Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended February 27, 2010.

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  X    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  X

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  X    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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      

      Accelerated filer                         X   

Non-accelerated filer        

   (Do not check if a smaller reporting company)    Smaller reporting company             

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

As of August 28, 2009, the approximate aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $228,530,000 based on the closing sales price on that day of $2.53 as reported by the New York Stock Exchange.

As of April 26, 2010, 116,306,384 shares of the registrant’s common stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

 

  1) Registrant’s Proxy Statement for the 2010 Annual Meeting in Part III hereof.


Table of Contents

PIER 1 IMPORTS, INC.

FORM 10-K ANNUAL REPORT

Fiscal Year Ended February 27, 2010

TABLE OF CONTENTS

 

         PART I   PAGE

Item

  1.    Business.   3

Item

  1A.    Risk Factors.   7

Item

  1B.    Unresolved Staff Comments.   13

Item

  2.    Properties.   13

Item

  3.    Legal Proceedings.   15

Item

  4.    Reserved.   15
         PART II    

Item

  5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   16

Item

  6.    Selected Financial Data.   18

Item

  7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.   19

Item

  7A.    Quantitative and Qualitative Disclosures About Market Risk.   35

Item

  8.    Financial Statements and Supplementary Data.   36

Item

  9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.   71

Item

  9A.    Controls and Procedures.   71

Item

  9B.    Other Information.   72
         PART III    

Item

  10.    Directors, Executive Officers and Corporate Governance.   73

Item

  11.    Executive Compensation.   73

Item

  12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   73

Item

  13.    Certain Relationships and Related Transactions, and Director Independence.   73

Item

  14.    Principal Accounting Fees and Services.   73
         PART IV    

Item

  15.    Exhibits, Financial Statement Schedules.   74


Table of Contents

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 locations operating under the name Pier 1 Imports®. References to “Pier 1 Kids” relate to the Company’s retail locations that operated under the name Pier 1 Kids®.

In fiscal 2010, the Company closed 38 Pier 1 Imports stores. During the fourth quarter of fiscal 2009, the Company began negotiating with landlords to achieve rental reductions across its store portfolio. Unsuccessful rental reduction negotiations have, and may continue to lead to the execution of early termination agreements for underperforming store locations.

As of the end of fiscal 2010, the Company operates regional distribution center facilities in or near Baltimore, Maryland; Columbus, Ohio; Fort Worth, Texas; Ontario, California; Savannah, Georgia; and Tacoma, Washington. The Company ceased operations at its Company-owned 514,000 square foot distribution center near Chicago, Illinois, at the end of the first quarter of fiscal 2010.

The Company has an arrangement to supply Grupo Sanborns, S.A. de C.V. (“Grupo Sanborns”) with Pier 1 Imports merchandise to be sold primarily in a “store within a store” format in certain stores operated by Grupo Sanborns’ subsidiaries, Sears Roebuck de Mexico, S.A. de C.V. (“Sears Mexico”) and Dorian’s Tijuana, S.A. de C.V. (“Dorian’s”). The agreement with Grupo Sanborns will expire January 1, 2012 unless extended by Grupo Sanborns through December 31, 2017 pursuant to a renewal option. The agreement is structured in a manner which substantially insulates the Company from currency fluctuations in the value of the Mexican peso. As of February 27, 2010, Pier 1 Imports merchandise was offered in 34 Sears Mexico stores and one Dorian’s store. Since Sears Mexico operates these locations, the Company has no employee or real estate obligations in Mexico.

As of October 19, 2009, the Company terminated its agreement with Sears Roebuck de Puerto Rico, Inc. (“Sears Puerto Rico”) and ceased operations in Puerto Rico. The Company had a product distribution agreement with Sears Puerto Rico, which allowed Sears Puerto Rico to market and sell Pier 1 Imports merchandise in a “store within a store” format in certain Sears Puerto Rico stores. The Company had no employee or real estate obligations in Puerto Rico because Sears Puerto Rico operated these locations. Pier 1 Imports merchandise was offered in seven Sears Puerto Rico stores prior to the termination of the agreement.

During fiscal 2007, the Company sold its credit card operations, which included its credit card bank located in Omaha, Nebraska, that operated under the name Pier 1 National Bank, N.A. (the “Bank”) to Chase Bank USA, N.A. (“Chase”). The sale was comprised of the Company’s proprietary credit card receivables, certain charged-off accounts and the common stock of the Bank. The Company and Chase have entered into a long-term program agreement. Under this agreement, the Company continues to support the card through marketing programs and receives payments over the life of the agreement for transaction level incentives, marketing support and other program terms.

In August 2007, the Company discontinued its e-commerce business. The Company continues to use its web site, www.pier1.com, for marketing and product information, plus investor relations purposes. The Company has plans to invest additional capital to enhance the website as an effective sales tool and the Company may return to on-line selling in the near future.

 

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(b) Financial Information about Industry Segments.

In fiscal 2010, the Company conducted business as one operating segment consisting of the retail sale of decorative home furnishings, gifts and related items.

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 operating under the name “Pier 1 Imports”, which sell a wide variety of furniture, decorative home furnishings, dining and kitchen goods, bath and bedding accessories, candles, gifts and other specialty items for the home.

On February 27, 2010, the Company operated 973 Pier 1 Imports stores in the United States and 81 Pier 1 Imports stores in Canada. During fiscal 2010, the Company supplied merchandise and licensed the Pier 1 Imports name to Grupo Sanborns and Sears Puerto Rico, which sold Pier 1 Imports merchandise primarily in a “store within a store” format in 34 Sears Mexico stores and one Dorian’s store. Pier 1 Imports stores in the United States and Canada average approximately 9,900 gross square feet, which includes an average of approximately 7,900 square feet of retail selling space. The stores consist of freestanding units located near shopping centers or malls and in-line positions in major shopping centers. Pier 1 Imports operates in all major U.S. metropolitan areas and many of the primary smaller markets. Pier 1 Imports stores generally have their highest sales volumes during November and December as a result of the holiday selling season. In fiscal 2010, net sales of the Company totaled $1.3 billion.

Pier 1 Imports offers a unique selection of merchandise consisting of more than 4,000 items throughout the year imported from many countries around the world. While the broad categories of Pier 1 Imports’ merchandise remain fairly constant, individual items within these merchandise categories change frequently in order to meet the changing demands and preferences of customers. The principal categories of merchandise include the following:

DECORATIVE ACCESSORIES - This merchandise group constitutes the broadest category of merchandise in Pier 1 Imports’ sales mix and contributed approximately 60% to Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2010, 60% in fiscal year 2009 and 59% in fiscal year 2008. These items are imported primarily from Asian and European countries, as well as some domestic sources. This category includes decorative wood accents, lamps, vases, dried and artificial flowers, baskets, ceramics, dinnerware, bath and fragrance products, candles, bedding, seasonal and gift items.

FURNITURE - This merchandise group consists of furniture and furniture cushions to be used in living, dining, office, kitchen and bedroom areas, sunrooms, and on patios. Also included in this group are wall decorations and mirrors. This product group constituted approximately 40% of Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2010, 40% in fiscal year 2009 and 41% in fiscal year 2008. These goods are imported from a variety of countries such as Vietnam, Malaysia, Brazil, Thailand, China, the Philippines, India and Indonesia, and are also obtained from domestic sources. This merchandise is generally made of metal or handcrafted natural materials, including rattan, pine, beech, rubberwood and selected hardwoods with either natural, stained, painted or upholstered finishes.

Pier 1 Imports merchandise largely consists of items that feature a significant degree of handcraftsmanship and are mostly imported directly from foreign suppliers. For the most part, the imported merchandise is handcrafted in cottage industries and small factories. Pier 1 Imports has enjoyed long-standing

 

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relationships with many vendors and agents and is not dependent on any particular supplier. The Company believes alternative sources of merchandise could be procured over a relatively short period of time, if necessary. In selecting the source of merchandise, Pier 1 Imports considers quality, dependability of delivery, and cost. During fiscal 2010, Pier 1 Imports sold merchandise imported from many different countries with approximately 53% of its sales derived from merchandise produced in China. The remainder of its merchandise is sourced from India, Vietnam, Indonesia and other countries around the world.

Imported merchandise and a portion of domestic purchases are delivered to the Company’s distribution centers, where merchandise is received, allocated and shipped to the various stores in each distribution center’s region.

The Company, through one of its wholly owned subsidiaries, owns a number of federally registered trademarks and service marks under which Pier 1 Imports stores do business. Additionally, certain subsidiaries of the Company have registered and have applications pending for the registration of certain other Pier 1 Imports trademarks and service marks in the United States and in numerous foreign countries. The Company believes that its marks have significant value and are important in its marketing efforts. The Company maintains a policy of pursuing registration of its marks and opposing any infringement of its marks.

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

The Company allows customers to return merchandise within a reasonable time after the date of purchase without limitation as to reason. 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 February 27, 2010, the Company employed approximately 16,200 associates in the United States and Canada, of which approximately 3,300 were full-time employees and 12,900 were part-time employees.

 

(d) Financial Information about Geographic Areas.

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

 

(e) Available Information.

The Company makes available free of charge through its Internet web site 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 Securities and Exchange Commission (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.

Certain statements contained in Item 1, Item 1A, Item 7, Item 7A, Item 8 and elsewhere in this report may constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. The Company may also make forward-looking statements in other reports filed with the SEC and in material delivered to the Company’s shareholders. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects” and other similar expressions. Management’s expectations

 

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and assumptions regarding planned store openings and closings, financing of Company obligations from operations, success of its marketing, merchandising and store operations strategies, and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, the effects of terrorist attacks or other acts of war, conflicts or war involving the United States or its allies or trading partners, labor strikes, weather conditions or natural disasters, volatility of fuel and utility costs, the on-going recession and the actions taken by the United States and other countries to stimulate the economy or to prevent the worsening of the recession, the general strength of the economy and levels of consumer spending, consumer confidence, suitable store sites and distribution center locations, the availability of a qualified labor force and management, the availability and proper functioning of technology and communications systems supporting the Company’s key business processes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas, and the ability of the Company to source, ship and deliver items of acceptable quality to its U.S. distribution centers at reasonable prices and rates and in a timely fashion. The foregoing risks and uncertainties are in addition to others 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.

Executive Officers of the Company

ALEXANDER W. SMITH, age 57, joined the Company as president and chief executive officer in February 2007. Prior to joining the Company, Mr. Smith was serving as group president of the TJX Companies, Inc. where he oversaw the operations and development of Home Goods, Marshalls, TJ Maxx, and a number of corporate functions. He was instrumental in the development of the TK Maxx stores in Great Britain and also ran their international operations.

CHARLES H. TURNER, age 53, was named Executive Vice President of the Company in April 2002 and has served as Chief Financial Officer of the Company since August 1999. Mr. Turner has served the Company for eighteen years in key executive capacities within the organization including Senior Vice President of Stores and Controller. Mr. Turner first became an officer of the Company in 1992 when he was named Principal Accounting Officer. Prior to joining the Company, he was Group Controller for JC Penney and a Senior Manager for KPMG Peat Marwick.

CATHERINE DAVID, age 46, joined the organization in August 2009 as Executive Vice President of Merchandising and was named an officer of the Company in October 2009. Prior to her current role, Ms. David served as President and Chief Operating Officer of Kirkland’s Inc. and Vice President and General Manager with Sears Essential, Sears Grand and The Great Indoors. Ms. David also previously served the Target Corporation for thirteen years in various positions including Vice President and General Manager of target, direct and various positions in the buying, planning and stores divisions.

GREGORY S. HUMENESKY, age 58, was named Executive Vice President of Human Resources of the Company in February 2005. Prior to his current position, he served in various human resource positions for other retailers including ten years as Senior Vice President of Human Resources at Zale Corporation and twenty-one years in various positions of increasing importance at Macys.

SHARON M. LEITE, age 47, joined the organization in August 2007 as Executive Vice President of Stores and was named an officer of the Company in September 2007. Prior to joining the Company, she spent eight years at Bath & Body Works, six years as Vice President of Store Operations and two years as a director. Before joining Bath & Body Works, Ms. Leite held various operations positions with several prominent retailers, including Gap, Inc., The Walt Disney Company, and Limited, Inc.

 

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MICHAEL R. BENKEL, age 41, joined the organization in September 2008 as Senior Vice President of Planning and Allocations and was named an officer of the Company in July 2009. Prior to joining the Company, he spent eleven 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 home furnishings and furniture buyer.

MICHAEL A. CARTER, age 51, was named Senior Vice President, General Counsel and Secretary of the Company in December 2005. Mr. Carter has served within the organization for nineteen years in various leadership capacities including Vice President – Legal Affairs, and Corporate Counsel. Mr. Carter first became an officer of the Company in 1991 when he was named Assistant Secretary. 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.

DONALD L. KINNISON, age 52, was named Senior Vice President of Marketing and Visual Merchandising in March 2008 and was named an officer of the Company in July 2009. Mr. Kinnison has served within the organization for twenty years in various capacities including Vice President of Visual Merchandising and Merchandise Support and Director, Visual Merchandising. Prior to joining the Company, Mr. Kinnison held various positions with May Company and Federated Department Stores.

The officers of the Company are appointed 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 him and any other person.

 

Item 1A. Risk Factors.

Strategic Risks and Strategy Execution Risks

An overall decline in the health of the United States economy and its impact on consumer confidence and spending could adversely impact the Company’s results of operations.

The recession experienced by the United States in recent years resulted in a significant decline in the market value of domestic and foreign companies, adversely affecting the savings and investments of United States consumers. The resulting deterioration in consumer confidence and spending resulted in consumers sacrificing purchases of discretionary items, including the Company’s merchandise, adversely impacting the Company’s financial results. Although the economy appears to be slowly recovering, that recovery could falter and the recession could continue or such a recession could occur again and could have a similar, if not worse, impact on the Company’s financial results.

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

Consumer spending, including spending for the home and home-related furnishings, are further dependent upon factors besides general economic conditions and include, but are not limited to, levels of employment, disposable consumer income, prevailing interest rates, consumer debt, costs of fuel, inflation, recession and 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 political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for the Company’s products and therefore lower sales and negatively impact the business and its financial results.

 

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

The Company’s return to profitability and long-term growth are dependant on its ability to identify and successfully implement strategic initiatives. If these initiatives are not properly developed and successfully executed, the implementation of such initiatives may negatively impact the Company’s operations. While the Company believes these disruptions would be short-term, it is unknown whether the impact would be material. The Company began implementing a strategy during fiscal 2008 for returning the Company to profitability. If the Company’s turnaround strategy does not continue to be successful, takes longer than currently projected due to the recession or other factors, or is not executed effectively, the Company’s business operations and financial results could be adversely affected. In addition, the Company’s inability to develop a successful long-term strategy could adversely affect the Company’s business operations and financial results.

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

The success of the Company’s specialty retail business depends largely upon its ability to predict trends in home furnishings consistently 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. 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 home furnishing 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 margins and in turn the results of operations.

Failure to control merchandise returns could negatively impact the business.

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, merchandise quality issues, changes in consumer confidence, 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.

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

The Company maintains regional distribution centers in Maryland, Ohio, Texas, California, Georgia and Washington. At these distribution centers, merchandise is received, allocated, and shipped to the Company’s stores. Major catastrophic events such as fire or flooding, malfunction or disruption of the information systems, or shipping problems could result in distribution delays of merchandise to the Company’s stores and customers. Such disruptions could have a negative impact on the Company’s sales and results of operations.

 

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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 and increased costs.

