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Try a Little Turnaround Magic at Two Retailers
By Michael Brush
Exclusively for InvestorIdeas.com
October 04, 2007
This is supposed to be a bad time to own retail stocks – think sub-prime mortgage disasters, high gasoline prices, and a supposedly slowing economy.
But insiders clearly disagree.
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We’ve seen impressive insider buying at over a half a dozen retailers in the past few weeks, and in the past week they added two more to their list. They are: the home furnishings chain Pier 1 Imports (PIR) and the bookstore Borders Group (BGP).
Both stocks have been hammered in the past three or four months. Not even brisk sales of the latest Harry Potter book were enough to save Borders Group this summer.
But as it turns out, Borders Group may not need any help from the bespectacled boy-wizard. It’s working some magic of its own making with a turnaround. The second quarter revealed signs that Borders Group managers may have trained at Hogwarts School of Witchcraft and Wizardry along side Potter. Stripping out the Potter-related avalanche of sales reveals modest revenue gains at the company last quarter. That reversed losses in the prior quarter.
Pier 1 is also mid-way through a sorely-needed turnaround that insiders obviously think will reverse five years of decline and push the stock higher. Otherwise, why would they have purchased a half a million dollars worth of stock in the past few days at just under $5? Let’s start with that one.
Pier 1 Imports (PIR)
Pier 1 Imports stock hit the skids in late September after the company announced a 7% sales decline for the second quarter – which contributed to a 4.5% comparable store sales decline year-to-date.
Investors panicked and drove the stock down below $5, where insiders bought. Since then, the stock has recovered by $1 to trade near $6. But at least one analyst thinks it is headed for $10. It is probably not be too late to buy.
The Pier 1 Turnaround
“Hopefully, we are coming to the end of a story which has being going a long, long time at Pier 1 Imports,” chief executive Alexander Smith told investors in the company’s most recent conference call. Here are the elements of the turnaround.
Closing stores. Pier 1 Imports had 1,184 stores at the beginning of June. It is closing less profitable ones, and it hopes to bring store count down to 1,020 stores in the United States and 81 stores in Canada. It hopes to have its Pier 1 Kids stores closed by the end of this month. It will close 20 or 30 Pier 1 stores in the fourth quarter.
Streamlining sales channels. The company has shuttered its e-commerce and catalog businesses. The website will still be used for marketing and public relations. Pier 1 believes that eliminating these “non-core activities” will cut costs and allow the company to focus on its core business.
Cutting costs. The company is roughly half way through a cost cutting campaign that will bring $150 million in annual savings. As part of this effort, it is cutting television advertising in favor of monthly mailers.
Offering a new merchandise mix. Pier 1 has hired new buyers to help it bulk up on impulse items, while cutting back on big-ticket furniture. What is an impulse item in home furnishings? “Think of it as anything that is not a major furniture piece,” says Smith. “Anything that you can put on a shelf, put on a countertop, put in a drawer, burn, things that scent your rooms, small gifts, all that sort of stuff comes under the category of impulse. It’s everything expect major furniture pieces.”
Improving efficiency. The Company is using new technology to improve the flow of merchandise from the distribution centers to the stores.
Signs of progress
In the most recent quarter, overhead (selling, general and administrative expenses) was down $35.6 million compared to the year before, coming in at 34% of sales compared to 41% of sales last year. The biggest contributor was a $14 million cut in marketing expense. But Pier 1 also saved $13.9 million in payroll expenses, and $4.8 million in other administrative costs, compared to the same quarter last year.
And what about the threat of an economic slowdown that hurts consumers? Smith thinks his company can buck the trend, if it happens. (I’m not so sure it will.) First, the store’s shift from high-ticket furniture to impulse items should help sustain demand from consumers if they get squeezed by an economic slow down. Next, Smith thinks he can gain share even in a weak home sector market. He thinks he can do this in part by increasing the “conversion rate” of store browsers into buyers. And those cost savings will help his company withstand a downturn.
Bernstein analyst Colin McGranahan has a $10 price target on the stock.
Borders Group (BGP)
Borders Group, which also operates Walden Book, is the second largest operator of book superstores and the largest operator of mall-based bookstores in the world. The company 576 superstores under the Borders brand, mostly in the U.S. It also operates 532 bookstores in malls and other locations.
Like Pier 1, Borders has a turnaround in progress. The company is trying to spruce up presentation in stores, create “destination businesses” inside stores like coffee shops, trim the number of troubled Waldenbooks stores, look for ways to lighten up in its international segment, and use technology to improve efficiency. While Pier 1 is shutting down an e-commerce platform, Borders is launching one.
All of this seems to be working. If you ignore the jump in sales linked to the Potter book this summer, comparable store sales increased by 0.4% in the second quarter. That’s not much. But it reverses a decline of 1.9% in same-store sales at superstores in the first quarter.
“We fully realize that we have a lot of hard work yet to do, but we are highly encouraged by what emerged in the second quarter,” chief executive George Jones told analysts in the second quarter conference call. “Our results give us confidence that our strategic plan is the right path to help us reach our goal of generating sustainable sales and earnings growth for the company beginning in 2008.”
Jones backs up his words with actions. He bought $668,000 worth of stock for an average price of $13.36 on September 28, according to InsiderScore.com.
Another plus: The activist hedge fund Pershing Square just upped its stake to 10.1%.
The bottom line : We’re not supposed to like retail stocks because of all the perceived threats to the consumer – threats that I’m not convinced will damage consumer spending all that much. Insiders keep expressing their doubts as well, most recently by purchasing shares in these two troubled retail names that may surprise investors with successful turnarounds.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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