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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: The 4 R's Of Investing In Retail

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.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center