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PIR > SEC Filings for PIR > Form 10-Q on 9-Jul-2013All Recent SEC Filings

Show all filings for PIER 1 IMPORTS INC/DE

Form 10-Q for PIER 1 IMPORTS INC/DE


9-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 March 2, 2013, 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 March 2, 2013.

Management Overview

Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the "Company") is one of North America's largest specialty retailers of imported decorative home furnishings and gifts. The Company directly imports merchandise from many countries and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products in its stores and through the Company's website, Pier1.com. The results of operations for the three months ended June 1, 2013 and May 26, 2012 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 June 1, 2013, the Company operated 1,065 stores in the United States and Canada.

In April 2012, the Company announced a new three-year growth plan designed to drive profitable top and bottom-line growth, expand market share, and increase shareholder value as the Company continues evolving into a multi-channel retailer. The plan includes investing $200 million in capital over a three-year period through initiatives which include building a best-in-class e-Commerce platform; strengthening the Company's infrastructure through investments in technology, processes and systems; and improving the Company's store portfolio through refurbishments, remodels, new store openings and strategic relocations. The plan also includes returning value to shareholders through share repurchases and quarterly cash dividends. In conjunction with the three-year growth plan, the Company established financial targets which include achieving sales per retail square foot of $225 and operating margins of at least 12% of sales by the end of fiscal 2015. The Company expects an online sales contribution of at least 10% of total revenues by the end of fiscal 2016. During the first quarter of fiscal 2014, the Company continued implementation of its plan through a number of strategic projects. The Company believes these projects provide the foundation and building blocks for long-term success.

The Company is making advancements in expanding its multi-channel strategies and executing its "1 Pier 1" vision. One of the key areas of focus is the seamless integration of its two mutually supportive and interdependent businesses - its Pier 1 Imports stores and its website, Pier1.com. Since the launch of Pier1.com last July, traffic to the website has increased significantly, and the Company has seen progressive increases in e-Commerce sales as a percentage of total Company sales. In addition, the Company will be executing major website upgrades this summer, which are intended to significantly enhance the customer experience. The rollout of the Company's point-of-sale system is near completion. Once it is complete, the Company expects to begin the integration process between e-Commerce and the stores, which is an important component of the 1 Pier 1 strategy.

Net sales for the first quarter of fiscal 2014 increased 9.3% and comparable store sales for the period increased 5.9%. The difference between the total sales and comparable store sales growth is primarily attributable to stores opened during fiscal 2013 and 2014, which are excluded from the comparable store sales calculation, and direct-to-customer sales. The comparable store sales increases were primarily attributable to increases in store traffic and average ticket versus last year. Sales per retail square foot were $201 for the trailing twelve months ended June 1, 2013, up from $187 for the trailing twelve months


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

ended May 26, 2012. Management believes that the Company's sales will continue to improve as a result of its unique and special merchandise assortments, superior in-store experience, and enhanced e-commerce experience.

For the first quarter of fiscal 2014, gross profit was 42.4% as a percentage of sales, compared to 41.6% during the same period last year, an improvement of 80 basis points. The year-over-year improvement was primarily due to the leveraging of store occupancy, as well as strong full-priced selling during the quarter.

Operating income for the first quarter of fiscal 2014 was $33.2 million or 8.4% of sales, compared to $27.4 million or 7.6% of sales for the same period in the prior year. Net income in the first quarter was $20.3 million, or $0.19 per share, compared to $17.8 million, or $0.16 per share during the same period last year.

During the first quarter of fiscal 2014, the Company utilized $14.1 million for capital expenditures, which included $9.3 million for the opening of six new stores, one major remodel, new merchandise fixtures and lighting, other leasehold improvements and equipment. The remaining $4.8 million in capital spending was utilized for technology and infrastructure initiatives, including e-Commerce and the new point-of-sale system. Capital expenditures for fiscal 2014 are expected to be approximately $75 million.

As of June 1, 2013, the Company had repurchased 727,400 shares of its common stock under the current share repurchase program at a weighted average cost of $23.36 per share for a total cost of $17.0 million, and $83.0 million remained available for repurchase under the December 2012 Board approved program. Subsequent to quarter end, the Company has utilized a total of $10.8 million to repurchase 459,600 shares of the Company's common stock at a weighted average cost of $23.60 and as of July 5, 2013, $72.2 million remained available for repurchase under the program. During the first quarter, the Company paid a quarterly cash dividend totaling approximately $5.3 million. In addition, on July 2, 2013, the Company's Board of Directors declared a $0.05 per share quarterly cash dividend payable on August 7, 2013 to shareholders of record on July 24, 2013.


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

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 June 1, 2013 and May 26, 2012:



                                                                 Three Months Ended
                                                             June 1,            May 26,
                                                              2013                2012
Key Performance Indicators
Total sales growth                                                9.3 %              7.9 %
Comparable stores sales growth (1)                                5.9 %              7.2 %
Gross profit as a % of sales                                     42.4 %             41.6 %
Selling, general and administrative expenses as a %
of sales                                                         31.8 %             32.2 %
Operating income as a % of sales                                  8.4 %              7.6 %
Net income as a % of sales                                        5.2 %              4.9 %

                                                             June 1,            May 26,
                                                              2013                2012
Sales per average retail square foot (2)                    $     201           $    187
Total retail square footage (in thousands)                      8,383              8,288
Total retail square footage increase from the same
period last year                                                  1.1 %              0.9 %

(1) Includes orders placed online for store pick-up.

