A sales slowdown that began a few years ago left Pier 1 Imports (PIRRQ) with little room for error by the beginning of last year. Unfortunately, the home furnishings chain experienced yet another setback in fiscal 2019 (the period that ended in early March). Comp sales plunged 11% and the company posted a net loss of nearly $200 million, after posting a slight profit in fiscal 2018. Pier 1 also burned about $135 million of cash last year, putting stress on its balance sheet.
Pressure from nimbler rivals like TJX Companies' (TJX 1.20%) HomeGoods chain has likely been a major factor in Pier 1 Imports' downward spiral. But while HomeGoods has stumbled a bit this year, Pier 1 has been unable to take advantage. Indeed, its recent earnings report shows that Pier 1 Imports may be beyond saving.
Another dreadful quarter
In the first quarter of fiscal 2020, Pier 1 posted another dreadful revenue performance, with net sales down 15.5% to $314.3 million on a 13.5% comp sales decline. Additionally, the company's efforts to clear out unwanted inventory caused gross margin to plummet to 25.1% from 32.3% a year earlier. As a result, Pier 1's net loss widened to $81.7 million (including $19 million of "transformation" costs) from $28.5 million in the prior-year period.
In the second quarter, Pier 1 Imports' sales trend improved marginally. Comp sales plunged 12.6%, while net sales dropped 14.3% to $304.6 million. However, the headwinds from liquidating old inventory increased. Gross margin fell to just 16.7% -- down nearly 10 percentage points year over year -- and Pier 1's net loss roughly doubled to $100.6 million.
Pier 1's profitability has plummeted in the first half of fiscal 2020. Image source: Pier 1 Imports.
The sad thing is that this deterioration in performance has occurred despite a rare stumble by HomeGoods. TJX executives revealed last month that merchandise planning mistakes had undermined sales and profitability at HomeGoods last quarter. (The chain posted flat comp sales, compared to 4% full-year gains in each of the prior two fiscal years.)
Despite this misstep, TJX's HomeGoods segment posted a solid segment margin of 9% and grew its revenue more than 7% year over year last quarter. Meanwhile, not only did Pier 1 fail to capitalize on this opportunity, but its margin erosion actually accelerated during the period.
The balance sheet is a mess
As recently as fiscal 2018 -- the period ending on March 3 of that year -- Pier 1 Imports produced slightly positive free cash flow. It ended that year with $135 million of cash and $200 million of debt. By contrast, after burning $135 million of cash last year, Pier 1 has already burned over $115 million in the first half of fiscal 2020. That's up from cash burn of just $21 million in the first half of last year.
This has turned Pier 1's balance sheet into a flaming wreck. At the end of last quarter, the company was down to just $10 million of cash, while its debt had ballooned to $316 million, including $55 million of borrowings on its credit line. Book value has fallen well into negative territory.
Net debt of $306 million wouldn't always be a problem for a company that produced over $1.5 billion of revenue last year. However, in combination with Pier 1 Imports' deep losses and negative cash flow, it could prove fatal.
This iconic brand is on life support
Pier 1 Imports' turnaround plan consists of cost cuts, the closure of underperforming stores, and -- most importantly -- an upgraded merchandise assortment that will hopefully be more attractive to customers. Management expects to see year-over-year improvement in the company's financial results by Q4, if not this quarter.
That said, it would take a lot of improvement for Pier 1 to start producing positive free cash flow again. Furthermore, a better merchandise mix may not be enough to stem the brand's ongoing market share losses to HomeGoods, discounters, and online retailers.
Realistically, Pier 1 Imports will need concessions from its lenders to stay in business. However, the company's negative earnings before interest, taxes, depreciation, and amortization (EBITDA) will probably make lenders reluctant to play ball. Investors have to hope for a substantial improvement in business trends before Pier 1 runs out of money -- and even that may not salvage any value for shareholders.