The Company outsources some business processes to third parties including gift card tracking and authorization, credit card authorization and processing, insurance claims processing, U.S. customs filings and reporting, ocean freight processing, certain payroll processing and tax filings, and record keeping for retirement plans. In addition, the Company has business relationships with third parties to provide essential services such as the extension of credit to its customers and maintenance of the Company’s rewards program. The Company makes a diligent effort to ensure that all providers of these services are observing proper internal control practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur. 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 an adverse effect on the Company’s results of operations, financial condition, or ability to accomplish its financial and management reporting.

Factors that may or may not be controllable by the Company may adversely affect the Company’s financial performance.

Increases in the Company’s expenses 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, fluctuations in foreign currency rates, higher costs of labor, labor disputes around the world, insurance and healthcare, increases in postage and media costs, higher tax rates and changes in laws and regulations, including accounting standards, may negatively impact the Company’s financial results.

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

The success and growth of the Company is partially dependent on generating customer traffic in order to gain sales momentum in its stores. Successful marketing efforts require the ability to reach customers through their desired mode of communication utilizing various media outlets. Media placement decisions are generally made months in advance of the scheduled release date. The Company’s inability to accurately predict its consumers’ preferences, to utilize the desired mode of communication, or to ensure availability of advertised products may negatively impact the business and operating 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, may cause the Company to incur impairment charges on certain long-lived assets.

The Company makes certain estimates and projections with regards 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 is required when the carrying value of the asset exceeds the estimated fair value or undiscounted future 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 adversely affected.

 

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Risks Related to Store 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 is dependent 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 a majority of the Company’s current store base, a large portion of a stores’ operating expense is the cost associated with leasing the location. Management actively monitors individual store performance and attempts to negotiate rent reductions to ensure stores can remain profitable or have the ability to rebound to a profitable state. Current locations may not continue to be desirable as demographics change, and the Company may choose to close an underperforming store before its lease expires and incur lease termination costs associated with that closing. The Company cannot give assurance that opening new stores or an increase in closing underperforming stores will result in greater profits.

Failure to attract and retain an effective management team or changes in the costs or availability of a suitable workforce to manage and support the Company’s stores and distribution facilities could adversely affect the business.

The Company’s success is dependent, in a large part, on being able to successfully attract, motivate and retain a qualified management team and employees. 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 home office, stores and the distribution facilities, which could have an adverse effect on the business. Management will continue to assess the Company’s compensation and benefit structure in an effort to attract future qualified candidates and retain current experienced management team members. The focus of the Company’s overall compensation program encourages management to take a balanced approach on returning the Company to profitability. The Company’s compensation policies, principles, objectives and practices are not intended to promote inappropriate risk taking by employees; however, there are no assurances that employees will not engage in taking risks that could negatively impact the Company.

Occasionally the Company experiences union organizing activities in non-unionized distribution facilities. These types of activities may result in work slowdowns or stoppages and higher labor costs. Any increase in costs associated with labor organization at distribution facilities could result in higher costs to distribute inventory and could negatively impact merchandise margins.

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

The Company’s retail locations operate in the highly competitive specialty retail business competing with specialty sections of large department stores, home furnishing stores, small specialty stores and mass merchandising discounters. Management believes that as it is competing for sales, it does so on the basis of pricing and quality of products, constantly changing merchandise assortment, visual presentation of its merchandise and customer service. The Company could also experience added short-term competition when other retailers are liquidating merchandise for various reasons. If the Company is unable to maintain a competitive position, it could experience negative pressure on retail prices and loss of customers, which in turn could result in reduced merchandise margins and operating results.

 

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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.

Approximately 25% of the Company’s sales generally occur during the November-December holiday selling season. Failure to predict consumer demand correctly during these months could result in lost sales or gross margin erosion if merchandise must be marked down significantly to clear inventory.

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

Extreme or undesirable weather can adversely 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 adversely affect any of the Company’s retail locations, distribution centers, administrative facilities, ports, or locations 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 any critical software applications, technology infrastructure, telecommunications, data communications, or networks could have a material adverse effect on the Company’s ability to manage the merchandise supply chain, sell merchandise, accomplish payment functions or report financial data. Although the Company maintains off-site data backups, a concentration of technology related risk exists in the Company’s headquarters located in Texas.

Failure to protect the integrity and security of individually identifiable data of the Company’s customers and employees could expose the Company to litigation and damage the Company’s reputation.

The Company receives and maintains certain personal information about its customers and employees. The use of this information by the Company is regulated at the international, federal and state levels, as well as by certain third party contracts. If the Company’s security and information systems are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect the Company’s reputation, as well as operations, results of operations and financial condition, and could result in litigation against the Company or the imposition of penalties. As privacy and information security laws and regulations change, the Company may incur additional costs to ensure it remains in compliance.

Regulatory Risks

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

The Company operates in many taxing jurisdictions, including foreign countries. In most of these jurisdictions, the Company is required to collect state and local sales taxes at the point of sale and remit them to the appropriate taxing authority. 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 material adverse impact on the Company’s profitability. Failure to comply with laws concerning the collection and remittance of taxes and with licensing requirements could also subject the Company to financial penalties or business interruptions.

 

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Legislation also has the potential on a local, regional, state or national level to have a material adverse 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 agencies in the course of operating its business because of its numerous locations, large number of employees, contact with consumers and importation and exportation of product. In addition, the Company is subject to regulations regarding consumer product quality and safety standards. Complying with regulations may cause the Company to incur significant expenses, including the costs associated with periodic audits. Failure to comply may also cause additional costs in the form of penalties.

Risks Associated with International Trade

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

The Company may 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, could affect the Company’s ability to import merchandise from certain countries. 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, taxes and other charges on imports, dock 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 material adverse effect on the results of operations of the Company. Freight costs contribute a substantial amount to the cost of imported merchandise. Monitoring of foreign vendors’ compliance with applicable laws and Company standards, including quality and safety standards, is more difficult than monitoring of 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 deemed to violate trade agreements or maintain laws or practices that are unjustifiable and restrict commerce. In these situations, governments may increase duties on imports from one or more foreign countries. In this event, the Company could be adversely affected by the imposition of trade sanctions.

In addition, the governments in which the Company does business maintain a variety of additional international trade laws under which the Company’s ability to import may be affected from time to time, including, but not limited to, antidumping laws, countervailing duty laws, safeguards 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.

In particular, because the Company imports merchandise from countries around the world, the Company may be affected from time to time by antidumping petitions filed with the United States Commerce Department and International Trade Commission by U.S. producers of competing products alleging that foreign manufacturers are selling their own products at prices in the United States 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 the United States import duties on those products. In that event, the Company might possibly decide to pay the increased duties, thereby possibly increasing the Company’s price to consumers. Alternatively, the Company might decide to source the product or a similar product from a different country not subject to increased duties or else discontinue the importation and sale of the product.

 

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In recent years, dispute resolution processes 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 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 other countries.

Risks Relating to Liquidity

A disruption in the global credit and equity markets could adversely 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 adversely affect the Company’s ability to enter into new financing agreements or obtain funding through the issuance of Company securities. A decline in economic conditions could also result in difficulties for financial institutions and other parties that the Company does business with, 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 Company’s contractual agreements. The inability of the Company to obtain financing as needed, on acceptable terms in order to fund its operations may have a material adverse impact on the Company’s business, financial condition and results of operations.

Insufficient cash flows from operations could result in the substantial utilization of the Company’s secured credit facility, which may impose certain financial covenants.

The Company maintains a secured credit facility to enable it to issue merchandise and special purpose standby letters of credit as well as to fund working capital requirements. Borrowings under the credit facility are subject to a borrowing base calculation consisting of a percentage of certain eligible assets of the Company and is subject to advance rates and commercially reasonable reserves. Substantial utilization of the availability under the borrowing base will result in various restrictions on the Company including: restricted ability of the Company to repurchase its common stock or pay dividends, dominion over the Company’s cash accounts, and compliance with a minimum fixed charge coverage ratio. As of the end of fiscal 2010, the Company’s minimum fixed charge coverage ratio, if calculated, would have exceeded this required minimum under the agreement. See Note 5 to the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s secured credit facility. Significant decreases in cash flow from operations and investing could result in the Company’s borrowing increased amounts under the credit facility to fund operational needs. Increases in utilization of letters of credit and/or increased cash borrowings could result in the Company being subject to these limitations.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

The Company is headquartered in Fort Worth, Texas. In August 2004, the Company completed construction of a corporate headquarters facility, which contains approximately 460,000 square feet of office space. On June 9, 2008, the Company sold its headquarters building and accompanying land. As part of the transaction, the Company entered into a lease agreement to rent approximately 250,000 square feet of office space in the building for a primary term of seven years beginning on the closing date, with one three-year renewal option, and a right to terminate the lease at the end of the fifth lease year.

 

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The Company leases the majority of its retail stores, its warehouses and regional spaces. As of February 27, 2010, the present value of the Company’s minimum future operating lease commitments discounted at 10% totaled approximately $635.1 million. The following table sets forth the distribution of Pier 1 Imports’ U.S. and Canadian stores by state and province as of February 27, 2010:

 

United States

                           

Alabama

  14      Louisiana    15      Ohio    30

Alaska

  1      Maine    1      Oklahoma    9

Arizona

  24      Maryland    22      Oregon    14

Arkansas

  8      Massachusetts    24      Pennsylvania    38

California

  110      Michigan    31      Rhode Island    3

Colorado

  15      Minnesota    18      South Carolina    17

Connecticut

  20      Mississippi    6      South Dakota    2

Delaware

  4      Missouri    18      Tennessee    18

Florida

  74      Montana    6      Texas    79

Georgia

  27      Nebraska    3      Utah    9

Hawaii

  4      Nevada    8      Virginia    34

Idaho

  6      New Hampshire    6      Washington    28

Illinois

  39      New Jersey    33      West Virginia    5

Indiana

  17      New Mexico    5      Wisconsin    19

Iowa

  7      New York    45      Wyoming    1

Kansas

  8      North Carolina    34        

Kentucky

  11      North Dakota    3        

Canada

                           

Alberta

  11      New Brunswick    2      Ontario    34

British Columbia

  14      Newfoundland    1      Quebec    14

Manitoba

  2      Nova Scotia    1      Saskatchewan    2

The Company currently owns or leases distribution center space of approximately 4.1 million square feet. The Company also acquires temporary distribution center space from time to time through short-term leases. During fiscal 2009, the Company vacated approximately 350,000 square feet of leased distribution center space near Baltimore. The lease on this space expired in July 2009. During fiscal 2010, the Company vacated a Company-owned distribution center near Chicago, Illinois and is planning to sell this property. As of February 27, 2010, the Company owned or leased under operating leases the following warehouse properties in or near the following cities:

 

Location

  

Approx. Sq. Ft.

  

Owned/Leased

Facility

Baltimore, Maryland

   634,000 sq. ft.    Leased

Chicago, Illinois

   514,000 sq. ft.                  Owned (vacant)

Columbus, Ohio

   527,000 sq. ft.    Leased

Fort Worth, Texas

   460,000 sq. ft.    Owned

Ontario, California

   747,000 sq. ft.    Leased

Savannah, Georgia

   784,000 sq. ft.    Leased

Tacoma, Washington

   451,000 sq. ft.    Leased

 

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Item 3. Legal Proceedings.

The Company is a party to various legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

 

Item 4. Reserved.

 

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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 (the “NYSE”), as reported in the consolidated transaction reporting system for each quarter of fiscal 2010 and 2009.

 

         Market Price

Fiscal 2010

       High        Low

First quarter

     $     2.28      $     0.11

Second quarter

       2.68        1.69

Third quarter

       4.85        2.49

Fourth quarter

       6.37        3.79

Fiscal 2009

       High        Low

First quarter

     $ 8.18      $ 4.91

Second quarter

       7.10        3.14

Third quarter

       4.75        0.38

Fourth quarter

       0.69        0.21

Number of Holders of Record

The Company’s common stock is traded on the NYSE. As of April 21, 2010, there were approximately 10,000 shareholders of record of the Company’s common stock.

Dividends

In fiscal 2007, the Company announced that its Board of Directors discontinued the Company’s quarterly cash dividend. The Company did not pay any cash dividends in fiscal years 2010, 2009 or 2008 and does not currently anticipate paying cash dividends in fiscal 2011. The Company’s dividend policy in the near term will depend upon the earnings, financial condition and capital needs of the Company and other factors deemed relevant by the Company’s Board of Directors.

Certain dividend payments are not restricted by the Company’s secured credit facility unless fundings on the line result in availability over a specified period of time that is projected to be less than 35% of the lesser of either $300.0 million or the calculated borrowing base. As of February 27, 2010, the Company was not restricted under its secured credit facility from paying certain dividends. See Note 5 to the Notes to Consolidated Financial Statements for further discussion of the Company’s secured credit facility.

Description of Capital Stock

An updated description of the Company’s capital stock is filed as Exhibit 99.2 to this annual report and incorporated by reference herein.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no purchases of common stock of the Company made during the three months ended February 27, 2010, by Pier 1 Imports, Inc. or any “affiliated purchaser” of Pier 1 Imports, Inc. as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. During fiscal 2010, 54,219 shares of the Company’s common stock were acquired from employees 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 the SEC’s rules, that $100 had been invested in the Company’s stock and in each index on February 26, 2005, and that all quarterly dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on February 27, 2010. The information used in the graph below was obtained from Bloomberg.

PIER 1 IMPORTS, INC. STOCK PERFORMANCE GRAPH

LOGO

 

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Item 6. Selected Financial Data.

FINANCIAL SUMMARY

 

    Year Ended  
    2010         2009         2008         2007  (1)         2006  
    ($ in millions except per share amounts)  

SUMMARY OF OPERATIONS (2):

                 

Net sales

  $     1,290.9        1,320.7        1,511.8        1,623.2        1,776.7   

Gross profit

  $ 440.4        363.5        439.6        474.0        601.7   

Selling, general and administrative expenses (3)

  $ 421.2        453.5        487.9        649.0        588.3   

Depreciation and amortization

  $ 22.5        30.6        39.8        51.2        56.2   

Operating loss

  $ (3.3     (120.6     (88.1     (226.2     (42.8

Nonoperating (income) and expenses, net (4)

  $ (35.3     8.1        5.3        1.9        (0.9

Income (loss) from continuing operations before income taxes

  $ 32.1        (128.6     (93.4     (228.1     (41.9

Income (loss) from continuing operations, net of tax (7)

  $ 86.8        (129.3     (96.0     (227.2     (27.5

Income (loss) from discontinued operations, net of tax

  $ -          -          -          (0.4     (12.3

Net income (loss)

  $ 86.8        (129.3     (96.0     (227.6     (39.8

PER SHARE AMOUNTS:

                 

Basic and diluted earnings (loss) from continuing operations

  $ .86        (1.45     (1.09     (2.59     (.32

Basic and diluted earnings (loss) from discontinued operations

  $ -          -          -          (.01     (.14

Basic and diluted earnings (loss)

  $ .86        (1.45     (1.09     (2.60     (.46

Cash dividends declared

  $ -          -          -          .20        .40   

Shareholders’ equity

  $ 3.01        1.62        3.04        4.13        6.81   

OTHER FINANCIAL DATA:

                 

Working capital

  $ 316.7        299.9        307.3        349.4        486.1   

Current ratio

    2.3        2.3        2.1        2.2        2.7   

Total assets

  $ 643.0        655.5        821.9        916.5        1,169.9   

Long-term debt (5)

  $ 19.0        184.0        184.0        184.0        184.0   

Shareholders’ equity (6)

  $ 303.1        144.3        267.7        361.1        590.0   

Weighted average diluted shares outstanding (millions) (6)

    100.7        88.9        88.1        87.4        86.6   

Effective tax rate (%) (7)

    (171.0     (0.5     (2.8     0.4        34.5   

 

(1)

Fiscal 2007 consisted of a 53-week year. All other fiscal years presented reflect 52-week years.

