Pier 1 Imports Swallows Poison Pill

Board adopts measure after activist investment firm takes large position

Author's Avatar
Sep 29, 2016
Article's Main Image

The board of Pier 1 Imports Inc. (PIR, Financial) announced it had adopted a shareholders’ rights agreement on Tuesday.

The agreement, sometimes called a poison pill, is designed to keep away unwanted takeovers. However, in this case, the agreement simply does not allow any person or group to acquire ownership of 10% or more of the company’s outstanding common stock.

“The board feels it is important to ensure that all shareholders have the opportunity to realize the long-term value of the iconic Pier 1 imports brand,” Terry London, the chairman of Pier 1, said, “and to guard against coercive or unfair tactics to gain control of the company without paying all shareholders an appropriate premium.”

Pier 1 clarified the agreement does not prevent a takeover of the company. The plan will simply make it more difficult for any mergers, tender offers or other business combinations to occur without the support of the board.

Last week, Alden Global Capital Ltd. announced that it had purchased 9.5% of the company’s shares. The firm disclosed its plans to discuss the selection of the company’s new CEO as well as its ownership structure with the board.

Alex Smith, CEO of the Fort Worth-based retailer, announced earlier this month that he will be stepping down at the end of the year. He has served as CEO since 2007.

Pier 1 is a specialty retailer of imported decorative home furnishings and gifts in North America. The company was founded in 1962 in California. It has a market cap of $355.7 million with an enterprise value of $429.6 million. It has a price-earnings (P/E) ratio of 13.4 with a forward P/E of 14.4. It has a price-book (P/B) ratio of 1.4 and a price-sales (P/S) ratio of 0.2. Pier 1 has a price-free cash flow (PFCF) ratio of 3.02 and a price-operating cash flow (POCF) ratio of 2.14.

02May2017152248.png

GuruFocus ranked the company’s financial strength 6 of 10. Its Piotroski F-Score of 5 indicates the company is in stable financial condition. Similarly, the Altman Z-Score of 4.5 places the company in the safe zone, meaning the company is not in danger of bankruptcy in the near future. Pier 1’s Beneish M-Score indicates the company does not manipulate its earnings. Its cash-debt ratio of 0.6 is below the industry median of 0.9.

GuruFocus ranked the company’s profitability and growth 6 of 10. It has an operating margin of 2.8% and a net margin of 1.4%. Pier 1 has a return on equity (ROE) of 9.3% that ranks above 62% of other companies in the global specialty retail industry. Its return on assets (ROA) of 3.1% ranks above 54% of its competitors.

Jim Simons (Trades, Portfolio) is the company’s largest shareholder among the gurus. He holds 2.9% of outstanding shares, which is 0.02% of his total assets managed. Other gurus invested in the company are Mario Gabelli (Trades, Portfolio), John Rogers (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

Although Alden Global just acquired a 9.5% stake, T. Rowe Price Associates Inc. is the largest shareholder among institutional investors with 11.6%.

Pier 1 said the new agreement attaches to every share of common stock the right to buy a fraction of junior preferred stock. The preferred shares would bear similar voting terms to common stock, thereby watering down the influence of shareholders with larger stakes.

The agreement is applicable to shareholders of record as of Oct. 7 and expires after the company’s 2017 annual shareholder meeting.

The DCF Calculator gives the stock a fair value of $3.42; it was trading at $4.67 on Thursday.

Disclosure: I do not own stock in any companies mentioned in the article.

Start a free 7-day trial of Premium Membership to GuruFocus.