The unofficial closing bells put the DJIA up more than 25 points to 11,796.23 (0.22%), the NASDAQ fell more than 15 points (-0.60%) to 2,572.50, and the S&P 500 fell 0.04% or about 0.48 points to 1,215.65.

There were several analyst upgrades and downgrades today, including Hewlett-Packard Co. (NYSE: HPQ), which was raised to ‘buy’ at Sterne Agee. Other action included The Coca-Cola Co. (NYSE: KO) started as ‘buy’ at Jefferies; Lennar Corp. (NYSE: LEN) cut to ‘neutral’ at Citigroup; Pepsico Inc. (NYSE: PEP) started as ‘hold’ at Jefferies; and Cree Inc. (NASDAQ: CREE) started as ‘buy’ at Goldman Sachs.

Here are today’s big post-earnings news reactions with prices during the last half-hour of trading: Ann Inc. (NYSE: ANN) is down more than -6.6%, at $23.63; Cost Plus Inc. (NASDAQ: CPWM) is up more than 3%, at $7.88; H.J. Heinz Co. (NYSE: HNZ) is down more than -3%, at $51.06; America’s Car Mart, Inc. (NASDAQ: CRMT) is up more than 10%, at $35.84; Salesforce.com (NYSE: CRM) is down more than -10.5%, at $112.67; and The Bon-Ton Stores, Inc. (NASDAQ: BONT) is down more than -8%, at $2.84, after posting a new 52-week low of $2.70 earlier today.

Several other standouts from today are as follows…

CF Industries Holdings, Inc. (NYSE: CF) is up about 2.9%, at $152.46. The company’s stock got pounded yesterday on news that the corn prices fell, but are recovering a bit today as investors remember that falling corn prices don’t necessarily mean that less corn will be planted and, thus, less fertilizer will be used.

The Mosaic Co. (NYSE: MOS) is up more than 4.6%, at $53.12. Another fertilizer maker that got slammed yesterday and is recovering somewhat today.

Fisher Communications Inc. (NASDAQ: FSCI) is up about 12.7%, at $29.20. The broadcast TV station operator has sold its Fisher Plaza building in Seattle for $160 million in cash to Hines Global REIT, Inc.

Clearwire Corp. (NASDAQ: CLWR) is down nearly -21%, at $1.47. The company is reported to be considering skipping a $237 million debt payment due in two weeks, raising fears that the wireless broadband provider could end up in bankruptcy.

Meritor, Inc. (NYSE: MTOR) is down about -9.7%, at $5.12, after posting a new 52-week low of $5.11 earlier in the day. Shares lost -17% earlier this week when the company lowered its guidance for 2012 and the stock was downgraded today from ‘buy’ to ‘hold’ at KeyBanc.

Marvell Technology Group Ltd. (NASDAQ: MRVL) is up more than ;6.8%, at $14.70. The chip maker reported so-so earnings yesterday, but strong positive statements by analysts at FBR and Citi have turned broken eggs into an omelette.

Stay tuned for Monday. Atlanta Federal Reserve Bank president Dennis Lockhart is speaking in Brazil. Here’s a list of other noteworthy events (all times Eastern):

• 8:30 a.m. – Chicago Federal Reserve Bank national activity index
• 10:00 a.m. – National Association of Retailers existing home sales report

Have a great weekend.

