Delaware | | | | Delaware | | 75-1729843 | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number)No.) | | | | 100 Pier 1 Place, Fort Worth, Texas | | 76102 | (Address of principal executive offices) | | (Zip code) |
100 Pier 1 Place, Fort Worth, Texas 76102
(Address of principal executive offices, including zip code)
(817) 252-8000 (Registrant’sRegistrant'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 ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | Large accelerated filer | ☐ | ☐ | | Accelerated filer | | ☒ | | | | | Non-accelerated filer | ☐ | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ | | | | | | | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of September 28, 2017,October 5, 2018, there were outstanding 83,789,60185,215,294 shares of the registrant’s common stock, all of one class.
PIER 1 IMPORTS, INC. INDEX TO QUARTERLY FORM 10-Q | | | | PAGE | | | Page | | | PART I. FINANCIAL INFORMATION | | | | | | 4 |
| | | | | Item 1. | | Financial Statements. | | | | 4 | | | | | | | | Consolidated Statements of Operations for the Three13 and Six Months26 Weeks Ended September 1, 2018 and August 26, 2017 and August 27, 2016 | | | 4 | | | | | | | | | Consolidated Statements of Comprehensive Loss for the Three13 and Six Months26 Weeks Ended September 1, 2018 and August 26, 2017 and August 27, 2016 | | | 5 | | | | | | | | | Consolidated Balance Sheets as of September 1, 2018, March 3, 2018 and August 26, 2017 February 25, 2017 and August 27, 2016 | | | 6 | | | | | | | | | Consolidated Statements of Cash Flows for the Six Months26 Weeks Ended September 1, 2018 and August 26, 2017 and August 27, 2016 | | | 7 | | | | | | | | | Consolidated Statement of Shareholders’Shareholders' Equity for the Six Months26 Weeks Ended August 26, 2017September 1, 2018 | | | 8 | | | | | | | | | Notes to Consolidated Financial Statements | | | 9 | | | |
| | | | | Item 2. Management’s | | Management's Discussion and Analysis of Financial Condition and Results of Operations. | | | 14 | | | |
| | | | | Item 3. | | Quantitative and Qualitative Disclosures about Market Risk. | | | 24 | 19 | | | | | | Item 4. | | Controls and Procedures. | | 19 | | | | | | Item 4. Controls and Procedures
| | | 24 | | | | PART II. OTHER INFORMATION | | | | | | 20 | Item 1. Legal Proceedings
| | | 25 | | | | Item 1A. Risk Factors1. | | Legal Proceedings. | 25 | | | 20 | | | | | | Item 1A. | | Risk Factors. | | 20 | | | | | | Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds. | | | 26 | | | 20 |
| | | | | Item 3. | | Defaults upon Senior Securities. | | | 26 | | | 20 |
| | | | | Item 4. | | Mine Safety Disclosures. | | | 26 | | | 20 | Item 5. Other Information
| | | 26 | | | | Item 6. Exhibits5. | | Other Information. | 27 | 20 | | | | | | Item 6. | | Exhibits. | | 21 | | | | | | Signatures | | | 28 | 22 |
Forward-Looking Statements
FORWARD-LOOKING STATEMENTS Certain statements contained in Items 1, 2 and 3 of Part I, and Item 1 of Part II and elsewhere in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Pier 1 Imports, Inc. and its consolidated subsidiaries (the “Company”) may also make forward-looking statements in other reports filed with the United States Securities and Exchange Commission (“SEC”), in press releases, in presentations and in material delivered to the Company’s shareholders. Forward-looking statements provide current expectations of future events based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments, and other relevant factors. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “believe,” “expect,” “estimate,” “anticipate,” “plan,” “may,” “will,” “intend” and other similar expressions. Management’s expectations and assumptions regarding: the impact of initiatives implemented in connection with the Company’s multi-year “New Day” strategic plan; the effectiveness of the Company’s marketing campaigns, merchandising and promotional strategies and customer databases; consumer spending patterns; inventory levels and values; the Company’s ability to implement planned cost control measures; expected benefits from the real estate optimization initiative, including cost savings and increases in efficiency; risks related to U.S. import policy; changes in foreign currency values relative to the U.S. Dollardollar and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Additional risks and uncertainties that may affect Company operations and performance include, among others: an inability to anticipate, identify and respond to changing customer trends and preferences;preferences and to source, ship and deliver items of acceptable quality to its U.S. distribution and fulfillment centers, stores and customers at reasonable prices and rates in a timely fashion; an inability to identify and successfully implement strategic initiatives; risks related to outsourcing, including disruptions in business and increased costs; an overall decline in the health of the United StatesU.S. economy and its impact on consumer confidence and spending; disruptions in the Company’s domestic supply chain or e‑Commerce website; failure to successfully manage and execute the Company’s marketing initiatives; negative impacts from failure to control merchandise returns and recalls; disruptions in the Company’s e-Commerce website; the ability of the Company to source, ship, and deliver items of acceptable quality to its U.S. distribution centers, stores and customers at reasonable prices and rates in a timely fashion; failure to successfully manage and execute the Company’s marketing initiatives; potential impairment charges; an inability to operate in desirable locations at reasonable rental rates; competition; factors affecting consumer spending, including employment levels and disposable income, interest rates, consumer debt levels, fuel and transportation costs and other factors; failure to attract and retain an effective management team or changes in the cost or availability of a suitable workforce; failure to successfully manage omni-channel operations; competition; seasonal variations; increases in costs that are outside the Company’s control; adverse weather conditions or natural disasters; risks related to technology; failure to protect consumer data; failure to successfully implement new information technology systems and enhance existing systems; risks related to cybersecurity; failure to maintain positive brand perception and recognition; regulatory and legal risks; litigation risks; risks related to imported merchandise including the health of global, national, regional, and local economies and their impact on vendors, manufacturers and merchandise; disruptionsadverse effects from changes in the global credit and equity markets; andU.S. policy related to imported merchandise; risks related to insufficient cash flows and access to capital.capital; disruption in the global credit and equity markets; factors beyond the Company’s control, including general economic and market conditions, fluctuations in the Company’s financial condition or other factors that could affect the stock price; and risks related to activist shareholders. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report which may also affect Company operations and performance. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized. Additional information concerning these risks and uncertainties is contained in the Company’sCompany's Annual Report on Form 10-K for the year ended February 25, 2017,March 3, 2018, as filed with the SEC. PART I
PART I Item 1. Financial Statements. Pier 1 Imports, Inc. Item 1.
| Financial Statements. |
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited) | | | Three Months Ended | | Six Months Ended | | | 13 Weeks Ended | | | 26 Weeks Ended | | | | August 26, | | August 27, | | August 26, | | August 27, | | | September 1, | | | August 26, | | | September 1, | | | August 26, | | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Net sales | | $ | 407,607 | | | $ | 405,823 | | | $ | 817,132 | | | $ | 824,193 | | | $ | 355,336 | | | $ | 407,607 | | | $ | 727,200 | | | $ | 817,132 | | Cost of sales | | | 267,443 | | | 260,787 | | | 525,371 | | | 530,190 | | | | 261,830 | | | | 267,443 | | | | 513,555 | | | | 525,371 | | | | | | | | | | | | | | | | Gross profit | | | 140,164 | | | 145,036 | | | 291,761 | | | 294,003 | | | | 93,506 | | | | 140,164 | | | | 213,645 | | | | 291,761 | | Selling, general and administrative expenses | | | 138,087 | | | 135,777 | | | 278,282 | | | 278,501 | | | | 143,149 | | | | 138,087 | | | | 281,729 | | | | 278,282 | | Depreciation | | | 13,417 | | | 13,598 | | | 27,140 | | | 27,649 | | | | 12,823 | | | | 13,417 | | | | 25,723 | | | | 27,140 | | | | | | | | | | | | | | | | Operating loss | | | (11,340 | ) | | (4,339 | ) | | (13,661 | ) | | (12,147 | ) | | | (62,466 | ) | | | (11,340 | ) | | | (93,807 | ) | | | (13,661 | ) | Nonoperating (income) and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Interest, investment income and other | | | (408 | ) | | (458 | ) | | (978 | ) | | (1,239 | ) | | | (846 | ) | | | (408 | ) | | | (1,163 | ) | | | (978 | ) | Interest expense | | | 2,983 | | | 3,017 | | | 6,031 | | | 6,064 | | | | 3,594 | | | | 2,983 | | | | 7,144 | | | | 6,031 | | | | | | | | | | | | | | | | | 2,748 | | | | 2,575 | | | | 5,981 | | | | 5,053 | | | | | 2,575 | | | 2,559 | | | 5,053 | | | 4,825 | | | | | | | | | | | | | | | | | Loss before income taxes | | | (13,915 | ) | | (6,898 | ) | | (18,714 | ) | | (16,972 | ) | | | (65,214 | ) | | | (13,915 | ) | | | (99,788 | ) | | | (18,714 | ) | Income tax benefit | | | (6,092 | ) | | (2,829 | ) | | (7,905 | ) | | (6,883 | ) | | | (14,126 | ) | | | (6,092 | ) | | | (20,197 | ) | | | (7,905 | ) | | | | | | | | | | | | | | | Net loss | | $ | (7,823 | ) | | $ | (4,069 | ) | | $ | (10,809 | ) | | $ | (10,089 | ) | | $ | (51,088 | ) | | $ | (7,823 | ) | | $ | (79,591 | ) | | $ | (10,809 | ) | | | | | | | | | | | | | | | Loss per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.10 | ) | | $ | (0.05 | ) | | $ | (0.13 | ) | | $ | (0.12 | ) | | $ | (0.63 | ) | | $ | (0.10 | ) | | $ | (0.99 | ) | | $ | (0.13 | ) | | | | | | | | | | | | | | | Diluted | | $ | (0.10 | ) | | $ | (0.05 | ) | | $ | (0.13 | ) | | $ | (0.12 | ) | | $ | (0.63 | ) | | $ | (0.10 | ) | | $ | (0.99 | ) | | $ | (0.13 | ) | | | | | | | | | | | | | | | Dividends declared per share: | | $ | 0.07 | | | $ | 0.07 | | | $ | 0.14 | | | $ | 0.14 | | | | | | | | | | | | | | | | | Dividends declared per share | | | $ | — | | | $ | 0.07 | | | $ | — | | | $ | 0.14 | | Average shares outstanding during period: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 80,350 | | | 80,437 | | | 80,715 | | | 81,050 | | | | 80,554 | | | | 80,350 | | | | 80,371 | | | | 80,715 | | | | | | | | | | | | | | | | Diluted | | | 80,350 | | | 80,437 | | | 80,715 | | | 81,050 | | | | 80,554 | | | | 80,350 | | | | 80,371 | | | | 80,715 | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc. PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited) | | | Three Months Ended | | Six Months Ended | | | 13 Weeks Ended | | | 26 Weeks Ended | | | | August 26, | | August 27, | | August 26, | | August 27, | | | September 1, | | | August 26, | | | September 1, | | | August 26, | | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Net loss | | $ | (7,823 | ) | | $ | (4,069 | ) | | $ | (10,809 | ) | | $ | (10,089 | ) | | $ | (51,088 | ) | | $ | (7,823 | ) | | $ | (79,591 | ) | | $ | (10,809 | ) | Other comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | 2,505 | | | 122 | | | 1,670 | | | 1,606 | | | | (32 | ) | | | 2,505 | | | | (261 | ) | | | 1,670 | | Pension adjustments | | | (56 | ) | | 363 | | | (113 | ) | | 727 | | | | 6 | | | | (56 | ) | | | 338 | | | | (113 | ) | | | | | | | | | | | | | | | Other comprehensive income | | | 2,449 | | | 485 | | | 1,557 | | | 2,333 | | | | | | | | | | | | | | | | | Other comprehensive income (loss) | | | | (26 | ) | | | 2,449 | | | | 77 | | | | 1,557 | | Comprehensive loss, net of tax | | $ | (5,374 | ) | | $ | (3,584 | ) | | $ | (9,252 | ) | | $ | (7,756 | ) | | $ | (51,114 | ) | | $ | (5,374 | ) | | $ | (79,514 | ) | | $ | (9,252 | ) | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc. PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS (in thousands except share amounts) (unaudited) | | | August 26, | | February 25, | | August 27, | | | September 1, | | | March 3, | | | August 26, | | | | 2017 | | 2017 | | 2016 | | | 2018 | | | 2018 | | | 2017 | | ASSETS | | | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | | | Cash and cash equivalents, including temporary investments of $29,705, $149,375 and $34,420, respectively | | $ | 34,945 | | | $ | 154,460 | | | $ | 38,339 | | | Cash and cash equivalents, including temporary investments of $89,208, $115,456 and $29,705, respectively | | | $ | 116,769 | | | $ | 135,379 | | | $ | 34,945 | | Accounts receivable, net | | | 22,263 | | | 22,945 | | | 20,760 | | | | 24,183 | | | | 22,149 | | | | 22,263 | | Inventories | | | 457,337 | | | 400,976 | | | 481,297 | | | | 386,691 | | | | 347,440 | | | | 457,337 | | Prepaid expenses and other current assets | | | 51,905 | | | 31,607 | | | 43,555 | | | | 51,797 | | | | 48,794 | | | | 51,905 | | | | | | | | | | | | | Total current assets | | | 566,450 | | | 609,988 | | | 583,951 | | | | 579,440 | | | | 553,762 | | | | 566,450 | | Properties and equipment, net of accumulated depreciation of $533,178, $505,555 and $506,160, respectively | | | 178,471 | | | 191,476 | | | 195,672 | | | Properties and equipment, net of accumulated depreciation of $578,476, $554,477 and $533,178, respectively | | | | 168,089 | | | | 178,767 | | | | 178,471 | | Other noncurrent assets | | | 37,515 | | | 41,618 | | | 35,773 | | | | 57,460 | | | | 39,790 | | | | 37,515 | | | | | | | | | | | | | $ | 804,989 | | | $ | 772,319 | | | $ | 782,436 | | | | $ | 782,436 | | | $ | 843,082 | | | $ | 815,396 | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 87,171 | | | $ | 68,981 | | | $ | 82,198 | | | $ | 181,486 | | | $ | 71,279 | | | $ | 87,171 | | Gift cards and other deferred revenue | | | 56,456 | | | 60,398 | | | 59,983 | | | | 43,388 | | | | 55,281 | | | | 56,456 | | Borrowings under revolving line of credit | | | — | | | | — | | | 20,000 | | | Accrued income taxes payable | | | — | | | 26,058 | | | 54 | | | | — | | | | 2,301 | | | | — | | Current portion of long-term debt | | | 2,000 | | | 2,000 | | | 2,000 | | | | 2,000 | | | | 2,000 | | | | 2,000 | | Other accrued liabilities | | | 108,349 | | | 133,866 | | | 103,509 | | | | 117,755 | | | | 106,268 | | | | 108,349 | | | | | | | | | | | | | Total current liabilities | | | 253,976 | | | 291,303 | | | 267,744 | | | | 344,629 | | | | 237,129 | | | | 253,976 | | Long-term debt | | | 198,485 | | | 199,077 | | | 199,667 | | | | 197,310 | | | | 197,906 | | | | 198,485 | | Other noncurrent liabilities | | | 64,851 | | | 60,674 | | | 89,975 | | | | 55,882 | | | | 59,714 | | | | 64,851 | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | Shareholders’ equity: | | | | | | | | Shareholders' equity: | | | | | | | | | | | | | | Common stock, $0.001 par, 500,000,000 shares authorized, 125,232,000 issued | | | 125 | | | 125 | | | 125 | | | | 125 | | | | 125 | | | | 125 | | Paid-in capital | | | 157,574 | | | 191,501 | | | 187,779 | | | | 137,391 | | | | 168,424 | | | | 157,574 | | Retained earnings | | | 714,870 | | | 737,165 | | | 708,171 | | | | 653,661 | | | | 726,232 | | | | 714,870 | | Cumulative other comprehensive loss | | | (5,857 | ) | | (7,414 | ) | | (8,304 | ) | | | (7,400 | ) | | | (7,477 | ) | | | (5,857 | ) | Less — 41,469,000, 42,050,000 and 41,910,000 common shares in treasury, at cost, respectively | | | (601,588 | ) | | (629,349 | ) | | (629,761 | ) | | Less -- 39,684,000, 41,974,000 and 41,469,000 common shares in treasury, at cost, respectively | | | | (576,609 | ) | | | (609,734 | ) | | | (601,588 | ) | Total shareholders' equity | | | | 207,168 | | | | 277,570 | | | | 265,124 | | | | | | | | | | | | | $ | 804,989 | | | $ | 772,319 | | | $ | 782,436 | | Total shareholders’ equity | | | 265,124 | | | 292,028 | | | 258,010 | | | | | | | | | | | | | | | | $ | 782,436 | | | $ | 843,082 | | | $ | 815,396 | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc. PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) | | | Six Months Ended | | | 26 Weeks Ended | | | | August 26, | | August 27, | | | September 1, | | | August 26, | | | | 2017 | | 2016 | | | 2018 | | | 2017 | | Cash flows from operating activities: | | | | | | | | | | | | | Net loss | | $ | (10,809 | ) | | $ | (10,089 | ) | | $ | (79,591 | ) | | $ | (10,809 | ) | Adjustments to reconcile to net cash used in operating activities: | | | | | | Adjustments to reconcile to net cash provided by (used in) operating activities: | | | | | | | | | | Depreciation | | | 31,011 | | | 30,457 | | | | 29,761 | | | | 31,011 | | Stock-based compensation expense | | | 2,544 | | | 2,778 | | | | 1,380 | | | | 2,544 | | Deferred compensation, net | | | 1,301 | | | 2,885 | | | | 1,477 | | | | 1,301 | | Deferred income taxes | | | 7,058 | | | (1,586 | ) | | | (21,419 | ) | | | 7,058 | | Amortization of deferred gains | | | (536 | ) | | (536 | ) | | Other | | | 3,326 | | | 3,935 | | | | 1,665 | | | | 2,790 | | Changes in cash from: | | | | | | | | | | | | | Inventories | | | (56,361 | ) | | (75,438 | ) | | | (39,343 | ) | | | (56,361 | ) | Prepaid expenses and other assets | | | (19,664 | ) | | (9,430 | ) | | | (2,291 | ) | | | (19,664 | ) | Accounts payable and other liabilities | | | (5,470 | ) | | 9,689 | | | | 115,327 | | | | (5,470 | ) | Accrued income taxes payable, net of payments | | | (26,058 | ) | | (6,270 | ) | | | (2,461 | ) | | | (26,058 | ) | | | | | | | | | Net cash used in operating activities | | | (73,658 | ) | | (53,605 | ) | | | | | | | | | | Net cash provided by (used in) operating activities | | | | 4,505 | | | | (73,658 | ) | Cash flows from investing activities: | | | | | | | | | | | | | Capital expenditures | | | (25,174 | ) | | (22,781 | ) | | | (25,643 | ) | | | (25,174 | ) | Proceeds from disposition of properties | | | 7 | | | 49 | | | | 1,678 | | | | 7 | | Proceeds from sale of restricted investments | | | 26,762 | | | 1,913 | | | | 2,411 | | | | 26,762 | | Purchase of restricted investments | | | (25,153 | ) | | (765 | ) | | | (1,121 | ) | | | (25,153 | ) | | | | | | | | | Net cash used in investing activities | | | (23,558 | ) | | (21,584 | ) | | | (22,675 | ) | | | (23,558 | ) | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Cash dividends | | | (11,221 | ) | | (11,277 | ) | | | — | | | | (11,221 | ) | Purchases of treasury stock | | | (9,679 | ) | | (10,566 | ) | | | — | | | | (9,679 | ) | Stock purchase plan and other, net | | | 861 | | | 1,150 | | | | 712 | | | | 861 | | Repayments of long-term debt | | | (1,000 | ) | | (1,000 | ) | | | (1,000 | ) | | | (1,000 | ) | Debt issuance costs | | | (1,260 | ) | | | — | | | | — | | | | (1,260 | ) | Borrowings under revolving line of credit | | | — | | | 23,000 | | | Repayments of borrowings under revolving line of credit | | | — | | | (3,000 | ) | | | | | | | | | | Net cash used in financing activities | | | (22,299 | ) | | (1,693 | ) | | | (288 | ) | | | (22,299 | ) | | | | | | | | | Effect of exchange rate changes on cash | | | | (152 | ) | | | — | | Change in cash and cash equivalents | | | (119,515 | ) | | (76,882 | ) | | | (18,610 | ) | | | (119,515 | ) | Cash and cash equivalents at beginning of period | | | 154,460 | | | 115,221 | | | | 135,379 | | | | 154,460 | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 34,945 | | | $ | 38,339 | | | $ | 116,769 | | | $ | 34,945 | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc. PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED AUGUST 26, 2017
(in thousands) (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | Cumulative | | | | | | | Common Stock | | | | | | | | | | | Other | | | | | | | Total | | | | Common Stock | | | | | | | Other | | | | Total | | | Outstanding | | | | | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | Shareholders' | | | | Outstanding | | | | | Paid-in | | Retained | | Comprehensive | | Treasury | | Shareholders’ | | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | Stock | | | Equity | | | | Shares | | Amount | | | Capital | | Earnings | | Income (Loss) | | Stock | | Equity | | | Balance February 25, 2017 | | | 83,182 | | | $ | 125 | | | $ | 191,501 | | | $ | 737,165 | | | $ | (7,414 | ) | | $ | (629,349 | ) | | $ | 292,028 | | | Balance March 3, 2018 | | | | 83,258 | | | $ | 125 | | | $ | 168,424 | | | $ | 726,232 | | | $ | (7,477 | ) | | $ | (609,734 | ) | | $ | 277,570 | | Net loss | | | — | | | | — | | | | — | | | (10,809 | ) | | | — | | | | — | | | (10,809 | ) | | | — | | | | — | | | | — | | | | (79,591 | ) | | | — | | | | — | | | | (79,591 | ) | Cumulative effect of accounting change | | | | — | | | | — | | | | — | | | | 7,020 | | | | — | | | | — | | | | 7,020 | | Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | 1,557 | | | | — | | | 1,557 | | | | — | | | | — | | | | — | | | | — | | | | 77 | | | | — | | | | 77 | | Purchases of treasury stock | | | (1,925 | ) | | | — | | | | — | | | | — | | | | — | | | (9,994 | ) | | (9,994 | ) | | Stock-based compensation expense | | | 2,412 | | | | — | | | | (33,036 | ) | | | — | | | | — | | | 35,580 | | | 2,544 | | | | 1,955 | | | | — | | | | (25,791 | ) | | | — | | | | — | | | | 27,171 | | | | 1,380 | | Stock purchase plan and other | | | 94 | | | | — | | | | (891 | ) | | (265 | ) | | | — | | | 2,175 | | | 1,019 | | | | 335 | | | | — | | | | (5,242 | ) | | | — | | | | — | | | | 5,954 | | | | 712 | | Cash dividends ($0.14 per share) | | | — | | | | — | | | | — | | | (11,221 | ) | | | — | | | | — | | | (11,221 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Balance August 26, 2017 | | | 83,763 | | | $ | 125 | | | $ | 157,574 | | | $ | 714,870 | | | $ | (5,857 | ) | | $ | (601,588 | ) | | $ | 265,124 | | | | | | | | | | | | | | | | | | | | | | | | | | Balance September 1, 2018 | | | | 85,548 | | | $ | 125 | | | $ | 137,391 | | | $ | 653,661 | | | $ | (7,400 | ) | | $ | (576,609 | ) | | $ | 207,168 | |
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED AUGUST 26, 2017
AND AUGUST 27, 2016
(unaudited)(unaudited)
Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. The accompanying unaudited financial statements should be read in conjunction with the Company’s Form 10-K for the year ended February 25, 2017.March 3, 2018. All adjustments that are, in the opinion of management, necessary for a fair presentation of the Consolidated Financial Statements contained in this report have been made and consist only of normal recurring adjustments, except as otherwise described herein, if any. Certain items in these Consolidated Financial Statements have been reclassified to conform to the current period presentation. Fiscal 2019 consists of a 52-week year ending on March 2, 2019. Fiscal 2018 consistsconsisted of a 53-week year endingwhich ended on March 3, 2018. Fiscal 2017 consisted of a 52-week year which ended on February 25, 2017. The results of operations for the three13 and six months26 weeks ended September 1, 2018 and August 26, 2017, and August 27, 2016, 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 under the name Pier 1 Imports. As of August 26, 2017,September 1, 2018, the Company had no financial instruments with fair market values that were materially different from their carrying values, unless otherwise disclosed. 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. Outstanding stock options and shares of unvested restricted stock totaling 1,781,0002,662,000 and 1,782,0001,970,000 were excluded from the computation of diluted loss per share for the three13 and six months26 weeks ended August 26, 2017,September 1, 2018, respectively, as the effect would be antidilutive. Outstanding stock options and shares of unvested restricted stock totaling 2,214,0001,781,000 and 2,263,0001,782,000 were excluded from the computation of diluted loss per share for the three13 and six months26 weeks ended August 27, 2016,26, 2017, respectively, as the effect would be antidilutive. Loss per share amounts were calculated as follows (in thousands except per share amounts): | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | August 26, 2017 | | | August 27, 2016 | | Net loss | | $ | (7,823 | ) | | $ | (4,069 | ) | | $ | (10,809 | ) | | $ | (10,089 | ) | | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | Basic | | | 80,350 | | | | 80,437 | | | | 80,715 | | | | 81,050 | | Effect of dilutive stock options | | | — | | | | — | | | | — | | | | — | | Effect of dilutive restricted stock | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Diluted | | | 80,350 | | | | 80,437 | | | | 80,715 | | | | 81,050 | | | | | | | | | | | | | | | | | | | Loss per share: | | | | | | | | | | | | | | | | | Basic | | $ | (0.10 | ) | | $ | (0.05 | ) | | $ | (0.13 | ) | | $ | (0.12 | ) | | | | | | | | | | | | | | | | | | Diluted | | $ | (0.10 | ) | | $ | (0.05 | ) | | $ | (0.13 | ) | | $ | (0.12 | ) | | | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | 13 Weeks Ended | | | 26 Weeks Ended | | | | September 1, | | | August 26, | | | September 1, | | | August 26, | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Net loss | | $ | (51,088 | ) | | $ | (7,823 | ) | | $ | (79,591 | ) | | $ | (10,809 | ) | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | Basic | | | 80,554 | | | | 80,350 | | | | 80,371 | | | | 80,715 | | Effect of dilutive stock options | | | — | | | | — | | | | — | | | | — | | Effect of dilutive restricted stock | | | — | | | | — | | | | — | | | | — | | Diluted | | | 80,554 | | | | 80,350 | | | | 80,371 | | | | 80,715 | | Loss per share: | | | | | | | | | | | | | | | | | Basic | | $ | (0.63 | ) | | $ | (0.10 | ) | | $ | (0.99 | ) | | $ | (0.13 | ) | Diluted | | $ | (0.63 | ) | | $ | (0.10 | ) | | $ | (0.99 | ) | | $ | (0.13 | ) |
NOTE 2 – MATTERS CONCERNING SHAREHOLDERS’ EQUITYLONG-TERM DEBT AND AVAILABLE CREDIT Restricted stock compensation -ForRevolving Credit Facility —The Company has a $350,000,000 secured revolving credit facility with a $150,000,000 accordion feature that matures on June 2, 2022 (“Revolving Credit Facility”). Credit extensions under the threeRevolving Credit Facility are limited to the lesser of $350,000,000 or the amount of the calculated borrowing base, as defined in the Revolving Credit Facility, which was $291,315,000 as of September 1, 2018. The Company had no cash borrowings and six months ended$40,641,000 in letters of credit and bankers’ acceptances outstanding under the Revolving Credit Facility, with $250,673,000 remaining available for cash borrowings, all as of September 1, 2018.
At the Company’s option, borrowings will bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the adjusted LIBOR rate as defined in the Revolving Credit Facility plus a spread varying from 125 to 150 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility, or (b) the prime rate as defined in the Revolving Credit Facility plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility. Term Loan Facility —The Company has a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of September 1, 2018, March 3, 2018 and August 26, 2017, the Company recorded compensation expense related to restricted stockhad $192,000,000, $193,000,000 and $194,000,000 outstanding, respectively, under the Term Loan Facility with carrying values of $1,390,000$189,894,000, $190,495,000 and $2,460,000, respectively. For$191,079,000, respectively, net of unamortized discounts and debt issuance costs.
The fair value of the three and six months ended August 27, 2016,amount outstanding under the Company recorded compensation expense related to restricted stock of $1,079,000 and $2,729,000, respectively. As of August 26, 2017, thereTerm Loan Facility was approximately $31,164,000$165,360,000 as of total unrecognized compensation expense related to unvested restricted stockSeptember 1, 2018, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchy based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that mayare not active; or other inputs that are observable or can be recognized over a weighted average period of approximately two years if certain performance targets are achieved. Share repurchase program -Duringcorroborated by observable market data for substantially the first six months of fiscal 2018, the Company repurchased 1,925,300 sharesfull term of the Company’s common stock at a weighted average cost of $5.19 per share for a total cost of $9,994,000, and $26,616,000 remained available for further share repurchases under the $200 million board-approved share repurchase program announced on April 10, 2014 (“April 2014 program”). Of the $9,994,000 repurchased in the first six months of fiscal 2018, $315,000 of the purchases settled subsequent to the second quarter of fiscal 2018. Shares repurchased during the period but settled subsequent to the period end are considered non-cash financing activities and are excluded from the Consolidated Statements of Cash Flows.asset or liability.
NOTE 3 – LONG-TERM DEBT AND AVAILABLE CREDITMATTERS CONCERNING SHAREHOLDERS’ EQUITY Revolving Credit Facility -AtFor the end13 and 26 weeks ended September 1, 2018, the Company recorded compensation expense related to restricted stock of $1,005,000 and $1,264,000, respectively. For the first13 and 26 weeks ended August 26, 2017, the Company recorded compensation expense related to restricted stock of $1,390,000 and $2,460,000, respectively. As of September 1, 2018, there was approximately $21,331,000 of total unrecognized compensation expense related to unvested restricted stock that may be recognized over a weighted average period of approximately 1.5 years if certain performance targets are achieved.
During the second quarter of fiscal 2018,2019, the Company hadawarded 2,958,373 shares of restricted stock. A total of 1,134,773 shares were time based and will vest ratably over a $350,000,000 secured revolving credit facility with a $100,000,000 accordion feature (“Revolving Credit Facility”). On June 2, 2017,three-year service period. The Company began expensing these shares during the second quarter of fiscal 2018,2019. The remaining shares are performance based and may vest following the end of fiscal 2021 if the Company entered into a Second Amended and Restated Credit Agreement which amendedachieves certain termsperformance targets as determined by the Compensation Committee of the Revolving Credit Facility.Board of Directors. The amended Revolving Credit Facility extendedCompany began expensing the maturityperformance-based shares awarded during the second quarter when the performance metric was established. The time-based and performance-based shares have a grant date from June 18, 2018 to June 2, 2022, and increasedfair value of $2.38, which was determined based on the amountclosing stock price at the time of the accordion feature to $150,000,000. grant. The amended Revolving Credit Facility continues to be secured primarily by the Company’s eligible merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and by a second lien on substantially all other assetsCompany awarded 290,904 of certain of the Company’s subsidiaries, subject to certain exceptions. Credit extensions under the amended Revolving Credit Facility are limitedrestricted stock units to the lesserBoard of $350,000,000 or the amount of the calculated borrowing base. At the Company’s option, borrowings will bear interest at either (a) the adjusted LIBOR rate plus a spread varying from 125 to 150 basis points per annum, depending on the amount then borrowed under the amended Revolving Credit Facility, or (b) the prime rate plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the amended Revolving Credit Facility. Provided that there is no default and no default would occur as a result thereof, the Company may request that the amended Revolving Credit Facility be increased to an amount not to exceed $500,000,000. The amendment did not result in any other material changes to the Revolving Credit Facility.
At the end ofDirectors during the second quarter of fiscal 2018, credit extensions under the amended Revolving Credit Facility were limited to the lesser of $350,000,000 or the amount of the calculated borrowing base, which was $366,436,000 as of August 26, 2017.2019. The Company had no cash borrowingsrestricted stock units are time based and $41,831,000 in letters of credit and bankers’ acceptances outstanding under the amended Revolving Credit Facility, with $308,169,000 remaining available for cash borrowings, all as of August 26, 2017.
Term Loan Facility -will be expensed ratably over a one-year service period. The Company hastime-based units have a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of August 26, 2017, February 25, 2017 and August 27, 2016, the Company had $194,000,000, $195,000,000 and $196,000,000 outstanding, respectively, under the Term Loan Facility with carrying values of $191,079,000, $191,676,000 and $192,271,000, respectively, net of unamortized discounts and debt issuance costs.
Thegrant date fair value of the amount outstanding under the Term Loan Facility was approximately $186,968,000 as of August 26, 2017,$2.97, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchydetermined based on the frequency and volume of trading for whichclosing stock price at the price was readily available. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full termtime of the asset or liability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 – DEFINED BENEFIT PLANS
grant. The Company maintains supplemental retirement plans for certainbegan expensing these units during the second quarter of its current and former executive officers. These plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will receive benefits based on highest compensation, years of service and years of plan participation. The plans are not funded and thus have no plan assets.fiscal 2019. Benefit costs are determined using actuarial cost methods to estimate the total benefits ultimately payable to executive officers, and this cost is allocated to the respective service periods. The actuarial assumptions used to calculate benefit costs are reviewed annually or in the event of a material change in the plans or participation in the plans.
The components of net periodic benefit cost are shown in the table below (in thousands). The amortization of amounts related to unrecognized prior service cost and net actuarial loss was reclassified out of other comprehensive income (loss) as a component of net periodic benefit cost.
| | | | | | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | August 26, 2017 | | | August 27, 2016 | | Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | Service cost | | $ | 73 | | | $ | 386 | | | $ | 145 | | | $ | 773 | | Interest cost | | | 71 | | | | 194 | | | | 143 | | | | 387 | | Amortization of unrecognized prior service cost | | | 8 | | | | 15 | | | | 15 | | | | 30 | | Amortization of net actuarial loss | | | 132 | | | | 450 | | | | 264 | | | | 900 | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 284 | | | $ | 1,045 | | | $ | 567 | | | $ | 2,090 | | | | | | | | | | | | | | | | | | |
NOTE 54 – INCOME TAX The income tax benefit for the second quarter of fiscal 20182019 was $6,092,000$14,126,000, compared to $2,829,000$6,092,000 during the same period in the prior fiscal year. The effective tax rate for the second quarter of fiscal 20182019 was 43.8%21.7%, compared to 41.0%43.8% in the same period during fiscal 2017.2018. The income tax benefit for the first half of fiscal 20182019 was $7,905,000,$20,197,000, compared to $6,883,000$7,905,000 during the same period in the prior fiscal year. The effective tax rate for the first half of fiscal 20182019 was 42.2%20.2%, compared to 40.6%42.2% in the same period during fiscal 2017.2018. The increase in the income tax benefit iswas primarily due to the Company’s higher pre-tax losses generated in the second quarter and first half of fiscal 20182019 as compared to the same periods last year. The higherlower effective tax raterates for the second quarter and first half of fiscal 20182019 primarily relatesrelate to the lower statutory federal tax rate enacted by the 2017 Tax Cuts and Jobs Act (“Tax Act”) and the impact of certain non-deductible items recognized in the second quarter of fiscal 2018, including the Consumer Product Safety Commission (“CPSC”) matter referenced inNote 6 –5 - Commitments and Contingencies. The statutory federal rate was 21% for the second quarter and first half of fiscal 2019 compared to 35% for the same periods last year. As of August 26, 2017,September 1, 2018, the Company had total unrecognized tax benefits of $5,808,000,$4,941,000, the majority of which, if recognized, would affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to settlements with certain taxing jurisdictions. NOTE 65 – COMMITMENTS AND CONTINGENCIES Putative class action complaints were filed in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between December 19, 2013April 10, 2014 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants’Defendants' alleged violations of the federal securities laws and to pursue remedies under Sections NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys’attorneys' fees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. On June 25, 2018, the court granted the Company’s motion to dismiss the amended complaint, with prejudice. On July 25, 2018, the plaintiffs filed a notice of appeal. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against it vigorously. The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the CPSC. In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The
Company responded to the inquiry and cooperated with the CPSC. On September 20, 2017, the Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. TheOn October 27, 2017, the Company is evaluating the assertions made bysubmitted its response to the CPSC and is preparing a response.letter. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. The CPSC has responded to the Company’s letter and generally declined to accept the Company’s position. The Company expects to enter into settlement discussions with the CPSC during fiscal 2019. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2,000,000 to $6,200,000. While we anticipatethe Company anticipates that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay. The Company is a defendant in lawsuits pending in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits seek unspecified monetary damages, injunctive relief and attorneys’ fees. The Company has sought to settle these cases on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company has settled or agreed to settle the pending cases, subject to completion of associated procedural requirements. The Company does not believe any reasonably foreseeable resolution of these matters will have a material adverse effect on the Company’s financial condition, results of operations or liquidity. The Company recognized expense of $6,600,000 in the second quarter of fiscal 2018 attributable to the legal and regulatory proceedings described in the two preceding paragraphs as a component of selling, general and administrative expenses. There are various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operationsoperation of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Note and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity. NOTE 76 – NEW ACCOUNTING STANDARDS In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)— Recently Adopted:
ASU 2014-09 “—Revenue from Contracts with Customers (Topic 606).” In August 2015, the FASB issued ASU 2015-14,“ Revenue Recognition — The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” ASU 2015-14 defers the effective date of revenue standard ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. During fiscal 2017, additional ASUs were issued related to this revenue guidance. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations.” ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,“Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations. In December 2016, the FASB issued ASU 2016-20,“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. ASU 2016-20 also makes additional technical corrections and improvements to the new revenue standard. The amendments have the same effective date and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
transition requirements as the revenue standard. The above ASUs are effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018. The Company anticipates the adoption of this guidance will result in a change, in the timingfirst quarter of revenue recognition for income related to gift card breakage. The Company plans to adopt this standard in fiscal 2019, using the modified retrospective method. Under this method,approach. As a result, the Company expects to recordrecorded a cumulative adjustment to increase retained earnings and decrease gift cards and other deferred revenue by $9,444,000 ($7,020,000, net of tax) related to the changeacceleration in the timing of recognizing gift card breakage income. Basedrevenue. The Company will now recognize gift card breakage revenue over the expected redemption period rather than when the likelihood of redemption is remote.
Revenue is recognized upon customer receipt or delivery for retail sales. A reserve has been established for estimated merchandise returns based upon historical experience and other known factors. The new standard required a change in the presentation of the reserve on the consolidated balance sheet, which was previously recorded net of the value of returned merchandise, but is now presented on a gross basis. During the first quarter of fiscal 2019, the Company recorded an adjustment of $2,216,000 to present the reserve on a gross basis, with an offset recorded to other current assets. The gross reserve for estimated merchandise returns at September 1, 2018 was $5,773,000. The Company’s revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties. Amounts charged to customers for shipping and handling are included in net sales. For the 13 and 26 weeks ended September 1, 2018, the Company recognized revenue of $3,276,000 and $8,610,000 for gift card redemptions. These amounts were previously included in gift cards and other deferred revenue on the Company’s preliminary assessment, we anticipateconsolidated balance sheet as of March 3, 2018. Disaggregated Revenues — Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during the 13 and 26 weeks ended September 1, 2018 and August 26, 2017 were as follows (in thousands): | | 13 Weeks Ended | | | 26 Weeks Ended | | | | September 1, | | | August 26, | | | September 1, | | | August 26, | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Retail sales | | $ | 352,800 | | | $ | 403,816 | | | $ | 721,793 | | | $ | 810,479 | | Other (1) | | | 2,536 | | | | 3,791 | | | | 5,407 | | | | 6,653 | | Net sales | | $ | 355,336 | | | $ | 407,607 | | | $ | 727,200 | | | $ | 817,132 | |
(1) | The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a "store within a store" format in Mexico and El Salvador and online in Mexico. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage. |
ASU 2016-15 —Statement of Cash Flows (Topic 230) In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).” The standard is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance willdid not have a material impact on the Company’s financial statements. ASU 2016-16 —Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory In FebruaryOctober 2016, the FASB issued ASU 2016-02,2016-16, “LeasesIncome Taxes (Topic 842),740): Intra-Entity Transfers of Assets Other Than Inventory.” which provides new guidance on This amendment is intended to improve accounting for leases. The Company leases its corporate headquarters, retail stores and the majorityincome tax consequences of its distribution and fulfillment centers. Under ASU 2016-02, lessees will be required tointra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize most leases on the balance sheet; therefore, ASU 2016-02 is expected to have a material impact onincome tax consequences of an intra-entity transfer of an asset other than inventory when the Company’s balance sheet. ASU 2016-02 is effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company plans to adopt this standard in fiscal 2020. ASU 2016-02 must be adopted using a modified retrospective transition, with the new guidance applied to the beginning of the earliest comparative period presented. The Company will continue to evaluate the impact of the adoption of ASU 2016-02 on its financial statements. In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides more specific guidance related to how companies account for cloud computing costs.transfer occurs. The Company adopted ASU 2015-05 on a prospective basisthe provisions of this guidance in the first quarter of fiscal 2017.2019 with modified retrospective application. The adoption of ASU 2015-05this guidance did not have a material impact on the Company’s financial statements.
ASU 2016-18 —Statement of Cash Flows (Topic 230): Restricted Cash In DecemberNovember 2016, the FASB issued ASU 2016-19, 2016-18, “Technical CorrectionsStatement of Cash Flows (Topic 230): Restricted Cash.” The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and Improvements” to clarify guidance, correct errorsamounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and make minor improvements torestricted cash equivalents should be included with cash and cash equivalents when reconciling the Accounting Standards Codification (“ASC”). ASU 2016-19 amends ASC 350-40 to clarify that after ASU 2015-05 is adopted, companies are required to record an intangible asset forbeginning-of-period and end-of-period total amounts shown on the license acquired in a software licensing arrangement. The asset for the software license is required to be recognized and measured at cost, which includes the present valuestatement of the license obligation if the license is to be paid for over time. Companies are required to record a liability for any of the software licensing fees that are not paid on or before the acquisition date of the license.cash flows. The Company adopted the provisions of ASU 2016-19 on a prospective basisthis guidance in the first quarter of fiscal 2018. ASU 2016-192019 with retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements upon adoption.statements. ASU 2017-07 — Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost In March 2016,2017, the FASB issued ASU 2016-09, 2017-07, “Compensation — Stock CompensationRetirement Benefits (Topic 718)715): Improvements to Employee Share-Based Payment Accounting,Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” which outlines The new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation inguidance requires the financial statements. ASU 2016-09 requires entities to record excess tax benefits and deficiencies as income taxservice cost component of the net periodic benefit or expense in the income statement. In addition, excess tax benefits are requiredcost to be presented as an operating activity in the Statementsame income statement line items as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization. Other components will be presented separately from the line items that include the service cost and outside of Cash Flows.any subtotal of operating income, if one is presented. The Company adopted thesethe provisions of ASU 2016-09 on a prospective basisthis guidance in the first quarter of fiscal 2018. ASU 2016-09 also allows an entity to make an accounting policy election to either recognize forfeitures2019. The guidance on the presentation of share-based payment awards as they occur or estimate the numbercomponents of awards expected to forfeit.net periodic benefit cost requires retrospective application. The Company adopted this provisionguidance limiting the capitalization of ASU 2016-09 on a modified retrospective basis in the first quarter of fiscal 2018. The Company will recognize forfeitures of share-based payment awards as they occur and recorded a cumulative adjustment to retained earnings for this change.net periodic benefit cost requires prospective application. The adoption of ASU 2016-09this guidance did not have a material impact on the Company’s financial statements. Subsequent to the adoption ASU 2017-09 — Compensation — Stock Compensation(Topic 718): Scope of ASU 2016-09, the Company expects increased volatility of income tax expense or benefit.Modification Accounting In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s financial statements. Accounting Standards — Pending Adoption: ASU 2016-02 — Leases (Topic 842) In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides new guidance on accounting for leases. The Company leases its corporate headquarters, retail stores and the majority of its distribution and fulfillment centers. Under ASU 2016-02, lessees will be required to recognize most leases on the balance sheet; therefore, ASU 2016-02 is expected to have a material impact on the Company’s consolidated balance sheets. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The above ASUs are effective for the Company beginning in fiscal 2020. The Company plans to adopt these standards in fiscal 2020 and is continuing to evaluate the impact of adoption on its financial statements. ASU 2018-02 — Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that have been stranded
in accumulated OCI as a result of the remeasurement of deferred taxes to reflect the lower federal income tax rate enacted as part of the Tax Act. ASU 2018-02 requires entities to make new disclosures, regardless of whether they elect to reclassify tax effects. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods,fiscal years beginning after December 15, 2017.2018. Early adoption in any period is permitted. ASU 2017-092018-02 can be applied either retrospectively or in the period of adoption. ASU 2018-02 is effective for the Company beginning in fiscal 2019.2020. The Company is evaluating the impact of the adoption of this guidanceASU 2018-02 on its financial statements, but does not expect it to have a material impact. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | ASU 2018-14 — Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit PlansIn August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU 2018-14 is effective for the Company beginning in fiscal 2022. The Company is evaluating the impact of the adoption of ASU 2018-14 on its financial statements, but does not expect it to have a material impact. ASU 2018-15 — Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 is effective for the Company beginning in fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2018-15 on its financial statements, but does not expect it to have a material impact.
