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Margaret Moran
Margaret Moran
Articles (236) 

Don’t Make Me Carry Furniture: Pier 1 Imports on the Way to Bankruptcy After 3rd-Quarter Loss

Another sharp loss sends the discount retailer plummeting towards Chapter 11

January 07, 2020 | About:

After market close on Jan. 6, Pier 1 Imports Inc. (PIR) reported the earnings results for its third quarter of fiscal 2020, which ended on Nov. 30, 2019.

The quarter saw net sales decrease by 13.3% to 358.4 million compared to the prior-year quarter. The net loss came in at $59 million, or $14.15 per share, which was an improvement over the net loss of $100.55 million ($24.29 per share) from the previous quarter. Cash and cash equivalents stood at $11.1 million for a cash-debt ratio of 0.01 and an Altman Z-score of 0.84.

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After-market trading on Monday brought the company’s shares down 17%. As of Jan. 7, Pier 1 shares were trading at an average price of $4.95 for a market cap of $20.92 million. The quarter saw a continued decline in sales and margins, which faced added pressure from the retailer’s efforts to clear out old inventory. Clearance sales brought accumulated inventory down 15.3% year over year to an estimated value of $328.9 million.

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All about accessibility

In response to both the seventh consecutive quarterly net loss and an overall loss of market space to an increasing number of online-only retailers and other competitors, Pier 1 announced that it will be closing 450 of its 942 stores, effectively cutting its store footprint in half.

“Looking ahead, we believe that we will deliver improved financial results over time as we realize the benefits of our business transformation and cost-reduction initiatives," Pier 1’s CEO and Chief Financial Officer Robert Riesbec said. "To further advance our progress, we are announcing additional actions today that will enable us to move forward with an appropriately sized store footprint and operating structure as an omni-channel retailer, and better position Pier 1 to meet our customers where they shop.” 

Though the retailer faced similar net loss and sales declines before and during the 2008 financial crisis, plunging share prices to less than $2.50 per share, the shape of the sector in which Pier 1 operates has changed. Increased competition from online retailers such as Wayfair (NYSE:W) and Amazon.com (NASDAQ:AMZN) has eaten a huge chunk of the market pie for “fashionable discount furniture.”

Overall, data from ShopperTrek indicates that there was a decline of a mere 1% in retail shopping center visits during Black Friday year over year, suggesting that brick-and-mortar stores may not be in as much peril as some investors fear. Google surveys indicate that 61% of consumers prefer shopping at a physical location over shopping online. If a buyer wants to obtain an item immediately, or if they want to see something before having it arrive at their home, visiting a physical store is a must.

However, some types of retailers have been more affected by e-commerce than others. Bookstores such as Borders, Hastings and Books-a-Million saw declines in physical store sales thanks to the ability of consumers to obtain e-books in a matter of seconds, while Blockbuster, Toys "R" Us and Sports Authority faced similar situations as increasing numbers of customers shifted their purchases online in search of cheaper prices and greater variety.

Some types of retailers have been better shielded from e-commerce than others. For example, clothing stores are somewhat insulated because many customers still prefer to try on clothes before they buy them, while most grocery stores have the important economic moat of being closer to their customers’ homes than the nearest Amazon Fresh delivery center.

Furniture retailers in particular have a large weight dragging them down as online retailers expand their ability to deliver items to their door more quickly and easily. Things like couches, tables and recliners are heavy, and the home delivery and assembly services of brick-and-mortar retailers are often lacking compared to their online-only counterparts. Pier 1’s in-home delivery service delivers and assembles your entire order (except large packages) for $169 within approximately 14 days, while some competitors provide low-cost or free shipping through Amazon. Wayfair’s shipping can take days or up to three weeks, depending on package size.

Of course, customers at brick-and-mortar shops have the option of transporting furniture themselves for free, especially if they have a large enough truck or SUV. However, an increasing number of customers are choosing the delivery option as the improving logistics of large-scale delivery companies makes this option more accessible.

Headed towards bankruptcy

Bankruptcy fears abound with this massive bow-out from the brick-and-mortar market, and investors are expecting to hear news of a Chapter 11 filing any day now. Last month, Pier 1 presented a bankruptcy plan to its creditors and received permission to close half of its stores, meaning that the holders of the company’s debt agree that its previous scale was far too bulky given the amount of income the brand is still able to generate. The plan includes the closure of 450 stores and several distribution centers, as well as a 40% reduction in headquarters staff.

Though Pier 1 remained optimistic about its ability to turn around the profitability of its remaining stores in its third-quarter earnings report, the company acknowledged in its 10-Q regulatory filing that it expects to have difficulty remaining solvent. Filing for Chapter 11 would allow it to continue operating while figuring out how to re-establish itself in the market and pay back the massive amount of money it owes to its creditors. While court protection would be a blow to the company’s creditors, it would be best to have it happen sooner rather than later if Pier 1’s losses are only going to increase in the future.

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When Pier 1 rocketed to popularity in the '80s and ‘90s, and again after the 2008 financial crisis, its competitive advantage was that it provided a combination of fashionable but affordable furniture and unique and charming home décor items that were difficult to find elsewhere. Pier 1 goods were higher quality than lower-priced competitors, but more affordable than designer brands. That moat has disappeared over the past decade as the market noted the popularity of such items and began mass-producing them for far cheaper. Long story short, Pier 1’s economic moat has disappeared, and its profitability has gone along with it.

Disclosure: Author owns no shares in any of the stocks mentioned.

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