Fundamentals Worsen at Cost Plus

We reiterate our Sell rating on Cost Plus Inc. (CPWM - Snapshot Report). In our view, Pier 1 Imports Inc.’s (PIR - Snapshot Report) offer to acquire the company in an all-stock deal valued at $88 million or $4 per share is the best that Cost Plus shareholders could have hoped for. We don’t believe the stock is worth $4 per share and would sell any remaining positions on the news of the potential deal.

Despite the company’s turnaround efforts (which include store closings and headcount reductions), Cost Plus fundamentals continue to deteriorate. While we agree with the store closures and headcount reductions, we have to question the company opening new stores in the current retail environment. We see no signs that company will be able to right its ship in the near term, due to macro headwinds that include the housing bust, tighter credit markets, and rising food and energy prices. We expect to see further profit margin deterioration.

Cost Plus shares are currently trading at a price-to-book ratio of 0.3x and price-to-sales of 0.1x. These relative valuation measures appear to be at depressed levels. However, the company’s business prospects remain weak and we are estimating losses for Cost Plus for the next few years. That being said, Pier 1’s offer price is well above our price target of $2. We don’t think Cost Plus is worth $4 per share and would sell CPWM shares on this news.

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