Pier 1 Imports: Weak Earnings Sent Shares Tumbling. Is This an Opportunity to Buy?

Pier 1 Imports (PIRRQ), North America's largest specialty retailer of unique and decorative home furnishings, recently released its first-quarter earnings and its stock has reacted by making a sharp move to the downside. Let's break down the company's results and outlook on the rest of the year, and then check in on one of its largest competitors, Williams-Sonoma (WSM 0.17%), to determine if this decline is our opportunity to buy or if this is a warning to stay away.

Source: Wikimedia Commons.

The disappointing quarterly results
Pier 1 Imports released its first-quarter report for fiscal 2015 before the market opened on June 19, and the results fell short of analysts' expectations. Here's an overview of the key statistics:

Source: Estimize.

Earnings per share decreased 15.8% and revenue increased 6.1% year over year, as comparable-store sales increased 6.3%; Pier 1 Imports cited an increase in its total brand traffic and a higher average ticket at its retail locations as the key drivers behind this revenue and comparable-store sales growth, but explained that a continued promotional environment led to weaker-than-expected overall results.

Source: Pier 1 Import's Facebook

Pier 1 Imports' gross profit increased 0.1% to $167.7 million and operating profit decreased 22.2% to $25.83 million, as the gross margin contracted 240 basis points to 40% and the operating margin contracted 220 basis points to 6.2%. These large contractions in the margins resulted from a 10.6% increase in costs of goods sold, a 4.8% increase in selling, general, and administrative expenses, and a 16.9% increase in depreciation and amortization for the quarter. 

Even though the above statistics were much weaker than expected, the quarter was not a complete disappointment, as Pier 1 Imports repurchased more than 5.7 million shares of its common stock for approximately $107.4 million; it now has $181.9 million available for future repurchases under the share repurchase program it announced in April 2014, and this will play a crucial role in the company's earnings growth going forward. 

In summary, it was a dismal quarter for Pier 1 Imports and the Street's sentiment worsened when the company went on to update its guidance for the full year...

What should we expect going forward?
In the report, Pier 1 Imports lowered its earnings-per-share outlook and reaffirmed its other growth expectations for fiscal 2015. Here's a summary of what the company now expects to accomplish:

Source: Pier 1 Imports.

• Earnings per share in the range of $1.14-$1.22, down from its previous guidance of $1.16-$1.24
• Comparable-store sales growth in the mid-single-digit percentage range at its retail locations
• Comparable-store sales growth, including e-commerce, in the high-single-digit percentage range

The new outlook calls for earnings-per-share growth of 12.9%-20.8% from the $1.01 earned in fiscal 2014, but this is significantly lower than its previous guidance of 14.9%-22.8% growth. The new outlook also fell short of the consensus analyst estimate, which called for earnings per share of $1.24, or 22.8% growth.

All in all, it was a poor first quarter for Pier 1 Imports and its stock reacted accordingly by plummeting 13.14% on the day of the release. In some cases, declines of this magnitude are opportunities to buy, but I do not believe this is one of those cases, primarily because of the outlook reduction, so I believe investors should avoid it for the time being.

A red-hot competitor continues to impress the market
Williams-Sonoma, a specialty retailer of high-quality products for the home, released first-quarter results of its own on May 21 that more than satisfied analysts' expectations. Here's a summary of the quarter:

Source: Estimize.

Williams-Sonoma's earnings per share increased 20% and revenue increased 9.7% compared to the same period a year ago; these results were driven by comparable-brand revenue growth of 10%, including 6% growth at Williams-Sonoma, 9.7% growth at Pottery Barn, and very impressive 18.8% growth at West Elm.

Source: Williams-Sonoma.

Gross profit increased 10.2% to $368.41 million and operating profit increased 16.5% to $74.33 million, as the gross margin expanded 20 basis points to 37.8% and the operating margin expanded 40 basis points to 7.6%. These margin expansions were helped by costs of goods sold and selling, general, and administrative expenses rising just 9.4% and 8.8%, respectively.

Also, Williams-Sonoma noted that it repurchased 840,761 shares of its common stock for approximately $53 million and paid approximately $33 million in dividends during the quarter; about $458 million remains under the three-year share repurchase program the company announced in March 2013. 

Overall, it was a fantastic quarter for Williams-Sonoma, and this led to the company raising its outlook on the full year; its stock responded by jumping 8.16% higher in the next trading session and it has continued higher in the weeks since. I believe it could go much higher, led by ongoing strength in the Williams-Sonoma and Pottery Barn brands. Pier 1 Imports may not be able to navigate the retail space today, but Williams-Sonoma sure can.

The Foolish bottom line
Pier 1 Imports announced unsatisfactory first-quarter earnings on June 19 and its stock reacted by falling more than 13% in the trading session. The shares have continued lower in the days since, and I believe there is more room to the downside, so Foolish investors might be wise to avoid making a new investment in Pier 1 Imports today and instead take a deeper look into one of its competitors, Williams-Sonoma, which reported a solid set of quarterly results in May and represents a great opportunity today.