Some Stocks Are Not Value Investments At Any Price

The current analyst consensus for Pier 1 Imports (PIR) calls for the stock to trade at $30 per share within five years. Based on the current price of $8 per share, you might think that sounds like an attractive investment to consider.

I think the analysts are wrong.

This is a company that, absent a corporate buyout, will eventually be destined for bankruptcy based on fundamental changes in the business model since 2004.

For most of the company’s existence, it was a lucrative investment. It sood niche furniture, lamps, wood accessories, vases, and other bourgeoisie furnishings at 15% profit margins. For people that wanted to be stuff brand new, and wanted something nicer than the Wal-Mart or Target variety brand, it had a captive audience.

And the investment returns showed how much can be made by selling highly profitable items to the same small niche over and over again. If you purchased the stock at the 1987 IPO, you would have earned 14.5% returns and increased your returns ten fold by the summer of 2004. $10,000 would have turned into $100,000. $100,000 would have grown to $1 million. And so on. The store count hit an all-time high of 1,400 in 2004.

But yet, there was one glaring problem: The company website,, has been absolutely awful. The online options in 2004 were limited, the color designs looked spammy, there was little encouragement of “basket” purchases to entice customers to buy multi-items, and the checkout on the company website didn’t even feel safe–it looked like the kind of thing a computer science undergraduate major could hack.

Every year, in every annual report, Pier 1 Imports management would say something to the effect: “We know the website isn’t where it needs to be. We’re working on it. It will be up to speed soon. We promise.” Meanwhile, Amazon continued to gain the market share of erstwhile consumers, and trendy startups like and lay claim to the younger generation.

Over 85% of the customers at Piers 1 are women. And of that, almost 90% are between the age of 40 and 70. Although Piers 1 finally did get around to improving the website in 2013, the current website setup still lacks the intuitiveness and “basket purchase enticement” that characterize the experience at Amazon.

The botched opportunity with the e-commerce website was so substantial that I find it unlikely Piers 1 will ever capture the audience made up of women who are currently in their 20s and 30s. I don’t think they will presently convert from Amazon to Piers 1, nor do I think they will age into it. Only shoppers with a memory of the Piers 1 brick-and-mortar stores in the 1990s and early 2000s will continue to use Piers 1.

And what about those brick and mortar stores? After hitting a high of 1,400 stores in 2004, Piers 1 has been gradually shrinking its physical footprint as the stores have not been profitable.

The store count is down to 1,000, and Piers 1 has already committed to closing 30 stores during the remainder of 2015, 40 next year, and 20 in 2017. The actual amounts will likely be higher, as that only speaks to the current stores slated for closure. This once proud company, which boasted 15% profit margins, now only earns 3.9% profits across the company.

That low profit margin is especially problematic considering that most people find the goods pricey. The problem is that the fixed rental costs are high at the stores, and low foot traffic translates into low sales that barely eek out an overall profit. A study of Piers 1 import in 2015 shares too many discomforting similarities to a study of Border’s before the fall.

What really bothers me is that Piers 1 is delivering disappointing returns during generally good economic conditions. Profits of $1.20 in 2012 fell to $1.01 in 2013 and then $0.84 last year. Piers 1 tumbled 9% in today’s after hours trading after management announced reduced guidance to $0.60 for earnings this year. And the dividend is still getting paid. This reminds me of Kodak in the late 1990s, paying dividends and reporting lower profits even as the general economy was improving. Eventually, Kodak got destroyed by Apple’s iPhone and the nascent smartphone market.

Today, we see Piers 1 report worsening results amidst a generally improving economy, and continue to make dividend payments even as Amazon and the nascent e-commerce industry strikes blows against the core Piers 1 business model.

Peter Lynch often mentioned that you do not buy a stock simply because its stock price fell 50%. That’s not value investing. Value investing involves finding companies where the sentiment and valuation of the stock is undeservedly bad. Wal-Mart and McDonald’s tend to do quite well in recessions, and tend to lag in improving markets when consumers “trade up.” Oil stocks report profits that are heavily reliant on the price of oil, and everyone knows this is subject to extreme fluctuations in the short term. Companies like GlaxoSmithKline have key products go off patent, and this provides a value opportunity as part of the ebbs and flows of the biotech sector.

But this is different. Piers 1 has always performed well during improving economic conditions, as it sells middle-class luxury goods. And it gets deciminated during recessions. Did you see what happened during The Great Recession? Losses of $1.09 per share, losses of $1.45 per share, and losses of $0.06 per share described the Piers 1 earnings experience during the recession. The bankruptcy risk became so substantial that the price of the stock fell from a pre-recession high of $25 to $0.10 per share. Although buying at $0.10 looks great in hindsight, I’m not sure it was wise: If the year “2009” repeated itself twice more, Piers 1 likely would have reorganized in bankruptcy.

In the long run, I question the survival ability of Piers 1. I don’t know who their core audience will be, and I’m not sure how they will gain market share from Amazon which tends to offer a better website experience, more options, and lower prices. The brick-and-mortar stores will continue to shutter. In the medium term, I am concerned about the performance of Piers 1 during a recession. It lost lots of money during the last one, saw the price fall to ten cents, and I would argue it is less equipped for a recession this time around than last.

The fact that it fell from $23 last year to $8 today is not proof of a value investment opportunity. A moderate or worse recession can make this company run losses. If the price falls below $3 or so, perhaps we could discuss Piers 1 in the spirit of a lottery ticket–like the old Graham days of buying 100+ stocks in deep financial trouble at firesale prices, with the expectation that the gains from the survivors will overcompensate for the ones that go bankrupt. Meanwhile, Piers 1 does not have any of the characteristics that resemble a buy-and-hold forever investment, and in the medium term, I am concerned for the shareholders that own this stock going into the next recession.

Originally posted 2015-09-24 21:19:28.

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