S&P Downgrades Pier 1 Imports (PIR) to 'B'; Outlook is Stable

August 15, 2016 11:08 AM EDT

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S&P Global Ratings lowered its corporate credit rating on Pier 1 Imports (NYSE: PIR) to 'B' from 'B+'. The outlook is stable.

At the same time, we lowered our issue-level rating on the company's senior secured term loan facility to 'B' from 'BB-'. We revised the recovery rating on this debt to '3' from '2', reflecting our expectation for meaningful (50%-70%, at the lower end of the range) recovery in the event of default.

"The downgrade follows Pier 1's continued operating underperformance over the past three quarters, with an especially pronounced decline in the first quarter of fiscal 2017 ended May 28, 2016," said credit analyst Olya Naumova.

The stable outlook reflects our view that Pier 1 will stabilize its operating performance over the next 12 to 18 months. We believe the company has optimized its operating costs, sold the remaining inventory that did not resonate well with the customers, and is in the process of refreshing its' merchandising strategy to be more in line with demand trends.

We could lower the rating if inventory turns and same-store sales decline above our projected levels and result in market share loss and further 200 basis points gross margin erosion, resulting in leverage above 6.0x range, or negative free operating cash flows. At that point, we would reassess the company's business risk profile downwards. We could also take a negative rating action if the company accelerates its debt financed share repurchase program.

We could revise the outlook to stable over the next year if the company successfully adjusts its merchandising and marketing strategy, pricing, efficiency of its distribution centers, and successfully grows top line and operating margins resulting in stabilization of its market share and leverage decreasing to below 5.0x. This would require a 300-basis-point gross margin expansion and 3% increase in same store sales.

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