Goldman Upgrade Lifts Pier 1

The firm sees a turnaround imminent at the struggling retailer.
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Pier 1 Imports'

(PIR) - Get Report

ship may finally be coming in, according to Goldman Sachs.

Shares of the struggling retailer were jumping 9% Tuesday after Goldman upgraded the stock to buy from neutral, noting that a turnaround may be imminent.

Analyst Adrianne Shapira pointed out that the home-decor company's new management team is zeroing in on cost cuts and merchandising, and a more vocal shareholder base is advocating change.

"We see the next retail turnaround opportunity unfolding at Pier 1, as it should regain profitability despite a challenging home environment and competition from peers," Shapira wrote.

The stock recently was climbing 71 cents, or 9.1%, to $8.52.

Sales at Pier 1 have been sliding for the past several years, and in April new President and CEO Alex Smith admitted to analysts that the company had alienated its loyal customers and was bleeding "from self-inflicted wounds."

Smith laid out a plan to restore profitability that included reducing costs, closing underperforming stores, and freeing up merchants so they can focus on developing and testing merchandise assortments.

While applauding Smith's plan, Shapira said that the merchandising portion is "a show-me proposition," saying the team will continue to be led by Jay Jacobs, the executive vice president of merchandising.

"Returning Pier 1 to is roots seems logical given 2006's turbulence; however, going up against the fierce discount channel remains challenging, especially given the merchandising team," she wrote.

In reviewing Pier 1's difficulties, Shapira wrote that "we believe the competitive positioning of Pier 1 has severely eroded over the last several years as discount specialty store operators have encroached onto its territory."

Shapira said Pier 1's business model hinged on "low touch" service, value pricing and unique "global" merchandise. Discounters such as

Target

(TGT) - Get Report

, however, have been offering comparable merchandise at lower prices.

"Pier 1 presents a baby step away in merchandise offering, but a giant step away in price -- this is not a sustainable position vis-à-vis discounters," Shapira wrote.

Pier 1's same-store sales, or sales at stores open at least a year, have steadily declined over the last six fiscal years, Shapira said. The declining comps have fed a vicious cycle of increased promotions to clear inventory.

"In order to reverse this cycle," Shapira wrote, "management must reclaim its customers from discounters with a differentiated offering."

There are likely to be some squalls in the voyage to profitability. Shapira said the home spending environment has been harsh, noting

Bed Bath & Beyond's

(BBBY) - Get Report

first-quarter warning earlier this month.

"While turning sales around in a tough environment will not be easy for Pier 1," she wrote, "we believe years of underperformance coupled with a significant cost savings opportunity should enable the company to deliver improvement."