For one thing, Pier 1 takes on a company that is in a worse financial situation than itself. Big mistake. Cost Plus has been closing down stores to stop the bleeding, but it still managed to report a $19.6 million loss from continuing operations before interest and taxes in its latest earnings results in May. The company is projecting another loss
from continuing operations before interest and taxes in the range of
$16 million to $18 million in the second quarter. And in this slowing economy, especially with the glut of unsold homes, those numbers could get worse.
The deal also seems to contradict part of Pier 1's strategy announced in June 2007 of exiting its catalog and Internet offerings and revamping its Web site for marketing. With the Cost Plus addition, it looks like Pier 1 would have to decide what it would want to do with its target's Internet offerings. It seems in this day and age, it's a more cost-effective way to garner sales through a wider customer base over the Internet than through actual stores.
As for Pier 1 chairman and CEO Alex Smith, he obviously believes the combination of Pier 1 and Cost Plus is a win-win situation for both home furnishing retailers, saying it would "create
a stronger and more competitive company that is better positioned for
future growth." Some would agree, but still others might add that the deal might position both companies for a bigger fall, along the lines of a Movie Gallery Inc. Remember it? The video rental company purchased peer Hollywood Entertainment Corp. in a bid to increase market share and put it in a strong position for profit, only to fall in bankruptcy. - Gerald Magpily
See 24/7 Wall Street blog
Dealscape: Pier 1 pursues Cost Plus
Dealscape: Pier 1 sticks to bricks and mortar
