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Pier 1 Imports (PIR, $12.00)
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Pier 1 is a leading retailer of furniture, baskets, candles, and a related selection of handcrafted home décor merchandise. The company imports more than 4,000 functional and decorative houseware products from forty different countries. It then distributes these products through a chain of nearly 1,200 retail stores nationwide.

For value investors that prefer to search for beaten-up turnaround candidates, Pier 1 could fit the bill. The company has tried one approach after another to turn its operations around over the past couple years, and nothing seems to have worked. Marketing spokespersons such as Kirstie Alley and Thom Filicia have been ineffective, inventory overhauls have failed to connect with consumers, languishing items have only been moved through margin-slashing markdowns, and same-store sales have declined for eighteen consecutive quarters. As a result, the company has been forced to lower its earnings outlook 12 times in the past twelve months.

Last week, the company announced a sharp -10.4% drop in October same-store sales. Management also added that recent promotional activity would weigh heavily on third-quarter margins.

Although the firm's recent results have been unusually bleak, all turnaround stories must reach bottom somewhere before they can begin to climb higher. Those with the faith to climb aboard before signs of a recovery emerge are typically rewarded for their foresight. To that end, the company has been upgraded by five different brokerage firms over the past three months, and Warren Buffett's Berkshire Hathaway purchased eight million shares of the firm last year -- taking a hefty 9% stake. 

While some of Pier One's weakness is attributable to company-specific issues, others in the industry have reported soft results as well. For example, Cost Plus has posted a -3% drop in same-store sales this year. Cost Plus is also experiencing problems with inventory buildup, as merchandise growth outpaced sales gains last quarter 21% to 7%. And markdowns of slow-moving merchandise also took a bite out of Bombay's recent results, with second-quarter net losses widening from $6.3 million to $9.4 million.

As the table below clearly illustrates, PIR has underperformed its industry peers for the past five years:

Not surprisingly, this pullback has made valuation levels for PIR difficult to value investors to ignore. This is true not only relative to PIR's rivals, but also with respect to the stock's historical averages. For example, the shares are currently trading at a Price/Sales ratio of just 0.48 -- precisely half of the five-year average of 0.96. The current Price/Book of 1.40 is also cheap by historical standards.

The recent share price correction has also made the company's dividend yield stand out, particularly for yield-hungry investors. After lifting its dividend payout in each of the past five years, Pier 1 is currently handing out an annual dividend of $0.38 per share, which equates to a yield of approximately 3.4%. However, given the extreme payout ratio and declining cash flows, it should be noted that this $35 million annual distribution could be cut if the firm's bottom line doesn't begin to improve. 

Still, the company's sizable cash balance -- which is expected to reach nearly $170 million at the end of the year -- could buy it some time as management searches for ways to reconnect with shoppers and improve sluggish store traffic. Until then, a generous stock repurchase program should help improve per-share results, and could be a prudent use of capital at these low prices.

Although the macroeconomic environment is challenging and competition may keep a lid on margins, now may be the time to take a closer look at Pier One. Given the level of negativity and pessimism built into the shares, further bad news is liable to be shrugged off, and any improvements could easily lead to a sharp advance in the shares -- possibly leading to a short-covering rally (13% of the company's shares are currently sold short).

To that end, management has revamped its merchandise yet again, is running new television commercials, and has distributed the company's first-ever fall catalog to more than 3 million homes. It takes time for any new strategy to take hold. However, those with the patience to wait on these initiatives to produce results may find the current oversold situation at Pier 1 intriguing.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editor John DiStanislao delivers an in-depth look at a variety of deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to register for this separate publication. To learn more, please visit the following link:
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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
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