By any reasonable standard, Pier 1 Imports (NYSE:PIR) has delivered an exceptional turnaround. It wasn't really that long ago when people were writing this company off as hopeless and pointing to Warren Buffett's investment in the retailer as a sure sign (yet again) that he had lost his touch. Since then, the stock has delivered exceptional returns to those brave enough to buy during the dark times.

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Now Pier 1 has a new problem - that of Wall Street's bottomless appetite for growth. Good enough is no longer good enough, and investors may be in for a few more difficult quarters before the shareholder base has turned over to a more a conventional retail growth crowd.

First Quarter Results As Expected

Pier 1 has a habit of announcing its quarterly results ahead of the formal releases, and this quarter was no different. As it happens, the company's final results were pretty much spot on with the earlier release.

Revenue rose almost 8%, with better than 7% comp-store growth. Pier 1 continues to see positive developments in both store traffic and customer ticket. Margins, too, continue to improve. Gross margin rose more than a point and a half, with merchandise margin up about 40 basis points (bp). That fueled a nearly 38% improvement in reported operating profit.

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Waiting for the Next Act

The market clearly wasn't pleased with Pier 1's earlier release of its first quarter numbers, as the stock fell about 10% afterward. This really isn't about the company missing numbers (it didn't), but rather more about the fact that it looks like Pier 1's momentum is slowing and the company is settling down to a more sedate growth curve.

After all, comps were up "only" 7.2% this quarter (versus 10.2% last year) and merchandise margins improved "only" 40bp this quarter. So where Pier 1 was once valued on the premise that the company would continue to outperform Wall Street expectations, the fact that the company has caught up means a lower multiple on the stock. It doesn't necessarily make that much sense, but that's the way Wall Street works.

It's worth asking what Pier 1 can do to stimulate further growth. Furniture is a meaningful chunk of Pier 1's sales, and Williams Sonoma (NYSE:WSM) could be stealing some of Pier's thunder with its West Elm concept. Rival Cost Plus (Nasdaq:CPWM) has also been showing better results and its acquisition by Bed Bath & Beyond (Nasdaq:BBBY) is not going to hurt the company's purchasing, merchandising or promotional capabilities. Then there are companies like Target (NYSE:TGT) and TJX (NYSE:TJX) on the hunt for more housewares revenue and market share.

For now, Pier 1 seems to largely be sticking to its knitting by working on driving store traffic and improving its e-commerce and multi-channel performance. That's good "blocking and tackling"-type work, but not what really gets sell-side analysts excited and pushing a stock.

SEE: Analyzing Retail Stocks

The Bottom Line

Pier 1's stock got overheated and was due for a pullback. That said, with high single-digit comp growth, improving margins and a more reasonable valuation, the downside should be pretty limited at this point. Although Pier 1 is not cheap enough to be exciting today, investors should probably check up on this name from time to time; if Wall Street's expectations stay unreasonably high, a bargain could emerge before the end of the summer.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: PIR, CPWM, WSM, BBBY, TGT, TJX

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