 

(2)

On March 20, 2006, the Company announced the sale of its subsidiary based in the United Kingdom, The Pier Retail Group Limited (“The Pier”). The Pier has been included in discontinued operations in the Company’s financial statements for fiscal 2007 and prior years. All financial information in this report relates to continuing operations, unless stated otherwise.

 

(3)

The decrease in selling, general and adminstrative expenses for fiscal years 2010, 2009 and 2008 relate primarily to initiatives to reduce costs Company-wide. See detailed description of these expenses in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Selling, general and administrative expense in fiscal 2007 included a pre-tax charge of $32.3 million related to impairment charges on long-lived store level assets.

 

(4)

Nonoperating income for fiscal 2010 includes a gain of $49.6 million related to the debt transactions during the year. This gain was paritally offset by $18.3 million in related expenses. See detailed discussion in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report. Nonoperating income also included a $10.0 million payment received as a result of a foreign litigation settlement. See detailed discussion in Note 11 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

 

(5)

The Company’s consolidated long-term debt was reduced significantly during fiscal 2010 as a result of mulitple debt transactions throughout the year. See detailed discussion in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

 

(6)

The increase in shares oustanding in fiscal 2010 was primarily the result of the Company issuing approximately 24.5 million shares of common stock related to the conversion of its 9% Notes. See detailed discussion in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

 

(7)

In fiscal 2010, the Company recorded and received a $55.9 million tax benefit as a result of a tax law change allowing additional carryback of the Company’s net operating losses. In fiscal years 2010, 2009 and 2008, the Company recorded minimal state and foreign tax provisions and provided a valuation allowance on the deferred tax asset arising from the tax benefit of those losses. The decrease in the Company’s effective tax rate for fiscal 2007 was the result of recording a valuation allowance on its deferred tax assets during the second quarter and only recording a tax benefit on the losses for the year that could be carried back.

 

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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 a global importer and is one of North America’s largest specialty retailers of imported decorative home furnishings and gifts. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture collections, bed and bath products, candles, housewares and other seasonal assortments in its stores. The Company conducts business as one operating segment and operates stores in the United States and Canada under the name Pier 1 Imports. As of February 27, 2010, the Company operated 1,054 stores in the United States and Canada.

In April 2007, the Company implemented a turnaround strategy built upon key business priorities. Since that time, management has successfully executed its plan to improve the merchandise assortment, reduce inventory levels, increase merchandise margins and reduce operational costs. Although the recession delayed the planned results, management believes its efforts have resulted in stronger vendor and customer relationships, a significantly stronger balance sheet and a leaner, more efficient organization. The efforts of the Company since 2007 have resulted in higher merchandise margins, better leveraged operating expenses, and more recently in comparable store sales gains and operating income.

Comparable store sales during fiscal 2010 increased 1.5% compared to a decline of 9.2% in fiscal 2009. Comparable store sales during the first half of fiscal 2010 declined 7.5%, but increased 9.7% over the last six months of the year. Excluding the January clearance event, traffic increased over the second half of the year, positively affecting comparable store sales. Additionally, the Company experienced increases in average ticket, conversion rate, and average unit retail. Helping to drive these sales increases was the increase in total sales on the Company’s privately branded loyalty card, resulting from the Company’s joint marketing agreement with Chase. During fiscal 2010, sales on the Pier 1 rewards card increased to 24.1% of U.S. store sales from 21.8% in fiscal 2009. The Company will continue to work with Chase in fiscal 2011 to develop dynamic marketing promotions aimed at the Company’s growing rewards card business.

Merchandise margins for fiscal 2010 were 54.8% compared to 49.0% in fiscal 2009. This improvement was the result of reduced markdowns, lower supply chain costs and more advantageous vendor costs. As part of its effort to improve merchandise offerings, the Company implemented improved and more sophisticated analysis of its inventory purchases that help control levels of initial purchase quantities and the timing and quantities of re-order merchandise. This strategy resulted in improved rates of sale, fewer markdowns and shorter clearance sale periods. Management believes it has significantly reduced future markdown risk, and as a result, expects merchandise margins will continue to be strong.

During fiscal 2010, the Company worked to reduce overall occupancy costs by negotiating with its landlords to reduce rents, or when necessary, close unprofitable stores at the lowest possible cost. This initiative resulted in substantial cost reductions and the closure of only 38 locations, significantly less than originally estimated. The reduction in store closures was a direct result of the favorable rent reductions with the landlords. In addition to cost savings through the real estate initiatives, the Company’s continued focus on controlling expenditures company-wide resulted in a reduction of $32.3 million in selling, general and administrative costs when compared to fiscal 2009. Selling, general and administrative costs as a percentage of sales declined to 32.6% from 34.3% in fiscal 2009. The Company expects to continue to see further leveraging of expenses as sales continue to increase.

 

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In addition to strengthening operations, the Company restructured its balance sheet during fiscal 2010 and reduced its total debt obligations by $146.8 million when compared to fiscal 2009 year-end balances. In privately negotiated transactions, the Company purchased $78.9 million of its outstanding 6.375% senior convertible notes for a purchase price of $27.4 million including accrued interest during the first quarter of the fiscal year. During the second quarter of the year, the Company entered into privately negotiated transactions to purchase an additional $5.0 million of notes and exchange $64.5 million of the remaining notes for newly issued 9% senior convertible notes. These 9% senior convertible notes were voluntarily converted into approximately 24.5 million shares of the Company’s common stock during the third quarter of fiscal 2010, leaving only $16.6 million in principal of the 6.375% convertible notes outstanding, which are expected to be paid off by the end of fiscal 2011. As a result of this reduction in debt, interest expense is expected to decline significantly during fiscal 2011.

Moving into the fourth year of its turnaround strategy, the Company remains focused on executing its key business priorities. The Company has demonstrated its ability to improve margins and run a lean and efficient organization, and with less pressure from the recession, management has shifted to an offensive mindset. Significant growth potential still exists as sales per square foot are currently $152, down from a high of $235 in fiscal 2003. Management believes it can improve the productivity of the stores by capitalizing on its unique market position and by continuously refining its merchandise offering to meet changing consumer demand without compromising the value and quality of the merchandise while maintaining competitive price points.

Another opportunity to drive growth is to capitalize on the Company’s strong brand name and loyal customer base. Over the past two years, the Company has focused a large percentage of its marketing dollars on communicating with its loyal customer base. Going forward, the Company plans to broaden communications to target new and former customers by using more mass acquisition mediums. Marketing expense for fiscal 2011 is currently expected to remain around 4.5% of sales.

Management will continue its efforts to lower real estate costs by partnering with its landlords to reduce costs wherever possible, and expects to close 10-15 locations and open 3-5 during fiscal 2011. Additionally, the Company will continue its efforts to remain cost efficient, and will continue to search for additional ways to reduce vendor, transportation and infrastructure costs.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources relates to continuing operations, unless otherwise stated, and 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.

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 of this section):

 

Key Performance Indicators    2010      2009      2008  

Total sales decline

     (2.3%      (12.6%      (6.9%

Comparable stores sales growth (decline)

     1.5%         (9.2%      (1.7%

Sales per average retail square foot

   $ 152       $ 149       $ 164   

Merchandise margins as a % of sales

     54.8%         49.0%         48.5%   

Gross profit as a % of sales

     34.1%         27.5%         29.1%   

Selling, general and administrative expenses as a % of sales

     32.6%         34.3%         32.3%   

Operating loss as a % of sales

     (0.3%      (9.1%      (5.8%

Net income (loss) as a % of sales

     6.7%         (9.8%      (6.4%

Inventory per retail square foot

   $ 38       $ 37       $ 47   

Total retail square footage (in thousands)

         8,290             8,586             8,782   

Total retail square footage decline

     (3.4%      (2.2%      (4.9%

 

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Stores included in the comparable store sales calculation are those stores that have been opened since the beginning of the preceding fiscal year. 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 closing and reopening. Such stores are included in the comparable store sales calculation in the first full month after the re-opening. 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 of a comparable store.

FISCAL YEARS ENDED FEBRUARY 27, 2010 AND FEBRUARY 28, 2009

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Sales by retail concept during fiscal years 2010, 2009 and 2008 were as follows (in thousands):

 

    2010        2009        2008

Stores

  $     1,279,742      $     1,308,331      $     1,486,147

Direct to consumer

    -        -        8,366

Other (1)

    11,110        12,346        17,319
                       

Net sales

  $ 1,290,852      $ 1,320,677      $ 1,511,832
                       

 

  (1)

Other sales consisted primarily of wholesale sales and royalties received from franchise stores, Grupo Sanborns, S.A. de C.V., other third parties and gift card breakage.

Net sales during fiscal 2010 were $1,290.9 million, a decrease of $29.8 million or 2.3%, from $1,320.7 million for the prior fiscal year. The decrease in sales for the fiscal year was comprised of the following components (in thousands):

 

    2010  

Comparable stores

  19,044   

Closed stores and other

  (48,869
     

Net decrease in sales

  $    (29,825
     

The total sales decline for fiscal 2010 was primarily the result of a net decrease of 38 stores compared to the same period in the prior year. As of February 27, 2010, the Company operated 1,054 stores in the United States and Canada, compared to 1,092 stores at the end of fiscal 2009. The Company’s net sales from Canadian stores were subject to fluctuation in currency conversion rates. However, these fluctuations had no net impact on either the net sales or comparable store calculations in fiscal 2010 compared to fiscal 2009.

 

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A summary reconciliation of the Company’s stores open at the beginning of fiscal 2010, 2009 and 2008 to the number open at the end of each period follows (openings and closings include relocated stores):

 

    United States            Canada              Total  

Open at March 3, 2007

  1,112           84         1,196   

Openings

  4           -         4   

Closings

  (82        (1      (83
                         

Open at March 1, 2008

  1,034           83         1,117   

Openings

  1           -         1   

Closings

  (24        (2      (26
                         

Open at February 28, 2009

  1,011           81         1,092   

Openings

  -           -         -   

Closings

  (38        -         (38
                         

Open at February 27, 2010 (1)

  973           81         1,054   
                         

 

  (1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, S.A. de C.V. which sells Pier 1 Imports merchandise primarily in a “store within a store” format. At the end of fiscal 2010, there were 35 of these locations in Mexico. During the third quarter of fiscal 2010, the company ended its relationship with Sears Roebuck de Puerto Rico, Inc. and closed all seven “store within a store” locations in Puerto Rico. These locations are excluded from the table above.

Gross Profit

Gross profit, which is calculated by deducting store occupancy costs from merchandise margin dollars, was 34.1% expressed as a percentage of sales in fiscal 2010 compared to 27.5% a year ago. Merchandise margins were 54.8% as a percentage of sales, an increase of 580 basis points over 49.0% in fiscal 2009. Improvements in merchandise margin over last year were primarily the result of significantly lower markdowns resulting from well managed inventory levels along with better buying strategies throughout the year. Merchandise margins also benefited from reduced vendor and supply chain costs, including fuel costs.

Store occupancy costs during fiscal 2010 were $267.1 million or 20.7% of sales, a decrease of $17.0 million and 80 basis points from store occupancy costs of $284.1 million or 21.5% of sales during fiscal 2009. The decrease of $17.0 million was primarily the result of negotiated rental reductions and a decrease in the total number of stores. The Company continues to evaluate every lease renewal and attempts to negotiate more favorable occupancy costs in an effort to lower the overall costs of its leased properties. Additionally, the Company is still utilizing a third-party real estate consulting firm to assist with these rent reduction efforts for existing leases, as well as to negotiate favorable lease buyouts with landlords for stores that would not favorably benefit from rent reduction efforts. As a result of these ongoing efforts, the Company closed 38 locations during fiscal 2010, a significant decrease from its original estimate at the start of fiscal 2010.

 

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Operating Expenses, Depreciation and Income Taxes

Selling, general and administrative expenses, including marketing, were $421.2 million or 32.6% of sales in fiscal 2010, a decrease of $32.3 million and 170 basis points from last year’s $453.5 million or 34.3% of sales. Selling, general and administrative expenses for fiscal years 2010 and 2009 included charges summarized in the table below (in thousands):

 

    February 27, 2010         February 28, 2009         Increase /
(Decrease)
 
    Expense       % Sales         Expense        % Sales        

Store payroll

  $     209,815     16.3     $ 217,774      16.5     $ (7,959

Marketing

    60,945     4.7       58,989      4.5       1,956   

Store supplies, services and other

    28,661     2.2       32,473      2.5       (3,812
                                        

Variable costs

    299,421     23.2       309,236      23.4       (9,815

Administrative payroll (excluding severance)

    74,734     5.8       70,118      5.3       4,616   

Other relatively fixed expenses

    34,449     2.7       51,188      3.9       (16,739
                                        

Relatively fixed costs

    109,183     8.5       121,306      9.2       (12,123
                                        

Subtotal

    408,604     31.7       430,542      32.6       (21,938

Lease termination costs and impairments

    11,246     0.9       15,727      1.2       (4,481

Acquistion costs

    -     0.0       1,660      0.1       (1,660

Severance and other

    1,329     0.1       5,542      0.4       (4,213
                                        

Special charges

    12,575     1.0       22,929      1.7       (10,354
  $ 421,179     32.6     $     453,471      34.3     $     (32,292
                                        

Expenses that tend to fluctuate proportionately with sales and number of stores, such as store payroll, marketing, store supplies, and equipment rental, decreased $9.8 million and 20 basis points as a percentage of sales from last year. Store payroll, including bonus, decreased $8.0 million primarily as a result of a decrease in total number of stores as well as planned efficiencies in store staffing compared to fiscal 2009. Marketing expense increased $2.0 million and 20 basis points as a percentage of sales as a result of an increase in the number of newspaper inserts, radio advertising and internet media in the current year, partially offset by a decrease in cable television advertising. Other variable expenses such as store supplies and equipment rental decreased $3.8 million or 30 basis points as a percentage of sales.

Other selling, general and administrative expenses that do not typically vary with sales decreased $12.1 million to 8.5% of sales, or 70 basis points from 9.2% of sales during fiscal 2009, primarily as a result of the Company’s continued initiative to manage and control expenses. During fiscal 2010, general insurance costs and foreign currency revaluation also contributed to this improvement. These decreases were partially offset by an increase in administrative payroll resulting primarily from an increase in home office management bonuses stemming from the improved performance.

Lease termination costs and impairments decreased $4.5 million primarily as a result of no impairment charges taken in the current year, compared to $9.7 million in the prior year. This decrease was partially offset by an increase in lease termination costs of $5.2 million related to the closure of stores where favorable rent reductions were not reached with landlords. Severance, outplacement and other costs decreased $4.2 million primarily as a result of expenses incurred in the prior year related to a reduction in the Company’s work force. Acquisition costs decreased $1.7 million as a result of expenses related to the Company’s withdrawn proposal to acquire all of the outstanding common stock shares of Cost Plus, Inc. in fiscal 2009, with no similar expenditure in fiscal 2010.

 

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Depreciation and amortization for fiscal 2010 was $22.5 million, representing a decrease of approximately $8.1 million from last year’s depreciation and amortization expense of $30.6 million. This decrease was primarily the result of the impairment of store-level long-lived assets during the second half of fiscal 2009, certain assets becoming fully depreciated, reduced capital spending and store closures.

In fiscal 2010, the Company recorded an operating loss of $3.3 million compared to an operating loss of $120.6 million for fiscal 2009. Although the Company saw an operating loss in fiscal 2010, management is encouraged by the strong performance in the last half of fiscal 2010, which showed an operating profit of $38.8 million.

