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Pier 1's boat comes in with $1 billion sales

By EDMUND MANDER

Pier 1 Imports Inc.'s recent announcement that it had exceeded $1 billion in third-quarter sales was a golden milestone in a journey that has taken the retailer from faded hippie haven to yuppie fashion destination.

Same-store sales for January grew 21.7%, the company's 28th consecutive month of double-digit average gains.

That sales performance is the result of a revolution by the Fort Worth, Texas-based hard goods specialty retailer that has seen it clean up its stores' cluttered image, improve the quality of its merchandise, pursue a disciplined low-cost real estate strategy, and thrust its advertising onto national television.

Pier 1 also is in the process of a steady expansion both at home and abroad. It has grown to more than 760 stores in North America, the United Kingdom, Mexico, Japan and Puerto Rico, and aspires to have up to 1,300 locations in the United States and Canada, according to Pier 1's president and COO Marvin Girouard.

Things are going so well, Mr. Girouard now has the luxury of weighing a question pertinent to only the most successful businesses: "At some point we'll need another growth vehicle," he said.

In short, Pier 1 has done exactly what its customers have done: grown up. When its baby boomer shoppers were flower children, it sold incense, beads and hip wicker furniture. Now, with their hippie days behind them, these affluent homeowners are going to Pier 1 for their quality home furnishings. The median annual household income of Pier 1's customers has risen from $26,500 in the mid-1980s to $53,000 last year, according to the company's annual report.

"Pier 1 is going great," said Kevin E. Silverman, a managing director of Chicago-based Everen Securities Inc., observing how the retailer has maneuvered to benefit from its original customers' growing prosperity.

Moreover, Pier 1 provides these customers something they are not likely to find elsewhere -- confidence.

"They [its customers] don't have any fashion knowledge, so Pier 1 is a store they trust to provide them with design and fashion guidance," Mr. Silverman said. "Department stores or regional furniture stores are just showplaces for an eclectic assortment of goods, rather than having a particular point of view."

For many years, eclectic was the operative word to describe Pier 1's stores, which were filled with a wide range of inexpensive products.

Pier 1's roots lie in a store called Cost Plus, which was established in San Mateo, Calif., by Charles Tandy, of Tandy Corp. fame, and Luther Henderson, Tandy Corp.'s treasurer. Cost Plus used the strong dollar to import hip merchandise, like wicker furniture, brass candlesticks, love beads and incense, from countries like Thailand, India and Mexico at very low prices.

The company was renamed Pier 1 Imports in 1965, and a year later Mr. Tandy divested himself to focus on his Radio Shack.

To say the least, Pier 1 was a hit, with sales growing from $4.5 million in 1967 to $68 million in 1973, and earnings increasing 20-fold to $3.8 million over the same period. In 1969 the retailer went public.

But by the 1980s, Pier 1 was facing some growing pains -- literally: Its customers had grown older and more affluent, and were looking beyond wicker and wax for furnishing their homes. To keep pace, the store began to replace its novelty items with better quality merchandise.

Pier 1 continued to transform after the arrival of Clark Johnson, who joined the company as president and CEO in 1985, and was appointed chairman three years later. He upgraded the merchandise further, increased the size of each store, and launched an expansion program to double the number of stores to 500 by the end of that decade.

But all this did not make Pier 1 immune to the recession during the early 1990s, a time that saw it cut its staff and slow its expansion program. In a little more than a year, though, Pier 1 was on the move again. Repositioning itself as "The Place to Discover," the retailer continued to develop its image by, among other things, stressing customer service. The changes showed when, at the end of 1992, it reported record earnings of $26.3 million.

The following year, the chain launched an international expansion program (see page 58.)

In 1995, Pier 1 aired its first TV ad, in an effort to project its new image into the living rooms of the upscale, and younger, customers it yearned to attract. Since then, it has dropped newspaper advertising almost entirely.

Pier 1 also dropped its clothing line last year, devoting the space instead to higher-margin home furnishings, including textiles, dinnerware, lamps and furniture.

