e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 1, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-7832
PIER 1 IMPORTS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   75-1729843
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
100 Pier 1 Place, Fort Worth, Texas 76102
 
(Address of principal executive offices, including zip code)
(817) 252-8000
 
(Registrant’s telephone number, including area code)
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 þ. No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.
     
Class   Shares outstanding as of October 3, 2007
Common Stock, $1.00 par value   88,430,798
 
 

 


 

PIER 1 IMPORTS, INC.
INDEX TO QUARTERLY FORM 10-Q
         
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    31  
 Third Amendment to 2006 Stock Incentive Plan
 First Amendment to 1999 Stock Plan, as Amended and Restated
 Amendment No. 1 to Credit Card Program Agreement
 Amendment No. 2 to Credit Card Program Agreement
 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 Section 1350 Certifications

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PART I
Item 1. Financial Statements.
PIER I IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
                                 
    Three Months Ended     Six Months Ended  
    September 1,     August 26,     September 1,     August 26,  
    2007     2006     2007     2006  
Net sales
  $ 344,566     $ 370,698     $ 700,941     $ 746,790  
 
                               
Operating costs and expenses:
                               
Cost of sales (including buying and store occupancy costs)
    257,042       265,201       526,239       514,041  
Selling, general and administrative expenses
    117,457       153,145       249,581       300,728  
Depreciation and amortization
    10,444       13,604       21,002       27,228  
 
                       
 
    384,943       431,950       796,822       841,997  
 
                       
 
                               
Operating loss
    (40,377 )     (61,252 )     (95,881 )     (95,207 )
 
                               
Nonoperating (income) and expenses:
                               
Interest and investment income
    (2,438 )     (2,795 )     (5,370 )     (5,708 )
Interest expense
    4,000       3,444       7,957       6,895  
Other income
    (405 )           (653 )      
 
                       
 
    1,157       649       1,934       1,187  
 
                       
 
                               
Loss from continuing operations before income taxes
    (41,534 )     (61,901 )     (97,815 )     (96,394 )
Income tax expense (benefit)
    1,875       11,158       1,972       (570 )
 
                       
Loss from continuing operations
    (43,409 )     (73,059 )     (99,787 )     (95,824 )
 
                               
Discontinued operations:
                               
Loss from discontinued operations
                      (638 )
Income tax benefit
                      (231 )
 
                       
Loss from discontinued operations
                      (407 )
Net loss
  ($  43,409 )   ($  73,059 )   ($  99,787 )   ($  96,231 )
 
                       
Loss per share from continuing operations:
                               
Basic and diluted
  ($  0.49 )   ($  0.84 )   ($  1.14 )   ($  1.09 )
 
                       
Loss per share from discontinued operations:
                               
Basic and diluted
                    ($  0.01 )
 
                       
 
                               
Loss per share:
                               
Basic and diluted
  ($  0.49 )   ($  0.84 )   ($  1.14 )   ($  1.10 )
 
                       
 
                               
Dividends declared per share:
        $ 0.10           $ 0.20  
 
                       
Average shares outstanding during period:
                               
Basic and diluted
    88,000       87,307       87,898       87,201  
 
                       
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)
(unaudited)
                         
    September 1,     March 3,     August 26,  
    2007     2007     2006  
ASSETS
Current assets:
                       
Cash and cash equivalents, including temporary investments of $112,468, $160,721 and $140,708, respectively
  $ 121,872     $ 167,178     $ 150,253  
Beneficial interest in securitized receivables
                44,928  
Other accounts receivable, net
    20,533       21,437       16,246  
Inventories
    374,468       360,063       404,117  
Income tax receivable
    15,143       34,966       43,344  
Prepaid expenses and other current assets
    47,318       50,324       78,115  
 
                 
Total current assets
    579,334       633,968       737,003  
 
                       
Properties, net
    212,623       239,548       282,938  
Other noncurrent assets
    46,524       42,954       41,165  
 
                 
 
                       
 
  $ 838,481     $ 916,470     $ 1,061,106  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                       
Accounts payable
  $ 125,253     $ 95,609     $ 125,404  
Gift cards and other deferred revenue
    64,318       66,130       63,482  
Accrued income taxes payable
    3,120       3,305       2,106  
Other accrued liabilities
    102,321       119,541       129,631  
 
                 
Total current liabilities
    295,012       284,585       320,623  
 
                       
Long-term debt
    184,000       184,000       184,000  
Other noncurrent liabilities
    97,321       86,768       75,950  
 
                       
Shareholders’ equity:
                       
Common stock, $1.00 par, 500,000,000 shares authorized, 100,779,000 issued
    100,779       100,779       100,779  
Paid-in capital
    125,663       130,416       127,276  
Retained earnings
    232,318       337,178       468,515  
Cumulative other comprehensive income (loss)
    3,012       2,408       (2,473 )
Less — 12,359,000, 12,981,000 and 13,223,000 common shares in treasury, at cost, respectively
    (199,624 )     (209,664 )     (213,564 )
 
                 
 
    262,148       361,117       480,533  
Commitments and contingencies
                 
 
                 
 
                       
 
  $ 838,481     $ 916,470     $ 1,061,106  
 
                 
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)
(unaudited)
                 
    Six Months Ended  
    September 1,     August 26,  
    2007     2006  
Cash flow from operating activities:
               
Net loss
  $ (99,787 )   $ (96,231 )
Adjustments to reconcile to net cash used in operating activities:
               
Depreciation and amortization
    27,172       32,519  
(Gain) loss on disposal of fixed assets
    (1,404 )     200  
Loss on impairment of fixed assets and long-lived assets
    4,164       5,063  
Stock-based compensation expense
    3,182       3,270  
Deferred compensation
    1,891       4,727  
Lease termination expense
    4,820       2,005  
Deferred income taxes
          24,613  
Other
    281       (2,154 )
Changes in cash from:
               
Sale of receivables in exchange for beneficial interest in securitized receivables
          (14,900 )
Inventories
    (14,405 )     (34,297 )
Other accounts receivable, prepaid expenses and other current assets
    (6,066 )     (15,701 )
Income tax receivable
    24,474       (25,237 )
Accounts payable and accrued expenses
    8,770       20,168  
Accrued income taxes payable
    434       (2,794 )
Defined benefit plan payments
    (6,282 )     (217 )
Other noncurrent assets
    305       469  
Other noncurrent liabilities
    (586 )     (721 )
 
           
Net cash used in operating activities
    (53,037 )     (99,218 )
 
           
 
               
Cash flow from investing activities:
               
Capital expenditures
    (2,665 )     (18,711 )
Proceeds from disposition of properties
    3,505       58  
Proceeds from sale of discontinued operations
          11,601  
Proceeds from sale of restricted investments
    6,373       217  
Purchase of restricted investments
    (589 )     (2,000 )
Collections of principal on beneficial interest in securitized receivables
          19,972  
 
           
Net cash provided by investing activities
    6,624       11,137  
 
           
 
               
Cash flow from financing activities:
               
Cash dividends
          (17,475 )
Proceeds from stock options exercised, stock purchase plan and other, net
    2,105       2,877  
Debt issuance costs
    (998 )     (283 )
 
           
Net cash provided by (used in) financing activities
    1,107       (14,881 )
 
           
 
               
Change in cash and cash equivalents
    (45,306 )     (102,962 )
 
               
Cash and cash equivalents at beginning of period (including cash held for sale of $0 and $7,100, respectively)
    167,178       253,215  
 
           
 
Cash and cash equivalents at end of period
  $ 121,872     $ 150,253  
 
           
The accompanying notes are an integral part of these financial statements.

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PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 1, 2007
(in thousands except per share amounts)
(unaudited)
                                                         
                                    Cumulative                
    Common Stock                     Other             Total  
    Outstanding             Paid-in     Retained     Comprehensive     Treasury     Shareholders’  
    Stock     Amount     Capital     Earnings     Income     Stock     Equity  
Balance March 3, 2007
    87,798     $ 100,779     $ 130,416     $ 337,178     $ 2,408     $ (209,664 )   $ 361,117  
 
                                                       
Implementation of new accounting pronouncement(1)
                      (5,073 )                 (5,073 )
 
                                                       
Comprehensive loss:
                                                       
 
                                                       
Net loss
                      (99,787 )                 (99,787 )
 
                                                       
Other comprehensive income:
                                                       
Currency translation adjustments
                            604             604  
 
                                                     
 
                                                       
Comprehensive loss
                                                    (99,183 )
 
                                                     
 
                                                       
Restricted stock compensation
    331             (4,600 )                 5,348       748  
 
                                                       
Stock option compensation expense
                2,434                         2,434  
 
                                                       
Exercise of stock options, stock purchase plan and other
    291             (2,587 )                 4,692       2,105  
 
                                         
 
                                                       
Balance September 1, 2007
    88,420     $ 100,779     $ 125,663     $ 232,318     $ 3,012     $ (199,624 )   $ 262,148  
 
                                         
 
(1)   Relates to Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxas — an Interpretation of FASB Statement No. 109. See Note 10 of the Notes to Consolidated Financial Statements for further discussion.
The accompanying notes are an integral part of these financial statements.

