Pier 1 Imports, Inc. (NYSE:PIR) shares moved down marginally after Elliott Associates and Elliott International disclosed a 5.5% stake in the company and expressed their concerns over the company's pace of cost-cutting and restructuring actions over the past two years. In a letter to the company, the hedge fund said that the company should "right-size" itself by closing down a significant number of stores, lease part or all of the corporate headquarters, and add new independent members to the company's board of directors. If executed properly, Elliott believes that this strategy will yield immense value to shareholders by creating a leaner, profitable company to better compete in the future.
The hedge fund believes that the Pier 1 should close down a significant number of stores because the company operates significantly more stores than its home furnishings retail competitors in a business that they believe will begin to scale back soon after a rapid expansion between 2000 and 2006. Moreover, Elliott believes that the company's recent accelerated expansion has led to significant levels of cannibalization and a meaningful number of highly unprofitable stores. Consequently, the hedge fund recommends closing around 250 to 300 underperforming stores as quickly as possible, returning their store count to no more than 1,000 stores.
Elliott is also concerned about the company's growing expenses. They noted in their letter than as Pier 1's store count has grown, so has its level of SG&A expense. Since 2002, SG&A expenses have increased 43% while the company's top-line has only grown seven percent. By reducing the company's store count, Elliott believes that the company will be able to reduce their SG&A expenses to 2002 levels while lowering their expenses as a percent of sales.
Finally, the hedge fund concluded its letter by recommending that the company add new independent directors to its board to assist in a turnaround. While they did not recommend any specific directors, they are likely seeking to simply add members that would be willing to pressure the company to implement any turnaround changes more quickly that the current pace. Overall, this company is definitely one
worth watching - if any of these changes are implemented, it could mean significant share appreciation over the medium to long term.
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