The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the Company's consolidated financial statements as of February 28, 2009, and for the year then ended, and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, all contained in the Company's Annual Report on Form 10-K for the year ended February 28, 2009.

Management Overview

Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the "Company") is a global importer and is one of North America's largest specialty retailers of imported decorative home furnishings and gifts. The Company directly imports merchandise from over 50 countries and sells a wide variety of decorative accessories, furniture collections, bed and bath products, candles, housewares and other seasonal assortments in its stores. The results of operations for the three months ended May 30, 2009 and May 31, 2008 are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company's products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment and operates stores in the United States and Canada under the name Pier 1 Imports. As of May 30, 2009, the Company operated 1,073 stores in the United States and Canada.

Despite the continuing economic recession, the Company saw improved operating results during the first quarter of fiscal 2010 when compared to the same period last year. Although comparable same store sales declined, the improvement in operating results were primarily the result of improved merchandise margins, decreased occupancy costs and overall reductions in selling, general and administrative costs.

The Company's merchandise margins improved to 54.2% during the first quarter of fiscal 2010 compared to 51.3% for the same period last year. The Company was able to achieve the improved margins as a result of reduced supply chain costs and decreased clearance activity. The Company took a cautious approach to inventory purchases and continued to focus on the timing and level of its purchases to keep inventory in line with consumer demand, resulting in a decrease in inventory of $90.7 million when compared to the same period last year. The Company's decreased inventory levels, primarily at its distribution centers, has allowed the Company to exit approximately one million square feet of distribution space over the last 24 months.

As general economic conditions have worsened, the Company has intensified its ongoing efforts to reduce occupancy costs and, where necessary, close unprofitable stores at the lowest possible cost. This initiative has resulted in significant cost reductions and is expected to result in the closing of approximately 50 stores in fiscal 2010. The Company expects to continue the initiative beyond fiscal 2010 with the principal objective of achieving further rent reductions across its store portfolio.

Overall, changes made to the Company's merchandise offerings have been well received by customers as the Company saw improvements in the sales of various areas including outdoor furniture and accessories, furniture and seasonal merchandise. Sales have been better than plan through the spring and that trend continues into the summer. As a result, management anticipates less excess inventory at the end of the summer when compared to a year ago. This should translate into lower clearance activity than last year, which could result in fewer sales but better merchandise margins during the second quarter.

Despite the challenging economic environment, the Company has been able to maintain a strong liquidity position. The Company ended the first quarter of fiscal 2010 with $135.8 million in cash and cash

equivalents and, with the exception of issuing letters of credit, did not utilize its secured credit facility during the first quarter.

During March, a foreign subsidiary of the Company purchased $78.9 million of the Company's outstanding 6.375% convertible senior notes due 2036 for a purchase price of $27.4 million, including accrued interest. This purchase improved the Company's balance sheet by reducing the principal amount of its outstanding convertible debt by $78.9 million on a consolidated basis.

The current economic recession faced by the United States continues to challenge the Company's turnaround strategy. The Company's management recognizes this challenge and remains focused on the aspects of its business that it can control: managing inventory levels, controlling costs, driving consumer traffic and its ongoing efforts to reduce its occupancy costs and improve its capital structure.

Results of Operations


Management reviews a number of key indicators to evaluate the Company's
financial performance.  The following table summarizes those key performance
indicators for the three months ended May 30, 2009 and May 31, 2008:



                                                May 30,         May 31,
                                                  2009            2008
Key Performance Indicators

Total sales decline                                   (9.3 )%        (13.0 )%
Comparable stores sales decline                       (7.5 )%         (5.4 )%
Sales per average retail square foot          $        147    $        163
Merchandise margins as a % of sales                   54.2 %          51.3 %
Gross profit as a % of sales                          30.2 %          28.3 %
Selling, general and administrative
expenses as a % of sales                              37.5 %          35.3 %
Operating loss as a % of sales                        (9.5 )%         (9.8 )%
Net income (loss) as a % of sales (1)                 10.4 %         (10.6 )%




                                                May 30,           May 31,
                                                  2009             2008

Inventory per retail square foot              $         35     $          44
Total retail square footage (in thousands)           8,438             8,775
Total retail square footage decline from
the same period last year                             (3.8 )%           (4.2 )%

Net Sales - Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery service revenues and wholesale sales and royalties. Sales by retail concept during the period were as follows (in thousands):

Three Months Ended

             May 30,      May 31,
               2009        2008

Stores      $  279,168   $ 307,082
Other (1)        1,962       2,938

Net sales   $  281,130   $ 310,020

Net sales for the first quarter of fiscal 2010 were $281.1 million, down 9.3% or $28.9 million from last year's first quarter net sales of $310.0 million. Comparable store sales for the quarter declined 7.5%, primarily the result of a reduction in store traffic over last year. Without the effects of Canadian currency conversion rates, the decline in comparable store sales would have been 6.1% for the quarter. The Company had a net decrease of 43 stores compared to the same period last year which contributed to the decrease in total sales. Total store count as of May 30, 2009 was 1,073 compared to 1,116 stores a year ago.