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Paul Ausick

Boingo Wireless, Inc. (NASDAQ: WIFI) Started as Outperform at William Blair.
Cabot Oil & Gas Corporation (NYSE: COG) Raised to Outperform as Bull of the Day at Zacks.
Cisco Systems, Inc. (NASDAQ: CSCO) Cut to Underperform at RBC.
Cost Plus, Inc. (NASDAQ: CPWM) called the daily Value Stock at Zacks.
Demand Media, Inc. (NYSE: DMD) Raised to Buy at Goldman Sachs.
DryShips Inc. (NASDAQ: DRYS) Raised to Outperform at Wells Fargo.
Goldman Sachs Group Inc. (NYSE: GS) Started as Underperform at RBC.
Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) Reiterated Buy with $97 target at Canaccord Genuity.
JDS Uniphase Corporation (NASDAQ: JDSU) called Bear of the Day at Zacks.
Juniper Networks, Inc. (NYSE: JNPR) Cut to Sector Perform at RBC.
MEMC Electronic Materials Inc. (NYSE: WFR) Raised to Neutral at Goldman Sachs.
Morgan Stanley (NYSE: MS) Started as Underperform at RBC.
SunPower Corporation (NASDAQ: SPWRA) Cut to Sell at Goldman Sachs.
WABCO Holdings Inc. (NYSE: WBC) Started as Outperform at Credit Suisse.
Wendy’s/Arby’s Group, Inc. (NYSE: WEN) Raised to Buy at UBS.
Yum! Brands Inc. (NYSE: YUM) Reiterated Buy with $62 target at Argus.
Zions Bancorporation (NASDAQ: ZION) Raised to Outperform at KBW.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Willem Mesdag, a director, recently purchased more than just a few shares.  On May 24, 2011, Mesdag bought 100,000 shares at $8.84 per share for a total of $884,000.00 and he bought another 29,700 shares the following day at $9.00 for a total of more than $267,000.00. Form 4 filings show that more shares were also acquired:

• June 2: Buy 89,300 shares at $8.94 for $798,601
• June 3:    Buy 36,250 shares at $8.92 for $323,259
• June 6: Buy 184,400 shares at $8.88 for $1,638,265

Mesdag is now shown to own a total of 1,542,150 shares, although the SEC footnotes show that these are held by Red Mountain Capital Partners II, L.P.

In mid-May came news that the company’s loss narrowed to $3.4 million as revenue rose about 6% to $199.7 million for the most recent quarter.  The company also raised guidance with its last earnings report.  Next quarter it sees a net quarter loss of $8 to $10 million, or -$0.37 to -$0.44 EPS with sales of $195 to $199 million.  Net income from continuing operations for its fiscal year of $13 to $15 million, or $0.54 to $0.63 EPS (was $4.7 million for fiscal 2010).

The company also ended the latest quarter with $41 million in borrowings and $7.8 million in letters of credit under its credit facility, down from $61.7 million in borrowings and $10.0 million in letters of credit a year earlier.  More importantly, it claims that the liquidity position is sufficient to meet expenses over the next year and for the foreseeable future.

Cost Plus is one of the retailers which has not ever paid a dividend to its shareholders.  Until the company is consistently earning money every quarter we do not expect that to change.  The company had long ago been a target of Pier 1 Imports, Inc. (NYSE: PIR) but the company fought that off and shares have rallied handily since then.

At the end of May came new coverage on Cost Plus from BB&T, but shares were only started with a HOLD rating.  This is not exactly the most deeply research-infested retailer as its market cap is only about $200 million.  At $9.00, the 52-week trading range is $2.63 to $12.88.

It s hard to know what insider buying means, but insider buying is almost always viewed better than insider selling.  This stake is now worth nearly $14 million and that has been increased substantially in just the last two weeks.

JON C. OGG

Ambac Financial Group, Inc. (NYSE: ABK) is down again, this time by a sharp 14% at $0.46 on over 200,000.  This appears to be more bankruptcy concerns after it hit a new 52-week low of $0.48 on Thursday.

Blue Coat Systems Inc. (NASDAQ: BCSI) is getting hit again after earnings with weak guidance due to Europe (for the second quarter in a row).  Shares are down 7.4% at $17.55 on almost 20,000 shares.  The 52-week range here is $16.35 to $36.25.

Cost Plus Inc. (NASDAQ: CPWM) traded higher last night after earnings by about 7%.  It appeared to be up 19% this morning at $3.75 but that is on tiny volume.  This one may be up but the bid-ask spread is not there.

