Furnishing a New Outlook at Pier 1

The home-furnishings retailer is putting its house in order, fans say.
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Pier 1 Imports

(PIR) - Get Report

appears to be getting its house in order.

The onetime home-furnishings darling fell on hard times in the most recent fiscal year ended in February, as same-store sales slipped from their once-torrid pace. The Fort Worth, Texas-based company, which has been furnishing people's homes for more than three decades, found itself in a slump during one of the most vigorous nesting booms of the past half-century. Its problem: increased competition and its own approaching saturation in its mainstay business of selling housewares and other decorating items. Over the past 12 months, Pier 1 shares declined 56% even as the

S&P Retail Index

climbed 42%.

But Pier 1 now has several strategies designed to juice sales and renew growth. The plan, which calls for price cuts, a new advertising campaign and an acquisition, appears to be showing modest results.

Monday, Pier 1 shares jumped 1 11/16, or 23%, to 9 as investors apparently bought into the theory that same-store sales, which have been trending negative for the past few months, could turn positive in May.

Edward Cimilluca, a portfolio manager with Pier 1 shareholder

Oak Hall Capital Advisors

, says improving sales and the possibility of an imminent acquisition is what's generating excitement.

"You put all that together with a $7 stock and whoopee," he says, adding that if his fund didn't have a full position, he'd buy more shares.

To be sure, Pier 1 has been talking about rejuvenating its business and making an acquisition for more than a year. And to date, there's little hard evidence, beyond management's assurances, that these tactics will prevail. And that leaves some less-than-true believers.

"Until investors see some proof of what's going to drive the top line, it's a show-me stock," says Dennis Telzrow, an analyst with

Hoak Breedlove Wesneski

who recently downgraded Pier 1 to accumulate from a buy. His firm hasn't performed underwriting for Pier 1.

Stephen Mangum, Pier 1's chief financial officer, says proof is at hand. He says the company's tabletop items had become too expensive for Pier 1's core customers, who are slightly below the more upscale demographic of, say

Williams Sonoma's

(WSM) - Get Report

Pottery Barn

or the privately held

Crate & Barrel

.

To address that problem, Pier 1 has reduced prices by as much as 40% on selected cups, plates and flatware.

The new pricing will eat into margins in the first quarter ending in May, as Pier 1 adjusts its buying to lower-cost items. That should keep earnings for the period between 12 cents a share and 15 cents a share, compared with 14 cents a share the year earlier, the company has said. For the fiscal year, however, earnings are expected to grow at least 10% to 85 cents a share from 77 cents a share last year, according to Pier 1's guidance.

Another drag on sales over the past year has been increased competition. With the housing marketing continuing to boom, it seems every specialty retailer decided to sell candles, picture frames and the like during the past holiday season.

Pier 1's solution: Move away from the ubiquitous scented candle and instead stock exotic, sculpted candles.

"We've seen that business come alive in the last six weeks," Mangum says. "Our total volume of candles is up dramatically." He adds that positive results from both those moves boosted sales for the last three weeks of April, although the uptick will be buried as sales are skewed due to the shift in the Easter holiday to March this year, from April last year. "You'll start seeing improvements in May," he says.

Coupled with the pricing and merchandising changes is a new advertising campaign -- Pier 1's first since 1995. Mangum says the message has shifted to focus more on special products that can be found only at Pier 1, compared with the earlier campaign that more broadly promoted the company's stores.

Even if all these moves pay off, Pier 1 is still facing saturation in its core market. Mangum notes that the company, with 750 stores, is already 80% near saturation, which he deems to be 900 stores.

"It's the buy-or-build question," he says, explaining that the company must do one or the other. Given that it would take at least two years to build a concept from scratch, Pier 1 is looking to buy, Mangum says, adding that a deal could take place in the next six months. He says the candidate would be a specialty store retailer in the home decorating industry.

Yet with Pier 1's stock trading near its 52-week low of 6 1/16, speculation has circulated that the company, which fancies itself a buyer, might, in fact, be bought out. There's been talk that

Ethan Allen

(ETH) - Get Report

has approached Pier 1 about doing a deal -- a story Mangum denies. An Ethan Allen spokeswoman says there's no truth to rumors of a merger.

David Magee, an analyst with

Robinson-Humphrey

, says that with Pier 1 generating roughly $60 million in free cash flow a year -- defined as cash from operations after capital expenditures -- the company has enough money to keep it in the acquisition game, despite its depressed stock. He rates the company a buy, and his firm hasn't performed underwriting services for Pier 1.

If business continues improving, a downtrodden stock may no longer be an issue.