Posted on Fri, Jul. 03, 2009  Comments   (0)

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Schnurman: Well-timed financial moves may have saved Pier 1 Imports

For more than two years, Pier 1 Imports has been focusing on its core business, trying to get its stores and merchandise just right for the times. Ultimately, success will hinge on how it handles that retailing mission.

But it’s what Pier 1 did outside the stores that moved the needle, that was the brilliant stroke.

In the past year, Pier 1 pulled off two well-timed financial moves that bought the company time to regroup, to keep downsizing and maybe re-emerge as a profit-maker.

In June 2008, when commercial real estate was still strong, Pier 1 sold its 4-year-old corporate headquarters to Chesapeake Energy of Oklahoma City. With natural gas prices near a record, the gas producer was riding high, and it paid $102 million for a signature presence in downtown Fort Worth.

Nine months later, Pier 1 put the money to work. With the recession in full force and credit markets still shaken (even Chesapeake was facing problems by then, too), Pier 1 used about a quarter of the cash to buy back almost half its debt — paying just 33 cents on the dollar.

Selling real estate high and buying back debt cheap is a great combination for the balance sheet. It also lifted the bottom line, with the buyback alone producing a $48 million gain.

The last time the retailer reported that much profit? Christmas season, 2003.

The moves looked impressive in March, when the debt deal was done. They stand out even more today, because others have tried and failed with similar exchanges.

In the past month or so, General Motors and Six Flags couldn’t get enough bondholders on board with their plans, so they ended up in bankruptcy. McClatchy Co., which publishes the Star-Telegram, recently enticed only 9 percent of bondholders with a swap offer, a disappointing result that drove down its penny stock by almost a third.

Pier 1 had an advantage that few distressed companies can match — the liquidity to offer all cash for its debt, thanks to the headquarters sale. And it had enough money in hand to make the offer enticing, offering a better payoff than most.

Alex Smith, who’s been chief executive officer for 2  1/2 years, says the board and its outside advisers worked out the swap strategy carefully and executed it well.

Pier 1 spent less than $15 million on interest payments last year, so the impact on cash flow for the $1.3 billion company won’t be large. But cutting the debt made a strong impression on investors and dashed fears that Pier 1 might run out of money.

"The investment community looked at the numbers again, and said, 'Oh, these guys have a whole ton of liquidity. They’re not going anyplace soon. Let’s get on board,’ " Smith said last week, talking with reporters after Pier 1’s annual meeting in Fort Worth. "I think it was as simple as that."

Pier 1’s stock price (ticker: PIR) soon shot up from 11 cents a share to more than $2. It closed Thursday at $2.05, a level it’s been trading around for two months.

It’s ironic that Pier 1’s big bump in the Smith era came from real estate and debt moves, because Smith has gone to lengths to focus everyone on operations. He dropped the catalog business, Pier 1 Kids, clearance stores and even online sales — a future that almost every other company is betting on.

He says that Pier 1 was losing money on its Web site and that it demanded a disproportionate amount of management time. He won’t rule out a re-entry but only after the stores are profitable again.

"Clearly, e-commerce is a very big part of consumer spending today — we’re not going to pretend it doesn’t exist," Smith said. "But we’ve got to fix the big end of the cow first."

That’s largely been about shrinking the company’s infrastructure, making over the merchandise in a major way and steadily improving every expense category. The results have been mixed.

Pier 1 has improved on many performance measures, showing wider margins and reduced overhead and inventory. But the most important indicator, same-store sales, continues to lag. After declining less than 2 percent two years ago, same-store sales fell 9.2 percent last year and another 7.5 percent in the latest quarter.

Analysts generally give the company high marks for managing its business, but only 1 of 7 analysts has a buy rating on Pier 1. The others worry that the economy will remain sluggish, and that Pier 1 will be pressed to hold its market share against big-box competitors.

Since Smith arrived, the housing market has been in a free fall nationwide. That has punished the home decor sector, driving out some players, and Smith has been trying to cut costs fast enough to keep pace.

In four years, Pier 1 revenues have fallen by $505 million, or almost 28 percent.

Three years ago, Pier 1 had 1,271 stores in the U.S. and Canada. It’s on track to reduce the total by 230, including 50 closures this year.

"I hate closing stores," Smith said. "You do what you got to do."

While housing prices continue to fall, at least unit sales show promising signs. Existing-home sales rose for the past two months, and new-home sales increased in three of four U.S. regions in May — trends that will help Pier 1.

Smith hopes investors will look at the company’s business story, now that the liquidity questions have been addressed.

Between its cash and credit line, Pier 1 has almost $200 million available.

He says that more items are hitting the bull’s-eye, reflected in a rise in reorders. The company cut inventories by $91 million in the past year, and it’s making fewer markdowns. Margins on merchandise increased 3 percentage points in the latest quarter.

"All those are hugely positive signs of the overall health of the business," Smith said. "We just keep plugging away."

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