Fort Worth Star-Telegram, Texas, Mitchell Schnurman Column: Pier 1, Bombay Made Same Mistakes

By Mitchell Schnurman, Fort Worth Star-Telegram, Texas

Oct. 7–In Bombay Co.’s recent bankruptcy filing, it cites Pier 1 Imports by name, lumping it with a handful of competitors that waged a pitched battle in the home furnishings market. The added pressure forced Bombay to cut prices and contributed to big losses.

Turns out that Bombay and Pier 1 have more in common than the same retail space. More, too, than both calling Fort Worth home and sharing some Tandy roots.

Each went through a golden period from 1998 to 2003, when they grew rapidly, racked up great results and made some noise on Wall Street. Then the bubble burst in their corner of commerce, and they’ve been caught in the shakeout.

In retrospect, both lost their way with merchandising and grew too fast in too many ways. They changed CEOs, embarked on major turnarounds and even hired investment bankers to scour for buyers.

The maneuvers didn’t save Bombay, now in Chapter 11. It’s headed for quick liquidation or a drastic reduction in size. The question is whether Pier 1 can pull out of its trouble and recover.

In recent weeks, signs have been more encouraging, and no one uses the B-word in talking about Pier 1. But the parallels with Bombay are almost uncanny.

Among their common mistakes: In their growth spurts, each launched big initiatives in kids’ furnishings, only to shutter the stores soon after. Both migrated to selling larger furniture pieces, rather than the cash-and-carry impulse items that had been their bread and butter.

They were also swarmed by competitors, from specialty retailers like Crate & Barrel to big-box retailers Target and Wal-Mart. Pier 1 and Bombay were early players in sourcing low-cost products in Asia, but others mastered that business, too.

Pier 1 has always been much larger and better known than Bombay, and it could well avoid the fate of its rival.

First, Pier 1 has plenty of cash — almost $122 million on Sept. 1. And its majestic headquarters building, which new CEO Alex Smith has said is too grand for Pier 1, can probably be sold for $100 million in a sale lease-back.

Pier 1′s stock price has stabilized, too. After losing two-thirds of its value in the past three years, it’s at about the same place it started in 2007 — near $6 a share. Bombay traded below $2 for more than a year and was a penny stock for five months before it filed for bankruptcy protection to reorganize its debt.

Perhaps most important, Pier 1 has managed to stanch the bleeding in its operations. After burning through almost $250 million in cash in 2006 and 2007, Pier 1 will have just $42 million in negative cash flow this year, according to a Bernstein Research analyst. He projects positive cash flow next year.

Reducing Pier 1′s burn rate was crucial, and soon after Smith took over in February he told analysts that the first priority was to reduce costs.

Pier 1 laid off 175 employees and is in the process of closing 100 stores, including the kids’ line and clearance outlets. It stopped TV advertising, dropped its catalog and ended sales on its Web site.

Pier 1 estimates that it will save about $150 million a year from those moves and other reductions. It lost $43 million from continuing operations in the second quarter, compared with a $73 million loss on the same business a year ago.

Pier 1 has also articulated a clear merchandising strategy. It’s getting back to its roots, banking on a wide assortment of handcrafted goods to boost impulse sales. The company added 18 buyers to travel extensively, because Smith says Pier 1 “needs a lot of feet on the ground” to execute the strategy.

For the first time, it offered Halloween merchandise — Smith said it’s been an early hit — and it will be followed by other seasonal themes.

From 1998 to 2003, Pier 1 added 356 stores, triple the expansion rate of the previous five years. It will end up closing 10 percent of its outlets as it winds down to about 1,100 stores by year-end, and Smith says that’s just fine.

“Pier 1 Imports has absolutely a big enough franchise to generate all the sales we need to generate,” he said in June.

Previously an executive at the parent company of T.J. Maxx, Smith is betting his own money on his new employer. On Sept. 28, he bought 40,000 shares of Pier 1 stock for about $195,000.

That’s a vote of confidence, to be sure.

But Bombay’s former CEO was even more aggressive on this front. For three years, James Carreker took his annual salary of about $600,000 in the form of company stock and added to his holdings with market purchases.

“When I talk to investors, I want my commitment to the company to come across loudly,” Carreker said in early 2004.

Bombay was near $8 a share then. By Carreker’s last day on the job in June 2006, it was at $2.27. On Friday, it traded for 11 cents.

Mitchell Schnurman’s column appears Sunday and Wednesday. 817-390-7821

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