Nonoperating Income and Expense

Nonoperating income for fiscal 2010 was $35.3 million compared to expense of $8.1 million in fiscal 2009. During the first quarter of fiscal 2010, a foreign subsidiary of the Company purchased $78.9 million of the Company’s outstanding 6.375% convertible senior notes due 2036 (the “6.375% Notes”) in privately negotiated transactions at a purchase price of $27.4 million, including accrued interest. The Company recognized a gain of $47.8 million in connection with this transaction. In August 2009, the Company retired $64.5 million of the remaining 6.375% Notes through separate privately negotiated exchange agreements. Under these agreements, holders received $61.3 million in aggregate principal of the Company’s new 9% convertible senior notes due 2036 (the “9% Notes”). In addition to this exchange, the Company also purchased $5.0 million of the outstanding 6.375% Notes for $4.8 million in cash. The Company recognized a net gain of $1.8 million related to these transactions in the second quarter of fiscal 2010. During the third quarter of fiscal 2010, all $61.3 million of the Company’s 9% Notes voluntarily converted into shares of the Company’s common stock. In connection with this exchange in the third quarter, the Company incurred additional interest expense to record the remaining amortization of debt issuance costs and debt discounts of $13.6 million. As a result of the reduction in debt during fiscal 2010, interest expense is expected to decline significantly during fiscal 2011.

The Company settled a lawsuit and received $10.0 million during the first quarter of fiscal 2010, and recorded a gain in other nonoperating income as a result of the settlement. This income was partially offset by a $4.7 million charge during the third quarter to adjust the fair value of the derivative liability for the make-whole interest provision related to the Company’s 9% Notes. See Note 5 of the Notes to Consolidated Financial Statements for further discussion regarding the fair value of the derivative liability.

Income Taxes

The Company recorded and received an income tax benefit of $55.9 million during fiscal 2010 primarily as a result of the Worker, Homeownership and Business Assistance Act of 2009. This law allows businesses with net operating losses incurred in either 2008 or 2009 to elect to carry back such losses up to five years. This benefit resulted from the reversal of $55.9 million of the Company’s valuation allowance on its deferred tax asset for its net operating loss carryforwards that were carried back under the new law. The Company continues to provide a valuation allowance against other deferred tax assets. As a result, no other federal tax benefit or expense was recorded on the results of fiscal 2010 and only minimal state and foreign tax provisions were made during the year. The Company had federal net operating loss carryforwards of approximately $92.0 million as of February 27, 2010. These loss carryforwards, with expirations beginning in fiscal 2027, can be utilized to offset future income for U.S. federal income tax purposes. Going forward, income tax expense is expected to remain minimal until the Company’s loss carryforwards are fully utilized.

Net Income and Loss

Net income in fiscal 2010 was $86.8 million, or $0.86 per share, compared to a net loss of $129.3 million, or $1.45 per share for fiscal 2009.

 

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FISCAL YEARS ENDED FEBRUARY 28, 2009 AND MARCH 1, 2008

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Sales by retail concept during fiscal 2009, 2008 and 2007 were as follows (in thousands):

 

    2009        2008        2007

Stores

  $     1,308,331      $     1,486,147      $     1,590,854

Direct to consumer

    -        8,366        18,943

Other (1)

    12,346        17,319        13,419
                       

Net sales

  $ 1,320,677      $ 1,511,832      $ 1,623,216
                       

 

  (1)

Other sales consisted primarily of wholesale sales and royalties received from franchise stores, Grupo Sanborns, S.A. de C.V., other third parties and gift card breakage.

Net sales during fiscal 2009 were $1,320.7 million, a decrease of $191.1 million or 12.6%, from $1,511.8 million for the prior fiscal year. The decrease in sales for the fiscal year was comprised of the following components (in thousands):

 

    2009  

Stores opened during fiscal 2008

  $ 1,231   

Comparable stores

    (129,901

Closed stores and other (1)

    (62,485
       

Net decrease in sales

  $     (191,155
       

 

  (1)

Includes a decrease in sales related to the absence of direct to consumer sales and sales to third parties.

The total sales decline for fiscal 2009 was attributable to macro-economic conditions, which caused a slowdown in consumer spending, a net decrease of 25 stores for the fiscal year, and a comparable store sales decline of 9.2%. The Company’s net sales from Canadian stores were subject to fluctuation in currency conversion rates. These fluctuations had an unfavorable impact of approximately 50 basis points on both net sales and comparable store calculations in fiscal 2009 compared to fiscal 2008.

During fiscal 2009, the Company opened one new store and closed 26 store locations. As of February 28, 2009, the Company operated 1,092 stores in the United States and Canada.

 

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A summary reconciliation of the Company’s stores open at the beginning of fiscal 2009, 2008 and 2007 to the number open at the end of each period follows (openings and closings include relocated stores):

 

     United States           Canada               Total      

Open at February 25, 2006

   1,143          83          1,226   

Openings

   32          2          34   

Closings

   (63       (1       (64
                          

Open at March 3, 2007

   1,112          84          1,196   

Openings

   4          -          4   

Closings

   (82       (1       (83
                          

Open at March 1, 2008

   1,034          83          1,117   

Openings

   1          -          1   

Closings

   (24       (2       (26
                          

Open at February 28, 2009 (1)

   1,011          81          1,092   
                          

 

  (1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, S.A. de C.V. and Sears Roebuck de Puerto Rico, Inc. which sell Pier 1 Imports merchandise primarily in a “store within a store” format. At the end of fiscal 2009, there were 35 and seven locations in Mexico and Puerto Rico, respectively. These locations are excluded from the table above.

Gross Profit

Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, was 27.5% in fiscal 2009 compared to 29.1% in fiscal 2008. Merchandise margins were 49.0% as a percentage of sales, an increase of 50 basis points over 48.5% in fiscal 2008. Improvements in merchandise margin from fiscal 2008 were primarily the result of less aggressive inventory liquidation activity that occurred during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008. Store occupancy costs during fiscal 2009 were $284.1 million or 21.5% of sales, a decrease of $9.1 million and an increase of 210 basis points over store occupancy costs of $293.2 million or 19.4% of sales during fiscal 2008. The decrease of $9.1 million was primarily due to store closures, while the increase as a percentage of sales was the result of the deleveraging of relatively fixed rental costs over a slightly lower sales base in the remaining open stores.

 

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Operating Expenses, Depreciation and Income Taxes

Selling, general and administrative expenses, including marketing, were $453.5 million or 34.3% of sales in fiscal 2009, a decrease of $34.4 million and an increase 200 basis points from $487.9 million or 32.3% of sales in fiscal 2008. Selling, general and administrative expenses for fiscal 2009 and 2008 included charges summarized in the table below (in thousands):

 

    February 28, 2009         March 1, 2008         Increase /
(Decrease)
    Expense        % Sales         Expense          % Sales        

Store payroll

  $     217,774      16.5     $     229,573         15.2     $     (11,799)

Marketing

    58,989      4.5       63,970         4.2       (4,981)

Store supplies, services and other

    32,473      2.5       38,341         2.5       (5,868)
                                         

Variable costs

    309,236      23.4       331,884         22.0       (22,648)

Administrative payroll (excluding severance)

    70,118      5.3       82,244         5.4       (12,126)

Lease termination costs and impairments

    15,727      1.2       15,470         1.0       257

Severance and other

    5,501      0.4       7,646         0.5       (2,145)

Acquistion costs

    1,660      0.1       -         0.0       1,660

Loss (gain) on sale of fixed assets

    41      0.0       (2,137      -0.1       2,178

Other relatively fixed expenses

    51,188      3.9       52,791         3.5       (1,603)
                                         
    144,235      10.9       156,014         10.3       (11,779)
  $ 453,471      34.3     $ 487,898         32.3     $ (34,427)
                                         

Expenses that tend to fluctuate proportionately with sales and number of stores, such as store payroll, marketing, store supplies, and equipment rental, decreased $22.6 million and increased 140 basis points as a percentage of sales from fiscal 2008. Store payroll, including bonus, decreased $11.8 million partly as a result of planned staffing reductions at the stores and as a result of store closures. Marketing expense decreased $5.0 million and increased 25 basis points as a percentage of sales as a result of the absence of television advertising for most of fiscal 2009, offset slightly by the introduction of a seasonal national cable television advertising campaign introduced late in the third quarter of fiscal 2009 running through the early part of the fourth quarter. The timing of marketing expenditures was shifted in order to utilize more of the budget in the all important holiday selling period. Other variable expenses such as store supplies and equipment rental decreased $5.9 million primarily due to efforts to reduce costs.

Other selling, general and administrative expenses decreased $11.8 million compared to last year. Administrative payroll including bonus decreased $12.1 million resulting primarily from a decrease in home office management bonus, stock option expense and home office payroll expense. Severance, outplacement and other costs decreased $2.1 million primarily as a result of expenses incurred in the prior year related to larger reductions in work force compared to a slightly smaller reduction in the current year. Other relatively fixed selling, general and administrative expenses decreased $1.6 million primarily as a result of the Company’s continued initiative to manage and control expenses. These decreases were partially offset by $1.7 million in expenses related to the Company’s withdrawn proposal to acquire all of the outstanding common stock shares of Cost Plus, Inc. and a $2.2 million gain recorded on the sale of fixed assets in fiscal 2008.

Depreciation and amortization for fiscal 2009 was $30.6 million, representing a decrease of approximately $9.2 million from $39.8 million in fiscal 2008. This decrease was primarily the result of the sale of the home office building and related assets during fiscal 2009, lower net book values on certain store-level long-lived assets because of impairment charges taken during and since the end of fiscal 2008, certain assets becoming fully depreciated, store closures, and reduced capital spending in recent years.

 

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In fiscal 2009, the Company recorded an operating loss of $120.6 million compared to an operating loss of $88.1 million for fiscal 2008.

As a result of the Company’s valuation allowance against all deferred tax assets, the Company did not record a federal tax benefit on its operating loss and only minimal state and foreign tax provisions were recorded on results for fiscal 2009. Net deferred tax assets of $181.0 million were fully reserved at year end through the valuation allowance.

Net Loss

Net loss in fiscal 2009 was $129.3 million, or $1.45 per share, compared to a net loss of $96.0 million, or $1.09 per share for fiscal 2008.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash and cash equivalents totaled $187.9 million at the end of fiscal 2010, an increase of $32.1 million from the fiscal 2009 year-end balance of $155.8 million. During fiscal 2010, the Company reduced its outstanding long-term debt obligations by $148.6 million through the utilization of $49.8 million in cash. This was accomplished through the privately negotiated purchase and exchange of almost all of the Company’s 6.375% Notes during the first half of the fiscal year which was followed by the voluntary conversion of the Company’s newly issued 9% Notes into slightly less than 24.5 million shares of the Company’s common stock during the third quarter. The $49.8 million of cash was comprised of $31.6 million for the purchases of the 6.375% Notes, $13.8 million for the payment of the make-whole interest on the 9% Notes at the time of voluntary conversion and $4.4 million for the payment of debt issuance costs. See Note 5 of the Notes to Consolidated Financial Statements for further discussion reduction in the Company’s long-term debt obligations.

Operating activities provided $70.6 million of cash, which included the receipt of a $55.9 million tax refund relating to changes in tax laws that occurred during the third quarter. Cash provided by the Company’s net income was partially offset by changes in various working capital accounts and $13.8 million in make-whole interest paid on the 9% Notes at the time of voluntary conversion as discussed above.

Inventory levels at the end of fiscal 2010 were $313.5 million, a decrease of $2.8 million, or 0.9%, from the end of fiscal 2009. Inventory per retail square foot at the end of fiscal 2010 was $38 compared to $37 at fiscal 2009 year-end. The Company continues to focus on managing inventory levels and closely monitoring merchandise purchases to keep inventory in line with consumer demand. Inventory levels at the end of fiscal 2011 are expected to be approximately the same as the end of fiscal 2010.

During fiscal 2010, the Company’s investing activities used $2.8 million. Proceeds from the sale of restricted investments used primarily for the payment of defined benefit obligations provided $3.9 million, partially offset by contributions of $3.7 million to purchase similar restricted investments. The Company collected $1.5 million of a note receivable related to the fiscal 2007 sale of its credit card operations. Proceeds from the disposition of properties provided $0.7 million. Capital expenditures for fiscal 2010 were $5.2 million, consisting primarily of $2.4 million for fixtures, equipment and leasehold improvements for stores, $2.2 million for information systems enhancements and $0.6 million related to the Company’s distribution centers.

Financing activities for fiscal 2010 used a net $35.7 million, primarily as a result of the use of $31.6 million to purchase and subsequently retire a significant portion of the 6.375% Notes and debt issuance costs of $4.4 million as discussed above.

 

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The Company’s bank facilities include a $300 million credit facility expiring in May 2012, which is secured by the Company’s eligible merchandise inventory and third-party credit card receivables. As of February 27, 2010, the Company had no outstanding borrowings and had utilized approximately $85.8 million in letters of credit and bankers acceptances. If advances under the facility result in availability of less than $30.0 million, the Company will be required to comply with a fixed charge coverage ratio as stated in the agreement. The Company does not anticipate falling below this minimum availability in the foreseeable future. As of February 27, 2010, the Company’s calculated borrowing base was $229.3 million. This borrowing base calculation is calculated using defined advance rates and commercially reasonable reserves. After excluding the required minimum of $30.0 million and the $85.8 million in utilized letters of credit and bankers’ acceptances from the borrowing base, $113.5 million remained available for cash borrowings. At the end of fiscal 2010, the Company was in compliance with all required covenants stated in the agreement.

The Company does not currently anticipate paying cash dividends in fiscal 2011, and its dividend policy in the near term will depend upon the earnings, financial condition and capital needs of the Company and other factors deemed relevant by the Company’s Board of Directors. Under the terms of the Company’s secured credit facility, the Company will not be restricted from paying certain dividends unless fundings on the line result in availability over a specified period of time that is projected to be less than 35% of the lesser of either $300.0 million or the calculated borrowing base.

During fiscal 2010, the Company did not make any repurchases of shares of its outstanding common stock other than 54,219 shares acquired from employees to satisfy tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans. The Company does not currently have authorization from its Board of Directors to repurchase shares of its common stock in the open market.

A summary of the Company’s contractual obligations and other commercial commitments as of February 27, 2010 is listed below (in thousands):

 

            Amount of Commitment per Period
    Total       Less Than

 

1 Year

      1 to 3

 

Years

      3 to 5

 

Years

      More Than

 

5 Years

Operating leases

  $ 789,360     $ 207,583     $ 347,315     $ 178,376     $ 56,086

Assets retirement obligation

    2,196       212       773       932       279

Purchase obligations (1)

    97,967       97,967       -       -       -

Convertible debt (2)

    16,577       16,577       -       -       -

Interest on convertible debt (2)

    1,036       1,036       -       -       -

Standby letters of credit (3)

    55,050       55,050       -       -       -

Industrial revenue bonds (3)

    19,000       -       -       -       19,000

Interest on industrial revenue bonds (4)

    732       44       87       87       514

Interest and related fees on secured credit facility (5)

    8,269       3,675       4,594       -       -

Other obligations (6) (7)

    46,236       12,368       2,589       9,875       21,404
                                     

Total (8)

  $     1,036,423     $     394,512     $ 355,358     $     189,270     $     97,283
                                     

Liabilities recorded on the balance sheet

        $ 107,855        

Commitments not recorded on the balance sheet

      928,568        
                     

Total

          $     1,036,423        
                     

 

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(1)

As of February 27, 2010, the Company had approximately $98.0 million of outstanding purchase orders, which were primarily related to merchandise inventory, and included $11.3 million in merchandise letters of credit and bankers’ acceptances. Such orders are generally cancelable at the discretion of the Company until the order has been shipped. The table above excludes certain executory contracts for goods and services that tend to be recurring in nature and similar in amount year over year.

 

(2)

The Company’s convertible debt is subject to redemption on February 15, 2011, and the above amounts assume the notes will be repaid at that time. As of February 27, 2010, if these notes remained outstanding until maturity in 2036, the total interest paid would have been $26.4 million. See Note 5 of the Notes to Consolidated Financial Statements for further discussion of the Company’s convertible senior notes.

