Pier 1 invests in assortment upgrade to right sinking ship

FORT WORTH, TEXAS —Pier 1 may be running out of chances to right itself. After posting more negative numbers in the first quarter, management expanded on its turnaround strategy by announcing major marketing cutbacks that will allow it to focus on its main goal of procuring more exciting inventory to lure back its core customer.

Still, cutting back on marketing may result in the core customer giving less thought to the company than in recent quarters where sales slumped and profits vanished. Pier 1 has said it will focus marketing efforts on store circulars.

Pier 1 posted a net loss from continuing operations of $56.4 million or 64 cents per share in the first quarter June 2, versus $22.8 million or 27 cents per share in the year-earlier period. Total sales declined 5.2% to $356.4 million and comparable-store sales declined 5.4%.

Announcing its 2006 sales in April, Pier 1 detailed a six-point plan to return the company toward growth. New ceo Alex Smith said Pier 1’s turnaround would be built upon streamlining the organization to reduce costs, establishing real estate strategies to protect the company’s short- and long-term future, strengthening merchandising, creating an effective planning and allocation team to tackle the process-driven tasks related to sourcing, tightening up the supply chain and establishing a cost-effective marketing plan.

To help effect the last stratagem, Pier 1 said it will be dropping its marketing spending by $50 million. It will sacrifice television advertising in the short term and will drop e-commerce.

Yet, if the company closes its Internet business and cuts back on advertising, how is anyone going to find out about all the changes Pier 1 is set to make?

Poor product resulting from shifting merchandising stagegies has hurt Pier 1 over the past few years, but mediocre marketing didn’t help. Pier 1 tried to fix its television advertising and even tried a catalog, but sales continued to slip.

In reiterating a hold rating on Pier 1 stock, Wedbush Morgan analyst Joan Storms said a reduced marketing investment and elimination of the non-core divisions—which include Pier 1 Kids and clearance stores and e-commerce—should allow Pier 1 to enjoy $150 million in annualized cost savings. She said, in a research note, “We are pleased the company is focusing on the core Pier 1 stores and returning to more traditional merchandise. The company has hired more buyers who are working diligently with vendors to formulate the new assortment. In addition, we are pleased the company is focused on improving return on ad spend and expects to eliminate TV and catalog spending for the near-term.”

Still, she reserved her opinion about the prospects of an immediate turnaround. “Nevertheless, as the merchandising initiatives are not expected to impact performance until later this year and the turnaround is still in the early stages, we remain on the sidelines awaiting further visibility,” Storms noted.

Deustche Banc analyst Michael Baker was even more cautious, stating in a research note, “We need to see Pier 1 win back some customers. We applaud the aggressive cost cutting moves by new management, but we do not believe that expense reductions will be enough to return Pier 1 to profitability.”

Getting back to basics could help Pier 1, but the market has changed during the years the company stumbled. Competition is more intense and the macroeconomic environment has hurt even the strong players in the home sector. If the once core customers that Pier 1 is trying to lure back don’t respond with sufficient enthusiasm, the company will have a major problem. Not only will Wall Street’s remaining patience be tried, but Pier 1 will have neglected efforts that might have brought new shoppers through the door. Additionally, reliance on the circular may represent an antiquated approach. With consumers comparing prices on the Internet and pre-shopping Web sites before they visit stores, Pier 1’s decision to do less online may push even more customers away.

If the latest initiative falters, Pier 1 may lack a fallback position, and its prospects of remaining as a publicly traded company could be called into question.