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 February 25, 2017,March 3, 2018, and for the fiscal year then ended, the related Notes to Consolidated Financial Statements 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 fiscal year ended February 25, 2017.March 3, 2018. Management OverviewMANAGEMENT OVERVIEW
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is dedicated to offering customers exclusive, one-of-a-kind products that reflect high quality at a great value. Starting with a single store in 1962, Pier 1 Imports’ product is now available in retail stores throughout the U.S. and Canada and online at pier1.com. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products.products in retail stores throughout the U.S. and Canada and online at pier1.com. Fiscal 2019 consists of a 52-week year ending on March 2, 2019. Fiscal 2018 consistsconsisted of a 53-week year endingwhich ended on March 3, 2018. Fiscal 2017 consisted of a 52-week year which ended on February 25, 2017. The results of operations for the three13 and six months26 weeks ended September 1, 2018 and August 26, 2017, and August 27, 2016, 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. As of August 26, 2017,September 1, 2018, the Company operated 1,012989 stores in the U.S. and Canada. As an omni-channel retailer,The Company’s multi-year “New Day” strategic plan is designed to improve the Company’s strategy is to ensure that customers have an extraordinary experience, regardless of how they shop. By enablingbrand proposition, drive sales growth and capture operating efficiencies. Under the customer to interact with the brand both in-store and online,New Day strategic plan, the Company expectsis focused on:
Improving brand proposition by segmenting the marketplace and focusing on targeted consumer groups, refining merchandise assortments, delivering value in order to maximize selling opportunities, extend brand reachbetter fit the customer’s style and capture greater market share. Thecreate ease of shopping; Driving sales growth through new marketing strategies focusing on content, digital communications and customer experience, improving the shopping experience and leveraging and strengthening the Company’s strategy has required,omni-channel platform; and Capturing operating efficiencies through initiatives that include pricing and promotion, inventory reduction, sourcing, supply chain improvements and real estate optimization. During fiscal 2019, the Company is investing in the tools and resources needed to execute against the plan, which is expected to continuecontribute to require,a net loss for the year. Capital investment in systems,fiscal 2019 is expected to total $60 million, which includes approximately $45 million of expenditures for the New Day strategic plan, primarily deployed toward information technology, supply chain and stores. During the first half of fiscal 2019, the Company utilized $25.6 million for capital expenditures, which was deployed toward technology and infrastructure initiatives, distribution and fulfillment centers, and distribution networkexisting stores. The Company is also making investments in selling, general and administrative (“SG&A”) expenditures in fiscal 2019 in the areas of marketing, corporate services and facilities planning and store development, including new in-store selling tools such as computersoperations. The investments in both capital and tablets.SG&A are expected to help position the Company to achieve sustainable sales growth and increased profitability over the long term. During the second quarter of fiscal 2018,2019, net sales increased 0.4%decreased 12.8% from the prior year second quarter, and company comparable sales increased 1.8%decreased 11.4%. The company comparable sales increase forThese results primarily reflected execution challenges resulting from the second quarter of fiscal 2018 resulted primarily from increased brandCompany’s marketing program driving lower than anticipated store traffic and average ticket, partially offset by lower conversion. Duringdelays in getting certain products into the second quarter of fiscal 2018, e-Commerce sales accounted for approximately 27% of net sales compared to 20% in the same period of the previous fiscal year. A significant portion of e-Commerce sales touch the retail stores, either by originating on in-store PCs and tablets, or through in-store pick-up. stores. Gross profit for the second quarter of fiscal 20182019 was $93.5 million, or 26.3% of sales, compared to $140.2 million, or 34.4% of sales, compared to $145.0 million, or 35.7% of sales, in the same period last year, a decrease of 130810 basis points. For the second quarter of fiscal 2018, merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $232.2 million, or 57.0% of sales, compared to $229.8 million, or 56.6% of sales, for the same period last year. The year-over-year improvement inThis decrease reflects lower merchandise margin, as a percentagewell as 220 basis points of salesdeleverage on store occupancy due to lower sales. The year-over-year decline in merchandise margin is primarily attributable to lowerpricing strategies implemented during the first half of fiscal 2019 and increased promotional discounts, as well as higher supply chain costs. Delivery and fulfillment net costs for the second quarter of fiscal 2018 were $18.7 million, or 4.6% of sales, comparedprimarily related to $10.6 million, or 2.6% of sales, in the same period last year. The increase is primarily due to additional free shipping promotions. The increase also reflects the increase in direct-to-customer sales as compared to prior year. To the extent these sales have grown and continue to grow, delivery and fulfillment net costs have also increased and are expected to continue to increase. For the second quarter of fiscal 2018, store occupancy costs were $73.3 million, or 18.0% of sales, compared to $74.2 million, or 18.3% of sales, during the same period last year. For the three months ended August 26, 2017, contribution from operations (gross profit less compensation from operations and operational expenses — see “Reconciliation of Non-GAAP Financial Measures”) totaled $61.1 million, compared to $61.5 million during the same period last year. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
freight expense. Operating loss for the second quarter of fiscal 20182019 was $11.3$62.5 million, or (2.8%(17.6%) of sales, compared to an operating loss of $4.3$11.3 million, or (1.1%(2.8%) of sales, for the same period in the prior year. Net loss forFor the second quarter of fiscal 2018 was $7.82019, the Company reported a net loss of $51.1 million, or ($0.10)0.63) per share, compared to a net loss of $4.1$7.8 million, or ($0.10) per share, and adjusted net loss (non-GAAP) of $4.2 million or ($0.05) per share, for the second quarter of fiscal 2017.2018. Adjusted net loss (non-GAAP) for the second quarter of fiscal 2018 was $4.2 million, or ($0.05) per share, and excludes $6.6 million ($3.6 million, or $0.05 per share, net of tax), of expense for legal and regulatory costs relating to a California wage-and-hour matter and an ongoing Consumer Product Safety Commission (“CPSC”) inquiry. EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter of fiscal 20182019 was ($49.3) million, compared to $2.8 million, and after excluding the legal and regulatory costs referred to above, adjusted EBITDA wasof $9.4 million, compared to EBITDA of $9.5 million, in the second quarter of fiscal 2017.2018. See “Reconciliation of Non-GAAP Financial Measures” below. As an omni-channel retailer, the Company’s strategies and plans are being enhanced to address sales trends, restore merchandise margin and reduce costs across the organization. These enhancements include, but are not limited to: improving merchandise assortments; enhancing marketing programs; optimizing the real estate portfolio; reducing store and administrative expenses; improving supply chain efficiencies; managing inventory levels; improving promotional effectiveness; and managing capital expenditures. Profitability in fiscal 2018 may continue to be challenged by store traffic declines, increases in media spending, additional delivery and fulfillment net costs and promotional and clearance activity. In addition, sales and merchandise margin for the third quarter of fiscal 2018 are expected to be impacted by recent weather-related events.
The Company is on track to close approximately 20 to 25 net stores by the end of fiscal 2018. These closures are consistent with, and a part of, the real estate optimization plan previously announced by the Company. The real estate optimization plan includes three parts: (1) closure of approximately 100 stores over a three to four fiscal-year period which commenced in fiscal 2016, primarily through natural lease expirations and relocations; (2) a more modest new store opening and relocation program; and (3) ongoing renegotiations of rent commitments.
During the first six months of fiscalOn April 18, 2018, the Company utilized $25.2 million for capital expenditures, which was deployed toward technology and infrastructure initiatives, new and existing stores and distribution centers. Capital spend in fiscal 2018 is expectedannounced that the Board of Directors had determined to be approximately $55 milliondiscontinue the Company’s common stock dividend. At the same time, the Board of Directors also determined to support ongoing investments in technology, stores and distribution centers.
On April 10, 2014,discontinue share repurchases under the Company announced a $200 million board-approved share repurchase program announced on April 10, 2014 (“April 2014 program”). DuringThese actions are expected to allow the first six monthsallocation of fiscal 2018, the Company repurchased 1,925,300 shares of its common stock under the April 2014 program at a weighted average cost of $5.19 per share for a total cost of $10.0 million, and $26.6 million remained available for further repurchases under the program. During the first six months of fiscal 2018, the Company paid quarterly cash dividends totaling approximately $11.2 million. On September 27, 2017, subsequent to quarter end, the Company announced a $0.07 per share quarterly cash dividend payable on November 1, 2017, to shareholders of record on October 18, 2017.
On May 1, 2017, Alasdair James joined the Company as President and Chief Executive Officer. Mr. James was also elected togreater resources toward implementing the Company’s Board of Directors effective May 1, 2017. Upon Mr. James assuming his role as President and Chief Executive Officer, Terry London was appointed to serve as Executive Chairman and served in this role through July 31, 2017. On August 1, 2017, Mr. London reassumed the role of Non-Executive Chairman of the Board.New Day strategic plan.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
Results of Operations Management reviews a number of key performance indicators to evaluate the Company’s financial performance. The following table summarizes those key performance indicators: | | | Three Months Ended | | Six Months Ended | | | 13 Weeks Ended | | | 26 Weeks Ended | | | | August 26, 2017 | | August 27, 2016 | | August 26, 2017 | | August 27, 2016 | | | September 1, | | | August 26, | | | September 1, | | | August 26, | | Key Performance Indicators | | | | | | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Total sales growth (decline) | | | 0.4 | % | | (6.7 | %) | | (0.9 | %) | | (5.5 | %) | | | (12.8 | %) | | | 0.4 | % | | | (11.0 | %) | | | (0.9 | %) | Company comparable sales growth (decline) | | | 1.8 | % | | (4.3 | %) | | 0.7 | % | | (3.4 | %) | | | (11.4 | %) | | | 1.8 | % | | | (9.8 | %) | | | 0.7 | % | Gross profit as a % of sales | | | 34.4 | % | | 35.7 | % | | 35.7 | % | | 35.7 | % | | | 26.3 | % | | | 34.4 | % | | | 29.4 | % | | | 35.7 | % | Contribution from operations as a % of sales(1) | | | 15.0 | % | | 15.2 | % | | 16.6 | % | | 15.8 | % | | Selling, general and administrative expenses as a % of sales | | | 33.9 | % | | 33.5 | % | | 34.1 | % | | 33.8 | % | | | 40.3 | % | | | 33.9 | % | | | 38.7 | % | | | 34.1 | % | Operating loss as a % of sales | | | (2.8 | %) | | (1.1 | %) | | (1.7 | %) | | (1.5 | %) | | | (17.6 | %) | | | (2.8 | %) | | | (12.9 | %) | | | (1.7 | %) | Net loss (in millions) | | | ($7.8 | ) | | ($4.1 | ) | | ($10.8 | ) | | ($10.1 | ) | | $ | (51.1 | ) | | $ | (7.8 | ) | | $ | (79.6 | ) | | $ | (10.8 | ) | Net loss as a % of sales | | | (1.9 | %) | | (1.0 | %) | | (1.3 | %) | | (1.2 | %) | | | (14.4 | %) | | | (1.9 | %) | | | (10.9 | %) | | | (1.3 | %) | EBITDA (in millions)(1) | | | $2.8 | | | $9.5 | | | $14.5 | | | $16.2 | | | $ | (49.3 | ) | | $ | 2.8 | | | $ | (68.1 | ) | | $ | 14.5 | | EBITDA as a % of sales | | | 0.7 | % | | 2.3 | % | | 1.8 | % | | 2.0 | % | | | (13.9 | %) | | | 0.7 | % | | | (9.4 | %) | | | 1.8 | % | Total retail square footage (in thousands) | | | 8,000 | | | 8,088 | | | 8,000 | | | 8,088 | | | | 7,824 | | | | 8,000 | | | | 7,824 | | | | 8,000 | |
(1) | See reconciliation of Gross Profit to Contribution from Operations and Net Loss to EBITDA in“Reconciliation"Reconciliation of Non-GAAP Financial Measures.”" |
Company Comparable Sales Calculation —The company comparable sales calculation includes all in-store sales, including direct-to-customer (as defined below),orders placed online inside the store, provided that the store was open prior to the beginning of the preceding fiscal year and was still open at period end. In addition, company comparable sales include all orders placed online outside of a store as direct-to-customer sales.store. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the following: the new store is within a specified distance serving the same market, no significant change in store size, and no significant overlap or gap between the store closing and reopening. Such stores are included in the company comparable sales calculation in the first full month after the reopening. If a relocated or remodeled store does not meet the above criteria, it is excluded from the calculation until it meets the Company’s established definition as described above. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
Net Sales —Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during the period were as follows (in thousands): | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | August 26, 2017 | | | August 27, 2016 | | Retail sales | | $ | 403,816 | | | $ | 402,365 | | | $ | 810,479 | | | $ | 817,046 | | Other(1) | | | 3,791 | | | | 3,458 | | | | 6,653 | | | | 7,147 | | | | | | | | | | | | | | | | | | | Net sales | | $ | 407,607 | | | $ | 405,823 | | | $ | 817,132 | | | $ | 824,193 | | | | | | | | | | | | | | | | | | |
(1) | The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a “store within a store” format in Mexico and El Salvador and online in Mexico. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns and gift card breakage. |
Net sales for the second quarter of fiscal 20182019 were $407.6$355.3 million, an increasea decrease of 0.4%12.8%, compared to $405.8$407.6 million for the second quarter of fiscal 2017.2018. At the end of the second quarter of fiscal 2018,2019, the Company operated 1123 fewer stores than at the end of the second quarter of fiscal 2017.2018. Company comparable sales for the second quarter of fiscal 2018 increased 1.8%2019 decreased 11.4%, compared to the same period last year primarily resulting from increased brand traffic and average ticket, partially offset by lower conversion and a decrease in delivery revenues due to additional free shipping promotions.year. Net sales for the year-to-date period of fiscal 20182019 were $817.1$727.2 million, a decrease of 0.9%11.0%, compared to $824.2$817.1 million for the first six months ofsame period in fiscal 2017.2018. Company comparable sales for the year-to-date period of fiscal 2018 increased 0.7%2019 decreased 9.8%, compared to the same period last year primarily resulting from increased brand traffic and average ticket, partially offset by a decrease in delivery revenues dueyear. See Note 6 of the Notes to additional free shipping promotions.