 

(3)

The Company also has outstanding standby letters of credit totaling $19.4 million related to the Company’s industrial revenue bonds. This amount is excluded from the table above as it is not incremental to the Company’s total outstanding commitments.

 

(4)

The interest rates on the Company’s industrial revenue bonds are variable and reset weekly. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 2010 year end and exclude fees for the related standby letter of credit which are included elsewhere in this table.

 

(5)

Represents estimated commitment fees for trade and standby letters of credit, and unused fees on the Company’s $300 million secured credit facility, which expires in May 2012, calculated based upon balances and rates in effect at fiscal 2010 year end.

 

(6)

Other obligations include the Company’s liability under various unfunded retirement plans. See Note 7 of the Notes to Consolidated Financial Statements for further discussion of the Company’s employee benefit plans.

 

(7)

Other obligations also include approximately $8.0 million of reserves for uncertain tax positions, including interest and penalties which have been classified as a current liability. Excluded from this table, but recorded on the Company’s balance sheet, is the noncurrent portion of reserves for uncertain tax positions of $10.2 million for which the Company is not reasonably able to estimate the timing of future cash flows.

 

(8)

The above amounts do not include payments that may be due under employment agreement(s) with certain employee(s).

The present value of the Company’s minimum future operating lease commitments discounted at 10% was $635.1 million at fiscal 2010 year end, compared to $736.4 million at fiscal 2009 year end. As part of the sale of the Company’s home office building and accompanying land during fiscal 2009, the Company entered into a lease agreement to rent office space in the building. The lease has a primary term of seven years beginning on June 9, 2008, with one three-year renewal option and provisions for terminating the lease at the end of the fifth lease year. The Company plans to fund its lease commitments from cash generated from the operations of the Company and, if needed, from borrowings on its secured credit facility.

On February 3, 2009, the Company announced that it hired an outside firm to assist in negotiations with its landlords to achieve rental reductions across its store portfolio. During fiscal 2010, the Company reached, in principal, rental reduction agreements on approximately 350 stores. Cumulatively, these agreements are expected to reduce the Company’s reported rental expense by $39.8 million, with approximately $30.0 million of the cash savings being realized by the end of fiscal 2012. During fiscal 2010, the Company closed 38 locations, significantly fewer than the original estimate. This reduction in store closures was the direct result of favorable rent reduction negotiations on those stores. The Company recorded $11.2 million related to store closures including lease termination expense of $7.7 million, and $3.5 million in fees and other costs associated with improving its store portfolio. At the end of fiscal 2010, the Company had ceased operations at the Chicago distribution center and plans to sell the property. If the property is sold, the Company intends to repay the industrial revenue bonds related to the distribution center with the proceeds from the sale upon receiving appropriate approvals.

The Company has an umbrella trust, currently consisting of four sub-trusts, which was established for the purpose of setting aside funds to be used to settle certain benefit plan obligations. Two of the sub-trusts are restricted to satisfy obligations to certain participants of the Company’s supplemental retirement plans. These trusts consisted of interest bearing investments of less than $0.1 million at both February 27, 2010 and February 28, 2009, and were included in other noncurrent assets. The remaining two sub-trusts are restricted to meet the funding requirements of the Company’s non-qualified deferred compensation plans. These trusts’ assets consisted of interest bearing investments totaling less than $0.2 million at February 27, 2010 and February 28, 2009, and were included in other noncurrent assets. These trusts also own and are the beneficiaries of life

 

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insurance policies with cash surrender values of approximately $5.0 million at February 27, 2010 and death benefits of approximately $11.7 million. In addition, the Company owns and is the beneficiary of a number of insurance policies on the lives of current and former key executives that are unrestricted as to use. The cash surrender value of these unrestricted policies was approximately $17.1 million at February 27, 2010 and was included in other noncurrent assets. These policies had a death benefit of approximately $27.0 million at February 27, 2010. At the discretion of the Board of Directors, contributions of cash or unrestricted life insurance policies could be made to the trusts.

The Company’s sources of working capital for fiscal 2010 were cash flows from internally generated funds, and the collection of income tax receivables. The Company has a variety of sources for liquidity, which include available cash balances and available lines of credit. The Company’s current plans for fiscal 2011 include a capital expenditure budget of approximately $25.0 million and the repayment of its $16.6 million 6.375% Notes. The Company does not presently anticipate any other significant cash outflows in fiscal 2011 other than those occurring in the normal course of business or as discussed herein.

The liquidity of the Company has significantly improved during fiscal 2010. The Company’s key drivers of cash flows are sales, management of inventory levels, vendor payment terms, management of expenses, and capital expenditures. The Company’s focus remains on making conservative inventory purchases, managing those inventories, continuing to evolve the Company’s merchandise offering, and improving the in-store experience. In addition, the Company’s ongoing mission is to maximize its revenues, while seeking out ways to reduce its cost base and still preserve liquidity. If for some reason consumer spending begins to decline to levels seen a year ago, the Company could experience a material adverse effect on its financial condition and ability to generate cash flows from operations. As a result, the Company could become dependent on the availability of adequate capital to fund its operations and carry out its turnaround strategy. While there can be no assurance that the Company will sustain positive cash flows or profitability over the long-term, given the Company’s cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund its obligations, capital expenditure requirements and the repayment of its convertible debt through fiscal 2011.

OFF-BALANCE SHEET ARRANGEMENTS

Other than the operating leases, letters of credit and purchase obligations discussed above, the Company has no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Historically, actual results have not varied materially from the Company’s estimates, with the exception of the impairment of long-lived assets, the early retirement of participants in its defined benefit plans, and income taxes as discussed below. The Company does not currently anticipate a significant change in its assumptions related to these estimates. Actual results may differ from these estimates under different assumptions or conditions. The Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements. The policies and estimates discussed below include the financial statement elements that are either judgmental or involve the selection or application of alternative accounting policies and are material to the Company’s financial statements. Unless specifically addressed below, the Company does not believe that its critical accounting policies are subject to market risk exposure that would be considered material and as a result, has not provided a sensitivity analysis. The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered most critical are as follows:

 

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Revenue recognition – The Company recognizes revenue from retail sales, net of sales tax and third-party credit card fees, upon customer receipt or delivery of merchandise. The Company records an allowance for estimated merchandise returns based upon historical experience and other known factors. Should actual returns differ from the Company’s estimates and current provision for merchandise returns, revisions to the estimated merchandise returns may be required.

Gift cards Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as payment. Gift card breakage is estimated and recorded as income based upon an analysis of the Company’s historical data and expected trends in redemption patterns and represents the remaining unused portion of the gift card liability for which the likelihood of redemption is remote. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. For all periods presented, gift card breakage was recognized at 30 months from the original issuance and was $4.6 million, $4.1 million and $1.7 million in fiscal 2010, 2009 and 2008, respectively.

Inventories – The Company’s inventory is comprised of finished merchandise and is stated at the lower of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at the time it is received in the Company’s warehouse using vendor invoices, the cost of warehousing and transporting product to the stores and other direct costs associated with purchasing products. Carrying values of inventory are analyzed and to the extent that the cost of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying amount of the inventory. The Company reviews its inventory levels in order to identify slow-moving merchandise and uses merchandise markdowns to sell such merchandise. Markdowns are recorded to reduce the retail price of such slow-moving merchandise as needed. Since the determination of carrying values of inventory involves both estimation and judgment with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.

The Company recognizes known inventory losses, shortages and damages when incurred and makes a provision for estimated shrinkage. The amount of the provision is estimated based on historical experience from the results of its physical inventories. Inventory is physically counted at substantially all locations at least once in each 12-month period, at which time actual results are reflected in the financial statements. Physical counts were taken at substantially all stores and distribution centers during each period presented in the financial statements. Although inventory shrinkage rates have not fluctuated significantly in recent years, should actual rates differ from the Company’s estimates, revisions to the inventory shrinkage expense may be required.

Impairment of long-lived assets – Long-lived assets such as buildings, equipment, furniture and fixtures, and leasehold improvements are reviewed for impairment at least annually and whenever an event or change in circumstances indicates that their carrying values may not be recoverable. If the carrying value exceeds the sum of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived assets, expected cash flows are estimated based on management’s estimate of changes in sales, merchandise margins, and expenses over the remaining expected terms of the leases. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment occurred. The Company recorded no impairment charges in fiscal 2010, and $9.4 million and $4.8 million in impairment charges in fiscal 2009 and 2008, respectively. As the projection of future cash flows requires the use of judgment and estimates, if actual results differ from the Company’s estimates, additional charges for asset impairments may be recorded in the future. If management had lowered its assumptions of comparable store sales results by 5% for the first year and kept them flat thereafter, impairment charges would have been negligible in fiscal 2010.

Insurance provision – The Company maintains insurance for workers’ compensation and general liability claims with deductibles prior to March 1, 2010 of $1,000,000 and $750,000, respectively, per occurrence. Effective March 1, 2010, the deductible for general liability claims was increased to $1,000,000 per

 

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occurrence. The liability recorded for such claims is determined by estimating the total future claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims development factors as well as information obtained from and projections made by the Company’s insurance carrier and underwriters. The recorded liabilities for workers’ compensation and general liability claims, including those occurring in prior years but not yet settled, at February 27, 2010 were $16.5 million and $6.3 million, respectively.

The assumptions made in determining the above estimates are reviewed monthly and the liability adjusted accordingly as new facts are developed. Changes in circumstances and conditions affecting the assumptions used in determining the liabilities could cause actual results to differ from the Company’s recorded amounts.

Costs associated with exit activities – As part of the ordinary course of business, the Company terminates leases prior to their expiration when certain stores or distribution center facilities are closed or relocated as deemed necessary. In connection with these lease terminations, the Company has recorded estimated liabilities to cover these termination costs. These estimated liabilities are recorded based upon the Company’s remaining lease obligations less estimated subtenant rental income. The Company must make assumptions regarding potential settlements of these obligations, the length of time required to sublease each location, and the amount of subtenant income that will be received in the future. When estimating future subtenant rental income, the Company considers factors such as the location and condition of the property, the underlying lease terms, historical experience, and relevant market and economic data related to each location. Additional lease termination expense may be incurred as a result of changes to the Company’s current assumptions.

Defined benefit plans – The Company maintains supplemental retirement plans (the “Plans”) for certain of its current and former executive officers. The Plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will receive benefits based on highest compensation, years of service and years of plan participation. These benefit costs are dependent upon numerous factors, assumptions and estimates. Benefit costs may be significantly affected by changes in key actuarial assumptions such as the discount rate, compensation rates, or retirement dates used to determine the projected benefit obligation. Additionally, changes made to the provisions of the Plans may impact current and future benefit costs.

Stock-based compensation The fair value of stock options is amortized as compensation expense over the vesting periods of the options. The fair values for options granted by the Company are estimated as of the date of grant using the Black-Scholes option-pricing model. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the average life of options. The Company uses expected volatilities and risk-free interest rates that correlate with the expected term of the option when estimating an option’s fair value. To determine the expected term of the option, the Company bases its estimates on historical exercise activity of grants with similar vesting periods. Expected volatility is based on the historical volatility of the common stock of the Company for a period approximating the expected life. The risk free interest rate utilized is the United States Treasury rate that most closely matches the weighted average expected life at the time of the grant. The expected dividend yield is based on the annual dividend rate at the time of grant or estimates of future anticipated dividend rates. If the Company had used different assumptions, the value of stock options may have been different.

Income taxes – The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are recorded in the Company’s consolidated balance sheets and are classified as current or noncurrent based on the classification of the related assets or liabilities for financial reporting purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not those assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered including past operating results, estimates

 

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of future income, and tax planning strategies. The Company is subject to income tax in many jurisdictions, including the United States, various states and localities, and foreign countries. At any point in time, multiple tax years are subject to audit by various jurisdictions and the Company records reserves for estimates of the tax exposure for foreign and domestic tax audits. The timing of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. If different assumptions had been used, the Company’s tax expense or benefit, assets and liabilities could have varied from recorded amounts. If actual results differ from estimated results or if the Company adjusts these assumptions in the future, the Company may need to adjust its deferred tax assets or liabilities, which could impact its effective tax rate.

IMPACT OF INFLATION AND CHANGING PRICES

Inflation has not had a significant impact on the operations of the Company during the preceding three years.

IMPACT OF NEW ACCOUNTING STANDARDS

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This guidance establishes the Accounting Standards Codification (the “ASC”) as the single source of authoritative accounting principles recognized by FASB for all nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). For SEC registrants, rules and interpretive releases of the SEC under federal securities laws are also considered authoritative sources of GAAP. The provisions of this guidance are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the provisions of this guidance during the fiscal year ended February 27, 2010 and has updated citations to accounting standards included in the Company’s financial statements. The adoption of the ASC did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

Convertible Debt

Effective March 1, 2009, the Company adopted new accounting guidance, which clarifies that issuers of convertible debt instruments that may be settled in cash upon conversion must separately account for the liability and equity components in a manner that will reflect the entities nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

In accordance with this new guidance, the Company estimated the fair value of the debt component of its 6.375% Notes using an income approach by discounting the present value of future payments associated with the Notes, assuming no conversion features. The Company did not apply the provisions of this guidance retrospectively on its 6.375% Notes as it determined that the effect on prior periods was not material. The remaining discount of $2.8 million as of the beginning of the year was reclassified to additional paid-in capital during the first quarter of fiscal 2010, and was to be amortized as interest expense over the remaining life of the 6.375% Notes, or through February 2011. However, as a result of the retirement and exchange of the majority of the 6.375% Notes as discussed above, the Company’s gain on the transactions included the write off of a portion of this unamortized discount. As of February 27, 2010, the remaining unamortized discount related to the 6.375% Notes totaled $142,000.

Fair Value Measurements and Disclosure

In April 2009, new guidance was issued related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments in interim and annual reporting periods. The adoption of this guidance has not impacted the Company’s consolidated financial position, results of operations or cash flows, as its requirements are disclosure-only in nature.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Market risks relating to the Company’s operations result primarily from changes in foreign exchange rates and interest rates. The Company has only limited involvement with derivative financial instruments, does not use them for trading purposes and is not a party to any leveraged derivatives. Collectively, the Company’s exposure to market risk factors is not significant and has not materially changed from February 28, 2009.

Foreign Currency Risk

Though the majority of the Company’s inventory purchases are made in U.S. dollars in order to limit its exposure to foreign currency fluctuations, the Company, from time to time, enters into forward foreign currency exchange contracts. The Company uses such contracts to hedge exposures to changes in foreign currency exchange rates associated with purchases denominated in foreign currencies, primarily euros. The Company operates stores in Canada and is subject to fluctuations in currency conversion rates related to those operations. The Company, on occasion, uses contracts to hedge its exposure associated with repatriation of funds from its Canadian operations. Changes in the fair value of the derivatives are included in the Company’s consolidated statements of operations as such contracts are not designated as hedges under the applicable accounting guidance. Forward contracts that hedge merchandise purchases generally have maturities not exceeding six months. Changes in the fair value and settlement of these forwards are included in cost of sales. Contracts that hedge the repatriation of Canadian funds have maturities not exceeding 18 months and changes in the fair value and settlement of these contracts are included in selling, general and administrative expenses. At February 27, 2010, there were no outstanding contracts to hedge exposure associated with the Company’s merchandise purchases denominated in foreign currencies or the repatriation of Canadian funds.

