pir-10k_20180303.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 3, 2018.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to____________

Commission File No. 001‑07832

PIER 1 IMPORTS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

75‑1729843

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

100 Pier 1 Place

Fort Worth, Texas

76102

(Address of principal executive offices)

(Zip Code)

 

Company's telephone number, including area code:  (817) 252‑8000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange

on which registered

Common Stock, $0.001 par value

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   No 

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, August 26, 2017, was approximately $338,171,797.  The registrant has no non-voting common stock.

As of April 27, 2018, there were outstanding 82,968,675 shares of the registrant’s common stock, all of one class.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents have been incorporated herein by reference:

 

1)

Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders in Part III hereof.

 

 


PIER 1 IMPORTS, INC.

FORM 10-K ANNUAL REPORT

Fiscal Year Ended March 3, 2018

TABLE OF CONTENTS

 

 

 

 

PAGE

 

 

 

 

PART I

  

 

4

 

 

 

 

Item 1.

 

Business.

4

 

 

 

 

Item 1A.

 

Risk Factors.

7

 

 

 

 

Item 1B.

 

Unresolved Staff Comments.

14

 

 

 

 

Item 2.

 

Properties.

15

 

 

 

 

Item 3.

 

Legal Proceedings.

15

 

 

 

 

Item 4.

 

Mine Safety Disclosures.

16

 

 

 

 

PART II

 

 

17

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

17

 

 

 

 

Item 6.

 

Selected Financial Data.

19

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

20

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

31

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data.

32

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

52

 

 

 

 

Item 9A.

 

Controls and Procedures.

52

 

 

 

 

Item 9B.

 

Other Information.

54

 

 

 

 

PART III

 

 

54

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance.

54

 

 

 

 

Item 11.

 

Executive Compensation.

54

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

54

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

54

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services.

54

 

 

 

 

PART IV

 

 

55

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules.

55

 

 


FORWARD-LOOKING STATEMENTS

Certain statements contained in Item 1, Item 1A, Item 3, Item 7, Item 7A, Item 8 and elsewhere in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Pier 1 Imports, Inc. and its consolidated subsidiaries (the “Company”) may also make forward-looking statements in other reports filed with the United States Securities and Exchange Commission (“SEC”), in press releases, in presentations 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 “believe,” “expect,” “estimate,” “anticipate,” “plan,” “may,” “will,” “intend” and other similar expressions. Management’s expectations and assumptions regarding: the impact of new initiatives implemented in connection with the Company’s Pier 1 2021: A New Day three-year strategic plan; the effectiveness of the Company’s marketing campaigns, merchandising and promotional strategies and customer databases; consumer spending patterns; inventory levels and values; the Company’s ability to implement planned cost control measures; expected benefits from the real estate optimization initiative, including cost savings and increases in efficiency; risks related to U.S. import policy; changes in foreign currency values relative to the U.S. Dollar 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. Additional risks and uncertainties that may affect Company operations and performance include, among others: an inability to anticipate, identify and respond to changing customer trends and preferences and to source, ship and deliver items of acceptable quality to its U.S. distribution and fulfillment centers, stores and customers at reasonable prices and rates in a timely fashion; an inability to identify and successfully implement strategic initiatives; risks related to outsourcing, including disruptions in business and increased costs; an overall decline in the health of the United States economy and its impact on consumer confidence and spending; disruptions in the Company’s domestic supply chain or e‑Commerce website; failure to successfully manage and execute the Company’s marketing initiatives; negative impacts from failure to control merchandise returns and recalls; potential impairment charges; an inability to operate in desirable locations at reasonable rental rates; competition; factors affecting consumer spending, including employment levels and disposable income, interest rates, consumer debt levels, fuel and transportation costs and other factors; failure to attract and retain an effective management team or changes in the cost or availability of a suitable workforce; failure to successfully manage omni-channel operations; seasonal variations; increases in costs that are outside the Company’s control; adverse weather conditions or natural disasters; risks related to technology; failure to protect consumer data; failure to successfully implement new information technology systems and enhance existing systems; risks related to cybersecurity; failure to maintain positive brand perception and recognition; regulatory and legal risks; litigation risks; risks related to imported merchandise including the health of global, national, regional, and local economies and their impact on vendors, manufacturers and merchandise; adverse effects from changes in U.S. policy related to imported merchandise; risks related to insufficient cash flows and access to capital; disruption in the global credit and equity markets; factors beyond the Company’s control, including general economic and market conditions, fluctuations in the Company’s financial condition or other factors that could affect the stock price; and risks related to activist shareholders. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report 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 this Annual Report on Form 10-K for the year ended March 3, 2018, included in Item 1A. Risk Factors.

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PART I

Item 1. Business.

(a) General Development of Business.

Pier 1 Imports, Inc. was incorporated as a Delaware corporation in 1986. Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. References to “Pier 1 Imports” relate to the Company’s retail stores and e‑Commerce website conducting business under the name Pier 1 Imports. The Company is dedicated to offering customers exclusive, one-of-a-kind products that reflect high quality at a great value. Starting with a single store in 1962, Pier 1 Imports’ product is now available in retail stores throughout the U.S. and Canada and online at pier1.com. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products.

The Company announced its Pier 1 2021: A New Day three-year strategic plan in April 2018, which is focused on improving brand proposition, driving sales growth and capturing operating efficiencies. In fiscal 2019, the Company plans to invest in the tools and resources needed to execute against the plan in order to drive sales growth and profitability in subsequent years.

As of March 3, 2018, the Company had 1,003 stores in the United States and Canada. In fiscal 2018, the Company opened 2 new stores and closed 17 stores. In April of 2015, the Company announced a plan to optimize its store portfolio through (1) closure of approximately 100 stores over a three to four fiscal-year period which commenced in fiscal 2016, primarily through natural lease expirations and relocations; (2) a more modest new store opening and relocation program; and (3) ongoing renegotiations of rent commitments. The Company operates regional distribution center facilities and/or fulfillment centers in or near Baltimore, Maryland; Columbus, Ohio; Fort Worth, Texas; Ontario, California; Savannah, Georgia; and Tacoma, Washington; and its corporate headquarters is located in Fort Worth, Texas.  

The Company has an arrangement to supply Grupo Sanborns, S.A.B. de C.V. (“Grupo Sanborns”) with the Company’s merchandise to be sold by Grupo Sanborns’ subsidiaries, Sears Operadora de Mexico, S.A. de C.V., Corporacion de Tiendas Internationales, S.A. de C.V., and Claroshop.com, S.A.P.I. de C.V., primarily in a “store within a store” format and online at Claroshop.com.

(b) Financial Information about Industry Segments.

In fiscal 2018, the Company conducted business as one operating segment consisting of retail sales of decorative accessories and furniture.

Financial information with respect to the Company's business is found in the Company's Consolidated Financial Statements, which are set forth in Item 8 herein.

(c) Narrative Description of Business.

The specialty retail operations of the Company consist of retail stores and an e‑Commerce website conducting business under the name Pier 1 Imports, which sell a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products.  

As of March 3, 2018, the Company operated 928 stores in the United States and 75 stores in Canada in addition to its e‑Commerce website, pier1.com. The Company’s stores in the United States and Canada average approximately 10,000 gross square feet, which includes an average of approximately 8,000 square feet of retail selling space. The stores are located in freestanding units near shopping centers or malls and in-line positions in major shopping centers. The Company operates in all major U.S. and Canadian metropolitan areas and many of the primary smaller markets. The Company generally has its highest sales volumes during November and December as a result of the holiday selling season. In fiscal 2018, net sales of the Company totaled $1.8 billion.

The Company offers a unique selection of merchandise items imported from many countries around the world. While the broad categories of the Company’s merchandise remain fairly constant, individual items within merchandise categories change frequently in order to meet the changing demands and preferences of customers and trends. The principal categories of merchandise include the following:

DECORATIVE ACCESSORIES — This merchandise group constitutes the broadest category of merchandise in the Company’s sales mix and has remained constant at approximately 65% of sales in fiscal years 2018, 2017 and 2016. These goods include decorative accents and textiles such as rugs, wall decorations and mirrors, pillows, bedding, lamps, vases, dried and artificial flowers, baskets, ceramics, dinnerware, candles, fragrance, gifts and seasonal items.

FURNITURE — This merchandise group consists of furniture and furniture cushions to be used in living, dining, office, kitchen and bedroom areas, sunrooms and patios. This group has remained constant at approximately 35% of sales in fiscal years 2018, 2017 and 2016. The Company’s furniture is generally made of metal or handcrafted natural materials, including rattan, pine, acacia, oak, and other woods with either natural, stained, painted or upholstered finishes.

4


The Company’s merchandise largely consists of items that feature a significant degree of handcraftsmanship. The Company enjoys long-standing relationships with many vendors and agents and is not dependent on any particular merchandise supplier. The Company believes alternative sources of merchandise could be procured over a reasonable period of time, if necessary. When sourcing merchandise, the Company considers quality, dependability of delivery and cost. During fiscal 2018, the Company sold merchandise imported from many different countries, with approximately 59% of its sales derived from merchandise produced in China, 17% in India and 16% collectively in Vietnam, Indonesia and the United States. The remainder of its merchandise is sourced from other countries around the world.  

Most merchandise is shipped from the supplier to the Company’s distribution centers, where merchandise is then allocated and delivered to retail stores, fulfillment centers or to third party carriers fulfilling customer orders.  

The Company owns a number of federally registered trademarks and service marks under which it conducts business.  Additionally, the Company has registered and has applications pending for the registration of certain other trademarks and service marks in the United States, Canada and other foreign countries. The Company believes that its marks have significant value and are important in its marketing efforts. The Company’s policy is to pursue registration of its marks and oppose any infringement of its marks.

The Company operates in the highly competitive specialty home retail business and competes primarily with specialty sections of large general merchandise retailers and department stores, home furnishings retailers, small specialty stores, online retailers and marketplaces and mass merchandising discounters.

The Company allows customers to return merchandise within a reasonable time after the date of purchase. Most returns occur within 30 days of the date of purchase. The Company monitors the level of returns and maintains a reserve for future returns based on historical experience and other known factors.

On March 3, 2018, the Company employed approximately 18,500 associates in the United States and Canada, of which approximately 4,500 were full-time employees and 14,000 were part-time employees.

(d) Financial Information about Geographic Areas.

Information required by this Item is found in Segment Information in Note 1 of the Notes to the Consolidated Financial Statements.

(e) Available Information.

The Company makes available, free of charge through its Internet website address (www.pier1.com), its Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the SEC.

