Dive Brief:

• Hedge fund Alden Global Capital, which last month disclosed a 9.5% stake in Pier 1, Friday delivered a letter with an ultimatum: Either appoint Alden President Heath Freeman as "director to assist with CEO search" and grant him authority to appoint new board members, or the hedge fund might pursue a consent solicitation to replace members of the struggling home goods retailer’s board. 

• Pier 1 responded publicly on Friday afternoon, saying that the retailer has been in talks with Alden, including phone calls as well as five meetings, and warned that Alden’s ultimatum is “not constructive and could erode shareholder value by undermining the company’s announced CEO search and disrupting its business in the holiday selling season.”

• Pier 1 adopted a poison pill last month after Alden disclosed its stake, a move that Freeman has called "a nonsensical scare tactic."

Dive Insight:

At a time when Pier 1 needs to direct its full attention to the all-important upcoming holiday season, its board of directors is squabbling with an activist shareholder over its future.

In a press release on Friday, the Pier 1 board walked a fine between defending its autonomy to elect its own board and noting its gratitude for the hedge fund's significant investment (which Pier 1 can't afford to lose). “Pier 1 Imports has a highly qualified, diverse Board with significant retail experience which was reelected with greater than 98% approval by our shareholders at our annual meeting less than four months ago," it wrote. "Nonetheless, we are mindful of Alden’s significant investment and will continue to engage and attempt to work collaboratively with Alden and all our stockholders to help the Company achieve success and enhance value for all stockholders."

Not long ago, Pier 1 seemed to be on a recovery trajectory under Alex W. Smith, who announced earlier this year he will step aside as president and CEO just before the new year. Over the last few years, Smith has made a concerted effort to boost the retailer’s e-commerce business: Digital sales were minimal at best when he took over 10 years ago, and accounted for some 20% of the company's total sales in its second quarter. Despite his efforts, Pier 1 reported a 6.7% revenue drop last quarter on declining traffic and discount pressure, and lowered its earnings guidance from 32 cents to 40 cents per share to 16 cents to 24 centers per share.

Pier 1's stock has been in decline since February of 2015, when CFO Cary Turner abruptly resigned. Analysts have since expressed concern over the retailer's ability to withstand intense competitive pressures, noting that while the housing market is improving, consumers enjoy a growing number of home furnishing options both offline and on the web.

Smith will also resign his position on the company's board of directors. Pier 1 is working with executive search firm Korn Ferry to find a replacement, and Alden Global Capital said it wants to play a role in the search. Meanwhile, the hedge fund denies plans to take over the company.