Interest Rate Risk

The Company manages its exposure to changes in interest rates by optimizing the use of variable and fixed rate debt. The interest rate exposure on the Company’s secured credit facility and industrial revenue bonds is based upon variable interest rates and therefore is affected by changes in market interest rates. As of February 27, 2010, the Company had $19.0 million in borrowings outstanding on its industrial revenue bonds and no cash borrowings outstanding on its secured credit facility. A hypothetical 10% adverse change in the interest rates applicable to either or both of these variable rate instruments would have a negligible impact on the Company’s earnings and cash flows.

Additionally, as of February 27, 2010, the Company had $16.6 million in convertible senior notes outstanding, which mature in February 2036. The notes pay a fixed annual rate of 6.375% for the first five years and a fixed rate of 6.125% thereafter. Changes in market interest rates generally affect the fair value of fixed rate debt instruments, but would not affect the Company’s financial position, results of operations or cash flows related to these notes. As of February 27, 2010, the fair value of these notes was approximately $16.5 million, based on quoted market values.

 

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Pier 1 Imports, Inc.

We have audited the accompanying consolidated balance sheets of Pier 1 Imports, Inc. as of February 27, 2010 and February 28, 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended February 27, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pier 1 Imports, Inc. at February 27, 2010 and February 28, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 27, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pier 1 Imports, Inc.’s internal control over financial reporting as of February 27, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 28, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Fort Worth, Texas

April 28, 2010

 

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Pier 1 Imports, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

 

    Year Ended  
    2010          2009          2008  

Net sales

  $     1,290,852         $     1,320,677         $     1,511,832   

Operating costs and expenses:

           

Cost of sales (including buying and store occupancy costs)

    850,438           957,213           1,072,280   

Selling, general and administrative expenses

    421,179           453,471           487,898   

Depreciation and amortization

    22,488           30,556           39,792   
                             
    1,294,105           1,441,240           1,599,970   
                             

Operating loss

    (3,253        (120,563        (88,138

Nonoperating (income) and expenses:

           

Interest and investment income

    (1,681        (4,250        (8,677

Interest expense

    23,726           14,592           15,916   

Gain on retirement of debt

    (49,654        -           -   

Other income

    (7,695        (2,276        (1,960
                             
    (35,304        8,066           5,279   
                             

Income (loss) before income taxes

    32,051           (128,629        (93,417

Provision (benefit) for income taxes

    (54,796        624           2,594   
                             

Net income (loss)

  $ 86,847         $ (129,253      $ (96,011
                             

Earnings (loss) per share:

           

Basic and diluted

  $ 0.86         $ (1.45      $ (1.09
                             

Average shares outstanding during period:

           

Basic and diluted

    100,715           88,912           88,083   
                             

The accompanying notes are an integral part of these financial statements.

 

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Pier 1 Imports, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands except share amounts)

 

    February 27,
2010
           February 28,
2009
 
ASSETS   

Current assets:

        

Cash and cash equivalents, including temporary investments of $176,503 and $142,523, respectively

  $ 187,912           $ 155,798   

Accounts receivable, net of allowance for doubtful accounts of $2,516 and $1,579, respectively

    14,701             17,566   

Inventories

    313,496             316,331   

Income tax receivable

    561             2,149   

Prepaid expenses and other current assets

    37,157             41,883   
                    

Total current assets

    553,827             533,727   

Properties, net

    55,837             85,135   

Other noncurrent assets

    33,310             36,600   
                    
  $     642,974           $     655,462   
                    
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities:

        

Accounts payable

  $ 65,344           $ 80,695   

Current portion convertible debt

    16,435             -   

Gift cards and other deferred revenue

    44,356             47,332   

Accrued income taxes payable

    4,967             4,434   

Other accrued liabilities

    106,073             101,350   
                    

Total current liabilities

    237,175             233,811   

Long-term debt

    19,000             184,000   

Other noncurrent liabilities

    83,665             93,390   

Shareholders’ equity:

        

Common stock, $0.001 par, 500,000,000 shares authorized 125,232,000 and 100,779,000 issued, respectively

    125             101   

Paid-in capital

    264,477             214,004   

Retained earnings

    193,688             106,841   

Cumulative other comprehensive loss

    (699          (1,195

Less - 9,645,000 and 10,905,000 common shares in
treasury, at cost, respectively

    (154,457          (175,490
                    
    303,134             144,261   

Commitments and contingencies

    -             -   
                    
  $ 642,974           $ 655,462   
                    

The accompanying notes are an integral part of these financial statements.

 

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Pier 1 Imports, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Year Ended  
    2010          2009         2008  

Cash flow from operating activities:

          

Net income (loss)

  $     86,847         $     (129,253     $     (96,011

Adjustments to reconcile to net cash (used in) provided by operating activities:

          

Depreciation and amortization

    33,335           45,156          55,303   

Loss (gain) on disposal of fixed assets

    246           41          (2,137

Loss on impairment of fixed assets and other long-lived assets

    -           9,653          5,030   

Stock-based compensation expense

    3,782           5,177          5,837   

Deferred compensation

    3,736           4,215          4,157   

Lease termination expense

    7,693           6,074          10,440   

Amortization of deferred gains

    (7,777        (6,774       (2,533

Gain on retirement of convertible bonds

    (49,654        -          -   

Charges related to the conversion of the 9% Convertible Notes

    18,308           -          -   

Other

    3,109           (2,201       1,543   

Change in cash from:

          

Inventories

    2,835           95,378          (51,646

Accounts receivable, prepaid expenses and other current assets

    8,294           (5,055       (8,776

Income tax receivable

    1,588           14,486          25,616   

Accounts payable and accrued expenses

    (26,537        (65,457       (22,818

Income taxes payable

    533           (1,620       2,765   

Defined benefit plan liabilities

    (1,784        (118       (6,351

Make whole interest provision

    (13,782        -          -   

Other noncurrent assets

    (197        1,209          762   

Other noncurrent liabilities

    (20        (2,545       (4,255
                            

Net cash provided by (used in) operating activities

    70,555           (31,634       (83,074
                            

Cash flow from investing activities:

          

Capital expenditures

    (5,246        (13,378       (7,153

Proceeds from disposition of properties

    730           102,478          5,674   

Proceeds from sale of restricted investments

    3,897           3,258          6,986   

Purchase of restricted investments

    (3,654        (2,020       (589

Collection of note receivable

    1,500           1,500          1,500   
                            

Net cash (used in) provided by investing activities

    (2,773        91,838          6,418   
                            

Cash flow from financing activities:

          

Proceeds from stock options exercised, stock purchase plan and other, net

    333           2,161          3,909   

Retirement of convertible bonds

    (31,593        -          -   

Debt issuance costs

    (4,408        -          (998
                            

Net cash (used in) provided by financing activities

    (35,668        2,161          2,911   
                            

Change in cash and cash equivalents

    32,114           62,365          (73,745

Cash and cash equivalents at beginning of period

    155,798           93,433          167,178   
                            

Cash and cash equivalents at end of period

  $ 187,912         $ 155,798        $ 93,433   
                            
   

Supplemental cash flow information:

          

Interest paid (1)

  $ 20,557         $ 14,018        $ 15,743   
                            

Income taxes paid

  $ 1,962         $ 2,617        $ 1,124   
                            

(1) Interest paid in fiscal 2010 includes $13,782 in make-whole interest related to the conversion of the Company’s 9% Senior Convertible Notes due 2036. See Note 5 of the Notes to Consolidated Financial Statements for further information regarding this payment.

The accompanying notes are an integral part of these financial statements.

 

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Pier 1 Imports, Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

 

    Common Stock                           Cumulative
Other
Comprehensive
Income (Loss)
         Treasury
Stock
        Total
Shareholders’
Equity
 
    Outstanding
Shares
      Amount       Paid-in
Capital
        Retained
Earnings
                

Balance March 3, 2007

  87,798     $     101     $     231,094        $ 337,178        $ 2,408         $     (209,664     $ 361,117   

Implementation of accounting guidance on uncertain tax
positions

  -       -       -          (5,073       -           -          (5,073

Comprehensive income (loss):

                          

Net loss

  -       -       -              (96,011       -           -          (96,011

Other comprehensive income (loss), net of tax as applicable:

                          

Pension adjustments

  -       -       -          -              (3,017        -          (3,017

Currency translation adjustments

  -       -       -          -          982           -          982   
                                

Comprehensive loss

                             (98,046
                                

Restricted stock compensation

  281       -       (2,974       -          -           4,533          1,559   

Stock option compensation expense

  -       -       4,278          -          -           -          4,278   

Exercise of stock options, stock purchase plan and other

  528       -       (4,925       -          -           8,834          3,909   
                                                              

Balance March 1, 2008

  88,607       101       227,473          236,094          373           (196,297     $ 267,744   
                                                              

Comprehensive loss:

                          

Net loss

  -       -       -          (129,253       -           -          (129,253

Other comprehensive income (loss), net of tax as applicable:

                          

Pension adjustments

  -       -       -          -          2,016           -          2,016   

Currency translation adjustments

  -       -       -          -          (3,584        -          (3,584
                                

Comprehensive loss

                                 (130,821
                                

Restricted stock compensation

  245       -       (2,298       -          -           3,947          1,649   

Stock option compensation expense

  -       -       3,528          -          -           -          3,528   

Exercise of stock options, stock purchase plan and other

  1,022       -       (14,699       -          -           16,860          2,161   
                                                              

Balance February 28, 2009

  89,874       101       214,004          106,841          (1,195        (175,490     $ 144,261   
                                                              

Comprehensive income:

                          

Net income

  -       -       -          86,847          -           -          86,847   

Other comprehensive income (loss), net of tax as applicable:

                          

Pension adjustments

  -       -       -          -          509           -          509   

Currency translation adjustments

  -       -       -          -          (13        -          (13
                                

Comprehensive income

                             87,343   
                                

Restricted stock compensation

  300       -       (3,038       -          -           4,800          1,762   

Stock option compensation expense

  -       -       2,020          -          -           -          2,020   

Stock purchase plan, directors deferred, and other

  960       -       (15,900       -          -           16,233          333   

Adoption of new accounting guidance on convertible debt

  -       -       2,818          -          -           -          2,818   

Beneficial conversion feature of 9% convertible debt

  -       -       3,343          -          -           -          3,343   

Conversion of 9% notes

  24,453       24       61,230          -          -           -          61,254   
                                                              

Balance February 27, 2010

  115,587       125       264,477          193,688          (699        (154,457     $ 303,134   
                                                              

The accompanying notes are an integral part of these financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is one of North America’s largest specialty retailers of imported decorative home furnishings and gifts, with retail stores located in the United States and Canada. Additionally, the Company had merchandise in “store within a store” locations in Mexico and Puerto Rico that are primarily operated by Sears Roebuck de Mexico, S.A. de C.V. and Sears Roebuck de Puerto Rico, Inc., respectively. As of October 19, 2009, the Company terminated its agreement with Sears Roebuck de Puerto Rico, Inc. (“Sears Puerto Rico”) and ceased operations.

Basis of consolidation – The consolidated financial statements of the Company include the accounts of all subsidiary companies, and all intercompany transactions and balances have been eliminated.

Segment information – The Company is a specialty retailer that offers a broad range of products in its stores and conducts business as one operating segment. The Company’s domestic operations provided 90.9%, 90.9% and 90.9% of its net sales, with 8.6%, 8.5% and 8.7% provided by stores in Canada, and the remainder from royalties received from Sears Roebuck de Mexico S.A. de C.V. during fiscal 2010, 2009 and 2008, respectively. As of February 27, 2010, February 28, 2009 and March 1, 2008, $1,749,000, $2,308,000 and $4,572,000, respectively, of the Company’s long-lived assets were located in Canada. There were no long-lived assets in Mexico during any period.

Use of estimates Preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fiscal periods The Company utilizes 5-4-4 (week) quarterly accounting periods with the fiscal year ending on the Saturday nearest the last day of February. Fiscal 2010 ended February 27, 2010, fiscal 2009 ended February 28, 2009 and fiscal 2008 ended March 1, 2008, all of which contained 52 weeks.

Cash and cash equivalents, including temporary investments – The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents, except for those investments that are restricted and have been set aside in a trust to satisfy retirement obligations. As of February 27, 2010 and February 28, 2009, the Company’s short-term investments classified as cash equivalents included investments in money market mutual funds totaling $176,503,000 and $142,523,000, respectively. The effect of foreign currency exchange rate fluctuations on cash was not material.

Translation of foreign currencies – Assets and liabilities of foreign operations are translated into U.S. dollars at fiscal year end exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included as a separate component of shareholders’ equity and are included in other comprehensive income (loss). As of February 27, 2010, February 28, 2009 and March 1, 2008, the Company had cumulative other comprehensive income (loss) balances of ($177,000), ($164,000) and $3,420,000, respectively, related to cumulative translation adjustments. The adjustments for currency translation during fiscal 2010, 2009 and 2008 resulted in other comprehensive income (loss), net of tax, as applicable, of ($13,000), ($3,584,000) and $982,000, respectively. Taxes on the portion of its cumulative currency translation adjustment considered not to be permanently reinvested abroad were insignificant in fiscal 2010, 2009 and 2008.

Concentrations of risk – The Company has some degree of risk concentration with respect to sourcing the Company’s inventory purchases. However, the Company believes alternative merchandise sources could be

 

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procured over a relatively short period of time. Pier 1 Imports sells merchandise imported from many countries, with approximately 53% of its sales derived from merchandise produced in China, approximately 13% derived from merchandise produced in India, and approximately 24% collectively derived from merchandise produced in Vietnam, Indonesia, and the United States. The remaining sales were from merchandise produced in various countries around the world.

Financial instruments – The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Other than the 6.375% convertible senior notes due 2036 (the “6.375% Notes”), there were no assets or liabilities with a fair value significantly different from the recorded value as of February 27, 2010 and February 28, 2009. The fair value of the 6.375% Notes was approximately $16,494,000, compared to a principal amount of $16,577,000, based on quoted market values as of February 27, 2010. The fair value of the 6.375% Notes was $42,900,000, compared to a principal amount of $165,000,000, based on quoted market values as of February 28, 2009. Changes in the market interest rates and other factors affecting convertible notes affect the fair value of the Company’s fixed rate notes, but do not affect the Company’s financial position, results of operations or cash flows related to these instruments.

Risk management instruments: The Company may utilize various financial instruments to manage interest rate and market risk associated with its on- and off-balance sheet commitments.

From time to time, the Company hedges certain commitments denominated in foreign currencies through the purchase of forward contracts. The forward contracts are purchased to cover a portion of commitments to buy merchandise for resale. The Company also, on occasion, uses contracts to hedge its exposure associated with the repatriation of funds from its Canadian operations. At February 27, 2010 and February 28, 2009, there were no outstanding contracts to hedge exposure associated with the Company’s merchandise purchases denominated in foreign currencies or the repatriation of Canadian funds. For financial accounting purposes, the Company does not designate such contracts as hedges. Thus, changes in the fair value of both types of forward contracts would be included in the Company’s consolidated statements of operations. Both the changes in fair value and settlement of these contracts are included in cost of sales for forwards related to merchandise purchases and in selling, general and administrative expense for the contracts associated with the repatriation of Canadian funds.

When the Company enters into forward foreign currency exchange contracts, it enters into them with major financial institutions and monitors its positions with, and the credit quality of, these counterparties to such financial instruments.

Accounts Receivable – The Company’s accounts receivable are stated at carrying value less an allowance for doubtful accounts. These receivables consist largely of third-party credit card receivables for which collection is reasonably assured. The remaining receivables are periodically evaluated for collectibility, and an allowance for doubtful accounts is recorded as appropriate.

Inventories – The Company’s inventory is comprised of finished merchandise and is stated at the lower of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at the time it is received in the Company’s warehouse using vendor invoices, the cost of warehousing and transporting merchandise to the stores and other direct costs associated with purchasing merchandise.

