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

Show all filings for PIER 1 IMPORTS INC/DE

Form 10-Q for PIER 1 IMPORTS INC/DE


9-Oct-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 and six months ended August 31, 2013 and August 25, 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 August 31, 2013, the Company operated 1,066 stores in the United States and Canada.

In April 2012, the Company announced a 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 omni-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 second 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 omni-channel strategy and executing its '1 Pier 1' vision. One of the key areas of focus is an expected 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 during July of fiscal 2013, 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 executed website upgrades during the second quarter of fiscal 2014, which continue to enhance the customer experience and interaction with the brand. The rollout of the Company's new point-of-sale system was completed during the second quarter, and the Company has begun the integration process between e-Commerce and the stores, which is an important component of the '1 Pier 1' strategy.

Net sales for the second quarter of fiscal 2014 increased 7.6% and comparable store sales for the period increased 3.5%. 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. Sales per retail square foot were $202 for the trailing twelve months ended August 31, 2013, up from $190 for the trailing twelve months ended August 25,


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

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 second quarter of fiscal 2014, gross profit was 40.8% of sales, compared to 41.2% during the same period last year, a decline of 40 basis points. The year-over-year decline was primarily due to increased promotional activity and clearance markdowns partially offset by the leveraging of store occupancy. Operating income for the second quarter of fiscal 2014 was $29.1 million, or 7.3% of sales, compared to $32.3 million, or 8.8% of sales, for the same period in the prior year.

During the first six months of fiscal 2014, the Company utilized $42.0 million for capital expenditures, which included approximately $23.7 million for the opening of 14 new stores, three major remodels, new merchandise fixtures and lighting, and other leasehold improvements and equipment. The remaining capital expenditures were 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.

During the first six months of fiscal 2014, the Company repurchased 2,594,200 shares of its common stock under the December 2012 Board-approved program at a weighted average cost of $22.99 per share for a total cost of $59.6 million. Subsequent to quarter end, the Company completed the December 2012 Board-approved program and utilized a total of $40.4 million to repurchase 1,931,605 shares of the Company's common stock at a weighted average cost of $20.90 per share. In total, the Company repurchased 4,525,805 shares of its common stock at a weighted average cost of $22.10 per share and a total cost of $100.0 million under the December 2012 program. During the first half of fiscal 2014, the Company paid quarterly cash dividends totaling approximately $10.5 million. In addition, on September 27, 2013, the Company's Board of Directors declared a $0.05 per share quarterly cash dividend payable on November 6, 2013 to shareholders of record on October 23, 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 performance indicators to evaluate the
Company's financial performance. The following table summarizes those key
performance indicators for the three and six months ended August 31, 2013 and
August 25, 2012:



                                              Three Months Ended                       Six Months Ended
                                        August 31,          August 25,          August 31,          August 25,
                                           2013                2012                2013                2012
Key Performance Indicators
Total sales growth                              7.6 %               8.3 %               8.5 %               8.1 %
Comparable stores sales growth (1)              3.5 %               6.7 %               4.7 %               7.0 %
Gross profit as a % of sales                   40.8 %              41.2 %              41.6 %              41.4 %
Selling, general and
administrative expenses as a % of
sales                                          31.0 %              30.5 %              31.4 %              31.3 %
EBITDA (2)                             $       38.8         $      39.8        $       81.1         $      75.0
Operating income as a % of sales                7.3 %               8.8 %               7.9 %               8.2 %
Net income as a % of sales                      4.5 %               7.1 %               4.8 %               6.0 %




                                                                 For the period ended
                                                          August 31,              August 25,
                                                             2013                    2012
Sales per average retail square foot (3)                 $         202           $        190
Total retail square footage (in thousands)                       8,392                  8,323
Total retail square footage increase from the same
period last year                                                   0.8 %                  1.3 %

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

(2) See reconciliation of Net Income to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") in Non-GAAP Financial Measures.

