The market continued to stumble today as if it were Heather Mills on an inclined treadmill.  With a dearth of macro news, the sell off was still a result of yesterday’s craptacular economic data where new claims for unemployment jumped, productivity in Philly shrank, and as always, Hannah Hilton remained retired (and please Hannah, come back to us and if not for yourself, do it for the kids).  That said, there was one kind of interesting piece of data today which seems about as good for the economy as downloading pictures of Cameron Diaz is for your computer (and interestingly they say the fact that she causes so many viruses has nothing to do with her acne) and that is that a record number of people with Fidelity accounts are taking early withdrawals on their 401Ks.  So with social security already likely to be insufficient in the coming years (and perhaps the years would stop coming if we took away their privileges), with unemployment about to start spiking up again, with the government deficit approaching a billionty trillion dollars (give or take a billionty), and with 401Ks already depleted due to the stock market sell off, it’s nice to know that the safety net for Americans is slimmer than Ben Stein’s chances of winning economist of the decade, and getting slimmer by the day.

Internationally, economic news was pretty quiet on the day as well as it has likely gone hoarse from yelling its safe word so frequently over the past several days due to the pounding it has been taking (and for the record, its safe word is “Hasselhoff”).  France cut its GDP target from 2.5% to 2% and said something about a budget squeeze but most of it was in French and as the only French Money McBags’ understands is “menage-a-trois” and “Non, non, retrait obligatoire sur la plaque, puis la boire dans la paille,” he missed the details.  Also Greece is putting in new austerity measures as their unemployment rates moves ever closer to 20% leaving even Poseidon out of work as he’s too qualified to be just a longshoreman and companies are not adding to senior management.

In the market, the news is transactions, transactions, transactions as M&A is firing up bankers more than T&A or getting to kick the homeless.   Swelling cash balances on company balance sheets are causing the acquisition market to heat up as this week BHP tried to buy some POT and INTC announced a deal for McAfee.  This flurry of deals is making bankers nostalgic for the bloated 2007 M&A market which was highlighted by solid deal flow and the great merger of Chick’s with Dick’s.

As for earnings, HP put up a sold Q but traded down as investors worry about them facing tougher comps without former CEO Mark Hurd at the helm to feel his way through any potential slowdown, or feel his way through any potential MILF.  Also DELL had a nice Q beating both analyst revenue and profit guesses despite selling crappy PCs.  The company maintained their 14% to 19% top line growth guidance for 2011, 18% to 23% operating income growth, and 30% part failure growth.  They said the business and government markets remain strong for them yet gross margins lagged guesses a bit causing the stock to trade down for most of the day.  Finally, in positive earnings news sold the fuck out of some sales forces (or whatever it is they sell) and shot up ~17% as the stock continues to party this year like it’s 1999.  The company raised guidance above analyst guesses as cloud computing continues to grow faster than Heidi Montag‘s chest (though pour some collagen out for her plastic surgeon) and it is a trend Money McBags believes in more than emerging market growth and rainbow parties.  That said, the stock trades at a P/E that would make Benjamin Graham roll over in his likely modestly priced, yet practical coffin so any slip up by the company and momentum investors will run from this stock faster than an anorexic runs from a KFC Double Down.

In small cap news, KIRK reported their quarter today and apparently this low end home accessory store has added a new “bags of dicks” product line since that is what they served up to investors (though apparently they look terrific on the mantel).  The stock traded down 25% as the company took down guidance, warned of increased discounting and higher costs, and scared momentum investors and algorithmic models back to their secret lairs.

Money McBags wrote about this stock in detail a few months ago saying it was a good buy because they sell cheap products that people will continue to buy to spruce up their homes now that they can no longer go on vacation, rightsized their operating structure and moved to more profitable locations, still had room for margin expansion, continued to grow in the downturn, were finally going to be adding net new stores, and could hit $1.80-$1.90 of eps on the high end with $3.50 of cash on the balance sheet so trading at $18 made it cheaper than a toothless AIDS infested hooker.  The logic and the analysis was solid, unfortunately the company’s execution wasn’t as it missed guesses by ~$.01 (the first miss in several Qs which made the momo investors yell nono) and guided down due to increased costs and more discounting.  Still a 25% drop on those results makes less sense and is more confusing to Money McBags than the past somehow not yet being determined, but you can’t spell “overreaction” without “holy fuck,” well you can, but whatever.