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PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 1, 2007
AND AUGUST 26, 2006
(unaudited)
Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and all its consolidated subsidiaries. The accompanying unaudited financial statements should be read in conjunction with the Form 10-K for the year ended March 3, 2007. All adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position as of September 1, 2007, and the results of operations and cash flows for the three and six months ended September 1, 2007 and August 26, 2006 have been made and consist only of normal recurring adjustments, except as otherwise described herein. The results of operations for the periods presented are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment. On March 20, 2006, the Company sold its subsidiary based in the United Kingdom, The Pier Retail Group Limited (“The Pier”). For all periods presented, The Pier has been classified as discontinued operations. The classification of certain amounts previously reported in the consolidated statement of cash flows for the six months ended August 26, 2006, has been modified to conform to the September 1, 2007 method of presentation.
Note 1 – Loss per share
Basic loss per share amounts were determined by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share amounts were similarly computed, but would have included the effect, if dilutive, of the Company’s weighted average number of stock options and shares of unvested restricted stock. As the effect would have been antidilutive, all 14,153,480 and 14,236,780 stock options and shares of unvested restricted stock were excluded from the computation of the second quarter and year-to-date loss per share for fiscal 2008 and fiscal 2007, respectively. Loss per share for the three and six months ended September 1, 2007 and August 26, 2006 was calculated as follows (in thousands except per share amounts):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                 
    Three Months Ended     Six Months Ended  
    September 1,     August 26,     September 1,     August 26,  
    2007     2006     2007     2006  
Loss from continuing operations, basic and diluted
  ($  43,409 )   ($  73,059 )   ($  99,787 )   ($  95,824 )
Loss from discontinued operations, basic and diluted
                      (407 )
 
                       
Net loss, basic and diluted
  ($  43,409 )   ($  73,059 )   ($  99,787 )   ($  96,231 )
 
                       
 
                               
Average shares outstanding:
                               
Basic and diluted
    88,000       87,307       87,898       87,201  
 
                       
 
                               
Loss per share from continuing operations:
                               
Basic and diluted
  ($  0.49 )   ($  0.84 )   ($  1.14 )   ($  1.09 )
 
                       
 
                               
Loss per share from discontinued operations:
                               
Basic and diluted
                    ($  0.01 )
 
                       
 
                               
Net loss per share:
                               
Basic and diluted
  ($  0.49 )   ($  0.84 )   ($  1.14 )   ($  1.10 )
 
                       
Note 2 – Discontinued operations
On March 20, 2006, the Company sold its operations of The Pier, with stores located in the United Kingdom and Ireland. The Pier’s prior period operations are considered discontinued and are presented as such in the Company’s financial statements. Net sales of The Pier were $3,323,000 for the period ended March 20, 2006.
Note 3 – Comprehensive loss
The components of comprehensive loss for the three and six months ended September 1, 2007 and August 26, 2006 were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    September 1,     August 26,     September 1,     August 26,  
    2007     2006     2007     2006  
Net loss
  ($  43,409 )   ($  73,059 )   ($  99,787 )   ($  96,231 )
Currency translation adjustments
    25       (41 )     604       (1,890 )
 
                       
 
                               
Comprehensive loss
  ($  43,384 )   ($  73,100 )   ($  99,183 )   ($  98,121 )
 
                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 – Stock-based compensation
The Company accounts for share-based compensation transactions in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R 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. The fair values for options granted during the respective periods were estimated as of the date of grant using the Black-Scholes option-pricing model and are amortized on a straight-line basis as compensation expense over the vesting periods of the options. For the three and six months ended September 1, 2007, the Company recorded stock-based compensation expense related to stock options and restricted stock of approximately $1,027,000, or $0.01 per share and approximately $3,182,000, or $0.04 per share, respectively. For the three and six months ending August 26, 2006, the Company recorded stock-based compensation expense related to stock options and restricted stock of approximately $2,660,000, or $0.03 per share and approximately $3,270,000, or $0.04 per share, respectively. The Company recognized no net tax benefit related to stock-based compensation during the first half of fiscal 2008 as a result of the Company’s valuation allowance on all deferred tax assets.
As of September 1, 2007, there was approximately $5,859,000 of total unrecognized compensation expense related to unvested stock option awards that is expected to be recognized over a weighted average period of 2.26 years and $4,207,000 of total unrecognized compensation expense related to restricted stock that may be recognized over a weighted average period of 2.23 years.
Note 5 – 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 storage facilities are closed or relocated as deemed necessary by the evaluation of its real estate portfolio. These decisions are based on lease renewal obligations, relocation space availability, local market conditions and prospects for future profitability. In connection with these lease terminations, the Company has recorded estimated liabilities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The estimated liabilities were recorded based upon the Company’s remaining lease obligations less estimated subtenant rental income. Revisions during the period related to changes in estimated 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. 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 following table represents a rollforward of the liability balances for the six months ended September 1, 2007 and August 26, 2006 (in thousands):
                 
    Six Months Ended  
    September 1,     August 26,  
    2007     2006  
Beginning of period
  $ 2,436     $ 2,859  
Original charges
    5,221       1,794  
Revisions
    (401 )     211  
Cash payments
    (2,748 )     (2,010 )
 
           
 
               
End of period
  $ 4,508     $ 2,854  
 
           
During the second quarter of fiscal 2008, the Company announced plans to close all of its remaining

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
clearance and Pier 1 Kids stores and the direct to consumer channel since the aggregate performance of these concepts was not in line with the Company’s profitability targets. Lease termination costs associated with these closures are being recorded to selling, general and administrative expenses as the stores are closed. Costs associated with these closures have been included in the table above and represent approximately $3,600,000 of the original charges. Total costs are currently anticipated to be approximately $10,000,000. The write-off of fixed assets, write-down of inventory, employee severance costs and contract termination costs associated with these closures has not been and is not expected to be material.
Note 6 Asset impairment
Impairment charges were $1,983,000, or $0.02 per share, and $4,164,000, or $0.05 per share, for the three and six months ended September 1, 2007, respectively, and were included in selling, general and administrative expenses. These impairment charges related to long-lived assets and intangible assets at underperforming stores and were based on cash flow projections for those stores. These cash flows were estimated based on management’s estimate of future sales, merchandise margins, and expenses over the remaining expected terms of the leases. Estimates used in the second quarter were updated from those used in prior periods to incorporate actual results experienced during the quarter. In the event that actual future results are worse than management’s current estimates, additional charges for asset impairments may be recorded and such charges could have an impact on the Company’s balance sheet and statement of operations.
Note 7 – Secured credit facility
Effective as of May 31, 2007, the Company amended its $325,000,000 secured credit facility to expand the definition of its borrowing base to include certain Company-owned real estate and to revise certain advance rates. Additionally, the maturity date of the facility was extended to May 2012 from the original maturity date of November 2010. The amendment also revised certain other definitions and terms of the facility, including the allowable use of proceeds and permitted dispositions. The Company’s calculated borrowing base was $314,572,000 at September 1, 2007. The Company utilized $166,216,000 for letters of credit and had no outstanding cash borrowings, leaving $148,356,000 available at the end of the second quarter. The Company is not required to comply with financial covenants under the facility unless the availability under such agreement is less than $32,500,000. At quarter end, $115,856,000 remained available before reaching the $32,500,000 threshold. The Company does not anticipate falling below this minimum availability in the foreseeable future. The Company was in compliance with required debt covenants at the end of the second quarter of fiscal 2008.
Note 8 – Condensed financial statements
The Company’s 6.375% convertible senior notes (the “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. On June 13, 2006, the Company registered these Notes with the Securities and Exchange Commission. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Three Months Ended September 1, 2007
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1 Imports,     Guarantor     Guarantor              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
Net sales
  $     $ 342,877     $ 10,522     $ (8,833 )   $ 344,566  
Cost of sales (including buying and store occupancy costs)
          256,066       9,799       (8,823 )     257,042  
Selling, general and administrative (including depreciation and amortization)
    490       127,356       55             127,901  
 
                             
Operating income (loss)
    (490 )     (40,545 )     668       (10 )     (40,377 )
 
                                       
Nonoperating (income) expenses
    (868 )     2,185       (160 )           1,157  
 
                             
 
                                       
Income (loss) before income taxes
    378       (42,730 )     828       (10 )     (41,534 )
Provision for income taxes
          1,722       153             1,875  
 
                             
Net income (loss) after income taxes
    378       (44,452 )     675       (10 )     (43,409 )
 
                                       
Net income (loss) from subsidiaries
    (43,777 )     675             43,102        
 
                             
 
                                       
Net income (loss)
  $ (43,399 )   $ (43,777 )   $ 675     $ 43,092     $ (43,409 )
 
                             
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Three Months Ended August 26, 2006
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1 Imports,     Guarantor     Guarantor              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
Net sales
  $     $ 368,837     $ 11,475     $ (9,614 )   $ 370,698  
Cost of sales (including buying and store occupancy costs)
          264,237       10,556       (9,592 )     265,201  
Selling, general and administrative (including depreciation and amortization)
    483       166,043       223             166,749  
 
                             
Operating income (loss)
    (483 )     (61,443 )     696       (22 )     (61,252 )
 
                                       
Nonoperating (income) expenses
    (742 )     1,574       (183 )           649  
 
                             
Income (loss) before income taxes
    259       (63,017 )     879       (22 )     (61,901 )
 
                                       
Provision for income taxes
          11,015       143             11,158  
 
                             
Net income (loss) after income taxes
    259       (74,032 )     736       (22 )     (73,059 )
 
                                       
Net income (loss) from subsidiaries
    (73,296 )     736             72,560        
 
                             
 
