Investopedia: Pier 1 Continues To Regain Its Mojo

Not many retailers flirt with utter ruin and make it back again, but Pier 1 (NYSE:PIR) continues to offer a lesson in the merits of a good turnaround story. Instead of going the way of other failed retailers like Linens N Things or Circuit City, Pier 1 returned to its roots, listened to its customers and made changes that went beyond simply cutting prices or offering exceptional sales promotions. While the going will get tougher for this eclectic housewares retailer, investors need not be in a hurry to abandon ship. 


A Very Encouraging Fiscal First Quarter
Pier 1 simply delivered the goods this quarter. Revenue rose over 9% and the company delivered comp-store growth of over 10%. Not only does that make it three of the last four quarters where Pier 1 has produced a double-digit comp, but that is also on top of a better-than 14% comp number last year. Granted, Pier 1 did go ever so far down the rabbit hole during its declining years, but these kinds of strong-on-strong quarters amidst a so-so retail environment are encouraging all the same.

The company also continues to deliver solid operating leverage. Gross margin rose nearly three full points, with core merchandise margins up more than one point. Operating expenses were also kept in check, and the company delivered 140% higher operating income as a result and operating margin more than doubled. Better still, it would look as though the company could have still more juice in its margins - Williams-Sonoma (NYSE:WSM) and Bed, Bath and Beyond (Nasdaq:BBBY) certainly are not perfect comps to Pier 1, but both would suggest that Pier 1 has not maxed out its margin improvement possibilities. 




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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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