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WIKI ANALYSIS
Pier 1 Imports (NYSE: PIR) sells moderately priced, imported home furniture which it sells through its chain of retail stores. 63% of its 2007 revenue came from selling decorative home items, including floor lamps, vases, candles, gifts, and other decorations. Furniture contributes the remaining 37%.[1]
PIR has reported a net loss from 2005-2007. The company's same store sales began to fall in 2005 when its traditional wicker and rattan items began to lose their customer appeal. At the same time, the company faced increasing competition from mass retailers. Companies like Wal-Mart and Target were able to lure away some PIR's more price sensitive customers by offering lower prices.[2][3] Unable to effectively compete with the mass discounters, Pier 1 attempted to reposition itself as a vendor of more modern merchandise by substituting leather and metal furniture for its more traditional items. The goal of this strategy was to introduce more appealing merchandise while appealing to a higher income demographic. Despite these efforts, sales continued to decline and by December of 2006, the company's stock had lost 50% of its value. Standard and Poors removed it from the S&P 500 in 2007.[4]
The 2007-2008 U.S. housing market slump caused by the sub-prime lending crisis has also exacerbated the company's situation. Fewer housing starts translates into less demand for home furnishings retailers. Moreover, for importers like PIR, the declining value of the dollar has made purchasing goods abroad more expensive.
Business Overview and Financials
Net sales in 2008 were $1.51 billion (down from 2007's revenue of $1.62 billion), and high operating costs and other expenses led to a net loss of $97.6 million for the year.[5] From 2005-2007, PIR had to rely on heavy discounting in order to sell its merchandise in the face of rising competitive pressure.
As of June 2008, some of the same problems exist. About half of PIR's total assets of $411.7 million is represented by inventories, but PIR management has noted that this is due to a change in strategy. [6][7] Inventories were valued at $48 per square foot of retail space at the end of Q3 2008, but in Q4 2008 dropped to $46 per square foot.[8]
Overall, 63% of sales in 2008 are attributable to decorative items, with furniture accounting for the other 37%.[12]
After unsuccessful forays into competition with high-end home furnishing companies like Williams-Sonoma and Crate&Barrel, PIR has attempted to readjust its product line to better match customer demand. The result of these new strategies has been positive this year, but not substantial enough to entirely escape a net loss like 2006 and 2007. Operating revenues have been negative in the last three years, with an operating loss of $226.2 million and $88.1 million in 2007 and 2008 respectively.[15] In 2007 PIR reported a net loss of $227.6 million, and this year Pier 1 did better with a loss of $96 million.[16] This increase in earnings comes alongside a decrease in net sales by 7.8%, explained by the closure of some of Pier 1's more costly stores.[17]
PIR's suppliers are based worldwide (including China, Italy, Brazil, Indonesia, and Malaysia), but their customer base is heavily dependent on the American market. Store closures in the 2008 fiscal year left the southern region of the U.S. containing the greatest proportional amount of store locations.
Key Trends and Forces
U.S. housing market slump taking a toll on PIR
Pier 1 was already struggling with to boost sales and profitability before the housing slump began. With fewer new homes being built, demand for decorative products and furniture has also been on the decline. Despite the sub-prime mortgage crisis pushing home prices down, the housing market is short of buyers. The National Association of Home Builders forecasts an additional 30% drop in housing starts in 2008.[20]
A declining dollar makes imports more expensive
PIR imports its furniture and decorative items in large quantities from Europe, Asia, Brazil, Mexico, and other emerging markets. This leaves the company vulnerable to variations in the value of the dollar, even if the company pursues hedging strategies. When the dollar's value declines and foreign currency becomes more expensive, PIR has to pay more for their inventory. Since December 2005, the dollar has been losing value relative to other currencies (though the dollar has gained modest value in short bursts over this period). Over the last year, the price of a dollar in euros has dropped by 12.9% and the price of a dollar in Chinese yuan has dropped by 9.8%.[22] Pier 1's management is aware of this risk and the company tries to make inventory purchases in dollars.
PIR is in midst of turnaround
PIR hired a new CEO on February 19, 2007, but despite new leadership the firm continues to struggle to overcome high operating costs and failed product lines. Losses from closed stores totaled nearly $100M in the last year. In 2008, Pier 1 ran 1,034 stores in the United States and 83 stores in Canada.[23] Yet for the past two years, PIR has been cutting costs and trying to hone its focus as a retailer. On March 20, 2006 Pier 1 sold off its UK subsidiary "The Pier" and since then PIR has closely followed a domestic downsizing schedule. All 36 remaining Pier 1 Kids stores and an additional 22 clearance outlets have also been closed.[24] The company plans to close an additional 100 stores in 2008.
