Pier 1, Cost Plus Battle on the Brink

(MoneyWatch)  With poor results getting retail stocks hammered on Wall Street, even more pain is being inflicted on the already beat up home furnishings sector where two major players, Pier 1 and Cost Plus, started today with share prices under a dollar and questions about their survival looming.

Pier 1 is in the tougher spot. In its last quarter reported, ending Nov. 29, sales were off by 20% and comparable store sales by 18%. While those numbers are scary by themselves, it's important to consider where the company stands as a business. This isn't case of thwarted progress. After years of languishing, Pier 1 hired CEO Alex Smith in 2007. He recognized that to survive Pier 1 first had to undo programs that had undermined its original position as an importer of unique furniture and home furnishings just to start winning back customers lost. By the time those steps were undertaken, though, a recession in home furnishings was well underway. Analysts have pointed out that the product offering has improved under Smith, but in a recent research note, Standard & Poors acknowledged that Pier 1 could run out of money before it could right the business.

Recently, shoppers visiting Pier 1's web site were alerted to a 75% off sale on the home page, one which included "many new items." Having to discount so deeply on new products to win customer attention confirms that things are tough at Pier 1.

Another hint of Pier 1 desperation came in June when it tried to acquire Cost Plus. The price offered then was $4 a share. Facing a skeptical investment community, Pier 1 withdrew the offer after two weeks, which must now be regarded as a relief around the Cost Plus headquarters and Pier 1's home base.

In struggling to survive, Cost Plus has more options than Pier 1. Over a third of the company's sales come from food and other consumables. Also import oriented, Cost Plus sells coffee, tea, wine, beer, snacks, sauces and meal kits featuring exotic dishes. And it emphasizes bargains. The stores sell some relatively pricy vintages, certainly, but they also offer private label Wine 4, a three-liter boxed item equivalent to four standard bottles of wine, for $14.99.

Cost Plus also got off track earlier in the decade, expanding rapidly east and venturing too deeply into furniture sales. The company acknowledged its mistakes a couple of years ago, pumping up consumables, which increased as a percentage of sales to 37% in the mos recent quarter completed from 36% in the same period last year. While a marginal improvement, it could be significant given that retailers carrying food are performing better these days than those that sell just general merchandise.

Still, Cost Plus holiday sales slid over 4% and same-store sales decreased by almost 7%. On Jan. 9, Cost Plus announced a plan to downsize headquarters and distribution staff while closing 26 stores and exiting eight eastern markets where it has too few stores to support efficient marketing. The move stopped a slide in its stock value, and, five days later, it's share price battled back to a buck. Pier 1's just slid.

In a market where even leader Bed, Bath & Beyond has suffered negative comps and declining share prices, Pier 1 and Cost Plus will need help to rebound, perhaps another bankruptcy in the home furnishings retail sector.