Executive Officers of the Company

ALASDAIR B. JAMES, age 47, became President and Chief Executive Officer and joined the Board of Directors on May 1, 2017.  Prior to joining the Company, Mr. James was employed by Sears Holdings Corporation as President of Kmart from August 2014 to March 2017. Prior to joining Sears Holdings, he served in various roles at Tesco PLC, a multinational grocery and general merchandise retailer, from June 2007 until August 2013, including Commercial Director – Global Business Unit. From June 2001 to June 2007, he served in various roles at GlaxoSmithKline PLC, a pharmaceutical company, including Global Marketing Director for Future Brands.

NANCY A. WALSH, age 57, joined the organization in January 2018 as Executive Vice President and Chief Financial Officer. Prior to joining the Company and since November 2015, Ms. Walsh served as Executive Vice President – Chief Financial Officer for The Bon-Ton Stores, Inc. Previously, she served as Senior Vice President, Finance for Tapestry, Inc., formerly known as Coach, Inc., from 2007 to 2013. Prior positions at Coach included serving as Chief Risk Officer from 2003 to 2007, Vice President, Finance and Treasurer from 2000 to 2003, and Chief Financial Officer of its Worldwide Wholesale Division from 1999 to 2000.

MICHAEL R. BENKEL, age 49, was named Executive Vice President of Global Supply Chain in July 2015, having previously served as Executive Vice President of Planning and Allocations since April 2012. He joined the organization in September 2008 as Senior Vice President of Planning and Allocations.  Prior to joining the Company, he spent 11 years at Williams-Sonoma Inc. in continuously advancing positions in the Pottery Barn Retail Stores division, including Vice President of Inventory Management, Director – Inventory Management, and as a home furnishings and furniture buyer.

MICHAEL A. CARTER, age 59, was named Executive Vice President, Compliance and General Counsel, Secretary of the Company in April 2016, having previously served as Senior Vice President, Compliance and General Counsel, Secretary of the Company since January 2014. Prior to that and since December 2005, he served as Senior Vice President, General Counsel and Secretary of the Company. Mr. Carter has served within the organization for 28 years in various leadership capacities, including Vice President – Legal Affairs, and Corporate Counsel. Mr. Carter first became an officer of the Company in 1991. Mr. Carter is a licensed attorney in the State of Texas. Prior to joining the Company, Mr. Carter practiced law with the Fort Worth, Texas law firm of Brackett and Ellis, LLP.

LAURA A. COFFEY, age 51, was named Executive Vice President of Business Development in April 2018. Ms. Coffey has served within the organization for 20 years in various capacities, including Executive Vice President of Planning and Allocations, Executive Vice President and Interim Chief Financial Officer, Senior Vice President of Planning, Senior Vice President of Business Development and Strategic Planning and Senior Vice President of Finance. Ms. Coffey first became an officer of the Company in 2005 and served as

5


Principal Accounting Officer from 2008 to 2011. Prior to joining the Company, she held various positions with Alcon Laboratories and KPMG, LLP.

WILLIAM H. SAVAGE, age 54, was named Executive Vice President – Global Sourcing of the Company in December 2017.  Prior to joining the Company, Mr. Savage served as the President Home Division for Sears Holdings Corporation from 2014 to 2017. From 2012 to 2014, Mr. Savage served as Executive Commercial Director for Tesco PLC in China and prior to that as Executive Vice President and Chief Merchandising Officer, Retail for Walmart, Inc. in India from 2010 to 2012. Earlier in his career, he held senior leadership positions with Metro Cash & Carry International in Vietnam and Kingfisher PLC in China, Korea and the U.K.  

BHARGAV J. SHAH, age 42, was named Senior Vice President and Chief Information Officer of the Company in August 2017.  Prior to joining the Company, Mr. Shah served as Chief Information Officer at IntegraCore LLC from 2015 to 2017 where he was responsible for information technology, e‑Commerce and digital marketing. Mr. Shah also previously held the position of Senior Vice President, Technology at Overstock.com, Inc. from 2012 to 2015. Earlier in his career, he held information technology positions at KPMG, LLP, BearingPoint, Inc. and Ernst & Young, LLP.

The executive officers of the Company are elected by the Board of Directors and hold office until their successors are elected or appointed and qualified or until their earlier resignation or removal. None of the above executive officers has any family relationship with any other of such officers or with any director of the Company. None of such officers was selected pursuant to any arrangement or understanding between her or him and any other person.

6


 

Item 1A. Risk Factors.

The Company’s business is subject to risk and uncertainties. The following discussion, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes, sets forth the most significant risks and uncertainties that management believes could adversely affect the Company’s business, financial condition or results of operations. Additional risks and uncertainties of which management is not aware or that management currently deems immaterial may also have a material adverse effect on the Company’s business, financial condition or results of operations. There is no assurance that this discussion covers all potential risks and uncertainties that may be faced by the Company. The occurrence of the described risks and uncertainties could cause the Company’s results to differ materially from those described in the forward-looking statements included elsewhere in this report, and could have a material adverse effect on the Company’s business, financial condition or results of operations.

Strategic Risks and Strategy Execution Risks

The Company must be able to anticipate, identify and respond to changing trends and customer preferences for home décor and furniture.  

The success of the Company’s specialty retail business depends largely upon its ability to consistently predict trends and to provide merchandise that satisfies consumer demand in a timely manner. Consumer preferences often change and may not be reasonably predicted. A majority of the Company’s merchandise is manufactured, purchased and imported from countries around the world and may be ordered well in advance of the applicable selling season. Extended lead times may make it difficult to respond rapidly to changes in consumer demand, and as a result, the Company may be unable to react quickly and source needed merchandise. In addition, the Company’s vendors may not have the ability to handle its increased demand for product or speed of replenishment. The seasonal nature of the business leads the Company to purchase and requires it to carry a significant amount of inventory prior to its peak selling season. As a result, the Company may be vulnerable to evolving home furnishing trends, changes in customer preferences, and pricing shifts, and may misjudge the timing and selection of merchandise purchases. The Company’s failure to anticipate, predict and respond in a timely manner to changing trends could lead to lower sales and additional discounts and markdowns in an effort to clear merchandise, which could have a negative impact on merchandise margin and, in turn, the results of operations.

Failure by the Company to identify, develop and successfully implement strategic initiatives could have a negative impact on the Company.

The Company’s strategies for long-term growth, strategic plans and capital allocation are dependent on the Company’s ability to identify and successfully implement those initiatives. If they are not properly identified, developed and successfully executed, the Company’s business operations and financial results will be negatively impacted. The Company announced its Pier 1 2021: A New Day three-year strategic plan in April 2018, which is focused on improving brand proposition, driving sales growth and capturing operating efficiencies. If the plan is not successfully executed, or if execution takes longer than expected, there is no assurance that the Company’s business, financial condition and results of operations would not be adversely affected.

The Company outsources certain business processes to third-party vendors and has certain business relationships that subject the Company to risks, including disruptions in business, cybersecurity threats and increased costs.  

The Company outsources numerous business processes to third parties including: gift card tracking and authorization; credit card authorization and processing; store schedule visibility and time/attendance tracking; store maintenance services; maintenance and support of the Company’s website and e‑Commerce platform; certain marketing services; insurance claims processing; real estate services; customs filings and reporting; domestic and ocean freight including certain processing functions; integration, shipment and delivery of customer orders including parcel, in-home delivery and drop ship; certain merchandise compliance functions including testing; certain payroll processing and various tax filings, administration and record keeping for certain employment benefits including retirement and deferred compensation plans, the stock purchase plan and medical and prescription plans; and third-party vendor auditing. In addition, the Company also has business relationships with third parties to provide essential services such as the extension of credit to its customers and maintenance of the Pier 1 rewards credit card program. The Company makes a diligent effort to ensure that all providers of these services are observing proper internal control and business continuity practices, such as redundant processing facilities, and appropriate policies and practices to mitigate the risk of security breaches, cyber incidents and e‑Commerce related fraud that could damage the Company, its customers or other third parties with whom it does business. Failures affecting the Company’s vendors have occurred in the past, without any material adverse impact upon the Company, and could occur in the future. There can be no assurance that failures will not occur or that their effects on the Company would not be material. Failure of third parties to provide adequate services or the Company’s inability to arrange for alternative providers on favorable terms in a timely manner could have a material negative effect on the Company’s operations and financial results.

7


An overall decline in the health of the economy in the United States or Canada and its impact on consumer confidence and spending could negatively impact the Company’s financial results.

The recessions experienced by the United States in various years adversely affected the discretionary spending, savings and investments of consumers. The resulting deterioration in consumer confidence and spending during those recessionary periods resulted in consumers reducing or eliminating their purchases of discretionary items, including the Company’s merchandise, which negatively impacted the Company’s financial results during those years. Such recessions could occur again and could have a significant impact on the Company’s financial results.

A disruption in the operation of the domestic portion of the Company’s supply chain, or the e‑Commerce website, could impact the Company’s ability to deliver merchandise to its stores and customers, which could impact its sales, operations and financial results.

The Company maintains regional distribution centers in Maryland, Ohio, Texas, California, Georgia and Washington, where merchandise is received, allocated, and delivered to the Company’s stores, fulfillment centers and customers. The Company may from time to time relocate or consolidate facilities, which could delay delivery of merchandise to the Company’s stores and customers. Major catastrophic events such as natural disasters, fire or flooding, malfunction or disruption of the information systems, security breaches, cyber incidents, a disruption in communication services or power outages, or shipping interruptions (including labor issues at the ports) could also delay distribution of merchandise to the Company’s stores and customers. Such disruptions could have a negative impact on the Company’s sales, operations and financial results.

Failure to successfully manage and execute the Company’s marketing initiatives could have a negative impact on the Company’s business and financial results.  

The success and growth of the Company is dependent upon retaining existing customers and acquiring new customers to generate increased traffic in order to produce sales in its stores and through the Company’s e‑Commerce website. Successful marketing efforts require the ability to obtain and maintain customer information, determine the customer’s merchandise and purchasing interests, and to personalize communication to customers through their desired mode of communication utilizing various channels. Media placement decisions are generally made months in advance of the scheduled release date and are subject to the competitive landscape of advertisement placement. While gathering information about customers, the Company must consider the customers’ interest in participating in loyalty programs, the customer’s desire for privacy and the need to comply with applicable laws and regulations regarding advertising and privacy. Any future changes in privacy laws or their interpretation or enforcement by courts and governmental agencies could adversely impact the Company’s ability to market to customers. The Company’s inability to obtain and use both new and existing customer information, accurately predict and respect its customers’ preferences, utilize the desired modes of communication, allocate marketing resources to maximize return, maintain effectiveness of its loyalty program or ensure availability of advertised products could negatively impact the business and financial results.  

