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Tuesday, April 6, 1999

Pier 1 Imports Inc.
Phone: 817-252-8000
Website: www.pier1.com
Price (4/5/99): $7 15/16


Attention home buyers! Do you really have all the rattan furniture you need? How about coffee mugs? Candles? Hello, are you there?

Although Pier 1 rode low mortgage rates, strong consumer confidence, and an improved merchandising mix to a Daily Double just over a year ago, the stock has stalled since then as sales have flattened out.

The stock market mayhem late last summer may have dampened some shoppers' spirits. Rising interest rates since then haven't helped either, and Pier's target Baby Boomers could have simply passed their peak shopping years for moderately priced casual home furnishings, too.

The company delivered a red hot 15.6% same-store sales gain in FY98, but results for the latest year showed a cooling trend, with comp sales sliding from +8.3% in Q1 to -1.0% in Q4. Overall, FY99 sales inched up 6% to $1.139 billion on a modest 3% gain in comp-store sales. Though some rough weather in the Midwest and Northeast hurt Q4 revenues a bit, generally warmer weather for the quarter should have balanced things out.

With such so-so numbers and no obvious catalysts for improved results, there's just not a lot of reason for investors or shoppers to get excited about Pier 1 at the moment.


With 751 stores in 47 states, Pier 1 Imports is North America's largest specialty retailer of imported decorative home furnishings, gifts, and related items, many of them handcrafted.

Including franchised stores, the company has more than 806 locations worldwide, including stores in Puerto Rico, Canada, the United Kingdom, Japan, and Mexico. It plans to add up to 60 stores in 1999, while closing 23 to 28.

Sales by category for FY98 were as follows: furniture (34.3%); decorative accessories, such as lamps and vases (23.4%); housewares (13.5%); bed & bath (18.3%); and seasonal merchandise (10.5%). Apparel accounted for 5.4% of FY97 sales but was discontinued at the end of that year.

Insiders own just 2.9% of the stock.


Income Statement*
12-month sales: $1,131.9 million
12-month income: $78.6 million
12-month EPS: $0.74
Profit Margin: 6.9%
Market Cap: $849.7 million
(*As of Nov. 28, 1998)

Balance Sheet*
Cash: $28.5 million
Current Assets: $393.7 million
Current Liabilities: $125.8 million
Long-term Debt: $125.1 million
(*As of Nov. 28, 1998)

Price-to-earnings: 10.7
Price-to-sales: 0.75


When two-and-a-half years of consistent double-digit same-store sales gains came to an end last April, Pier 1's stock began its descent. Though bubbling fears of recession came into the picture late last summer, sending the stock down to a low of $6 1/16, the real story of stalling momentum was already reflected in the same-store sales numbers.

By getting out of the apparel business at the end of FY97, Pier 1 had been able to redesign its store layout, stressing a broader line of hard goods that are less susceptible to markdowns. As a result, hard goods sales increased 18.4% in FY98. That was terrific, but it made for tough comparisons, especially in the latter half of FY99.


Pier 1 has been buying back its own stock. In April 1998, the board authorized the repurchase of 4.5 million split-adjusted shares. Those shares had been bought by September, when the board approved purchase of an additional 5 million shares. Yet, management appears to have bought high instead of low, paying an average price per share of $13.88 during the first nine months of FY99.

Chairman and CEO Marvin Girouard recently predicted a record FY 2000, but the latest four-week period didn't provide much to get excited about. Sales rose 2%, but fell 1% on a same-store basis. However, the comps should get progressively easier throughout the year.

Barron's ran a story last November highlighting talk that Pier 1 is thinking of launching a discount chain, jokingly referred to as Pier 2. The idea is to adopt the market segmentation strategy that's worked so well for retailers like Gap Inc. (NYSE: GPS), where its low-end Old Navy and high-end Banana Republic concepts complement the core Gap stores. Exactly how well that strategy would work for Pier 1 is a big question mark. Consumers love discount stores, but the likes of Target already do a pretty nice job on the home furnishings front.

The consensus earnings estimate for the year just ended is $0.76 per share and $0.87 for the current year. So the stock now trades at just 10 times trailing earnings and less than 9 times this year's estimates, which assumes 16% EPS growth. With a net profit margin of nearly 7%, Pier 1 looks cheap at well-below one times sales. No doubt that's partly why the company has begun to attract some value-oriented investors.

Still, these ought to be the best of times for a company like Pier 1, since the economy could hardly be in better shape. If the company can't knock the cover off the ball now, what happens if we see any kind of substantial slowdown?

-- Louis Corrigan

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