Dive Brief:

• A group of Pier 1 lenders have organized amid concerns the company's deteriorating financial situation will require a balance sheet overhaul, three sources familiar with the situation told Debtwire.

• The lenders tapped Brown Rudnick as legal counsel to assist in next steps, the sources said. Pier 1 did not immediately respond to Retail Dive's request for comment.

• Beyond its financial picture, Pier 1 is also experiencing a lot of executive turnover. CEO Alasdair James resigned in December and board member Cheryl Bachelder was appointed interim CEO. Earlier this month, CIO Lance Willis joined the company from Toys R Us, where he was the global technology officer.

Dive Insight:

The situation at Pier 1 has gone from bad to worse. Five consecutive quarters of negative comparable sales and continued merchandising misses as inventory remains high has led to deteriorating gross profit margins, and of course, a lot of debt.

"They have this situation building that you say, 'Well, how do they ever get themselves out of it?'" Debtwire Analyst Philip Emma told Retail Dive in an interview Friday. Net sales in its latest quarter, which ended Dec. 1, plummeted 11.9% year-over-year, while comps declined 10.5%.

The company's earnings have dropped so low that in January the company received a notice from the New York Stock Exchange that it had six months to regain compliance with its minimum share price, which is at least $1.00 over a 30 trading-day period. Emma estimates the company will end the year with a potential negative $50 million adjusted EBITDA.

That said, the company still has time and solutions before a bankruptcy is more likely to occur, Emma said, noting the company appears to have a lot of liquidity and borrowing capacity.

"They have time to restabilize the business. There is no hard deadline, nothing that will force them to do something this calendar year. They can continue to add debt with the business beginning to flounder," he said. "The big picture is how do you fix this business?"

From a competitive position, the industry grows at best 5%, depending on how you include home furnishings, Emma said, but online businesses are far outshining that. Wayfair, for example, notched record fourth quarter growth, reporting last month that full year 2018 revenue rose 44.7% year over year to $6.7 billion.

The company has been taking steps to try to turnaround the business by cutting costs. But slashing marketing expenses appeared to backfire last year, Emma said, and the fact that their inventory is inflated relative to their sales performance, "implies they may have a lot of inventory but they don't have good inventory." Now interim CEO Bachelder is tasked with figuring out a way to unload a lackluster assortment.

"It would not surprise me if they wind up closing a significant number of stores," Emma said.