Not many retailers flirt with utter ruin and make it back again, but Pier 1 (NYSE:PIR) continues to offer a lesson in the merits of a good turnaround story. Instead of going the way of other failed retailers like Linens N Things or Circuit City, Pier 1 returned to its roots, listened to its customers and made changes that went beyond simply cutting prices or offering exceptional sales promotions. While the going will get tougher for this eclectic housewares retailer, investors need not be in a hurry to abandon ship.
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A Very Encouraging Fiscal First Quarter
Pier 1 simply delivered the goods this quarter. Revenue rose over 9% and the company delivered comp-store growth of over 10%. Not only does that make it three of the last four quarters where Pier 1 has produced a double-digit comp, but that is also on top of a better-than 14% comp number last year. Granted, Pier 1 did go ever so far down the rabbit hole during its declining years, but these kinds of strong-on-strong quarters amidst a so-so retail environment are encouraging all the same.
The company also continues to deliver solid operating leverage. Gross margin rose nearly three full points, with core merchandise margins up more than one point. Operating expenses were also kept in check, and the company delivered 140% higher operating income as a result and operating margin more than doubled. Better still, it would look as though the company could have still more juice in its margins - Williams-Sonoma (NYSE:WSM) and Bed, Bath and Beyond (Nasdaq:BBBY) certainly are not perfect comps to Pier 1, but both would suggest that Pier 1 has not maxed out its margin improvement possibilities.
A Comfortable Port During a Storm
Pier 1 operates in an odd little niche of the retailing world. Though the company sells some furniture, it really is nothing like Haverty (NYSE:HVT), Ethan Allen (NYSE:ETH) or La-Z-Boy (NYSE:LZB). Given the dire housing market and the inability of most consumers to spend on large ticket non-necessities, that's a good thing for Pier 1 (though Ethan Allen's results have been improving of late).
On the other end of the spectrum, the company is more than just a Yankee Candle-style retailer of specialty knickknacks. Really, Cost Plus (Nasdaq:CPWM), operator of World Market, may be the only true publicly-traded comparable, and Pier 1 is doing quite a bit better than them right now.
Whatever the competitive dynamic, Pier 1 has once again carved out a worthwhile niche in the home retailing space. Pier 1 does not sell a lot of big-ticket items, and this allows the company to tap into a market of people looking to make some changes to the look of their interiors on a modest budget. Additionally, Pier 1 seems to be getting back to a more traditional "love it or leave it" type of merchandising sensibility - a lot of the company's offerings are quirky, but that's what the traditional customer base wanted and Pier 1 didn't do so well when it tried to adopt more mass-market tastes.
The Bottom Line
With solid rebounds in comp-store sales and sales per square foot, Pier 1 is arguably not really a turnaround story any more. The company is back in good health and accumulating cash. Though not the cheapest name in retailing, Pier 1 may be the cheapest with double-digit comp growth. Even mid-single digit sales growth and slight margin improvements suggest a stock undervalued by nearly 20% and a couple extra points of sales growth or margin leverage would make it an intriguingly cheap stock. Though there is no particular shortage of downtrodden and beaten up retailers, Pier 1 is still worth a look from investors. (For related reading, also check out Bed Bath And Beyond Riding The Recovery Wave.)
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