Pier 1 No Longer A Recovery Story

There really is no handbook for corporate turnarounds or recoveries. With that in mind, there is also no hard-and-fast rule about when a company moves from "recovering" to "recovered". Nevertheless, when it comes to successfully annualizing difficult comps and regaining industry-normal valuations, it seems fair to say that Pier 1 Imports (NYSE:PIR) is no longer an intriguing retail recovery play - it's just a retailer with growing sales and profitability. (For background reading, see Analyzing Retail Stocks.) 



A Solid Third Quarter 
Like many retailers, Pier 1 reports a little off-center from the regular calendar quarter - an industry convention that may have something to do with capturing post-Thanksgiving Day sales and Christmas sales in two separate quarters. In any event, PIR reported revenue growth of over 8% this period, topping the average estimate, but not quite reaching the high end of the range. Growth was fueled by comp-store growth of more than 10%, down from the year-ago level of 13.7% but an excellent result in what should be the most difficult comp quarter for the company.

While retailers can slash prices to fuel some top-line growth, that is not what Pier 1 is doing. Instead, the company is taking the shockingly novel approach of stocking what customers actually want to buy. As a result, profitability is improving significantly. Gross margin improved by more than four full points this quarter (to almost 41%), while operating margin increased by more than five points as operating income jumped considerably from last year's low level. At this point, then, Pier 1 is back in line with many of its peers from a gross margin perspective, although there is work yet to be done on the operating line. (For further reading, check out Retailers To Watch This Holiday Season.)

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