                                       
Net income (loss)
  $ (73,037 )   $ (73,296 )   $ 736     $ 72,538     $ (73,059 )
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Six Months Ended September 1, 2007
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1 Imports,     Guarantor     Guarantor              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
Net sales
  $     $ 697,990     $ 18,069     $ (15,118 )   $ 700,941  
Cost of sales (including buying and store occupancy costs)
          524,771       16,767       (15,299 )     526,239  
Selling, general and administrative (including depreciation and amortization)
    942       269,521       120             270,583  
 
                             
Operating income (loss)
    (942 )     (96,302 )     1,182       181       (95,881 )
 
                                       
Nonoperating (income) expenses
    (1,653 )     3,908       (321 )           1,934  
 
                             
 
                                       
Income (loss) before income taxes
    711       (100,210 )     1,503       181       (97,815 )
Provision for income taxes
          1,767       205             1,972  
 
                             
Net income (loss) after income taxes
    711       (101,977 )     1,298       181       (99,787 )
 
                                       
Net income (loss) from subsidiaries
    (100,679 )     1,298             99,381        
 
                             
 
                                       
Net income (loss)
  $ (99,968 )   $ (100,679 )   $ 1,298     $ 99,562     $ (99,787 )
 
                             

12


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Six Months Ended August 26, 2006
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1 Imports,     Guarantor     Guarantor              
    Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
Net sales
  $     $ 742,543     $ 20,566     $ (16,319 )   $ 746,790  
Cost of sales (including buying and store occupancy costs)
          511,810       18,796       (16,565 )     514,041  
Selling, general and administrative (including depreciation and amortization)
    1,033       326,401       522             327,956  
 
                             
Operating income (loss)
    (1,033 )     (95,668 )     1,248       246       (95,207 )
 
                                       
Nonoperating (income) expenses
    (1,467 )     2,996       (342 )           1,187  
 
                             
 
                                       
Income (loss) from continuing operations before income taxes
    434       (98,664 )     1,590       246       (96,394 )
Income tax (benefit) provision
          (801 )     231             (570 )
 
                             
Net income (loss) from continuing operations
    434       (97,863 )     1,359       246       (95,824 )
 
                                       
Net income (loss) from subsidiaries
    (96,911 )     952             95,959        
 
Discontinued operations:
                                       
Loss from discontinued operations
                (638 )           (638 )
Income tax benefit
                (231 )           (231 )
 
                             
 
                                       
Net loss from discontinued operations
                (407 )           (407 )
 
                             
 
                                       
Net income (loss)
  $ (96,477 )   $ (96,911 )   $ 952     $ 96,205     $ (96,231 )
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED BALANCE SHEET
September 1, 2007
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1     Guarantor     Guarantor              
    Imports, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
ASSETS
                                       
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 76,384     $ 33,364     $ 12,124     $     $ 121,872  
Other accounts receivable, net
    11       18,884       1,638             20,533  
Inventories
          374,468                   374,468  
Income tax receivable
          14,841       302             15,143  
Prepaid expenses and other current assets
          47,318                   47,318  
 
                             
Total current assets
    76,395       488,875       14,064             579,334  
 
                                       
Properties, net
          208,731       3,892             212,623  
Investment in subsidiaries
    143,987       42,102             (186,089 )      
Other noncurrent assets
    7,119       39,405                   46,524  
 
                             
 
  $ 227,501     $ 779,113     $ 17,956     $ (186,089 )   $ 838,481  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
                                       
Current liabilities:
                                       
Accounts payable
  $ 38     $ 120,267     $ 4,948     $     $ 125,253  
Intercompany payable (receivable)
    (200,391 )     229,387       (28,996 )            
Gift cards and other deferred revenue
          64,318                   64,318  
Accrued income taxes payable (receivable)
    48       3,220       (148 )           3,120  
Other accrued liabilities
    658       101,613       50             102,321  
 
                             
Total current liabilities
    (199,647 )     518,805       (24,146 )           295,012  
 
                                       
Long-term debt
    165,000       19,000                   184,000  
Other noncurrent liabilities
          97,321                   97,321  
Shareholders’ equity
    262,148       143,987       42,102       (186,089 )     262,148  
 
                             
 
  $ 227,501     $ 779,113     $ 17,956     $ (186,089 )   $ 838,481  
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED BALANCE SHEET
March 3, 2007
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1     Guarantor     Guarantor              
    Imports, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
ASSETS
                                       
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 111,163     $ 43,699     $ 12,316     $     $ 167,178  
Other accounts receivable, net
    47       20,311       1,079             21,437  
Inventories
          360,063                   360,063  
Income tax receivable
          34,708       258             34,966  
Prepaid expenses and other current assets
          50,324                   50,324  
 
                             
Total current assets
    111,210       509,105       13,653             633,968  
 
                                       
Properties, net
          233,514       6,034             239,548  
Investment in subsidiaries
    248,953       40,629             (289,582 )      
Other noncurrent assets
    7,650       35,304                   42,954  
 
                             
 
  $ 367,813     $ 818,552     $ 19,687     $ (289,582 )   $ 916,470  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
                                       
Current liabilities:
                                       
Accounts payable
  $ 45     $ 93,889     $ 1,675     $     $ 95,609  
Intercompany payable (receivable)
    (159,038 )     181,316       (22,278 )            
Gift cards and other deferred revenue
          66,130                   66,130  
Accrued income taxes payable (receivable)
    48       3,610       (353 )           3,305  
Other accrued liabilities
    641       118,886       14             119,541  
 
                             
Total current liabilities
    (158,304 )     463,831       (20,942 )           284,585  
 
                                       
Long-term debt
    165,000       19,000                   184,000  
Other noncurrent liabilities
          86,768                   86,768  
Shareholders’ equity
    361,117       248,953       40,629       (289,582 )     361,117  
 
                             
 
  $ 367,813     $ 818,552     $ 19,687     $ (289,582 )   $ 916,470  
 
                             

15


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED BALANCE SHEET
August 26, 2006
(in thousands)
(unaudited)
                                         
                    Non-              
    Pier 1     Guarantor     Guarantor              
    Imports, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
ASSETS
                                       
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 114,960     $ 20,310     $ 14,983     $     $ 150,253  
Beneficial interest in securitized receivables
          44,928                   44,928  
Other accounts receivable, net
    518       14,115       1,613             16,246  
Inventories
          404,117                   404,117  
Income tax receivable
          43,468       (124 )           43,344  
Prepaid expenses and other current assets
          78,108       7             78,115  
 
                             
Total current assets
    115,478       605,046       16,479             737,003  
 
                                       
Properties, net
          276,815       6,123             282,938  
Investment in subsidiaries
    377,079       41,643             (418,722 )      
Other noncurrent assets
    8,181       32,905       79             41,165  
 
                             
 
  $ 500,738     $ 956,409     $ 22,681     $ (418,722 )   $ 1,061,106  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
 
                                       
Current liabilities:
                                       
Accounts payable
  $ 28     $ 123,868     $ 1,508     $     $ 125,404  
Intercompany payable (receivable)
    (148,288 )     168,025       (19,737 )            
Gift cards and other deferred revenue
          63,482                   63,482  
Accrued income taxes payable (receivable)
          2,910       (804 )           2,106  
Other accrued liabilities
    672       128,888       71             129,631  
 
                             
Total current liabilities
    (147,588 )     487,173       (18,962 )           320,623  
 
                                       
Long-term debt
    165,000       19,000                   184,000  
Other noncurrent liabilities
    2,793       73,157                   75,950  
Shareholders’ equity
    480,533       377,079       41,643       (418,722 )     480,533  
 
                             
 
  $ 500,738     $ 956,409     $ 22,681     $ (418,722 )   $ 1,061,106  
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended September 1, 2007
(in thousands)
(unaudited)
                                         
    Pier 1     Guarantor     Non-Guarantor              
    Imports, Inc.     Subsidiaries     Subsidiaries     Eliminations     Total  
Cash flow from operating activities:
                                       
Net cash provided by (used in) operating activities
  $ 4,469     $ (64,032 )   $ 6,526     $     $ (53,037 )
 
                                       
Cash flow from investing activities:
                                       
Capital expenditures
          (2,665 )                 (2,665 )
Proceeds from disposition of properties
          3,505                   3,505  
Proceeds from sale of restricted investments
          6,373                   6,373  
Purchase of restricted investments
          (589 )                 (589 )
 
                             
Net cash provided by investing activities
          6,624                   6,624  
 
                                       
Cash flow from financing activities:
                                       
Proceeds from stock options exercised, stock purchase plan and other, net
    2,105                         2,105  
Debt issuance costs
          (998 )                 (998 )
Advances (to) from subsidiaries
    (41,353 )     48,071       (6,718 )            
 
                             
Net cash (used in) provided by financing activities
    (39,248 )     47,073       (6,718 )           1,107  
 
                                       
Change in cash and cash equivalents
    (34,779 )     (10,335 )     (192 )           (45,306 )
Cash and cash equivalents at beginning of period
    111,163       43,699       12,316             167,178  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 76,384     $ 33,364     $ 12,124     $     $ 121,872  
 
                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended August 26, 2006
(in thousands)
(unaudited)
                                         
    Pier 1     Guarantor     Non-Guarantor              
    Imports, Inc.     Subsidiaries     Subsidiaries (1)     Eliminations     Total (1)  
Cash flow from operating activities:
                                       
Net cash provided by (used in) operating activities
  $ 5,187     $ (101,992 )   $ (2,395 )   $ (18 )   $ (99,218 )
 