Failure to control merchandise returns could negatively impact the Company’s business and financial results.  

The Company has established a provision for estimated merchandise returns based upon historical experience and other known factors. If actual returns are greater than those projected by management, additional reductions of revenue could be recorded in the future. Also, to the extent that returned merchandise is damaged, the Company may not receive full retail value from the resale of the returned merchandise. Introductions of new merchandise, changes in merchandise mix, associate selling behavior, merchandise quality issues, changes to the Company’s return policy, e‑Commerce return behavior, changes in consumer confidence, new delivery channels/methods, recalls or other competitive and general economic conditions may cause actual returns to exceed the provision for estimated merchandise returns. An increase in merchandise returns that exceeds the Company’s current provisions could negatively impact the business and financial results.

Changes to estimates related to the Company’s property and equipment, or financial results that are lower than its current estimates at certain store locations and determinations to close underperforming stores, may cause the Company to incur impairment charges on certain long-lived assets, negatively affecting its financial results.

The Company makes certain accounting estimates and projections with regard to individual store operations as well as overall Company performance in connection with its impairment analyses for long-lived assets in accordance with applicable accounting guidance. An impairment charge may be required if the impairment analysis indicates that the carrying value of an asset exceeds the sum of the expected undiscounted cash flows of the asset. The projection of future cash flows used in this analysis requires the use of judgment and a number of estimates and projections of future operating results. If actual results differ from the Company’s estimates, additional charges for asset impairments may be required in the future. If impairment charges are significant, the Company’s financial results could be negatively affected.

8


Risks Related to Profitability

The Company’s success depends, in part, on its ability to operate in desirable locations at reasonable rental rates and to close underperforming stores at or before the conclusion of their lease terms.  

The profitability of the business depends in large part on operating the current store base at a reasonable profit, opening and operating new stores at a reasonable profit, and identifying and closing underperforming stores. For the majority of the Company’s current store base, a large portion of a store’s operating expense is the cost associated with leasing the location. The Company actively monitors individual store performance and attempts to negotiate favorable lease terms to ensure stores can remain profitable or have the ability to return to a profitable state. Current locations may not continue to be desirable as the Company’s omni-channel strategy evolves or demographics change, and the Company may choose to close underperforming stores before lease expiration and incur lease termination costs associated with those closings. In April of 2015, the Company announced a real estate optimization plan to reduce occupancy costs and improve efficiency. The Company’s inability to achieve desired cost reductions and improved efficiencies could negatively impact the Company’s future growth and earnings. The Company cannot give assurance that opening new stores or an increase in closing underperforming stores will result in improved financial results.  

The Company operates in a highly competitive retail environment with companies offering similar merchandise. If customers are lost to the Company’s competitors, sales could decline.  

The Company operates in the highly competitive specialty home retail business and competes primarily with specialty sections of large general merchandise retailers and department stores, home furnishing retailers, small specialty stores, online retailers and marketplaces, and mass merchandising discounters. Management believes that the Company is competing for sales on the basis of style, product value proposition given pricing and quality, newness of merchandise assortment, visual presentation of its merchandise, including store layout, degree of convenience and customer service. The Company experiences increased competition when other retailers offer promotional pricing, including free shipping, or liquidate merchandise for various reasons. The Company has experienced the adverse effects of increasing competition in recent years. If the Company is unable to maintain a competitive position, it could experience increased negative pressure on retail prices for its products and loss of customers, which in turn, would have a material adverse effect on its business, financial condition and results of operations.

The success of the business depends on factors affecting consumer spending that are not controllable by the Company.

Consumer spending, including spending for the home and home-related furnishings, depends upon many factors beyond general economic conditions (both domestic and international), including, among others, levels of employment, disposable consumer income, prevailing interest rates, changes in the housing market, consumer debt, costs of fuel and other energy sources, inflation, fears of recession or actual recession periods, war and fears of war, pandemics, inclement weather, tax rates and rate increases, consumer confidence in future economic conditions and global, national, regional and local political conditions (including the possibility of governmental shut downs), and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for the Company’s products, resulting in lower sales and a negative impact to the business and its financial results.

Failure to attract, motivate and retain an effective management team or changes in the cost or availability of a suitable workforce to manage and support the Company’s stores, distribution and fulfillment centers and e‑Commerce website could negatively affect the Company’s business.    

The Company’s success depends, in a large part, on being able to successfully attract, motivate and retain a qualified management team and associates. Sourcing qualified candidates to fill important positions within the Company, especially management, in the highly competitive retail environment may prove to be a challenge. The inability to recruit and retain such individuals could result in turnover in the corporate headquarters, stores, and distribution and fulfillment centers, which could have a negative effect on the Company’s business and the Pier 1 2021: A New Day strategic plan. Management will continue to assess the Company’s compensation and benefit program in an effort to attract future qualified candidates and retain current experienced management team members. The Company does not believe that its compensation policies, principles, objectives and practices are structured to promote inappropriate risk taking by its executives or associates, whose behavior would be most affected by performance-based incentives. The Company believes that the focus of its overall compensation program encourages its associates to take a balanced approach that focuses on increasing and sustaining the Company’s profitability.

Occasionally, the Company experiences union organizing activities in non-unionized distribution facilities. These types of activities may result in work slowdowns or stoppages, higher labor costs and higher operating expenses. Any increase in cost associated with labor organization at distribution facilities could result in higher costs to distribute inventory and could negatively impact margins.  Similar activities could also occur in the Company’s stores and fulfillment centers.

9


Failure to successfully manage the Company’s omni-channel operations could negatively affect the Company’s business.  

In fiscal 2018, the Company continued to enhance its omni-channel capabilities. Successful execution of omni-channel initiatives depends on the Company’s ability to maintain uninterrupted availability of the Company’s e‑Commerce website and supporting applications, adequate and accurate inventory levels, timely and cost-effective fulfillment and delivery of customer orders, accurate shipping of undamaged product and coordination of those activities within the Company’s retail stores. In addition, the Company’s customer service function must maintain a high standard of customer care. As e‑Commerce sales continue to grow, delivery and fulfillment net costs are expected to continue to increase. Failure to successfully manage these processes and costs may negatively impact sales and profitability, result in the loss of customers and damage the Company’s reputation.

The Company’s business is subject to seasonal variations, with a significant portion of its sales and earnings occurring during two months of the year.

The Company generally has its highest sales volumes during the November and December holiday selling season. Severe weather or failure to predict consumer demand correctly during these months could result in material lost sales or gross margin erosion if merchandise must be marked down significantly to clear inventory.

Factors that may or may not be controllable by the Company may negatively affect the Company’s financial results.

The Company’s financial results may be negatively impacted by increases in costs that are beyond the Company’s control, including items such as increases in fuel and transportation costs, higher interest rates, increases in losses from damaged merchandise, inflation, litigation, recalls, fluctuations in foreign currency exchange rates, higher costs of labor, labor disputes around the world, increases in the costs of insurance and healthcare, increases in postage and media costs, higher tax rates and unfavorable changes in tax and trade policies. In addition, compliance with changes in laws and regulations and compliance with accounting standards and internal control requirements, may negatively impact the Company’s financial results.

The Company’s business may be harmed by adverse weather conditions and natural disasters.  

Extreme or undesirable weather can negatively affect customer traffic in retail stores as well as customer shopping behavior. Natural disasters such as earthquakes, weather phenomena, and events causing infrastructure failures could negatively affect any of the Company’s operations, including its distribution and fulfillment centers, administrative facilities, logistics infrastructure, or operations of its suppliers domestically and in foreign countries.

Risks Associated with Dependence on Technology

The Company is heavily dependent on various kinds of technology in the operation of its business.

Failure of, or security breaches or cyber incidents associated with, any critical software applications maintained by the Company or its vendors, including software-as-a-service and cloud operations, technology infrastructure, telecommunications, data communications, data storage equipment, or networks could have a material negative effect, including additional expense, on the Company’s ability to manage the merchandise supply chain, allocate and sell merchandise, manage its relationships with its customers, accomplish payment functions, report financial data or manage labor and staffing. Although the Company maintains off-site data backups, a concentration of technology-related risk exists in the Company’s headquarters located in Fort Worth, Texas. External events, including but not limited to, natural disasters, fire or flooding, civil unrest, service disruptions or degradation because of technology malfunction, sudden increases in customer transaction volume, power or internet outages, telecommunications failures, fraud, denial-of-service and other cyberattacks, terrorism, computer viruses, physical or electronic break-ins or other events not within the Company’s control could prohibit access to or limit functionality of the data center located in the Company’s headquarters or the ability of its stores to function. While the Company has successfully mitigated past events of this nature with minimal disruption to the business, a major event could be more disruptive and require significant time and resources to resolve, and could result in a material adverse impact on the Company’s operations and financial results.

Failure to protect the integrity and security of individually identifiable data of the Company’s customers and associates could expose the Company to litigation and/or regulatory action and damage the Company’s reputation.

The Company receives and maintains certain personal and payment information of its customers, vendors and associates. The collection and use of this information by the Company is regulated at the international, national, federal, state and other political subdivision levels, and is subject to certain contractual restrictions in third-party agreements. The Company utilizes numerous tools and processes intended to protect against, detect and respond to security breaches and cyber incidents that could compromise this information, including an integrated risk assessment and disclosure process. The Company utilizes an incident response plan as part of

10


its crisis management program, which is reviewed, enhanced and tested annually. This response plan includes notification and disclosure to appropriate levels of management, the Company’s Board of Directors and other stakeholders including affected customers and governmental authorities. Although the Company has implemented processes to collect and protect the integrity and security of personal and payment information, there can be no assurance that this information will not be obtained by unauthorized persons, or collected or used inappropriately.

