At this point, Pier 1 Imports (NYSE:PIR) stock almost certainly is heading to zero. Pier 1’s third-quarter results, released earlier this month, show a company in dire straits.
Pier 1 management is trying to respond to the company’s challenges via store closures and cost cuts. And other names in and around the home furnishings category have posted rallies despite difficulties of their own.
But both the balance sheet and the income statement suggest that those efforts almost certainly will be too little and too late. There’s a long list of brick-and-mortar retailers that have gone bankrupt in recent years, and Pier 1 Imports likely will be added to that list.
PIR Stock Retreats
It’s been a long and steep decline for PIR stock, which has lost over 99% of its value from 2013 highs. But shares did manage to rally sharply last year, moving from under $4 in August to briefly hit $14 in September.
Frankly, it’s not clear why. Fiscal second-quarter earnings didn’t arrive until late September and quickly undercut the rally. Same-store sales declined 12.6% year-over-year. Even excluding one-time costs, the company lost over $80 million in the quarter and ended the period with just $10 million in cash.
The numbers for Q3, released on Jan. 6, don’t look much better. Same-store sales fell 11.4% in the quarter. Even excluding the negative effect of a calendar shift, comps dropped nearly 5%. Losses neared $30 million. PIR stock unsurprisingly re-tested its all-time low after the report.
After all, Pier 1 is in a precarious financial position coming out of the quarter. The company ended the quarter with just $11 million in cash and $336 million in debt. The company does have $158.5 million left on its credit facility, which gives it some room to operate. But according to filings with the U.S. Securities and Exchange Commission, Pier 1 has burned some $220 million in cash over the past twelve months.
As a result, Pier 1 included a so-called “going concern” warning with its third-quarter results. That disclosure warns investors that the company may not have the liquidity to make it through the next 12 months. In this case, that disclosure appears well-founded.
To be sure, a going concern warning doesn’t guarantee near-term bankruptcy. Chesapeake Energy (NYSE:CHK) provides a recent example. That company added the same disclosure after its Q3 earnings report in November. A month later, Chesapeake executed an exchange offer for its debt that improved its financial position. CHK stock would rally sharply, though recent oil and gas price weakness has led the stock to new lows.
For its part, Pier 1 is trying to find a path forward. The company is shuttering as many as 450 locations — nearly half of the 942 stores open at the end of the third quarter. It’s closing distribution centers and reducing expenses at the corporate level as well.
The closures could have dual benefits. Obviously, labor costs and rent expense will decrease dramatically; it’s likely that at least some of those stores already are losing money on a full-year basis. But liquidation sales also can also improve the balance sheet. Pier 1 closed Q3 with $328.9 million in inventory. The inventory in stores that are closing obviously will be sold at significantly discounted prices, but it’s not hard to imagine the company pulling in $50 million in cash or more.
Combine that cash with availability on the credit facility and lowered cash burn and operating losses, and Pier 1 might be able to make it through the next year after all. From there, perhaps there’s hope for a longer-term turnaround backed by improving results.
Too Much Risk
But the path to avoiding bankruptcy seems far too narrow. There will be cash costs involved in cutting corporate employees and closing stores. Same-store sales are plunging and that’s not just a Pier 1 problem. At Home Group (NYSE:HOME) is guiding for its same-store sales to fall at least 2% in 2019; its shares have declined 74% in the past year. Bed Bath & Beyond (NASDAQ:BBBY) continues to struggle.
As in so many areas of retail, online competition from the likes of Amazon.com (NASDAQ:AMZN) and, in Pier 1’s category, Wayfair (NYSE:W), is a key factor. TJX Companies’ (NYSE:TJX) HomeGoods concept has expanded, adding another well-run brick-and-mortar competitor as well.
It’s possible Pier 1 does make it through the next few quarters. But that doesn’t mean the company suddenly is out of the woods. It still needs to get same-store sales to inflect despite intense competition. Its current losses are staggering, with operating loss in Q3 over 8% of revenue. Margin pressure, even with store closures, will accelerate unless comps suddenly turn positive.
More broadly, we’ve seen this story over and over for years. When a struggling retailer runs into financial problems, bankruptcy nearly always ensues. Bulls talked up Sears Holdings (NASDAQ:SHLDQ) to the very end. Barneys New York, Destination Maternity, and Gymboree were among the bankruptcies last year; more are on the way in 2020.
Pier 1 likely will be on the list in 2020 or 2021. Bloomberg reported this month that the company already has bankruptcy plans in place. Its term loan is trading at 27 cents on the dollar, according to that outlet. Right now, not even the company’s creditors will be made whole. Barring a miracle, there certainly won’t be any value left in PIR stock.
As of this writing, Vince Martin has no positions in any securities mentioned.