                                       
Cash flow from investing activities:
                                       
Capital expenditures
          (18,711 )                 (18,711 )
Proceeds from disposition of properties
          58                   58  
Proceeds from sale of discontinued operations
          14,998       (3,397 )           11,601  
Proceeds from sale of restricted investments
          217                   217  
Purchase of restricted investments
          (2,000 )                 (2,000 )
Collections of principal on beneficial interest in securitized receivables
          19,972                   19,972  
 
                             
Net cash provided by investing activities
          14,534       (3,397 )           11,137  
 
                                       
Cash flow from financing activities:
                                       
Cash dividends
    (17,475 )     (18 )           18       (17,475 )
Proceeds from stock options exercised, stock purchase plan and other, net
    2,781       96                   2,877  
Debt issuance costs
          (283 )                 (283 )
Advances (to) from subsidiaries
    (6,312 )     7,204       (892 )            
 
                             
Net cash (used in) provided by financing activities
    (21,006 )     6,999       (892 )     18       (14,881 )
 
                                       
Change in cash and cash equivalents
    (15,819 )     (80,459 )     (6,684 )           (102,962 )
Cash and cash equivalents at beginning of period
    130,779       100,769       21,667             253,215  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 114,960     $ 20,310     $ 14,983     $     $ 150,253  
 
                             
 
(1)   Includes cash related to discontinued operations of $7,100 at beginning of period.
Note 9 Defined benefit plans
The Company maintains supplemental retirement plans (the “Plans”) for certain of its executive officers. The Plans provide that upon death, disability, reaching retirement age, or certain termination events, a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
participant will receive benefits based on highest compensation, years of service and years of plan participation. Benefit costs are determined using various actuarial cost methods to estimate the total benefits ultimately payable to executive officers and this cost is allocated to the respective service periods.
The Plans are not funded and thus have no plan assets. Retirement benefit payments made during the second quarter of fiscal 2008 and 2007 were funded by the sale of restricted investments in the amounts of $6,373,000 and $217,000, respectively, which were held by a trust for this purpose. The actuarial assumptions used to calculate benefit costs are reviewed annually. The components of net periodic benefit costs for the three and six months ended September 1, 2007 and August 26, 2006 were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    September 1,     August 26,     September 1,     August 26,  
    2007     2006     2007     2006  
 
                       
Components of net periodic benefit cost:
                               
Service cost
  $ 40     $ 601     $ 80     $ 1,202  
Interest cost
    183       483       366       966  
Amortization of unrecognized prior service costs
    39       201       78       402  
Amortization of net actuarial loss
    36       810       73       1,619  
Settlement charge
    1,065             1,065        
 
                       
 
                               
Net periodic benefit cost
  $ 1,363     $ 2,095     $ 1,662     $ 4,189  
 
                       
The net periodic benefit cost in fiscal 2008 is less than fiscal 2007 as the result of the retirement in fiscal 2007 of two executives covered by the Plans. The settlement charge of $1,065,000 in the second quarter of fiscal 2008 related to the final payout to these retirees.
Note 10 – Income taxes
In July 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 effective as of the beginning of fiscal 2008. As a result of the cumulative effect of the adoption, the Company recorded a $5,073,000 decrease in retained earnings. Upon adoption on March 4, 2007, total reserves for uncertain tax positions were $13,908,000, and accrued penalties and interest totaled $4,730,000. If the Company were to prevail on all unrecognized tax benefits recorded, this entire reserve for uncertain tax positions would have a favorable impact on the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded in nonoperating (income) and expenses and selling, general and administrative expenses, respectively.
On a quarterly and annual basis, the Company accrues for the effects of open uncertain tax positions and the related potential penalties and interest. There were no material adjustments to the Company’s recorded reserves for uncertain tax positions during the first six months of fiscal 2008, other than those made in connection with the adoption of FIN 48 that are described above.
It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company’s unrecognized tax positions will increase or decrease during the next 12 months as a result of audit settlements. Accordingly, the Company has classified $5,006,000 of the reserve for uncertain tax positions and the related accrued interest as a current liability in the accompanying consolidated balance sheet.  The Company does not expect the resolution of these issues to have a significant effect on the Company’s results of operations or financial position.
The Company files a federal income tax return and income tax returns in various states and foreign jurisdictions. The Internal Revenue Service (the “IRS”) is near completion of its examination of the Company’s fiscal 2000 through 2002 years. The IRS has begun an examination of fiscal years 2003 through 2006. With only a few exceptions, and other than changes to state taxable income required by the IRS adjustments from the fiscal years 2000 through 2002 audit, the Company is no longer subject to state, local and non-U.S. income tax examinations by tax authorities for years before fiscal 2003.
During the second quarter of fiscal 2008, the Company filed its fiscal 2007 tax return and recorded a $1,500,000 charge to tax expense to adjust its estimated tax refund at fiscal 2007 year-end to the actual tax refund received. During fiscal 2007, the Company recorded a valuation allowance against all deferred tax assets. No federal tax benefit was provided and only minimal state and foreign tax provisions were recorded on losses in the first six months of fiscal 2008.
Note 11 – Legal matters
During the second quarter of fiscal 2008, the Company paid $4,376,000 for the settlement of a class action lawsuit regarding compensation matters, which had been accrued during the second quarter of fiscal 2007.

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PART I
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the Company’s consolidated financial statements as of March 3, 2007, and for the year then ended, and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, all contained in the Company’s Annual Report on Form 10-K for the year ended March 3, 2007.
Management Overview
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is one of North America’s largest specialty retailers of unique decorative home furnishings, gifts and related items. The Company directly imports merchandise from over 40 countries, and sells a wide variety of furniture collections, decorative accessories, bed and bath products, housewares and other seasonal assortments in its stores. The results of operations for the three and six months ended September 1, 2007 and August 26, 2006 are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment and operates stores in the United States and Canada primarily under the name Pier 1 Imports. As of September 1, 2007, the Company operated 1,157 stores in the United States and Canada, including 27 Pier 1 Kids stores and one clearance store. During the second quarter of fiscal 2008, the Company announced plans to close all of the remaining Pier 1 Kids and clearance stores. By fiscal year-end, the Company expects to have approximately 1,100 stores in the United States and Canada.
During the second quarter of fiscal 2008, the Company closed its direct to consumer business. The Company’s management believes that the termination of these non-core business activities will not only allow for complete focus on the core business, but will also result in substantial cost savings.
The Company does not believe that the current macro-economic environment will significantly impact its turnaround plan. The Company is focusing on repositioning its merchandise mix, moving away from high-ticket furniture and developing stronger assortments of more affordable impulse purchase items and smaller decorative furniture items. The Company’s management expects this shift in merchandise to help reduce the impact of a market-wide decrease in spending on high-ticket home products.
Additionally, by strengthening the Company’s competitive position relative to other retailers and remaining focused on outstanding execution in all areas, management believes that it can achieve increases in market share which should equate to sales improvements. The Company is focused on executing its merchandising and marketing strategies to increase overall conversion rates which will translate into improved comparable store sales.
The Company outlined its plan to return the Company to profitability in April of 2007. The plan is built on six business priorities and the Company’s progress on these goals during the first half of fiscal 2008 is discussed below:
     1) Improve operational efficiency. During the first half of the year, the Company continued to review all costs and to seek ways to streamline and simplify the organization. Management believes that on-going cost savings from the first half of the year were approximately $53 million and consisted primarily of savings of $23 million in marketing and $21 million in store and administrative payroll with the remainder of the savings from general cost-cutting measures. As the Company continues to improve efficiency and simplify all aspects of its organization structure, management expects to realize

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
additional savings through the remainder of the fiscal year, and estimates savings will be at least $100 million for fiscal 2008. On an annualized basis, the on-going savings are estimated to be $150 million.
     2) Develop real estate strategies that protect the short-term and long-term future of the Company. The Company continues to carefully review the individual contributions of its existing store portfolio, including all real estate costs in relation to sales by store. As a result of these reviews, the Company has decided to close a total of 90 to 100 stores during fiscal 2008. New store openings will be minimal during fiscal 2008.
     3) Provide a compelling merchandise selection. The Company has strengthened its buying department by reassigning administrative tasks, promoting internal talent and hiring new buyers. Changes are being made to allow buyers to focus on merchandise strategy and on working with vendors to develop new products. During the first six months, the Company liquidated merchandise that was not popular with its customers to make space for new merchandise that reflects the Company’s unique place in the market. As discussed above, the Company is shifting its merchandise mix away from high-ticket furniture to more affordable impulse items and smaller decorative furniture.
     4) Create an effective planning and allocations team. The merchandise planning and allocations teams have been combined under single executive management to facilitate better planning and decision making around the quantitative side of the buying process and to ensure the product is in the appropriate store at the optimal time.
     5) Improve supply chain efficiency. The Company has been seeking out ways to simplify and to improve the flow of merchandise throughout the supply chain.  During the first six months of this fiscal year, the Company introduced technological advances in the distribution centers and changes to the delivery schedules which improved the store replenishment process and reduced costs.  The Company will further its efforts to reduce damage to inventory at every stage of the supply chain and to reduce overseas consolidation and freight costs. In addition, the Company will continue working with its vendors to increase efficiency and ensure the timely shipment of merchandise.
     6) Create a cost-effective marketing plan. During the final two quarters of this fiscal year, the Company’s marketing efforts will be focused on reinforcing the Company’s brand positioning and continuing to drive traffic using more cost effective methods.  External marketing efforts will be structured to reach new and existing customers primarily through the use of periodic in-home mailers, newspaper inserts, email notifications and web site advertisements. In addition to these efforts, the Company will continue to operate its web site as a marketing tool with copies of the in-home mailers and product information available to site visitors. The Company will also continue to use its partnership with Chase and the Pier 1 Imports preferred credit card to reach existing and potential new customers. The Company anticipates that marketing expenditures will be approximately 4% to 5% of sales which historically has been an appropriate amount.
Results of Operations
On March 20, 2006, the Company sold its operations of The Pier Retail Group Limited (“The Pier”), the Company’s subsidiary based in the United Kingdom. As a result, The Pier’s prior period operations are considered discontinued and have been reclassified accordingly. Discussions below relate to continuing operations, unless stated otherwise.
Management reviews a number of key indicators to evaluate the Company’s financial performance. The following table summarizes those key performance indicators for the three and six months ended September 1, 2007 and August 26, 2006:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
                                 
