Dive Brief:

• Pier 1 Imports on Wednesday said that first quarter same-store sales were basically flat after adjusting for a decline in the Canadian dollar, falling about 1% compared to Q1 last year. Net sales in the quarter fell 2% to $409.5 million from $418.4 million in the year-ago quarter, missing FactSet analysts expectations for a loss of 5 cents per share on revenue of $421 million, according to MarketWatch. 

• E-commerce sales in the quarter rose 23% to $99.3 million, representing 24% of net sales in the quarter, compared to about 19% in the same quarter last year, the company said in a press release. Shares tumbled more than 10% Thursday morning after the report.

• Some measures indicate that cost controls and the ability to avoid discounting is paying off. Gross profit in the first quarter rose 140 basis points to $151.6 million or 37% of net sales, compared to $149 million, or 35.6% of net sales in the year-ago period. First quarter merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit) totaled $240.2 million, or 58.6% of net sales, compared to $232.5 million, or 55.6% of net sales in the year-ago period, due to improved supply chain operations and decreased clearance, the company said.

Dive Insight:

It’s early days at Pier 1 for CEO Alasdair James, who arrived just last month from Kmart. 

The furniture and home goods retailer is in the midst of a turnaround that entails shrinking its store base. The average number of stores operating in the first quarter of fiscal 2018 fell approximately 1% compared to the first quarter last year. The company is on track to close 20 to 25 locations this fiscal year and next, bringing the portfolio to about 965 stores, James told analysts Wednesday, according to a transcript from Seeking Alpha.

“Going forward, there will be continued opportunities to exit some locations and to further reduce occupancy costs,” James said. “But our analysis tells us the vast majority of the portfolio will continue to be profitable for the foreseeable future. It is one of the most positive things about my first few weeks in this role.” James joined Pier 1 in May following a stint as president and chief member officer of Sears Holding Co.’s Kmart unit.

With 11 fewer stores than at the same point last year, shrinking sales aren’t a surprise, says GlobalData Retail Managing Director Neil Saunders, who added that its “an acceptable price to pay … to maximize productivity and profitability.”

But it doesn’t look like the remaining stores are delivering, Saunders told Retail Dive in an email. “The 0.2% slip in comparable sales is only mild, and it is undoubtedly affected by a weaker Canadian dollar, but even so, it underscores the fact that stores are delivering virtually no growth,” Saunders warned. “Worryingly, this has been the case for quite some time — in the same period last year, comparables were down by 2.5% [and] last quarter they only just nudged into positive territory, rising by 0.4%. These are lackluster results.”

Considering that Pier 1’s play is an omnichannel one, leveraging stores for digital sales and vice versa, those numbers should be better, according to Saunders. Speaking to analysts Wednesday, James said that the company aims to look at the effect of store closures on digital sales. He believes that more showrooming and customer experience is going to drive stores while more delivery will be fulfilled from stores or direct to home.

“[W]e have to get to a place where we measure zip code profitability because we know from when we close a store that we retain about 20% of the sales from that store closure and we retain about 80% of the online sales,” he said. “We also know that over 90% of all of the online sales either are initiated in pass through or touched by our store portfolio in some way.”

“[A]s long as we understand the role of store plays in the zip codes profitability, as a whole we'll make sure we do the right thing by the portfolio and have the right platform for future growth,” he added.

But Pier 1 stores are undermining those goals, Saunders suggested, saying that the problem rests on some store locations and the state of the stores themselves.

“[G]iven that the company has also increased marketing spend, pushed its loyalty scheme, and improved the layout, it is disappointing that physical stores have not made more of a contribution,” he said. “[W]hile we recognize that improvements have been made to the layout, we maintain our view that the proposition is not as clear and compelling as it should or could be.”

The retailer offers attractive merchandise at good price points, but that can be hard to find, while furniture needs more space to be showcased properly, Saunders said. “In short, stores are not terrible, but neither are they compelling enough to drive visitation.”

The bottom line is suffering as a result, compounded by the higher costs of e-commerce, which has been exacerbated by the retailer’s lower free shipping threshold. Still, the improving merchandise and lower costs have enabled Pier 1 to reduce losses. “In our view, this shows the company is on the right track—even though it has many more things to do if it is to get back into the black,” Saunders concluded.