Intuit Inc. (NASDAQ: INTU) shares are up big after earnings and guidance were both above estimates.  Shares are up 6% at $41.25 but trading volume is still rather thin.

Marvell Technology Group, Ltd. (NASDAQ: MRVL) is soaring after earnings and after a buyback plan.  Shares are up 9% at $16.26 on close to 300,000 shares.

Research in Motion Limited (NASDAQ: RIMM) is getting whacked on a late research call from Morgan Stanley with an underweight rating.  Shares are down 2.5% at $49.20 on over 50,000 shares.

Salesforce.com Inc (NYSE: CRM) earned $0.29 in non-GAAP EPS vs. $0.27 expected from Thomson Reuters. Shares were up almost 8% in after-hours trading and that is the same level this morning at $104.20 on 35,000 shares.

Vermillion, Inc. (NASDAQ: VRML) has no fresh news and no fresh volume this morning.  BUt how long can a trend last?  We counted that there have been 13 straight trading days of share price declines.  It closed at $5.93 yesterday and was at $11.80 when the mudslide started.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The most astonishing fact about the retail industry now is that the environment has gotten much worse than it was when each of these businesses began to fail. Sales at stores across the country will be down this holiday season. Some analysts believe that the numbers will be as bad as for any fourth quarter in thirty-five years.

Adding to the problem of slow consumer spending brought on by the recession is an unprecedented liquidity crisis. Retailers who need access to capital for inventory, rent, and personnel costs are finding that it is nearly impossible to get access to funds without a pristine balance sheet and a history of substantial positive cash flow.

These troubles point to a number of other retail chains going out of business between now and early next year. Sales on Black Friday, the day after Thanksgiving, which is considered the bellwether of holiday sales, will determine the fate of several companies which are now viewed as the weakest operators in the industry.

Here is a list of ten companies which may well not make it if their sales drop by double digits this holiday season compared to last:

1. Bon-Ton Stores (BONT) trades at $1.13, down from a 52-week high of $15.06. That probably says all that needs to be said, but there is more. Over its last three fiscal quarters BONT has lost $82 million. In the latest quarter, same-store sales were off over 8% and total revenue was down 7% to $725 million. The company has interest expense of $25 million. BONT says that its revolving credit facility will get it through any cash crunch. Maybe. With long-term debt of $2.5 billion and $374 million in accounts payable, there is not much margin for error. The company needs an outstanding holiday season.

2. Dillard’s (DDS) is a retail operator that really is in trouble. It has 318 stores, which makes it a relatively small operation in a world dominated by outfits like Sears (SHLD) which has more than 3000 locations. Dillard’s stock is at $3.75, down from a 52-week high of $23.11. S&P dropped the company’s credit rating recently and said, "The rating change reflects our belief that the company will be more challenged than previously expected by the current weak economic environment in the U.S., and that credit metrics will deteriorate more than we had originally projected." In October, the firm’s sales dropped more than 9% to $406 million. Dillard’s points to its revolving credit facility with JP Morgan as its lifeline. In the last quarter, the company lost $38 million. It made $45 million in debt services payments and has long-term debt of $807 million. In other words, no dry powder. It recently cut staff.

3. Talbots (TLB) is another struggling operator. It recently announced that it would try to sell its J. Jill brand. This operation has 383 of Talbots 878 stories. It would be an understatement to say a company would part with that much of its operation if it did not need the money. And, TLB does. Its shares are at $2.68, down from a 52-week high of $17.97. Research house Friedman, Billings, Ramsey recently predicted that the chain would cut its dividend to save money. In the last quarter, TLB lost $15 million. Revenue fell from $414 million in the period a year ago to $357 million in the most recent quarter. Talbots has $212 million in long-term debt. It can’t afford to have sales fall another $50 million this holiday quarter. Recently, it improved working capital agreements.