The decrease in sales for the three-month period was comprised of the following components (in thousands):

                                                    Net Sales

Net sales for the three months ended May 31, 2008   $  310,020

Incremental sales decline from:
Comparable stores                                      (22,433 )
Closed stores and other                                 (6,458 )

Net sales for the three months ended May 30, 2009   $  281,129

A summary reconciliation of the Company's stores open at the beginning of fiscal 2010 to the number open at the end of the first quarter follows:

                            United States   Canada   Total
Open at February 28, 2009           1,011       81   1,092
Openings                                -        -       -
Closings                              (19 )      -     (19 )
Open at May 30, 2009 (1)              992       81   1,073

Gross Profit - Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, increased 190 basis points to 30.2% for the first quarter of fiscal 2010 from 28.3% last year. Merchandise margins for the first quarter increased 290 basis points to 54.2% of sales over last year's

51.3% of sales. This increase was primarily the result of decreased clearance activity as the Company focused on managing its inventory levels, requiring fewer markdowns than were necessary to clear inventory during the same period last year. Additionally, margins were positively impacted during the quarter by reduced supply chain costs, including improved vendor and fuel costs.

Store occupancy costs for the quarter decreased $3.9 million from the first quarter of fiscal 2009 as a result of the closure of a net 43 stores compared to the same period last year as well as the Company's efforts to lower overall costs of its leased properties through negotiations with its landlords for rental rate reductions. To date, the Company has achieved approximately $9.0 million in rental savings for fiscal 2010 and expects to close approximately 50 locations in total.

Operating Expenses and Depreciation - Selling, general and administrative expenses for the first quarter of fiscal 2010 were $105.6 million, a decrease of $3.8 million from the same period last year and an increase of 220 basis points as a percentage of sales. The decrease in dollars primarily related to management's intentional reduction of expenses as well as store closures, while the increase as a percentage of sales was the result of the deleveraging of relatively fixed costs over a lower sales base.

Selling, general and administrative expenses for the quarter included the charges summarized in the table below (in thousands):

                                      May 30, 2009               May 31, 2008           Increase /
Quarter                           Expense     % of Sales     Expense     % of Sales     (Decrease)

Store payroll                    $  50,779          18.1 %  $  52,636          17.0 %  $      (1,857 )
Marketing                           13,099           4.7 %     12,673           4.1 %            426
Store supplies, services and
equipment rental                     7,008           2.5 %      7,883           2.5 %           (875 )
                                    70,886          25.2 %     73,192          23.6 %         (2,306 )

Administrative payroll              18,300           6.5 %     20,721           6.7 %         (2,421 )
Lease termination costs              6,412           2.3 %        587           0.2 %          5,825
Severance and other                    468           0.2 %      2,224           0.7 %         (1,756 )
Loss on sale of fixed assets           168           0.1 %         39           0.0 %            129
Other relatively fixed
expenses                             9,323           3.3 %     12,605           4.1 %         (3,282 )
                                    34,671          12.3 %     36,176          11.7 %         (1,505 )
                                 $ 105,557          37.5 %  $ 109,368          35.3 %  $      (3,811 )

Expenses that tend to fluctuate with sales and number of stores, such as store payroll, marketing, store supplies and equipment rental decreased $2.3 million. Store payroll decreased $1.9 million primarily as a result of a decrease in the total number of stores and a planned reduction in full time staff hours compared to the prior year. Marketing expenditures were $13.1 million, an increase of $0.4 million compared to the same quarter last year, primarily as a result of an increase in television advertising offset by a decrease in brochures, catalogues and newspaper inserts. Marketing expenses for the first quarter were 4.7% as a percentage of sales. The Company expects marketing expense for the full fiscal year to be comparable to last year's expense and should be approximately $60.0 million. Other variable expenses, primarily supplies and equipment rental, decreased $0.9 million when compared to the same period last year.

