momentum vs. e-commerce and when e-commerce stabilizes?
  Response: E-commerce remains challenged and will be deprioritized; focus capital on profitable store and BOPIS transactions. Expect e-commerce declines to normalize to earlier-year levels.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): Can you confirm current debt/liquidity following the IP sale and financing structure?
  Response: Management affirmed figures in line with ABL and Bed Bath & Beyond loan facilities, indicating sufficient availability to support operations and conversions.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): How will tariffs affect Q3/Q4 and how are you managing sourcing exposure into 2026?
  Response: Expect Q3 gross-margin pressure mitigated by vendor negotiations and pricing; Q4 limited impact. Shift mix toward domestic/national brands as stores convert and reduce China exposure; India negotiations ongoing.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): Can you quantify back-half gross margin impact from tariffs?
  Response: ~100 bps GM headwind in Q3; limited in Q4. Liquidation to prep conversions will likely weigh more on GM than tariffs through year-end.

• Question from Jeremy Hamblin (Craig-Hallum Capital Group): How many conversions can you achieve in 2026 vs. 2027?
  Response: Buys placed for 30 conversions in Q1 2026; targeting as many additional conversions as supply allows to capture the 2026 back-to-campus season.