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Pier 1 Imports (PIR)
Pier 1 Proposes Merger; Stock Plummets
During yesterday's trading session, Pier 1 Imports announced that they were offering to purchase competitor Cost Plus Inc (CPWM: Charts, News, Offers). Typically, a proposed merger is exciting for investors, a sign of good things to come. As expected, the news helped push forward shares of Cost Plus, which rose about 10% by the close of trading yesterday and has continued to rise this morning. Shares of Pier 1, however, plummeted, falling 21%. Why are Pier 1's shareholders reacting so negatively to this news which the company hoped would be stimulating?
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First, we need to look at Cost Plus. The company operates 292 stores, and brings in yearly sales just over $1 billion. However, the company has been struggling in recent years. In the last year, the share price has fallen 13%. The company posted a loss last quarter, and expects one this quarter as well. Much of the company's struggle is due to the declining housing market and weak economy, with people having less money to spend on the home furnishings sold at their store.
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In that light, Cost Plus's shareholders have every right to be encouraged by the deal. Pier 1's offer of 0.6 Pier 1 shares for every Cost Plus share values the company at $88 million. The two companies are both in the retail home furnishings market, which makes it easier to merge. In addition, joining the two companies into a larger company might allow the newly formed company to become more competitive with its larger competitors, such as Bed Bath & Beyond (BBY: Charts, News, Offers) and Target (TGT: Charts, News, Offers).
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To Pier 1 shareholders, however, the deal doesn't look nearly as rosy, although the executives seem to think otherwise. The executives are seeing this as a way to advance the company, while shareholders are being a little more wary. Shareholders remember that Pier 1 was much stronger about 5 years ago, with a stock price around $25 per share (currently, their stock is trading around $5). In recent years, Pier 1 has struggled just as much as Cost Plus, if not more, due to the housing concerns. A new CEO was brought in about a year and a half ago, with bold plans to make the company more efficient through methods such as reducing costs, closing some stores, and more. And despite his efforts, the company's sales are continuing to fall and the company is struggling to produce a positive operating cash flow.
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The biggest question that Pier 1 investors have is how is the company planning to deal with not only the financial burden of a merger, but also the time and logistical components of combining two companies, at the same time as the company is facing serious financial trouble due to the decrease in consumer spending. Hopefully the company can avoid going down the same path as Linens 'n Things, which had to file for bankruptcy protection earlier this year. Many analysts are being just as critical of the deal, with some advising that Cost Plus shareholders should just sell now, while the company has been boosted by the merger news, rather than wait and see how the new company will fare. If Pier 1 really wants to go through with this merger, the best advice to give them is just to be extra careful; this is a big move at a risky time.
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