Pier 1: Back to the Future
Pier 1 has returned to the merchandising of accent pieces and away from higher-priced products.
By David Gill
Retailing is fun again for Pier 1 Imports.
For its most recent fiscal year, which ended on Feb. 26, the home-furnishings specialist posted some very enjoyable numbers. It reported an operating profit for the first time in six years, which brought the bottom line to a 15 percent jump over the last fiscal year. Net sales, on both a total and same-store basis, rose impressively as well--8.2 percent and 8.9 percent, respectively.
Speaking to financial analysts in a conference call after the company released its fourth-quarter results (available on a Seeking Alpha transcript), Alex Smith, president and CEO, said Pier 1 will invest $200 million into increasing sales to $200 per retail square foot, and into transforming the company from a pure brick-and-mortar retailer to a multichannel seller of home products.
This is highly optimistic from a retailer that, four years ago, appeared to have completely lost its way. From 2006 through 2009, Pier 1 registered net losses each year, including $227.6 million in 2007. Annual net sales from 2006 through 2010 fell from $1.8 billion to $1.3 billion.
Pier 1's numbers plummeted largely because it had abandoned the strategy that had made it successful early in the last decade.
"They had a nice little niche in home furnishings, doing a good job of providing accent pieces," Brad Thomas, financial analyst with KeyBanc Capital Markets, told HFN. "Beginning in 2002 and 2003, they began to offer items such as furniture that were priced too high. And at that point, Walmart and Target set their sights on home furnishings and picked up pretty significant share, so Pier 1 then began relying too much on promotions. You'd see 30, 40, 50 percent off plastered on their windows. They had lost their discipline."
The arrival of Smith, the former group president of TJX Cos. who succeeded Marvin Girouard as CEO in 2007, began the turnaround, according to company watchers.
"Smith saw this as an opportunity to bring back the old Pier 1," Joan Storms, financial analyst with Wedbush, told HFN. "Pier 1 had gotten away from all the seasonal products they had done, so they brought in more holiday and outdoor stuff for all season. He also restructured the merchandising department and brought in a whole new philosophy. They expanded from 12 to 24 buyers, changed it to buyers for individual categories and had the buyers work more closely with the planning and allocation departments."
Smith also began cutting the deadwood out of the company's operations. He closed underperforming stores, bringing the store count down from about 1,200 when he took over to about 1,000 today. Over the first three years of his tenure, Smith cut (by Storms' estimate) $150 million out of selling, general and administrative expenses, which included headquarters staff and its catalog business, which were "major drags on profits," she said.
In the conference call to the analysts, Smith said Pier 1's "four-year journey to profitability" began with right-sizing the business, and proceeded to doing the work to make sure the company emerged from the recession in a stronger position than when it entered the downturn. The fiscal year that has just ended "was the year we changed from playing defense to playing offense," he said.
With that journey over, Pier 1 is now ready to begin scoring even more points with consumers, Smith said. The three-year growth plan will transform Pier 1 "from a single-brand, bricks-and mortar retailer into a multichannel retailer with assortments and brand reach significantly enhanced from where we are today," he said.
Two key online initiatives, Pier 1.2Go and Pier 1.2You, will play key roles in this evolution. Pier 1.2Go will allow shoppers to order and reserve merchandise online and pick it up and pay for it in the store, and is slated for launch later this spring. Pier 1.2You, which will enable consumers to purchase merchandise online with multiple delivery options, will debut in early summer 2012.
The analysts are cautiously bullish on Pier 1's future. "Over the next two to three years, we see Pier 1 continuing to improve its market share," Thomas said, "not only through online, but I think it could have 5 to 10 percent more stores total, opening in markets where it would make sense."
Storms said, "The company is feeling better and better about this tempo of business. Despite the economy, their work has resonated with their customers. There is a more consistent traffic flow and a sustained flow of business."