FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from [ ] to [ ]
Commission File Number 1-7832
PIER 1 IMPORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1729843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 Commerce Street, Suite 600, Fort Worth, Texas 76102
(Address of principal executive offices, including zip code)
(817) 252-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of July 6, 1998
- ----------------------------- -------------------------------------
Common Stock, $1.00 par value 65,700,457
PART I
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Item 1. Financial Statements.
---------------------
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
May 30, May 31,
1998 1997
-------- --------
Net sales $250,508 $229,243
Operating costs and expenses:
Cost of sales (including buying and
store occupancy) 140,821 130,087
Selling, general and administrative expenses 76,290 70,938
Depreciation and amortization 6,996 5,415
-------- --------
224,107 206,440
-------- --------
Operating income 26,401 22,803
Nonoperating (income) and expense:
Interest income (730) (294)
Interest expense 2,128 2,027
-------- --------
1,398 1,733
-------- --------
Income before income taxes 25,003 21,070
Provision for income taxes 9,502 8,431
-------- --------
Net income $ 15,501 $ 12,639
======== ========
Net income per share:*
Basic $.15 $.13
==== ====
Diluted $.14 $.12
==== ====
Average shares outstanding during period,
including common stock equivalents:*
Basic 100,936 100,903
======= =======
Diluted 113,046 112,500
======= =======
* Adjusted to reflect a three for two stock split effected in the form of a
stock dividend declared June 25, 1998.
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
May 30, February 28,
1998 1998
-------- ------------
ASSETS
Current assets:
Cash, including temporary investments of $42,795
and $67,972, respectively $ 57,387 $ 80,729
Accounts receivable, net 10,618 12,638
Inventories 240,409 234,180
Prepaid expenses and other current assets 77,343 74,834
-------- --------
Total current assets 385,757 402,381
Properties, net 231,556 216,330
Other assets 35,208 34,699
-------- --------
$652,521 $653,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term
debt $ 1,982 $ 1,994
Accounts payable and accrued liabilities 121,252 119,596
-------- --------
Total current liabilities 123,234 121,590
Long-term debt 114,856 114,881
Other non-current liabilities 24,352 24,208
Stockholders' equity:
Common stock, $1.00 par, 500,000,000 shares
authorized, 67,903,000 issued 67,903 67,903
Paid-in capital 165,618 166,824
Retained earnings 178,148 165,345
Cumulative other comprehensive income (1,315) (1,108)
Less - 735,000 and 176,000 common shares in
treasury, at cost, respectively (17,634) (3,149)
Less - unearned compensation (2,641) (3,084)
-------- --------
390,079 392,731
-------- --------
$652,521 $653,410
======== ========
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
May 30, May 31,
1998 1997
------- -------
Cash flow from operating activities:
Net income $15,501 $12,639
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 6,996 5,415
Deferred taxes and other 267 734
Change in cash from:
Inventories (6,229) (783)
Accounts receivable and other current assets (2,227) (2,600)
Accounts payable and accrued expenses (608) (1,205)
Other assets, liabilities, and other, net (303) (954)
------- -------
Net cash provided by operating activities 13,397 13,246
------- -------
Cash flow from investing activities:
Capital expenditures (24,346) (9,550)
Proceeds from disposition of properties 503 509
Beneficial interest in securitized receivables 2,609 (2,935)
Acquisition of national bank charter -- (943)
------- -------
Net cash used in investing activities (21,234) (12,919)
------- -------
Cash flow from financing activities:
Cash dividends (2,698) (1,802)
Purchases of treasury stock (14,742) (1,662)
Proceeds (payments) from sales (purchases) of
stock options exercised, stock purchase plan
and other, net 1,935 1,724
------- -------
Net cash used in financing activities (15,505) (1,740)
------- -------
Change in cash and cash equivalents (23,342) (1,413)
Cash and cash equivalents at beginning of period 80,729 32,280
------- -------
