Be Careful Trying To Time A Bottom At Pier 1 Imports

| About: Pier 1 (PIR)
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Housewares-oriented retailer Pier 1 Imports has struggled to find profit growth in the current fiscal year, hurt by relatively heavy promotions and the rising costs of supporting its sales growth.

The company's relatively weak financial performance has led to a sell off for its stock price in 2014.

With management forecasting continued margin weakness going forward, there seems to be little hope for profit growth in the near term and investors should probably avoid the story.

Shareholders in housewares retailer Pier 1 Imports (NYSE: PIR) have likely not been too happy with the company's stock price trajectory in 2014, off more than 30%. Pier 1 Imports has been hurt by a sharp drop in its adjusted operating profitability in the current fiscal year, down roughly 260 basis points, a performance that management blamed on a highly promotional selling environment, as well as a shift toward lower-margin online sales. On the upside, though, the company continues to generate higher customer traffic volumes and overall sales, providing hope for better profit growth in the future. So, at its discounted price, is Pier 1 Imports a good bet for investors?

What's the value?

Pier 1 Imports is a niche player in the retail sales of housewares, selling an assortment of products that includes home décor accessories, bedding, and furniture. The company has anecdotally taken advantage of its brand name position as one of the first retailers to focus almost exclusively on imported products, a selling proposition that has allowed it to attract a loyal base of customers, mostly women. The net result for Pier 1 Imports has been a generally consistent history of operating profitability, funding an expansion of its store network that has led to rising overall sales tallies.

In its latest fiscal year, it was a continuation of the growth story for Pier 1 Imports, highlighted by a 3.9% top-line gain that was a function of a modestly larger store base and higher comparable store sales, up 2.4%. On the downside, though, the company's gross margin was negatively impacted by management's strategy of using greater promotions to move merchandise, culminating in a 150 basis point decline. Not surprisingly, Pier 1 Import's adjusted operating margin also dipped by a similar amount, producing an unfavorable 7.2% decline in operating income.

Looking into the crystal ball

The question for investors is whether Pier 1 Imports can find its way back to profit growth in the future, thereby providing a foundation for a higher market valuation. Unfortunately, things aren't looking so good on that score, judging by the company's 20.5% decrease in adjusted operating income in the current fiscal year. As previously mentioned, Pier 1 Imports has been hurt by greater promotional activity, as well as its focus on growing sales through its online channel, a lower-margin area that currently accounts for approximately 10% of sales versus less than 5% in the prior-year period. More worrisome, management is forecasting the operating margin pressure to continue going forward, a negative trend that makes profit growth a hard goal to achieve in the near term.

A better way to go

Given the profit growth challenges at Pier 1 Imports, investors should probably stick with an industry player that continues to generate solid profit growth in the current selling environment, like Williams-Sonoma (NYSE: WSM). The operator of housewares-oriented stores, primarily under its Williams-Sonoma and Pottery Barn brands, has continued to deliver a strong financial performance in FY2014, evidenced by a 12.8% increase in its operating income. While Williams-Sonoma's gross margin was also negatively impacted by greater promotional activity, it took advantage of an ability to drive overall sales growth without adding materially to its overhead cost structure, which allowed it to report a slight increase in its operating margin, up roughly 40 basis points. The net result for the company was a continuation of solid operating cash flow, helping to fund its investments in new product development and a selective expansion of its footprint in untapped markets.

The bottom line

Pier 1 Imports is certainly cheaper than it was at the start of the year, after a double-digit decline to-date in 2014. That being said, there is a reasonable basis for that price action, given the company's drop in operating profit in FY2014. More importantly, with profit growth a seemingly low probability event for Pier 1 Imports in the near term, there appears to be little momentum to drive a higher market valuation at Pier 1 Imports and investors should probably avoid the story.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.