Relatively fixed selling, general and administrative expenses during the first quarter of fiscal 2010 decreased $1.5 million from the same period last year. Lease termination costs were $6.4 million, an increase of $5.8

million over the first quarter of the prior year. This increase was primarily as a result of the closing of 19 stores in the first quarter of fiscal 2010 and increased lease terminations and buyouts. Administrative payroll decreased $2.4 million during the first quarter of fiscal 2010 compared to the same period a year ago, resulting primarily from a decrease in salaries and wages related to the reduction in home office and field administrative employees during the first quarter of fiscal 2009. In addition, the Company froze salaries and implemented other cost saving measures during the first quarter of fiscal 2010. Severance and outplacement costs decreased $1.8 million as a result of the reduction in home office and field administrative employees during the first quarter of fiscal 2009, with no comparable reduction in the first quarter of fiscal 2010. All other expenses decreased $3.1 million.

Depreciation and amortization expense for the first quarter of fiscal 2010 was $6.0 million compared to $8.7 million for the same period last year. This decrease was primarily a result of the impairment of certain long-lived store fixed assets, certain assets' becoming fully depreciated, store closures and the sale of the home office building and related assets at the beginning of June 2008.

The operating loss for the quarter was $26.7 million compared to $30.4 million for last year's first quarter.

Nonoperating income and expense - During the first quarter of fiscal 2010, a foreign subsidiary of the Company purchased $78.9 million of the Company's outstanding 6.375% convertible senior notes due 2036 at a purchase price of $27.4 million, including accrued interest. As a result of this transaction, the Company reduced the principal amount of its outstanding convertible debt by $78.9 million on a consolidated basis. The Company recognized a gain of $47.8 million in connection with this transaction. As discussed in new accounting pronouncements below, the Company adopted Financial Accounting Standards Board ("FASB") Staff Position ("FSP") APB 14-1 under which it reduced the carrying value of its outstanding convertible senior notes as of the end of the quarter by a net $1.3 million.

In addition, the Company settled a lawsuit and received a $10,000,000 payment during the quarter, and recorded a gain as a result of the settlement.

Income taxes - The Company recorded an income tax benefit of $0.2 million during the first quarter of fiscal 2010 compared to an expense of $0.3 million in the prior year. The current year benefit was the result of a $0.3 million increase to the income tax receivable based on the audit results of the Internal Revenue Service. This benefit was partly offset by minimal state and foreign tax provisions during the period. The Company continues to provide a valuation allowance against all deferred tax assets. As a result, no other federal tax benefit or expense was recorded on the results of the first quarter of fiscal 2010.

The Company has accumulated considerable tax net operating loss carryforwards ("NOL's") that can be utilized to offset future income but will expire in fiscal year 2027 if not utilized before then. The benefit and timing of the utilization of these NOL's could be impacted if the Company were to experience a change of ownership as defined by Section 382 of the Internal Revenue Code.

Net Income (Loss) - Net income for the first quarter of fiscal 2010 was $29.3 million, or $0.32 per share, compared to a loss of $32.8 million, or $0.37 per share, for the first quarter of fiscal 2009.

Inventory - Inventory levels at the end of the first quarter of fiscal 2010 were $294.2 million, down $22.1 million or 7.0%, from inventory levels at the end of fiscal 2009 and were in line with the Company's plan for the fiscal year. At the end of the first quarter of fiscal 2010, inventory per retail square foot was $35 compared to $37 at fiscal 2009 year end. The Company continues to focus on managing inventory levels and closely monitoring merchandise purchases to keep inventory in line with consumer demand. Total

inventory during the remainder of fiscal 2010 is expected to range between the current level of $294 million and $350 million with seasonal fluctuations similar to prior year trends.

Liquidity and Capital Resources

The Company ended the first quarter of fiscal 2010 with $135.8 million in cash and temporary investments compared to $155.8 million at the end of fiscal 2009. Operating activities in the first quarter of fiscal 2010 provided $6.1 million of cash, primarily as a result of the Company's net income, a decrease in inventory, and the collection of a $10.0 million settlement related to a foreign lawsuit. These cash inflows were partially offset by the repurchase of a portion of the Company's 6.375% convertible senior notes due 2036 for $27.4 million, including interest, which resulted in the non-cash gain of $47.8 million.

During the first three months of fiscal 2010, investing activities provided $0.5 million compared to using $1.4 million during the same period last year. Proceeds from the sale of restricted investments used primarily for the payment of defined benefit obligations provided $3.3 million, partially offset by contributions of $3.1 million to purchase similar restricted investments. Proceeds from the disposition of properties provided $0.7 million. Capital expenditures were $0.4 million in fiscal 2010 compared to $1.9 million in fiscal 2009. Capital expenditures for fiscal 2010 are expected to be approximately $7.0 million.

