Occasionally, it can be worthwhile to scan the list of stocks trading on the dreaded 52-week low list. I wouldn't recommend using it exclusively, as the overwhelming majority of companies found there have hit rock bottom for concrete reasons. However, it can sometimes be a reliable way of spotting beaten-up stocks that are ripe for a rebound. At the bottom of today's trash can, nestled underneath a discarded closed-end municipal bond fund, is specialty retailer Pier 1 Imports
The nation's largest specialty retailer of imported items offers shoppers at its 1,100 stores a wide assortment of baskets, candles, furniture, and other home interior furnishings imported from more than 40 countries. Consumers' appetite for the exotic has waned lately, sending shares of Pier 1 sliding steadily south since March.
The beginning of the downfall roughly coincides with the release of fourth-quarter and fiscal 2004 year-end results that were troubling on a number of fronts. Top-line revenues for the year grew 6.7% to a record $1.87 billion; however, much of the gain was fueled by expansion. During the year, 120 new stores were opened, but comps fell by 2.2%, breaking a string of 11 years of same-store sales increases. Furthermore, the uptick in sales was partially offset by a 52-basis-points rise in selling, general, and administrative expenses, which trimmed operating income by 9% and scaled back earnings from $1.36 the prior year to $1.31.
Unfortunately, year-end weakness spilled over into the first quarter. Estimates for an April same-store sales increase of 3% to 5% proved to be overly optimistic, as reduced traffic late in the month actually led to a decline of 1.7%. After Pier 1 posted disappointing April results, first-quarter guidance was slashed by one-third to $0.14 to $0.21.
Declines in traffic, conversion rate, and average ticket all spelled an acceleration in the sales falloff during the month of May. With a drop in same-store sales of 7.6%, Pier 1 trailed only a handful of companies -- such as the Bombay Company
By all accounts, this first quarter has been disastrous for Pier 1. Promotional events around Mother's Day and Memorial Day were disappointing, margins suffered as a result of inventory markdowns (the bane of the retail world), and earnings (announced before the market opens tomorrow) will likely fall far short of last year's $0.21.
However, those who believe that Pier One's first quarter was nothing more than a temporary stumble may find the current valuation to their liking. Much of the bad news is discounted in the price, which at $17.30 is 25% below where the stock was trading back in April. With nearly everyone expecting dismal first-quarter numbers to be released tomorrow, missing by a penny or two should elicit little response. A surprise to the upside, on the other hand, might just be interesting.
Fool contributor Nathan Slaughter owns none of the companies mentioned.