This Massive Turnaround Isn't Over

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Pier 1 Imports (NYSE: PIR  ) gets no respect. It has an abysmal one-star rating on Motley Fool CAPS, and the majority of the underperform pitches agree on one point -- the company operates in a competitive market and has no edge to set it apart. But the outperform pitches have a common thread as well, and I agree with them. This is an undervalued stock that is performing admirably, and today I am throwing my hat in the ring and initiating my own outperform CAPScall.

How it got burned
Five years ago, Pier 1 was in dire straits. For several years, it had experienced declining sales and even worse profits, ultimately experiencing a trailing-12-month loss of $261 million in early 2007.

At the time, Pier 1 brought in new CEO Alex Smith and went as far as to fight a legal battle with his previous employer, TJX (NYSE: TJX  ) , to keep him. TJX sued Smith for allegedly breaking his non-compete contract, but Pier 1 countered that it wasn't truly a competitor of TJX and obtained a restraining order to prevent the lawsuit.

Whether the fight was worth it was not immediately apparent. Revenues continued falling through 2009, the stock traded down to a single dime per share, and rumors swirled about possible bankruptcy.

Sacrifices to the Wicker Man
Things have improved at Pier 1, though. Operating margin has improved from negative-15% in 2007 to a recent 10%, a result of laying off employees, closing unprofitable stores, and renegotiating rents.

To avoid bankruptcy, Smith even took the extraordinary step of selling the company's headquarters building, constructed just a few years prior, and used the cash to buy back Pier 1's distressed debt at a cheap price to make the company debt-free.

One of the most important steps Smith took was to double the buying team in an effort to add more specialization and give the team more resources. In light of the recession, the team focused on shifting the merchandise assortment toward selling more low-priced, knick-knack items, and fewer high-priced luxury furniture pieces. As a result, people entering Pier 1 stores have been more likely to actually buy something, offsetting the negative effects of lower traffic and transaction amounts.

The naysayers claim that Pier 1's offering of wicker chairs and other kitschy housewares is easily matched by the same sort of offerings at Wal-Mart (NYSE: WMT  ) or Target (NYSE: TGT  ) , where customers will be shopping already for groceries, electronics, and whatever else they need. That may be true, but both stores have seen low or even negative same-store sales growth, while Pier 1 has been growing by leaps and bounds.

Same-store sales have improved from negative-15% in the second quarter of 2007 to 10.3% in the most recent quarter, the 10th consecutive quarter of growth. Pier 1's same-store sales growth has been beating even competitor Williams-Sonoma (NYSE: WSM  ) , a high-priced retailer that has often been hailed for growing sales in a difficult environment. But Williams-Sonoma's growth is slowing down, while Pier 1 is still maintaining a low double-digit pace.

And despite its rapid growth and operating improvement, Pier 1's stock is cheaper than even Wal-Mart's, at a P/E of 11.75 compared with 13.20.

Bringing back the honey
One of the surest signs of Pier 1's successful turnaround is how quickly it has met its three-year goals. A year ago, management called for a 10% operating margin and $200 in sales per retail square foot within three years. It has already met the operating-margin goal, and sales per square foot reached $184 recently. Management is now upping the ante, calling for 12% and $225, as well as $200 million in investments to renovate or open stores and repurchase shares. This ship has turned around, but it won't wait at the pier forever.

Add Pier 1 Imports to My Watchlist to see how quickly it meets and beats its next set of goals. Pier 1 isn't the only great retail opportunity to watch for, either. Check out The Motley Fool's Top Stock for 2012. You can uncover this soon-to-be highflier that Wall-Street is still aloof to by checking out our special free report. Get your free copy now. Enjoy, and fool on!

Fool contributor Jacob Roche thought Wicker Man was a terrible movie but can't resist Nicolas Cage. He holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Williams-Sonoma and Wal-Mart Stores and creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1861937, ~/Articles/ArticleHandler.aspx, 5/26/2016 2:55:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,828.94 -22.57 -0.13%
S&P 500 2,090.94 0.40 0.02%
NASD 4,903.31 8.42 0.17%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/26/2016 2:39 PM
PIR $5.56 Down -0.20 -3.39%
Pier 1 Imports, In… CAPS Rating: **
TGT $69.06 Down -0.22 -0.32%
Target CAPS Rating: ***
TJX $76.03 Up +0.71 +0.94%
The TJX Companies,… CAPS Rating: *****
WMT $70.91 Up +0.43 +0.61%
Wal-Mart Stores CAPS Rating: ***
WSM $52.14 Up +0.04 +0.08%
Williams-Sonoma CAPS Rating: ***