Retailer Pier 1 (NYSE:PIR) kind of took the fun out of Thursday's earnings release when it pre-announced its results earlier this month. Investors today no longer have much hope of seeing good numbers tomorrow.

As fellow Fool W.D. Crotty observed then, the preannouncement caused Pier 1's stock to fall 7.7% -- and the stock hasn't stopped falling since. Pier 1 has shed 13% of its market cap since the end of November. The reason: Although the company reported its first positive comparable-sales results (for November) in months, the previous several months of negative comps combined to yield a comparable-sales decline of 6.5% for the third quarter as a whole. This undermined the company's chances of meeting analyst forecasts of $0.05 per share in quarterly profits. Both the company and the analysts now believe that Pier 1 will post about $0.09 in losses instead.

"But what about the dividend?" you ask. With the company paying its owners a market-thumping 3.5% dividend; with its balance sheet in fine shape, supported by more cash than debt on the books; and with analysts forecasting 14% earnings growth over the next five years (on par with the rest of the retail industry), surely it's worth waiting for a recovery here, so long as the company stays solvent.

The problem, though, is that solvency isn't necessarily assured. So far this year, Pier 1 has spent $140 million worth of free cash to build up inventories that the company apparently can't sell. Granted, the store usually does bulk up its inventories in anticipation of the Christmas selling season, but this year has seen inventories reach new heights of excess.

Consider: Inventories today stand 18% higher than they did one year ago, despite a 3% sales decline during that period. It's the same story we saw last year, where Q3 2004 inventories stood 12% higher than the year previous, despite sales falling 6%. At this rate of cash burn, it's entirely possible that we could soon see Pier 1's debt surpass its cash; it's even possible that the company will be forced to curtail or eliminate its dividend in an effort to conserve that cash.

And that leads us to what Fools need to look for in tomorrow's news. We already know that the quarter's earnings will disappoint. Instead, we need to focus on the future -- specifically, does the company have one? How much cash remains in its coffers? What is its debt? And did November's comparable-store sales gains, combined with the surprise preannouncement of a quarterly loss, mean that Pier 1 discounted its prices enough to begin chipping away at its mountain of inventories?

Peer into this company's problematic past:

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Fool contributor Rich Smith has no position, long or short, in Pier 1.