Pier 1's Turnaround Is Entering Phase 2

What others see as outdated and uncompetitive may be just what contrarian investors are looking for

Apr 21, 2014 at 10:12AM

It's been two years since I last wrote about my Pier 1 (NYSE:PIR) outperform CAPScall, and the company still seems to get no respect. That's not without good reason -- Pier 1's stock performed great in 2013, handily beating the market, and then proceeded to give all of its gains back. It's now essentially unchanged from where it was two years ago, while the S&P 500 has risen close to 30%.

Pier 1 still has an abysmal one-star rating on Motley Fool CAPS, and the Fool's Chris Hill and David Hanson recently panned it as outdated and uncompetitive. No one's arguing that Pier 1 is a hot growth stock, but I think investors are still overlooking the turnaround potential of this company.

Not a weakness, but an opportunity
To buy the turnaround thesis for Pier 1, you first have to look at the full story. Pier 1 has been in turnaround mode since 2007, which admittedly might make you skeptical of whether it's ever going to pan out. But the truth is, it already is panning out. At its nadir, Pier 1's stock traded down to a low of about $0.10. At the time, it had an operating margin of negative 9%, and revenues had been falling steadily since the company's 2004 IPO.

Pier 1 brought in a new CEO who steered it away from bankruptcy and then began taking steps to increase its operational performance. Revenues have increased 35%, while operating margin is now around 10%.

PIR Chart

PIR data by YCharts.

Those numbers are likely to improve going forward. Chris and David panned the company because it gets a strikingly low 4% of revenue from its website. The benefits of e-commerce are obvious: Sales can be higher because there's less friction; shoppers don't have to drive all the way to a store, sometimes through inclement weather, to browse a selection limited by the square footage available. On top of that, margins can be higher because it's cheaper to run a website and a warehouse than it is to rent and staff a few hundred stores.

It's true that Pier 1's low e-commerce rate is hurting the company. Revenue had been growing at around 10% every quarter for the past couple of years, until the most recent quarter, which was affected hard by heavy snowstorms in many key markets. That might have been less of a problem if customers had just stayed home and shopped on Pier1.com.

I look at Pier 1's 4% e-commerce rate as an opportunity rather than a weakness, though. The company's "1 Pier 1" strategy involves moving the company toward an omnichannel format, using the brick-and-mortar stores as "facilitators and ambassadors" for Pier1.com. This year, the company rolled out a new point-of-sale system and in-home delivery, both aimed at getting customers to use the online platform. As fellow Fool Michael Lewis points out, "Shoppers who use both the stores and the website spend, on average, four times as much as store-only customers."

Time to tie down?
The goal of 1 Pier 1 is to reach e-commerce sales representing 10% of total sales by 2016 and to see operating margins expand to 11.5%. But even in the upcoming fiscal year, management expects EBITDA growth in the range of 11% to 17%. At an already-low EV-to-EBITDA ratio of about 8, that kind of growth could be attractive for value investors.

Your credit card may soon be completely worthless
Pier 1 is just one of the latest companies to change its point-of-sale system to integrate better with the Internet, and, in turn, the Internet-connected devices consumers carry. That means plastic card in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Jacob Roche and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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