UPDATE 5-Pier 1 loss narrows; stronger sales trends seen
* Q2 loss 19 cts/shr ex-items vs Wall St view 22 ct loss
* Cost cuts, better inventory management boost margins
* Sees merchandise margins improving significantly in Q3
* Sees stronger sales trends in second half
* Pier 1 shares down 3 pct after 15 pct jump earlier (Adds conference call comments, analyst reaction, updates shares)
BANGALORE, Sept 17 (Reuters) - Home furnishings retailer Pier 1 Imports Inc (PIR.N) reported a smaller-than-expected quarterly loss on cost cuts and said sales trends and margins were improving ahead of the all-important holiday season, sending shares up as much as 15 percent.
The results and the optimistic comments also lifted shares of peer Bed Bath & Beyond Inc (BBBY.O) about 3.6 percent to a year high of $39.76. It will report results next week.
Pier 1 expects significant improvements in merchandise margins in the current quarter and said its purchases for the fall and holiday selling season were less cautious than in the last two quarters.
It also plans to double its marketing spend in the current quarter from second-quarter levels to woo more shoppers.
"Green shoots are taller and the light is brighter," Pier 1 Chief Executive Officer Alex Smith said in a statement.
The company's level of clearance inventory is very low, and initial markups are strong, Smith added.
The retailer, which sells goods ranging from wicker chairs and rugs to Jack O' Lanterns and wine glasses, had said in June that traffic at its stores was gradually improving and sales declines in areas like Florida and the West Coast were slowing.
On Thursday, Pier 1 said it was generating positive same-store sales thus far in September. On a conference call, it indicated it was seeing improvements at both its furniture and non-furniture businesses.
"Which is good news. Because it means that we are no longer under pressure from average ticket declines," Smith said.
While analyst Budd Bugatch at Raymond James reaffirmed his "strong buy" rating on Pier 1, Oppenheimer's Brian Nagel raised his price target on the stock to to $3.50 from $2.00. Nagel has a "perform" rating on Pier 1.
However, Standard & Poor's retail analyst Michael Souers downgraded the retailer to "sell" from "hold."
"With negative underlying macro drivers for home goods retailers and profitability several years away, we think the recent surge in share price is overdone," Souers said in a note to clients.
Pier 1 shares were down 9 cents or 3.1 percent in early afternoon on the New York Stock Exchange after rising sharply earlier in the session.
Sales at home-goods chains have suffered as the U.S. housing slump and recession eroded demand for furnishings and other big-ticket items.
Pier 1, whose rivals include Williams-Sonoma Inc (WSM.N) and Bed Bath & Beyond Inc, has been eliminating jobs, closing stores and negotiating with landlords to reduce rents to cut costs. It has also managed its inventory tightly.
In the quarter, the company's selling, general and administrative expenses fell 14 percent to $91 million.
The net loss narrowed to $15.8 million, or 17 cents a share, in the second quarter that ended on Aug. 29, from a loss of $30.2 million, or 34 cents a share, a year earlier.
Excluding a gain on retirement of debt, the loss was 19 cents a share, beating analysts' average forecast of a loss of 22 cents.
Merchandise margins were 52 percent of sales in the quarter, compared with 49 percent a year earlier, while inventories were $43 million lower than last year.
Sales at the Fort Worth, Texas-based company fell about 10 percent to $287 million. Sales at stores open at least a year fell 7.6 percent. (Reporting by Dhanya Skariachan in Bangalore; Editing by Lisa Von Ahn, Dave Zimmerman and Matthew Lewis)