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Fool on Call: Rebuilding Pier 1 After the Storm

In 1910, the Naples, Fla., pier was completely destroyed. It was rebuilt, then destroyed again in 1960 by Hurricane Donna. The good news: The current pier has withstood a number of close encounters -- including the latest in 2005, when Hurricane Wilma rushed toward Naples with 125-mph winds and brought $135 million worth of damage to the city. Pier 1 Imports (NYSE: PIR  ) has also faced a different sort of storm, and it's currently looking to rebuild -- but this rebuilding process is taking a lot longer than anticipated.

To get a snapshot view of just how poorly things have gone for the company in recent months, read the four-word title of a take on its latest quarterly results: Jumping Off Pier 1. That pretty much captures Wall Street's opinion of this company right now. My colleague Ryan Fuhrmann summarized his sentiments in the article, writing, "I can't find much positive to say about Pier 1 right now."

Things have been ugly for the company, to put it mildly. But now the all-important holiday season is rapidly approaching. Is there any chance that Pier 1 can pull it together and come out of the holidays with positive momentum? After an analysis of its quarterly earnings conference call, there's an inkling of hopeful evidence to suggest that Pier 1 may finally be rediscovering itself. We will focus our discussion in particular on merchandising and marketing.

Providing products people will actually purchase
In my analysis of Pier 1's previous conference call, I noted that the home furnishings retailer quickly found itself between a rock and a hard place. On the one hand, its staple wicker and rattan items were becoming virtually commoditized by the presence of Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , both of which were pushing similar merchandise. On the other hand, it was being picked clean by higher-end retailers like Crate and Barrel, Restoration Hardware (Nasdaq: RSTO  ) , and Williams-Sonoma (NYSE: WSM  ) . All the while, it was being outplayed in the middle market by Bed Bath & Beyond (Nasdaq: BBBY  ) .

Pier 1 found itself caught in no man's land. It knew it couldn't compete with the pricing power of giant retailers, and sitting idly in the middle wasn't going to work, either. The company decided to aim for a piece of the higher-end market. To do so, Pier 1 would not only have to differentiate itself from the low end by shifting somewhat away from traditional wicker offerings; it would also have to offer something unique on the high end to set itself apart. The result of all this strategizing was a much more contemporary line of merchandise.

Unfortunately, it appears that Pier 1's designers swung the pendulum too far in the opposite direction. As CEO Marvin Girouard admitted, "Some of the more contemporary home furnishing introductions may have been a little too severe for our past loyal customers." For instance, its Loft 21 collection, "targeted to younger customers," did attract the back-to-college crowd -- at the expense of alienating other traditional shoppers, who found the line "too minimalistic and contemporary."

In response, over the next few months Pier 1 will transform itself into a "holiday store" with an emphasis on gift-giving. Whereas many of its competitors will remain focused on furniture during this time, management believes it can increase customer traffic significantly by offering a bountiful assortment of moderately priced "colorful" merchandise. The aim here is to be much more "unpredictable," so that when customers walk in the door, they "don't see the same thing every time."

One analyst during the question-and-answer portion of the call noted the irony in Pier 1's apparent return to the middle, and asked whether yet another shift will end up confusing the customer. Girouard acknowledged that the company recently found itself "trying to chase furniture stores" like Crate and Barrel, at the expense of losing its "eclectic" edge. Now Pier 1 is hoping to reclaim its niche, somewhere between a Target and a Restoration Hardware. Girouard agreed that changing things does risk confusing customers, but added, "The bigger risk is if you don't do anything."

Getting the message out
Just to make sure we're all on the same page -- Pier 1 was being squeezed by low-end retailers on one end, and high-end retailers at the other, and to confront this problem, it opted to compete at the high end. It spent millions of dollars on market research, product design, inventory revamps, refreshed store layouts, and marketing, only to find out that the customer didn't like what Pier 1 had to sell. Now it wants to move back to the middle, offering an eclectic and unusual line of moderately priced merchandise.

OK, so that's the story so far. Now, to get shoppers to check out its revamped and moderately priced line in time for the holiday season, it is "aggressively marketing to customers with a strong promotional message." Over the next three months, Pier 1 will employ one fall catalog and three holiday catalogs. In addition to traditional mailings, it is also "planning a very proactive Internet advertising campaign." Television and a national magazine campaign will also be used. The expenditures for the entire marketing campaign are expected to be comparable with year-ago levels.

Rediscovering itself
Last quarter, in wrapping up an analysis of Pier 1's conference call, I concluded that "Pier 1 may have to go back to the drawing board sooner rather than later." That sooner is now, it seems, as Girouard and company scrap their high-end initiatives in favor of the company's old middle position. On this point, I agree with Pier 1's management: Trying to totally redesign the company to look like all the other high-end retailers, and then expecting your traditional clients to go along with the radical shift, seemed too farfetched.

In my opinion, Pier 1 may finally be rediscovering itself over the next three critical months. Shoppers should see just enough of the unusual to keep them wanting more.

The only question: Will all this shifting one way, then shifting back, confuse customers too much and risk losing them altogether? It's an important question, and we'll begin to find the answer over the next three months.

More Fool on Call analysis:

Wal-Mart is aMotley Fool Inside Valueselection. Best Buy and Bed Bath & Beyond are bothStock Advisor picks. Both newsletters are beating the market -- why notsign up for a free trialtoday to find out how they're doing it?

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Fool's disclosure policy would look great above the fireplace.

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