Should You Buy Pier 1 When Bankruptcy Is on the Horizon?

While the retailer is taking steps to right the business it might be too late 

Home furnishings retailer Pier 1 (NYSE:PIR) announced Jan. 6 that it was closing 450 stores in 2020 amid mounting losses. The news sent PIR stock down 17% on the day. In the days since, it has lost another 30% of its value. 

Source: Jonathan Weiss / Shutterstock.com

As a result of this announcement, speculation is growing that the specialty retailer will file for bankruptcy, making it another in a long line of companies who have been forced in recent years to restructure under the protection of the bankruptcy courts. 

What does this mean if you own PIR stock? It’s not good. What does this mean if you’re a speculative investor considering a beaten-down value play? The risk of Pier 1’s share price going to $0 is real. You might want to consider other stocks trading under $5 before making your decision. 

In the meantime, here are my two cents on buying PIR stock, given all of the uncertainty swirling around the retailer. 

PIR Stock Was a Very Different Stock in 2013

As I’ve said before, the great thing about writing and making opinions about stocks for an online forum is that your calls — good and bad — are forever in full view for anyone who cares to read them. Like life itself, it’s tempting to toot your own horn when you’re right about something, but inevitably, you’ll be wrong about something else soon enough.

That’s the way I feel about Pier 1. 

In September 2013, I wrote a piece about why investors should buy Pier 1 stock after suffering a second-quarter earnings miss. My rationale revolved around three things: Strong leadership, a sound turnaround plan, and same-store sales growth that was still very positive at a time when many retailers weren’t doing very well.  

“All in all, Pier 1 stock is fairly valued when compared to its peers. Should it get back on track, which I believe it will, you’re buying growth at a reasonable price — and that’s always a good thing,” my article concluded. 

Care to guess what its share price was in September 2013? A whopping $417 or $354 adjusted for dividends. 

Yes, you read that right. Almost 12,000% higher than where it trades today. If you happened to follow my recommendation and bought Pier 1, I genuinely hope you sold long ago. 

The funny thing is, some of my best recommendations over the years have been retail stocks, which is why Pier 1’s current state is so disappointing. 

Who Will Benefit?

Telsey Advisory Group (TAG) specializes in research and consulting for the consumer sector. Founder Dana Telsey covered retail and apparel stocks for other brokerages before starting her own company in 2006.   

TAG analyst Cristina Fernandez, according to CNBC, estimates that At Home (NYSE:HOME), Wayfair (NYSE:W), and TJX’s (NYSE:TJX) Home Goods’ business would experience a 100-basis-point gain in sales were Pier 1 to close all 942 of its stores. Target (NYSE:TGT) would also benefit but to a lesser extent. This is because so many of Pier 1’s stores are located close to these other retailers’ locations. 

One company’s loss is another’s gain.

“Although decisions that impact our associates are never easy, reducing the number of our brick-and-mortar locations is a necessary business decision. We thank our team of hard-working associates for their commitment to Pier 1 and to serving our customers,” CEO Robert Riesbeck stated in Pier 1’s Jan. 6 press release. 

While the closure of 450 stores, some of its distribution centers, and a reduction in its head office staff are meant to stem the losses at the company, the move will only weaken its ability to compete with the names mentioned above. 

The Beginning of the End

In November, Pier 1’s board promoted Riesbeck from CFO to the top job. Forbes retail expert and senior contributor Warren Shoulberg wrote a very insightful article shortly after Riesbeck’s promotion, pointing out why shareholders (and employees) should be worried about the move.

“Pier 1, as would be expected, positioned Riesbeck’s appointment as a positive in its efforts to turn the company around,” Shoulberg wrote in November. “What was not in the statement was exactly what Riesbeck’s capabilities are. His last two jobs were as a C-level executive at HHGregg (CFO and then CEO) and FullBeauty (CFO), both of which filed for bankruptcy.”

The move to cut half its stores is Riesbeck’s, Hail Mary. It’s going to take most of 2020 to get all of these stores liquidated. While its lenders have approved the store closures, you can be sure they will be keeping the company on a tight leash. 

In the meantime, you have a business whose same-store sales decreased by 11.4% in its latest quarter, lost $59 million, and had just $11.1 million in cash and cash equivalents at the end of November. 

Pier 1’s financial position is precarious. The company’s current Altman Z-score is 0.64. The Altman Z-score predicts the likelihood of a bankruptcy filing within the next 12-24 months. Anything under 1.81 is considered distressed. 

While it’s not the worst Z-score from a retailer I’ve seen over the years, it’s still worse than J.C. Penney (NYSE:JCP). If Pier 1 doesn’t file for Chapter 11, I’d be shocked.

The Bottom Line on PIR Stock

It’s not impossible for shareholders of a company that goes bankrupt to emerge from the process with their shareholdings still intact. However, a lot has to go right before that happens.

If you are looking to speculate on PIR, I would wait for it to fall much further before wading into what would be a lengthy hold.     

For the rest of us, I would suggest you visit one of Pier 1’s liquidating stores to see if there’s a good deal to be had. 

So sad. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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