Watching Pier 1 Imports (NYSE: PIR) erode before my eyes is truly painful, especially since I have fond memories of making a nice chunk of change on this stock not all that long ago. Yet this is one of those cases where your eyes and the numbers don't lie -- this retailer is in trouble.
Digging into the third-quarter results, I don't see much reason to get too hopeful. Sales dropped more than 2% for the quarter alongside a 6.5% drop in comp-store sales. Comp-store sales figures aren't the end-all, be-all of evaluating retail stocks, but they are a valid indicator of growth trends. And Pier 1's have just been bad for some time now.
It doesn't get all that much better after the top line, either. Gross margin fell, operating income reversed to a loss on an 11% increase in sales, general, and administrative spending, and net income fell from a profit of more than $19 million last year to a loss of more than $7 million this year.
Looking at the balance sheet, I see that inventories are up about 15% from last year. But wait, you say . shouldn't retailers build inventory going into the Christmas season? In most cases, yes. But in the case of Pier 1, I think it's lost its merchandising touch. So stocking more of the things people don't want to buy isn't going to help much. And given that the company dropped its comp-sales guidance for December from the low single digits to negative mid-single digits, it's pretty clear that people still don't want to buy Pier 1's stuff.
I'm also not exactly impressed to hear management talking about catalogs increasing floor traffic and boosting marketing expenditures. The problem at Pier 1, in my opinion, is merchandise. As I've said in the past, I used to like the company's stuff, but I haven't been tempted to buy anything there for years now. And if you look at more successful companies like Williams-Sonoma (NYSE: WSM) or Bed Bath & Beyond (Nasdaq: BBBY), you see that consumers are still willing to spend if stores have the goods they want.
I'm worried about Pier 1, but I don't think the problems are terminal yet. The company has very little debt and hasn't yet fallen completely off shoppers' radar. Besides, if sales-challenged retailers like Bombay (NYSE: BBA) and Restoration Hardware (Nasdaq: RSTO) can flop around for a while, Pier 1 certainly has time. If management can somehow recapture its past sense of style and merchandising, a future walk down Pier 1 may not be so depressing.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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