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Is Pier 1's December Sag Evidence of More to Come?

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Similar to its larger competitor Bed Bath & Beyond, home goods retailer Pier 1 (NYSE: PIR  ) took a big hit on the public markets as it failed to deliver encouraging results from its recently ended holiday shopping season. Despite continued strength in the housing sector and the calendar year's most favorable season, the retailer didn't find a confident, spend-happy consumer. The question for investors is whether the issue is more closely related to poor merchandising strategies on behalf of the retailer, or broad, industrywide issues that stem from a still-cautious average American.

December woes
Compared to 2012's holiday shopping season, Pier 1 saw its same-store sales climb 1.3% -- and that's including the extra week in 2013's year. Once adjusted for the calendar shift, same-store sales dropped a precipitous 5.7%.

Now, investors should note that this comes off a difficult comp. 2012's number was a chunky 8.2% over its comparable year in 2011. Year-over-year growth was certainly difficult for Pier 1 to begin with, before even mentioning the ongoing tepidity in consumer spending.

Management did not try to understate the lack of performance, saying they were "extremely disappointed" with the holiday numbers, especially considering the post-Thanksgiving sales rush that set a record for Pier 1. The company did mention, however, that its omnichannel retailing strategy (mainly a push into e-commerce) is gaining traction. hit another monthly high in terms of visits and conversion, with sales now accounting for 4% of the total in December.

Looking ahead
For the full year 2014, Pier 1 expects same-store sales to be in the low-to-mid single digits, net sales up mid-to-high single digits, EBITDA flat at 3%, and diluted EPS in the range of $1.07 to $1.12 per share.

Previously, the company had guided for EBITDA growth of 9% to 13% and EPS of $1.21 to $1.27. The market did not take the news kindly.

More to come?
December didn't pan out the way they expected, which led to the reduced guidance -- we get that. The question is, was it purely situational, or is there a problem here?

Management mentioned the adverse weather during December, and pointed to the larger e-commerce sales as evidence. While that makes sense and certainly had an impact on earnings, it doesn't quite account for the drastic underperformance. Specialty retailers, offering products from teen clothing to yoga pants, are struggling in this stiff economy. The average shopper (note, not the rich one) isn't so convinced about 2014's already oversold return to economic normalcy. Furthermore, with Internet retailers cementing their lasting dominance, shoppers just aren't that impressed with middle-of-the-road brick-and-mortar operations.

Pier 1 isn't a bad company, and much of its recent issues could be of a short-term nature, but the weak December serves as a reminder that the successful retailers of the last couple of decades have a lot of work to do in order to remain relevant.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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