4. Pier 1′s (PIR) shares are on sale for $.50.  A little less than a year ago they would have cost $8.25, making this a remarkable write-down. PIR said its Q3 same-store sales would be down as much as 18%. The firm says it has a $325 million credit facility, but the stock market clearly thinks that is inadequate. The company’s guidance for the quarter sent shareholders running for the exits. In the last quarter, revenue fell 7% and the company lost $30 million. Pier 1 pulled its guidance because it believes it cannot predict how much the retail market will deteriorate. With $183 million in debt, it won’t take much to tip Pier 1 into insolvency. UBS recently cut its price target on the shares.

5. Cost Plus (CPWM) recently released earnings, and they looked grim. Among other things, the chain said same-store sales could drop 6% in the current quarter. The 296-store retailer predicted poor revenue of as little as $356 million for the period. In the quarter just past, revenue was flat at $213 million and Cost Plus lost $26 million. The firm has $146 million in long-term debt and obligations. Cost Plus pointed out that its credit line borrowings peaked at $125 million in November, well under the limit of the $200 million credit facility. But, that does not leave much room for the company to miss its numbers. The stock trades at $1, down from a 52-week high of $6.22.

6. Williams-Sonoma (WSM) operates 600 stores. The company is doing badly enough that Barclays Capital recently said that it may violate financial covenants on its $300 million credit facility. The retailer made a sharp downward revision in its forecasts. It said it would lose as much as $.12 a share in the third quarter against its previous projection of as much as a $.04 profit. It took its revenue forecast down as low as $732 million. The earlier projection had sales as high as $820 million.  WSM also made extremely sharp cuts in its projections for the fourth quarter. Lenders take loan covenants more seriously in a recession than during other periods. WSM has to beat its numbers or face a chance of its lenders pushing for remedies. The CEO recently forced to sell over 60% of shares due to financial obligations.

7. Chico’s FAS (CHS) trades fairly close to its cash value, a sign that the market thinks that operations are going to burn into that nest egg. The company’s stock trades at $2.58, down from a 52-week high of $11.68, showing that the market does not have many believers in the company. In October, the chain’s same-store sales were off over 13%. For the month, revenue dropped 5% to $394 million. In the last quarter, revenue dropped 5% to $394 million. Net income was $2 million, down from $24 million in the same quarter a year ago. The company had $278 million in cash and securities. But, it cannot sustain double-digit drops in same-store sales indefinitely. The company recently entered into a new credit agreement to help its capital position.

8. Fitch recently cut its ratings on Saks (SKS) to "B" from "B+", hardly investment grade. The retailer has debt of $649 million. In the last quarter, Saks same-store sales were off almost 12% and got progressively worse as each month in the period went by. Like other weak retailers, Saks is in a race to improve sales and earnings before its debt catches up to it. The firm’s stock has dropped to $3.56 from a 52-week high of $22.19. In the last quarter, Saks lost $43 million. In its statement about its financial situation, the company said it believes it has ample flexibility under its existing debt facilities. If Saks’ drop-off in revenue continues from last quarter’s rate of 12% or gets considerably worse over the holidays, the chain could have a very difficult time keeping all of its stores open.

9. Eddie Bauer’s (EBHI) shares trade for $.97, down from a 52-week high of $8.72. The company recently reported an operating loss of $17 million. Revenue dropped slightly to $207 million. The firm has almost 400 stores and outlets. The worst bit of news is that, as of the end of the last quarter, EBHI had only $3 million in cash. It has a $192 million senior term note and $27 million in short term borrowing. It would be nearly impossible to convince investors that EBHI will make it well into next year if sales are poor this holiday season

10. Rite Aid (RAD) is an example of a company that proved the old maxim, "what can go wrong, will go wrong". Its shares are at $.41, down from a 52-week high of $4.72. Rite Aid is bloated with over 5,000 stores, some of which are certainly losing money. The pharmacy company has competition from huge operators including Wal-Mart (WMT). The firm has a massive debt load of $6.1 billion. Rite Aid says that refinancing the load may help its prospects. A Raymond James analyst recently said, "Rite Aid has the worst balance sheet of any company I follow." In the quarter ending August 30, the company’s loss rose to $222 million and its integration of its Brooks and Eckerd drugstore chains appears to be going very badly. Rite Aid also cut forecasts due to "economic weakness". This kind of weakness usually leads to death.

