HOME FURNISHINGS BLACK BOOK
Slide Deck: CLICK HERE
Video Replay: CLICK HERE
Here's a quick summary of where we stand on PIR, as well as links to our 90 page Home Furnishings Black Book and video presentation.
CONCLUSION: PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything stupid and destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock.
1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.
2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything stupid that would cause a downturn in the business (espec w ouster of CFO in Feb). Quite the opposite, in fact.
1. Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.
2. Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.
3. We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.