Pier 1 shares fall after downgrade

NEW YORK (Reuters) - Shares of Pier 1 Imports Inc (PIR.N) fell as much as 9.5 percent on Monday after an analyst downgraded the stock, citing concerns about the home decor retailer's cash flow and ability to attract shoppers in a difficult economic environment.

"We are skeptical about Pier 1's ability to drive traffic without discounting, and our recent checks at Pier 1 suggest that the company is still using aggressive promotions to clear inventory," Morgan Keegan analyst Laura Champine wrote in a research note.

"If the company is being forced by a weakening consumer to stray from its plan of reducing store-wide markdowns, the margin impact could be extremely detrimental to earnings," she wrote. Champine downgraded Pier 1 shares to "underperform" from "market perform."

Pier 1 has been operating in a challenging sales environment as consumers face declining home values, higher mortgage payments, and rising food and fuel costs.

Its shares, however, had soared nearly 70 percent since December as the company cut its losses by closing stores, slashing jobs and spending less on marketing.

The company invested millions last year in a futile attempt to boost store traffic.

Champine wrote that she remains concerned about the company's balance sheet.

"Although we recognize the stock market's ability to discount some of the future bad news, we feel that a challenging and competitive atmosphere will continue through at least the first six months of 2008," she wrote.

Shares of Pier 1 were down 45 cents to $6.48 in morning trading on the New York Stock Exchange after falling as low as $6.27 earlier.

(Reporting by Justin Grant; editing by John Wallace)