Pier 1 Imports has had a dramatic turnaround since 2008 and should continue to outperform other retailers. It has found an answer to online competition like Amazon (NASDAQ: AMZN) and is utilizing a strategy that takes advantage of its core competency, offing consumers unique merchandise not available elsewhere. In addition, Pier 1 and company’s like Restoration Hardware (NYSE: RH) and Williams-Sonoma (NYSE: WSM) should also benefit from steady improvements in the housing market.
About Pier 1 Imports
Pier 1 Imports (NYSE:PIR) is a specialty retailer and importer of home furnishings and gifts. It has both brick and mortar and online stores. The company sells furniture for any room in the house and for outdoor use on patios and in sunrooms. It sells decorative accessories, lamps, vases, dried and artificial flowers, baskets, ceramics, dinnerware, bath and fragrance products candles and season items. It was founded in 1970 and it operates 1,065 stores in the US and Canada.
3Q Sales Strong, Margins Compress on Promos
Pier 1 reported 3Q14 on December 19, 2013 that same store sales increased by 6.9% and total sales were up 9.6%. Three-year cumulative same store sales increased by 21.8%. EPS for the quarter was $0.26, below the $0.28 consensus, but up $0.01 from the same period a year ago based on continuing EPS. Gross margins declined in the quarter by 50 bps to 43.4% but SG&A improved by 70 bps due to better leveraging of store salaries and marketing expense. Bring those together and the operating margin improved by 20 bps to 9.3% or $43.1 million (up 11% y/y) and EBITDA was up 13.3% to $53.4 million.
Management stated that more aggressive promotional activity drove the increase in traffic. The online business now represents 4% of total sales and its growth is outperforming management’s expectations. The same store sales numbers beat analyst expectations of 4.9% and were driven by the greater promotional activity. This in turn hurt gross margins in the quarter.
The Board also approved a $200 million share repurchases program and increased the quarterly cash dividend to $0.06 per share. The company completed its prior $100 million share repurchase authorization during the quarter and purchased 650,000 shares under the new program for $14 million and another $6.9 million since quarter end. This and the dividend increase represents ongoing confidence in the company’s future earnings and the operating environment.
Guidance was in line with consensus forecasts with the strongest Thanksgiving weekend in the company’s history offset by poor winter weather in the first part of December. This problem could compound given the weather over the two weeks since Pier 1 reported earnings. Management issued 4Q14 EPS guidance of $0.60-$0.66, prior and current consensus is $0.63.
Pier 1’s Strategy to Beat Online Retailers
It’s no secret consumers have adopted browsing brick-and-mortar showrooms and then going online to find the best prices. Products at online stores will have a lower price because the online retailers lack the overhead of a retail network. In order to drive volumes, many brick-and-mortar stores have had to sacrifice margins to compete with online stores.
Pier 1 found a strategy to beat the online retailers like Amazon (NASDAQ: AMZN), it has over 6,000 unique items not available elsewhere. Management knew online could always beat Pier 1 on price but looked at what was its founding core competency, offering unique merchandise not available elsewhere. The company adopted this strategy in 2007 had a close run in with bankruptcy in 2008 due to the financial crisis and the stock has responded and increased in value by over 6,000% since.
Positioned for Strong Top-line Growth in 2014
For the coming year, the company’s merchandising should continue to differentiate it from its peers. Shoppers at Pier 1 will continue to find unique and merchandise not available elsewhere. The company’s three year sales target is $225/sq ft. This compates to a prior peak of $235, trough of $145 and the current evel of $205. The goal is achievable and its merchandising can help drive its efforts. The Long-term goal management has set is for $250/sq. ft. Improved promotional and marketing efforts, its e-commerce site, recently introduced rewards card and the addition of impulse items call will contribute to hitting its targets.
The e-commerce site represents a new opportunity and can drive outperformance for Pier 1. This is a new arena for the company and not offers a new sales channel. Pier 1 is offering online shopping and in store pick up. This allows consumers to shop either online or in store based on preference but allows the online shoppers to receive the product quicker and cut out the shipping costs, which for furniture is high.
In addition to internal top-line growth drivers, an ongoing rebound in the US housing market in 2014 should also contribute to higher sales. Consumers tend to spend more on home furnishings when they buy new houses so activity should increase for Pier 1 and other home good retailers like Restoration Hardware (NYSE: RH)
Pier 1 is positioned to benefit from internal initiatives and macro trends to outperform in 2014. The company’s ability to continue to drive higher sales per square foot through its unique merchandising, new promotions like the rewards card, and the introduction of impulse items combined with an improving housing market should drive outperformance versus other retailers.
What are your thoughts on Pier 1 Imports?
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.