Pier 1 Blues (News) August 5, 1999

Pier 1 Blues

By Dave Marino-Nachison (TMF Braden)
August 5, 1999

Despite the approval of the unflappably cool Elwood Blues, it hasn't all been dancing in the streets for home furnishings retailer Pier 1 Imports Inc. (NYSE: PIR) of late. The shares, following this morning's move, have lost about half of their value this year as the company couldn't maintain the momentum that powered it -- and several of its peers -- skyward in a year-long runup that ended last summer.

Bargain time? Could be, as the company's shares are currently trading at less than 10 times projected full-year fiscal 2000 EPS, a significant discount to the shares of companies like Williams-Sonoma (NYSE: WSM), Linens 'n Things (NYSE: LIN) and Bed, Bath & Beyond (Nasdaq: BBBY).

But that didn't impress one potential (unnamed) buyer, discussions with which have apparently ended.

So Pier 1 must now turn back to generating returns for its shareholders internally, something that's proven difficult in recent periods. Lower-than-anticipated July sales -- revenues for the four weeks ended July 31 were $87.9 million, down 5.5% from last year, with comparable-store sales off 9.9% -- are expected to pull Q2 EPS to between $0.12 and $0.14, missing First Call's $0.18 consensus estimate. Pier 1 hadn't missed Street earnings projections since Q1 of last year, but it hasn't consistently beaten them either.

Year-to-date revenues are up less than 3%, with same-store sales falling nearly 2% so far.

Among the company's options may be the development of a new retail concept or an acquisition in the home fashion/decorative accessory sector. It's an interesting idea, particularly if Pier 1 attempts, as examined in an April Foolish Trouble, to capitalize on the market segmentation that proved so successful for Gap Inc. (NYSE: GPS).

But value-priced home-furnishings is hardly a new market, as shoppers of Dayton Hudson's (NYSE: DH) Target and Wal-Mart (NYSE: WMT) will attest. It's competition with these companies, and not just the traditional housewares names mentioned above, that slowed full-year fiscal 1999 sales growth to 6%, well off the 14% growth figure of the previous year. Same-store sales growth, while positive at 6%, was less than half the percentage improvement of the preceding two years.

And establishing a new chain at an even lower price point, while potentially reinvigorating sales, may not have the same affect on profitability. Margins already came under increased pressure in Q1 because of a new value-pricing strategy that reduced prices on certain items. Profits were slightly higher in fiscal 1999 in part because of markups.

Besides, there's still the matter of the company's more than 750 stores already up and running under its original concept. Pier 1 planned to open 60 more in fiscal 2000, closing about 25. If Pier 1 is going to turn things around in the foreseeable future, it's going to have to get the bulk of its fleet shipshape before christening too many other new boats.

Apparently pessimistic was CFO Stephen Mangum, for seven years a company man, who went looking for a new port o' call.

Related Links:
Daily Trouble, 4/6/1999
Pier 1 website
Pier 1 message board

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