Like all large scale retailers, the Company’s information systems and those of its vendors are under continuous attack by U.S. and foreign criminal elements seeking access to the Company’s data generally and particularly information regarding its customers and employees or to otherwise disrupt its operations. These increasingly sophisticated cyberattacks include computer viruses, malicious code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks and similar disruptions. While the Company has not to its knowledge experienced a material breach or loss of sensitive information, there can be no assurance that such breaches or losses will not occur or that their cost or impact to the Company will not be material. If the security and information systems of the Company or of its business partners are compromised or its internal or external business associates fail to comply with the Company’s security breach and cyber incident policies and procedures or applicable laws and regulations and customer or employee information is obtained by unauthorized persons, or collected or used inappropriately, the Company’s reputation and marketing initiatives, as well as operations and financial results, could be materially impacted.  These events could result in litigation and/or regulatory action against the Company, including the imposition of monetary judgments, penalties and fines in amounts that would be material to the Company. In addition, a compromise of the Company’s systems could result in a disruption to operations and strategic initiatives and require materially greater resources to remediate, investigate, correct and upgrade systems. As the tactics and capabilities of cyber criminals change and become more sophisticated, and as privacy and information security laws and regulations change, the Company will continue to incur significant costs to remain reasonably secure and in compliance. 

Failure to successfully implement new information technology systems and enhance existing systems could negatively impact the Company’s operations and financial results.

The Company regularly invests in new information technology systems and implements modifications and upgrades to existing systems. These investments include replacing legacy systems, making changes to existing systems, building redundancies, acquiring new systems and hardware with updated functionality and cloud-based solutions such as software-as-a-service, platform-as-a service  and data storage. The Company believes it is taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business.  However, there can be no assurance the Company has anticipated all potential risks including security breach and cyber incident risks. Failure to successfully implement these initiatives could negatively impact the Company’s operations and financial results.

The Company’s business operations, including the Company’s e‑Commerce website, are subject to inherent cybersecurity risks and e‑Commerce related fraud that may disrupt its business and negatively impact the Company’s operations, financial results and reputation.

The Company’s e‑Commerce functionality has increased the Company’s exposure to security breach and cyber incident risks and e‑Commerce related fraud. A compromise of the Company’s or its third-party vendors’ information systems could result in a service disruption, personal information of the Company’s customers or proprietary information of the Company or its vendors being obtained by unauthorized users or the Company, its customers or its vendors falling victim to unauthorized, fraudulent transactions. A failure to exercise adequate oversight over third-party vendors, including compliance with service level agreements or regulatory or legal requirements, could result in economic and reputational harm to the Company. Although the Company has implemented processes to mitigate the risks of security breaches, cyber incidents and e‑Commerce related fraud, and believes that it has responded appropriately and effectively to prevent any material adverse effect on the Company or its customers when these events have occurred, there can be no assurance that such events will not continue to occur, that such mitigation will be successful or that the Company or its customers will not in a future instance suffer material losses. These events could result in violation of privacy laws, litigation or regulatory action, increased costs and a loss of consumer confidence in the Company’s security measures. While the Company has successfully mitigated past events of this nature with minimal disruption to the business, a major event could be more disruptive and require significant time and resources to resolve, and could result in a material adverse impact on the Company’s operations and financial results.

Failure to maintain positive brand perception and recognition could have a negative impact on the Company’s operations, financial results and reputation.

Maintaining a good reputation is critical to the Company’s business. Social media has increased the risk that the Company’s reputation could be negatively impacted in a short amount of time. If the Company is unable to quickly and effectively respond to occurrences of negative publicity through social media or otherwise, it may suffer declines in customer loyalty and traffic, vendor relationship issues, diversion of management’s time to respond and other adverse effects, all of which could negatively impact the Company’s reputation, operations and financial results.

11


Legal and Regulatory Risks

The Company is subject to laws and regulatory requirements in many jurisdictions. Changes in these laws and requirements, or interpretations of them, may result in additional costs to the Company, including the costs of compliance as well as potential penalties and fines for non-compliance.

Legislation on a local, regional, state, national or global level may have a negative effect on the Company’s profitability or ability to operate its business. Compliance with certain legislation carries with it significant costs. The Company is subject to oversight by many governmental and quasi-governmental agencies in the course of operating its business because of its numerous locations, large number of associates, contact with consumers and importation and exportation of product.  In addition, the Company is subject to a broad range of business regulations including consumer product quality and safety standards. Complying with regulations may cause the Company to incur significant expenses, including the costs associated with periodic audits and recalls. Any failure or alleged failure to comply may also result in damage to the Company’s reputation or additional costs in the form of litigation, financial penalties and fines or business interruptions.  

The Company conducts business in many jurisdictions, including foreign countries. In many of these jurisdictions, the Company may be required to comply with employment laws and pay or collect tariffs and duties, national, state and local sales taxes or similar taxes at the point of sale or delivery of merchandise and remit such amounts to the appropriate authorities. The Company is also subject to income taxes, excise taxes, franchise taxes, payroll taxes and other special taxes. The Company is also required to maintain various kinds of business and commercial licenses to operate its stores and other facilities. Rates of taxation are beyond the Company’s control, and increases in such rates or taxation methods and rules could have a negative impact on the Company’s financial results. Failure to comply with laws concerning the collection and remittance of taxes, duties and tariffs, and with licensing requirements could also subject the Company to financial penalties and fines or business interruptions.

The Company is subject to claims and litigation that are inherently unpredictable and could have a material adverse effect on the Company’s business, financial condition and results.

The Company is subject to claims, lawsuits, inquiries, investigations and pending legal and administrative actions incident to the operations of its business. These actions can be initiated by employees, customers, vendors, competitors, holders of claimed intellectual property rights, shareholders, government agencies and others, individually or by groups through mass and class actions. While the Company generally considers these matters to be ordinary and routine in nature, budgets for their cost and maintains insurance or reserves against a portion of the costs of certain of these exposures, there can be no assurance that the Company will not incur material unexpected costs, judgments or penalties, or material demands on management’s time, attributable to these matters. The likely outcome and cost of litigation and other disputes is often difficult or impossible to determine or quantify. Claims may seek very large or unspecified amounts. The full extent of the Company’s risk of loss relating to these matters may remain unknown for substantial periods of time as a decision at one level of the courts or administrative proceedings can be overturned by appeals to higher courts or other decisional bodies. The Company expends significant amounts for insurance, personnel costs and external advisors in an effort to limit exposures to these sources of claims and litigation, which costs are increasing. There is no assurance that these efforts will prove effective. Claims ultimately decided adversely to the Company, or settlements that the Company agrees to, may be very large and could have a material adverse effect on the Company’s business, financial condition and results.

Risks Associated with International Trade

As an importer and retailer of imported merchandise, the Company is subject to certain risks that typically do not affect retailers of domestically produced merchandise.

The Company must order merchandise well in advance of delivery and generally takes title to the merchandise at the time it is loaded for transport to designated U.S. destinations. Global political unrest, war, threats of war, terrorist acts or threats, especially threats to foreign and U.S. ports and piracy, disruption in the operation of the international portion of the Company’s supply chain, labor unrest or natural disasters could adversely affect the Company’s ability to import merchandise from certain countries. Although the Company pays for the vast majority of its merchandise in U.S. dollars, fluctuations in foreign currency exchange rates and the relative value of the U.S. dollar, restrictions on the convertibility of the dollar and other currencies, duties, preferential trade agreements including generalized system of preferences, retaliatory tariffs or commercially restrictive duties, taxes and other charges on imports, rising labor costs and cost of living in foreign countries, dock strikes, worker strikes, import quota systems and other restrictions sometimes placed on foreign trade can affect the price, delivery and availability of imported merchandise as well as exports to the Company’s stores in other countries. The inability to import merchandise from China and other countries, unavailability of adequate shipping capacity at reasonable rates, or the imposition of significant tariffs could have a negative effect on the operations and financial results of the Company. Ocean carriage and freight costs, duties and agent commissions contribute a substantial amount to the cost of imported merchandise. Monitoring foreign vendors’ compliance with applicable laws and Company standards, including quality and safety standards and social compliance issues, is more difficult than monitoring domestic vendors.

Governmental agencies have the authority to enforce trade agreements, resolve trade disputes and control market access to goods and services. Governments may also impose trade sanctions on foreign countries that are found to violate trade agreements or maintain

12


laws or practices that are unjustifiable and restrict commerce. In these situations, governments may increase duties on imports from one or more foreign countries. The Company could be negatively affected by the imposition of trade sanctions.

The governments of the countries in which the Company does business maintain a variety of additional trade laws under which the Company’s ability to import may be affected from time to time, including antidumping laws, countervailing duty laws, safeguard laws, and laws designed to protect intellectual property rights. Although the Company may not be directly involved in a particular trade dispute under any of these laws, its ability to import, or the terms and conditions under which it can continue to import, may be affected by the outcome of such disputes.

The Company imports merchandise from countries around the world and as a result may be affected from time to time by antidumping petitions alleging that foreign manufacturers are selling their own products at prices that are less than the prices that they charge in their home country market or in third-country markets or at less than their cost of production. Such petitions, if successful, could significantly increase import duties on those products. In that event, the Company might decide to pay the increased duties, thereby reducing gross profits or increasing the price to consumers of the affected products. Alternatively, the Company might decide to source the product or a similar product from a different country not subject to increased duties or discontinue the importation and sale of the product.

Dispute resolution processes in recent years have been utilized to resolve disputes regarding market access between the European Union, China, the United States and other countries. In some instances, these trade disputes can lead to threats by countries of sanctions or other retaliatory actions against each other, which can include import prohibitions and increased duty rates on imported items. The Company considers any agreement that reduces tariff and non-tariff barriers in international trade to be beneficial to its business. Any type of sanction on imports is likely to increase the Company’s import costs or limit the availability of merchandise purchased from sanctioned countries. In that case, the Company may be required to seek similar merchandise from providers in other countries on terms that could be materially less favorable.

The Company’s business may be adversely affected by changes in U.S. policy related to imported merchandise.

The majority of the Company’s merchandise is sourced from outside of the United States. The U.S. government has made substantial changes to its trade policies, including import restrictions and increased import tariffs on certain classes of products, among other measures reported to be under consideration. While these actions and proposed actions have not materially affected the Company’s sourcing of merchandise to date, there is no assurance that trade actions by the U.S. government or foreign governments will not have a material adverse effect on the Company. Material changes in these policies could require the Company to increase prices to customers, which would likely adversely affect sales. Any significant change in U.S. policy related to imported merchandise could have a material adverse effect on the Company’s business and financial results.    

Risks Relating to Liquidity

If the Company is unable to generate sufficient cash flows from operations, it may not be able to fund its obligations, including debt-related payments and capital expenditure requirements.  Insufficient cash flows from operations could result in the substantial utilization of the Company’s secured revolving credit facility or similar financing, which may limit the Company’s ability to conduct certain activities.  

