Pier 1 Continues to Struggle

In this episode of MarketFoolery, Chris Hill talks with Bill Barker about some market news. Pier 1 (PIRRQ) dropped some 15% after announcing it was closing 450 locations. Maybe the company shouldn't have had 1,000 locations in the first place. Chris and Bill get into how and why the company is struggling and how difficult the path forward will be for the home-goods seller. Then the guys respond to some listener mail, talk about the unbearable silliness of price targets, and pick up a ball they dropped in the "Apropos of Canada" episode a few weeks back. Tune in to hear more.

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This video was recorded on Jan. 7, 2020.

Chris Hill: It's Tuesday, Jan. 7. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Bill Barker. Happy New Year!

Bill Barker: Thank you! Happy New Year!

Hill: We're going to dip into the Fool mailbag. And that's pretty much it, because honestly, it's a slow news day. It's a slow news day with the exception of this one retail story, which is in its own way remarkable, and that is that Pier 1 Imports is closing 450 locations. Pier 1 is cutting jobs. Not surprisingly, the stock is down about 15%. I don't know about you, but when I first saw this news, my initial thought was, "Wait a minute. Pier 1 has more than 450 locations?" And in fact, they do. When you go to their website, they say that they have over 1,000 locations. And I think, as we've talked about with other bricks-and-mortar retailers in the past, I've identified maybe the major problem facing Pier 1 Imports, which is, they have way too many locations. Even cutting roughly half of them, they still have way too many.

Barker: I feel a tension here. The easy place to go -- and I'm sure that we'll be going there -- is to mock the whole situation here --

Hill: I don't want to mock them.

Barker: -- and dance upon the grave of this perhaps once-proud company. There are employees that are going to be losing their jobs. And there's going to be, I guess, some more space in malls to fill. Nevertheless, I think we're going to quickly get to mocking this whole thing, because, yeah, why did there need to be 1,000 stores at this point, when I think -- having done the math recently -- the number of people that actually go to Pier 1 rounds to zero? So it seems like 1,000 stores is roughly 1,000 too many.

Hill: It's not 1,000 too many, and I'm not looking to mock them, I'm looking to be more -- I'll date myself with this reference -- like Quincy, and do an autopsy, and just be like, "How did we get to this point?" How did they go from wherever they started to 1,000 locations? You go to their website, and in the FAQ about Pier 1 section, where they say, "We have over 1,000 locations," the first line about their company is, "Pier 1 Imports is dedicated to offering customers distinct home furnishings and decor at a good value." That right there, just that in and of itself, "distinct home furnishings and decor at a good value," that's a viable business. That is absolutely a viable business for someone. But at some point along the way, I don't know if they got drunk with power, or private equity got involved, but something happened that made them say, "Oh, this is a world-dominating business idea." It's like, no, you have good business idea, and it can work on a certain level. This is not a "we need 1,000 locations" business idea.

Barker: I'm going to back up and challenge you on part of that. Can you repeat the phrase? Was it "distinct home furnishings"?

Hill: Distinct home furnishings.

Barker: See, I think you need a little bit more. You need distinct and desired home furnishings. Because when I happened to be in a Pier 1 store -- I think I can recall maybe 15 years ago doing so -- walking around and just seeing this stuff and thinking, "I don't know what you do with any of this stuff." It's stuff that you put on a shelf, as far as I can tell, and then it appears to be from Pier 1. I get distinct home furnishings, if true. But if it's just a bunch of stuff that nobody actually knows why they bought after they bought it, then your business model is not great.

Hill: How is this company still around? And where do they go from here? Because recently on this show, we talked about Bed Bath & Beyond, which appears to be in the early stages of a turnaround. They've got a new CEO. He's got a vision. They're doing some interesting things with the real estate. Bed Bath & Beyond, I think, at a minimum, is no longer a stock that someone looking to short stocks, I think they should stay away from Bed Bath & Beyond. So I'm not saying Pier 1 is going straight to zero, but holy cow, they seem like they're in an even tougher spot than Bed Bath & Beyond was.

Barker: Yeah, it's a pretty tough balance sheet. I don't see where the light at the end of this tunnel is going to be. I think, maybe, that they had had a reverse stock split or something in the recent past. I'm looking at their book value per share, and there are only 4 million shares, so I'm pretty sure they had some sort of reverse stock split. Total book value per share was $75 a share back four years ago. Today, it's negative-$35 a share, which implies, you take all the cash, you take the value of everything of their inventory, everything they've got, and then you subtract the debt, and you get a negative number. So when you're buying a share of Pier 1 today, you're getting negative-$35 of tangible book value, which is a pretty bad bet. Now, that said, Amazon, once upon a time, had negative, I think, tangible book value per share. But still, there's a very, very, very different equation.