Merry Christmas

Cost Plus (CPWM) Tough results for last quarter. Sells down to $1.50 from 52-week high of $6.22.

China Techfaith (CNTF) Company warns on sales, cut jobs. Plunges to $1.51 from 52-week high of $9.98.

Exlservice Holdings (EXLS) No big news. Slips to $11.07 from 52-week high of $28.96.

Douglas A. McIntyre

There are several larger retailers that are in real trouble. Some are at risk for bankruptcy and each of them could have to cut operations so much that their revenue would be a fraction of what it is now.

24/7 Wall St. has reviewed the stocks of a number of retailers that are still operating independently. If  consumer buying power gets worse it could lead to an ugly outcome for retailers that don’t have strong balance sheets and at least modest same-store sales.  Bankruptcy is not at all a pre-determined fate and these retailers may have modest prospects if they can get their houses in order.  But significant risks loom for their shareholders, especially if the economy takes several quarters to recover.

Sears (SHLD) is the most likely candidate for mass store closings. It has the balance sheet to weather a tough period, but not at its current size. Between the Sears and K-Mart brands, SHLD operates in 3,800 locations. The company is losing money and its cash balance fell sharply in the last quarter. In its comments about financial results, Sears said it did not expect that the troubles with a slow economy or rising commodities prices would get better this year. Comparable store sales for the Sears brand dropped almost 10%. The only way to improve that if the current retail recession continues is to close 10% of the company’s outlet, about 350 locations.

Circuit City (CC) has to top the list of retailers that are not likely to make it out of a severe recession.The company’s share price is $2, down from over $25 less than two years ago. Its market cap is only $350 million even though annual revenue runs about $12 billion. The competition in consumer electronics is killing CC margins.The company has almost 700 stores. If a downturn lasts well into next year, CC will have to cut scores of locations or seek court protection for its assets

The cool importers….. You can argue that Pier 1 Imports Inc. (PIR) and Cost Plus Inc. (CPWM) are being thought of as one because of the plan by Pier 1 to acquire its smaller troubled competitor.

Pier 1 is expected to lose money for fiscal Feb-2009 and has posted losses over the last three years.  The good news is that appears to have liquidity enough to get through the storm as long as it can move back to annual profitability in fiscal 2010 as analysts expect.  As of March 1, 2008 it had 1,117 stores and it has already closed some locations and many expect more.  If consumer buying power get worse, at a minimum you could anticipate fewer Pier 1 stores as it reviews its geographic position. If the retail recession lasts into next year, Pier 1′s future starts to get dicey.

Cost Plus is thought of by many as "The Other Pier 1" and it can’t be any secret that its restructuring and turnaround have failed to generate anything of benefit. Its market cap is only $50 million against annual sales of $1 billion  It has just shy of 300 locations and Cost Plus is faced with the prospects of closing more stores or paring down the size of some of the stores on its current leases whether their landlords want that or not.  As it fights a buyout by Pier 1, Cost Plus is faced with management and legal distractions not unlike those which Yahoo! has been up against.  Analysts expect losses for the next two years and loyal customers are likely wondering how long the financial performance can be tolerated. The current market value of the company is astonishing close to nothing

Re-Sellers and Retailers:

Tuesday Morning Corp. (TUES) is another at-risk liquidation retailer that sells many in-home items that overlap products sold at larger retailers.  In fact, it is not infrequent at all that the items on their shelves still have the original large store’s price and retail tag on them with the lower-priced Tuesday Morning tag over the original price.  The company is expected to be profitable by analysts but it doesn’t take a genius to realize that the company has had enough earnings warnings to bring the stock down from $30 in 2005 down to $4 today.  Bankruptcy isn’t an immediate possibility, but it would be easy to imagine that with 800+ locations the company may start lopping off some under-performing units.