The Company is dependent upon generating sufficient cash flows from operations to fund its obligations and strategic investments. The Company maintains a secured revolving credit facility to enable it to acquire merchandise, fund working capital requirements as well as to support standby letters of credit. Borrowings under the secured revolving credit facility are subject to a borrowing base calculation consisting of a percentage of certain eligible assets of the Company and are subject to advance rates and commercially reasonable reserves.  Substantial utilization of the available borrowing base will result in various restrictions on the Company, including restrictions on the ability of the Company to repurchase its common stock or pay dividends and an increase in the lender’s control over the Company’s cash accounts. The Company entered into a senior secured term loan facility in April of 2014. The facility contains a number of affirmative and restrictive covenants that may also limit the Company’s actions. Significant decreases in cash flows from operations could result in the Company borrowing increased amounts under its credit facilities to fund operational needs and increased utilization of letters of credit and greater dependence on the availability of the revolving credit facility. These actions could result in the Company being subject to increased restrictions as described above and increase interest expense and overall leverage. See Note 4 of the Notes to Consolidated Financial Statements – Secured Revolving Credit Facility and Term Loan Facility for additional discussion.  

A disruption in the global credit and equity markets could negatively impact the Company’s ability to obtain financing on acceptable terms.

In the future, the Company could become dependent on the availability of adequate capital to fund its operations. Disruption in the global credit and equity markets and future disruptions in the financial markets could negatively affect the Company’s ability to enter into new financing agreements or obtain funding through the sale of Company securities. A decline in economic conditions could also result in difficulties for financial institutions and other parties with whom the Company does business, which could potentially affect the Company’s ability to access financing under existing arrangements or to otherwise recover amounts as they become due under the

13


Company’s contractual agreements. The inability of the Company to obtain financing as needed on acceptable terms to fund its operations may have a negative impact on the Company’s business and financial results.

Risks Relating to the Company’s Common Stock

Many factors, including factors beyond the Company’s control, could affect the Company’s common stock price.

The Company’s common stock is subject to significant volatility as a result of many factors, including those beyond the Company’s control. These factors include, but are not limited to, general economic and market conditions, fluctuations in the Company’s financial condition, operating results or liquidity, execution of the Company’s strategic plan, discontinuation of common stock dividends and share repurchases, or failure to meet shareholder expectations. These and other risks could affect the Company’s common stock price.  

The Company’s business or the value of its common stock could be negatively affected as a result of actions by activist shareholders.

The Company values constructive input from investors and regularly engages in dialogue with its shareholders regarding strategy and performance. The Company’s Board of Directors and management team are committed to acting in the best interests of all of the Company’s shareholders. There is no assurance that the actions taken by the Board of Directors and management in seeking to maintain constructive engagement with the Company’s shareholders will be successful.

Activist shareholders who disagree with the composition of the Board of Directors, the Company’s strategy or the way the Company is managed may seek to effect change through various strategies that range from private engagement to publicity campaigns, proxy contests, efforts to force transactions not supported by the Board of Directors and litigation. Responding to some of these actions can be costly and time consuming, may disrupt the Company’s operations and divert the attention of the Board of Directors, management and the Company’s employees. Such activities could interfere with the Company’s ability to execute its strategic plan and to attract and retain qualified executive leadership. The perceived uncertainty as to the Company’s future direction resulting from activist strategies could also affect the market price and volatility of the Company’s common stock.

 

Item 1B. Unresolved Staff Comments.

None.

14


Item 2. Properties.

The Company leases its corporate headquarters, retail stores and the majority of its distribution and fulfillment centers.  The Company has an operating lease for its corporate headquarters located in Fort Worth, Texas, which included approximately 408,000 square feet of office space as of March 3, 2018. Approximately 43,000 square feet of this office space was subleased at fiscal 2018 year end. Total gross square footage for all stores was 10.0 million and retail square footage was 7.9 million as of March 3, 2018. The following table sets forth the Company’s U.S. and Canadian stores by state and province as of March 3, 2018:  

 

United States

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alabama

 

 

11

 

 

Louisiana

 

 

15

 

 

Ohio

 

 

28

 

Alaska

 

 

3

 

 

Maine

 

 

2

 

 

Oklahoma

 

 

6

 

Arizona

 

 

23

 

 

Maryland

 

 

21

 

 

Oregon

 

 

12

 

Arkansas

 

 

8

 

 

Massachusetts

 

 

21

 

 

Pennsylvania

 

 

37

 

California

 

 

102

 

 

Michigan

 

 

30

 

 

Rhode Island

 

 

2

 

Colorado

 

 

13

 

 

Minnesota

 

 

18

 

 

South Carolina

 

 

15

 

Connecticut

 

 

17

 

 

Mississippi

 

 

6

 

 

South Dakota

 

 

2

 

Delaware

 

 

4

 

 

Missouri

 

 

16

 

 

Tennessee

 

 

17

 

Florida

 

 

72

 

 

Montana

 

 

5

 

 

Texas

 

 

76

 

Georgia

 

 

27

 

 

Nebraska

 

 

4

 

 

Utah

 

 

8

 

Hawaii

 

 

8

 

 

Nevada

 

 

7

 

 

Vermont

 

 

1

 

Idaho

 

 

6

 

 

New Hampshire

 

 

6

 

 

Virginia

 

 

32

 

Illinois

 

 

35

 

 

New Jersey

 

 

32

 

 

Washington

 

 

26

 

Indiana

 

 

17

 

 

New Mexico

 

 

4

 

 

West Virginia

 

 

5

 

Iowa

 

 

8

 

 

New York

 

 

47

 

 

Wisconsin

 

 

18

 

Kansas

 

 

7

 

 

North Carolina

 

 

32

 

 

Wyoming

 

 

2

 

Kentucky

 

 

11

 

 

North Dakota

 

 

3

 

 

 

 

 

 

 

Canada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alberta

 

 

12

 

 

New Brunswick

 

 

2

 

 

Ontario

 

 

35

 

British Columbia

 

 

13

 

 

Newfoundland

 

 

1

 

 

Quebec

 

 

6

 

Manitoba

 

 

2

 

 

Nova Scotia

 

 

2

 

 

Saskatchewan

 

 

2

 

 

The Company currently owns or leases distribution and fulfillment center space of approximately 5.6 million square feet.  The Company also acquires temporary distribution center space periodically through short-term leases.  As of March 3, 2018, the Company owned or leased under operating leases the following properties, which include distribution and/or fulfillment centers in or near the following cities:

 

Location

 

Approx. Sq. Ft.

 

 

Owned/Leased

Facility

Baltimore, Maryland

 

 

1,278,000

 

 

Leased

Columbus, Ohio

 

 

1,356,000

 

 

Leased

Fort Worth, Texas

 

 

460,000

 

 

Owned

Fort Worth, Texas

 

 

310,000

 

 

Leased

Ontario, California

 

 

991,000

 

 

Leased

Savannah, Georgia

 

 

784,000

 

 

Leased

Tacoma, Washington

 

 

451,000

 

 

Leased

 

Item 3. Legal Proceedings.

Putative class action complaints were filed in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between April 10, 2014 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants' alleged violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys' fees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. On November 22, 2017, the Company filed a motion to dismiss the amended complaint.  Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against it vigorously.

The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the Consumer Product Safety Commission (“CPSC”). In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The Company responded to the inquiry and cooperated with the CPSC.  On September 20, 2017, the

15


Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. On October 27, 2017, the Company submitted its response to the CPSC letter. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2.0 million to $6.2 million. While we anticipate that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay.

The Company is a defendant in lawsuits pending in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits seek unspecified monetary damages, injunctive relief and attorneys’ fees.  The Company has sought to settle these cases on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company has settled or agreed to settle the pending cases, subject to completion of associated procedural requirements. The Company does not believe any reasonably foreseeable resolution of these matters will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The Company recognized expense of $6.6 million in the second quarter of fiscal 2018 attributable to the legal and regulatory proceedings described in the two preceding paragraphs as a component of selling, general and administrative expenses.

During fiscal years 2018, 2017 and 2016, there were various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operation of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Item and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity.

Item 4. Mine Safety Disclosures.

Not applicable.  

16


PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Prices of Common Stock

The following table shows the high and low closing sale prices of the Company’s common stock on the New York Stock Exchange (“NYSE”), as reported in the consolidated transaction reporting system for each quarter of fiscal 2018 and 2017.  

 

 

 

Market Price

 

Fiscal 2018

 

High

 

 

Low

 

First quarter

 

$

7.26

 

 

$

5.09

 

Second quarter

 

 

5.65

 

 

 

4.01

 

Third quarter

 

 

5.20

 

 

 

4.08

 

Fourth quarter

 

 

5.84

 

 

 

2.98

 

 

Fiscal 2017

 

High

 

 

Low

 

First quarter

 

$

7.34

 

 

$

4.94

 

Second quarter

 

 

5.97

 

 

 

4.54

 

Third quarter

 

 

6.24

 

 

 

3.84

 

Fourth quarter

 

 

9.49

 

 

 

5.59

 

 

Number of Holders of Record

The Company’s common stock is traded on the NYSE under the symbol “PIR.” As of April 27, 2018, there were approximately 6,000 shareholders of record of the Company's common stock.

Dividends

The Company declared cash dividends on its outstanding shares of common stock of $0.07 per share in each of the quarters of fiscal 2018, which totaled $22.3 million in cash dividends paid during fiscal 2018. The Company declared cash dividends on its outstanding shares of common stock of $0.07 per share in each of the quarters of fiscal 2017, which totaled $22.5 million in cash dividends paid during fiscal 2017. On April 18, 2018, subsequent to year end, the Company announced that the Board of Directors had determined to discontinue the Company’s common stock dividend to allocate greater resources towards implementing its Pier 1 2021: A New Day three-year strategic plan to drive sales and earnings growth and increase shareholder value. 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

November 26, 2017 through March 3, 2018 The following table provides information with respect to purchases of common stock of the Company made during the three months ended March 3, 2018, by the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.  