The Company’s e-Commerce sales accountedConsolidated Financial Statements for approximately 27% and 20% of net sales for the three months ended August 26, 2017 and August 27, 2016, respectively. The Company’s e-Commerce year-to-date sales accounted for approximately 26% and 20% of net sales for the six month periods ended August 26, 2017 and August 27, 2016, respectively. E-Commerce sales are comprised of customer orders placed online which were delivered directly to the customer (“direct-to-customer”) or those picked up by the customer at a store location.more information.
Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. For the second quarter of fiscal 2018,2019, the year-over-year increase in the value of the Canadian Dollar, relative to the U.S. Dollar, had no impact on net sales and positively impacted company comparable sales by approximately 10 basis points. For the first six months of fiscal 2018, the year-over-year declinechange in the value of the Canadian Dollar, relative to the U.S. Dollar, negatively impacted net sales and company comparable sales by approximately 10 basis points. For the year-to-date period of fiscal 2019, the year-over-year change in the value of the Canadian Dollar, relative to the U.S. Dollar, positively impacted net sales and company comparable sales by approximately 10 basis points. Sales on the Pier 1 credit card comprised 37.3%34.6% of U.S. sales for the trailing twelve months ended August 26, 2017,September 1, 2018, compared to 34.5%37.4% for the comparable period in fiscal 2017.2018. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
The decrease in net sales for the period was comprised of the following incremental components (in thousands): | | | | | | | Net Sales | | Net sales for the six months ended August 27, 2016 | | $ | 824,193 | | Incremental sales growth (decline) from: | | | | | Company comparable sales | | | 5,987 | | New stores opened during fiscal 2018 | | | 362 | | Stores opened during fiscal 2017 | | | 1,399 | | Closed stores and other | | | (14,809 | ) | | | | | | Net sales for the six months ended August 26, 2017 | | $ | 817,132 | | | | | | |
| | Net Sales | | Net sales for the 26 weeks ended August 26, 2017 | | $ | 817,132 | | Incremental sales growth (decline) from: | | | | | Company comparable sales | | | (78,785 | ) | New stores opened during fiscal 2019 | | | — | | Stores opened during fiscal 2018 | | | 1,608 | | Closed stores and other | | | (12,755 | ) | Net sales for the 26 weeks ended September 1, 2018 | | $ | 727,200 | |
A summary reconciliation of the Company’s stores open at the beginning of fiscal 20182019 to the number open at the end of the second quarter is as follows (openings and closings include relocated stores):follows: | | | | | | | | United States | | | Canada | | | Total | | | | United States | | | Canada | | | Total | | | Open at February 25, 2017 | | | 941 | | | | 77 | | | | 1,018 | | | Open at March 3, 2018 | | | | 928 | | | | 75 | | | | 1,003 | | Openings | | | 1 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | Closings | | | (7 | ) | | | — | | | | (7 | ) | | | (6 | ) | | | (8 | ) | | | (14 | ) | | | | | | | | | | | | Open at August 26, 2017 | | | 935 | | | | 77 | | | | 1,012 | | | | | | | | | | | | | | Open at September 1, 2018 | | | 922 | | | 67 | | | | 989 | |
Gross Profit and Merchandise Margin — In For the second quarter of fiscal 2018,2019, gross profit was $93.5 million, or 26.3% of sales, compared to $140.2 million, or 34.4% of sales, for the same period last year, a decrease of 810 basis points. For the year-to-date period of fiscal 2019, gross profit was $213.6 million, or 29.4% of sales, compared to $145.0$291.8 million, or 35.7% of sales, for the same period last year, a decrease of 130630 basis points. In the first six monthsThis decrease reflects lower merchandise margin, as well as 220 and 190 basis points of fiscal 2018, gross profit remained flat at 35.7% of sales and was $291.8 million, compared to $294.0 milliondeleverage on store occupancy for the same period last year. Merchandise margin (see “Reconciliation of Non-GAAP Financial Measures”) in the second quarter and first half of fiscal 2018 was $232.2 million, or 57.0% of sales, compared2019, respectively, due to $229.8 million, or 56.6% of sales, for the same period last year. For the first six months of fiscal 2018, merchandise margin was $472.4 million, or 57.8% of sales, compared to $462.3 million, or 56.1% of sales, for the same period last year.lower sales. The year-over-year improvementdecline in merchandise margin is primarily attributable to lowerpricing strategies implemented during the first half of fiscal 2019 and increased promotional discounts, as well as higher supply chain costs. Deliverycosts primarily related to increased freight expense. SG&A Expenses, Depreciation and fulfillment net costs for the second quarter of fiscal 2018 were $18.7 million, or 4.6% of sales, compared to $10.6 million, or 2.6% of sales, in the same period last year. Delivery and fulfillment net costs for the first six months of fiscal 2018 were $35.4 million, or 4.3% of sales, compared to $21.4 million, or 2.6% of sales, in the same period last year. The increase in delivery and fulfillment net costs is primarily due to additional free shipping promotions. The increase also reflects the increase in direct-to-customer sales as compared to the prior year.Operating Loss — For the second quarter of fiscal 2018, store occupancy costs2019, SG&A expenses were $73.3$143.1 million, or 18.0%40.3% of sales, compared to $74.2$138.1 million, or 18.3%33.9% of sales, during the same period last year. Store occupancy costs decreased in dollars for the first six months of fiscal 2018; however, as a percentage of sales, these costs remained flat at 17.8% of sales. Selling, General & Administrative Expenses, Depreciation and Operating Loss — In the second quarter of fiscal 2018, selling, general and administrative (“SG&A”) expenses were $138.1 million, compared to $135.8 million for the same period in fiscal 2017. As a percentage2018. SG&A expenses for the year-to-date period of fiscal 2019 were $281.7 million, or 38.7% of sales, SG&A expenses were 33.9% in the second quarter of fiscal 2018, compared to 33.5%$278.3 million, or 34.1% of sales, for the same period in fiscal 2017. Year-to-date SG&A expenses were $278.3 million, compared to $278.5 million for the same period in fiscal 2017. As a percentage of sales, SG&A expenses were 34.1% for the first six months of fiscal 2018, compared to 33.8% for the same period in fiscal 2017.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
SG&A expenses are summarized in the tables below (in millions):
| | | | | | | | | | | | | | | | | | | Three Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | | Expense | | | % of Sales | | | Expense | | | % of Sales | | Compensation for operations | | $ | 58.4 | | | | 14.3 | % | | $ | 61.5 | | | | 15.1 | % | Operational expenses | | | 20.7 | | | | 5.1 | % | | | 22.1 | | | | 5.4 | % | Marketing | | | 19.2 | | | | 4.7 | % | | | 19.1 | | | | 4.7 | % | Other selling, general and administrative | | | 39.8 | | | | 9.8 | % | | | 33.2 | | | | 8.2 | % | | | | | | | | | | | | | | | | | | Total selling, general and administrative | | $ | 138.1 | | | | 33.9 | % | | $ | 135.8 | | | | 33.5 | % | | | | | | | | | | | | | | | | | | | | | | Six Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | | Expense | | | % of Sales | | | Expense | | | % of Sales | | Compensation for operations | | $ | 114.5 | | | | 14.0 | % | | $ | 121.7 | | | | 14.8 | % | Operational expenses | | | 41.3 | | | | 5.1 | % | | | 42.1 | | | | 5.1 | % | Marketing | | | 48.6 | | | | 6.0 | % | | | 47.7 | | | | 5.8 | % | Other selling, general and administrative | | | 73.9 | | | | 9.0 | % | | | 67.0 | | | | 8.1 | % | | | | | | | | | | | | | | | | | | Total selling, general and administrative | | $ | 278.3 | | | | 34.1 | % | | $ | 278.5 | | | | 33.8 | % | | | | | | | | | | | | | | | | | |
2018. For the second quarter and first half of fiscal 2019, marketing expenses included planned investments related to the Company’s brand relaunch, which offset ongoing expense discipline throughout the organization. SG&A expenses for the second quarter and first half of fiscal 2018 cost reductions in store compensation and corporateinclude expenses were offset byfor legal and regulatory costs relatingrelated to a California wage-and-hour matter and an ongoing CPSC inquiry, as well as investments in brand consulting totaling approximately $8 million. ForSG&A expenses are summarized in the first six months of fiscal 2018, reductions in store compensation expense were offset by the legal and regulatory costs referred to above.table below (in millions): | | 13 Weeks Ended | | | 26 Weeks Ended | | | | September 1, 2018 | | | August 26, 2017 | | | September 1, 2018 | | | August 26, 2017 | | | | Expense | | | % of Sales | | | Expense | | | % of Sales | | | Expense | | | % of Sales | | | Expense | | | % of Sales | | Compensation for operations | | $ | 59.1 | | | | 16.6 | % | | $ | 58.4 | | | | 14.3 | % | | $ | 115.6 | | | | 15.9 | % | | $ | 114.5 | | | | 14.0 | % | Operational expenses | | | 19.8 | | | | 5.6 | % | | | 20.7 | | | | 5.1 | % | | | 40.4 | | | | 5.6 | % | | | 41.3 | | | | 5.1 | % | Marketing | | | 33.6 | | | | 9.5 | % | | | 19.2 | | | | 4.7 | % | | | 60.1 | | | | 8.3 | % | | | 48.6 | | | | 6.0 | % | Other selling, general and administrative | | | 30.7 | | | | 8.6 | % | | | 39.8 | | | | 9.8 | % | | | 65.6 | | | | 9.0 | % | | | 73.9 | | | | 9.0 | % | Total selling, general and administrative | | $ | 143.1 | | | | 40.3 | % | | $ | 138.1 | | | | 33.9 | % | | $ | 281.7 | | | | 38.7 | % | | $ | 278.3 | | | | 34.1 | % |
Depreciation expense for the second quarter of fiscal 20182019 was $13.4$12.8 million, compared to $13.6$13.4 million infor the same period last year. Depreciation expense for the first six monthsyear-to-date period of fiscal 20182019 was $27.1$25.7 million, compared to $27.6$27.1 million infor the same period last year. The decrease was primarily due to certain assets becoming fully depreciated and store closures,asset retirements, partially offset by capital expenditure additions. Operating loss for the second quarter of fiscal 20182019 was $11.3$62.5 million, or (2.8%(17.6%) of sales, compared to operating loss of $4.3$11.3 million, or (1.1%(2.8%) of sales, for the same period last year. Operating loss for the first six monthsyear-to-date period of fiscal 20182019 was $13.7$93.8 million, or (1.7%(12.9%) of sales, compared to operating loss of $12.1$13.7 million, or (1.5%(1.7%) of sales, for the same period last year. Income Taxes —The income tax benefit for the second quarter of fiscal 20182019 was $6.1$14.1 million, compared to $2.8$6.1 million during the same period in the prior fiscal year. The effective tax rate for the second quarter of fiscal 20182019 was 43.8%21.7%, compared to 41.0% in43.8% for the same period during fiscal 2017.2018. The income tax benefit for the first half of fiscal 20182019 was $7.9$20.2 million, compared to $6.9$7.9 million during the same period in the prior fiscal year. The effective tax rate for the first half of fiscal 20182019 was 42.2%20.2%, compared to 40.6% in42.2% for the same period during fiscal 2017.2018. The increase in the income tax benefit iswas primarily due to the Company’s higher pre-tax losses generated in the second quarter and first half of fiscal 20182019 as compared to the same periods last year. The higherlower effective tax rate for the second quarter and first half of fiscal 20182019 primarily relates to the lower statutory federal tax rate enacted by the 2017 Tax Cuts and Jobs Act and the impact of certain non-deductible items recognized in the second quarter of fiscal 2018, including the CPSC matter referenced in Note 65 of theNotes to Consolidated Financial Statements. The Company’s full yearstatutory federal rate was 21% for the second quarter and first half of fiscal 2018 corporate tax rate will be negatively impacted by2019 compared to 35% for the non-deductibility of the CPSC matter.same periods last year. Net Loss and EBITDA— For the second quarter of fiscal 2018,2019, the Company reported a net loss of $51.1 million, or ($0.63) per share, compared to a net loss of $7.8 million, or ($0.10) per share, compared to aand adjusted net loss (non-GAAP) of $4.1$4.2 million or ($0.05) per share, for the same period last year.in fiscal 2018. For the second half of fiscal 2019, the Company reported a net loss of $79.6 million, or ($0.99) per share, compared to a net loss of $10.8 million, or ($0.13) per share, and adjusted net loss (non-GAAP) of $7.2 million or ($0.09) per share, for the same period in fiscal 2018. Adjusted net loss (non-GAAP) was $4.2 million, or ($0.05) per share,for the second quarter and first half of fiscal 2018 excludes $6.6 million ($3.6 million or $0.05 per share, net of tax), of expense for Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
legal and regulatory costs relating to a California wage-and-hour matter and an ongoing CPSC inquiry. For the first six months of fiscal 2018, the Company reported a net loss of $10.8 million, or ($0.13) per share, compared to a net loss of $10.1 million, or ($0.12) per share, for the same period last year. Adjusted net loss (non-GAAP) for the first six months of fiscal 2018 was $7.2 million, or ($0.09) per share and excludes the legal and regulatory costs referred to above. EBITDA was $2.8 million for the second quarter of fiscal 2018,2019 was ($49.3) million, compared to $2.8 million, and after excluding the legal and regulatory costs referred to above, adjusted EBITDA wasof $9.4 million, compared to EBITDA of $9.5 million, for the same period last year.in fiscal 2018. For the first half of fiscal 2019, EBITDA was ($68.1) million, compared to $14.5 million, for the first six months of fiscal 2018, and after excluding the legal and regulatory costs referred to above, adjusted EBITDA wasof $21.1 million, compared to EBITDA of $16.2 million for the same period last year. See “Reconciliation of Non-GAAP Financial Measures” below. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
Reconciliation of Non-GAAP Financial MeasuresRECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). This Quarterly Report on Form 10-Q references non-GAAP financial measures including merchandise margin, contribution from operations, EBITDA, adjusted EBITDA, adjusted net loss and adjusted loss per share.
