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The Ratings Game: Pier 1 liquidation is a possibility, analysts say

Pier 1 Imports has announced a turnaround strategy, including store closures, but analysts are raising the possibility of a liquidation. Read More...

Pier 1 Imports Inc.’s Interim Chief Executive Cheryl Bachelder may have taken an optimistic tone after the home décor retailer reported disappointing fourth-quarter earnings, but analysts were bearish, bringing up the possibility of a liquidation in the not-so-distant future.

“Given the trends in business, and its negative earnings per share, EBITDA [earnings before interest, tax, depreciation and amortization], and free cash flow, we see Pier 1 and its $1.6 billion in revenues as potentially at risk of needing liquidation if trends don’t improve,” wrote KeyBanc Capital Markets analysts led by Bradley Thomas.

KeyBanc thinks Kirkland’s Inc. KIRK, -3.77%   , Williams-Sonoma Inc. WSM, -0.54%   , Bed Bath & Beyond Inc. BBBY, +0.75%   and At Home Group Inc. HOME, +1.85%   would benefit from a Pier 1 PIR, -25.67%   liquidation.

See: Bed Bath & Beyond’s efforts to improve profitability hurt sales

Bachelder said Pier 1 has examined the problems it faces and pinpointed who is to blame: themselves.

“[O]ur analysis confirmed that our wounds were predominantly self-inflicted,” Bachelder said, according to a FactSet transcript. “Decision-making around critical areas of the business was poor, and costs were not managed to match the performance. We also lost focus of our core customer.”

The good thing about this assessment is since it caused the problems, it can solve them.

“Over the past four months, our team has worked with a sense of urgency to get Pier 1 back on track,” she said.

The company has a plan that it says will yield benefits totaling $100 million to $110 million in fiscal 2020, with a focus on gross margin and cost reductions. Already, Bachelder said the company has taken steps to make improvements for spring and summer, given the restrictions of long lead times. And the merchandise assortment has been recalibrated for the remainder of the year.

“We’ve done a lot of consumer homework and aided by CRM [customer relationship management] analysis we found that our core customer is continuing to shop,” she said. “She still loves Pier 1 and that means we have an opportunity to win her back.”

Pier 1 reported losses and a sales decline in the fourth quarter and said that, after shuttering 30 stores in 2018, it will close up to 145 more. Pier 1 had 973 stores at the end of fiscal 2019.

The news sent shares plummeting 25.8% in Thursday trading, closing at around 48 cents.

Read: Pier 1 Imports to close up to 145 stores in yet another attempt to stall steep decline

“To its credit, the new leadership at Pier 1 appears to be working very hard to right its ship,” wrote Raymond James analysts led by Bobby Griffin. “But the problems are many and it’s not clear that the leadership has the time and pathway to the resources that will allow its plan to work.”

In addition to Bachelder, Pier 1 has a new chief customer officer, Donna Colaco, and an interim chief financial officer, Deborah Rieger-Paganis, among other changes.

Raymond James rates Pier 1 shares underperform.

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“While the company has embarked on a number of transformation and cost control initiatives, in our view its ability to turn around earnings to a level that supports a timely and economical refinancing of its term loan due 2021 remain highly uncertain,” said Raya Sokolyanska, vice president and senior analyst at Moody’s.

But there is one silver lining.

“Nevertheless, over the next 12 months liquidity should be adequate mainly due to availability under the company’s $400 million asset-based revolver and a lack of maturities until the term loan due date,” she said.

Pier 1 stock has gained 57% in 2019, but has lost nearly 82% over the last year. The S&P 500 index SPX, +0.16%   is up nearly 16% for 2019 so far.

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