Kirkland's Weathering the Storm

Kirkland's, Inc. (KIRK) shares are up 111% year-to-date and have rewarded those buyers who were bottom fishing at much lower levels. We continue to applaud Kirkland's for taking the necessary steps to weather the current storm by focusing on cash flow and closing its unprofitable stores. Moreover, we believe the company's second-quarter results will benefit from higher gross margins and cost controls and are narrowing our quarterly net loss estimate.

However, we are less sanguine about the company's prospects for the second half of the year. Macro headwinds will continue to pressure consumer discretionary spending, and the consumer will not be helped out by those $600 tax rebate checks, as they were in the second quarter. Until we see evidence of the macro conditions improving, we believe it makes sense to take profits in KIRK shares. As such, we are downgrading Kirkland's from a Buy to a Hold.

Companies in the home furnishings space will continue to retrench and focus on cash management, while waiting for industry conditions to improve. Inventory management will remain a focus for Kirkland's and should reduce the need to borrow on its revolving credit line. The company has shifted into cash conservation mode by closing 30 stores in January and planning to close another 40 stores in 2008. Including those store closures, Kirkland's has 108 stores with expiring leases in the next 18 months, which it can exit at no cash cost.

The valuation of stocks in the home furnishings industry is depressed across the board. Kirkland's trades at a slight discount to its industry peers based on price-to-book, price-to-sales, and price-to-cash flow ratios. We think this discount is reasonable because Kirkland's is much smaller than its peers and see a fair value at $2.25 or 25x our 2009 EPS estimate.

MetLife with Market Headwinds

MetLife Inc.'s (MET) second quarter operating earnings came in at $1.30 per share, substantially below the estimates, due primarily to a decline in equity markets and higher catastrophe losses in its homeowners business. Net income for the quarter fell 19% year-over-year, due to a spike in investment losses, which overshadowed the 10% growth in the top-line.

After reviewing second quarter results, we have moderated our FY08 and FY09 operating earnings estimates to $5.82 per share and $6.43 per share, respectively. Shares of MetLife currently trade at 1.23 times its 2Q08 reported book value of $41.98 per share, a 2% discount to the peer group median.

Relative pricing looks fair on a price-to-book basis, given a ROE about 1% below the peer group median. We expect MET to continue strong growth in the International and Institutional Business segments, which will be somewhat offset by the decline in investment income.