2 for Tuesday: Pier 1's Ship Is Set to Sail

Sales of home furnishings haven't flagged the way apparel and other sectors have.
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Sales of home furnishings and holiday decorations are hot, as consumers seek refuge from terrorism jitters.

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A good way for investors to cash in on this trend is to take a look at

Pier 1 Imports

(PIR) - Get Report

, a value-oriented home furnishings chain that could have a big holiday season. Sales are strong, its valuation is modest compared to both is peers and its historical average, and most of the company's 820 stores -- which are located in 48 states and abroad -- are not in shopping malls, which means they could benefit from consumer fears of visiting high-traffic areas.

In the wake of the terrorist attacks, companies littered the retail scene with earnings warnings and sales shortfalls as economists predicted the worst holiday shopping season in more than a decade. Pier 1, however, has bucked this trend. It reported a 4% gain in October same-store sales, which measure activity in shops open at least a year, a figure one analyst describes as "astounding." Many had expected sales to fall.

In response, analysts who cover the company upped their earnings estimates and price targets. For example, Robin Murchison, of Hibernia Southcoast Capital, upped her third-quarter earnings estimate to 20 cents a share from 17 cents, and said "we suspect another upward revision may be in the offing" after November sales are released in early December. She rates the stock a strong buy and her firm has not had an underwriting relationship with the company.

Why the excitement?

"In times of crisis, people retreat to the home," says Kurt Barnard, a retail consultant and publisher of the newsletter

Barnard's Retail Trend Report

. "And they are likely to spend more on that than, say, apparel."

Sales at Fort Worth, Texas-based Pier 1 and higher-end competitor

Williams-Sonoma

(WSM) - Get Report

, which recently topped earnings estimates and affirmed its guidance, support this thesis, as does recent e-commerce data. According to research firm comScore, traffic to home and living sites like marthastewart.com and foodtv.com was up significantly in October.

In addition to the rosy outlook for home goods in general, there are some company-specific reasons why Pier 1 is a good investment right now. For one, starting in November its same-store sales comparisons get easier. In October of last year, for example, same-store sales shot up about 14%. In November, they rose a more modest 7%. Stocks often move on sales comparisons.

Second, the company has positioned its inventory to avoid massive markdowns that are expected to afflict much of the retail industry, say analysts. Pier 1's mix of goods -- from furniture to candles to holiday accessories -- has hit the mark with consumers thus far in the early holiday shopping season, resulting in fewer markdowns than anticipated, say analysts.

One analyst, Joan Bogucki-Storms of Wedbush Morgan, raised her gross margin estimate for the third quarter from 41.8% to 42.8% because more customers are purchasing full-priced merchandise. She recently upgraded her rating to buy from hold; her firm does not have a banking relationship with the company.

The shares, meanwhile, are up about 38% since Sept. 11, but still trade at a modest 14 times next fiscal year's estimated earnings, according to Thomson Financial/First Call, less than their historical average price-to-earnings ratio of 15.5 and the valuation of competitor Williams-Sonoma, which trades at over 24 times forward earnings.

This is one stock that could bring investors some holiday cheer.