Stale brand and increasing competitive pressure leave Pier 1 without a niche
As early as 2005, Pier 1's weakening brand was failing to attract customers to buy its wicker and rattan furniture. Larger, low-cost stores like Wal-Mart had expanded into the furniture market. Competitive pricing pressure combined with a weakening brand eroded the company's operating margins. PIR's new strategy was to replace 70% of its merchandise with new items (which in the past were only about 40% of shelf space).[27] In the third quarter of 2005, PIR announced that it would abandon wicker and rattan products to pursue a more "modern" look, featuring furniture with more leather and metal components.[28] By June 2007, Pier 1 was slashing prices to clear stale inventory, cutting margins down by nearly 7%[29]
Competition
As a specialty retailer, Pier 1 Imports competes with a wide variety of other firms, many of which participate in other retail markets. The company competes with many large, low cost retailers like Wal-Mart, Target, and Bed Bath & Beyond. In the high cost and high quality home furnishings market, established firms like Williams-Sonoma make it difficult to compete as well, albeit with less relative influence than a company like Wal-Mart might in the low cost sector. Other competitors include Restoration Hardware, Cost Plus World Market, and K-Mart. Attempting to further expand its market share within the niche it occupies, PIR's bid of $4/share (for a total of $88M) for Cost Plus on June 9, 2008 was met with mixed reception; the stock price dropped nearly $2 on announcement. PIR management was convinced that the acquisition of Cost Plus can help bring Pier 1's income back into the positive range, but Cost Plus turned down the offer on June 17.
| Company | Store Changes | ' | Sales Per Square Foot | Inventory | Net Income |
| Store Openings | Store Closings | ||||
| Pier 1 Imports[30] | 4 | 82 | $164 | $412M | ($96M) - Loss |
| Wal-Mart[31] | 109 | 2 | $423 | $35.2B | $17.5B |
| Target[32] | 118 | 15 | $296 | $6.8B | $2.85B |
| Bed Bath and Beyond[33] | 83 (net) | - | $234 | $1.6B | $563M |
| Williams-Sonoma[34] | 49 | 37 | $638 | $694M | $196M |
| Cost Plus World Market[35] | 15 | 4 | $223 | $273M | ($46M) - Loss |
| Restoration Hardware[36] | - | 1 | $547 | $200M | ($52M) - Loss |
PIR lags behind its competitors in sales per square foot, a common metric used to compare retail stores. While Williams-Sonoma and Restoration Hardware have the highest ratios, their products tend to be more expensive than stores like Pier 1 or Wal-Mart. Even so, PIR and Cost Plus struggle relative to larger competitors where alternative products mitigate the risk of austere consumer budgets.
References
- ↑ PIR FY2008 10-K, Item 1 p.4
- ↑ CEO's Plans Lift Pier 1, February 12, 2007, Forbes.com
- ↑ Pier 1 Under Water, June 21, 2007, Forbes.com
- ↑ CEO's Plans Lift Pier 1, February 12, 2007, Forbes.com
- ↑ PIR FY2008 10-K, Item 8 p.33
- ↑ PIR FY2008 10-K, Item 8 p.34
- ↑ SeekingAlpha.com PIR Earnings Transcript Q3 2008 - 12/01/07
- ↑ SeekingAlpha.com PIR Earnings Transcript Q4 2008 - 03/01/08
- ↑ PIR FY2008 10-K, Item 8 p.33
- ↑ PIR FY2005 10-K
- ↑ PIR FY2008 10-K
- ↑ PIR FY2008 10-K, Item 1 p.4
- ↑ PIR FY2005 10-K
- ↑ PIR FY2008 10-K
- ↑ PIR FY2008 10-K, Item 8 p.33
- ↑ PIR FY2008 10-K, Item 8 p.33
- ↑ SeekingAlpha.com PIR Earnings Transcript Q4 2008 - 03/01/08
- ↑ PIR FY2008 10-K, Item 8 p.37
- ↑ PIR FY2008 10-K, Item 4 p.12-13
- ↑ Bloomberg.com - "U.S. Housing Starts Slide to Lowest Level in 17 Years" - 04/16/08
- ↑ U.S. Census Bureau - New Housing Units Started - 06/17/08
- ↑ www.Oanda.com Historical Currency Exchange Rates - 06/15/08
- ↑ PIR FY2008 10-K, Item 1 p.4
- ↑ PIR FY2008 10-K, Item 1 p.3
- ↑ www.Oanda.com Historical Currency Exchange Rates - 06/15/08
- ↑ www.Oanda.com Historical Currency Exchange Rates - 06/15/08
- ↑ The Motley Fool - "Lower Comps Plague Pier 1 Imports" - 12/30/2004
- ↑ The New York Times - "The Markets: An Odd 'Witching' Day Closes out a Mixed Week" - 12/17/05
- ↑ Forbes.com - "Pier 1 Under Water" - 06/17/07
- ↑ PIR FY2008 10-K
- ↑ Wal-Mart FY2007 10-K
- ↑ Target FY2007 10-K
- ↑ Bed Bath and Beyond FY2007 10-K
- ↑ Williams-Sonoma FY2007 10-K
- ↑ Cost Plus FY2008 10-K
- ↑ Restoration Hardware FY2007 10-K
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