Gap Inc. (GPS) is such a damaged brand that you have to be amazed that it has remained profitable during a period of declining sales.  The "dead money stock" classification for investors has been in effect for almost this entire decade.  It shuttered its Forth & Towne brand and has been restructuring under new management.  It has announced that it is closing many locations of the Gap, Banana Republic, and Old Navy brand stores, and it is really consolidating the Gap locations of Baby, Kids, and "Us."  The problem is that GPS has to fight so much brand damage that even in the current economy the restructuring could go on for years.  Added economic pressure will drive more store closures.  The good news here is that this could always be a break-up stock or a a perpetual "re-org" for investors.  Analysts are still expecting profits for the coming years, so don’t lose too much sleep about whether or not the company will be there.  How many locations of each store brand is another question entirely. With same-store sales at Old Navy in particularly bad shape, the entire division may be closed. The Gap will make it, but its weakest brand will not

Blockbuster Inc. (BBI) has been a perpetual saga which many would have to call a race to Zero. Netflix is only one of its problems, but it is amazing that Blockbuster has managed to do well as it has.  Many market pundits believe it is only WHEN rather than IF it disappears.  But there is hope and amazingly enough it is expected that the company will be profitable for each of the next two years and it is even expected to grow earnings.  Whether or not this happens depends on both the economy and the rate at which consumer move to digital downloads.  The company has sliced store counts already but it still has 7,800 locations when combining the U.S. overseas.  Competition and a changing consumer are elements BBI has had to adapt to and Wall Street would seemingly not be in a position to blame management if they decided to close more stores. While consumers may still rent DVD’s, the risk that internet delivery of content will grows as a formidable alternative every day puts an endpoint on physical stores are a primary delivery system. At some point Blockbuster cannot support its own infrastructure.

Rite Aid Corp. (NYSE: RAD) has been another turnaround stock that just never turned around.  The company was a huge growth engine for investors for much of the 1990′s, but it has been under $10 this whole decade and sits close to a $1 now.  It has lost money in the last two years and Wall Street expects losses to continue for the next two years. It has over 5,000 stores and yet it doesn’t cover the entire U.S.  When a company keep losing money, has sporadic to negative sales growth, and faces much more dominant competition, the market begins to wonder if or when the day will come when it disappears.  A turnaround is always possible and it has many investors holding out for that day.  But competing against Walgreen’s, CVS, Wal-Mart, and Target is a tough space to be in.  If the trends of the last decade continue and if you include an economy where stronger companies can undercut Rite-Aid day in and day out, then store traffic is likely to fall very sharply.  Management’s purchase of shares recently can’t change the economy.

Some of these companies will not make it, at least not without a Chapter 11 filing. Others may survive, but in terms or size and store count, they will likely look nothing like they do now.

Jon C. Ogg and Douglas A. McIntyre

Pier One also noted that it sees a slight negative to slight positive for its same store sales.  It also said it expects a slight positive earnings for its fiscal 2009, with the caveat of holiday sales living up to the company’s expectations.  Wall Street isn’t a believer, at least it doesn’t seem that way since its own internal track record has been a poor one for some time.   

This should effectively kill its unsolicited proposed buyout offer chances for Cost Plus Inc. (NASDAQ: CPWM) coming under the Pier One umbrella.  If Pier One wants the company they are now likely going to have to come up with a cash component for the merger to where it is as close to a no-lose situation for Cost Plus shareholders.  The 0.6 shares of Pier 1 would barely be $3.05 per Cost Plus share based upon a $5.08 Pier One stock price.

This shouldn’t be interpreted that Cost Plus has done a great job or that it will do a great job.  Much of the issues that hurt Pier 1 are the same issues that hurt Cost Plus.  But shareholders over at Cost Plus are likely going to roll the dice rather than accept a take-under buyout after feeling this much pain.