Cash and cash equivalents at end of period $57,387 $30,867
======= =======
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 30, 1998
(In thousands)
(Unaudited)
Cumulative
Other Total
Common Paid-in Retained Comprehensive Treasury Unearned Stockholders'
Stock Capital Earnings Income Stock Compensation Equity
------- -------- -------- ------------- --------- ------------- -------------
Balance, February 28, 1998 $67,903 $166,824 $165,345 ($1,108) ($ 3,149) ($3,084) $392,731
--------
Comprehensive income
Net income 15,501 15,501
Other comprehensive income, net of tax:
Foreign currency translation adjustments (207) (207)
--------
Comprehensive income 15,294
--------
Purchases of treasury stock (19,857) (19,857)
Restricted stock grant and amortization 443 443
Stock purchase plan, exercise of stock
options and other (1,206) 5,372 4,166
Cash dividends, declared or paid ($.04
per share) (2,698) (2,698)
------- -------- -------- ------- -------- ------- --------
Balance, May 30, 1998 $67,903 $165,618 $178,148 ($1,315) ($17,634) ($2,641) $390,079
======= ======== ======== ======= ======= ===== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 30, 1998 AND MAY 31, 1997
(Unaudited)
The accompanying unaudited financial statements should be read in
conjunction with the Form 10-K for the year ended February 28, 1998. All
adjustments that are, in the opinion of management, necessary for a fair
statement of the financial position as of May 30, 1998, and the results of
operations and cash flows for the three months ended May 30, 1998 and May 31,
1997 have been made and consist only of normal recurring adjustments. The
results of operations for the three months ended May 30, 1998 and May 31,
1997 are not indicative of results to be expected for the fiscal year because
of, among other things, seasonality factors in the retail business. The
classifications of certain amounts previously reported in the statement of
cash flows for the three months ended May 31, 1997 have been modified to
conform with the May 30, 1998 method of presentation.
Note 1 - Net income per share
Basic net income per share was determined by dividing net income by
the weighted average number of common shares outstanding. Diluted net income
per share amounts are similarly computed, but include the effect, when
dilutive, of the Company's weighted average number of stock options
outstanding and the average number of common shares that would be issuable
upon conversion of the Company's convertible securities. To determine
dilutive net income, interest and debt issue costs, net of any applicable
taxes, have been added back to net income to reflect assumed conversions.
Net income per share for the three months ended May 30, 1998 and May
31, 1997 (adjusted for the stock split effected in the form of a stock
dividend declared June 25, 1998) are calculated as follows:
Three Months Ended
May 30, May 31,
1998 1997
------- -------
(in thousands except per share amounts)
Net income $15,501 $12,639
Assumed conversion of 5 3/4% subordinated
notes:
Plus interest and debt issue costs,
net of tax 838 811
------- -------
Diluted net income $16,339 $13,450
======= =======
Average shares outstanding during period:
Basic 100,936 100,903
Plus assumed exercise of stock options 1,621 1,107
Plus assumed conversion of 5 3/4%
subordinated notes to common stock 10,489 10,490
------- -------
Diluted 113,046 112,500
======= =======
Net income per share:
Basic $.15 $.13
==== ====
Diluted $.14 $.12
==== ====
Note 2 - Subsequent event - three for two stock split
In June 1998, the Company announced a three for two stock split of its
common shares distributable to shareholders of record on July 15, 1998. The
stock split will be effected in the form of a 50% stock dividend. The new
shares will be distributed on July 29, 1998. All per share amounts have been
adjusted to reflect the impact of the stock split. The effect of this stock
split has not been reflected in the May 30, 1998 consolidated balance sheet.
Additionally, the Company announced a 12.5% effective increase in the
Company's quarterly cash dividend on the post split shares. The cash
dividend of $.03 will be paid August 26, 1998 to shareholders of record on
August 12, 1998.
