You can tell a company isn't doing so well when the headline on the press release makes no mention of records or gains of any kind, and the first paragraph in the release dives directly to the loss reported on the bottom line. Give Cost Plus (NASDAQ:CPWM) some credit for that straightforward approach, folks. The company could have led with its 6.5% increase in sales!
All kidding aside, this is a company that is not doing well. The Fool by Numbers highlights the struggles with margins, earnings, and its balance sheet. What makes Cost Plus interesting is that it's fairly cheap and in the midst of trying to reposition its business.
Listening to the company's conference call, it's clear that working down the inventory and repositioning the stores are the two focus areas. If you've ever been to a World Market store and seen the inventory that is stacked to the ceiling, these make sense.
The other thing that comes across in the conference call is that Cost Plus needs to reduce its price points as it reduces inventory. The company's analysis shows that customers aren't purchasing the home furnishings largely because the price isn't competitive. To remain competitive with Bed Bath & Beyond (NASDAQ:BBBY), Pier 1 Imports (NYSE:PIR), and others that are often located in the same shopping centers, or close by, the company plans to change the mix in its stores while trying to wring efficiencies out of its purchasing power and its suppliers. To an investor, the benefits of being competitive on price are appealing in the short term, but in the long term, I don't see a winning model unless the entire company is overhauled to become the low-cost provider of home furnishings.
An additional piece of good news is that Cost Plus is concentrating on its problems and putting other activities to the side. Expansion plans into the Northeast, including a New York City flagship store, have been shelved. Given the state of the current stores and the competition the company is facing, I think this is a very smart decision. Working the kinks out of the current model is absolutely necessary before expanding into new markets.
With a $0.22 loss per share in the first quarter and a forecasted loss of $0.30 to $0.40 per share in the second quarter, Cost Plus is still expecting to make it up in the second half and post a profit of $0.70 per diluted share for the year. That's not impossible because this company and others like it, such as Pier 1 Imports, earn the bulk of their profitability in the fourth quarter. That said, every portion of Cost Plus' business is open to fairly substantial competition, and the company's balance sheet does give cause for concern. If you're looking for a value among beaten-up retailers, I'd focus on those that have strong balance sheets that allow them to weather all of the inevitable ups and downs and then move to those with weaker balance sheets and more competitive markets.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
