Pier-ing Into This Retailer's Bright Future
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The saying the more things change, the more they stay the same has never been more true. I've read Peter Lynch's Beating the Street and One Up On Wall Street many times over, and I'm constantly amazed at the fact that advice he gave years ago still rings true today. He talked about the housing issues in parts of the country back then. He knew the builders would benefit from a turnaround, but he wanted a less obvious beneficiary. One of the names he came across was Pier 1 Imports (NYSE: PIR). He thought that as more houses sold, or were redecorated, that Pier 1 would benefit as one of the pure plays on home furnishings. The company's most recent earnings report seems to bear out that the same thing could happen again.
Pier 1 operates over 1,000 stores that offer home furnishings with an international flavor. Shoppers seem to enjoy Pier 1 as their selection is constantly updated, and their pricing is reasonable. While there is significant competition in the home furnishings industry, the financial turmoil of the last few years has somewhat weeded out the weaker players. Many department stores used to carry a significant amount of home merchandise. The problem was, most of the department store selection were beds, frames, and bigger items that take up a lot of space. As sales of these items stagnated, many retailers got out of the business all together.
There are really two big players in this field, with several other retailers offering a smaller selection. Two of Pier 1's primary competitors are Bed Bath & Beyond (NASDAQ: BBBY) and Williams-Sonoma (NYSE: WSM). Bed Bath & Beyond operates its namesake stores and also the small and in my opinion undeveloped Christmas Tree Shops concept. Christmas Tree Shops is located primarily in the northeast, and though the name would suggest otherwise, about a fourth of the store is dedicated to home furnishings. Williams-Sonoma operates the popular, but higher priced Pottery Barn concept. However, the company has less stores than either Pier 1 or Bed Bath & Beyond. Big box retailers like Target and Wal-Mart (NYSE: WMT) also are competition, offering a segment of each of their stores dedicated to home furnishings. Naturally the question comes to mind, why look at Pier 1 with all of this stiff competition?
The two reasons Pier 1 could be a better investment than some of their competitors is the company's tremendous growth prospects and their ability to benefit from a slowly recovering housing industry. Pier 1's recent earnings report seems to bear out this theory. The company saw sales increase 8.3%, but EPS increased an impressive 35.71%. These strong results were driven by comparable store sales increasing 6.7%, which marked the 12th consecutive quarter of positive comparable sales. While these numbers are impressive on their own, where Pier 1 really shines is their financials.
Pier 1 is doing as much as it can not only to improve the company's efficiency, but also to improve earnings over the long-term. The company improved its gross profit margin significantly from 39.6% last year to 41.2% this year. By point of comparison, on a gross margin basis the only competitor that comes close is Bed Bath & Beyond at 40%. Williams-Sonoma falls behind both at 37.83%, and Wal-Mart shows a gross margin of just 24.63%. Wal-Mart's primary business isn't home furnishings, which leads to their much lower margin.
Pier 1 has been aggressively buying back shares and actually retired over 8% of their diluted shares versus last year. This focus continued in the current quarter with 1.89 million shares retired at an average price of $16.20. The company also shows good cash flow, with their free cash flow payout ratio at just 35.89% over the last six months. If there is one place that Pier 1 could improve it would be their cash flow efficiency. If you compare the amount of cash flow generated per $1 of sales, Pier 1 has some work to do. The company generated about $0.03 of free cash flow per $1 of sales in the most recent quarter. Even Wal-Mart with its much lower margins was able to match this performance. Williams-Sonoma did slightly better with $0.04 per $1 of sales, but the standard bearer was Bed Bath & Beyond at $0.09 per $1 of sales. Since Bed Bath & Beyond has a similar gross margin and operates in the same industry as Pier 1, it seems that Pier 1 should be able to generate more free cash flow given their competitive position. The one thing that investors in Pier 1 can hang their hat on is, the company is expected to outgrow all of its competition by a significant margin over the next few years.
Analysts are calling for over 18% EPS growth at Pier 1. Though the stock does trade at about 16.5 times forward estimates, this seems justified due to the company's higher expected growth. This growth rate is far above Williams-Sonoma, with its 12% growth rate and Bed Bath & Beyond's 11% growth rate. With Williams-Sonoma actually selling for a higher P/E ratio, and Bed Bath & Beyond only slightly cheaper than Pier 1, it seems the market is skeptical of Pier 1's future growth. This looks like an opportunity for investors. The company recently redesigned its web site and it is now e-commerce enabled. This would seem like Pier 1 is late to the party, as many retailers have been selling their wares online for years, but better late than never.
The unique selection that Pier 1 offers should allow the company to capitalize on the continued recovery in the housing market. With multiple homebuilders seeing significant increases in their backlogs, this argues well for Pier 1 as all of these homes will need to be furnished. Just like years ago when Peter Lynch recommended the company, I can comfortably say that Pier 1 should benefit from today's upcoming recovery in housing like they did years ago.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Bed Bath & Beyond and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.