Pier 1 Imports (NYSE: PIR ) company officials put on a brave face today when they reported sales results for November and the company's fiscal third quarter. Sales for the month dropped 14.7% to $144.3 million from last November, while comparable same-store sales fell by an even greater 15.3%. Unfortunately for Pier 1, this negative trend is not one that its equity investors can afford to ride.
I do give credit to Pier 1 for facing the music while many retail companies -- among them Sears Holdings (NYSE: SHLD ) and Home Depot (NYSE: HD ) -- are opting for less disclosure by dropping the release of monthly sales figures. Although monthly reporting might cause short-term volatility in the company's stock or myopic focus from investors, it is still useful in measuring a company's trend in operating performance.
And in Pier 1's case, the continued negative same-store sales performance means that the company is losing money at an accelerating pace. For all of fiscal 2006, the company reported $39 million in losses. For the first six months of fiscal 2007, it has already reported $96 million in losses. At some point, Pier 1 will run the risk of a liquidity crunch that will force the company to sell to a private-equity buyer or file for bankruptcy.
Management recently took steps toward increasing Pier 1's short-term liquidity by suspending dividends. The company also raised $155 million when it recently completed the sale of its proprietary credit card business to JPMorgan Chase (NYSE: JPM ) . And it issued $165 million of convertible debt earlier in the year. However, even with the boost in cash, it's anyone's guess how much time the added liquidity will buy Pier 1.
If Pier 1 runs out of liquidity, it could run into liquidation. Yet I don't see the company as worth more dead than alive. It has sold its credit card business, and because it leases most of its properties, I doubt there is much hidden value in its land or buildings. The bulk of the remaining assets are in inventory, fixtures, and leasehold improvements, which will all fetch less than book value.
Even if I did miss any hidden value and Pier 1 enters Chapter 11, it probably won't matter much for equity holders. Whoever owns the company's $184 million in debt will be in the driver's seat. Ask any pre-bankruptcy Kmart shareholder how that worked out for them.
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