Last quarter, Pier 1 Imports (PIRRQ) filled up its bag with discounts. They spilled out over the top, littering the reed-carpeted floor with the deepest of cuts and largest of coupons. Investors fled from the mess, leaving Pier 1 all alone with a towel, a mop, and a substantially reduced market cap. Shares fell 13% today on the bad news.
Pier 1 claimed that "the retail environment remains highly promotional and is pressuring gross profit in the near-term." That led the company to drop its full-year earnings forecast. Competitors have been able to stay out of the promotional fray, and companies like Williams-Sonoma (WSM -0.12%) and Restoration Hardware (RH -1.99%) seem to be leaving Pier 1 behind.
Discounting as a way of life
Pier 1's gross margin fell almost 2.5 percentage points this quarter, sinking to 40%. The company was unclear on whether the discounting was a short-term problem -- and it is a problem -- or whether it was indicative of a long-term shift. Regardless, management seemed upbeat about the future, emphasizing the work being done online to get Pier 1 ready for the future.
The company called out its online growth and increased its estimate for e-commerce sales in fiscal 2015. Pier 1 now believes that it will hit $200 million in online sales this year, accounting for around 10% of total sales by the end of next year.
The company is hoping to continue its online growth, with physical stores acting as "a gateway to [its] e-commerce site." That focus on e-commerce may have affected the business's ability to bring customers into physical stores, as Pier 1 seems to be suffering in a way that Restoration Hardware and William-Sonoma have not.
Losing the battle for American homes
In its press release, Pier 1 blamed some of its woes on a promotional retail environment. However, Williams-Sonoma has actually seen an increase in gross margin while Restoration Hardware has held steady. Both of those brands have been riding the resurgence in home sales to solid results, marketing themselves as go-to locations for high-end home decor.
Pier 1's problem isn't the promotional environment, it's the brand's own weakness compared to its competitors. Pier 1 has had an incredible turnaround over the last five years, when the company seemed to be on death's doorstep. That turnaround demonstrated that the market has a desire for Pier 1 products, but that demand is slowing. Pier 1 needs a new shot in the arm to keep its run alive, lest it fall too far behind once again.
