Why Pier 1 Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of home furnishings and decor company Pier 1 Imports sank more than 11% today after its quarterly results and outlook missed Wall Street expectations.

So what: The stock has rallied nicely over the past year on a string of market-topping quarters, but today's second-quarter results -- income plunged 32% on 8% revenue growth -- coupled with downbeat guidance is forcing Mr. Market to sober up. In fact, gross margin narrowed to 40.8% from 41.2% a year ago while same-store sales grew just 3.5% versus 6.5% in the year-ago period, suggesting that the company's competitive position is weakening.

Now what: Management now sees full-year EPS of $1.23 to $1.29 per share -- down from its previous view of $1.27 to $1.32 -- on revenue growth in the high single digits. "We're confident in our plans for the holiday season, including a stepped up marketing campaign which will see our return to advertising on network TV," CEO Alex Smith reassured investors. "We believe the business is well-positioned for the second half of the year and expect to return to our historical levels of quarterly sales and profit growth." Of course, with the stock still up more than 15% from its 52-week lows and trading at a near-20 P/E, I'd wait for a wider margin of safety before betting on that.

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