Redecorating a bathroom with towels, soaps, and silk flowers costs a lot less than ripping out cabinets and plumbing. Changing the color scheme of the living room with new pillows, lighting, candles, and accessories gives a bright fresh look without emptying the bank account. That's exactly the business model behind Pier 1 Imports (NYSE: PIR ) , Bed Bath & Beyond (NASDAQ: BBBY ) , and Williams-Sonoma (NYSE: WSM ) . The question, is which one is doing the best job of enticing shoppers to part with their hard-earned money?
Peering into Pier 1 Imports
Shoppers can find over 1,000 Pier 1 Import stores in the United States and Canada offering furniture, accessories, linens, artwork, and decorative items from countries all over the world. The company's website touts "If it's interesting, if it's impressive, if it's colorful and cute and one-of-a-kind -- then odds are it's probably from Pier 1 Imports."
The results for the third quarter ending Nov. 30, 2013 include the Thanksgiving weekend, one of the biggest shopping weekends of the year. Comparable-store sales increased 6.9% from the third quarter of 2012, based on a higher conversion rate and increased sales per customer. Total sales increased to $465.5 million, a 9.6% increase. The gross margin was $202.2 million, or 43.4% of sales, which deteriorated from 43.9% of sales for the third quarter of 2012. This was mitigated by a 70 basis point decrease in selling and administrative costs which came in at $149.2 million, or 32.1% as a percentage of sales.
So, the company ended the third quarter with operating income of $43.1 million, an improvement of $4.3 million dollars, or 11%. How does Pier 1 Imports stack up against its competitors?
Behind competitor door number one
Bed Bath & Beyond offers linens, bedding, kitchenware, small appliances, and decorative accessories. The company operates 266 World Market and Cost Plus World Market stores which compete directly with Pier 1. In addition there are 1,009 Bed Bath & Beyond stores and 209 other store brands such as Buy Buy Baby and Harmon and Harmon Value. Bed Bath & Beyond has about 48% more stores than Pier 1, and the average stores are about twice the size of Pier 1 stores.
Net sales for the second quarter ending Aug. 31, 2013 were $2.8 billion, an improvement of 8.9% from the previous year's quarter. Same-store sales increased by only 3.7%. Cost of sales increased 50 basis points in 2013 but selling, general, and administrative expense fell by 10 basis points, which left the operating profit at $389 million for the quarter, an improvement of slightly over $24 million.
It all started around the kitchen table
Williams-Sonoma started out as a kitchen wares store and then branched out to home accessories, linens, and furniture. Its 595 stores, including 196 Pottery Barn stores, are located in the United States, Canada and Puerto Rico. Unlike Pier 1 or Bed Bath & Beyond, the company franchises its brand in the Middle East.
Almost half -- 48.7% -- of sales are generated through the internet and the company's catalogs. In comparison, Pier 1 only generated 4% of its third-quarter sales through the internet. Third quarter sales for Williams-Sonoma as a company improved 11% to $1.05 billion. The West Elm brand led the increase at 22.2% followed by PBTeen at 16.7%, and the Pottery Barn brand had a sales increase of 8.4%. The Williams-Sonoma brand only increased its sales by 1.4%. Gross margin declined 40 basis points to 38.6%, 4.8 percentage points below that of Pier 1. Selling, general, and administrative expenses were $313 million, or 29.8% of revenues. Operating profit landed at $92.5 million.
What's interesting is that if 48.7% of sales take place through the Internet or catalog it would seem that selling, general, and administrative expenses should be considerably lower as a percent of revenue than it is for Pier 1 Imports. It's not--selling, general, and administrative expenses for Williams-Sonoma accounted for 29.8% of sales, while it's 32.1% for Pier 1.
Here's another way of looking at it on a per store basis -- Pier 1 has selling, general, and administrative expenses averaging $149,200 per store, while Williams-Sonoma averages $569,050 per store. It would seem that Internet and catalog sales don't come with reduced selling, general, and administrative costs, at least not for Williams-Sonoma.
To invest or not to invest?
If I owned Bed Bath and Beyond -- which I don't -- I wouldn't sell but I wouldn't buy either. Linens are its biggest selling product line, which isn't surprising. However, linens are something of a commodity. There's not a lot of difference in sheets other than thread count.
William-Sonoma has me a bit baffled. With nearly half of sales taking place outside the stores I would expect the company to be in a better position with regards to its operating costs. I'd wait to see how the company does before investing.
I like the fact that Pier 1 has turned itself around and it is still improving. In 2007, the company lost $228 million and Alex Smith was brought in as the new CEO. In 2010 the company finally reached profitability, has remained profitable, and projects that it will continue to be profitable. Pier 1 has established a recognizable brand for itself with its customers, and prices are modest and value-oriented.
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