3 Stocks That Missed the Mark

It happens to every company sooner or later: Wall Street sets a mark for quarterly earnings, and the company misses that goal. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. Today, we're reaching the end of the pier, before going on a military-style bargain hunt and checking up on our home theater options.

Repeat offender
Let's kick things off with a regular here at 3 Misses: floundering furniture retailer Pier 1 (NYSE: PIR  ) . This marks the third quarter in a row in which the company's report has made it into my humble column, and the bad news is getting a bit much. Wall Street wanted a $0.34 net loss per share but got $0.83 of red ink instead, thanks to slow sales, weak comps, and a large asset impairment charge on unsold merchandise. Ouch. The pro forma numbers analysts like to compare against, excluding costs like the asset impairments, clocked in at a $0.53 loss per share -- still not good enough.

So how is the company fighting the slow business environment it created for itself? Deep discounts, of course. Hence, gross margins are down almost 3% from last year's comparable period. Oh, and there's a boosted advertising budget, which cuts into what little cash is left after paying store leases and employees. Fellow Fool Matthew Crews noted that Pier 1's bottom line has been sliding south for three years, and that the stock price is back where it was 10 years ago. Double ouch.

Investors have been calling for serious changes for some time, and it looks like we're finally getting some. CEO Marvin Girouard is retiring this February, so the company can deal a new hand at that point. We'll have to see who the board taps as his replacement, but I'd imagine they'll have to find a proven turnaround specialist. The turning radius on this boat has proven cumbersome so far, and Pier 1 could prove to be a challenge even for a bootstrap wizard like Nissan's (Nasdaq: NSANY  ) Carlos Ghosn -- not that he'd want this job. I fear the Pier is going the way of MontgomeryWard: here today, gone tomorrow.

Atten-tion!
We're moving on to a slightly happier story featuring deep-discount retailer Dollar General (NYSE: DG  ) . The company pulled a $5.3 million loss, or $0.02 per share, while analysts expected a $0.15 profit per share. But this underperformance was the result of what I think is sound business strategy. A $7.8 million charge accounts for an acceleration in the recently announced store closing program, and gross profits were reduced by a further $63.5 million because of a change in inventory management.

The store closing program is meant to clear the way for new stores in better locations, akin to the Walgreen (NYSE: WAG  ) philosophy of gladly moving an existing store half a block if the new location is a corner lot. It's all about improving the customer experience, which should eventually give returns in the form of better margins and higher sales.

The elimination of "packaway" inventory is an even more fundamental change in direction than the real estate program. Unsold seasonal inventory used to go back into storage until next year, when that season came back around and gave the stores another chance to get rid of it all. Now, Dollar General stores mark down unsold seasonals to make sure inventory stays fresh at all times. It's costing the company some margin points, but it's another way to make stores more appealing to the customer, which can only be a good thing in the long run.

Will the customer-centric measures work out the way management has planned? Nobody knows, of course. But what the company is doing looks like a page taken right out of the playbook of some of the greatest performers in the retail business, like Walgreen and Wal-Mart (NYSE: WMT  ) . I think this plan stands a chance, given enough time.

Is the best good enough?
Our final stop on this tour is Best Buy (NYSE: BBY  ) . Despite a healthy 15.5% year-over-year jump in revenues and 4.8% comps growth, earnings per share came in $0.04 less than the average analyst forecast, at $0.31. So what happened? Margins took a hit from a price war on consumer electronics like flat-panel televisions, started by Wal-Mart back in September. Best Buy and Circuit City (NYSE: CC  ) were quick to match the Bentonville giant's rollbacks, and the result has been increased volume sales across the industry, but also lower profits.

Like Dollar General, Best Buy is focusing on driving customer traffic through its stores, even if it means sacrificing a few basis points in various margins. For many companies, a 0.9% drop in gross margins might not be a big deal, but with net margins below 2% to begin with, every point counts.

My esteemed colleague Rick Munarriz ranks Best Buy behind Wal-Mart and Circuit City as an investment in consumer electronics today, based on sales performance and valuation, respectively. I can't say I disagree on either point. Best Buy might still get its groove back, but the market conditions today aren't playing in its favor. Is this a buy-in opportunity, then? That has to be a judgment call, based on the likelihood of a return to fatter margins.

Sorry, store closed
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps, and which really are stuck in the mud. Come back next Monday, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.

Further Foolish reading:

Seeking great deals on unfairly punished stocks? Philip Durell and his merry band of Fools at theMotley Fool Inside Valuenewsletter service are standing by to help you find great stocks at ridiculously low markdowns. Trya30-day trial subscription to seewhether bargain-hunting is right for you. Wal-Mart is currently an Inside Value recommendation, and Best Buy is a Stock Advisor pick.

Fool contributorAnders Bylundis a Nissan shareholder, but holds no other position in the companies discussed this week. He wouldn't mind upgrading his home entertainment system. The Fool has adisclosurepolicy, and you cansee his current holdingsfor yourself.


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