June 19, 2014

Pier 1 shares sink as first-quarter profit falls 25%

The home furnishings retailer reported higher sales in stores and online, but said a “highly promotional” environment squeezed profits.

Shares of Fort Worth-based Pier 1 Imports plummeted more than 13 percent on Thursday after the company reported weaker-than-expected first-quarter profits and lowered its forecast for the rest of the year.

But the news wasn’t all bad.

The home furnishings retailer said sales rose by 6.1 percent in the quarter, to $419.1 million, led by a surge in online sales. Pier 1 now projects that its e-commerce business, which was relaunched just two years ago, will generate at least $200 million in sales this fiscal year and $400 million next year. That would be about 20 percent of its business.

Still, profits were squeezed in the three months ended May 31 due to a “highly promotional” retail environment that has shoppers accustomed to getting a deal, said Alex W. Smith, president and chief executive officer.

The company reported net income of $15.1 million, or 16 cents per share, compared to $20.3 million, or 19 cents per share a year ago. Pier 1 lowered its full-year forecast to a range of $1.14 to $1.22 a share, down from previous guidance of $1.16 to $1.24.

On Wall Street, Pier 1 shares (ticker: PIR) closed down $2.40 at $15.86.

“In the near term, we expect the pressure on the gross profit rate to continue, and we are adjusting this year’s expectations accordingly,” Smith said during a conference call with analysts. “We’re very frustrated that we do not show year-over-year growth on the bottom line, particularly as our execution was significantly improved over last year. However, there are many positive take-aways from the quarter.”

Smith talked up the company’s progress in integrating its e-commerce business with its network of more than 1,000 brick-and-mortar stores. At the end of last year, executives said that online sales were 4 percent of total sales and that the company hoped to reach 10 percent by the end of next year.

On Thursday, Smith said online sales reached 9 percent of sales in the first quarter, though business at its traditional stores was disappointing, “impacted by soft traffic and a higher level of promotional activity than we anticipated.”

Smith told analysts it’s hard to tell whether the slowdown in store traffic “is representative of a permanent sea change in customer behavior or a temporary phenomenon.” But the pickup in e-commerce is tied to its stores through an “omni-channel” retail strategy known as 1 Pier 1.

Smith said a quarter of the retailer’s online transactions originated at brick-and-mortar stores, while a third of the orders placed in homes were picked up at stores.

Asked whether growing online sales would lead to fewer brick-and-mortar stores, Smith said that it’s possible and that the company will remain flexible with its real estate.

“You can be sure that as we look at the strength of our online business, in parallel with that, we are thinking how many stores we need to go with it,” Smith said.

Pier 1 is building a second fulfillment center in Columbus, Ohio, to handle its growing e-commerce business. Executives have said they expect the e-commerce business to be more profitable than its traditional retail trade.

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