It's Time to Deck the Halls at Pier 1

In its third-quarter earnings release, Pier 1 Imports (NYSE: PIR  ) seemed to gain back a chunk of the loss it experienced earlier in the year. The home furnishings retailer increased revenue and comparable sales, seeming to right much of the wrong that it picked up in its second quarter. While that earlier period wasn't a bad showing, it had been less stellar than investors had hoped, and the stock fell 14% in a day. The growth this quarter was much more impressive, and the stock was up nearly 7% in afternoon trading yesterday.

The company's rediscovered strength came from an excellent kickoff to the holiday season, with Pier 1 putting up record numbers for Black Friday and the shopping weekend. Pier 1 also announced a share repurchase program this quarter, picking up $200 million in stock over an undetermined time. All in all, things are looking up for Pier 1, but the competition isn't doing poorly, either, and challenges abound.

Pier 1 brings it home for the holidays
Pier 1 hasn't had a great year. That's not fair -- Pier 1 has had a spotty year. The company stormed out to some fantastic gains, and by mid-May the stock peaked with a 26% year-to-date gain. Then things slowed for a few months before falling in October, when the second quarter was announced. The company missed revenue and earnings estimates, saying its "efforts focused around short- and long-term goals fell slightly out of balance." 

That focus didn't seem to be a problem in the third quarter, and sales beat the market's expectations. However, the company entered into a more promotional environment than anticipated, and earnings per share took a hit, falling $0.02 short of the $0.28 expectation.

Operational efficiency was the key to this quarter's results. Gross margin declined slightly, but the business was able to make up for it on the cost side, keeping the earnings shortfall relatively small. Even with the promotions, operating margin increased compared to the same period last year, up to 9.3% of total sales.

A difficult competitive environment
Competitively, Pier 1 has been slightly outpaced this year by Williams-Sonoma (NYSE: WSM  ) and Restoration Hardware (NYSE: RH  ) . Both companies have had rebound years, with Williams-Sonoma successfully expanding into Australia and Restoration Hardware clearly defining its brand.

Pier 1 seems to be having more difficulty connecting to customers, though its gross and operating margins are stronger than either Williams-Sonoma or Restoration Hardware, so it's not promoting too heavily yet. The problem is that it's also not driving customers through the door at the same rate.

The good news from Pier 1
Williams-Sonoma's Pottery Barn brand increased comparable-store sales by 8.4% last quarter, compared to 2012. Restoration Hardware was up a silly 29%, while Pier 1 rose just 6.9%. On the plus side, though, that's still at the higher end of the full retail spectrum, and it shows just how much this subsector is benefiting from a renewed interest in house buying in the U.S.

Overall, this was a very good quarter for Pier 1, and it proved that the company can recognize and fix its missteps. In 2014, I'm looking for a steadier pattern of growth from the company, as it figures out how to make its stores even more attractive to shoppers.

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