(3) 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 (includes orders place online for store pick-up but 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                 Six Months Ended
                      August 31,       August 25,       August 31,       August 25,
                         2013             2012             2013             2012
         Stores      $    380,389     $    363,555     $    761,729     $    720,948
         Other (1)         15,252            4,060           28,766            7,786

         Net sales   $    395,641     $    367,615     $    790,495     $    728,734

(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.


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

Net sales for the second quarter of fiscal 2014 were $395.6 million, an increase of 7.6%, over last year's second quarter net sales of $367.6 million. Comparable store sales for the quarter increased 3.5%, which was primarily the result of an increase in conversion and average ticket over the same period last year, partially offset by a decline in traffic during the month of July. Net sales during the year-to-date period increased $61.8 million, or 8.5%, to $790.5 million when compared to the same period last year, primarily as a result of an increase in average ticket. Comparable store sales increased 4.7% for the first six months of fiscal 2014. The Company's net sales from Canadian stores were subject to fluctuation in currency conversion rates. These fluctuations offset the increase in comparable store sales by approximately 30 basis points for the quarter and 20 basis points for the year-to-date period. Sales on the Pier 1 credit card comprised 28.0% of U.S. store sales for the trailing twelve months ended August 31, 2013, compared to 25.7% at the end of fiscal 2013. Sales per retail square foot were $202 for the trailing twelve months ended August 31, 2013, up from $190 for the trailing twelve months ended August 25, 2012. Total store count as of August 31, 2013 was 1,066 compared to 1,058 stores a year ago.

The increase in sales for the six-month period was comprised of the following incremental components (in thousands):

                                                              Net Sales
         Net sales for the six months ended August 25, 2012   $  728,734
         Incremental sales growth (decline) from:
         New stores opened during fiscal 2014                      5,909
         Stores opened during fiscal 2013 (1)                     32,760
         Comparable stores(2)                                     33,047
         Closed stores and other                                  (9,955 )

         Net sales for the six months ended August 31, 2013   $  790,495

(1) Includes incremental sales of $19,740 from direct-to-customer sales.

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

A summary reconciliation of the Company's stores open at the beginning of fiscal 2014 to the number open at the end of the second quarter is as follows:

                                        United States       Canada       Total
         Open at March 2, 2013                     982           80       1,062
         Openings                                   13            1          14
         Closings                                  (10 )          -         (10 )

         Open at August 31, 2013 (1)               985           81       1,066

(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 August 31, 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 second quarter of fiscal 2014, cost of sales were 59.2% of sales, compared to 58.8% of sales for the same period last year and gross profit was 40.8% of sales, compared to 41.2% of sales for the same period a year ago. The year-over-year gross profit decline was primarily due to increased promotional activity and clearance markdowns partially offset by the leveraging of store occupancy.


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

For the first six months of fiscal 2014, cost of sales were 58.4% of sales, compared to 58.6% of sales for the same period last year and gross profit was 41.6% of sales, compared to 41.4% last year. The year-over-year gross profit improvement was primarily due to the leveraging of store occupancy costs. During the first six months 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 - Second quarter selling, general and administrative expenses were $122.6 million, or 31.0% of sales, compared to $112.0 million, or 30.5% of sales, for the same period in fiscal 2013. The 50 basis point increase was primarily due to increases in fixed expenses partially offset by the leveraging of store payroll. 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.

Year-to-date selling, general and administrative expenses were $248.1 million, or 31.4% of sales, compared to $228.4 million, or 31.3% of sales, in the same period of fiscal 2013.

Operating income for the second quarter of fiscal 2014 was $29.1 million, or 7.3% of sales, compared to $32.3 million, or 8.8% of sales, last year. For the first half of fiscal 2014, operating income totaled $62.3 million, or 7.9% of sales, compared to $59.7 million, or 8.2% of sales, for the same period last year.