Note 3 - Adoption of new accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." This standard was adopted by the Company in the first
quarter of fiscal 1999. SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, which for the Company
includes foreign currency translation adjustments. The impact of the
adoption of this statement was primarily limited to the form and content of
the disclosures on the Company's consolidated balance sheets and statement of
stockholders' equity with no impact to the Company's financial position or
net income. The May 31, 1997 first quarter financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The components of comprehensive income, net of related tax, for the
first quarter of fiscal 1999 and 1998 are as follows:
Three Months Ended
May 30, May 31,
1998 1997
------- -------
(in thousands)
Net income $15,501 $12,639
Foreign currency translation adjustments (207) (15)
------- -------
Comprehensive income $15,294 $12,624
======= =======
PART I
------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
For the first quarter of fiscal 1999, Pier 1 Imports, Inc. ("the
Company") recorded net sales of $250.5 million, a 9.3% increase over the
$229.2 million recorded for the same period in fiscal 1998. Same-store sales
for the first quarter of fiscal 1999 increased 8.3% compared to the first
quarter of fiscal 1998. The growth in same-store sales is primarily a result
of the Company's expanded network television advertising campaign, which
added more networks to the previous advertising schedule, and the increasing
number of remodeled and remerchandised stores. Additionally, the Company
initiated a new credit card program which enables customers to make lower
periodic payments on big ticket purchases. This new credit card program
fueled hard goods sales on furniture and decorative accessories with
increases of 14.4% and 13.4%, respectively, for the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998. Sales on the Company's
proprietary credit card totaled $65.9 million for the first three months of
fiscal 1999, an increase of $5.2 million, or 8.5% over the same period of
fiscal 1998. The Company opened five new stores and closed six stores in
North America during the first quarter of fiscal 1999. After a two year
testing period, the Company decided not to proceed with the concept of mall-
based stores operating under the name "The Market of Pier 1." The remaining
eight test stores were closed during the first quarter of fiscal 1999
bringing the North American store count to 709 at the end of the quarter
compared to 689 stores a year earlier. Stores worldwide, including North
America, Puerto Rico, the United Kingdom, Mexico and Japan, totaled 754 at
the fiscal 1999 first quarter-end.
Gross profit, after related buying and store occupancy costs,
expressed as a percentage of sales, increased 50 basis points to 43.8% for
the first quarter of fiscal 1999 compared to 43.3% for the first quarter of
fiscal 1998. These increases are principally the result of higher
merchandise margins on certain items, particularly furniture and decorative
accessories, offset partially by a slight increase in clearance and
promotional markdowns. Store occupancy costs, as a percentage of sales,
declined to 13.1% during the first three months of fiscal 1999 from 13.3% for
the comparable period of fiscal 1998. This improvement is primarily due to
leveraging relatively fixed store rental rates over a higher sales base.
Selling, general and administrative expenses, including marketing, as
a percentage of sales, improved 40 basis points to 30.5% in the first quarter
of fiscal 1999 compared to the same period a year earlier. In total dollars,
expenses for the first quarter of fiscal 1999 increased $5.4 million over the
first quarter of fiscal 1998. Expenses that normally grow proportionately
with sales and net new stores, such as store salaries, equipment rental,
supplies and marketing, grew by $5.9 million, a 60 basis point increase over
the first quarter of last year as a percentage of sales. These variable
expenses increased primarily due to a 40 basis point increase in marketing
expenses related to the timing of the Company's national television
advertising expenses coupled with the introduction of a major seasonal direct
mail piece. In addition, other selling, general and administrative expenses
grew in the first quarter of fiscal 1999 by $2.7 million related to non-store
compensation costs, offset by a $1.9 million decrease in net proprietary
credit card costs. All other selling, general and administrative expenses
decreased by $1.3 million.
Operating income increased $3.6 million, or 15.8%, to $26.4 million
for the first quarter of fiscal 1999 compared to $22.8 million in the first
quarter of fiscal 1998.
During the first quarter of fiscal 1999, net interest expense declined
$.3 million primarily as a result of increased interest income on higher cash
balances and short-term investments.
The Company's effective income tax rate for fiscal 1999 is estimated
at 38% compared to 40% recorded in the first quarter of fiscal 1998. The
decline in the estimated effective income tax rate is a result of favorable
resolution of a number of federal tax issues as well as state income tax
benefits resulting from certain operational initiatives.
Net income for the first quarter of fiscal 1999 was $15.5 million or
$.14 per share on a diluted basis compared to net income of $12.6 million or
$.12 per share on a diluted basis for the first quarter of fiscal 1998.
These per share amounts have been adjusted to reflect the impact of the three
for two stock split declared June 25, 1998. See: Note 2 of the Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
Cash, including temporary investments, decreased $23.3 million to
$57.4 million at the end of the first quarter of fiscal 1999 from $80.7
million at fiscal 1998 year-end. This decrease is primarily due to capital
expenditures of $24.3 million, repurchases of the Company's common stock in
open market transactions of $14.7 million and cash dividend payments of $2.7
million. These cash expenditures were partially offset by cash flow from
operations of $13.4 million and decreased beneficial interest in securitized
receivables of $2.6 million. Other investing and financing activities
provided cash of $2.4 million.