Anyway, let’s look at the numbers a bit.  Comp store sales were up 1% while total sales were up 2% despite having fewer stores in operation which means that the new stores they opened must have done hella better business which makes sense as part of their strategy has been to pare shitty mall location stores and move to more big box locations (for instance, they are scheduled to open up a store in the Octomom‘s vagina next Q since that is the biggest box they could find).  The 1% comp store sales jump was driven by a 5% increase in traffic but hindered by a 4% decrease in prices as like most retailers, KIRK had to rely on coupons, discounts, and promotions to get people to buy shit.  And therein lies the problem.  KIRK had been moving up as margins were expanded faster than the Universe or Kirstie Alley‘s waste at a Sizzler all you can eat buffet, but now margins are ticking down.  Last Q gross margins were ~43% and this Q they dropped back down to ~39%, where they were a year ago.  And it wasn’t just pricing as they also incurred higher shipping costs which they say will persist through the year so for margins, that blows like Carmen Luvana on a pay day.


As for guidance, management said sales should be marginally up or marginally down from the second half of last year (or as we say in the business, plus or minus a nut hair) but up 4% to 6% for the entire year (down from their 6%-8% estimate last Q), margins will continue to be challenged due to discounting and shipping costs, and they expect a slight increase in the $1.42 in adjusted earnings they had last year.  They are also going to open ~25 new stores and shut down ~12 while continuing to be solidly cash flow positive.  So hoofuckingray all the way around.

Ok, so let’s toggle away from the Molly Sims pics and over to Excel and see if we can’t figure shit out.  In the second half of last year, revenue was ~$235MM and they said the second half of this year should be near that, but let’s just say they are wrong and the consumer continues to get weaker and decides they don’t need that $7 elephant night light or the $13 chocolate bath accessory set because in these difficult times, does one really need their ass to smell like a Snickers bar?  So lets knock 5% off of last year’s second half top line and call it $223MM of sales for the rest of the year putting 2010 sales flat with 2009 even though guidance is for 4% to 6% up.

They said they expect gross margins to be pressured by 150bps to 250bp so lets take this quarter’s ~39% gross margin down 500bp to 34% assuming shit gets worse and they have to discount more (and gross margins for the second half of last year were ~43%).  So now we’re at ~$76MM gross profit.  Operating expenses have been running ~$26MM a Q but lets assume they open 15 net new stores all in the third Q and thus their store count grows by ~5% which should make their operating cost rise by a bit under that.  So we’ll call operating expenses for the 2nd half of the year ~$55MM and with depreciation of ~$6MM, that gets us to $15MM pre-tax operating income and at 39% tax rate with ~20.5MM shares, that’s $.44 for the second half of the year in non-adjusted EPS.  They have had ~$1.5MM of added back adjustments in the last 6 months, so if one assumes that stays the same, that would make eps closer to $.52 per share but those adjustments can go fuck themselves.  KIRK has already earned ~$.51 for the year so these estimates would put them at ~$.95 to $1.00 eps for 2010, far below the $1.42+ per share they are guiding to and assumes operating margins fall to ~6.6% from the 11.6% they were last year.  So basically, Money McBags just ass raped their numbers like they assraped investors today.

But here’s the interesting thing, KIRK has $66MM of cash on the balance sheet for an EV of ~$170MM and using the estimated numbers from above, they should generate $43MM of EBITDA this year so they are trading at only ~4.5x EV/EBITDA on Money McBags’ numbers hatchet job.  Fuck, if the company really does earn $1.42 per share and grows cash to $90MM like they said, that means they are only trading at ~3x EV/EBITDA.

Unfortunately, every quant algo puked this shit out today as if it were laced with Paris Hilton‘s saliva because once earnings lose momentum and a company misses guesses, computers want nothing to do with it.  On an eps basis, KIRK is trading at ~12.5x Money McBags’ low end shit the bed number (and Money McBags isn’t saying this is going to happen, he’s just trying to put out an ugly scenario to show it still looks cheap), or ~9x company guidance and with ~$3.50 in cash and growing on the balance sheet. it’s just not that expensive, even if growth is becoming harder than Abe Vigoda‘s calcified testicles.  Obviously the big question is what happens in 2011 and unfortunately Money McBags’ just doesn’t feel like he has enough information to make a qualified guess right now.  So today sucked for investors, but the stock seems to be oversold.  That said, nobody wants to buy a company where trends are getting worse even if it is ridonkulously cheap so you if you don’t own this name, you can probably wait for another Q to see if shit is going to get better and if you own it, there isn’t any rush to sell here unless you are vindictive or think Money McBags’ harsh assumptions are too rosy.

Enjoy the weekend.