Sunday, January 6, 2013

Pier 1 Import's Guidance Seems Conservative

If anyone had any lingering doubts over the recovery in housing related spending, then home furnishings retailer Pier 1 Imports' (NYSE: PIR) latest set of results would have surely dispelled them. The housing investment theme is doing well and Pier 1 is executing on all fronts with its nascent e-commerce operations generating good growth. In summary, I think Pier 1 remains a good play on housing with some near term upside, particularly as I believe its management is being cautious with guidance. On the other hand I have some longer term concerns.

Pier 1 Imports' Q3 Numbers

Results exceeded expectations, and PIR reported a 7.9% increase in comparable same store sales. This is impressive stuff given that a significant number of its outlets were hit with closures thanks to Sandy. In addition, this number comes on top of a 6.7% increase in the last quarter.  Putting these two figures together suggests that the continued guidance of mid-single digit same store sales guidance for the full year may prove to be conservative.

This was the second quarter in a row where footfall and average ticket item spend went up, with the company claiming broad based strength across its product range. It cited particular strength in its furniture range. In common with the likes of Home Depot (NYSE: HD), management called out the start of a housing recovery. The interesting thing about HD’s latest results was that it is the discretionary parts of spending that are starting to improve (kitchens, baths, flooring etc), and this is a sure sign that housing is coming back. PIR's sales are more weighted to the discretionary end, and it should benefit disproportionately from a recovery.

The improved environment also suggests that PIR will hit some long term targets a bit earlier than expected. Management is on record as targeting e-commerce to be 10% of revenues by 2016 and sales per retail square foot in stores to reach $225 by 2015. Given that e-commerce revenues are already around 1.5% of total revenues (after just four months) and sales per retail square foot are currently $194 on a trailing basis, it is not hard to speculate that PIR is very much on track.

E-commerce Initiatives

Its e-commerce activities are performing well, but it’s here that I have some long term concerns. PIR is unique in the sector in that it offers online customers the option to pick up orders in-store, and it was surprised by the strength of take-up (35% of online sales) for this option. This is a good thing because it encourages more footfall and customer interaction to possibly increase things like impulse purchases. Apparently online customers are spending twice what in-store customers are, but it is hard to know whether that is due to the type of customer shopping online or something intrinsic to purchasing online itself.

My long term concern here would be with online cannibalization of its retail store sales and the effect that this might have on its gross margins and customer loyalty. PIR sells a lot of low ticket items that are, arguably, exactly the kind of products that can be sold online effectively. The problem is that everyone else can do it too, and there is no shortage of companies expanding in the space. Amazon’s subsidiary Quidsi has in the space and Williams-Sonoma saw its online sales expand 17% in the quarter.

Furthermore off-price retailers like TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST) are both rapidly expanding their home ware retail outlets and taking advantage of strong footfall attracted by their off-price clothing. There is nothing to stop either expanding their online offerings and I suspect it is only a matter of time before other retailers move into areas where PIR may be expanding strongly.

On a more positive note, PIR’s in-store pick-up does create differentiation and investors should look for this to expand. This could somewhat restrict the opportunity for operating margin expansion with online sales in the future. I don’t believe PIR’s idea is to become an online retailer in the long term.

Where Next For Pier 1?

As ever, investors want to know where the stock price is headed from here. I think the indications and trends are indicating a good Christmas for the sector, and PIR should see some benefit. Full year non-GAAP EPS guidance was raised again to $1.17-1.21 from $1.10-1.16 last time around. I think the management may be a little cautious with guidance in general, and investors might see some upside ‘surprise.’

My long term concerns are, well, long term, and even if I am right I don’t think that they will bite into PIR's prospects just yet. My guess is that PIR will continue to do well, but I prefer other stocks within the theme.

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