During fiscal 1999, the Company estimates capital expenditures to be
approximately $80 million, with the majority of these expenses related to the
Company's store development plans for new and existing locations, including
various store-related technology investments. In the first quarter of fiscal
1999, capital expenditures were $24.3 million. Capital expenditures are
expected to continue to be funded by operations, working capital and bank
lines of credit.
The Company expects working capital requirements will continue to be
funded through cash flow from operations, sales of proprietary credit card
receivables and bank lines of credit. The bank facilities consist of a
committed $65 million competitive advance and revolving credit facility,
which expires in December 1998, all of which was available at the end of the
first quarter of fiscal 1999, other short-term (12-month) bank facilities
used principally for the issuance of letters of credit totaling $146.1
million, $60.6 million of which was available at the end of the first quarter
of fiscal 1999, and other long-term bank facilities of $32.1 million. At the
end of the first quarter of fiscal 1999, the short-term bank facilities
consisted of $4.8 million of committed lines of credit and $141.3 million of
uncommitted lines, while the long-term facilities consisted of $25.6 million
of committed lines of credit and $6.5 million in uncommitted lines. The
Company expects to replace the competitive advance and revolving credit
facility, prior to the existing facility's expiration date, with a five year
$125 million facility that will have substantially similar or better terms.
Additionally, Pier 1 Imports Credit Card Master Trust has issued Series 1997-
2 variable funding certificates maturing October 2002 that provide for a
maximum outstanding principal balance of $50 million. At the end of the
first quarter of fiscal 1999, approximately $9 million was available to be
drawn against the variable funding certificates, and as of May 30, 1998, no
amounts had been drawn against such certificates. The Company's current
ratio at the end of the first quarter of fiscal 1999 was 3.1 to 1 compared to
3.3 to 1 at the end of fiscal 1998.
At the end of fiscal 1998, the Company had utilized commitments from
an unaffiliated party to make available up to $23.6 million for the
development or acquisition of store properties for lease to the Company.
This facility was to expire on June 15, 1998. Prior to the expiration date,
the Company arranged alternative financing by entering into lease agreements
with another unaffiliated party for these store properties. The Company's
minimum operating lease commitments remaining for fiscal 1998 are $74.5
million, and the present value of total existing minimum operating lease
commitments is $398 million. The Company expects to fund these commitments
from operating cash flow.
The Company continues to guarantee certain nursery store leases of
Wolfe Nursery, Inc. ("Wolfe"), a subsidiary of Sunbelt Nursery Group, Inc.
("Sunbelt"). These commitments totaled $2.1 million at the end of the first
quarter of fiscal 1999. In April 1998, Sunbelt initiated bankruptcy
proceedings and as of June 30, 1998, all of the leases were rejected by Wolfe
in these proceedings. The Company believes it has accrued sufficient amounts
to cover any deficiencies in payments on these store lease commitments as a
result of Wolfe's defaults on these leases and its bankruptcy. Any cash
payments to satisfy these guarantees are expected to be funded through
working capital and operations.
In April 1998, the Board of Directors approved the purchase of up to
three million shares of the Company's outstanding common stock. During the
first three months of fiscal 1999, the Company repurchased approximately
698,100 shares of its common stock in open market transactions for
approximately $17.6 million, of which $14.7 million was paid in the first
quarter of fiscal 1999. In addition, approximately 93,000 shares of common
stock were acquired as payment for the exercise of employee stock options.
As of June 30, 1998, the Company has repurchased approximately 2,189,400
shares in open market transactions for approximately $51.9 million.
In June 1998, the Company announced a three for two stock split of its
common shares distributable July 29, 1998 to shareholders of record on July
15, 1998. The stock split will be effected in the form of a 50% stock
dividend. All per share amounts have been adjusted to reflect the impact of
the stock split. The effect of this stock split has not been reflected in
the May 30, 1998 consolidated balance sheet.