 

Period

 

Total

Number of

Shares

Purchased

 

 

Average

Price Paid

per Share

(including

fees)

 

 

Total

Number of

Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs

 

 

Approximate

Dollar Value of

Shares that May

Yet Be Purchased

Under the Plans

or Programs

 

Nov. 26, 2017 through Dec. 30, 2017

 

 

 

 

$

 

 

 

 

 

$

26,610,135

 

Dec. 31, 2017 through Jan. 27, 2018

 

 

 

 

 

 

 

 

 

 

 

26,610,135

 

Jan. 28, 2018 through Mar. 3, 2018

 

 

 

 

 

 

 

 

 

 

 

26,610,135

 

 

 

 

 

 

$

 

 

 

 

 

$

26,610,135

 

 

17


Fiscal years 2018, 2017 and 2016 The following table summarizes the Company’s total share repurchases of its common stock under the $200 million board-approved share repurchase program announced on April 10, 2014, (“April 2014 program”) for each of the last three fiscal years:

 

 

 

 

 

 

 

Shares Purchased

 

 

Weighted

 

 

Remaining

 

Date Program Announced

 

Authorized

Amount

 

 

Fiscal

2018

 

 

Fiscal

2017

 

 

Fiscal

2016

 

 

Average

Cost

 

 

Available as of

March 3, 2018

 

Apr. 10, 2014

 

$

200,000,000

 

 

 

1,926,602

 

 

 

1,794,053

 

 

 

7,460,935

 

 

$

10.58

(1)

 

$

26,610,135

 

 

(1)

Represents weighted average cost for all share repurchases under the April 2014 program.

During fiscal 2018, the Company repurchased 1,926,602 shares of its common stock under the April 2014 program at a weighted average cost of $5.19 per share for a total cost of $10.0 million. There were no share repurchases during the fourth quarter of fiscal 2018. As of March 3, 2018, $26.6 million remained available for further share repurchases of common stock under the April 2014 program. There is no expiration date on the current authorization. On April 18, 2018, subsequent to year end, the Company announced that the Board of Directors had determined to discontinue share repurchases at the present time under the April 2014 program.

During fiscal 2018, the Company withheld 97,647 shares of its common stock from associates to satisfy tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans.  

Performance Graph

The following graph compares the five-year cumulative total shareholder return for the Company’s common stock against the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Retail Stores Composite Index. The annual changes for the five-year period shown on the graph are based on the assumption, as required by SEC rules, that $100 had been invested in the Company’s stock and in each index on March 2, 2013, and that dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on March 3, 2018. The information used in the graph below was obtained from Bloomberg L.P.

PIER 1 IMPORTS, INC. STOCK PERFORMANCE GRAPH

 

 

18


Item 6. Selected Financial Data.

FINANCIAL SUMMARY

 

 

 

Year Ended

 

 

 

2018 (1)

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

($ in millions except per share amounts)

 

SUMMARY OF OPERATIONS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,798.5

 

 

 

1,828.4

 

 

 

1,892.2

 

 

 

1,884.6

 

 

 

1,791.4

 

Gross profit

 

$

658.1

 

 

 

697.3

 

 

 

705.0

 

 

 

768.5

 

 

 

765.3

 

Selling, general and administrative expenses

 

$

576.9

 

 

 

587.8

 

 

 

578.8

 

 

 

594.9

 

 

 

550.9

 

Depreciation

 

$

53.6

 

 

 

54.6

 

 

 

50.9

 

 

 

46.3

 

 

 

38.9

 

Operating income

 

$

27.7

 

 

 

54.9

 

 

 

75.2

 

 

 

127.3

 

 

 

175.5

 

Operating income as a % of sales

 

 

1.5

%

 

 

3.0

%

 

 

4.0

%

 

 

6.8

%

 

 

9.8

%

Nonoperating (income) and expenses, net

 

$

9.8

 

 

 

9.6

 

 

 

12.0

 

 

 

6.9

 

 

 

0.9

 

Income before income taxes

 

$

17.9

 

 

 

45.3

 

 

 

63.2

 

 

 

120.4

 

 

 

174.6

 

Net income

 

$

11.6

 

 

 

30.1

 

 

 

39.6

 

 

 

75.2

 

 

 

107.5

 

PER SHARE AMOUNTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.14

 

 

 

0.37

 

 

 

0.47

 

 

 

0.83

 

 

 

1.03

 

Diluted earnings

 

$

0.14

 

 

 

0.37

 

 

 

0.46

 

 

 

0.82

 

 

 

1.01

 

Cash dividends declared

 

$

0.28

 

 

 

0.28

 

 

 

0.28

 

 

 

0.24

 

 

 

0.21

 

OTHER FINANCIAL DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

316.6

 

 

 

318.7

 

 

 

328.2

 

 

 

365.5

 

 

 

306.4

 

Current ratio

 

 

2.3

 

 

 

2.1

 

 

 

2.3

 

 

 

2.3

 

 

 

2.2

 

Total assets

 

$

772.3

 

 

 

843.1

 

 

 

819.2

 

 

 

906.9

 

 

 

800.2

 

Long-term debt

 

$

197.9

 

 

 

199.1

 

 

 

200.3

 

 

 

201.4

 

 

 

9.4

 

Shareholders' equity

 

$

277.6

 

 

 

292.0

 

 

 

284.8

 

 

 

337.3

 

 

 

449.4

 

Weighted average diluted shares outstanding (in millions) (2)

 

 

80.3

 

 

 

81.0

 

 

 

85.4

 

 

 

92.1

 

 

 

106.2

 

Effective tax rate (%)

 

 

35.0

%

 

 

33.4

%

 

 

37.3

%

 

 

37.6

%

 

 

38.4

%

 

(1)

Fiscal 2018 consisted of a 53-week year.  All other fiscal years presented reflect a 52-week year.

(2)

The decrease in shares outstanding during fiscal 2018, 2017, 2016, 2015 and 2014 was primarily the result of the Company's board-approved share repurchase programs.  Under these programs, the Company repurchased 1,926,602; 1,794,053; 7,460,935; 10,280,312; and 9,788,257 shares of its common stock in fiscal 2018, 2017, 2016, 2015 and 2014, respectively.

 

19


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT OVERVIEW

Introduction

Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is dedicated to offering customers exclusive, one-of-a-kind products that reflect high quality at a great value. Starting with a single store in 1962, Pier 1 Imports’ product is now available in retail stores throughout the U.S. and Canada and online at pier1.com. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products.  Fiscal 2018 consisted of a 53-week year which ended on March 3, 2018. Fiscal 2017 and 2016 both consisted of 52-week years which ended on February 25, 2017 and February 27, 2016, respectively. As of March 3, 2018, the Company operated 1,003 stores in the U.S. and Canada. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the accompanying audited Consolidated Financial Statements and notes thereto, which can be found in Item 8 of this report.

The Company announced its three-year strategic plan, Pier 1 2021: A New Day on April 19, 2018 which is designed to improve the Company’s brand proposition, drive sales growth and capture operating efficiencies. Under Pier 1 2021: A New Day, the Company will be focused on:

Improving brand proposition by segmenting the marketplace and focusing on targeted consumer groups, refining merchandise assortments, delivering value in order to better fit the customer’s style and create ease of shopping.

Driving sales growth through new marketing strategies focusing on content, digital communications and customer experience, improving the shopping experience and leveraging and strengthening the Company’s omni-channel platform.

Capturing operating efficiencies through initiatives that include pricing and promotion, inventory reduction, sourcing and supply chain improvements.

In fiscal 2019, the Company plans to invest in the tools and resources needed to execute against the plan, which is expected to result in a net loss for the year. Capital investments in fiscal 2019 are expected to total $60 million, which includes approximately $45 million of expenditures for Pier 1 2021: A New Day, primarily deployed toward information technology, supply chain and stores. The Company also plans to make investments in selling, general and administrative (“SG&A”) expenditures in fiscal 2019 in the areas of marketing, corporate services and facilities planning and store operations. The investments in both capital and SG&A are expected to help drive sales growth and increased profitability in fiscal 2020 and 2021. Profit improvement through increased efficiencies, improved productivity and managed expenses will be important to the three-year strategic plan.

Fiscal 2018 net sales (on a 53-week basis) decreased 1.6% from the prior year and company comparable sales (on a 52-week basis) decreased 2.0% as the average number of stores declined approximately 1.5%. The company comparable sales decrease for fiscal 2018 resulted primarily from decreased store traffic and average ticket, partially offset by higher conversion. During fiscal 2018, e‑Commerce sales accounted for approximately 26% of net sales, compared to approximately 20% in the previous fiscal year. A significant portion of e‑Commerce sales touch the retail stores, either by originating on in-store PCs and tablets, or through in-store pick-up.  

Gross profit for fiscal 2018 was $658.1 million, or 36.6% of sales, compared to $697.3 million, or 38.1% of sales, in fiscal 2017, a decrease of 150 basis points. Merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit – see “Reconciliation of Non-GAAP Financial Measures”) was $1.026 billion for fiscal 2018, or 57.1% of sales, compared to $1.048 billion, or 57.3% of sales, for fiscal 2017. The year-over-year decline in merchandise margin is primarily attributable to higher promotional activity, partially offset by supply chain cost savings. Delivery and fulfillment net costs for fiscal 2018 were $77.6 million, or 4.3% of sales, compared to $59.0 million, or 3.2% of sales, in fiscal 2017. The increase is primarily attributable to free shipping promotions and also reflects the increase in direct-to-customer (as defined below) sales as compared to fiscal 2017. To the extent these sales have grown and continue to grow, delivery and fulfillment net costs have also increased and are expected to continue to increase. Store occupancy costs decreased in dollars during fiscal 2018; however, as a percentage of sales, these costs deleveraged to 16.2% compared to 16.0% during fiscal 2017 as a result of lower sales. Contribution from operations (gross profit less compensation from operations and operational expenses — see “Reconciliation of Non-GAAP Financial Measures”) for fiscal 2018 totaled $329.5 million, compared to $360.1 million during fiscal 2017.  

Operating income for fiscal 2018 was 1.5% of sales, compared to 3.0% of sales, in fiscal 2017. Net income for fiscal 2018 was $11.6 million, or $0.14 per share. Adjusted net income (non-GAAP) for fiscal 2018 was $16.8 million, or $0.21 per share and excludes $6.6 million ($5.2 million, or $0.07 per share, net of tax) of expense for legal and regulatory costs relating to a California wage-and-hour matter and an ongoing CPSC inquiry. Fiscal 2017 net income totaled $30.1 million, or $0.37 per share. Adjusted net income for fiscal 2017 was $35.7 million, or $0.44 per share and excludes costs related to the departure of the Company’s former Chief Executive Officer (“former CEO”) and the related tax benefit.  EBITDA (earnings before interest, taxes, depreciation and amortization) for fiscal 2018 was $82.7 million, or $89.3 million as adjusted for legal and regulatory costs described above, compared to EBITDA of $110.6 million last year, or $120.4 million as adjusted for the former CEO departure costs noted above. See “Reconciliation of Non-GAAP Financial Measures” below. Profitability in fiscal 2018 was challenged by store traffic declines and promotional and clearance activity.    

