It was a case of one down, one up last week at troubled home decor retailer Pier 1 Imports (NYSE:PIR).
On the downside, same-store sales declined 13.2% in January and overall sales fell 13.7% to $110.7 million. However, shareholders got some relief as the company hired a new CEO, Alex W. Smith, a veteran retail executive. While the stock price surged 8%, the company still has enormous challenges.
For the past couple of years, Pier 1 has been a money loser and its brand name seems to be eroding. Companies such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) have moved on its turf using "cheap chic" and aggressive pricing, respectively, to get their piece of the home decor pie. Unfortunately, it looks as though the pressure will continue.
Like any good executive, Smith thinks he can improve things. At age 54, he is young and comes to the company with a strong resume. His background includes stints with high-end retailers such as Harvey Nichols, and his most recent position was as a senior executive at TJX (NYSE:TJX), home of Marshalls and TJ Maxx.
Smith brings lots of know-how to the table, but his experience in merchandising is what Pier 1 needs to utilize the most. The company has been having trouble finding the right mix of products that customers get excited enough to pay full prices.
What's more, Smith's compensation package offers him a nice set of incentives to get the job done. His base salary comes to $1 million, with a bonus that ranges from $500,000 to $750,000 (for the next year). He also has been granted an option to purchase 3 million Pier 1 shares. The option grant is composed of two tranches: one for 1 million shares, which will vest in one year; the second based on the performance of Pier 1's earnings before taxes, interest, depreciation, and amortization (1 million shares vest in 2009 and the other vests a year later). So if Smith can turn things around, he stands to be rewarded for his leadership.
I have to wonder whether Smith may be on the hook to try to sell Pier 1. After all, in May, the company retained JPMorgan Chase (NYSE:JPM) to explore "strategic alternatives," which is often a prelude to a sale. And since Danish retail baron Jakup a Dul Jacobsen owns about 10% of Pier 1, one could wonder whether Jacobsen's looking to own the whole thing one day.
And let's not forget that there are lots of private-equity firms flush with capital and hungry to do deals. Hey, even the troubled Eddie Bauer Holdings (NASDAQ:EBHI) found some buyers.
But, in light of Pier 1's troubles, a premium is likely to be muted. Keep in mind that for the first nine months of 2006, the company had negative cash flows from operations of $84 million and there is only $172 million left in the bank.
Besides, while Smith has a strong background, he has not led a turnaround of a distressed, publicly traded retailer. For investors, there is still considerable risk at Pier 1, and staying on the sidelines looks like the best option.
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Fool contributor Tom Taulli does not own shares of any company mentioned in this article.
