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Pier 1 Imports, Inc. (PIR): Up 18% and Just Getting Started

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Not many companies are able to fall significantly behind their competition when it comes to technology and still compete. In fact, most investors look for companies that are using technology to its fullest to stay ahead of their peers. With that being said, there is one retailer that seems clearly behind the times, and yet the stock could be a great value for investors. If you are looking to capitalize on the continued recovery in the domestic housing market, Pier 1 Imports, Inc. (NYSE:PIR) could be the perfect stock to ride this recovery.

A Little Perspective

Pier 1 Imports, Inc.For those who don’t follow Pier 1 Imports, Inc. (NYSE:PIR), let me set the stage. This is a retailer that sells an eclectic mix of housing goods primarily through its stores. In an age where millions of purchases are made online, Pier 1 stands apart as an old school retailer. The reason the company is able to thrive in this environment is the housing market is beginning to recover, the employment picture is improving, and customers feel better about making purchases for their homes than they did just a few years ago.

What’s ironic is that Pier 1 Imports, Inc. (NYSE:PIR)’s story above could have been cut from the pages of one of Peter Lynch’s books from more than 20 years ago. Contrary to popular belief, the housing market didn’t always go straight up prior to the Great Recession. Lynch lamented years ago that homebuilders’ stocks had already been discovered as housing recovered, and he looked at Pier 1 as an indirect play on the coming recovery, sound familiar? Pier 1 Imports, Inc. (NYSE:PIR)’s stock is up about 18% since the beginning of the year, but this move up is just getting started.

3 Numbers Tell a Growth Story

Any company that can post positive sales momentum in a world where Amazon.com, Inc. (NASDAQ:AMZN) seems to want to take over everything, is a company to watch. Though Pier 1 Imports, Inc. (NYSE:PIR) faces competition from not only Amazon, but also Bed Bath & Beyond Inc. (NASDAQ:BBBY) and Williams-Sonoma, Inc. (NYSE:WSM), the company is doing quite well.

In their last quarter, Pier 1 posted a comparable store sales increase of 5.9%, which drove top-line sales growth of 9.3%. This might not sound that great, until you consider the company was able to turn 9.3% sales growth into 19% earnings growth. What’s more, analysts expect similar growth going forward.

At present, most analysts see Pier 1 posting better than 16% EPS growth over the next five years. Of their peer group, only Amazon.com, Inc. (NASDAQ:AMZN) is expected to see better EPS growth at 37%. By comparison, Bed Bath & Beyond Inc. (NASDAQ:BBBY) and Williams-Sonoma, Inc. (NYSE:WSM) are both expected to grow earnings by more than 12%.

In a similar way, Pier 1 finishes second only to Amazon when it comes to cash flow growth. Earnings growth is important, but cash flow growth is more important to some investors. Amazon posted better than 58% operating cash flow growth last quarter, whereas Pier 1 reported core operating cash flow (net income + depreciation) of nearly 17%. In case investors assume this is standard growth, for established companies, consider that Williams-Sonoma posted core operating cash flow growth of 7.22% and Bed Bath & Beyond reported growth of 5.38%.

A third reason investors should watch Pier 1’s performance going forward is that the company has the best gross margin of their peer group. Pier 1’s gross margin of over 42% has a lot to do with the type of merchandise the company carries. Pier 1 focuses on unique merchandise, which helps the company avoid competing on price with Amazon and other retailers. The only company that comes close to Pier 1’s gross margin is Bed Bath & Beyond at 39.55%, but Williams-Sonoma and Amazon’s margins don’t even come close at 30.46% and 26.56% respectively.

2 Ways Pier 1 Gets Better

While Pier 1 is doing well, there is always room for improvement. What’s exciting for investors is that the company can improve its sales with one change, and its margin and earnings with another.

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