The chain also has expanded steadily, growing from 265 North American stores at the end of 1985 to 605 in fiscal 1993, and opening locations in Puerto Rico and Britain.

Sales grew accordingly -- but so did long-term debt, which had reached $180 million in 1996. Undaunted, Pier 1 pressed forward, projecting its new image into homes across the country through a new national television advertising strategy. The company had concluded that newspaper advertising was not attracting customers so, in 1995, it switched to television as a way to inform people that it was no longer the knickknack store they had known in the 1960s and 1970s.

"It's been a runaway success," Mr. Girouard said, explaining that television has enabled the retailer to show off its new look in vivid color, and to pinpoint its audience. For instance, ads shown during episodes of "Seinfeld" and "Home Improvement" have drawn younger people's attention to the store, he said. (Most of Pier 1's customers are between 25 and 44 years old.)

"Pier 1's a place you've got to see and smell," Mr. Girouard said. "On TV you can see the colors."

This has had a significant impact on the store's success, according to Dana L. Telsey, managing director at Bear, Stearns & Co. Inc., New York. "Television advertising has increased the awareness of the new product selection."

Reaching a national audience made sense for a company that was rapidly expanding throughout the country. It operates more than 725 stores in 47 states, and plans to have 1,000 locations in the United States within five to seven years. It also has 16 stores in Britain -- called The Pier -- nine in Mexico and eight in Japan.

But while Pier 1 might be steadily opening new stores, the retailer also is quick to close those that do not perform up to par. It opened 55 new stores worldwide last year, but closed or relocated 27 others.

The company prefers 8,000-square-foot spaces in better strip centers and mall pads. But outparcels are as close as Pier 1 is likely to get to malls, at least for the moment. It is shutting down a three-year experiment with a mall concept, called The Market at Pier 1, and will stay out of malls for the foreseeable future, Mr. Girouard said. (See accompanying story, page 56).

However, Pier 1 did roll out kiosks selling holiday gift items in 12 shopping centers from October through December of last year. The kiosks were located only in centers that had a Pier 1 store on its perimeters.

Part of Pier 1's reluctance to locate inside malls comes from an ingrained aversion to paying high rents, company officials and observers say.

"One of the secrets to Pier 1's success with regard to profitability has been their ability to keep real estate costs low," Everen Securities' Mr. Silverman explained. This has enabled the company to pass on savings to the consumer. It also has shrunk its long-term debt to around $110 million.

The strategy of keeping prices down is working, observers say.

"They're offering it [merchandise] at very competitive prices that's making the consumers return on a very frequent basis," said Bear Stearns' Ms. Telsey.

But when those customers do return, it is unlikely they'll see the same merchandise, due to a high turnover. About half of the merchandise available is new each year, the company said.

Mr. Girouard wants to increase average sales per square foot, which currently total less than $200, to $250 or even $300 per square foot.

This chain's future is looking good: Company officials and analysts say there is not a competitor in sight. Pottery Barn and Crate and Barrel come closest to being competitors from the house furnishings and housewares point of view, Mr. Silverman said. But, he added, competition is just something Pier 1 does not have to worry about.

Ms. Telsey agreed. "The whole home furnishings industry is very fragmented -- there's still room to expand." Meanwhile, Pier 1's customer base of affluent baby boomers continues to get wealthier still.

Moreover, the strong dollar and the recent collapse of Asian currencies is likely to benefit the retailer, Mr. Silverman said, given that it imports more than 80% of its merchandise from 44 countries, primarily in Asia.

The only challenge that appears to loom for Pier 1 comes from itself, when it runs out of new locations in which to expand.

"I think we can have probably 1,200 to 1,300 Pier 1 stores in America and Canada, but at some point we'll need another growth vehicle," said Mr. Girouard, adding that one solution might be the purchase of a chain of mall stores.

Such problems would be the envy of many other retailers, and are especially ironic for a store that got its start in life from hippies. But there's certainly no mistaking Pier 1 for a hippie haven now: It recently added a bridal registry, and disclosed that a quarter of its sales last year were made on that most bourgeois of modern conveniences -- a "private-label preferred customer card."