Struggling home furnishings retailer Pier 1 (NYSE:PIR) is in crisis mode right now. Sales are in free fall, margins are eroding and losses are widening. Cash balance is dwindling, liquidity risks are escalating and management is planning to close nearly half of the company’s locations.
In a nutshell, nothing is going right for PIR stock at the moment, and the price reflects this reality. On a split-adjusted basis, Pier 1’s stock price was $350 five years ago. Today, PIR stock trades hands at $3.50.
At this point in time, I don’t see any reason to try and catch this falling knife. The secular trends remain adverse. There is no clear pathway towards sales or margin stabilization. Cutting the store base in half only adds more uncertainty into the mix. Profits are elusive and the balance sheet looks like a ticking time bomb.
There’s just too many negatives here to warrant playing contrarian.
Instead, the smart move here is to remain on the sidelines. With Pier 1 in crisis mode, PIR stock is simply too risky to touch.
Pier 1 is in Crisis Mode
The bleak reality is that Pier 1, once one of America’s most beloved physical furniture stores, is in crisis mode on the brink of extinction.
There are two big trends behind this fall from grace for Pier 1. First, you have the e-commerce wave. Online shopping has birthed e-furniture platforms like Wayfair (NYSE:W). As these platforms have gained scale, they have expanded their reach and inventory, improved their logistics, and become more competitive in the furniture retail game. More and more consumers are flocking to these online platforms. Less and less consumers are shopping in-store. This has naturally created a multi-year traffic headwind for PIR stock.
Second, you have the all-in-one retail wave. The biggest retailers in the game, like Walmart (NYSE:WMT) and Target (NYSE:TGT), have increasingly become retail one-stop-shops over the past few years. A byproduct of this movement? Walmart and Target are selling more furniture pieces now. Often, they are selling those pieces at discount prices, too. This has naturally created multi-year traffic and margin headwinds for Pier 1.
That’s the bad news. The worse news is that neither of these trends are going to reverse course anytime soon. Consumers will continue to migrate online as delivery logistics improve, and big box retailers will continue to build out their furniture businesses as they continue to gain share in the market.
Yet the worst news of all is that Pier 1 doesn’t have enough resources to combat these adverse trends. There’s only $11.1 million in cash on the balance sheet, and the business isn’t producing any cash. Any cash it does produce (from asset sales and store closures) will have to go to paying down debt (there’s over $250 million in long-term debt on the balance sheet).
Consequently, a recovery for PIR stock looks unlikely.
Pier 1 Stock is a Falling Knife
Without a recovery in the core operating business, Pier 1 stock won’t ever stage a sustainable rebound.
Over the next several years, PIR will likely move forward with its 450 store closures. That will cut the company’s store base in half. By my numbers, assuming Pier 1 closes under-performing stores and that the remaining stores perform at higher average unit volumes, then sales could stabilize around $900 million within the next few years.
Gross margins are at 25%, and rapidly dropping. Once upon a time, they were up above 35%. It’s tough to see PIR stock getting back to that point, given the furniture market’s competitive landscape. But, store rationalization could drive a gross margin rebound to the low 30% range, implying about $300 million in gross profits one day.
Store rationalization will drive operating expenses down, too. But even if operational expenses drop by half, you’re still talking about almost $300 million. Gross profits of about $300 million less operating expenses of about $300 million equals zero dollars in net profits.
In other words, even if a lot goes right for Pier 1 over the next few years through store base rationalization, it’s still tough to see how this company nets a profit. In the absence of a profitable turnaround, PIR stock looks like a lost cause.
Bottom Line on PIR Stock
Pier 1 looks doomed. Secular trends remain adverse and the company doesn’t have enough resources to combat them. And even if management’s store base rationalization plan goes well over the next few years, it’s still tough to see how the company nets a profit in the intensely competitive furniture retail market.
Consequently, a rebound in PIR stock looks unlikely.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.