Pier One shares were at north of $8.00 even in mid-May and shares dropped from $6.67 to $5.26 when it announced its unsolicited offer for Cost Plus.  Cost Plus shares are at $3.40 after today’s open.  Perhaps both companies need to hear the old saying "Physician, heal thyself."

You can join our open email distribution list to hear about other mergers, IPO’s, secondary offerings, restructuring, and other special situations.

Jon C. Ogg
June 19, 2008

Early this morning, Cost Plus issued a statement saying the company is unanimously rejecting the Pier 1 offer to acquire the company after determining that the offer is not in the best interest of the company and its shareholders.  Its statement pretty much says it all:

• We believe that our strategic plan, which is yielding positive results, will provide Cost Plus shareholders with superior and compelling long-term value as an independent company. Despite your statements to the contrary, Cost Plus has significant liquidity to pursue its business objectives and to deliver improvement in our core business metrics…. Your proposal to combine our operations is not attractive from either a financial or a strategic perspective. It is both distracting and ill-timed given the difficult retail environment and the progress we have made investing in and improving our business.

After today’s close, Pier 1 came out swinging on its own and it doesn’t look like they are going to go away no matter "distracting" this may be.  It even notes its terms and conditions as "subject to only limited conditions that are customary for transactions of this type, which are confirmatory due diligence, the negotiation of a definitive acquisition agreement and the receipt of all necessary shareholder and regulatory approvals."  Unfortunately, when you are engaged in a stock for stock merger where the premium has shrunk to a near take-under those are fairly strong conditions.  Pier 1 plans to take this issue straight to Cost Plus shareholders.

Pier 1 goes further and notes that it could yield roughly $50 million in cost savings and give shareholders the chance for upside in execution.  The original offer would have been valued at $4.00 per share based upon the 0.60 shares of Pier 1 per Cost Plus share.  But with a $5.97 closing price today the offer price at a full swap is only $3.58.  Cost Plus shares closed up at $3.46 today and its 52-week trading range is $3.46 to $9.00.

If Pier 1 wants this company, on the surface it is going to take more money or a larger share offer.  Otherwise many Cost Plus shareholders are going to have to use the worst investment strategy of simply crossing their fingers and hoping things get better, because that exchange ratio isn’t going to get too many holders that excited.

Both stores have their niches, and both have their current problems that overlap.  This merger saga is far from over.

You can join our open email distribution list to hear about other mergers, IPO’s, secondary offerings, private financings, activist investors, and more.

Jon C. Ogg
June 16, 2008

As far as the terms before any dilution, this would have been a 31% premium for Cost Plus before any dilution metrics come into play.  The buyout terms are for 0.6 shares of Pier One for each share of Cost Plus.   

The problem is that Pier One shares have fallen and therefore lowered the potential buyout price compared to any cash offer buyout deal. With a 16% drop to $5.55 per Pier One share, this works out to a mere $3.33 for Cost Plus.

The truth is that a deal of this sort would perhaps allow the company to stabilize the bleeding of the two operations.  Both suffer from many of the same commonalities:

1. weak consumer
2. brutal housing markets
3. weak dollar and dependence on foreign suppliers
4. poor execution and inability to compete
5. lack of pricing power
6. lack of profitability and inconsistent turnarounds

The problem is that while Cost Plus is up on the offer, this is just a stock for stock swap and requires the faithless to take faith into another group that also its legion of faithless behind it.  Pier One did note that Cost Plus was going to soon run into liquidity issues if it does not agree to to a deal.  Unfortunately, that is correct if its books are accurate.

Lastly, this would have made great sense in 2006 before Cost Plus pared down some of its real estate ownership for a sale-leaseback arrangement.  Cost Plus shares are now only up about 7% at $3.28; its 52-week trading range is $2.65 to $9.02.

We have reviewed both Cost Plus and Pier One for our weekly "10 Stocks Under $10" newsletter.  Unfortunately, for now it appears that this merger is the mathematical equivalent of "1+1=1"… or so it seems.

Jon C. Ogg
June 9, 2008