    Three Months Ended   Six Months Ended
    September 1,   August 26,   September 1,   August 26,
    2007   2006   2007   2006
 
                               
Key Performance Indicators
                               
Net sales decline
    (7.0 %)     (12.5 %)     (6.1 %)     (8.3 %)
Comparable stores sales decline (1)
    (3.6 %)     (14.8 %)     (4.5 %)     (10.9 %)
Merchandise margins as a % of sales
    47.0 %     49.2 %     46.3 %     51.5 %
Store occupancy as a % of sales
    21.6 %     20.8 %     21.3 %     20.4 %
Selling, general and administrative expenses as a % of sales
    34.1 %     41.3 %     35.6 %     40.3 %
Operating loss as a % of sales
    (11.7 %)     (16.5 %)     (13.7 %)     (12.7 %)
Loss from continuing operations as a % of sales
    (12.6 %)     (19.7 %)     (14.2 %)     (12.8 %)
Loss per share from continuing operations
    ($0.49 )     ($0.84 )     ($1.14 )     ($1.09 )
                 
    For the period ended
    September 1,   August 26,
    2007   2006
 
               
Inventory per retail square foot
  $ 41.56     $ 42.69  
Total retail square footage (in thousands)
    8,975       9,434  
Total retail square footage growth (decline) from the same period last year
    (4.9 %)     1.3 %
 
(1)   Comparable stores sales declines during fiscal 2008 exclude clearance, Pier 1 Kids and direct to consumer.
Net Sales – Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery service revenues and wholesale sales and royalties. Sales by retail concept during the period were as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    September 1,     August 26,     September 1,     August 26,  
    2007     2006     2007     2006  
 
                       
Stores
  $ 340,452     $ 361,962     $ 680,782     $ 729,814  
Direct to consumer
    3,241       4,402       8,377       8,989  
Other (1)
    873       4,334       11,782       7,987  
 
                       
 
                               
Net sales
  $ 344,566     $ 370,698     $ 700,941     $ 746,790  
 
                       
 
(1)   Other sales consisted primarily of wholesale sales and royalties received from franchise stores, Grupo Sanborns, S.A. de C.V., and other third parties.
Net sales for the second quarter of fiscal 2008 were $344.6 million, down 7.0% or $26.1 million from last year’s second quarter net sales of $370.7 million. As shown in the table below, the decline in sales was primarily due to the increase in store closures and comparable store sales declines during the first half of the year. Net sales declined $45.8 million or 6.1% from $746.8 million to $700.9 million during the six-month period ended September 1, 2007 when compared to the same period last year. Comparable store sales for the quarter and year-to-date periods declined 3.6% and 4.5%, respectively. Sales for the six-month period were comprised of the following incremental components (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
         
    Net Sales  
Net sales for the six months ended August 26, 2006
  $ 746,790  
 
       
Incremental sales growth (decline) from:
       
New stores opened during fiscal 2008
    218  
Stores opened during fiscal 2007
    8,034  
Comparable stores
    (30,173 )
Closed stores and other
    (23,928 )
 
     
 
       
Net sales for the six months ended September 1, 2007
  $ 700,941  
 
     
During the second quarter, the Company opened three and closed 30 Pier 1 Imports stores in the United States and Canada. During the first half of fiscal 2008, the Company opened three and closed 42 Pier 1 Imports stores in the United States and Canada. Total retail square footage decreased 2.8% from the beginning of fiscal 2008 and 4.9% from the second quarter of fiscal 2007. The Pier 1 Imports store count totaled 1,157 in the United States and Canada at the end of the second quarter compared to 1,226 stores a year ago.
A summary reconciliation of the Company’s stores open at the beginning of fiscal 2008 to the number open at the end of the second quarter:
                         
    United States   Canada   Total (2)
Open at March 3, 2007
    1,112       84       1,196  
Openings
    3             3  
Closings
    (41 )     (1 )     (42 )
 
                       
Open at September 1, 2007 (1)
    1,074       83       1,157  
 
                       
 
(1)   The Company supplies merchandise and licenses the Pier 1 name to Grupo Sanborns, S.A. de C.V. and Sears Roebuck de Puerto Rico, Inc. which sell Pier 1 merchandise in a “store within a store” format. At September 1, 2007, there were 29 and seven locations in Mexico and Puerto Rico, respectively.
 
(2)   Total store count included 27 Pier 1 Kids stores and one clearance store at September 1, 2007.
Gross Profit – Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, decreased 310 basis points to 25.4% for the second quarter of fiscal 2008, and decreased 630 basis points to 24.9% for the first six months of fiscal 2008. As a percentage of sales, merchandise margins decreased 220 basis points for the second quarter and 530 basis points for the six-month period ended September 1, 2007, from the comparable periods a year ago, primarily as a result of the Company’s liquidation efforts to clear excess inventory. The Company’s margins were negatively impacted by activities related to the clearance of the modern craftsman merchandise and the closure of the Company’s clearance stores, its direct to consumer channel and many of its Pier 1 Kids stores. The Company believes the aggressive liquidation of merchandise during fiscal 2008 negatively impacted its merchandise margins by approximately 200 basis points in the second quarter and 450 basis points in the first six months, assuming that merchandise margins on the sale of these products would otherwise have been comparable to the prior year.
Store occupancy costs for the quarter were $74.6 million, or 21.6% of sales, a $2.5 million decrease and an increase of 90 basis points as a percentage of sales, compared to last year’s second quarter store occupancy expense of $77.0 million. Year-to-date, store occupancy costs decreased $2.6 million and increased 100 basis points to 21.3% of sales compared to the same period last year. Store occupancy costs decreased as a result of store closures and increased as a percentage of sales as a result of relatively fixed rental costs over a lower sales base in the remaining open stores.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
Operating Expenses, Depreciation and Income Taxes – Selling, general and administrative expenses for the second quarter of fiscal 2008 were $117.5 million, or 34.1% of sales, a decrease from the same quarter last year of $35.7 million. Year-to-date selling, general and administrative expenses were $249.6 million, or 35.6% of sales, a decrease of $51.1 million. Selling, general and administrative expenses for the quarter and year-to-date periods included the following charges summarized in the tables below (in thousands):
                                         
    September 1, 2007     August 26, 2006     Increase /  
Quarter   Expense     % of Sales     Expense     % of Sales     (Decrease)  
 
                             
Store payroll
  $ 54,538       15.8 %   $ 62,537       16.9 %   $ (7,999 )
Marketing
    13,754       4.0 %     27,803       7.5 %     (14,049 )
Store supplies and services
    9,067       2.6 %     10,509       2.8 %     (1,442 )
 
                             
Variable costs
    77,359       22.5 %     100,849       27.2 %     (23,490 )
 
                                       
Administrative payroll (excluding severance)
    20,012       5.8 %     25,880       7.0 %     (5,868 )
Lease termination costs and impairments
    5,541       1.6 %     5,268       1.4 %     273  
Litigation settlements and related costs
                4,572       1.2 %     (4,572 )
Severance and outplacement
    1,818       0.5 %     363       0.1 %     1,455  
Other relatively fixed expenses
    12,727       3.7 %     16,213       4.4 %     (3,486 )
 
                             
 
  $ 117,457       34.1 %   $ 153,145       41.3 %   $ (35,688 )
 
                             
                                         
    September 1, 2007     August 26, 2006     Increase /  
Year-to-Date   Expense     % of Sales     Expense     % of Sales     (Decrease)  
 
                             
Store payroll
  $ 111,822       16.0 %   $ 125,526       16.8 %   $ (13,704 )
Marketing
    34,587       4.9 %     57,722       7.7 %     (23,135 )
Store supplies and services
    19,166       2.7 %     21,303       2.9 %     (2,137 )
 
                             
Variable costs
    165,575       23.6 %     204,551       27.4 %     (38,976 )
 
                                       
Administrative payroll (excluding severance)
    41,940       6.0 %     49,190       6.6 %     (7,250 )
Lease termination costs and impairments
    8,984       1.3 %     7,718       1.0 %     1,266  
Litigation settlements and related costs
    49       0.0 %     4,579       0.6 %     (4,530 )
Severance and outplacement
    5,335       0.8 %     477       0.1 %     4,858  
Other relatively fixed expenses
    27,698       4.0 %     34,213       4.6 %     (6,515 )
 
                             
 
  $ 249,581       35.6 %   $ 300,728       40.3 %   $ (51,147 )
 
