In this time of uncertainty, when many retailers are still trying to figure out strategies for long-term survival, home furnishings seller Pier 1 Imports is an unlikely source of inspiration. Even before the recession, many analysts and industry experts predicted a bankruptcy filing for the Fort Worth, Texas-based chain as it struggled with falling sales and stiff competition from more affordable big-box players.
Yet a year after peers Linens 'n Things and Bombay Co. have liquidated, Pier 1 is still around. Last week, the retailer even announced it would cut the number of expected store closings in fiscal 2009 to 50 from the previously scheduled 125.
The chain’s secret, according to experts, has not been its merchandising strategy, but the aggressiveness in managing its balance sheet. In the past year, it completed a sale-leaseback of its headquarters, made an aggressive push to renegotiate store rents and maintained conservative use of its credit facility. “They took a series of steps that bought them time and that’s the reason they are not out of business,” says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm. “They were very aggressive on cost-cutting, they were very aggressive on their balance sheet and they were more aggressive on negotiating lower rents than anybody I’ve seen. Money buys you time.”
That's enabled the firm to hang on even while it continues to struggle with sales. Pier 1 reported higher merchandise margins in the second quarter, but its same-store sales were down 7.6 percent –worse than the 1.7 percent decrease reported in the second quarter of 2008. One issue there, according to Davidowitz, is that the firm continues to have difficulty differentiating itself from other home furnishings sellers and its product selection remains uninspiring.
Still, Pier 1's financial strategies have bought the chain precious time to straighten out its merchandising—and that provides a powerful example for other retailers looking to survive until a brighter sales environment emerges.
“Overall, we feel good about our business, what we have achieved and what is to come," CEO Alex Smith said during the company's second quarter earnings call with analysts on Sept. 17. "We have done so much to make our company leaner and more efficient—now it’s all about growing the top line. We are confident that if the improvements in customer traffic continue, we will be able with our improved merchandise and in-store experience to generate positive comp store sales at solid merchandise margins.”
Pier 1's survival stems in part from the fact that it began to address its liquidity position as early as March 2008. At that point it announced a sale-leaseback transaction with Chesapeake Energy Corp. for its corporate headquarters in Fort Worth. The deal, which allowed Pier 1’s corporate staff to remain in the building, brought in approximately $100 million of extra cash for the retailer. Pier 1 followed this up with a 10 percent reduction in workforce, affecting primarily its distribution, home office and administrative staff and the vacating of its 514,000-square-foot distribution facility in St. Charles, Ill. All of this was months before paralysis struck financial system in September 2008 and prior to the stretch when retail sales really began to dive off a cliff.
In another move, to hold onto as much available credit as possible, the retailer avoided using the $267 million left on its secured credit facility for anything other than the issuance of letters of credit in the first half of 2009. Inability to secure credit was one of the primary reasons for the demise of Linens 'n Things late last year, when the home furnishings seller couldn’t pay its bondholders more than $1 billion in debt.
In February of this year, Pier 1 also moved to cut its occupancy costs with the appointment of DJM Realty, a Melville, N.Y.-based space disposition specialist to help it renegotiate its rents. At the time, the retailer issued a press release warning its shareholders and, presumably, its landlords, that it would close up to 125 underperforming stores if the negotiations proved unsuccessful. By the second quarter, Pier 1’s occupancy costs were $68 million—down 5.5 percent from $72 million in second quarter 2008. The chain managed to secure rent reductions at approximately 30 percent of its 980 U.S. stores, according to comments made by Charles H. Turner, Pier 1 CFO and executive vice president, during the company’s second quarter conference call. He expects the reductions will save Pier 1 $11 million in cash in fiscal 2010.
"As we continue to look, we’re looking at every single store in every single market and depending on the individual landlords and the good news is we have a lot of individual landlords, we will be taking a look at it market by market," Turner said. "We’d like to say at some point we’ll start to fill in the holes ... because there are some markets we have left that we want to get back into. But right now we’re not prepared to talk about that."
The company may close 20 additional stores in 2010, but the strategy going forward will be to focus on rent reductions rather than lease terminations.
Part of Pier 1’s success in the negotiations may have been due to the fact that landlords are well-aware the company has been in dire financial straits, notes Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based consulting firm. “One of the benefits of being in such a precarious position is that it gives them leverage with the landlords,” he says. Yet according to Davidowitz, Pier 1 had to convince its landlords not just that it genuinely needed the rent reductions, but that it was going to survive the recession. He credits Smith for presenting Pier 1 as a viable retailer going forward, even as most analysts continue to question its long-term prospects.
“Why would a developer do this if you are going to be gone in a year?” Davidowitz says. “That’s why this guy is a fabulous salesman. I think it's persistence and an ability to convince the developer that you are going to be around. They started before anyone else; they were more aggressive and they were more persistent. They’ve done a lot of things right in the tackling of survival, or they wouldn’t be around.”