Rearranging the deck chairs at Pier One?

Back in August, back when this blog was a wee one, I compared DWRI and PIR. Fortunately, I did not have money to invest, because I may have flushed it into DWRI. Yes, I picked the purveyor of sorta-affordable high design furniture over the Pottery Barn wannabe Pier One.

Cramer can and does change his mind on a stock from one day to the next. I'm taking a second look at PIR six months later.

Nat Worden at thestreet.com thinks Pier One could be a Danish takeover target:

Jacobsen, a European retail magnate and chairman of an Iceland-based firm called Lagerinn ehf, franchises Jysk stores (pronounced yoo-sk), a home furnishings chain that's known as the Danish version of IKEA. Jacobsen's chain has 1,000 stores worldwide, with 23 stores in Canada and two in New Jersey under the name Inspiration. Some investors see his interest in Linens 'n Things, which has now shifted to Pier 1, as a sign that he is looking for a cheap acquisition to expand his reach in the U.S. -- the consumer capital of the world.

"It's entirely possible that he views Pier 1 as a potential takeover target," says Morningstar analyst Anthony Chukumba. "Acquiring Pier 1 would give him entry into the U.S. with a company that has a fairly well-known and well-respected name brand, a nationwide store presence and a decent amount of scale."

The presence of Jacobsen at Pier 1 adds one more wrinkle to a value play that has already attracted legendary investor Warren Buffett, whose Berkshire Hathaway (BRKA:NYSE) disclosed a 9% stake in 2004. Buffett cut his stake in half as the retailer floundered, and Berkshire now owns about 3 million shares.

Shares of Pier 1 have declined about 50% over the last two years as its sales and earnings have consistently slowed and disappointed Wall Street. So far this year, the stock has shown some signs of life after dipping below $9 in December. Despite a dreary holiday performance, shares are now up 29% for 2006, and with a major merchandise overhaul in the works, investors are starting to look at it as a glass-half-full situation.

Sanford Bernstein analyst Colin McGranahan says an investment in Pier 1 is speculative, as it is currently trading at about 86 times earnings estimates reported by Thomson First Call through 2006. But he also says the upside reward potential far outweighs the downside risk.

"It's a very cheap stock with massive potential upside if any kind of turnaround ever materialized," McGranahan said. "It looks like the downside, especially with this guy Jacobsen poking around, is minimal. The stock has bottomed out at around $9 on a few occasions.

Anthony Chukumba at Morningstar spells out the four possible reasons to pick up shares of PIR as a value bet:

We think that there are four possible scenarios for Pier 1 over the next 12-18 months that could significantly increase shareholder value. The first is the planned introduction of more modern styling to the company's products being well received by customers and spurring a sales rebound. The second is the closing of several unproductive locations, leading to higher sales and profits in the remaining store base. The third is an overhaul of top management, which is long overdue, in our opinion. Finally, with all the recent interest in the retail sector by private equity firms, we think that a leveraged buyout of Pier 1 is a distinct possibility. If none of these scenarios appears likely to play out, we will cut our fair value estimate substantially.

Morningstar puts a fair value of $17 on this $11.11 stock. I'm putting PIR in the on-deck circle.