                             
Expenses that fluctuate proportionately with sales and number of stores decreased $23.5 million from the same quarter last year and $39.0 million year-to-date due in part to store closures. The decline was also the result of a conscious effort by management to reduce costs at all levels of the organization. Store payroll as a percentage of sales decreased 110 basis points for the quarter and 80 basis points year-to-date as the direct result of a planned reduction in store staffing levels. Marketing as a percentage of sales decreased 350 basis points for the quarter and 280 basis points year-to-date as a result of the Company tightly controlling marketing expenditures to ensure the optimal return on dollars spent. The Company anticipates total marketing expenditures for fiscal 2008 to approximate 4% to 5% of sales. Store supplies and services as a percentage of sales declined 20 basis points for the quarter and year-to-date periods.
Relatively fixed selling, general and administrative expenses during the second quarter of fiscal 2008 decreased $12.2 million and 250 basis points as a percentage of sales. This decrease was due to a decrease in non-store payroll of $5.9 million or 120 basis points as a percentage of sales, primarily as a result of a reduction in home

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
office and field employees. The decrease in litigation settlements was the result of a $4.6 million charge in the prior year related to the settlement of a class action lawsuit with no corresponding accrual in the current year. The remaining decrease during the second quarter of fiscal 2008 compared to the same period last year was primarily the result of decreased impairment charges and other general cost savings partially offset by severance costs and an increase in lease termination expense. Year-to-date relatively fixed selling, general administrative expenses decreased $12.2 million or 90 basis points as a percentage of sales, primarily for the same general reasons as the net quarterly decrease discussed above.
Depreciation and amortization expense for the second quarter and year-to-date periods was $10.4 million and $21.0 million, respectively, compared to $13.6 million and $27.2 million for the same periods last year. The decreases were primarily the result of lower net book values on certain store-level assets because of impairment charges taken since the end of the second quarter of fiscal 2007, certain assets becoming fully depreciated, and store closures.
The operating loss for the quarter was $40.4 million compared to $61.3 million for last year’s second quarter. For the first half of fiscal 2008, operating losses totaled $95.9 million compared to $95.2 million for the same period last year.
During the second quarter of fiscal 2008, the Company filed its fiscal 2007 tax return and recorded a $1.5 million charge to tax expense to adjust its estimated tax refund at fiscal 2007 year-end to the actual tax refund received. During fiscal 2007, the Company recorded a valuation allowance against all deferred tax assets. No federal tax benefit was provided and minimal state and foreign tax provisions were recorded during the first six months of fiscal 2008. The Company has tax loss carryforwards of approximately $186.0 million. These loss carryforwards can be utilized to offset future income but will expire in fiscal year 2027 if not utilized before then.
Net Loss – During the second quarter of fiscal 2008, the Company recorded a net loss of $43.4 million, or $0.49 per share, compared to $73.1 million, or $0.84 per share, for the same period last year. Net loss for the first six months of fiscal 2008 was $99.8 million, or $1.14 per share, compared to $96.2 million, or $1.10 per share, for the first half of fiscal 2007, including discontinued operations.
Liquidity and Capital Resources
For the purposes of liquidity and capital resource discussions, the Company’s discontinued operations will be included in the financial results of the prior year. The Company ended the second quarter of fiscal 2008 with $121.9 million in cash and temporary investments compared to $150.3 million a year ago. Operating activities in the first six months of fiscal 2008 used $53.0 million of cash, primarily as a result of the Company’s net loss, an increase in inventory and payment of retirement benefits. These changes were partially offset by the collection of a $24.5 million income tax receivable and an increase in accounts payable and accrued expenses. Inventory levels at the end of the second quarter of fiscal 2007 were $374.5 million, down $29.6 million or 7.3% from inventory levels at the end of last year’s second quarter. At the end of the second quarter of fiscal 2008, retail square footage was 4.9% lower compared to the same period last year, and inventory per retail square foot was $41.56, a decrease from $42.69 per retail square foot in the prior year. The decrease in inventory was the result of the Company’s accelerated liquidation of certain merchandise in an effort to eliminate slow-moving inventory and make room for inventory that supports the Company’s new merchandise strategy and in anticipation of an overall reduction in number of stores for fiscal 2008.
During the first half of fiscal 2008, investing activities provided $6.6 million compared to $11.1 million during the same period last year. Proceeds from the sale of investments restricted for payment of retirement obligations provided $6.4 million. Proceeds from the disposition of properties provided $3.5 million. Capital expenditures were $2.7 million in fiscal 2008 compared to $18.7 million in fiscal 2007, consisting primarily of $1.7 million for fixtures, equipment, and leasehold improvements for new and existing stores, $0.7 million for information

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
systems’ enhancements and $0.3 million related to the Company’s distribution centers. Capital expenditures for fiscal 2008 are expected to be $10.0 million to $12.0 million, to be spent primarily on existing stores. The Company anticipates closing 90 to 100 stores during fiscal 2008, including all Pier 1 Kids stores and clearance stores. In addition, the Company closed its direct to consumer business in the second quarter. The Company anticipates net cash outflows related to exit activities of up to $6.0 million, of which approximately $2.5 million occurred in the first half of fiscal 2008. The remainder is expected to be settled during the last six months of fiscal 2008.
Financing activities for the first six months of fiscal 2008 provided a net $1.1 million of the Company’s cash. Other financing activities, primarily the exercise of stock options, provided net cash of $2.1 million, which was partially offset by debt issuance costs of $1.0 million, primarily related to an amendment to the Company’s secured credit agreement.
At the end of the second quarter, the Company’s minimum operating lease commitments remaining for fiscal 2008 were $116.1 million. The present value of total existing minimum operating lease commitments discounted at 10% was $856.1 million at the fiscal 2008 second quarter-end.
As of the beginning of fiscal 2008, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. Except for the adoption of FIN 48, there have been no significant changes to the table of contractual obligations as disclosed in the Company’s fiscal 2007 Annual Report on Form 10-K. As of September 1, 2007, the current and noncurrent liabilities for uncertain tax positions including the related accrued interest were $5.0 million and $14.5 million, respectively. The Company is not able to reasonably estimate when the cash payments of the noncurrent portion of the liability will be made. See Note 10 of the Notes to Consolidated Financial Statements for further discussion.
Working capital requirements are expected to be funded from cash generated from the operations of the Company and borrowings against lines of credit. Current projections indicate that the Company’s cash position and borrowings will not be significantly different at the end of the year from its position at the beginning of the year. The Company’s bank facilities include a $325 million credit facility, which is secured by the Company’s eligible merchandise inventory, third-party credit card receivables, and, as of May 31, 2007, was amended to include certain Company-owned real estate. The amendment also extended the maturity date of the facility to May 2012.
The Company’s calculated borrowing base was $314.6 million at September 1, 2007. The Company utilized $166.2 million for letters of credit and had no outstanding cash borrowings. The Company is not required to comply with financial covenants under the facility unless the availability under such agreement is less than $32.5 million. At quarter-end, $115.9 million remained available before reaching the $32.5 million threshold. The Company does not anticipate falling below this minimum availability. The Company was in compliance with required debt covenants at the end of the second quarter of fiscal 2008.
The Company has an umbrella trust, currently consisting of four sub-trusts (the “Trusts”), which was established for the purpose of setting aside funds to be used to settle benefit plan obligations. Two of the sub-trusts are restricted to meet funding requirements of the Company’s supplemental retirement plans. These trusts consisted of interest bearing investments totaling $16,000 and $24,728,000 at September 1, 2007 and August 26, 2006, respectively, and were included in other current 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 $2,026,000 at September 1, 2007 and none August 26, 2006, respectively, and were included in other noncurrent assets. These trusts also own and are the beneficiary of life insurance policies with cash surrender values of approximately $7,047,000 at September 1, 2007, and death benefits of approximately $17,093,000. In addition, the Company owns and is the beneficiary of a number of

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued)
insurance policies on the lives of current and past key executives that are unrestricted as to use. The cash surrender value of these unrestricted policies was approximately $13,620,000 at September 1, 2007, and the death benefit was approximately $20,851,000. At the discretion of the Board of Directors contributions of cash or unrestricted life insurance policies could be contributed to the Trusts.
The Company has a variety of sources for liquidity, which include available cash balances, available lines of credit, cash surrender value of life insurance policies not restricted as to use, and real estate financing options. As discussed above, the Company amended its secured credit facility to include certain Company-owned real estate in the borrowing base which provides flexibility through additional availability under the Company’s line of credit and reduces the Company’s dependence on inventory levels as the determinant of the size of its borrowing base. The amendment allows enough flexibility for this real estate to be removed from the collateral in the future. The Company is evaluating its options with regard to the use and ownership of its owned real estate. Given the various liquidity options available, the Company believes it has sufficient liquidity to fund operational obligations and capital expenditure requirements throughout fiscal years 2008 and 2009.
Forward-looking Statements
Certain matters discussed in this quarterly report, except for historical information contained herein, may constitute “forward-looking statements” that are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects” and other similar expressions. Management’s expectations and assumptions regarding planned store openings, financing of Company obligations from operations, results from its new 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 general strength of the economy and levels of consumer spending, consumer confidence, the availability of suitable sites for locating stores and distribution facilities, availability of a qualified labor force and management, the availability 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, if any, discussed elsewhere in this quarterly report. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized. Additional information concerning these risks and uncertainties is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007, as filed with the Securities and Exchange Commission.
Impact of Inflation
Inflation has not had a significant impact on the operations of the Company.

