Pier 1's Turnaround Is Entering Phase 2

What others see as outdated and uncompetitive may be just what contrarian investors are looking for

Jacob Roche
Jacob Roche
Apr 21, 2014 at 10:12AM
Consumer Goods

It's been two years since I last wrote about my Pier 1 (NYSE:PIR) outperform CAPScall, and the company still seems to get no respect. That's not without good reason -- Pier 1's stock performed great in 2013, handily beating the market, and then proceeded to give all of its gains back. It's now essentially unchanged from where it was two years ago, while the S&P 500 has risen close to 30%.

Pier 1 still has an abysmal one-star rating on Motley Fool CAPS, and the Fool's Chris Hill and David Hanson recently panned it as outdated and uncompetitive. No one's arguing that Pier 1 is a hot growth stock, but I think investors are still overlooking the turnaround potential of this company.

Not a weakness, but an opportunity
To buy the turnaround thesis for Pier 1, you first have to look at the full story. Pier 1 has been in turnaround mode since 2007, which admittedly might make you skeptical of whether it's ever going to pan out. But the truth is, it already is panning out. At its nadir, Pier 1's stock traded down to a low of about $0.10. At the time, it had an operating margin of negative 9%, and revenues had been falling steadily since the company's 2004 IPO.

Pier 1 brought in a new CEO who steered it away from bankruptcy and then began taking steps to increase its operational performance. Revenues have increased 35%, while operating margin is now around 10%.

PIR Chart

PIR data by YCharts.

Those numbers are likely to improve going forward. Chris and David panned the company because it gets a strikingly low 4% of revenue from its website. The benefits of e-commerce are obvious: Sales can be higher because there's less friction; shoppers don't have to drive all the way to a store, sometimes through inclement weather, to browse a selection limited by the square footage available. On top of that, margins can be higher because it's cheaper to run a website and a warehouse than it is to rent and staff a few hundred stores.

It's true that Pier 1's low e-commerce rate is hurting the company. Revenue had been growing at around 10% every quarter for the past couple of years, until the most recent quarter, which was affected hard by heavy snowstorms in many key markets. That might have been less of a problem if customers had just stayed home and shopped on Pier1.com.

I look at Pier 1's 4% e-commerce rate as an opportunity rather than a weakness, though. The company's "1 Pier 1" strategy involves moving the company toward an omnichannel format, using the brick-and-mortar stores as "facilitators and ambassadors" for Pier1.com. This year, the company rolled out a new point-of-sale system and in-home delivery, both aimed at getting customers to use the online platform. As fellow Fool Michael Lewis points out, "Shoppers who use both the stores and the website spend, on average, four times as much as store-only customers."

Time to tie down?
The goal of 1 Pier 1 is to reach e-commerce sales representing 10% of total sales by 2016 and to see operating margins expand to 11.5%. But even in the upcoming fiscal year, management expects EBITDA growth in the range of 11% to 17%. At an already-low EV-to-EBITDA ratio of about 8, that kind of growth could be attractive for value investors.