Why You Shouldn’t Count Pier 1 Imports Inc (PIR) Stock Out Yet

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Its safe to say that Pier 1 Imports Inc (NYSE: PIR ) stock hasn't been a winner. PIR stock entered the year right around $9.

Why You Shouldn't Count Pier 1 Imports Inc (PIR) Stock Out Yet

Source: Mike Mozart via Flickr

But a couple quarters later, the stock trades below $5. The downtrend took another leg lower today as investors digest PIR's Q1 report.

Sometimes, though, the biggest losers can turn into the biggest winners.

I think that's the case with PIR stock.

Here's why.

Why to Like Pier 1

The quarter was actually pretty good, and it feels like PIR is just being sold-off because its in a tough space.

The company missed top-line estimates, but beat bottom-line estimates. Comps were flat when the Street was looking for gains of more than 2%. E-commerce sales jumped 23%, and that has been a story-line for Pier 1 for some time. Last quarter, e-commerce sales jumped 28%.

Dour brick-and-mortar results coupled with this surging digital business means that e-commerce is making up a bigger and bigger slice of the pie. E-comm was 24% of sales in the quarter versus 19% in the same quarter one year ago. That positions the company nicely to exist in an e-commerce dominated world.

The really good thing about PIR is the company's margin story. Other retailers are having to drive sales with heavy promotions, and that is causing gross profits industry-wide to shrink dramatically. But not PIR. Gross profit jumped 140 basis points in the quarter to 37%. Merchandise margins jumped 300 basis points.

The catalyst for the strong gross and merch margin gains? Greater supply chain efficiency and less markdowns. The latter is huge, since it shows that Pier 1 isn't having to discount to drive sales. That is somewhat unheard of in today's retail environment, and it means that customers actually see value in Pier 1's product offering. Investors should look at this customer affinity and stickiness as long-term defensible value.

Meanwhile, management is keeping operating expenses down. The SG&A rate increased only 10 basis points in the quarter. Even as the rest of the industry suffers from sales deleverage and labor inflation, PIR is managing to keep operating expenses down due to the company's lean operating model. The pick-up in the SG&A rate was a result of increased marketing spend, and that is actually a good thing because it should result in some return on investment. It is a revenue-generating cost.

Putting that all together, PIR saw EBITDA margins expand 120 basis points in the quarter to 2.8% on a sales decline of roughly 2%. That is unusual and healthy expansion in this retail environment.

Meanwhile, PIR has a strong and growing balance sheet. Pier 1 has about $161.6 million in cash on the balance sheet. That is about $2 per share, and its up about 25% year-over-year. There is about $200 million of debt on the balance sheet, and that is cause for some concern. But as stated earlier, cash is up more than 25% year-over-year. The debt-load, meanwhile, is actually down.

The cash flow situation is equally as strong. Operating cash flow was positive, free cash flow was positive, and net cash flow was positive even after paying a $0.07 quarterly cash dividend. For what its worth, that dividend is good enough for a 5.8% yield. Investors might just buy the stock based on that 5.8% yield.

Bottom Line on PIR Stock

Overall, with PIR, we have a company that has stagnant overall sales growth, a booming e-commerce business, rapidly expanding gross margins, flat SG&A expenses, healthy EBITDA margin expansion, a strong balance sheet, a growing cash balance, healthy and positive cash flows and a big dividend.

The company also has a long-term future because customers continue to pay more for PIR goods, even in this heavily promotional retail environment. That means customers actually like Pier 1 stuff, not just Pier 1 prices and that's something, Inc. (NASDAQ: AMZN ), Wayfair Inc (NYSE: W ) or any other e-commerce home goods retailer can't damage.

You can't really say that for many other retailers in this current market. Yet PIR stock continues to get killed. The trend is tough to fight, but for investors who can stomach some near-term weakness, PIR could yield big results in a long-term window.

Plus, PIR stock has some very bullish insider activity, and I always like aligning myself with insiders. Although the multi-quarter downtrend is ugly, but PIR stock offers deep value at these levels.

As of this writing, Luke Lango was long PIR and AMZN.

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The post Why You Shouldn't Count Pier 1 Imports Inc (PIR) Stock Out Yet appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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