Pier 1 Imports (PIR) reported lower-than-expected second-quarter earnings last Thursday, and the market made PIR stock pay for the miss and for lowering its guidance for the coming quarter and full year.
On Friday, PIR stock was down as much as 21%, though it closed the session only down 12%. At one point Monday, it was down another 4%.
So, should investors continue to run from PIR stock or try to catch the falling knife?
The answer is easy — run. Pier 1 Imports is not in great shape right now, and PIR stock could do worse before it gets better.
Let’s look at what the company told us about the last quarter and what is expected moving forward.
Not Much Good News for PIR Stock
The only good news from the earnings release was that same-store sales came in 2.5% higher, while quarterly revenue climbed 2.7%, or 4% on a constant-currency basis. That led to revenue of $430 million for the quarter, up from $418 last year but below the $435 million Wall Street was expecting.
Due to tightening margins from inventory issues, increased promotions and clearance activities, the bottom line shrank 65% from $9.2 million, or 10 cents per share, down to $3.2 million, or 4 cents per share. Wall Street was expecting Pier 1 Imports to report earnings per share of 7 cents for the quarter.
What’s even worse is that inventories rose this past quarter from $514 million to $534 million, even though discounting was enough to shrink net income the way it did.
Looking out a little further, PIR management expects EPS within a range from 10 cents to 14 cents for its fiscal third quarter on the back of low single digit sales growth. For the year, EPS is estimated to come in between 56 cents and 64 cents.
Analysts had expected third-quarter EPS of 23 cents on revenue of more than $500 million, a much higher mark than low single digit growth will produce. As for fiscal 2016, Wall Street was estimating 83 cents on revenue of $1.93 billion — both figures again way higher than what is realistic at this point.
If that is not enough to stop you from buying shares of PIR stock — or to make you sell every share you own — think about these figures.
As of August 29, there were 1,053 open Pier 1 Imports locations. Based on the $3.2 million in net income for the quarter, that would mean each store contributed $3,039 in profit for the quarter, or $1,012 each month. That is a crazy thin profit margin this past quarter and one that could easily turn negative if a store experiences a little overtime, inventory damage, theft or other small issues.
As any long-term PIR stockholder knows, the past quarter is a historically slow quarter for the company, but margins aren’t expected to improve dramatically during the remainder of the year. If we go with the company’s own 14 cent EPS estimate, the high end of its range for the coming quarter and using a fully diluted share count of 86 million, we come up with net income of $12 million.
Based on the same 1,053 current stores, for the quarter each store will only make $11,434, or $3,811 each month, a figure that is still very small considering how many things can go wrong and wipe out that profit.
Consider that the upper end of what PIR expects to make for the year is 64 cents per share, or $55 million in net income. That would break down to each store contributing $52,300 for the year or just more than $1,000 a week. While that would be much better than last quarter’s $1,000 a month contribution, I don’t think those figures are realistic.
Bottom Line
This past quarter’s poor results were blamed on inventory issues and discounting, but even still, PIR saw inventories increase. Therefore it shouldn’t surprise anyone if discounting continued for the remainder of the year as the company attempts to get its inventory in check, which will continue to put pressure on margins and affect EPS.
PIR stock has lost more than 50% year-to-date, and with the big inventory issues the company is still facing, PIR stock could likely fall even more before the end of the year.
Investors should stay away from PIR stock today — if you must own Pier 1 Imports, there will likely be a better buying opportunity in the future.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
