Home furnishings retailer Pier 1 Imports (NYSE:PIR) got a lot of its old customers - and probably some new ones - back during the company's fiscal second quarter. In the fiscal second quarter ended August 28, Pier 1 reported a profit of $14.4 million, or 12 cents a share, compared with a prior-year loss of $15.8 million, or 17 cents a share. This earnings record is even more impressive as shares outstanding increased 28% year over year.

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Improving Its Own House
During the quarter, Pier 1 was making fewer markdowns on its inventory, a great sign that the company is doing a better job managing its inventory with products that customers want. During the quarter the company experienced a 600 basis point increase in its merchandise margin to 58% from 52%, respectively. In addition, comparable store sales, or sales for stores open over a year, increased 11% versus a decline of 7.6% in the year ago quarter. Gross margins improved to 37% of sales versus 28.5% a year ago. For a retailer, these types of margins are hard to beat. If Pier 1 can keep benefiting from management's initiatives, then this quarter could be a sign of things to come.

Inventory is the Key
In retailing, inventory management is the holy grail - especially when you are dealing with fashion and furnishings. Today's hot item could be tomorrow's dud. If that item can't get sold, it can quickly eat away at margins. Pier 1 did a great job of handling its inventory in the quarter. Going forward, it will be more important than ever for the company to continue its successful execution of inventory management. As it now stands, the company's inventory is $350 million against equity of $330 million. An inventory write-off could really hurt the balance sheet.

Compare this with $1.8 billion in inventory at Bed Bath and Beyond (Nasdaq:BBBY) against over $3.6 billion in equity. Haverty's, a more traditional furniture retailer holds $89 million in inventory against $250 million in equity. Inventory management can have a profound effect on the overall success of a retailer especially when that inventory consists of the latest fashions which can be marked down significantly in a short amount of time. Stores like discount fashion retailer TJX (NYSE:TJX), which has $2.8 billion in inventory against $2.9 billion in assets, may be at a slight advantage since most of its inventory purchases are already done at discounted prices.

Sales Cure Ails
If Pier 1 can continue to increase the number of customers walking in the door, then the company will likely continue to deliver attractive results. (For related reading, take a look at Analyzing Retail Stocks.)

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