20


The Company closed 15 and 14 stores, on a net basis, during fiscal 2018 and fiscal 2017, respectively. These closures are consistent with, and a part of, the real estate optimization plan previously announced by the Company. The Company expects to continue to optimize the location, number and functionality of its distribution and fulfillment centers and stores as part of Pier 1 2021: A New Day three-year strategic plan. The real estate optimization plan has to date included three parts: (1) closure of approximately 100 stores over a three to four fiscal-year period which commenced in fiscal 2016, primarily through natural lease expirations and relocations; (2) a more modest new store opening and relocation program; and (3) ongoing renegotiations of rent commitments.  

During fiscal 2018, the Company utilized $53.2 million of cash for capital expenditures, which was deployed toward technology and infrastructure initiatives, new and existing stores, and distribution and fulfillment centers.

As of March 3, 2018, the Company had $193.0 million outstanding under its $200 million Term Loan Facility that matures on April 30, 2021. See “Liquidity and Capital Resources Revolving Credit Facility” and “Liquidity and Capital Resources Term Loan Facility” below for more information.

As of March 3, 2018, the Company had repurchased 16,390,090 shares of its common stock under the April 2014 program at a weighted average cost of $10.58 per share for a total cost of $173.4 million, and $26.6 million remained available for further share repurchases. During fiscal 2018, the Company repurchased 1,926,602 shares of its common stock under the April 2014 program at a weighted average cost of $5.19 per share for a total cost of $10.0 million. During fiscal 2018, the Company paid quarterly cash dividends totaling approximately $22.3 million. On April 18, 2018, the Company announced that the Board of Directors had determined to discontinue the Company’s common stock dividend.  The Board of Directors also determined to discontinue share repurchases at the present time under the April 2014 program. These actions are expected to allow for the allocation of greater resources toward implementing the Company’s Pier 1 2021: A New Day three-year strategic plan.    

Overview of Business

The Company’s key financial and operational indicators used by management to evaluate the performance of the business include the following (trends for these indicators are explained in the comparative discussions below).

 

Key Performance Indicators

 

2018

(1)

 

2017

 

 

2016

 

Total sales growth (decline)

 

 

(1.6

%)

 

 

(3.4

%)

 

 

0.4

%

Company comparable sales growth (decline) (2)

 

 

(2.0

%)

 

 

(1.0

%)

 

 

0.7

%

Gross profit as a % of sales

 

 

36.6

%

 

 

38.1

%

 

 

37.3

%

Contribution from operations as a % of sales (3)

 

 

18.3

%

 

 

19.7

%

 

 

18.7

%

Selling, general & administrative expenses as a % of sales

 

 

32.1

%

 

 

32.1

%

 

 

30.6

%

Operating income as a % of sales

 

 

1.5

%

 

 

3.0

%

 

 

4.0

%

Net income (in millions)

 

$

11.6

 

 

$

30.1

 

 

$

39.6

 

Net income as a % of sales

 

 

0.6

%

 

 

1.6

%

 

 

2.1

%

EBITDA (in millions) (3)

 

$

82.7

 

 

$

110.6

 

 

$

125.2

 

EBITDA as a % of sales (3)

 

 

4.6

%

 

 

6.0

%

 

 

6.6

%

Total retail square footage (in thousands)

 

 

7,934

 

 

 

8,048

 

 

 

8,165

 

 

(1)

Fiscal 2018 consisted of a 53-week year.  All other fiscal years presented reflect a 52-week year.

(2)

All fiscal years were calculated on a 52-week basis.

(3)

See "Reconciliation of Non-GAAP Financial Measures."

Company Comparable Sales Calculation The company comparable sales calculation includes all in-store sales, including direct-to-customer (as defined below), provided that the store was open prior to the beginning of the preceding fiscal year and was still open at period end. In addition, company comparable sales include all orders placed online outside of a store as direct-to-customer sales. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the following: the new store is within a specified distance serving the same market, no significant change in store size, and no significant overlap or gap between the store closing and reopening. Such stores are included in the company comparable sales calculation in the first full month after the reopening. If a relocated or remodeled store does not meet the above criteria, it is excluded from the calculation until it meets the Company’s established definition as described above.

21


FISCAL YEARS ENDED MARCH 3, 2018 AND FEBRUARY 25, 2017

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during fiscal years 2018 and 2017 were as follows (in thousands):

 

 

 

2018

 

 

2017

 

Retail sales

 

$

1,785,989

 

 

$

1,816,402

 

Other (1)

 

 

12,533

 

 

 

12,044

 

Net sales

 

$

1,798,522

 

 

$

1,828,446

 

 

(1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a “store within a store” format in Mexico and El Salvador and online in Mexico.  Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage.  

Net sales during fiscal 2018 were $1.799 billion for the 53-week period, a decrease of 1.6%, from $1.828 billion in the prior 52-week fiscal year. At the end of fiscal 2018, the Company operated 15 fewer stores than at the end of fiscal 2017. Company comparable sales for fiscal 2018 (on a 52-week basis) decreased 2.0% as compared to prior year, primarily resulting from decreased store traffic and average ticket, partially offset by higher conversion. The Company’s e‑Commerce sales accounted for approximately 26% of net sales for fiscal 2018, compared to approximately 20% for fiscal 2017. E‑Commerce sales are comprised of both customer orders placed online which were delivered directly to the customer (“direct-to-customer”) or those picked up by the customer at a store location.

Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. The year-over-year change in the value of the Canadian Dollar, relative to the U.S. Dollar, positively impacted net sales and company comparable sales by approximately 20 basis points and 10 basis points, respectively, in fiscal 2018. Sales on the Pier 1 rewards credit card comprised 36.6% of U.S. sales for both fiscal 2018 and fiscal 2017. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.  

The decrease in net sales for fiscal 2018 was comprised of the following components (in thousands):

 

 

 

Net Sales

 

Net sales for fiscal 2017

 

$

1,828,446

 

Incremental sales growth (decline) from:

 

 

 

 

Company comparable sales (1)

 

 

(36,029

)

New stores opened during fiscal 2018

 

 

1,213

 

Stores opened during fiscal 2017

 

 

1,409

 

Closed stores and other (1)

 

 

3,483

 

Net sales for fiscal 2018

 

$

1,798,522

 

 

(1)

Comparable store sales for the 53rd week of fiscal 2018 are included in Closed Stores and Other.  

 

A summary reconciliation of the Company’s stores open at the beginning of fiscal 2018 and 2017 to the number open at the end of each period is as follows (openings and closings include relocated stores):

 

 

 

United

States

 

 

Canada

 

 

Total

 

Open at February 27, 2016

 

 

953

 

 

 

79

 

 

 

1,032

 

Openings

 

 

7

 

 

 

 

 

 

7

 

Closings

 

 

(19

)

 

 

(2

)

 

 

(21

)

Open at February 25, 2017

 

 

941

 

 

 

77

 

 

 

1,018

 

Openings

 

 

2

 

 

 

 

 

 

2

 

Closings

 

 

(15

)

 

 

(2

)

 

 

(17

)

Open at March 3, 2018

 

 

928

 

 

 

75

 

 

 

1,003

 

Gross Profit and Merchandise Margin

Gross profit for fiscal 2018 was $658.1 million, or 36.6% of sales, compared to $697.3 million, or 38.1% of sales, in fiscal 2017, a decrease of 150 basis points. Merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit – see “Reconciliation of Non-GAAP Financial Measures”) was $1.026 billion for fiscal 2018, or 57.1% of sales, compared to $1.048 billion, or 57.3% of sales, for fiscal 2017. The year-over-year decline in merchandise margin is primarily attributable to higher promotional activity, partially offset by supply chain cost savings. Delivery and fulfillment net costs for fiscal 2018 were $77.6 million, or 4.3% of sales, compared to $59.0 million, or 3.2% of sales, in fiscal 2017. The increase in delivery and fulfillment net costs is primarily due to free shipping promotions and also reflects the increase in direct-to-customer sales compared to prior year.  Store occupancy costs decreased in dollars during fiscal 2018; however, as a percentage of sales, these costs deleveraged to 16.2% compared to 16.0% during fiscal 2017 as a result of lower sales.  

22


SG&A Expenses, Depreciation and Operating Income

SG&A expenses were $576.9 million in fiscal 2018, compared to $587.8 million in fiscal 2017. As a percentage of sales, SG&A expenses remained flat at 32.1% in fiscal 2018 compared to fiscal 2017.  

SG&A expenses are summarized in the table below (in millions):

 

 

 

53 Weeks Ended

 

 

52 Weeks Ended

 

 

 

March 3, 2018

 

 

February 25, 2017

 

 

 

Expense

 

 

% Sales

 

 

Expense

 

 

% Sales

 

Compensation for operations

 

$

239.9

 

 

 

13.3

%

 

$

249.7

 

 

 

13.7

%

Operational expenses

 

 

88.8

 

 

 

4.9

%

 

 

87.6

 

 

 

4.8

%

Marketing

 

 

105.6

 

 

 

5.9

%

 

 

104.4

 

 

 

5.7

%

Other selling, general and administrative

 

 

142.5

 

 

 

7.9

%

 

 

146.1

 

 

 

8.0

%

Total selling, general and administrative

 

$

576.9

 

 

 

32.1

%

 

$

587.8

 

 

 

32.1

%

The year-over-year decrease in the dollar amount of SG&A expenses was primarily attributable to reductions in store compensation. The decrease was primarily offset by approximately $12 million for legal and regulatory costs related to a California wage-and-hour matter and an ongoing CPSC inquiry (referenced in Item 3 of this report), as well as investments in brand consulting. Other selling, general and administrative expenses in fiscal 2017 include approximately $10 million of costs associated with the departure of the Company’s former CEO and approximately $7 million for incremental legal and advisory fees, CEO transition costs, including CEO search fees and retention program awards to executives, and certain costs for subleasing portions of the corporate headquarters.  

Depreciation for fiscal 2018 was $53.6 million, compared to $54.6 million in fiscal 2017. The decrease was primarily attributable to assets becoming fully depreciated, partially offset by additions and accelerated depreciation for certain assets.

In fiscal 2018, the Company recorded operating income of $27.7 million, or 1.5% of sales, compared to $54.9 million, or 3.0% of sales, for fiscal 2017.  

Income Taxes

The income tax provision for fiscal 2018 was $6.3 million, compared to $15.1 million in fiscal 2017. The decrease is primarily due to the Company’s lower income before income taxes in fiscal 2018. The effective tax rate for fiscal 2018 was 35.0%, compared to 33.4% for fiscal 2017. The higher effective tax rate primarily relates to the impact of certain non-deductible items recognized in the second quarter of fiscal 2018, including the CPSC matter referenced above, partially offset by certain favorable discrete items related to state income tax benefits and the provisional remeasurement of the Company’s federal deferred tax assets and liabilities.

