Analysis: Pier I stores not inspiring enough to drive traffic

Pier 1 has ended its fiscal year with a very dismal set of numbers. In spite of the additional week of trade in the quarter, total sales fell by 3.1%. While some of this is down to the ongoing store closure program, the fact that comparable sales dropped by a more dramatic 7.5% reveals a worrying deterioration in underlying trade. Meanwhile, on the bottom line, net income continues to plummet, dipping by almost 44% over the prior year.

The homewares and furniture markets both performed well over this period, as did many of Pier 1's rivals. As such, the fault for all of this falls squarely on the shoulders of Pier 1. And despite a long period of decline, the company has not yet taken the right actions to correct performance.

The poor numbers at physical stores can be partly explained by the continued surge in online, where sales rose by 21% this quarter. Pier 1 has, for some time, pursued an omnichannel strategy which means that some of the sales made through its e-commerce division are supported by customer visits to shops. However, when overall sales are in freefall and when profitability is weakening, it is clear that this strategy is not paying dividends. In our view, unless Pier 1 can drive store performance it will continue to fail.

In our view, there are two main reasons for the current poor store performance. The first is the location of some of the shops. The second is the nature of the stores.

Looking at location, while Pier 1 does not have a sub-optimal fleet, there is no doubt that some stores are in locations suffering from weak customer traffic. With its smaller store footplate and more specific offering, this is not something Pier 1 can completely remedy on its own -- although it has tried with initiatives like in-store events. Unfortunately, it does not look like trade will pick up in some of these locations which could, over the longer term, mean more store closures.

Regarding the nature of the stores, while we recognize that improvements have been made to the layout, we maintain our view that the proposition is not as clear and compelling as it should or could be. Pier 1 has some nice pieces, often at good price points, but these can be hard to find. Meanwhile, categories like furniture need more space if they are to be showcased properly. In short, stores are not terrible, but neither are they inspiring enough to drive visitation.

With stores not pulling their weight, the bottom line suffers. This is particularly true given the higher costs of online fulfillment -- something that Pier 1 has started to address, but where it has much further to go before it achieves optimum efficiency.

Although performance has been weak for some time, we believe Pier 1's response has been lackluster. There have been some initiatives, but these have neither addressed fundamental weaknesses, nor have they been part of a well-coordinated strategy. We are encouraged that the company intends to try and remedy this with both new management appointees and a three-year strategic plan.

In our view, it is now absolutely imperative that Pier 1 improves its profile and attractiveness among consumers. While the market is growing, so too is competition. As much as it is true that Pier 1's aesthetic used to make it distinct, others are now replicating this - at least in parts of their offers. Wayfair and TJX are among them. To survive, Pier 1 needs to stand for something different and work to educate consumers about its uniqueness.