Nonoperating Income and Expense - During the first six months of fiscal 2014, nonoperating expense was $0.7 million, compared to nonoperating income of $3.2 million for the same period in fiscal 2013. The decrease was the 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. Additionally, in conjunction with the adjustment for uncertain income tax positions discussed below, $2.8 million of accrued interest expense was reversed during the second quarter of fiscal 2013.

Income Taxes - The Company recorded an effective tax rate of 38.0% and an income tax provision of $10.9 million during the second quarter of fiscal 2014, compared to an effective tax rate of 24.8% and an income tax provision of $8.6 million during the second quarter last year. For the first six months of fiscal 2014, the Company recorded an effective tax rate of 38.0% and an income tax provision of $23.4 million, compared to an effective tax rate of 29.9% and an income tax provision of $18.8 million during the same period last year. During the second quarter of fiscal 2013, the Company reversed a portion of its reserve for uncertain income tax positions for which the statute of limitations expired. This adjustment resulted in an income tax benefit of $5.9 million during fiscal 2013.

Net Income - For the second quarter of fiscal 2014, the Company reported net income of $17.8 million, or $0.17 per share. For the second quarter of fiscal 2013 net income was $26.2 million, or $0.24 per share, which included the tax benefit and reduced accrued interest resulting from the reversal of a portion of the Company's reserve for uncertain income tax positions, as described above. Utilizing an estimated annual effective tax rate of 35.6%, and excluding the reversal of accrued interest, fiscal 2013 second quarter adjusted net income on a non-GAAP basis was $20.7 million, or $0.19 per share compared to $0.17 per share in the second quarter of fiscal 2014 which did not have the benefit from uncertain tax positions.

For the first six months of fiscal 2014, the Company reported net income of $38.2 million, or $0.35 per share. For the same period last year, net income was $44.1 million, or $0.40 per share, which included the tax benefit and reduced accrued interest resulting from the reversal of a portion of the Company's reserve for uncertain income tax positions, as described above. Utilizing an estimated annual effective tax rate of 35.6%, and excluding the reversal of accrued interest, adjusted net income on a non-GAAP basis was $38.7 million, or $0.35 per share, for the first six months of fiscal 2013, which was flat compared to $0.35 per share for the first six months of fiscal 2014 which did not have the benefit from uncertain tax positions.


Table of Contents

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

Non-GAAP Financial Measures

The following reconciles adjusted net income and adjusted diluted earnings per
share for the prior year periods that included a benefit related to uncertain
tax positions.



                                                   Three Months Ended              Six Months Ended
                                                    August 25, 2012                August 25, 2012
                                                      ($ in millions, except per share amounts)
Net Income (GAAP)                                $                 26.2           $             44.1
Add back: Income Tax Provision (GAAP)                               8.6                         18.8

Income Before Income Taxes (GAAP)                                  34.9                         62.9
Interest Expense Adjustment Related to
Uncertain Tax Positions                                            (2.8 )                       (2.8 )

Adjusted Income Before Income Taxes
(non-GAAP)                                                         32.1                         60.1
Adjusted Income Tax Provision at
Estimated 35.6% Annual Effective Tax Rate                          11.4                         21.4

Adjusted Net Income (non-GAAP)                   $                 20.7           $             38.7

Diluted Earnings per Share (GAAP)                $                 0.24           $             0.40
Interest Expense Adjustment Related to
Uncertain Tax Positions, net of tax                               (0.02 )                      (0.02 )
Difference of Income Tax Provision at
Estimated 35.6% Annual Effective Tax Rate                         (0.03 )                      (0.03 )

Adjusted Diluted Earnings per Share
(non-GAAP)                                       $                 0.19           $             0.35


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

EBITDA represents earnings before interest, taxes, depreciation and amortization. Management believes EBITDA is a meaningful indicator of the Company's performance that provides useful information to investors regarding its financial condition and results of operations. Management uses EBITDA, together with financial measures prepared in accordance with GAAP, to assess the Company's operating performance, to enhance its understanding of core operating performance and to compare the Company's operating performance to other retailers. A reconciliation of net income to EBITDA is shown below for the periods indicated (in millions).

