Pier 1 Cleans House

Specialty retailer Pier 1 Imports (NYSE: PIR  ) just reported another difficult quarter of falling sales and negative earnings. But it's got a game plan to swim against the tide, rather than be swept away by its current challenges.

First-quarter results weren't pretty. Total sales fell 5.2%, and same-store sales dropped 5.4%. Merchandise margins plummeted as Pier 1 marked down certain inventory lines to clear the way for more appealing furniture and related home-furnishing items. CEO Alex Smith mentioned that he and his management team are "very busy cleaning house" to improve the merchandise mix and focus on the core business -- Pier 1 stores.

As a result, during the earnings conference call, Smith detailed that all of Pier 1's clearance and kids' stores will be closed by Oct. 31. The catalog business and e-commerce operations will also shut down. Overall, Pier 1 will close about 100 stores this year, exceeding the 60 it previously targeted.

Pier 1 aims to break even this year on a cash flow basis; if it's going to succeed, it had better get busy. The company burned through nearly $16 million in operating cash flow for the first quarter. Capital expenditures actually brought in cash as the company disposed of certain properties, but plenty of charges await as Pier 1 closes stores and continues to eliminate employees.

Pier 1 could still sink into oblivion. Management mentioned its need to increase the company's borrowing flexibility, should moves to return to profitability fall flat. But overall, management appears to be getting a handle on minimizing costs. Now it just needs to turn around the core store base.

Until sales start to move in a positive direction, Fools may be best off placing Pier 1 on the retailing trash heap, along with Sharper Image (Nasdaq: SHRP  ) , Circuit City (NYSE: CC  ) , and Bakers Footwear (Nasdaq: BKRS  ) . It appears that the little guys find it increasingly hard to compete with the likes of Best Buy (NYSE: BBY  ) , Wal-Mart (NYSE: WMT  ) , and Target (NYSE: TGT  ) . The retailing giants can more easily align their merchandise mix with what consumers want, and they've got the clout to offer those goods at lower prices.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.