Pier 1 still aiming higher after stunning turnaround

This is usually the high sale season for Pier 1 Imports, with window-sized posters screaming about bargains and a giant clearance. Not this time, though, because the Fort Worth company is sitting in retail's sweet spot.

With merchandise flying off the shelves and inventory down sharply, there aren't a lot of leftovers to clear out. So the big summer event will be shorter and understated, which has analysts wondering about the impact on quarterly results.

"It certainly seems to be a good problem to have, if you would even call it a problem," said Bradley Thomas of KeyBanc Capital.

That a clearance sale generates interest during a conference call says much about Pier 1's progress in the past couple of years. From near-death and a stock price of 10 cents, the Fort Worth company has roared back, surviving an epic housing bust and one of the worst recessions ever.

The latest step in its recovery came last week, when it surprised Wall Street with an $8 million operating profit for the traditionally weak first quarter. That's the first time Pier 1 has reached that milestone in six years.

Same-store sales, arguably the best indicator of a retailer's health, jumped 14.3 percent, another impressive showing. Both operating income and same-store sales have improved strongly for three consecutive quarters.

Another key metric, merchandise margins, totaled 58.6 percent of sales, near a record high for the company. That tally of core profit on merchandise is almost 11 percentage points higher than in 2007, and it reflects gains across the spectrum -- in merchandise selection, buying quantities, vendor costs, freight expense and managing markdowns.

"In other words, every contributor to merchandise margin is positive," CEO Alex Smith told analysts.

In a turnaround, it doesn't get much better than that. Unless it's having a cash chest of $205 million and a debt load that will fall below $10 million within the next 12 months.

Since Smith arrived in February 2007, he has guided Pier 1 through a grueling period, slashing costs and employees and selling the headquarters building in Fort Worth. Pier 1 has closed 267 stores since its peak, and a dozen or so more are on the chopping block this year.

Just as important, Smith brought a fresh vision for merchandising, adding unique items and reviving the treasure-hunt feel of Pier 1's early years. He also put a daily focus on execution, improving the buying network, supply chain and store experience.

Investors should be pleased to hear that Smith has signed on for three more years as CEO, after his initial employment contract expired in February. According to a recent proxy statement, Smith's pay package totaled $8 million last year, including hefty bonuses, stock options and a new group of stock grants.

His final pay may be lower or higher, depending on the stock price and company performance. His first contract netted him 2 million options, but the strike price is close to the current trading range, so their value is limited at the moment.

His new contract simply grants him 1.5 million shares. But to get them all, Smith must stay with Pier 1 until at least 2012, and the company must hit certain thresholds.

Smith sounds like he'll be around a while, and he's not letting people get too comfortable with the recent success.

"It was a very good first quarter, but our feet are firmly on the ground," he said last week. "Our execution, while improved, is not yet flawless."

For Pier 1, much of the challenge lies in getting the right assortment of merchandise -- not just the look, but also the mix of recurring items, promotions and markdowns. Pier 1 customers want bargains, along with the staples, and the company wants solid margins with just the right level of inventory.

Inventories are down almost a quarter in the past two years, and roughly two-thirds of Pier 1 merchandise is in its stores, rather than in storage centers or transit. The company has struck this balance so well that it can't stock a giant clearance sale at the end of June.

Pier 1 still has plenty of room to improve, primarily in sales per square foot, a common industry measure. In the past 12 months, Pier 1 generated $155 in sales per foot, up significantly from the $118 bottom five quarters ago. But in its heyday, during the 2003 housing boom, sales per square foot hit $235.

Smith's goal is to top $200 again, and soon. Home sales are expected to slow after tax credits expire, and Pier 1's business hadn't declined through mid-June.

To pump up sales, the company is investing in stores and prepping for a bigger push online. About two dozen stores are getting new fixtures for jewelry and risers for dining chairs, among other things. Pier 1 has been reworking its website, well aware that e-commerce has become a significant contributor for other retailers.

In the past, Pier 1 lost money online, because it set up fulfillment and distribution centers. This time, at least in the early stages, customers will order online and take delivery at a local Pier 1. That offers a chance to work out the kinks and make additional sales.

"This is a natural and low-risk extension of our business," Smith said.

It's how Pier 1 has been winning the race -- with slow, steady execution.

Mitchell Schnurman's column appears Sundays and Wednesdays. 817-390-7821