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PART I
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There are no material changes to the Company’s market risk as disclosed in its Form 10-K filed for the fiscal year ended March 3, 2007.
Item 4. Controls and Procedures.
As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 1, 2007, and based on this evaluation the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by the Company in its reports filed or furnished under the Exchange Act is (a) accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (b) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has not been any change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
During the second quarter of fiscal 2008, the Company paid $4.4 million for the settlement of a class action lawsuit in California regarding compensation matters, which had been accrued during the second quarter of fiscal 2007.
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 1A. Risk Factors.
There are no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to purchases of common stock of the Company made during the three months ended September 1, 2007, by Pier 1 Imports, Inc. or any “affiliated purchaser” of Pier 1 Imports, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.
                                 
                    Total        
                    Number of        
                    Shares        
                    Purchased     Approximate  
            Average     as Part of     Dollar Value of  
    Total     Price Paid     Publicly     Shares that May  
    Number of     per Share     Announced     Yet Be Purchased  
    Shares     (including     Plans or     Under the Plans  
Period   Purchased     fees)     Programs     or Programs  
June 3, 2007 through July 7, 2007 (1)
    21,086     $ 8.42           $ 107,449,628  
July 8, 2007 through August 4, 2007
                      107,449,628  
August 5, 2007 through September 1, 2007
                      107,449,628  
 
                       
 
    21,086     $ 8.42           $ 107,449,628  
 
                       
 
(1)   Private purchases from the Company’s employees who sold shares to pay withholding taxes on vested shares of restricted stock.
Under the Company’s secured credit facility, the Company would not be restricted from paying dividends unless the availability under the credit facility is less than 30% of the Company’s calculated borrowing base. The Company is not required to comply with financial covenants under its secured credit facility unless the availability under such agreement is less than $32.5 million.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits.
See Exhibit Index.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PIER 1 IMPORTS, INC. (Registrant)
         
     
Date: October 9, 2007  By:   /s/ Alexander W. Smith    
    Alexander W. Smith, President and   
    Chief Executive Officer   
 
     
Date: October 9, 2007  By:   /s/ Charles H. Turner    
    Charles H. Turner, Executive Vice President and   
    Chief Financial Officer   
 
     
Date: October 9, 2007  By:   /s/ Susan E. Barley    
    Susan E. Barley, Principal Accounting Officer   
       

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EXHIBIT INDEX
     
Exhibit No.   Description
 
   
3(i)
  Certificate of Incorporation and Amendments thereto, incorporated herein by reference to Exhibit 3(i) to Registrant’s Form 10-Q for the quarter ended May 30, 1998.
 
   
3(ii)
  Bylaws of the Company as amended to date thereto, incorporated herein by reference to Exhibit 3(ii) to Registrant’s Form 10-K for the year ended February 26, 2005.
 
   
10.1*
  Third Amendment to the Pier 1 Imports, Inc. 2006 Stock Incentive Plan.
 
   
10.2*
  First Amendment to the Pier 1 Imports, Inc. 1999 Stock Plan, as amended and restated December 31, 2004.
 
   
10.3*
  Amendment No. 1 to Credit Card Program Agreement by and among Pier 1 Imports (U.S.), Inc. and Chase Bank USA, N.A.
 
   
10.4*
  Amendment No. 2 to Credit Card Program Agreement by and among Pier 1 Imports (U.S.), Inc. and Chase Bank USA, N.A.
 
   
31.1*
  Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
   
31.2*
  Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
 
   
32.1*
  Section 1350 Certifications.
 
*   Filed herewithin

 

exv10w1
 

Exhibit 10.1
THIRD AMENDMENT TO
PIER 1 IMPORTS, INC.
2006 STOCK INCENTIVE PLAN
     WHEREAS, Pier 1 Imports, Inc. has heretofore adopted the Pier 1 Imports, Inc. 2006 Stock Incentive Plan (the “Plan”) effective March 23, 2006;
     WHEREAS, the Plan was amended by a First Amendment to the Pier 1 Imports, Inc. 2006 Stock Incentive Plan effective June 22, 2006;
     WHEREAS, the Plan was amended by a Second Amendment to the Pier 1 Imports, Inc. 2006 Stock Incentive Plan effective March 4, 2007 (“Second Amendment”);
     NOW, THEREFORE, the Plan is amended as follows:
     1. The last sentence of subsection (b) of Paragraph IX of the Plan is deleted and replaced with the following:
     “In no event shall a Performance Award which is an Award of shares of Common Stock vest in full prior to the expiration of a one-year period following the grant of the Award.”
     2. Subsection (c) of Paragraph XI of the Plan is deleted and replaced with the following:
     “(c) Director Deferred Stock Unit Award Payouts. At the time that a Director terminates such Director’s service as a Director, the deferred stock units then credited to such Director shall be exchanged for shares of Common Stock which will be distributed to such Director. The transfer of shares of Common Stock to a Director in payment of such Director’s deferred stock units shall be effected within thirty (30) days after the date such Director terminated such Director’s position as a Director of the Company.”
     3. Effective as of June 1, 2007, the following shall be added to subsection (a) of Paragraph XI of the Plan as the last sentence to such subsection as in effect as of June 1, 2007 and as the next-to-last sentence to such subsection as amended by the Second Amendment:
“Notwithstanding the foregoing, the election described in the preceding sentence by an individual who has first become elected as a Director may be made before or within the 30 day period immediately following his election as a Director provided that the deferral effected by such election will only apply with respect to services rendered as a Director after the date such election was made.”
     4. All terms used in this Third Amendment, unless specifically defined herein, have the same meanings attributed to them in the Plan. As amended hereby, the Plan is specifically ratified and reaffirmed.
     IN WITNESS WHEREOF, the party hereto has caused this Third Amendment to be executed on June 28, 2007.
         
  PIER 1 IMPORTS, INC.
 
 
  By:      
    Gregory S. Humenesky   
       
 

exv10w2
 

Exhibit 10.2
FIRST AMENDMENT TO
PIER 1 IMPORTS, INC.
1999 STOCK PLAN
(Restated as Amended December 31, 2004)
     WHEREAS, Pier 1 Imports, Inc. has heretofore adopted the Pier 1 Imports, Inc. 1999 Stock Plan (the “Plan”) Restated as Amended December 31, 2004;
     NOW, THEREFORE, the Plan is amended as follows:
          1. Subsection 8(f) of the Plan is deleted in its entirety and replaced with the following:
“(f) Payment. The balance of each Non-Employee Director’s Deferred Stock Account shall be paid to such director within thirty (30) days after such director terminates his position as a Non-Employee Director. Each Deferred Stock Unit shall be exchanged for shares of Common Stock.”
          2. As amended hereby, the Plan is specifically ratified and reaffirmed.
     IN WITNESS WHEREOF, the party hereto has caused this First Amendment to be executed effective as of June 28, 2007.
         
  PIER 1 IMPORTS, INC.
 
 
  By:      
    Gregory S. Humenesky   
       
 

exv10w3
 

Exhibit 10.3
AMENDMENT NO. 1
TO
CREDIT CARD PROGRAM AGREEMENT
     This Amendment No. 1 to the Credit Card Program Agreement (the “Amendment”) is made and entered into this 17th day of November, 2006, by and among Pier 1 Imports (U.S.), Inc., a Delaware corporation (“Pier 1”) and Chase Bank USA, N.A. (“Bank”).
WITNESSETH:
     WHEREAS, Pier 1 and Bank have previously entered into that certain Credit Card Program Agreement, dated as of August 30, 2006 (the “Program Agreement”);
     WHEREAS, Pier 1 and Bank desire to amend the Program Agreement to provide for certain modifications to the payment and handling of certain fees and settlements addressed by the Program Agreement;
     NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND USAGE
1.1 Definitions.
     For purposes of this Amendment, capitalized terms used but not otherwise defined in this Amendment will have the meaning ascribed to such terms in the Program Agreement.
1.2 Miscellaneous.
     (a) As used herein: (1) all references to the plural number shall include the singular number (and vice versa); (2) all references to “herein,” “hereunder,” “hereof” or like words shall refer to this Amendment as a whole and not to any particular section, subsection or clause contained in this Amendment; (3) all references to “include,” “includes” or “including” shall be deemed to be followed by the words “without limitation”; (4) unless specified as Business Days or Fiscal Months, all references to days or months shall be deemed references to calendar days or months; and (5) all references to “$” or “dollars” shall be deemed references to United States dollars.
     (b) Any approvals and consents required under this Amendment shall not be unreasonably withheld, unless such consent or approval may be made in the sole discretion of a party.
     (c) This Amendment was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof.

