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Research analyst, valuentum
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Home furnishing and decorating company Pier 1 Imports Inc. (NYSE:PIR) reported strong second quarter earnings Thursday morning. Revenue grew 8% year-over-year to $367.6 million, roughly in-line with consensus expectations. Earnings, on a non-GAAP basis, increased 36% year-over-year to $0.19, also in-line with consensus estimates. Looking ahead, the company raised its fiscal 2013 full-year earnings outlook to $1.10 to $1.16 per share, in-line with consensus expectations of $1.16, but an increase from its previous range of $1.08 to $1.14.

Nearly all of the major metrics we monitor for retailers were incredibly strong for Pier 1 during its second quarter. Same-store sales grew 6.7% during the quarter, on top of a 10.8% gain last year, due to increased traffic and higher ticket prices. Both have a strong read-thru, but we think increased traffic underscores the strength in housing (particularly household formation) that we've seen throughout 2012. Pier 1 carries both decorative items and essential furnishings that are generally higher priced than substitutes at Target (NYSE:TGT) or Wal-Mart (NYSE:WMT), so we think people are feeling better about investing in their homes.

Merchandise margins increased 50 basis points to 60.4%, while overall gross margins grew 160 basis points to 41.2%. The firm is doing an excellent job maintaining strong pricing and has managed to control occupancy costs. We think the increase in gross margins also reflects demand for higher-priced goods, which is certainly a positive for consumer confidence. SG&A, as a percentage of revenue, fell 60 basis points to 30.5% as the firm continues to leverage fixed costs as sales increase. These small changes led to operating margins of 8.8%, a 180 basis point improvement over the same period of last year.

We continue to like Pier 1 as it benefits from strong execution and a housing tailwind. However, the company has historically been prone to boom-and-bust cycles that don't necessarily coincide entirely with housing. We think management has done a great job of reinvigorating the brand and improving its competitive position, but execution remains crucial.

We continue to evaluate individual housing-related equities as ideas for the portfolio of our Best Ideas Newsletter. However, we're currently exposed to the housing recovery through diversified exposure to the banking sector via the SPDR S&P Bank ETF (NYSEARCA:KBE) and Financial Select Sector SPDR (NYSEARCA:XLF), which have advanced roughly 22% and 24% year-to-date (excluding dividends), respectively.

Source: Pier 1 Shines As Housing Continues To Recover

Additional disclosure: KBE and XLF are included in our Best Ideas portfolio.