(2) Sales per average retail square foot is calculated using a rolling 12-month total of store sales over a 13-month retail square footage weighted average (excludes direct-to-customer sales).

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
                                      June 1,       May 26,
                                       2013          2012
                         Stores      $ 381,340     $ 357,393
                         Other (1)      13,513         3,726

                         Net sales   $ 394,853     $ 361,119

(1) Other sales consisted primarily of direct-to-customer sales, wholesale sales and royalties received from Grupo Sanborns, S.A. de C.V., and gift card breakage.

Net sales for the first quarter of fiscal 2014 were $394.9 million, an increase of 9.3% over last year's first quarter net sales of $361.1 million. Comparable store sales for the quarter increased 5.9%, which was primarily the result of an increase in store traffic and average ticket over last year. The Company's net


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

sales from Canadian stores were subject to fluctuation in currency conversion rates. These fluctuations contributed to a 20 basis point decrease in comparable store sales. Sales on the Pier 1 credit card comprised 27% of U.S. store sales on a trailing twelve-month basis, compared to 25.7% at the end of fiscal 2013. Sales per retail square foot were $201 for the trailing twelve months ended June 1, 2013, up from $187 for the trailing twelve months ended May 26, 2012. The store count as of June 1, 2013 was 1,065 compared to 1,054 stores at the same time last year.

The increase 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 26, 2012   $  361,119
         Incremental sales growth (decline) from:
         New stores opened during fiscal 2014                     1,477
         Stores opened during fiscal 2013 (1)                    16,625
         Comparable stores(2)                                    20,754
         Closed stores and other                                 (5,122 )

         Net sales for the three months ended June 1, 2013   $  394,853

(1) Includes direct-to-customer sales.

(2) Includes orders placed online for store pick-up.

A summary reconciliation of stores open at the beginning of fiscal 2014 to the number open at the end of the first quarter follows:

                                      United States       Canada       Total
           Open at March 2, 2013                 982           80       1,062
           Openings                                6            -           6
           Closings                               (3 )          -          (3 )

           Open at June 1, 2013(1)               985           80       1,065

(1) The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, S.A. de C.V., which sells Pier 1 Imports merchandise primarily in a "store within a store" format. At June 1, 2013, there were 49 locations in Mexico and one in El Salvador. These locations were excluded from the table above.

Cost of Sales and Gross Profit - In the first quarter of fiscal 2014, cost of sales were 57.6% as a percentage of sales in the first quarter of fiscal 2014, compared to 58.4% of sales for the same period last year and gross profit was 42.4% of sales compared to 41.6% of sales for the same period a year ago. The year-over-year improvement was primarily due to leveraging store occupancy costs, as well as strong full-priced selling during the quarter. During the first quarter of fiscal 2014, rent expense increased in dollars compared to the same period last year primarily due to the increase in new store openings, but decreased as a percentage of sales.

Operating Expenses - Selling, general and administrative expenses for the first quarter of fiscal 2014 were $125.5 million, or 31.8% of sales, compared to $116.3 million, or 32.2% of sales for the same period last year. The 40 basis point improvement was primarily due to the leveraging of store payroll, and was slightly offset by increases in marketing expense and fixed expenses. For the quarter, marketing expenses were in line with the Company's expectations and the increase in fixed expenses was primarily attributable to additional headcount to support e-Commerce and other strategic initiatives. Operating income for the first quarter of fiscal 2014 was $33.2 million compared to $27.4 million for last year's first quarter.


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

Nonoperating Income and Expense - During the first quarter of fiscal 2014, nonoperating expense was $0.4 million, compared to nonoperating income of $0.6 million for the same period in fiscal 2013, primarily as a result of the completion of deferred gain recognition related to transactions with the Company's former proprietary credit card provider during the first quarter of fiscal 2013.

Income Taxes - The Company recorded an effective tax rate of 38.0% and an income tax provision of $12.5 million during the first quarter of fiscal 2014, compared to an effective tax rate of 36.4% and an income tax provision of $10.2 million during the same period last year. The increase in tax expense over the prior year was primarily due to the Company reporting increased income in fiscal 2014.

Net Income - Net income for the first quarter of fiscal 2014 was $20.3 million, or $0.19 per share, compared to $17.8 million, or $0.16 per share, for the first quarter of fiscal 2013.

Liquidity and Capital Resources

The Company ended the first quarter of fiscal 2014 with $241.9 million in cash and temporary investments compared to $231.6 million at the end of fiscal 2013. The increase in cash was the result of cash provided by operating activities of $39.0 million, primarily the result of the Company's net income and an increase in accounts payable due mainly to increased purchases to support higher sales. This increase was partially offset by cash used to support the Company's three-year growth plan, including capital expenditures of $14.1 million, $17.0 million to repurchase shares of the Company's stock and cash dividends of $5.3 million.

