Pier 1 Imports Inc (NYSE:PIR) delivered yet another strong quarter of results that highlighted its status as one of the ‘go to’ plays for a housing recovery in the States. It is not that the US mass consumer is in particularly good shape right now, but there are a few sweet spots (housing and autos) seeing relative strength. In addition they tend to be coming off a low base so the opportunity for upside leverage is considerable. Where next for the sector?
Housing Thesis Still Intact?
It’s been an interesting few days for the housing market thesis. I’ll return to Pier 1 Imports Inc (NYSE:PIR) in a moment but first a few words on Wells Fargo & Co (NYSE:WFC)’s latest results. The bank’s importance to the US mortgage market is significant, and there wasn’t a lot of great news on that front in the latest report. Within its consumer lending group, originations, applications and the application pipeline for home loans all declined sequentially by $16 billion, $12 billion and $7 billion respectively. However there was better news for auto originations, which rose 10% year on year.
This is hardly great news for the current housing market and suggests that it will take a while yet for the recovery to fully kick in. I suspect we are seeing a sustainable recovery, but it is gathering traction at the higher end first. Ultimately, these things feed down into the wider market, and as long as employment gains continue to grow apace I suspect this will happen. There is no doubt that it is taking longer to happen than normal at this stage of a recovery, but that is the way it is and investors need to factor this in.
For Wells Fargo & Co (NYSE:WFC) investors this means patience will be required, and they will need to take a sanguine view over yield compression. This graph demonstrates the essence of the challenge facing the bank in 2013:
Net interest income and margins are getting weaker because the bank has seen large rises in deposits while the bank deals with the maturing of previous loans at favorable rates.
With that said, the net interest income after provision for credit losses actually rose 4.3% thanks to a lowering of provisions. The bulls’ hope is that a point of inflection will come whereby increasing credit quality and an improving economy will graduate into a better lending environment. I happen to think this will happen, but Wells Fargo & Co (NYSE:WFC) could clearly do with diversifying its revenue generation while waiting.
Pier 1’s Plans
Of course this is music to the ears of Pier 1 Imports Inc (NYSE:PIR) investors, because the company has thus far benefited from the nascent housing recovery and there should be upside to come if it continues. I had previously thought that its same store sales guidance for 2012 was conservative, and indeed the Q4 numbers came in at a healthy 7.5%.
On the basis of any metric the company is seeing strong performance, and its plans for 2013 and beyond are being made within a decent end market backdrop. I think there is a good chance that Pier 1’s plans to aggressively increase its e-commerce activities and its point of sales (POS) in-store systems (the two will be fully integrated in the future) will work to expand revenue generation in the near to mid-term.
The idea of a multi-channel retail experience is also in fashion at Nordstrom, Inc. (NYSE:JWN). The latter is trying to differentiate its offerings but offering more of its lower price point stores (Rack) while increasing its e-commerce activities (organically and via acquisitions) offering–you guessed it–point of sales systems in its stores that are intended to integrate with the e-commerce offering. My concern with Nordstrom, Inc. (NYSE:JWN) relates to the sheer expense and sophistication of its program.