Shares of Pier 1 Imports (PIR) fell off a cliff in afterhours trading last Tuesday.
The stock made very little progress in trimming its losses in Wednesday’s trading, too, as Pier 1 Imports finished the day off more than 24.3% below Tuesday’s close.
An unexpectedly lower FY 2015 outlook and subsequent departure of the company’s CFO, Charles Turner, are to blame for the selloff.
The bloodshed won’t end soon, either, since Turner’s departure just opened Pandora’s box.
An Unwelcome Surprise
The company’s revised FY 2015 outlook reflects January and February sales that are expected to be lower than previously thought. The firm said that in addition to lower sales, Pier 1 expects to experience higher expenses than previously forecast – due primarily to incremental supply chain costs.
Pier 1 disclosed that it now projects earnings of $0.80 to $0.83 per share for the fiscal year ending February 28, 2015 – well below the previous projection of $0.95 to $1.05 per share.
The retailer now sees same-store sales growth of about 5% for the year, compared to previous estimates of 5.3%.
Company CEO, Alex Smith, blamed the incorrect FY 2015 guidance on an upbeat expectation of sales improvements for the current period that were overly optimistic when compared to last year’s weather-related woes.
Then, in a separate press release, the company announced that Turner had retired. The sudden retirement took Wall Street by surprise, and it’s clear from the press release that the incorrect guidance is the proximate cause for Turner’s “retirement.”
Turner’s immediate replacement is Laura Coffey, a 17-year veteran of Pier 1 Imports. She will take over as Interim Chief Financial Officer, effective immediately.
The result of these surprising announcements is the loss of more than $342 million in market cap in less than 24 hours.
Ultimately, all of this unearthed deeper problems at the company…
According to Brian Nagel, an analyst at Oppenheimer & Co., “We are shocked and very disappointed by Tuesday night’s announcement. It is now clear that our call that the ‘worst was over’ for Pier 1 was premature.”
In other words, Oppenheimer expects more room to fall…
Reports also indicate that Nagel thinks the company used Turner as a scapegoat.
In the end, things don’t look too pretty for Pier 1. Still, it’s hard not to see potential right now. Here’s why…
Seeing Value in Adversity: Time to Buy?
Despite the revised guidance and management shakeup, Pier 1 Imports makes for a compelling investment at current levels.
Total sales for Q3 FY 2015 were $484.5 million, a 4.08% increase over the $465.5 million in the same quarter a year ago.
The company’s comparable sales increased by 2.5% over Q3 FY 2014 numbers, and like many companies, would have seen a 3% improvement in sales if not for the stronger dollar.
Gross profit for the quarter, ended November 29, 2014, was $204.9 million – a 1.3% increase over the same quarter last year.
Pier 1 Imports reported net income of $17.9 million, or $0.20 per share, compared to last year’s third-quarter net income of $26.8 million ($0.26 per share).
A Step in the Right Direction…
Pier 1 Imports started Tuesday with a P/E ratio of 17, which was based on the company’s mid-point estimate of $1.00 EPS for FY 2015.
Today the company is trading at a P/E of 14.6, a discount of 240 basis points overnight. And the company’s EV/EBITDA ratio now sits at 8.72 – well below the S&P 500 average of about 11.
The company pays a small dividend that yields 1.86% at current prices, making Pier 1 Imports an attractive play that every value investor should consider.