Shareholders in specialty retailer Pier 1 Imports (NYSE: PIR) are probably not too enamored with the company's stock price action over the past year, down more than 20%. The company's financial results took a hit in FY2014 from a sizable adjusted operating margin contraction that was part less favorable merchandise pricing and part higher overhead support costs, culminating in a roughly 280 basis point dip. On the upside, though, Pier 1 Import's total sales continued to beat a path higher during the period, aided by a solid performance for its online segment that has hit a run-rate of $200 million in annual sales, providing a modicum of hope that better profit growth is in the cards for the future. So, at its discounted price, is the company a good bet for investors?
What's the value?
Pier 1 Imports is a niche player in the specialty retailing space, operating a network of approximately 1,000 stores that sell an eclectic mix of imported products, including home décor, bed/bath accessories, and accent furniture. The company has anecdotally benefited from a loyal base of treasure hunt-loving, female shoppers that always seem to be on the lookout for something unique, a group that it has tried to mollify with a constantly changing inventory assortment. The net result for Pier 1 Imports has been higher sales and operating profit over the past five fiscal years, funding capital investments in the digital sphere that is furthering the company's multiple-channel selling strategy, coined 1 Pier 1.
In FY2014, it was a continuation of the growth story for Pier 1 Imports, highlighted by a 5.3% top-line gain that was a function of better per-store sales productivity, partially engineered through incorporating online capabilities into the in-store shopping experience. On the downside, though, having more sales from the online channel was a two-edged sword for the company, as that channel's sales skew toward lower average prices and hence lower selling margins, a trend that helped to produce a gross margin decline of 190 basis points. Not surprisingly, the lower gross margin pushed Pier 1 Imports' operating margin down during the period as well, culminating in an 18.2% decrease in adjusted operating income.
Looking into the crystal ball
The question for investors is whether Pier 1 Imports can find its way to profit growth in the foreseeable future, thereby providing a foundation for a higher market valuation. On that score, things don't appear too promising at the moment, judging by the company's 16.3% decline in adjusted operating income in its latest fiscal quarter. Despite continued positive sales traction, Pier 1 Imports was negatively impacted by an inability to secure incremental customer transactions without price discounts, which continued to apply downward pressure to its gross margin. More importantly, management doesn't seem too confident about an improvement in its business momentum over the near term, recently unveiling an earnings per share outlook for FY2015 that is in line with its results in FY2014.
A better way to go
Given the profit growth challenges at Pier 1 Imports, investors should probably stick with an industry player that has generated more consistent profit gains in the current operating environment, like Williams-Sonoma (NYSE: WSM). The company posted another solid financial performance in FY2014, highlighted by a 7.1% gain in total sales that was a byproduct of higher comparable stores sales across each of its major brands. While Williams-Sonoma couldn't completely avoid the promotional behavior in vogue at competitors, its gross margin was affected to a lesser extent than was Pier 1 Imports, likely due to its focus on shoppers that seem to value quality over price. Combined with an ability to leverage much of its greater sales tallies over its in-place support infrastructure, it added up to a slight operating margin expansion for the company during the period, resulting in an 8.8% rise in operating income that has support stock price appreciation over the past year.
The bottom line
Pier 1 Imports is certainly cheaper than it was a year ago, after a double-digit stock price decline over the ensuing time period. That being said, with a current P/E multiple of approximately 15, the company still doesn't seem to be a good bet, given its sharp drop in adjusted operating profit in FY2014 and little expectation for growth in the current fiscal year. As such, there seems to be a lack of momentum capable of driving upside to the current market valuation and investors should probably look for better opportunities elsewhere in the specialty retailing patch.
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