The Company believes the non-GAAP financial measures referenced in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the three-13-week and six-month26-week periods ended September 1, 2018 and August 26, 2017 and August 27, 2016.2017. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented. Merchandise margin represents the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit. Contribution from operations represents gross profit, less compensation for operations (which includes store and customer service payroll) and operational expenses. EBITDA represents earnings before interest, taxes, depreciation and amortization. Management believes merchandise margin, contribution from operations and EBITDA areis a meaningful indicatorsindicator of the Company’s performance which provideprovides useful information to investors regarding its financial condition and results of operations. Management uses merchandise margin, contribution from operations and EBITDA, together with financial measures prepared in accordance with GAAP, to assess the Company’s operating performance, to enhance its understanding of core operating performance and to compare the Company’s operating performance to other retailers. These non-GAAP financial measuresEBITDA should not be considered in isolation or used as an alternative to GAAP financial measures and dodoes not purport to be an alternative to net income (loss) or gross profit as a measure of operating performance. A reconciliation of net loss to EBITDA to contribution from operations to merchandise marginnet loss is shown below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | | | | August 26, 2017 | | | August 27, 2016 | | | August 26, 2017 | | | August 27, 2016 | | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | Merchandise margin (non-GAAP) | | $ | 232.2 | | | | 57.0 | % | | $ | 229.8 | | | | 56.6 | % | | $ | 472.4 | | | | 57.8 | % | | $ | 462.3 | | | | 56.1 | % | Less: Delivery and fulfillment net costs | | | 18.7 | | | | 4.6 | % | | | 10.6 | | | | 2.6 | % | | | 35.4 | | | | 4.3 | % | | | 21.4 | | | | 2.6 | % | Store occupancy costs | | | 73.3 | | | | 18.0 | % | | | 74.2 | | | | 18.3 | % | | | 145.2 | | | | 17.8 | % | | | 146.9 | | | | 17.8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit (GAAP) | | | 140.2 | | | | 34.4 | % | | | 145.0 | | | | 35.7 | % | | | 291.8 | | | | 35.7 | % | | | 294.0 | | | | 35.7 | % | | | | | | | | | | Less: Compensation for operations | | | 58.4 | | | | 14.3 | % | | | 61.5 | | | | 15.1 | % | | | 114.5 | | | | 14.0 | % | | | 121.7 | | | | 14.8 | % | Operational expenses | | | 20.7 | | | | 5.1 | % | | | 22.1 | | | | 5.4 | % | | | 41.3 | | | | 5.1 | % | | | 42.1 | | | | 5.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contribution from operations (non-GAAP) | | | 61.1 | | | | 15.0 | % | | | 61.5 | | | | 15.2 | % | | | 136.0 | | | | 16.6 | % | | | 130.2 | | | | 15.8 | % | | | | | | | | | | Less: Other nonoperating income | | | (0.8 | ) | | | (0.1 | %) | | | (0.2 | ) | | | 0.0 | % | | | (1.0 | ) | | | (0.1 | %) | | | (0.7 | ) | | | (0.1 | %) | Marketing and other SG&A | | | 59.0 | | | | 14.5 | % | | | 52.2 | | | | 12.9 | % | | | 122.5 | | | | 15.0 | % | | | 114.7 | | | | 13.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | EBITDA (non-GAAP) | | | 2.8 | | | | 0.7 | % | | | 9.5 | | | | 2.3 | % | | | 14.5 | | | | 1.8 | % | | | 16.2 | | | | 2.0 | % | | | | | | | | | | Less: Income tax benefit | | | (6.1 | ) | | | (1.5 | %) | | | (2.8 | ) | | | (0.7 | %) | | | (7.9 | ) | | | (1.0 | %) | | | (6.9 | ) | | | (0.9 | %) | Interest expense, net | | | 3.3 | | | | 0.8 | % | | | 2.8 | | | | 0.7 | % | | | 6.1 | | | | 0.7 | % | | | 5.6 | | | | 0.7 | % | Depreciation | | | 13.4 | | | | 3.3 | % | | | 13.6 | | | | 3.3 | % | | | 27.1 | | | | 3.3 | % | | | 27.6 | | | | 3.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss (GAAP) | | $ | (7.8 | ) | | | (1.9 | %) | | $ | (4.1 | ) | | | (1.0 | %) | | $ | (10.8 | ) | | | (1.3 | %) | | $ | (10.1 | ) | | | (1.2 | %) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
| | 13 Weeks Ended | | | 26 Weeks Ended | | | | September 1, 2018 | | | August 26, 2017 | | | September 1, 2018 | | | August 26, 2017 | | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | | $ Amount | | | % of Sales | | EBITDA (non-GAAP) | | $ | (49.3 | ) | | | (13.9 | %) | | $ | 2.8 | | | | 0.7 | % | | $ | (68.1 | ) | | | (9.4 | %) | | $ | 14.5 | | | | 1.8 | % | Less: Income tax benefit | | | (14.1 | ) | | | (4.0 | %) | | | (6.1 | ) | | | (1.5 | %) | | | (20.2 | ) | | | (2.8 | %) | | | (7.9 | ) | | | (1.0 | %) | Interest expense, net | | | 3.1 | | | | 0.9 | % | | | 3.3 | | | | 0.8 | % | | | 6.0 | | | | 0.8 | % | | | 6.1 | | | | 0.7 | % | Depreciation | | | 12.8 | | | | 3.6 | % | | | 13.4 | | | | 3.3 | % | | | 25.7 | | | | 3.6 | % | | | 27.1 | | | | 3.3 | % | Net loss (GAAP) | | $ | (51.1 | ) | | | (14.4 | %) | | $ | (7.8 | ) | | | (1.9 | %) | | $ | (79.6 | ) | | | (10.9 | %) | | $ | (10.8 | ) | | | (1.3 | %) |
This Quarterly Report on Form 10-Q also references adjusted EBITDA, adjusted net loss and adjusted loss per share, each of which excludes prior fiscal year legal and regulatory costs relating to a California wage-and-hour matter and an ongoing CPSC inquiry. Management believes these non-GAAP financial measures are useful in comparing the Company’s year-over-year operating performance. Adjusted EBITDA, adjusted net lossperformance and adjusted loss per share should be considered supplemental and not a substitute for the Company’s net loss and loss per share results reported in accordance with GAAP for the periods presented. A reconciliation of EBITDA, net loss and loss per share to adjusted EBITDA, adjusted net loss and adjusted loss per share, respectively, is shown below (in millions except per share amounts). | | | 13 Weeks Ended | | | 26 Weeks Ended | | | | | | | | September 1, 2018 | | | August 26, 2017 | | | September 1, 2018 | | | August 26, 2017 | | | | Three months ended August 26, 2017 | | | Six months ended August 26, 2017 | | | | | | | | | | | | | | | | | | EBITDA (Non-GAAP) | | $ | 2.8 | | | $ | 14.5 | | | $ | (49.3 | ) | | $ | 2.8 | | | $ | (68.1 | ) | | $ | 14.5 | | Add back: | | | | | | Legal and regulatory matters | | | 6.6 | | | | 6.6 | | | | | | | | | | | Add back: Legal and regulatory matters | | | | — | | | | 6.6 | | | | — | | | | 6.6 | | Adjusted EBITDA (Non-GAAP) | | $ | 9.4 | | | $ | 21.1 | | | $ | (49.3 | ) | | $ | 9.4 | | | $ | (68.1 | ) | | $ | 21.1 | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss (GAAP) | | $ | (7.8 | ) | | $ | (10.8 | ) | | $ | (51.1 | ) | | $ | (7.8 | ) | | $ | (79.6 | ) | | $ | (10.8 | ) | Add back: | | | | | | Legal and regulatory matters, net of tax(1) | | | 3.6 | | | | 3.6 | | | | | | | | | | | Add back: Legal and regulatory matters, net of tax (1) | | | | — | | | | 3.6 | | | | — | | | | 3.6 | | Adjusted net loss (Non-GAAP) | | $ | (4.2 | ) | | $ | (7.2 | ) | | $ | (51.1 | ) | | $ | (4.2 | ) | | $ | (79.6 | ) | | $ | (7.2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Loss per share (GAAP) | | $ | (0.10 | ) | | $ | (0.13 | ) | | $ | (0.63 | ) | | $ | (0.10 | ) | | $ | (0.99 | ) | | $ | (0.13 | ) | Add back: | | | | | | Legal and regulatory matters, net of tax(1) | | | 0.05 | | | | 0.04 | | | | | | | | | | | Add back: Legal and regulatory matters, net of tax (1) | | | | — | | | | 0.05 | | | | — | | | | 0.04 | | Adjusted loss per share (Non-GAAP) | | $ | (0.05 | ) | | $ | (0.09 | ) | | $ | (0.63 | ) | | $ | (0.05 | ) | | $ | (0.99 | ) | | $ | (0.09 | ) | | | | | | | | |
(1) | For the three13 and six months26 weeks ended August 26, 2017, legal and regulatory costs relating to a California wage-and-hour matter and an ongoing CPSC inquiry totaled $6.6 million, or $3.6 million after adjusting for the tax impact. |
Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES The Company ended the first six monthssecond quarter of fiscal 20182019 with $34.9$116.8 million in cash and cash equivalents, compared to $154.5$135.4 million at the end of fiscal 20172018 and $38.3$34.9 million at the end of the first six monthssecond quarter of fiscal 2017.2018. The decrease from the end of fiscal 20172018 was primarily the result of cash used in operating activities of $73.7 million and the utilization of cash to fund the Company’s capital expenditures of $25.2$25.6 million, partially offset by cash provided by operating activities of $4.5 million and proceeds from disposition of properties of $1.7 million. In addition, during the first six months of fiscal 2018, the Company returned excess capital to shareholders, including $11.2 million for cash dividends and $9.7 million to repurchase shares of the Company’s common stock under the April 2014 program. Cash Flows from Operating Activities During the first six monthshalf of fiscal 2018,2019, operating activities used $73.7provided $4.5 million of cash, primarily as a result of an increase in inventories, federalaccounts payable and state income tax paymentsother liabilities and a supplemental retirement plan lump sum distribution payment to the Company’s former chief executive officer.adjustments for non-cash items. These items were partially offset by adjustments for non-cash items.a net loss of $79.6 million and an increase in inventories. The increase in accounts payable from fiscal 2018 year end primarily resulted from changes in trade terms with certain vendors and timing of merchandise purchases. Inventory levels at the end of the second quarter of fiscal 20182019 were $457.3$386.7 million, an increase of $56.4$39.3 million, or 14.1%11.3%, from the end of fiscal 20172018 primarily due to the seasonal build of inventory for the fall and holiday selling seasons.
