Dive Brief:

• S&P Global analysts downgraded Pier 1's debt Thursday evening from B to B- and issued a negative outlook. "[Pier 1] will continue to face operating performance pressure through at least the next year amid a transformational turnaround plan under new management, especially given steep declines in comparable store sales in the fourth quarter of fiscal year 2018 and first-quarter 2019," analysts with the credit ratings agency said in a press release emailed to Retail Dive.
• The downgrade comes after Pier 1 last month unveiled a three-year turnaround plan to boost sales and profits at the home furnishings and decor retailer, which would include $60 million in new capital investments during its current fiscal year, according to a press release.
• That announcement followed the company's fourth quarter and full-year report for fiscal 2018, both of which showed a retailer in need of improvement. Pier 1's Q4 net sales fell 3.1% year over year to $512.2 million, and comparable sales fell 7.5%. Earnings, sales and comps all missed analyst expectations, according to MarketWatch. For its fiscal 2018 (which ended in March), Pier 1 made $1.8 billion in sales, a 1.6% decline from the previous year, and comps fell 2%.

Dive Insight:

Pier 1's executive team, which includes some new faces — including former Bon-Ton exec Nancy Walsh, who joined in January as CFO — sees the writing on the wall. The good news for the home goods retailer is that it has still been making money up to this point, with net income of $15.1 million in the fiscal year that just wrapped up. The bad news is Pier 1 is losing market share and sales.

Competition in the space is heavy, with Target and Walmart both expanding their home goods offerings, and TJX Cos. picking up customers with its Home Goods and new Homesense store lines. And then there's the constant growth of Amazon and Wayfair in the space is well. Against that backdrop, Pier 1 is struggling to find its footing.

In last month's press release, executives at the company outlined their turnaround plan, which aims to better target and market to customers, improve the customer experience and boost the company's operating performance through new pricing strategies, inventory reduction and supply chain initiatives. Pier 1 President and CEO Alasdair James, a former Kmart chief who joined last year, said in a statement he expected investments related to the plan to lead to a loss for the year.

S&P analysts said Thursday that even as Pier takes measures and makes investments to boost sales, it faces high execution risk given "customer perception that the merchandise is overpriced relative to peers."

"We are not expecting any meaningful benefits from the plan this year, partly because newer product offerings at better values will arrive in stores only in the second half of the year," the analysts also said. "We expect modest benefits thereafter, but we think margins will be under continued pressure from highly competitive and nationally expanding discount brick-and-mortar home decor competitors like At Home Group, and TJX's Homegoods and Homesense. We also expect continued expansion of e-commerce furniture competition (e.g. Wayfair, Amazon)."  

Pier 1's store comps fell 5.3% from 2015 to 2017, while it's total comps fell 0.8%, according to data from Morgan Stanley analysts. The company has also closed a net of 18 stores between 2014 and 2017 as it tries to adapt to the rise of e-commerce.

To that end, the retailer said it made $450 million in online sales in fiscal 2018, with e-commerce penetration of 26%. As part of its turnaround plan, Pier 1 said it plans to boost its omnichannel platform.

But that comes with its own set of issues. In a report from earlier this month, Morgan Stanley analysts pointed to Pier 1 as among the "e-commerce challenged retailers" whose sales are subject to online incursion. As those retailers respond by boosting their own online sales, their margins erode with the higher costs of e-commerce sales as compared to stores, the analysts noted.