There really is no handbook for corporate turnarounds or recoveries. With that in mind, there is also no hard-and-fast rule about when a company moves from "recovering" to "recovered". Nevertheless, when it comes to successfully annualizing difficult comps and regaining industry-normal valuations, it seems fair to say that Pier 1 Imports (NYSE:PIR) is no longer an intriguing retail recovery play - it's just a retailer with growing sales and profitability. (For background reading, see Analyzing Retail Stocks.)

IN PICTURES: 5 Lessons From The Recession

A Solid Third Quarter
Like many retailers, Pier 1 reports a little off-center from the regular calendar quarter - an industry convention that may have something to do with capturing post-Thanksgiving Day sales and Christmas sales in two separate quarters. In any event, PIR reported revenue growth of over 8% this period, topping the average estimate, but not quite reaching the high end of the range. Growth was fueled by comp-store growth of more than 10%, down from the year-ago level of 13.7% but an excellent result in what should be the most difficult comp quarter for the company.

While retailers can slash prices to fuel some top-line growth, that is not what Pier 1 is doing. Instead, the company is taking the shockingly novel approach of stocking what customers actually want to buy. As a result, profitability is improving significantly. Gross margin improved by more than four full points this quarter (to almost 41%), while operating margin increased by more than five points as operating income jumped considerably from last year's low level. At this point, then, Pier 1 is back in line with many of its peers from a gross margin perspective, although there is work yet to be done on the operating line. (For further reading, check out Retailers To Watch This Holiday Season.)

Can Pier 1 Sustain Its Momentum?
Although Pier 1 is classified as a home furnishings store, it is much more on par with Cost Plus (Nasdaq:CPWM) (owner of World Market), Restoration Hardware, IKEA, or Williams-Sonoma (NYSE:WSM) than Haverty (NYSE:HVT) or Ethan Allen (NYSE:ETH). Purchases at Pier 1 don't require credit checks or serious family budget discussions, which is arguably very much a point in the company's favor as the economy and consumer spending recover at a slow pace.

On the other hand, Pier 1 has an ever-present challenge to keep a fresh and attractive product assortment in the store. Pier 1 has never really targeted what may be called "traditional" or classic tastes, so there is always a risk that one season's quirky assortment will alienate customers. Given that this is at least part of what got the company into trouble all along, though, investors can probably assume that management has learned that particular lesson. As a result, Pier 1 arguably faces same challenges as every other competitor - branding, pricing, and getting customers through the door - but at least the company is on solid footing again.

The Bottom Line
Retailing has gone from something of a dog to a darling since the summer, but still stands more or less below where it started the year. That makes Pier 1 something of a standout. Looking a little deeper, the company has also more or less reclaimed what passes for industry-standard valuations. That does not make Pier 1 a bad stock from this point on, but it does mean that the low-hanging fruit has been picked, canned and shipped by investors who showed up earlier. As a result, investors looking for a likely success story should probably look elsewhere for easier pickings.

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Tickers in this Article: PIR, CPWM, WSM, HVT, ETH

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