The Tax Cuts and Jobs Act of 2017 (“Tax Act”), as signed by the President of the United States on December 22, 2017, significantly revises U.S. tax law. The legislation is expected to positively impact the Company’s ongoing effective tax rate due to the reduction of the U.S. federal corporate tax rate from 35% to 21%, among other changes. See Note 7 to the Consolidated Financial Statements - Income Taxes for additional information.

Net Income and EBITDA

Net income in fiscal 2018, which consisted of 53 weeks, was $11.6 million, or $0.14 per share. Adjusted net income (non-GAAP) for fiscal 2018, which excludes the legal and regulatory costs referenced above, totaled $16.8 million, or $0.21 per share. For fiscal 2017, which consisted of 52 weeks, net income was $30.1 million, or $0.37 per share, and adjusted net income (non-GAAP) was $35.7 million, or $0.44 per share. Adjusted net income for the fiscal 2017 period excludes costs related to the departure of the Company’s former CEO and the related tax benefit. EBITDA for fiscal 2018 was $82.7 million and adjusted EBITDA was $89.3 million after excluding the legal and regulatory costs referenced above. This compares to EBITDA of $110.6 million, and adjusted EBITDA of $120.4 million, in fiscal 2017 as adjusted for costs related to the departure of the Company’s former CEO. See “Reconciliation of Non-GAAP Financial Measures.”

23


FISCAL YEARS ENDED FEBRUARY 25, 2017 AND FEBRUARY 27, 2016

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during fiscal years 2017 and 2016 were as follows (in thousands):

 

 

 

2017

 

 

2016

 

Retail sales

 

$

1,816,402

 

 

$

1,876,854

 

Other (1)

 

 

12,044

 

 

 

15,376

 

Net sales

 

$

1,828,446

 

 

$

1,892,230

 

 

(1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a “store within a store” format in Mexico and El Salvador and online in Mexico.  Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage.  

Net sales during fiscal 2017 were $1.828 billion, a decrease of 3.4%, from $1.892 billion in fiscal 2016. At the end of fiscal 2017, the Company operated 14 fewer stores than at the end of fiscal 2016. Company comparable sales for fiscal 2017 decreased 1.0% as compared to fiscal 2016 primarily resulting from decreased in-store activity, partially offset by an increase in online direct-to-customer sales. The Company’s e‑Commerce sales accounted for approximately 20% of net sales for fiscal 2017, compared to approximately 16% for fiscal 2016.

Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. The year-over-year decline in the value of the Canadian Dollar, relative to the U.S. Dollar, negatively impacted net sales by approximately 10 basis points in fiscal 2017. Sales on the Pier 1 rewards credit card comprised 36.6% of U.S. sales for the twelve months ended February 25, 2017, compared to 34.2% for the twelve months ended February 27, 2016. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.  

The decrease in net sales for fiscal 2017 was comprised of the following components (in thousands):

 

 

 

Net Sales

 

Net sales for fiscal 2016

 

$

1,892,230

 

Incremental sales growth (decline) from:

 

 

 

 

Company comparable sales

 

 

(19,071

)

New stores opened during fiscal 2017

 

 

4,414

 

Stores opened during fiscal 2016

 

 

6,882

 

Closed stores and other

 

 

(56,009

)

Net sales for fiscal 2017

 

$

1,828,446

 

 

A summary reconciliation of the Company’s stores open at the beginning of fiscal 2017 and 2016 to the number open at the end of each period is as follows (openings and closings include relocated stores):

 

 

 

United States

 

 

Canada

 

 

Total

 

Open at February 28, 2015

 

 

984

 

 

 

81

 

 

 

1,065

 

Openings

 

 

16

 

 

 

1

 

 

 

17

 

Closings

 

 

(47

)

 

 

(3

)

 

 

(50

)

Open at February 27, 2016

 

 

953

 

 

 

79

 

 

 

1,032

 

Openings

 

 

7

 

 

 

 

 

 

7

 

Closings

 

 

(19

)

 

 

(2

)

 

 

(21

)

Open at February 25, 2017

 

 

941

 

 

 

77

 

 

 

1,018

 

 

Gross Profit and Merchandise Margin

Gross profit for fiscal 2017 was $697.3 million, or 38.1% of sales, compared to $705.0 million, or 37.3% of sales, for fiscal 2016, an increase of 80 basis points. Merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit see “Reconciliation of Non-GAAP Financial Measures”) was $1.048 billion, or 57.3% of sales, for fiscal 2017, compared to $1.046 billion, or 55.3% of sales, for fiscal 2016. The year-over-year improvement in merchandise margin as a percentage of sales is primarily attributable to decreased clearance and improved operations within the Company’s supply chain. Delivery and fulfillment net costs for fiscal 2017 were $59.0 million, or 3.2% of sales, compared to $42.5 million, or 2.2% of sales, in fiscal 2016. The increase in delivery and fulfillment net costs as a percentage of sales is primarily due to shifting promotional spend to free shipping. Store occupancy costs decreased in dollars during fiscal 2017; however, as a percentage of sales, these costs deleveraged to 16.0% compared to 15.7% during fiscal 2016 as a result of lower sales.  

SG&A Expenses, Depreciation and Operating Income

SG&A expenses were $587.8 million in fiscal 2017, compared to $578.8 million in fiscal 2016, an increase of $9.0 million. As a percentage of sales, SG&A expenses were 32.1% in fiscal 2017, compared to 30.6% in fiscal 2016.  

24


SG&A expenses are summarized in the table below (in millions):

 

 

 

52 Weeks Ended

 

 

52 Weeks Ended

 

 

 

February 25, 2017

 

 

February 27, 2016

 

 

 

Expense

 

 

% Sales

 

 

Expense

 

 

% Sales

 

Compensation for operations

 

$

249.7

 

 

 

13.7

%

 

$

260.2

 

 

 

13.7

%

Operational expenses

 

 

87.6

 

 

 

4.8

%

 

 

90.5

 

 

 

4.8

%

Marketing

 

 

104.4

 

 

 

5.7

%

 

 

92.6

 

 

 

4.9

%

Other selling, general and administrative

 

 

146.1

 

 

 

8.0

%

 

 

135.6

 

 

 

7.2

%

Total selling, general and administrative

 

$

587.8

 

 

 

32.1

%

 

$

578.8

 

 

 

30.6

%

The year-over-year increase both in dollars and as a percentage of sales was primarily attributable to an increase in marketing and other selling, general and administrative expenses. Other selling, general and administrative expenses in fiscal 2017 include approximately $10 million of costs associated with the departure of the Company’s former CEO and approximately $7 million for incremental legal and advisory fees, CEO transition costs, including CEO search fees and retention program awards to executives, and certain costs for sub-leasing portions of the corporate headquarters.    

Depreciation for fiscal 2017 was $54.6 million, compared to $50.9 million in fiscal 2016.  This increase was primarily the result of additional capital expenditures in recent fiscal years.  

In fiscal 2017, the Company recorded operating income of $54.9 million, or 3.0% of sales, compared to $75.2 million, or 4.0% of sales, for fiscal 2016.  

Nonoperating Income and Expense

Nonoperating expense for fiscal 2017 was $9.6 million, compared to $12.0 million in fiscal 2016.  The change was primarily related to unrealized gains and losses on certain investments which were favorable compared to the prior year.

Income Taxes

The income tax provision for fiscal 2017 was $15.1 million, compared to $23.5 million in fiscal 2016. The decrease is primarily due to the Company’s lower income before income taxes in fiscal 2017 and certain favorable discrete items also occurring during fiscal 2017. The effective tax rate for fiscal 2017 was 33.4%, compared to an effective tax rate of 37.3% for fiscal 2016.  The lower effective tax rate for fiscal 2017 primarily relates to the elimination of deduction limitations for certain executive compensation and certain state income tax benefits.

Net Income and EBITDA

Net income in fiscal 2017 was $30.1 million, or $0.37 per share, compared to $39.6 million, or $0.46 per share, for fiscal 2016.  Adjusted net income (non-GAAP) for fiscal 2017, which excludes the costs related to the departure of the Company’s former CEO and the related tax benefit, totaled $35.7 million, or $0.44 per share. EBITDA for fiscal 2017 was $110.6 million, compared to $125.2 million in fiscal 2016. See “Reconciliation of Non-GAAP Financial Measures.”

Reconciliation of Non-GAAP Financial Measures

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). This Annual Report on Form 10-K references non-GAAP financial measures including merchandise margin, contribution from operations, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.

The Company believes the non-GAAP financial measures referenced in this Annual Report on Form 10-K allow management and investors to understand and compare results in a more consistent manner for the 53-week period ended March 3, 2018 and the 52-week periods ended February 25, 2017 and February 27, 2016. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented.  

25


Merchandise margin represents the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit. Contribution from operations represents gross profit, less compensation for operations (which includes store and customer service payroll) and operational expenses. EBITDA represents earnings before interest, taxes, depreciation and amortization.  Management believes merchandise margin, contribution from operations and EBITDA are meaningful indicators of the Company’s performance which provide useful information to investors regarding its financial condition and results of operations. Management uses merchandise margin, contribution from operations and 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. These non-GAAP financial measures should not be considered in isolation or used as an alternative to GAAP financial measures and do not purport to be an alternative to net income or gross profit as a measure of operating performance. A reconciliation of net income to EBITDA to contribution from operations to merchandise margin is shown below for the periods indicated (in millions).

 

 

 

53 Weeks Ended

 

 

52 Weeks Ended

 

 

52 Weeks Ended

 

 

 

March 3, 2018

 

 

February 25, 2017

 

 

February 27, 2016

 

 

 

$ Amount

 

 

% of Sales

 

 

$ Amount

 

 

% of Sales

 

 

$ Amount

 

 

% of Sales

 

Merchandise margin (non-GAAP)

 

$

1,026.2

 

 

 

57.1

%

 

$

1,048.2

 

 

 

57.3

%

 

$

1,046.0

 

 

 

55.3

%

Less: Delivery and fulfillment net costs

 

 

77.6

 

 

 

4.3

%

 

 

59.0

 

 

 

3.2

%

 

 

42.5

 

 

 

2.2

%

    Store occupancy costs

 

 

290.5

 

 

 

16.2

%

 

 

291.9

 

 

 

16.0

%