business

Have Investors Missed the Boat on Pier 1?

The retailer of affordable home furnishings is flying high, but at least one analyst would prefer to see the stock drop a tad

By Eric Wahlgren

When it came time for Cresta Freeberg, 29, to squeeze in some holiday shopping amid the demands of an acting and music career, the New York City resident ducked into Pier 1 Imports' store near New York's Greenwich Village. A few minutes later, she emerged with a bag full of candles and other small gifts that didn't load up her credit-card bill. "I had some specific things in mind," says Freeburg. "They have cool stuff, and it's not very generic."

That describes the formula the Fort Worth (Tex.) chain is using to log an estimated $1.5 billion in sales for fiscal 2002, which ends in March, 2002 -- and to buck the retail downturn. The strategy is to sell unique (more or less) merchandise at everyday prices. The company, which specializes in furniture, housewares, and home decorations is also benefiting big-time from the nationwide nesting fad that took hold after the September 11 terrorist attacks. Another part of Pier 1's success, analysts add, is that it has concentrated this year on giving customers more value.

On Dec. 18, Pier 1 (PIR ) posted a profit increase of 6% for its third quarter, which ended Dec. 1, on a 12.8% jump in sales, to $387.4 million. The gain included a 5.1% increase in sales from stores open at least one year, a key measure of growth in the retail industry.

HIPPIE ROOTS.

  Those results hit the high end of analysts' already heightened expectations -- and provided a pleasing contrast with U.S. retail sales in November, which fell 3.7%, the biggest one-month drop in nine years, according to the Commerce Dept. "Pier 1 has been very good about bringing in merchandise that has appeal from a color-and-design standpoint, but that is priced to give customers the perception that they're getting a good value," says Bill Baldwin, a principal at Baldwin Anthony Securities in Dallas.

Wall Street has noted the recent performance of Pier 1, which got its start in California in the '60s selling incense and other knick-knacks to hippies and the funky set. The stock has been on a tear, more than doubling, to $17.75, since a calendar-year low of $8.13 on Sept. 21.

The question for investors is, of course, have they missed the boat on Pier 1? Analysts are split on the answer. Lynn Detrick at Sanders Morris Harris in Houston rates the stock a buy and sees it climbing to $20 in the next 12 months. Says Detrick: "I think it represents growth at a reasonable price."

HOLD RATING.

  Pier 1 currently is trading at 19.1 times estimated 2002 earnings, vs. forward price-earnings ratios of 27.6 and 45.2 for competitors Cost Plus (CPWM ) and Bed Bath & Beyond (BBBY ), respectively, according to earnings-tracking service First Call/Thomson Financial. (The fiscal years for all three companies vary by only a month or so.) Still, Brian Postol, an analyst at A.G. Edwards in St. Louis, has a hold rating on the stock at its current price. He advises waiting to buy until the price comes down a little. "If you get a pullback of 10% from these values," he says, "it's worth it."

Detrick's enthusiasm is based in part on the chain's expansion plans. It anticipates adding 85 stores in the U.S. next year, on top of its existing 902 outlets. Analysts say the plan demonstrates management's confidence in Pier 1's ability to prosper in a tough economy. Over the past four years, the company has typically expanded by some 60 stores annually, according to Marvin Girouard, Pier 1's chairman and CEO. "They have [also] done an impressive job of managing inventory," Detrick adds. "Their growth plan is stepped up from the past, but it's still a manageable."

Over the next decade, the chain could expand by nearly 66%, to a total of 1,500 stores, Girouard says. "This is cranking it up," he concedes, but "the opportunity is there." Included in the buildup would be as many as a dozen children's furniture stores, which would operate under the Cargo name. Corporate profits, Girouard says, could grow by 15% in fiscal 2003, which pretty much matches the growth expected from much larger companies in the Standard & Poor's 500-stock index. "I think that's a good growth story in this environment," Girouard says.

LOW-MARGIN PROMOS.

  Pier 1, which had boosted its third-quarter profit projection three times before reporting in December, is forecasting profits of $0.40 to $0.42 a share for the fourth quarter, which would again surpass the expectations of analysts, who are looking for $0.38 a share, according to First Call/Thomson Financial.

The company's financial picture hasn't always been this cheery. Flash back to the fiscal first quarter, when profits plunged 27% because of Pier 1's dependence on lower-margin promotional items. Chief Financial Officer Cary Turner says during part of that quarter, about 40% of sales were from such come-ons, which usually represent just one-third of sales.

What's more, the company had launched a new television ad campaign with Kirstie Alley of Cheers fame, pushing marketing costs as a percentage of sales higher than Pier 1's usual 4.5%. A.G. Edwards' Postol says the company, which each year replaces about 65% of its lineup with new merchandise, has put much more attractive products in its stores this year while holding the line on price.

FORGIVEN.

  Turner explains that because of the strong U.S. dollar and weak global economy, Pier 1 has been able to obtain goods from overseas -- about 80% of Pier 1's merchandise is imported -- at lower cost. The company also has managed to trim spending on getting those goods into its stores, including shipping and warehousing, Turner says. Girouard confirms that the chain's prices have come down by about 10% to 12% over the past two years. "We had gotten a little pricey," he concedes. But once that ended, "the customers came back and gave us a chance."

One reason for that, notes analyst Baldwin, is "they have positioned themselves in a segment of the market that isn't loaded with players." Cost Plus, in Oakland, Calif., which just posted a third-quarter loss, is a bit down-market from Pier 1 and also has a greater emphasis on food. Meanwhile, Bed Bath & Beyond, another publicly traded rival, which just posted higher third-quarter profits, offers more appliances and less furniture.

Unlike many companies, Pier 1 even approached the Internet wisely. Its site, launched last June with a $1.5 million investment, is already poised to break even, Girouard says. "We think it's an important part of our marketing effort," he adds. In a further effort to boost Pier 1's visibility, the company decided on those TV commercials featuring Alley.

FICKLE SECTOR.

  Despite Pier 1's higher profile, Wall Street decided to wait and see how the revamped pricing-and-merchandise mix played out. "We've often said that Main Street has always known about Pier 1, but Wall Street was slow to come around," says Girouard. And that, of course, may have stemmed from habitual suspicion about the notoriously fickle retail sector. Where will Pier 1 be, for instance, if consumers' nesting urge abates and they turn instead to clothing and luxury goods?

Baldwin, for one, believes that with a CEO like Girouard, who has 27 years at the company, much of it in merchandising, Pier 1 will remain a pretty good bet for investors. "I don't think anything is going to get in the way of their [expansion], he says. He agrees that the company's shares were more attractive when they were half their current price. He adds, however, that "there are some decent total returns to be had in Pier 1 over the years."

At a time when the future looks murky for many stocks, especially retailers, is it any wonder that many investors believe the potential for solid returns makes Pier 1 a nice stocking-stuffer?

Wahlgren is a staff reporter for BusinessWeek Online in New York

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