E-commerce fuels Pier 1 profit decline

Omnichannel investments are driving solid top line growth at Pier 1 Imports but having the opposite effect on profits as the company transitions to an integrated digital business model.



Sales at Pier 1 increased 5.8% to $418.6 million and same store sales increased 4.5% due to a blend of increased traffic and average transaction size during the second quarter ended August 30. E-commerce sales now account for nearly 10% of total volume, according to the company. However, the heightened promotional activity needed to drive the top line growth and fulfillment costs associated with e-commerce eroded profitability. Net income declined to $9.2 million, or 10 cents a share, from $17.8 million, or 17 cents a share, the prior year. Gross margins also contracted to 38.9% from 40.8% the prior year.



E-commerce also impacted the company’s expenses structure with new hires and increased digital marketing costs pushing selling, general and administrative expenses up to 32.2% of sales up from 31% of sales.



“Our customers love our expanded assortments and the ability to shop however they choose. With the acceleration of investments in our ‘1 Pier 1’ omnichannel strategy, we expect this momentum to continue,” said Pier 1 president and CEO Alex Smith. “These incremental investments are impacting our near-term financial performance as anticipated, as we rapidly evolve into our new business model. While total brand traffic, conversion and average ticket all increased in the second quarter, we were challenged by soft store traffic and, more significantly, by declines in our merchandise margins. Consequently, results for the second quarter came in below our expectations. Returning our base merchandise margins toward their previous levels is a top priority, and we’re confident that it can be done through a careful balance of full and promotional pricing, as well as improvements to the initial margin.”



The second quarter saw the company fast-track its ominichannel strategy by opening a second distribution center, expanding online only product assortments and installing design stations in stores. With e-commerce continuing to drive growth, the company is focused on improving “curation,” with an emphasis on inspirational photography and merchandise floor sets in stores where one third of online orders are picked up.



“As we move into the second half of the year and prepare for the all-important holiday season, we are also bolstering our marketing and promotional strategies to drive both store and web site traffic, conversion and average ticket, while reinforcing Pier 1 Imports’ competitive positioning,” Smith said.



The company’s initiatives include additional circulation of mailers and catalogs, new TV spots that feature fresh creative, new digital programs and a more aspirational brand message.



Longer term, Smith couldn’t be more optimistic about Pier 1’s future as an omnichannel retailer. Since it began selling online in July 2012 the company has gone from zero to online sales of roughly $200 million and a year from now he expects the company’s online sales will exceed $400 million.



“The early success of our omnichannel strategy and rapid increase in sales contribution coming from e-commerce, especially direct and home delivery orders, has reframed the Pier 1 Imports business model,” Smith said. “It is clear to everyone that our transformation from one of the most profitable furniture and décor retail store formats, to an even more profitable omnichannel business will not be without a point of inflection.”



That point is now, according to Smith, noting the company has evolved from a “crawl, walk, run” approach to its transformation to more of a “crawl, run,” approach.



“While the incremental costs will pressure us temporarily, once we reach scale and restore our merchandise margins, the new business model will drive strong profit growth,” Smith said.