Point72 Asset Management opens new position in Pier 1 Imports

Position summary

Steven Cohen’s Point72 Asset Management added to its positions in LogMeIn, Inc. (LOGM), AMC Entertainment Holdings Inc (AMC), Bloomin’ Brands Inc (BLMN), Insmed Incorporated (INSM), Kraton Performance Polymers, Inc. (KRA), Kindred Healthcare, Inc. (KND), Aegerion Pharmaceuticals, Inc. (AEGR), and Lumber Liquidators Holdings, Inc. (LL). New positions were initiated in Pier 1 Imports Inc (PIR), Stage Stores, Inc. (SSI), CymaBay Therapeutics Inc (CBAY), and Applied Genetic Technologies Corporation (AGTC).

Point72 Asset Management disclosed a new position in Pier 1 Imports Inc (PIR). A September 13G filing reveals that the fund acquired 4,705,946 shares, representing a 5.0% passive stake in Pier 1 Imports.

Overview of Pier 1 Imports

Pier 1 Imports is a global importer of home decor and furniture. The company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts, and seasonal products in its stores and through its website, Pier1.com. As of August 30, 2014, Pier 1 operated 1,073 stores in the United States and Canada.

Pier 1 is undergoing a transformation based on a strategy dubbed “1 Pier 1.”  With this strategy, the company expects to evolve from a store-only business model to one with full omni-channel capabilities. The company expects to maximize selling opportunities, extend brand reach, and capture greater market share.

Earnings down due to soft store traffic and merchandise margin erosion

Shares fell after the company posted a decline in earnings for the latest fiscal 2Q14 results announced in September. Pier 1 posted lower profits of $9.2 million, or $0.10 per share, compared to $17.8 million, or $0.17 per share, in the period a year ago.

Total sales for the second quarter were $418.6 million, a 5.8% increase over $395.6 million in 2Q13. Comparable sales increased 4.5% during the second quarter, driven by increases in brand traffic, conversion, and average ticket.

In the earnings release, management said, “While total brand traffic, conversion and average ticket all increased in the second quarter, we were challenged by soft store traffic and, more significantly, by declines in our merchandise margins. Consequently, results for the second quarter came in below our expectations.”

Merchandise margins fell as Pier 1 resorted to heavy promotions and felt the effect of fulfillment costs associated with e-commerce sales. Going forward, management expects a “more balanced mix of regular versus promotional pricing.”

On the earnings call, management said, “we are moving back to a promotional strategy based on markdowns, category and stock-keeping-unit (or SKU)-based promotions and incentives for our reward card customers. There will be fewer across the company coupons.”

E-commerce a significant growth driver

E-commerce represented approximately 1% of total sales in fiscal 2013, 4% in fiscal year 2014, 9% in the first quarter of fiscal 2015, and 9.7% in the second quarter of fiscal 2015. Management noted, “The early success of our omni-channel strategy and rapid increase in sales contribution coming from e-Commerce, especially direct and home delivery orders, has reframed the Pier 1 Imports business model.”

With its 1 Pier 1 omni-channel strategy, Pier 1 expects to achieve e-commerce sales of at least $200 million in fiscal 2015. In fiscal 2016, e-commerce sales should be at least $400 million.

During the first six months of fiscal 2015, Pier 1 repurchased 8,055,012 shares of its common stock for a total cost of $144.6 million. It also paid quarterly cash dividends totaling approximately $11.0 million.

In the next part of this series, we’ll discuss Point72’s new position in another Texas-based retailer, Stage Stores.