Cash Flows from Investing Activities During the first six monthshalf of fiscal 2018,2019, investing activities used $23.6$22.7 million of cash, which were primarily related to capital expenditures of $25.6 million deployed toward technology and infrastructure initiatives, newdistribution and fulfillment centers, and existing stores, and distribution centers.partially offset by proceeds from disposition of properties of $1.7 million. Of those capital expenditures, $7.0$5.4 million related to timing differences between receipt of fixed asset purchases and cash payment of invoices. Capital spend in fiscal 20182019 is expected to be approximately $55$60 million, which includes approximately $45 million of expenditures for the New Day strategic plan, to support ongoing investments inbe deployed toward information technology, storessupply chain and distribution centers.stores. Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
Cash Flows from Financing Activities During the first six monthshalf of fiscal 2018,2019, financing activities used $22.3$0.3 million of cash primarily resulting from cash outflows for repayments of $11.2 million for the paymentlong-term debt, partially offset by issuances of dividends and $9.7 million for repurchases ofcommon stock primarily in connection with the Company’s common stock pursuant to the April 2014 program. See“Share Repurchase Program” below for more information.purchase plan. Revolving Credit Facility On June 2, 2017, during the second quarter of fiscal 2018, theThe Company entered intohas a Second Amended and Restated Credit Agreement which amended certain terms of its $350 million secured revolving credit facility with a $150 million accordion feature that matures on June 2, 2022 (“Revolving Credit Facility”). The amendedCredit extensions under the Revolving Credit Facility extended the maturity date from June 18, 2018 to June 2, 2022, and increased the amount of the accordion feature to $150 million. The amended Revolving Credit Facility continues to be secured primarily by the Company’s eligible merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and by a second lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions.
At the end of the second quarter of fiscal 2018, credit extensions wereare limited to the lesser of $350.0 million or the amount of the calculated borrowing base, as defined in the Revolving Credit Facility, which was $366.4$291.3 million as of August 26, 2017.September 1, 2018. The Company had no cash borrowings and $41.8$40.6 million in letters of credit and bankers’ acceptances outstanding under the Revolving Credit Facility, with $308.2$250.7 million remaining available for cash borrowings, all as of August 26, 2017. September 1, 2018. See Note 32 of the Notes to Consolidated Financial Statements for more information regarding the amended Revolving Credit Facility.
Term Loan Facility The Company has a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of August 26, 2017,September 1, 2018, the Company had $194.0$192.0 million outstanding under the Term Loan Facility with a carrying value of $191.1$189.9 million, net of unamortized discounts and debt issuance costs. The fair valueSee Note 2 of the amount outstanding under Notes to Consolidated Financial Statements for more information regarding the Term Loan Facility was approximately $187.0 million as of August 26, 2017, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchy based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.Facility. Share Repurchase Program
During the first six months of fiscal 2018, the Company repurchased 1,925,300 shares of its common stock at a weighted average cost of $5.19 per share for a total cost of $10.0 million under the April 2014 program. Of the $10.0 million repurchased in the first six months of fiscal 2018, $0.3 million of the purchases were settled subsequent to the second quarter of fiscal 2018. Shares repurchased during the period but settled subsequent to the period end are considered non-cash financing activities and are excluded from the Consolidated Statements of Cash Flows.
Dividends Payable
On September 27, 2017, subsequent to quarter end, the Company announced a $0.07 per share quarterly cash dividend on the Company’s outstanding shares of common stock. The $0.07 quarterly cash dividend will be paid on November 1, 2017, to shareholders of record on October 18, 2017.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued) |
Sources of Working Capital Working capital requirements are expected to be funded with cash from operations, available cash balances and, as needed, borrowings against the Company’s amended Revolving Credit Facility and Term Loan Facility. GivenWhile there can be no assurance that the Company will sustain positive cash flows or profitability over the long term, given the Company’s cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund its obligations, for the foreseeable future, including debt-related payments and capital expenditure requirements cash dividends and share repurchases.through fiscal 2019. Impact of InflationIMPACT OF INFLATION
Inflation has not had a significant impact on the operations of the Company. However, the Company’s management cannot be certain of the effect inflation may have on the Company’s operations in the future. Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk. There are no material changes to the Company’s market risk as disclosed in its Annual Report on Form 10-K for the fiscal year ended February 25, 2017.March 3, 2018. Item 4. | Controls and Procedures. |
Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in its reports filed or furnished under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms, and that such information is (b) accumulated and communicated to the Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the required disclosure. As required by Rules 13a-15 and 15d-15 under the Exchange Act, an evaluation was conducted under the supervision and with the participation of the Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures as of August 26, 2017.September 1, 2018. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded, with reasonable assurance, that the Company’sCompany's disclosure controls and procedures were effective as of such date. 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.
PARTPART II
Item 1. | Legal Proceedings. |
Putative class action complaints were filedItem 1. Legal Proceedings.
See the discussion of pending legal proceedings in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between December 19, 2013 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants’ alleged violationsNote 5 of the federal securities laws andNotes to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys’ fees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against it vigorously.Consolidated Financial Statements. The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the Consumer Product Safety Commission (“CPSC”). In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The Company responded to the inquiry and cooperated with the CPSC. On September 20, 2017, the Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. The Company is evaluating the assertions made by the CPSC and is preparing a response. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2.0 million to $6.2 million. While we anticipate that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay.
The Company is a defendant in lawsuits pending in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits seek unspecified monetary damages, injunctive relief and attorneys’ fees. The Company has sought to settle these cases on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company has settled or agreed to settle the pending cases, subject to completion of associated procedural requirements. The Company does not believe any reasonably foreseeable resolution of these matters will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
The Company recognized expense of $6.6 million in the second quarter of fiscal 2018 attributable to the legal and regulatory proceedings described in the two preceding paragraphs as a component of other selling, general and administrative expenses.
There are various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operations of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Item and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity.
Item 1A. Risk Factors. There are no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2017.March 3, 2018. Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
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 months13 weeks ended August 26, 2017,September 1, 2018, by the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act: | | | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased(1) | | | Average Price Paid per Share (including fees)(2) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | May 28, 2017 through Jul 1, 2017 | | | 480,000 | | | $ | 5.32 | | | | 480,000 | | | $ | 30,920,753 | | Jul 2, 2017 through Jul 29, 2017 | | | 446,725 | | | | 4.75 | | | | 445,300 | | | | 28,805,163 | | Jul 30, 2017 through Aug 26, 2017 | | | 500,000 | | | | 4.38 | | | | 500,000 | | | | 26,615,633 | | | | | | | | | | | | | | | | | | | | | | 1,426,725 | | | $ | 4.81 | | | | 1,425,300 | | | $ | 26,615,633 | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | | Average Price Paid per Share (including fees) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | Jun 3, 2018 through Jul 7, 2018 | | | — | | | $ | — | | | | — | | | $ | 26,610,135 | | Jul 8, 2018 through Aug 4, 2018 | | | — | | | | — | | | | — | | | | 26,610,135 | | Aug 5, 2018 through Sep 1, 2018 | | | 2,938 | | | | — | | | | — | | | | 26,610,135 | | | | | 2,938 | | | $ | — | | | | — | | | $ | 26,610,135 | |
(1) | Totals include 1,425During the period, 2,938 shares of the Company’sCompany's common stock were withheld during the second quarter of fiscal 2018 from associates to satisfy tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans. |
(2) | Excludes average price paid per share for shares identified in footnote 1 above. Average price per share of those shares equals the fair market value of the shares on the date of vesting of the restricted stock. |
The
On April 18, 2018, the Company announced that the Board of Directors had determined to discontinue share purchases in the table above were maderepurchases under the April 2014 program and asprogram. As of August 26, 2017,September 1, 2018, $26.6 million remained available for further purchasesshare repurchases of common stock under the April 2014 program. There is no expiration date on the current authorization and no determination has been made by the Company to suspend or cancel purchases under the program.authorization. Item 3. | Defaults upon Senior Securities. |
Item 3. Defaults upon Senior Securities. None. Item 4. | Mine Safety Disclosures. |
Item 4. Mine Safety Disclosures. Not applicable. Item 5. | Other Information. |
Item 5. Other Information. None.
Item 6. Exhibits. | | | Exhibit No. | | Description | | | | 3.1 | | Restated Certificate of Incorporation of Pier 1 Imports, Inc. as filed with the Delaware Secretary of State on October 12, 2009, incorporated herein by reference to Exhibit 3(i) to the Company’s Form 10-Q for the quarter ended November 28, 2009 (File No. 001-07832). | | | | 3.2 | | | 3.2 | | Amended and Restated Bylaws of Pier 1 Imports, Inc. (as amended through June 20, 2014), incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed on June 24, 2014 (File No. 001-07832). | | | | 10.1* | | | 10.1*+ | | Eighth Amendment to Office LeaseCash-Based Long-Term Incentive Award Agreement (“EPS as adjusted”) dated July 9, 2018 between Hines VAV III Energy Way LLCAlasdair B. James and Pier 1 Services Company, dated September 8, 2017.Imports, Inc.
| | | | 31.1*10.2*+ | | Form of Restricted Stock Award Agreement – June 29, 2018 Time-Based Award. | | | | 10.3*+ | | Form of Restricted Stock Award Agreement – June 29, 2018 Performance-Based Award (“EPS as adjusted”). | | | | 31.1* | | Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). | | | | 31.2* | | | 31.2* | | Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). | | | | | | | 32.1** | | Certification of the 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. | | | | 101.INS* | | | 101.INS* | | XBRL Instance Document | | | | 101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
+ | Management Contracts and Compensatory Plans |
SIGNATURESSIGNATURES
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. | | | | | | | Date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Date: | | October 3, 201710, 2018 | By: | | | By: | | /s/ Alasdair B. James | | | | | | | | | Alasdair B. James, President and | | | | | | | | | Chief Executive Officer | | | | | | | Date: | | October 3, 2017 | | | | By: | | /s/ Jeffrey N. Boyer | | | | | | | | | | Jeffrey N. Boyer, | | | | | | | | | | | | | | | | | | | | | Date: | | October 10, 2018 | By: | | /s/ Nancy A. Walsh | | | | | | Nancy A. Walsh, Executive Vice President and | | | | | | | | | Chief Financial Officer | | | | | | | Date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Date: | | October 3, 201710, 2018 | By: | | | By: | | /s/ Darla D. Ramirez | | | | | | | | | Darla D. Ramirez, Principal Accounting Officer |
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