The Company recognizes known inventory losses, shortages and damages when incurred and maintains a reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded. The reserves for estimated shrinkage at the end of fiscal 2010 and 2009 were $5,388,000 and $6,582,000, respectively.

 

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Properties, maintenance and repairs – Buildings, equipment, furniture and fixtures, and leasehold improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated remaining useful lives of the assets, generally thirty years for buildings and three to ten years for equipment, furniture and fixtures. Depreciation of improvements to leased properties is based upon the shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation related to the Company’s distribution centers is included in cost of sales. All other depreciation costs are included in depreciation and amortization. Depreciation costs were $22,488,000, $30,556,000 and $39,478,000 in fiscal 2010, 2009 and 2008, respectively.

Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to income.

Long-lived assets are reviewed for impairment at least annually and whenever an event or change in circumstances indicates that its carrying value may not be recoverable. If the carrying value exceeds the sum of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived assets, expected cash flows are estimated based on management’s estimate of future sales, merchandise margin rates, and expenses over the remaining expected terms of the leases. Impairment is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment occurred. There were no impairment charges for fiscal 2010. Impairment charges for fiscal 2009 and fiscal 2008 were as follows: $9,420,000, or $0.11 per share, for fiscal 2009 and $4,838,000, or $0.05 per share, for fiscal 2008, and were included in selling, general and administrative expenses. As the projection of future cash flows requires the use of judgment and estimates, if actual results differ from the Company’s estimates, additional charges for asset impairments may be recorded in the future.

Revenue recognition – Revenue is recognized upon customer receipt or delivery for retail sales. A reserve has been established for estimated merchandise returns based upon historical experience and other known factors. The reserves for estimated merchandise returns at the end of fiscal 2010 and 2009 were $1,690,000 and $1,374,000, respectively. The Company’s revenues are reported net of discounts and returns, net of sales tax and third-party credit card fees, and include wholesale sales and royalties received from Sears Roebuck de Mexico S.A. de C.V and from franchise stores in fiscal 2008. Amounts billed to customers for shipping and handling are included in net sales and the costs incurred by the Company for these items are recorded in cost of sales.

Gift cards – Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as payment. Gift card breakage is estimated and recorded as income based upon an analysis of the Company’s historical data and expected trends in redemption patterns and represents the remaining unused portion of the gift card liability for which the likelihood of redemption is remote. If actual redemption patterns vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. For all periods presented, gift card breakage was recognized at 30 months from the original issuance and was $4,648,000, $4,107,000 and $1,699,000 in fiscal 2010, 2009 and 2008, respectively.

Leases – The Company leases certain property consisting principally of retail stores, warehouses, its home office and material handling and office equipment under operating leases expiring through fiscal 2022. Most retail store locations were leased for primary terms of ten years with varying renewal options and rent escalation clauses. Escalations occurring during the primary terms of the leases are included in the calculation of the minimum lease payments, and the rent expense related to these leases is recognized on a straight-line basis over this lease term, including free rent periods prior to the opening of its stores. The portion of rent expense applicable to a store before opening is included in selling, general and administrative expenses. Once opened for

 

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business, rent expense is included in cost of sales. Certain leases provide for additional rental payments based on a percentage of sales in excess of a specified base. This additional rent is accrued when it appears that the sales will exceed the specified base. Construction allowances received from landlords are initially recorded as lease liabilities and amortized as a reduction of rental expense over the primary lease term.

Advertising costs – Advertising production costs are expensed the first time the advertising takes place. Advertising costs were $51,625,000, $49,506,000 and $55,122,000 in fiscal 2010, 2009 and 2008, respectively. Prepaid advertising at the end of fiscal years 2010 and 2009 was $2,085,000 and $2,707,000, respectively.

Defined benefit plans – The Company maintains supplemental retirement plans (the “Plans”) for certain of its current and former executive officers. The Plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will receive benefits based on highest compensation, years of service and years of plan participation. These benefit costs are dependent upon numerous factors, assumptions and estimates. Benefit costs may be significantly affected by changes in key actuarial assumptions such as the discount rate, compensation increase rates, or retirement dates used to determine the projected benefit obligation. Additionally, changes made to the provisions of the Plans may impact current and future benefit costs. In accordance with accounting rules, changes in benefit obligations associated with these factors may not be immediately recognized as costs in the statement of operations, but recognized in future years over the remaining average service period of plan participants. See Note 7 of the Notes to Consolidated Financial Statements for further discussion.

Income taxes – The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are recorded in the Company’s consolidated balance sheet and are classified as current or noncurrent based on the classification of the related assets or liabilities for financial reporting purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not those assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered including past operating results, estimates of future income, and tax planning strategies. At any point in time, multiple tax years are subject to audit by various jurisdictions and the Company records reserves for estimates of tax exposures for foreign and domestic tax audits. However, negotiations with taxing authorities may yield results different from those currently estimated. See Note 10 of the Notes to Consolidated Financial Statements for further discussion.

Earnings per share – Basic earnings per share amounts were determined by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share amounts were similarly computed, but would have included the effect, if dilutive, of the Company’s weighted average number of stock options outstanding and shares of unvested restricted stock.

Earnings per share amounts were calculated as follows (in thousands except per share amounts):

 

    2010       2009         2008  

Net Income (loss), basic and diluted

  $     86,847     $     (129,253     $     (96,011
                         

Average shares outstanding:

         

Basic and diluted

    100,715       88,912          88,083   
                         

Earnings (loss) per share

         

Basic and diluted

  $ 0.86       $(1.45)        $ (1.09
                         

 

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All 10,424,035, 12,302,323 and 13,102,360 outstanding stock options and shares of unvested restricted stock were excluded from the computation of the fiscal 2010, 2009 and 2008, respectively, income (loss) per share as the effect would be antidilutive. In addition, incremental net shares for the conversion feature of the Company’s 6.375% senior convertible notes due 2036 have not been included in the Company’s diluted earnings per share calculations for those periods as the average common stock price has not exceeded the initial conversion price of $15.19 per share.

Stock-based compensation – The Company grants stock options and restricted stock for a fixed number of shares to employees with stock option exercise prices equal to the fair market value of the shares on the date of the grant. Accounting guidance requires all companies to measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements.

Currently, the Company’s stock-based compensation relates to stock options, restricted stock awards and director deferred stock units. Compensation expense is recognized for any unvested stock option awards outstanding on a straight-line basis over the requisite service period. The fair values of the options are calculated using a Black-Scholes option pricing model. The Company records compensation expense for stock-based awards with a performance condition when it is probable that the condition will be achieved. The compensation expense ultimately recognized, if any, related to these awards will equal the grant date fair value for the number of shares for which the performance condition has been satisfied.

The Company estimates forfeitures based on its historical forfeiture experience, and adjusts forfeiture estimates based on actual forfeiture experience for all awards with service conditions. The effect of forfeiture adjustments for the year was insignificant.

Adoption of new accounting standards

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This guidance establishes the Accounting Standards Codification (the “ASC”) as the single source of authoritative accounting principles recognized by FASB for all nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). For SEC registrants, rules and interpretive releases of the SEC under federal securities laws are also considered authoritative sources of GAAP. The provisions of this guidance are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the provisions of this guidance during the fiscal year ended February 27, 2010 and has updated citations to accounting standards included in the Company’s financial statements. The adoption of the ASC did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

Convertible Debt

Effective March 1, 2009, the Company adopted new accounting guidance, which clarifies that issuers of convertible debt instruments that may be settled in cash upon conversion must separately account for the liability and equity components in a manner that will reflect the entities nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. See Note 5 of the Notes to Consolidated Financial Statements for discussion regarding this adoption.

 

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Fair Value Measurements and Disclosure

In April 2009, new guidance was issued related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments in interim and annual reporting periods. The adoption of this guidance has not impacted the Company’s consolidated financial position, results of operations or cash flows, as its requirements are disclosure-only in nature.

NOTE 2 – PROPERTIES

Properties are summarized as follows at February 27, 2010 and February 28, 2009 (in thousands):

 

    2010       2009

Land

  $ 4,776     $ 6,379

Buildings

    12,994       29,546

Equipment, furniture and fixtures

    237,178       243,403

Leasehold improvements

    163,786       162,832

Computer software

    76,152       74,588

Projects in progress

    613       798
             
    495,499       517,546

Less accumulated depreciation and amortization

    439,662       432,411
             

Properties, net

  $       55,837     $       85,135
             

NOTE 3 – OTHER ACCRUED LIABILITIES AND NONCURRENT LIABILITIES

The following is a summary of other accrued liabilities and noncurrent liabilities at February 27, 2010 and February 28, 2009 (in thousands):

 

    2010       2009

Accrued payroll and other employee-related liabilities

  $ 48,440     $ 41,477

Accrued taxes, other than income

    22,845       23,617

Rent-related liabilities

    11,511       10,423

Other

    23,277       25,833
             

Other accrued liabilities

  $     106,073     $     101,350
             

Rent-related liabilities

  $ 25,698     $ 30,047

Deferred gains

    24,095       31,673

Retirement benefits

    19,834       21,074

Other

    14,038       10,596
             

Other noncurrent liabilities

  $ 83,665     $ 93,390
             

NOTE 4 – COSTS ASSOCIATED WITH EXIT ACTIVITIES

As part of the ordinary course of business, the Company terminates leases prior to their expiration when certain stores or distribution center facilities are closed or relocated as deemed necessary by the evaluation of its real estate portfolio. These decisions are based on store profitability, lease renewal obligations, relocation space

 

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availability, local market conditions and prospects for future profitability. In connection with these lease terminations, the Company has recorded estimated liabilities to cover the termination costs. At the time of closure, neither the write-off of fixed assets nor the write-down of inventory related to such stores was material. Additionally, employee severance costs associated with these closures were not significant. The estimated liabilities were recorded based upon the Company’s remaining lease obligations less estimated subtenant rental income. Revisions during the periods presented relate to changes in estimated buyout terms or subtenant receipts expected on closed facilities. Expenses related to lease termination obligations are included in selling, general and administrative expenses in the Company’s consolidated statements of operations. The write-off of fixed assets and associated intangible assets related to Pier 1 Imports store closures, excluding clearance and Pier 1 Kids stores, was approximately $177,000, $56,000 and $751,000 in fiscal 2010, 2009 and 2008, respectively. The following table represents a rollforward of the liability balances for the three fiscal years ended February 27, 2010 (in thousands):

 

    Lease

 

Termination

 

Obligations

 

Balance at March 3, 2007

  $ 2,436   

Original charges

    11,573   

Revisions

    (1,133

Cash payments

    (7,248
       

Balance at March 1, 2008

    5,628   

Original charges

    5,591   

Revisions

    483   

Cash payments

    (6,704
       

Balance at February 28, 2009

    4,998   

Original charges

    4,942   

Revisions

    2,751   

Cash payments

    (7,790
       

Balance at February 27, 2010

  $       4,901   
       

Included in the table above are lease termination costs related to the closure of all of the Company’s clearance and Pier 1 Kids stores and the direct to consumer channel. These concepts were closed during fiscal 2008 since their aggregate performance was not in line with the Company’s profitability targets. Lease termination costs associated with these closures were $1,636,000, or $0.02 per share, during fiscal 2010 and $258,000, or less than $0.01 per share, during fiscal 2009 and $7,973,000, or $0.09 per share, during fiscal 2008. Cash outflows related to these lease terminations were $1,187,000, $2,889,000 and $5,138,000 during fiscal 2010, 2009 and 2008, respectively. The net write-off of fixed assets, write-down of inventory and employee severance costs associated with these closures was not material.

 

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NOTE 5 – LONG-TERM DEBT AND AVAILABLE CREDIT

Long-term debt is summarized as follows at February 27, 2010 and February 28, 2009 (in thousands):

 

    2010          2009

6.375% convertible senior notes due 2036

  $ 16,577         $ 165,000

Less - debt discount

    (142        -
                
    16,435           165,000

Industrial revenue bonds

    19,000           19,000
                
    35,435           184,000

Less - current portion

    (16,435        -
                

Long-term debt

  $     19,000         $     184,000
                

The Company has $19,000,000 in industrial revenue bond loan agreements, which have been outstanding since 1987. Proceeds were used to construct warehouse/distribution facilities. The loan agreements and related tax-exempt bonds mature in the year 2026. The Company’s interest rates on the loans are based on the bond interest rates, which are market driven, reset weekly and are similar to other tax-exempt municipal debt issues. The Company’s weighted average effective interest rate, including standby letter of credit fees, was 3.2%, 3.5% and 5.2% for fiscal 2010, 2009 and 2008, respectively.

In February 2006, the Company issued $165,000,000 of 6.375% convertible senior notes due 2036 (the “6.375% Notes”) in a private placement, and subsequently registered the 6.375% Notes with the Securities and Exchange Commission in June 2006. As described in detail below, only $16,577,000 of the 6.375% Notes remained outstanding at the end of fiscal 2010. The 6.375% Notes are governed by an Indenture dated February 14, 2006 (the “Indenture”). The 6.375% Notes bear interest at a rate of 6.375% per year until February 15, 2011 and at a rate of 6.125% per year thereafter. Interest is payable semiannually in arrears on February 15 and August 15 of each year, and commenced August 15, 2006. The 6.375% Notes are convertible into cash and, if applicable, shares of the Company’s common stock based on an initial conversion rate, subject to adjustments, of 65.8328 shares per $1,000 principal amount of 6.375% Notes (which represents an initial conversion price of approximately $15.19 per share representing a 40% conversion premium at issuance). Holders of the 6.375% Notes may convert their 6.375% Notes only under the following circumstances: (1) during any fiscal quarter (and only during such fiscal quarter) commencing after May 27, 2006, if the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on such last trading day; (2) if the Company has called the 6.375% Notes for redemption; or (3) upon the occurrence of specified corporate transactions. In general, upon conversion of a 6.375% Note, a holder will receive cash equal to the lesser of the principal amount of the 6.375% Note or the conversion value of the 6.375% Note, plus common stock of the Company for any conversion value in excess of the principal amount. As of February 27, 2010, the maximum number of shares that could be required to be issued upon conversion of the 6.375% Notes was 1,091,310 shares. The Company may redeem the 6.375% Notes at its option on or after February 15, 2011 for cash at 100% of the principal amount plus accrued interest. The 6.375% Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s material domestic consolidated subsidiaries.

The holders of the 6.375% Notes can, at their option, require the Company to purchase all or a portion of their 6.375% Notes at a repurchase price in cash equal to 100% of the principal amount of the repurchased 6.375% Notes at February 15, 2011, February 15, 2016, February 15, 2021, February 15, 2026 and February 15, 2031, or if a fundamental change occurs. “Fundamental change” is defined in the Indenture and will be deemed

 

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to have occurred upon (1) certain changes in beneficial ownership of the Company’s common equity as described in the Indenture, (2) certain share exchanges, consolidations, mergers, or assets transactions as described in the Indenture, (3) “Continuing Directors” as defined in the Indenture ceasing to constitute at least a majority of the Company’s board of directors, (4) the Company’s stockholders approving any plan or proposal for the Company’s liquidation or dissolution, or (5) the Company’s common stock ceasing to be listed on a national securities exchange or quoted on the Nasdaq National Market or another established automated over-the-counter trading market in the United States.

In connection with the issuance of the 6.375% Notes, the Company purchased a call option with respect to its common stock. If the call option, which expires February 15, 2011, is exercised by the Company, it must be net share settled, and, in all cases, the Company would receive shares. This transaction has no effect on the terms of the 6.375% Notes, but is intended to reduce the potential dilution upon future conversion of the 6.375% Notes by effectively increasing the initial conversion price to $17.09 per share, representing a 57.5% conversion premium at issuance. The call option is exercisable under the same circumstances which can trigger conversion under the 6.375% Notes so long as the Company remains listed on the New York Stock Exchange, The American Stock Exchange, or the Nasdaq National Market or their respective successors.

