Will flat-screen TVs save Pier 1?
At least one analyst says hot electronic gear -- more than the housing slowdown -- will help home furnishings sizzle in 2006.
By Parija Bhatnagar, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - 2006 could be the year that style wins over economics to boost the fortunes of flagging home furnishing chains like Pier 1 Imports, Bombay Co. and other chains, according to one industry analyst.

In a recent note, Pipar Jaffray analyst Neely Tamminga said the entire sector deserves another look. Most shockingly, she's even bullish on longtime industry laggard Pier 1.

Despite the past three record-breaking years for the housing market, home decor and home furnishing chains for the most part haven't been able to capitalize on the boom.

Among the casualties, Pier 1 (Research)'s sales at stores open at least a year -- a key retail measure known as same-store sales -- were negative for most of 2005. Bombay Co. (Research) has logged same-store sales declines for seven of the last 12 months.

Cost Plus (Research)' sales fell 2.6 percent last year while Kirkland (Research) saw its sales tumbled 7 percent in its last fiscal year.

Moreover, the stocks of all four companies have suffered over the past 12 months, led by a 46 percent drop for Pier 1 and 48 percent for both Bombay and Kirkland.

So why is Tamminga positive on the sector?

Two reasons -- the growing popularity of flat-screen TVs and an anticipated slowdown in spending on clothes.

Tamminga disagrees with some who say that in a housing slowdown, consumers typically shift attention to sprucing up their homes, boosting spending on renovation and home decor.

"We think 'home' fundamentals are tied to product cycles and not the housing cycles," Tamminga said. As prices keep dropping and flat-screen TVs become affordable to more households, consumers are making them the focal point of their homes, she said.

"When you put a brand new flat-screen in your living room or bedroom, the old furniture becomes outdated," Tamminga said. "A lot of people are updating their furniture and decor to match the TV itself. We think is helping to fuel home furnishing sales."

Secondly, she expects a drop in spending on clothing to mean more dollars for electronics and other home goods.

"Part of this is cyclical. Apparel spending has been strong for the past three years. As we head into spring, apparel sales could be hurt by the lack of strong trends," she said.

Pier 1 shares are off 17 percent so far this year but Tamminga upgraded the stock late last month to "outperform" from "market perform."

"This spring will be a genesis for Pier 1. They'll have 80 percent new products in their stores and I do believe there's less wicker. Pier 1 will also debut its new TV ad and catalog mid-March," she said.

Meanwhile, the rising tide in home decor should also benefit non-traditional "home" retailers like Target (Research) and Wal-Mart (Research), both of which have made an aggressive push into the home area, usually at the expense of Pier 1 and other chains.

"In terms of market dynamics, there are many hands in the market share grab," Tamminga said. "Wal-Mart, Target and department store chains like J.C. Penney and Kohl's will see incremental dollars coming into home furnishing as well."

Kids getting into decorating?

Marshal Cohen, an industry expert and chief retail analyst with market research firm NPD Group, said he's been aware of the trend toward "accessorizing the home" for some time.

"There's no question that the dynamics of the house are very different today," said Cohen. "People who are buying plasma TVs want to add a surround-sound system next, then they want to upgrade to theater seating. In some instances, people aren't even putting in dining rooms anymore but replacing them with media rooms."

At the same time, he identified one more area that could be contributing to growth in home furnishing sales this year -- kids.

"Kids as young as age six are influencing their parents about decorating decisions," he said. "This used to happen when they were more like 16. But now they're telling their parents that they want their room to be renovated for their birthday."

Wal-Mart and Target have cleverly ratcheted up their room decor products geared toward young kids and even college students. On the other hand, Cohen said, he's still not convinced that Pier 1 is a turnaround story.

"It's a two-tier problem for Pier 1," he said.

"Younger customers are migrating to Wal-Mart and Target because the prices are better. Pier 1 has already lost the mid-tier customers who want to upgrade to chains like Ethan Allen. (And) if that's not enough, retailers like Costco, Home Depot and Lowe's are squeezing these traditional chains too in both indoor and outdoor furniture.

"I agree that this will be a better year for home furnishings but I'm not sure about Pier 1's performance," he said.


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--Analysts quoted in this story do not personally own share of the companies mentioned in the story and their firms do not currently have investment banking relationship with any of the companies that they cover.