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Deutsche Bank: An Activist Investor May 'Perhaps' Show Interest In Pier 1 Imports

Jayson Derrick

When Pier 1 Imports (NYSE: PIR) reported its first quarter results on June 19, the company's earnings per share and revenue fell short of what analysts expected. In addition, Pier 1 Imports lowered its full year fiscal 2015 earnings per share guidance to a range of $1.14 to $1.22 from $1.16 to $1.24.

Shares of Pier 1 Imports tumbled more than 10 percent as it was clear Pier 1 Imports is lagging its peers like Williams-Sonoma. In fact, the entire sector has been under pressure as the S&P Retail Index has under-performed the S&P 500 by approximately ten percent year to date.

As PetSmart has seen recent activist involvement, analysts at Deutsche Bank are now speculating that Pier 1 Imports could be next.

“With the pull back, activist chatter has increased, with PetSmart already having activist involvement and discussions around names like Bed Bath & Beyond as well,” Adam Sindler of Deutsche Bank wrote on Monday. “On Pier 1 Imports specifically, the shares are currently trading at 10.4x CY15 (fiscal 2016) versus the [Retail Index] group at 14.9x on P/E and 5.1x versus 8.1x on EV/EBITDA.”

Related Link: Rosenstein Makes More Noise On Sale Of PetSmart

Despite a belief that an activist investor may show an interest in Pier 1 Imports, Sindler maintains a Hold rating and $18 price target.

Leveraged buyout ‘could work'

Sindler notes that a leveraged buyout of Pier 1 Imports “could work” if Pier 1 Imports could maintain high-single-digit sales and stem operating margin declines.

The analyst assumes a minimum 1.5x coverage ratio, beginning debt to EBITDAR of 5x to 6x and approximately 30 percent equity-to-cap. In addition, a return on equity of 15 percent is set as a minimum.

The analyst also assumes a bank debt carries a rate of LIBOR plus 350, or about four percent, and that high yield debt carries a rate of eight percent.

“Recently, however, we believe investors have moved a bit more to the aggressive side, accepting either less equity (so more levered) or traditional leverage metrics less stringent than historically speaking, so we also run our leveraged buyouts with a coverage ratio under 1.5x, adj debt to EBITDAR above 6x and only 20 percent equity-to-cap,” the analyst wrote before concluding “we believe a buyer could pay between $17 to $17.50 for the company.”

Sindler also adds that the likelihood of Pier 1 Imports seeking an operational acquisition partner or repurchasing a significant amount of stock are not likely. The analyst points out Pier 1 Import's above average leverage at 4.4x for CY14E versus its peers at 2.7x.

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