A Glimmer of Good News for Pier 1

A Goldman Sachs analyst upgrade of the stockbased on new management and a turnaround plansent shares sharply higher on June 12

Is it time for Pier 1 Imports (PIR) shareholders to break out the candy-colored champagne glasses? Investors starved for any piece of good news on the unprofitable home-furnishings retailer—which has been beset by steady declines in same-store sales and shrinking margins—seized on an upgrade of the stock by Goldman Sachs Group (GS) to bid the shares higher on June 12.

Goldman analyst Adrianne Shapira and her team upgraded Pier 1 to buy from neutral and added the stock to the firm's Americas Conviction List. Goldman raised its price target on the stock by $3, to $10.50.

Optimistic Forecast

Any glimmers of hope are welcome at Fort Worth (Texas)-based Pier 1. Recent results have been discouraging. The company posted a loss of 14 cents per share in its February quarter, vs. a loss of 4 cents one year earlier, on an 11% drop in same-store sales amid a difficult environment for home-furnishings merchants. Pier 1 is changing its merchandise mix to lure shoppers back into its stores, but will also be closing some stores and cutting staff.

Shapira took an upbeat tone in a June 12 Goldman research note: "After years of expensive [market] share losses dragging down EBITDA [earnings before interest, taxes, depreciation, and amortization], we believe a critical inflection point is being ushered in by (1) a new management team armed with a turnaround plan and (2) increased shareholder vocalism."

Investors reacted positively to the Goldman note, and the stock moved up by 8.8% on June 13, to $8.50—near its highest level in the past year.

Goldman is more optimistic than the rest of the Street that Pier 1 can improve its results. The firm's forecast for fiscal 2007 EBITDA of a $50 million loss and a loss per share of 68 cents is better than the Street consensus forecast of losses of $81 million and $1 per share, respectively. "We believe incremental cost savings across PIR's labor and supply chain exist," Shapira writes in the research note.

Goldman notes that first-quarter results are scheduled to be released on June 21, ahead of the company's shareholder meeting on June 28, and it expects the stock to react positively as the company clears excess inventory and perhaps makes further cost-cutting announcements in the first quarter. Goldman also thinks the company may ease up on marketing spending and could sell its headquarters in the second half of the fiscal year. In fiscal 2008, the firm thinks same-store sales could stabilize and merchandise margins begin to improve.

S&P Expects Volatility

Standard & Poor's Equity Research takes a dimmer view of the shares. In an April research report, S&P said that despite Pier 1's "slightly encouraging" February quarter results, "we believe the company's turnaround will be lengthy and will include several hiccoughs along the way." S&P thinks Pier 1 is having problems driving traffic due to difficult macroeconomic conditions and an increasingly competitive retail environment.

Despite the negatives, S&P believes that Pier 1 could be acquired, and it expects the shares to be volatile over the near term. S&P has a hold rating and an $8 price target on the shares. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies. (MHP)).

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