 


 

ARTICLE 2
AMENDMENTS
2.1 Amendment to Section 7.1 of the Program Agreement.
     Section 7.1 of the Program Agreement is amended to read in its entirety as follows:
7.1 Reports. From the Closing Date to the Systems Transition Date, within ten (10) Business Days after the end of each Fiscal Month or such other time as may be agreed by the Parties with respect to particular reports, Pier 1 shall provide to the Management Committee and Bank the report specified in Schedule 7.1(a) (which report shall be reported on a Fiscal Month, calendar month or cycles-basis, as agreed upon by the parties), and such other reports as are mutually agreed to by the Parties from time to time. From and after the Systems Transition Date, within ten (10) Business Days after the end of each Fiscal Month or such other time as may be agreed by the Parties with respect to particular reports, Bank shall provide to the Management Committee and Pier 1 the report specified in Schedule 7.1(b) (which report shall be reported on a Fiscal Month, calendar month or cycles-basis, as agreed upon by the parties), and such other reports as are mutually agreed to by the Parties from time to time. The payment report to be delivered by either Pier 1 or Bank pursuant to this Section 7.1 shall be known as a “Monthly Settlement Sheet”.
2.2 Amendment to Section 8.4(b) of the Program Agreement.
     Section 8.4(b) of the Program Agreement is amended to read in its entirety as follows:
     “(b) Bank shall remit to Pier 1 for itself and the Retail Merchants, an amount calculated in accordance with Schedule 8.4(a) or Schedule 8.4(b), as applicable.”
2.3 Amendment to Section 9.1(a) of the Program Agreement.
     Section 9.1(a) of the Program Agreement is amended to read in its entirety as follows:
     (a) Payments.
     (i) Not later than 1:00 pm (Central time) on each Business Day, Bank shall initiate payment to Pier 1 an amount equal to the amount set forth on Schedule 8.4(a) or Schedule 8.4(b), as applicable, with respect to the Accounts.
     (ii) Not later than 1:00 p.m. (Central time) on the tenth (10th) Business Day after the end of each Fiscal Month, Bank shall initiate payment to Pier 1 in the amounts determined in accordance with Schedule 7.1(a) or Schedule 7.1(b), as applicable, with respect to the Accounts.
For the avoidance of doubt, any such payment shall not be deemed a waiver of, or in any other way limit, a Party’s right to pursue any dispute with respect to such payment in accordance with the terms of this Agreement and each of Bank or Pier 1 may invoke the dispute resolution procedures set forth herein following payment of such amounts.

-2-


 

2.4 Amendment to Schedule 7.1 of the Program Agreement.
     During the period between the Closing Date and the Systems Transition Date, the Parties shall use Schedule 7.1(a) attached hereto in lieu of Schedule 7.1 attached to the Program Agreement. Following the Systems Transition Date, the Parties shall use Schedule 7.1(b) attached hereto in lieu of Schedule 7.1 attached to the Program Agreement.
2.5 Amendment to Schedule 8.4 of the Program Agreement.
     During the period between the Closing Date and the Systems Transition Date, the Parties shall use Schedule 8.4(a) attached hereto in lieu of Schedule 8.4 attached to the Program Agreement. Following the Systems Transition Date, the Parties shall use Schedule 8.4(b) attached hereto in lieu of Schedule 8.4 attached to the Program Agreement.
2.6 No Other Amendments
     Except as amended by this Amendment, all other provisions of the Program Agreement remain unmodified and in full force and effect.
ARTICLE 3
GENERAL PROVISIONS
3.1 Severability
     If any provision of this Amendment is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Amendment will remain in full force and effect. Any provision of this Amendment held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.
3.2 Governing Law
     (a) This Amendment and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made to be performed within such State and applicable federal law.
     (b) Each Party shall comply in all material respects with Applicable Law in connection with its activities and the exercise of its rights and performance of its obligations hereunder.
3.3 Execution of Amendment
     This Amendment may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Amendment and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Amendment and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Amendment as to the parties and may be used in lieu of the original Amendment for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

-3-


 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
         
  PIER 1 IMPORTS (US), INC.
 
 
  By:      
    Name:      
    Title:      
 
  CHASE BANK USA, NA
 
 
  By:      
    Name:      
    Title:      

-4-

exv10w4
 

Exhibit 10.4
AMENDMENT NO. 2
TO
CREDIT CARD PROGRAM AGREEMENT
     This Amendment No. 2 to the Credit Card Program Agreement (the “Amendment”) is made and entered into this 8th day of June, 2007, by and among Pier 1 Imports (U.S.), Inc., a Delaware corporation (“Pier 1”) and Chase Bank USA, N.A. (“Bank”).
WITNESSETH:
     WHEREAS, Pier 1 and Bank have previously entered into that certain Credit Card Program Agreement, dated as of August 30, 2006, as amended (the “Program Agreement”);
     WHEREAS, Pier 1 and Bank desire to further amend the Program Agreement to provide for certain modifications to address the issuance of a “co-brand” credit card pursuant to the Program Agreement;
     NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND USAGE
1.1 Definitions.
     For purposes of this Amendment, capitalized terms used but not otherwise defined in this Amendment will have the meaning ascribed to such terms in the Program Agreement.
1.2 Miscellaneous.
     (a) As used herein: (1) all references to the plural number shall include the singular number (and vice versa); (2) all references to “herein,” “hereunder,” “hereof” or like words shall refer to this Amendment as a whole and not to any particular section, subsection or clause contained in this Amendment; (3) all references to “include,” “includes” or “including” shall be deemed to be followed by the words “without limitation”; (4) unless specified as Business Days or Fiscal Months, all references to days or months shall be deemed references to calendar days or months; and (5) all references to “$” or “dollars” shall be deemed references to United States dollars.
     (b) Any approvals and consents required under this Amendment shall not be unreasonably withheld, unless such consent or approval may be made in the sole discretion of a party.
     (c) This Amendment was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this

 


 

Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof.
ARTICLE 2
AMENDMENTS
2.1 Amendment to Section 1.1 of the Program Agreement.
     Section 1.1 of the Program Agreement is amended to add or modify the following defined terms:
“Card Association” means American Express, Visa International Inc., Visa U.S.A., Inc. or Mastercard International Inc., or any other payment system that is generally acceptable to sellers of goods and services.
“Co-Branded Credit Card” means a Credit Card that bears a Pier 1 Licensed Mark and the trademarks, tradenames, service marks, logs and other proprietary designations of a Card Association.”
“Pier 1 Credit Card” means a Private Label Credit Card and/or a Co-Branded Credit Card offered pursuant to the terms of this Agreement.”
2.2 Amendment to Section 3.1 of the Program Agreement.
     Section 3.1 of the Program Agreement is amended to read in its entirety as follows:
     “3.1 Program Objectives. In performing its responsibilities with respect to the management and administration of the Program, each Party shall be guided by the following Program objectives (the “Program Objectives”):
     (a) to enhance the experience of Pier 1 Shoppers;
     (b) to increase profits from retail sales of Pier 1;
     (c) to maintain or improve customer insight through data acquisition and analysis;
     (d) to maximize Program economics while minimizing operational costs and complexity;
     (e) to leverage the Program to identify existing and potential Pier 1 Shoppers, develop and deepen relationships with Pier 1 Shoppers and finance retail sales growth;
     (f) to ensure that the Bank’s Program-related activities are at all times conducted in a safe and sound manner and in accordance with Applicable Law; and
     (g) to increase the Pier 1 Credit Card’s share of Pier 1 retail sales.

-2-


 

In pursuing the Program Objectives, the Parties acknowledge and agree the Co-Branded Credit Card component of the Program is intended to supplement, and not displace, the Private Label Credit Card component of the Program. In the event the Co-Branded Credit Card component of the Program causes a Material Adverse Effect with respect to the Private Label Credit Card component of the Program, the Parties agree to cooperate in good faith to adjust the Program to align with the Program Objectives.”
2.3 Amendment to Schedule 16.2(d) of the Program Agreement.
     Schedule 16.2(d) of the Program Agreement is hereby amended to read in its entirety as set forth on Schedule 16.2(d) hereto.
2.4 No Other Amendments
     Except as amended by this Amendment, all other provisions of the Program Agreement remain unmodified and in full force and effect.
ARTICLE 3
GENERAL PROVISIONS
3.1 Severability
     If any provision of this Amendment is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Amendment will remain in full force and effect. Any provision of this Amendment held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.
3.2 Governing Law
     (a) This Amendment and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made to be performed within such State and applicable federal law.
     (b) Each Party shall comply in all material respects with Applicable Law in connection with its activities and the exercise of its rights and performance of its obligations hereunder.
3.3 Execution of Amendment
     This Amendment may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Amendment and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Amendment and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Amendment as to the parties and may be used in lieu of the original Amendment for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
         
  PIER 1 IMPORTS (U.S.), INC.
 
 
  By:      
    Name:      
    Title:      
 
  CHASE BANK USA, N.A.
 
 
  By:      
    Name:      
    Title:      

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exv31w1
 

Exhibit 31.1
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
I, Alexander W. Smith, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Pier 1 Imports, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: October 9, 2007  By:   /s/ Alexander W. Smith    
    Alexander W. Smith, President and   
    Chief Executive Officer  
 

 

exv31w2
 

Exhibit 31.2
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
I, Charles H. Turner, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Pier 1 Imports, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: October 9, 2007  By:   /s/ Charles H. Turner    
    Charles H. Turner, Executive Vice President and   
    Chief Financial Officer   

 

exv32w1
 

         
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of Pier 1 Imports, Inc., hereby certifies that:
  1.   The quarterly report of Pier 1 Imports, Inc. for the period ended September 1, 2007 fully complies with the requirements of sections 13(a) and 15(d) of the Securities Exchange Act of 1934; and
 
  2.   The information contained in the above-mentioned report fairly presents, in all material respects, the financial condition and results of operations of Pier 1 Imports, Inc. for the period covered by the report.
         
     
Date: October 9, 2007  By:   /s/ Alexander W. Smith    
    Alexander W. Smith, President and   
    Chief Executive Officer   
 
     
Date: October 9, 2007  By:   /s/ Charles H. Turner    
    Charles H. Turner, Executive Vice President and   
    Chief Financial Officer