In the first quarter of fiscal 1999, the Company paid a $.04 per share
cash dividend and in June 1998 declared a cash dividend of $.03 per share, a
12.5% effective increase in the Company's quarterly cash dividend on the post
split shares, payable on August 26, 1998 to shareholders of record on August
12, 1998. The Company currently expects to continue to pay cash dividends in
fiscal 1999 but to retain most of its future earnings for expansion of the
Company's business.
In June 1998, Standard & Poor's ("S&P") raised the Company's corporate
credit rating to an investment grade of BBB-. In addition, S&P raised the
Company's convertible subordinated debt rating to BB+ from BB-. The
investment grade rating should provide the Company the opportunity to obtain
more favorable interest rates as well as provide an advantage in lease
agreement negotiations on new stores.
Impact of Year 2000 Issues
The Company is in the process of reviewing and addressing its computer
systems with regard to the year 2000 issue. The Company has conducted an
initial review of its computer systems to identify those areas both
internally and externally that could be affected by the year 2000 issue and
has engaged consultants to review its assessments and implementation
strategies. The year 2000 project has been divided into five phases: 1)
awareness, 2) assessment, 3) renovation, 4) validation and 5) implementation.
The Company's systems are in various stages of these phases; some of the
systems have completed the implementation phase and are running in
production. The Company plans to complete the assessment phase of its year
2000 project in the second quarter of fiscal 1999. The Company's strategy
also includes development of contingency plans for critical business
processes in the event of a compliance failure on the part of the Company or
any of its business partners.
Additionally, the Company is in the process of communicating with
service providers and suppliers of merchandise in order to assess their year
2000 readiness and the extent to which the Company may be vulnerable to any
third parties' failure to remediate their own year 2000 issues. If necessary
modifications and conversions by other companies on whose systems the
Company's business processes rely are not completed on time, the year 2000
issue may have an adverse effect on the Company's operations. The areas of
greatest risk include communications systems and elements of the merchandise
supply chain, including procurement, transportation, and import activities.
The Company plans to continue to rely primarily on internal resources
in order to identify, correct or reprogram and test systems for year 2000
compliance. Costs incurred to date for year 2000 remediation have totaled
approximately $1 million, the majority of which consisted of normal salaries
paid to existing employees; such costs were consistent with the Company's
operating budget and have not had a material effect on the results of
operations in any period or on liquidity or financial position. Remaining
remediation costs are not expected to exceed $3 million over the next seven
quarters. Cost estimates will be further refined as the assessment phase
nears completion. Contingency plans include arrangements for engaging
external resources to assist in remediation efforts if necessary.
Significant utilization of such outside resources, although not expected,
could cause remediation costs to increase above the Company's estimates. The
Company's plan provides for internal compliance of all mission-critical
systems by mid-1999.
Impact of Inflation
Inflation has not had a significant impact on the operations of the
Company.
PART II
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Item 2. Changes in Securities.
---------------------
The Company's Certificate of Incorporation was amended,
effective June 29, 1998 to increase the authorized number of shares of common
stock from 200,000,000 to 500,000,000.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held June
25, 1998 for the purpose of electing six (6) Directors to hold office until
the next Annual Meeting of Shareholders and to vote upon the proposed
amendment to the Company's certificate of incorporation. The result of this
vote follows:
Director Election
-----------------
Director FOR WITHHELD
-------- --- --------
Clark A. Johnson 59,465,336 106,149
Marvin J. Girouard 59,478,807 92,678
Martin L. Berman 59,462,781 108,704
Craig C. Gordon 59,480,320 91,165
James M. Hoak, Jr. 59,480,814 90,671
Sally F. McKenzie 59,446,662 124,823
Proposed Amendment to the Company's Certificate of Incorporation
----------------------------------------------------------------
For Against Abstained
--- ------- ---------
36,910,324 22,562,654 98,507
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits See Exhibit Index.
(b) Reports on Form 8-K None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIER 1 IMPORTS, INC. (Registrant)
Date: July 14, 1998 By: /s/ Marvin J. Girouard
------------- --------------------------------------------
Marvin J. Girouard, President
and Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1998 By: /s/ Stephen F. Mangum
------------- -------------------------------------------
Stephen F. Mangum, Senior Vice President
and Chief Financial Officer
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3(i) Certificate of Incorporation and Amendments thereto.
27 Financial Data Schedule for Three-Month Period ended May 30,
1998.