Forget About Pier 1 Imports, Consider Restoration Hardware or Williams-Sonoma Instead

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Pier 1 Imports (NYSE: PIR  )  crashed by more than 13% on Thursday after reporting disappointing financial performance for the first quarter of fiscal 2015. Investors could be overreacting to the negative news in the short term, but alternatives such as Restoration Hardware (NYSE: RH  ) and Williams-Sonoma (NYSE: WSM  )  nonetheless look like much stronger names in the home-furnishings sector.

Disappointing performance
Pier 1 Imports announced that total sales during the quarter ended on May 31 increased 6.1% to $419.1 million, versus $394.9 million during the same period in fiscal 2014; this came in below analysts' expectation of $422.8 million. Comparable sales increased 6.3%, which management attributed to increases in total brand traffic, improved conversion, and higher average ticket price.

Gross profit was roughly flat during the quarter. However, gross profit margin as a percentage of sales declined to 40%, compared to 42.4% in the year-ago period, due to pricing promotions.

Net income declined from $20.3 million in the first quarter of 2014 to $15 million, and net earnings per share of $0.16 came in materially below the forecast of $0.20 per share.

Adding to the negativity, the company reduced its guidance for the rest of the year. Earnings per share are expected to be in the range of $1.14 to $1.22, versus a prior guidance of between $1.16 and $1.24.

CEO Alex W. Smith said in the earnings press release that the downward guidance adjustment was due to harsh industry conditions: "The retail environment remains highly promotional and is pressuring gross profit in the near-term. As a result, we are adjusting our full-year earnings forecast accordingly."

The retail business has been notoriously difficult across many different categories lately, so margin pressure should come as no big surprise. However, it's also worth noting that Restoration Hardware and Williams-Sonoma recently reported substantially better performances than Pier 1.

Restoration Hardware and Williams-Sonoma not only operate in the same industry, but they also target a similar clientele as Pier 1 Imports. When it comes to the high-end furnishing market, these two companies seem to be gaining market share and stealing customers from Pier 1.

Pier 1 Imports vs. Restoration Hardware and Williams-Sonoma
Restoration Hardware announced an impressive 22% sales increase during the quarter ended on May 3. Revenue came in at $366.3 million, comfortably better than the $346 million forecast on average by Wall Street.

Comparable-brand revenue rose 18% versus the same period in the prior year, while direct revenue rose 24% to $176.4 million.

Restoration Hardware delivered increased margins during the quarter, and adjusted diluted earnings per share grew 200% to $0.18. This was materially better than the average earnings estimate of $0.10 per share for the quarter. In addition, Restoration Hardware increased its guidance for both sales and earnings during the rest of the year.

Williams-Sonoma said sales during the fiscal first quarter ended on May 4 grew 9.7% to $974 million on the back of a 10% increase in comparable-brand revenue. The number was better than Wall Street analysts' expectation of $943 million in revenue.

Earnings per share came in at $0.48 during the quarter, up 20% from the year-ago quarter and considerably better than the analysts' expectation of $0.44 per share.

Williams-Sonoma expects fiscal 2014 sales of $4.65 billion to $4.73 billion, versus a prior range of $4.63 billion to $4.71 billion. The company also raised its full-year earnings-per-share guidance from $3.05 to $3.15 to the new range of $3.07 to $3.17.

CEO Laura Alber sounded clearly confident in the earnings press release regarding Williams-Sonoma's performance and future growth opportunities. She said the company is gaining market share versus the competition:

Innovative, high-quality product, personalized service, relevant marketing and strong execution across all brands drove these better than expected results. With 50% of our revenue in the direct channel this quarter, we believe our multi-brand, multi-channel platform is driving consistent market share gains and providing us with a sustainable competitive advantage.

Foolish takeaway
The steep decline in Pier 1 Imports' stock could easily be considered a disproportionate reaction from investors, as the company is still financially healthy and performance was not as dismal as the price decline would indicate. However, Restoration Hardware and Williams-Sonoma are considerably stronger alternatives in the sector, and they could continue outperforming Pier 1 in the medium term.

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