Hill: A very different equation, and I don't think we ever heard Jeff Bezos use a phrase that the CEO of Pier 1 used in sharing recent material information about the third quarter -- you Slacked this to me this morning. You were like, "Can we talk about this phrase that the CEO used?" It was like, "Fiscal third-quarter sales and margins remained under pressure as we completed our efforts to clear out non-go-forward merchandise."

Barker: Yes, "non-go-forward," with two hyphens. It's just not a word. You're not allowed to do that. When you get to the point where your use is going to "non-go-forward" merchandise -- discontinued. How about that? There are other words that are more accurate than "non-go-forward." You're just hiding behind hyphens at that point.

Hill: I'd be more apt to get on board with this phrase if I had ever heard anyone in the retail industry use the phrase "go-forward merchandise." Then it'd be like, "Well, we've got two types of merchandise. We've got the go-forward and the non-go-forward." Like, I'm sorry, what is non-go-forward?

Barker: I can see using it in my own vocabulary. To get back to things we are mocking. If somebody orders another round of drinks, and you're like, "No, no, no. This is a non-go-forward round of drinks for me. That's not happening." That's what you're implying.

Hill: I think that's true. I think it's our duty -- just as, in the month of December, we take it upon ourselves to share holiday music that doesn't see the light of day on broadcast radio stations -- let's try and make non-go-forward happen. It sounds like that's what you're saying. That's the major takeaway in terms of Pier 1 Imports. 

Barker: Let's try to make that happen. That is what they're going to come out of this with, I think.

Hill: Got a question from Tony Ross that, I think, actually ties into Pier 1 Imports in a way. Tony asks, "I was listening to the episode you did last week where you talked about looking under the Christmas tree and seeing ticker symbols. I couldn't help but think about Peter Lynch's book Beating the Street, especially when Peter Lynch talks about going to the mall back in the day with his kids and just observing what they buy and looking at that as investing opportunities. My question is, call it circadian rhythms or full circles, should full investors readopt this strategy? Thanks, and please keep up the good work." Thanks for the question, Tony. Thanks for listening! What do you think?

Barker: Well, I think that in terms of rereading Lynch, yes, I think that's a good strategy to revisit full circle. But in terms of malls themselves, perhaps in the sense that if you go to a mall and somebody is actually going into stores there, that distinguishes it from the situation of many other companies, such as Pier 1 -- which doesn't exist solely in malls, but has mall locations. The number of stores which are getting hammered because they are mall-based, and that is not where the purchasing power is going. It's going more and more online. Apply Lynch's logic to things that you do if you had been doing that years ago and had arrived at "I seem to be shopping a lot more on Amazon," then you'd be happy today with having applied that logic. I went to a couple malls during the Christmas season. Did you?

Hill: I'm trying to think. No, I don't think I did. I don't think I went to actual malls. I went to physical stores. Walmart one time, Target a couple of times.

Barker: My experience was, I think, misleading. What you don't want to do is apply Lynch's logic too anecdotally, because you'll come away with the wrong lessons. I went to Tysons Corner, a big mall here, on a Saturday, maybe the week before Christmas.

Hill: Let me guess. Was it crowded?

Barker: Well, I couldn't park. I spent about 20 minutes looking for parking. Couldn't park. Now, I don't think that is a good bit of data for how malls as a whole are doing.

Hill: I was going to say, should we go back to Tysons Corner this Saturday and see if you can find parking? I'm guessing you can.

Barker: [laughs] And there's a King of Prussia Mall near my hometown. That was very busy. But I don't think that as a whole, malls are doing well, and that's where you want to be invested in over the long term. But if you go to a mall and you see a lot of people going into a store that you had not heard of, that is maybe a reason to look into it. Like, what is this place? I've never heard of it, and yet everybody's shopping here. Maybe you're going to get in early on something.

Hill: Well, and going back to Tony's question, I mean, it's Peter Lynch going to the mall with his kids. I think if you have kids, it's usually a worthwhile endeavor as an investor occasionally to check in with what is of interest to your children at any given moment. Because that can lead you to things that are not necessarily right in your purview, whether it's video games or entertainment or social media, that sort of thing.

When we were trading emails this morning -- every day on Wall Street, a list comes out. And the list is, "Here are the analyst upgrades and downgrades for the day." And I sent that to you and said, "Hey, is there anything here of interest to you?" And not only was there not anything of interest to you, you dug deep into the archives for something that you wrote 20 years ago about price targets.

Barker: Yes.

Hill: Care to share?

Barker: [laughs] I was wondering if there was going to be a question there.

Hill: That was the question.

Barker: I'm agreeing with your description of the events between us this morning. You are correct, sir.

Hill: I'm going to channel a sports reporter. Talk about that. Coach, great second half. Talk about that.