At the end of the first quarter, the Company's minimum operating lease commitments remaining for fiscal 2010 were $166.6 million. The present value of total existing minimum operating lease commitments discounted at 10% was $714.0 million at the fiscal 2010 first quarter-end.

As a result of on-going negotiations with its landlords to achieve rental reductions or lease terminations across its store portfolio, the Company has now reached agreements in principal to terminate the leases on 22 stores and will close 5 additional stores for which termination or rental reduction agreements have not been reached. The Company estimates total charges of approximately $8.0 million in cash and non-cash termination charges related to these closures, of which $5.0 million were incurred in the first quarter of fiscal 2010. The cash portion of these charges will be partially offset by the liquidation of inventory in the closing stores. To date, the Company has achieved approximately $9.0 million in rental savings for fiscal 2010 and expects to close approximately 50 locations in total. Going forward the Company's negotiation efforts will be primarily focused on negotiating rental reductions.

Working capital requirements are expected to be funded from cash from operations, available cash balances, cash surrender value of life insurance policies not restricted as to use, and if required, borrowings against lines of credit. The Company's bank facilities at the end of the first quarter of fiscal 2010 included a $325 million credit facility, which was secured by the Company's eligible merchandise inventory and third-party credit card receivables. As of May 30, 2009, the Company had no outstanding cash borrowings and had utilized $100.7 million in letters of credit and bankers' acceptances. Should the availability under this facility be less than $32.5 million, the Company will be required to comply with a fixed charge coverage ratio as stated in the agreement. The Company does not anticipate falling below this minimum availability in the foreseeable future. As of May 30, 2009, the Company's calculated borrowing base was $194.3 million. After excluding the required minimum of $32.5 million and the $100.7 million in utilized letters of credit and bankers' acceptances from the borrowing base, $61.1 million remained available for cash borrowings. As of the end of the first quarter of fiscal 2010, the Company was in compliance with required debt covenants stated in the agreement.

Given the Company's cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund operational obligations and capital expenditure requirements for the next twelve months. The end of the difficult economic situation faced by the United States is not known at this time and consumer confidence and spending could remain depressed and possibly deteriorate even further. The Company may incur negative operating cash flows in future periods and a long-term decline

in consumer spending could have a material adverse effect on the Company's financial condition and ability to generate cash flows from operations. As a result, the Company may become dependent on the availability of adequate capital to fund its operations, carry out its turnaround strategy, or refinance existing indebtedness if necessary. Future availability of financing sources cannot be assured given the current economic environment and the Company's recent financial results, and there can be no assurance that the Company will achieve or sustain positive cash flows or profitability over the long-term.

New Accounting Pronouncements

Effective March 1, 2009, the Company adopted FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)", whichclarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. In accordance with FSP APB 14-1, the Company estimated the fair value of the debt component of its Notes using an income approach by discounting the present value of future payments associated with the Notes, assuming no conversion features. The Company has not applied the provisions of FSP APB 14-1 retrospectively as it determined that the effect on prior periods was not material. The remaining discount of $2.8 million as of the beginning of the year was reclassified to additional paid-in capital during the quarter, and will be amortized as interest expense over the remaining life of the Notes, or through February 2011.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. ("SFAS") 165, "Subsequent Events." SFAS 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Guidance for this topic was previously addressed only in auditing literature. SFAS 165 will be effective for the Company in the second quarter of fiscal 2010. The Company does not expect the adoption of SFAS 165 to have a material effect on its financial position, cash flows, or results of operations.

Forward-looking Statements

Certain matters discussed in this quarterly report, except for historical information contained herein, may constitute "forward-looking statements" that are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission and in material delivered to the Company's shareholders. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects" and other similar expressions. Management's expectations and assumptions regarding planned store openings and closings, financing of Company obligations from operations, success of its marketing, merchandising and store operations strategies, and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, the effects of terrorist attacks or other acts of war, conflicts or war involving the United States or its allies or trading partners, labor strikes, weather conditions or natural disasters, volatility of fuel and utility costs, the on-going recession and related financial crisis and the actions taken by the United States and other countries to stimulate the economy or to prevent the worsening of the financial crisis, the general strength of the economy and levels of consumer spending, consumer confidence, the availability of suitable sites for locating stores and distribution facilities, availability of a qualified labor force and management, the availability

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