The conversion feature of the 6.375% Notes and the call option each met the requirements of the accounting guidance on financial instruments indexed to, and potentially settled in, a company’s own stock to be accounted for as equity instruments. Therefore, the conversion feature has not been accounted for as a derivative, which would require a mark-to-market adjustment each period. In the event the debt is exchanged, the transaction will be accounted for with the cash payment of principal reducing the recorded liability and the issuance of common shares recorded in shareholders’ equity. In addition, the premium paid for the call option has been recorded as additional paid-in capital in the accompanying consolidated balance sheet and is not accounted for as a derivative. Incremental net shares for the 6.375% Notes conversion feature will be included in the Company’s future diluted earnings per share calculations for those periods in which the Company’s average common stock price exceeds $15.19 per share.

During the first quarter of fiscal 2010, a foreign subsidiary of the Company purchased $78,941,000 of the Company’s outstanding 6.375% Notes in privately negotiated transactions at a purchase price of $27,399,000, including accrued interest. The Company recognized a gain of $47,811,000 in connection with this transaction. During August 2009, the $78,941,000 in 6.375% Notes were retired by the Company.

During the second quarter of fiscal 2010, the Company entered into separate privately negotiated exchange agreements for $64,482,000 of the Company’s outstanding 6.375% Notes retiring these notes. Under the exchange agreements, the exchanging holders received $61,255,000 in aggregate principal of the Company’s new 9% convertible senior notes due 2036 (the “9% Notes”). In addition to this exchange, the Company also purchased $5,000,000 of the outstanding 6.375% Notes for $4,750,000 in cash. The Company recognized a net gain of $1,843,000 related to these transactions during the second quarter of fiscal 2010. Currently $16,577,000 of the Company’s 6.375% Notes remain outstanding.

During the third quarter of fiscal 2010, all $61,255,000 of the Company’s 9% Notes voluntarily converted into shares of the Company’s common stock. The 9% Notes were convertible into shares of the Company’s common stock at a conversion rate of 399.2016 shares for each $1,000 principal amount, representing a conversion price of $2.5050 per share. The Company issued 24,453,065 shares of common stock as a result of the conversion of the 9% Notes. Interest on the outstanding balance of the 9% Notes was payable at a rate of 9% per year and all accrued interest was paid to the holders at the time of conversion. The Company incurred non-operating charges of $18,308,000 during fiscal 2010 to record amortization of the remaining debt issuance costs and debt discounts of $13,616,000, and a $4,692,000 derivative fair value adjustment, as discussed in more detail below.

 

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The 9% Notes contained make-whole interest provisions. During the third quarter of fiscal 2010, all of the holders voluntarily converted their 9% Notes into common stock and pursuant to the indenture, received additional make-whole interest at that time equal to 2.5 years of interest. The cash payment of make-whole interest totaled $13,782,000. The Company separately accounted for the additional interest payment feature of the 9% Notes as an embedded derivative instrument. For the purpose of accounting for the 9% Notes, the fair value of this embedded derivative upon issuance reduced the carrying value of the debt and was reflected as a debt discount. This potential interest payout was initially recorded at its estimated fair value as both a $9,090,000 derivative liability and a $9,090,000 discount to the 9% Notes based on the probability of when holders of the 9% Notes would convert their notes into shares of the Company’s common stock and assumptions regarding the Company’s common stock price. Upon conversion, the fair value of this derivative for the make-whole interest provision was adjusted to its settlement value of $13,782,000, which resulted in a $4,692,000 charge to other nonoperating expense during the third quarter.

The 9% Notes also included a beneficial conversion feature because the price of the Company’s common stock on the issuance date of the notes exceeded the effective conversion price. In accordance with applicable accounting guidance, the Company recorded a $3,343,000 discount to the 9% Notes and a $3,343,000 addition to paid-in-capital representing the intrinsic value of the beneficial conversion feature.

The two underlying features described above resulted in a total debt discount of $12,433,000 and an initial carrying amount of the 9% Notes on the Company’s balance sheet of $48,822,000 compared to a face amount of $61,255,000. When the notes were converted into common stock during the third quarter, the remaining unamortized debt discount and debt issuance costs of $13,616,000 were charged to interest expense at that time.

Effective March 1, 2009, the Company adopted the new guidance on “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which clarifies that issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The 6.375% Notes are convertible into cash and, if applicable, shares of the Company’s common stock. In accordance with the new guidance, the Company estimated the fair value of the debt component of the 6.375% Notes as of the date of their issuance using an income approach by discounting the present value of future payments associated with the notes, assuming no conversion features. The Company did not apply the provisions of the new guidance retrospectively on its 6.375% Notes as it determined that the effect on prior periods was not material. The impact of adoption representing the remaining value of the equity component of the 6.375% Notes as of the beginning of the fiscal year was $2,818,000, recorded as a reduction in carrying value of the notes and an increase in additional paid-in capital. This amount was to be amortized as interest expense over the remaining life of the 6.375% Notes, or through February 2011. However, as a result of the retirement and exchange of the majority of the 6.375% Notes as discussed above, the Company’s gain on the transactions included the write-off of a portion of this unamortized discount. As of February 27, 2010, the remaining unamortized discount related to the 6.375% Notes totaled $142,000.

 

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The Company anticipates that the remainder of the 6.375% Notes will be repaid on or before February 15, 2011. The 6.375% Notes are included in fiscal 2011 debt maturities in the table below. Debt matures as follows (in thousands):

 

Fiscal Year

  Debt      

2011

    16,577   

2012

    -   

2013

    -   

2014

    -   

Thereafter

    19,000   
       
    35,577   

Debt discount

    (142
       

Total debt

  $     35,435   
       

The Company has a secured credit facility which matures in May 2012 and is secured by the Company’s eligible merchandise inventory and third-party credit card receivables. At the beginning of fiscal 2010, the total commitment amount was $325,000,000. Effective July 30, 2009, the Company amended its secured credit facility. The amendment reduced the total commitment amount to $300,000,000, removed real estate from eligibility for inclusion in the calculation of the borrowing base, increased applicable interest rate spreads and redefined permitted uses, liens, indebtedness, acquisitions, and restricted payments. In addition, the amendment updated certain provisions to allow for the refinance or repurchase of the balance of the Company’s 6.375% Notes, as well as repurchases of the Company’s outstanding common stock. During fiscal 2010 and 2009, the Company had no cash borrowings under this facility. As of February 27, 2010, the Company’s borrowing base, as defined by the agreement, was $229,299,000. This borrowing base calculation is subject to advance rates and commercially reasonable availability reserves. After excluding the required minimum $30,000,000 and the $85,758,000 in utilized letters of credit and bankers’ acceptances from the borrowing base, $113,541,000 remained available for cash borrowings. The facility bears interest at LIBOR plus 3.25% for cash borrowings. The Company pays a fee ranging from 3.0% to 3.5% for standby letters of credit depending on the average daily availability as defined by the agreement, 1.50% to 1.75% for trade letters of credit and a commitment fee of 0.50% for any unused amounts. As of February 27, 2010, the fee for standby letters of credit was 3.25% and 1.63% for trade letters of credit. As of February 27, 2010, the Company utilized approximately $85,758,000 in letters of credit and bankers’ acceptances against the secured credit facility. Of the outstanding balance, approximately $11,279,000 related to trade letters of credit and bankers acceptances for merchandise purchases, $45,950,000 related to standby letters of credit for the Company’s workers’ compensation and general liability insurance policies, $19,429,000 related to standby letters of credit related to the Company’s industrial revenue bonds, and $9,100,000 related to other miscellaneous standby letters of credit. If advances under the facility result in availability of less than $30,000,000, the Company would be required to comply with a fixed charge coverage ratio as stated in the agreement. The Company does not anticipate falling below this minimum availability in the foreseeable future. The Company was in compliance with all required covenants at fiscal 2010 year end. This facility may limit certain investments and, in some instances, limit payment of cash dividends and repurchases of the Company’s common stock. Under this credit facility, the Company will not be restricted from paying certain dividends unless fundings on the line result in availability over a specified period of time that is projected to be less than 35% of the lesser of either $300,000,000 or the calculated borrowing base.

 

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NOTE 6 – CONDENSED FINANCIAL STATEMENTS

The Company’s 6.375% Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s material domestic consolidated subsidiaries (the “Guarantor Subsidiaries”). The subsidiaries that do not guarantee such notes are comprised of the Company’s foreign subsidiaries and certain other insignificant domestic consolidated subsidiaries (the “Non-Guarantor Subsidiaries”). Each of the Guarantor Subsidiaries is wholly owned. The Company registered these notes with the Securities and Exchange Commission in June 2006; therefore, in lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended February 27, 2010

(in thousands)

 

    Pier 1
Imports, Inc.
        Guarantor
Subsidiaries
        Non-
Guarantor
Subsidiaries
        Eliminations         Total  

Net sales

  $ -        $   1,284,336        $ 9,366        $ (2,850     $   1,290,852   

Cost of sales (including buying and store occupancy costs)

    -          845,386          7,974          (2,922       850,438   

Selling, general and administrative (including depreciation and     amortization)

    1,799          441,342          526          -          443,667   
                                               

Operating income (loss)

    (1,799       (2,392       866          72          (3,253

Nonoperating (income) expenses

    (35,517       2,318          (2,105       -          (35,304
                                               

Income (loss) before income taxes

    33,718          (4,710       2,971          72          32,051   

Provision (benefit) for income taxes

    -          (54,895       99          -          (54,796
                                               

Net income

    33,718          50,185          2,872          72          86,847   

Net income (loss) from subsidiaries

    53,057          2,872          -          (55,929       -   
                                               

Net income (loss)

  $     86,775        $ 53,057        $     2,872        $     (55,857     $ 86,847   
                                               

 

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CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended February 28, 2009

(in thousands)

 

    Pier 1
Imports, Inc.
         Guarantor
Subsidiaries
        Non-
Guarantor
Subsidiaries
        Eliminations         Total  

Net sales

  $ -         $   1,312,426        $   14,674        $ (6,423     $   1,320,677   

Cost of sales (including buying and store occupancy costs)

    -           950,710          13,244          (6,741       957,213   

Selling, general and administrative (including depreciation and
    amortization)

    3,788           479,724          515          -          484,027   
                                                

Operating income (loss)

    (3,788        (118,008       915          318          (120,563

Nonoperating (income) expenses

    (2,398        10,881          (417       -          8,066   
                                                

Income (loss) before income taxes

    (1,390        (128,889       1,332          318          (128,629

Provision (benefit) for income taxes

    -           637          (13       -          624   
                                                

Net income (loss)

    (1,390        (129,526       1,345          318          (129,253

Net income (loss) from subsidiaries

    (128,181        1,345          -          126,836          -   
                                                

Net income (loss)

  $   (129,571      $ (128,181     $ 1,345        $   127,154        $ (129,253
                                                

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended March 1, 2008

(in thousands)

 

    Pier 1
Imports, Inc.
        Guarantor
Subsidiaries
        Non-
Guarantor
Subsidiaries
        Eliminations          Total  

Net sales

  $ -        $   1,505,011        $   38,155        $   (31,334      $   1,511,832   

Cost of sales (including buying and store occupancy costs)

    -          1,068,371          35,466          (31,557        1,072,280   

Selling, general and administrative (including depreciation and
    amortization)

    1,829          525,279          582          -           527,690   
                                                

Operating income (loss)

    (1,829       (88,639       2,107          223           (88,138

Nonoperating (income) expenses

    (2,106       7,999          (614       -           5,279   
                                                

Income (loss) before income taxes

    277          (96,638       2,721          223           (93,417

Provision for income taxes

    -          2,380          214          -           2,594   
                                                

Net income (loss)

    277          (99,018       2,507          223           (96,011

Net income (loss) from subsidiaries

    (96,511       2,507          -          94,004           -   
                                                

Net income (loss)

  $   (96,234     $ (96,511     $ 2,507        $ 94,227         $ (96,011
                                                

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

February 27, 2010

(in thousands)

 

    Pier 1
Imports, Inc.
        Guarantor
Subsidiaries
      Non-Guarantor
Subsidiaries
        Eliminations         Total

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  $ 38,433        $ 147,233     $       2,246        $ -        $ 187,912

Accounts receivable, net

    -          13,011       1,690          -          14,701

Inventories

    -          313,496       -          -          313,496

Income tax receivable

    -          79       482          -          561

Prepaid expenses and other current assets

    97          37,060       -          -          37,157
                                           

Total current assets

    38,530          510,879       4,418          -          553,827

Properties, net

    -          52,204       3,633          -          55,837

Investment in subsidiaries

    69,750          16,985       -          (86,735       -

Other noncurrent assets

    3,548          29,762       -          -          33,310
                                           
  $   111,828        $     609,830     $ 8,051        $     (86,735     $     642,974
                                           

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities:

                 

Accounts payable

  $ 223        $ 65,081     $ 40        $ -        $ 65,344

Intercompany payable (receivable)

    (207,865       217,029       (9,164       -          -

Current portion of convertible debt

    16,435          -       -          -          16,435

Gift cards and other deferred revenue

    -          44,356       -          -          44,356

Accrued income taxes payable (receivable)

    -          5,001       (34       -          4,967

Other accrued liabilities

    (99       105,948       224          -          106,073
                                           

Total current liabilities

    (191,306       437,415       (8,934       -          237,175

Long-term debt

    -          19,000       -          -          19,000

Other noncurrent liabilities

    -          83,665       -          -          83,665

Shareholders’ equity

    303,134          69,750       16,985          (86,735       303,134
                                           
  $ 111,828        $ 609,830     $ 8,051        $ (86,735     $ 642,974
                                           

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

February 28, 2009

(in thousands)

 

    Pier 1
Imports, Inc.
        Guarantor
Subsidiaries
      Non-Guarantor
Subsidiaries
        Eliminations         Total

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  $ 61,648        $ 62,399     $ 31,751        $ -        $ 155,798

Accounts receivable, net

    2          15,684       1,880          -          17,566

Inventories

    -          316,245       86          -          316,331

Income tax receivable

    -          1,667       482          -          2,149

Prepaid expenses and other current assets

    100          41,783       -          -          41,883
                                           

Total current assets

    61,750          437,778       34,199          -          533,727

Properties, net

    -          81,398       3,737          -          85,135

Investment in subsidiaries

    16,125          45,262       -          (61,387       -

Other noncurrent assets

    5,525          31,075       -          -          36,600
                                           
  $ 83,400        $     595,513     $ 37,936        $ (61,387     $ 655,462
                                           

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities:

                 

Accounts payable

  $ 116        $ 80,288     $ 291        $ -        $ 80,695

Intercompany payable (receivable)

    (226,635       234,163       (7,528       -          -

Gift cards and other deferred revenue

    -          47,332       -          -          47,332

Accrued income taxes payable (receivable)

    48          4,553       (167       -          4,434

Other accrued liabilities

    610          100,662       78          -          101,350
                                           

Total current liabilities

    (225,861       466,998       (7,326       -          233,811

Long-term debt

    165,000          19,000       -          -          184,000

Other noncurrent liabilities

    -          93,390       -          -          93,390

Shareholders’ equity

    144,261          16,125       45,262          (61,387       144,261
                                           
  $ 83,400        $ 595,513     $       37,936        $     (61,387     $     655,462
                                           

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Year Ended February 27, 2010

(in thousands)

 

    Pier 1
Imports, Inc.
        Guarantor
Subsidiaries
        Non-Guarantor
Subsidiaries
        Eliminations       Total  

Cash flow from operating activities:

                 

Net cash provided by (used in) operating activities

  $     (35,825     $     104,410        $ 1,970        $               -     $     70,555   

Cash flow from investing activities:

                 

Capital expenditures

    -          (5,246       -          -