Cash Flows from Operating Activities

Operating activities provided $39.0 million of cash, primarily as a result of net income of $20.3 million and an increase in accounts payable, partially offset by increases in inventory. Inventory levels at the end of the first quarter of fiscal 2014 were $383.3 million, an increase of $49.8 million from the first quarter of fiscal 2013. The increase in inventory resulted from additional inventory to support e-Commerce sales, the broadening assortments under the special request program, and slightly larger purchases of select merchandise to support higher sales. At the end of fiscal 2014, inventory is planned to increase over last fiscal year end, in line with planned sales growth.

Cash Flows from Investing Activities

During the first quarter of fiscal 2014, investing activities used $12.7 million, compared to $13.5 million during the same period last year. Total capital expenditures during the first quarter of fiscal 2014 were $14.1 million, which included $9.3 million for the opening of six new stores, one major remodel, new merchandise fixtures and lighting, other leasehold improvements and equipment. The remaining $4.8 million in capital spending was utilized for technology and infrastructure initiatives, including e-Commerce and the new point-of-sale system. Capital expenditures for fiscal 2014 are expected to be approximately $75 million.

Cash Flows from Financing Activities

During the first quarter of fiscal 2014, financing activities used $16.0 million primarily related to $17.0 million for repurchases of the Company's common stock under the Board approved share repurchase program. In addition, the Company paid $5.3 million in cash dividends. The cash outflows were partially offset by the receipt of proceeds related primarily to employee stock option exercises and the Company's employee stock purchase plan. During the first quarter of fiscal 2013, financing activities used $51.6 million primarily related to $48.7 million for repurchases of the Company's common stock.


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

Lease Obligations

At the end of the first quarter, the Company's minimum operating lease commitments remaining for fiscal 2014 were $171.3 million. The present value of total existing minimum operating lease commitments discounted at 10% was $821.7 million at the fiscal 2014 first quarter end compared to $798.7 million at the end of fiscal 2013.

Secured Credit Facility

As of June 1, 2013, the Company had no cash borrowings and approximately $41.6 million in letters of credit and bankers' acceptances outstanding under its secured credit facility. At that time, the calculated borrowing base was $300 million, of which approximately $258.4 million was available for additional borrowings. As of the end of the first quarter of fiscal 2014, the Company was in compliance with all required covenants stated in the agreement.

On June 18, 2013, subsequent to quarter-end, the Company amended, renewed and extended its secured credit facility. The facility was amended to extend the maturity date from April 4, 2016 to June 18, 2018 and increase the amount of the facility from $300 million to $350 million. The amended facility includes a $100 million accordion feature, which enables the Company to request that the facility be increased to an amount not to exceed $450 million under certain circumstances. The Company expects to continue funding its working capital requirements with cash flow from operations but may use the facility for general corporate purposes.

Share Repurchase Program

During the first three months of fiscal 2014, the Company repurchased 727,400 shares of its common stock at a weighted average cost of $23.36 per share and a total cost of approximately $17.0 million under the share repurchase program approved by the Board of Directors in December 2012. From the end of the first quarter and through July 5, 2013, the Company has repurchased an additional 459,600 shares of its common stock at a weighted average cost of $23.60 per share and a total cost of approximately $10.8 million. In total, the Company has repurchased 1,187,000 shares at a weighted average cost of $23.45 and a total cost of $27.8 million, and $72.2 million remains available for repurchase under the Company's $100 million share repurchase program.

Dividends Payable

On July 2, 2013, subsequent to quarter end, the Board of Directors declared a $0.05 per share quarterly cash dividend on the Company's outstanding shares of common stock. The $0.05 quarterly cash dividend will be paid on August 7, 2013 to shareholders of record on July 24, 2013.

Sources of Working Capital

Working capital requirements are expected to be funded from cash from operations, available cash balances, and if required, borrowings against lines of credit. Given the Company's cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund operational obligations, capital expenditure requirements, share repurchases and cash dividends.


Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued)

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 SEC and in material delivered to the Company's shareholders. Forward-looking statements provide current expectations of future events based on management's assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments, and other relevant factors. 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, its e-Commerce business, 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 actions taken by the United States and other countries to stimulate the economy, the general strength of the economy and levels of consumer spending, consumer confidence, suitable store sites and distribution center locations, the availability of a qualified labor force and management, the availability and proper functioning of technology and communications systems supporting the Company's key business processes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas, and the ability of the Company to source, ship and deliver items of acceptable quality to its U.S. distribution centers at reasonable prices and rates and in a timely fashion. The foregoing risks and uncertainties are in addition to others which may be discussed elsewhere in this report and which may also affect Company operations and performance. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized. Additional information concerning these risks and uncertainties is contained in the Company's Annual Report on Form 10-K for the year ended March 2, 2013, as filed with the Securities and Exchange Commission.

Impact of Inflation

Inflation has not had a significant impact on the operations of the Company. However, the Company's management cannot be certain of the effect inflation may have on the Company's operations in the future.


Table of Contents

PART I

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