Barker: So. This article -- I don't know if you want to post it. It's not available on The Motley Fool website. You have to go to the Wayback Machine, the internet archive.

Hill: I'll put that out on the MarketFoolery Twitter.

Barker: It's not a bad article.

Hill: I didn't read the article.

Barker: I know that.

Hill: It has a great headline, though. The headline is "The Unbearable Silliness of Price Targets."

Barker: Yeah. Now, not everybody would get that reference today.

Hill: Is it a reference to The Unbearable Lightness of Being?

Barker: Exactly. You would get it because --

Hill: I'm old.

Barker: -- much like myself, you're old. But the kids, they might not know what that's a reference to. But it was an Academy Award-nominated picture, as I recall. Anyway, the article is actually taking apart an analyst price target on a one-time competitor, thestreet.com. And it's really just going into the analyst's work. I do think that analyst reports are well worth reading. The price targets and the buy, sell, or hold, what appears to be the bottom line -- I think this has improved in the 20 years since I wrote this, but there were almost no sells issued back then. There are a few more today. There have been some changes in the industry. But still, things are basically rated either buy or hold, or overweight or normal weight and market weight. I don't think the bottom lines, what appears to be the bottom lines, a difference in the price target, a difference in buy, sell, or hold, that's what matters. It's the words in between that you can learn from. Unfortunately, the only part that seeps into most people's knowledge is, "Oh, there's a re-rating here." The reasons for that need to be explored. And sometimes they're persuasive, sometimes they're not. But all that you see in the headlines are, the price targets and the ratings.

Hill: Yeah. It really is the least valuable, and for me, as well as you, the least interesting part of the analyst reports that come out every day. I don't even care what the price target is. I just want to know, what are they saying about the business? Where do they think this is going, whether it's positive or negative?

Barker: Yeah. There's not enough time to go into all that, usually, in the reports that you see in the media, so it's just, "Something was re-rated from hold to buy"; therefore, the price goes up. One of the reasons you see this is that the analyst reports tend to have an effect over extremely short periods of time, like the morning, or maybe the full day, that will produce a couple-percent move. One of the reasons that it does so is, it's amplified by the media. So-and-so put out a report; they're saying buy, whereas yesterday they were saying hold. That gets amplified; people see it; they react thinking that they're getting in ahead of something. So the effect tends to go away pretty quickly. But there's a lot of good work being done. It's just not captured in the price targets.

Hill: Our email address is [email protected]. Email from Jamie Box in Toronto, who writes, "I listened to your 'Apropos of Canada' episode. Jim Gillies neglected to mention Harvey's. Harvey's is a burger chain that beats McDonald's, Burger King, and even Wendy's hands down. However, they too have been struggling, much like Second Cup," which was the coffee chain that Jim had mentioned. "I'm almost certain that Jim Gillies would agree. All the best from the Great White North." Thank you, Jamie. Thank you for listening.

I had not heard of Harvey's. And Jamie's right. No mention of Harvey's from Gillies, which is one more thing we can punish him for.

Barker: Jim Gillies likes a good burger, though. I am willing to agree that he would agree that this is a good burger.

Hill: Yeah, but why do you think he neglected to mention it, then?

Barker: Lethargy.

Hill: I was thinking something far more nefarious, like maybe Big Burger had gotten to him and was like, "You keep your mouth shut about Harvey's. We've got them right where we want them."

Barker: [laughs] Did we talk burgers?

Hill: No, we didn't.

Barker: We talked coffee, doughnuts.

Hill: We talked coffee. We were talking about --

Barker: All things Canada. All things that we know about Canada. And that's a short show, but Gillies made it a little bit longer.

Hill: [laughs] A little bit longer. Are you going to be traveling to the Great White North? You've got some travels coming up, and you had floated the idea of at least the attractiveness of a cross-country drive.

Barker: Yeah, I'm thinking about driving across the country in March. Then I have to get back, apparently. If I end the trip in in or near Seattle and Vancouver, two places I've never been.

Hill: Great cities.

Barker: I could drive back through Canada. But it's March. And as you know, the winter lasts until June in Canada. And they don't plow the roads. Everybody's just snowed in from September to June.

Hill: I mean, there are, obviously, dogsleds. That's a major mode of transportation.

Barker: I wouldn't make dogs pull my car across the country.

Hill: I wasn't suggesting you would. I'm saying that's how, for people who are venturing out in Canada from now until mid-June, it's mainly dog sleds. Obviously, if it's a short trip, you've got your snowshoes, that sort of thing. But, yeah, I think driving.

Barker: I don't think you can drive across Canada except in August.

Hill: July and August.

Barker: Otherwise, you'd better just hunker down where you are and try to get through the winter.

Hill: Maybe get to Harvey's, get a burger.

Barker: Exactly.

Hill: As long as it's still in business. Bill Barker, thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.