                                                 Three Months Ended                       Six Months Ended
                                           August 31,          August 25,           August 31,         August 25,
                                              2013                2012                 2013               2012
Net Income (GAAP)                         $       17.8        $        26.2        $       38.2        $      44.1
Add Back: Income Tax Provision                    10.9                  8.6                23.4               18.8
Interest Expense (Income), net                     0.4                 (2.3 )               1.0               (1.6 )
Depreciation and Amortization                      9.6                  7.2                18.5               13.7

EBITDA (non-GAAP)                         $       38.8        $        39.8        $       81.1        $      75.0

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). The Company believes that the non-GAAP financial measures included in this quarterly report allow management and investors to understand and compare the Company's net income and earnings per share results in a more consistent manner for the periods covered by this report. The non-GAAP measures should be considered supplemental and not a substitute for the Company's net income and earnings per share results that were reported in accordance with GAAP for the periods presented.

Liquidity and Capital Resources

The Company ended the first six months of fiscal 2014 with $124.9 million in cash and temporary investments compared to $231.6 million at the end of fiscal 2013. The decrease was primarily the result of the utilization of cash to support the Company's three-year growth plan, including $42.0 million for capital expenditures, $59.6 million to repurchase shares of the Company's common stock, and $10.5 million for cash dividends.

Cash Flows from Operating Activities

Operating activities in the first half of fiscal 2014 used $10.4 million of cash, primarily as a result of an increase in inventories partially offset by net income. Inventory levels at the end of the second quarter of fiscal 2014 were $444.7 million, an increase of $23.9 million, or 5.7%, from the second quarter of fiscal 2013 and in line with the Company's expectations. The increase in inventories primarily resulted from additional inventory to support e-Commerce sales and the broadening of assortments under the Company's special merchandise order program known as "Express Request". 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 six months of fiscal 2014, investing activities used $39.5 million compared to $39.4 million during the same period last year. Total capital expenditures during the first six months of fiscal 2014 were


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

$42.0 million, which included approximately $23.7 million for the opening of 14 new stores, three major remodels, new merchandise fixtures and lighting, and other leasehold improvements and equipment. The remaining capital expenditures were 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 six months of fiscal 2014, financing activities used $56.8 million, primarily related to $59.6 million for repurchases of the Company's common stock under the December 2012 Board-approved share repurchase program. In addition, the Company paid $10.5 million in cash dividends. These cash outflows were partially offset by the receipt of $14.5 million in proceeds related to employee stock option exercises and the Company's employee stock purchase plan.

Lease Obligations

At the end of the second quarter of fiscal 2014, the Company's minimum operating lease commitments remaining for fiscal 2014 were $115.2 million. The present value of total existing minimum operating lease commitments discounted at 10% was $838.8 million at the fiscal 2014 second quarter end compared to $798.7 million at the end of fiscal 2013.

Secured Credit Facility

As of August 31, 2013, the Company had no cash borrowings and approximately $40.1 million in letters of credit and bankers' acceptances outstanding under its secured credit facility. The calculated borrowing base was $350 million, of which approximately $309.9 million was available for additional borrowings. As of the end of the second quarter of fiscal 2014, the Company was in compliance with all required covenants stated in the agreement.

On June 18, 2013, 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 operating activities but may use the facility for general corporate purposes.

Share Repurchase Program

During the first six months of fiscal 2014, the Company repurchased 2,594,200 shares of its common stock under the December 2012 Board-approved program at a weighted average cost of $22.99 per share for a total cost of $59.6 million. Subsequent to quarter end, the Company completed the December 2012 Board-approved program and utilized a total of $40.4 million to repurchase 1,931,605 shares of the Company's common stock at a weighted average cost of . . .

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