I recommend initiate a long position in PIR ($21) with near-term target $22.50 (+8%) ahead of 12/13 earnings release and 9-12 month target of $28 = 17.5x CY2014 EPS (+38%) as guidance/consensus estimates rise on ongoing earnings beats and multiple re-inflation.
PIR missed 2Q13 earnings due to what appear to be transitory execution issues of a lack of marketing emphasis on value during a very promotional period and failure to adequately display newness due to an overemphasis on outdoor furniture, all during the final period of peak investment deleverage. The stock sold off -19% over the subsequent few weeks. Given systems and execution improvements in place at the start of 3Q13, a better sequential backdrop, an easy weather compare, and further DTC momentum, I expect comps and profitability to rebound ahead of consensus estimates, leading to earnings and multiple reflation for a housing derivative name.
CEO Alex Smith started 2/07, just in time to commence restructuring the company before the recession hit. Management appears quite capable in depth and is clearly executing well.
Investment Highlights and Competitive Advantages/Barriers to Entry:
Low, growing market share, and nationwide presence - should allow ongoing growth drivers (DTC, systems, assortment expansion) to fuel productivity gains well past peak. Internet - sales capability has been in place for only 1 year and DTC revenues are still ramping, with marketing, testing, and assortment expansions still in the future leading to likely acceleration. Average ticket 2x that of stores. Rewards card - holders purchase more frequently, with higher tickets. Base is growing, and penetration increasing ahead of schedule from 21% to 28% 2Q14, on way to past peak of 33%. Customer captivity - in the form of ADS rewards gains that are growing rapidly and are tailwind to comp • Exclusive products - 95% of assortment, limits vulnerability to direct Internet price competition. Housing - spending still -11% below past peak; home décor usually lags turnover, which was still strong 1H13. Strong B/S and FCF - being returned to shareholders with 1% dividend yield, and $100m share repo/year (-11% share reduction in last 2.5 years).
There is always some degree of fashion risk. Internet cannibalization - started to impact comps in 2Q14 according to bears. Seems unlikely as only 1% of customers are shopping multi-channel, so could not really have been a factor. Peak margins - true, and there is likely to be continued small compression of GM based on mix to DTC, with margins remaining stable at peak 60% levels subject to execution
Target and Valuation:
I would look for the stock to go to at least $22.50 (+8%) ahead of earnings in mid-December as the market starts to focus the combination of the 2Q14 disruption, 3Q13 weather compare, and 3Q14 initiatives. Assuming a beat, I think my above consensus numbers for 2013/2014 are achievable, and suggest accelerated growth in 2014 and onward as they get past some noise in the numbers and DTC growth kicks in and starts to leverage.
Given what could be a period of sustained >+20% EPS growth and strong FCF generation, albeit with low ssf growth, and without assuming a real acceleration in comp, I think a 17.5x multiple is easily justifiable (and below where it recently was), suggesting a stock value of $28 (+34%) within a year. At a 20x 2014 multiple, still lower than PEG, the stock would be worth $32 (+53%). o 16.7x 2013 P/E and 13.8x 2013 P/E seem cheap o Selected comps (home décor and furniture) are currently trading at 18.5x P/E, so this doesn't seem to be a stretch.
Ahead of earnings, I'd see potential downside risk to $20 where I think buyers step in again given that it's a housing derivative that's barely up on the year (+4% vs. +34% XRT) despite numbers that haven't really moved, while recent body tone from the company appears to be positive. EPS growth should step up next year, with a tailwind of 2% from lack of anniversarying 53rd week, and 3% from 2Q14 issue, offset by 2% Hurricane Sandy anniversary, or ~3% tailwind. Leverage from DTC should start to build starting 2014. See next few years EPS growth >+20%, but sf growth is anemic and comp needs to accelerate for real multiple expansion. LT upside is +93% to $40 = 16.5x $2.44 CY2016 EPS, or a 34% stock CAGR (out 2-years) and an EPS CAGR of 24%.