Another quarter, another sell-off for Pier 1 Imports Inc (NYSE:PIR) stock. The home furnishing retailer actually reported pretty good second quarter numbers that topped analyst expectations. But investors are choosing to focus on hurricane-impacted guidance that came in well-below sell-side expectations.
Consequently, PIR stock is down about 10% as of this writing, to the $4 level.
For traditional, risk-adverse investors, it’s usually a good rule of thumb to avoid stocks under $5. After all, there is a reason why they are trading that low, and it’s not because they are great companies with outstanding growth prospects.
But I’m making an exception with PIR.
This is an undervalued retail name that has proven operational stability in today’s challenging retail environment. Bears are selling because of a hurricane-impacted guide, but I’m buying because this stock because is way undervalued.
Pier 1 Has Good Growth Prospects
Comb through recent retail earnings reports. You’ll discover that there are some common themes:
- Negative revenue growth.
- Negative comparable sales growth.
- Gross and merchandise margin compression.
- Higher operating expense rates. Earnings degradation.
Comb through PIR’s most recent report. You might be surprised by what you find:
- Revenue growth was positive for the first time in two years.
- Comparable sales growth was also positive (up a reasonably healthy 1.8%).
- Merchandise margins were up.
- Gross margins were down due to high fulfillment costs, but, year-to-date, gross margins are flat.
- The operating expense rate is barely higher, and that is because of some one-offs.
- Adjusted earnings are actually flat year-over-year.
All in all, Pier 1 isn’t doing all that bad.
Investors are freaked out because the full-year earnings per share guide came in at $0.38 to $0.48, the midpoint of which ($0.43) missed consensus estimates ($0.47). The guide also implies that earnings may not have bottomed out. Adjusted EPS was $0.44 last year, so a $0.43 mark this year implies year-over-year declines are set to continue.
But, remember, that new guide is hurricane-impacted. If you look past the hurricane-impacted third quarter noise, you’ll actually see a pretty promising fourth quarter guide. Comps are expected to be up about 1%. Revenues are expected to be up about 6%. Adjusted EPS is expected to be up more than 20%.
Those are pretty good numbers, epecially for a retailer that is being left for dead.
In other words, PIR has proven operational stability in today’s challenging retail environment. Positive comps and positive revenue growth is the new norm. Gross margins are stable. Operating expenses are being levered. Earnings are bottoming out (this year should, in fact, be the bottom).
But the stock is priced as if that weren’t the case. This is why I smell a “buy the dip” opportunity.
Bottom Line on PIR Stock
No one wants to be invested in retail because no one knows where the bottom is or when retail will hit that bottom.
But PIR appears to have bottomed out. Comps and revenue growth have turned positive. Gross margins remain stable. Earnings, sans hurricane effects, have gone as low they are likely to in the foreseeable future.
But PIR stock only trades at 9.3 times this year’s guided earnings.
That is far too cheap. I peg PIR’s fair value somewhere around $6 per share. That is about 50% upside.
As of this writing, Luke Lango was long PIR.
