UPDATE 2-Pier 1 qrtrly loss worse than expected; shrs plunge

(Adds analyst comment, stock price)

NEW YORK, June 19 (Reuters) - Struggling home furnishings retailer Pier 1 Imports (PIR.N) posted a worse-than-expected quarterly loss and sales on Thursday, and its shares sank 20 percent.

The retailer, which has been criticized for bidding for smaller rival Cost Plus Inc (CPWM.O) while still trying to right its own ship, expects "modest net income" before charges for the full year.

"The company clearly took a step forward" with improvement in selling and general expenses, as well as its margins, but "there's still a lot of work to be done," said Anthony Chukumba, senior research analyst with FTN Midwest Securities. "The acquisition of Cost Plus is ill-advised," he added.

Pier 1's first-quarter loss came to $32.8 million, or 37 cents a share, for the period ended on May 31, narrower than the year-earlier loss of $56.4 million, or 64 cents a share. The results were helped by lower expenses and decreased promotional activity.

Sales fell to $310 million from $356 million, hurt by lower traffic in March and April because of a year-earlier promotional event. Pier 1 said traffic improved during May. Analysts expected sales of $338.5 million for the quarter, according to Reuters Estimates.

Sales at stores open at least a year, or same-store sales, fell 5.4 percent in the quarter, but the company noted that same-store sales rose 7.5 percent in May.

Merchandise margins improved to 51.3 percent during the quarter from 45.5 percent a year earlier, reflecting lower promotional and clearance activity. Selling, general and administrative costs fell 17 percent.

Pier 1 offered to buy Cost Plus for about $88.4 million in stock earlier this month, but the operator of Cost Plus World Markets rejected the bid this week, saying it was not attractive financially or strategically.

Analysts have also given the Cost Plus bid a thumbs-down, saying acquiring the smaller rival would distract Pier 1 as it looks to keep its own turnaround on track. Cost Plus said this week the bid was not attractive financially or strategically.

"Buying Cost Plus would reduce (Pier 1's) financial flexibility," said Chukumba.

Falling home sales and values and tighter credit have compounded trouble for home-goods retailers as higher gasoline and food costs pressure consumers. Linens 'n Things recently filed for bankruptcy protection.

For the second quarter, Pier 1 forecast "slightly negative to modestly positive" same-store sales, with earnings before interest, taxes, depreciation and amortization expected to be "slightly negative to slightly positive."

Pier 1 shares sank $1.36, or 22 percent, to $4.88 in morning New York Stock Exchange trading, while Cost Plus was down 21 cents, or 6 percent, to $3.29 on Nasdaq. Pier 1's shares have fallen about 42 percent in the past year while Cost Plus shares have dropped about 60 percent. (Reporting by Karen Jacobs)