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Pier 1 Imports An Eclectic First Quarter

Posted: Jun 23, 2008 09:37 AM by Glenn Curtis

Tickers in this Article: BBBY, PIR

Stiff competition and a plethora of red ink have kept a lid on retailer Pier 1 Imports' (NYSE:PIR) stock price over the last couple of years, and the resurrection of the stock is still in doubt. Investors are looking for answers from the underachieving home furnishings retailer, but unfortunately the latest quarter just presented them with more questions.

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Expense Control Improving
A quick gander at the income statement from the first quarter ended May 31 reveals that Pier 1's gross margin increased from about 24.5% in the comparable period last year to right around 28.3% in the most recent quarter. In addition, thanks to management's efforts to rein in costs, its SG&A line in the quarter totaled about $109.4 million. That's a decline of $22.7 million from the same period last year, and as a percentage of sales, SG&A declined to 35.3% from 37.1% in Q1 last year.

This is good news. It demonstrates that management is being proactive in getting costs under control. The investment community generally likes to see that. The margin growth also helps pick up some of the slack being caused by its sluggish sales (more on that in a moment).

Going forward, I think management will continue to keep a tight rein on costs, which should allow it to survive the spending slowdown. (To learn more, read Understanding The Income Statement.)

Sluggish Comps
Same store sales (comps) were down 5.4% in the quarter, which is bad news for two reasons. First, it was going up against a pretty easy comparison, as in last year's first quarter it reported a 5.4% comp store decline as well.

Next let's look at how rival Bed Bath & Beyond (Nasdaq:BBBY) is faring. We are still awaiting that company's Q1 results; however, in its fourth quarter Bed Bath & Beyond posted a 0.4% comps decline. That's nothing stellar, but I think the performance was pretty solid given current operating conditions and the fact that in the comparable period the year before it posted a comp increase of 5.2%. (Find out how to pick up your next investment at the next trip to the mall, in Analyzing Retail Stocks.)

Can Pier 1 Make It As A Show Me Stock?
Investor confidence is also an issue. The "highlights" from Pier 1's Q4 press release say it all:

• "Fourth quarter EPS $0.16 per share - first positive earnings in 12 quarters."
• "Fourth quarter comp store sales gain of 2.5% - first gain in 17 quarters."

I should point out that the company lost $32.8 million or 37 cents a share in Q1. It also reported, as mentioned above, a Q1 comp store decline. For what it's worth, the company said that it "anticipates flat or slightly positive comparable store sales with merchandise margins of at least 53%". It also expects to report a modest net income before special charges for the full year.

That sounds good, but I think that this is now a "show me" stock. In other words, I doubt retail and institutional investors are going to be jumping on the bandwagon until Pier 1 literally shows them the money. The second problem with this comment is that it implies investors will have to wait until next year if they want to see the company make some real money. Impatient investors may jettison the stock.

Bottom Line
Pier 1's first quarter results were a bit of a mixed bag. It was nice to see management get some control over SG&A costs, but its same store sales were lousy. The shares are probably a decent risk here, but patient investors will likely find a better entry point down the road.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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