1
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 June 2, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 1-7832
PIER 1 IMPORTS, INC.
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(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
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(Address of principal executive offices, including zip code)
(817) 252-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 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, 2001
----------------------------- -------------------------------------
Common Stock, $1.00 par value 95,084,090
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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
June 2, May 27,
2001 2000
------------ ------------
Net sales $ 325,387 $ 299,528
Operating costs and expenses:
Cost of sales (including buying and store
occupancy) 190,473 172,882
Selling, general and administrative expenses 104,497 89,311
Depreciation and amortization 10,696 10,372
------------ ------------
305,666 272,565
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Operating income 19,721 26,963
Nonoperating (income) and expenses:
Interest and investment income (471) (429)
Interest expense 608 616
------------ ------------
137 187
------------ ------------
Income before income taxes 19,584 26,776
Provision for income taxes 7,239 9,899
------------ ------------
Net income $ 12,345 $ 16,877
============ ============
Earnings per share:
Basic $ .13 $ .17
============ ============
Diluted $ .13 $ .17
============ ============
Dividends declared per share: $ .04 $ .04
============ ============
Average shares outstanding during period:
Basic 95,826 97,030
============ ============
Diluted 97,335 99,532
============ ============
The accompanying notes are an integral part of these financial statements.
3
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
June 2, March 3, May 27,
2001 2001 2000
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash, including temporary investments of $26,717,
$31,142 and $24,379, respectively $ 40,329 $ 46,841 $ 37,269
Beneficial interest in securitized receivables 81,468 75,403 49,878
Other accounts receivable, net 8,197 8,370 6,158
Inventories 304,814 310,704 286,031
Prepaid expenses and other current assets 34,647 35,748 38,400
------------ ------------ ------------
Total current assets 469,455 477,066 417,736
Properties, net 207,123 211,751 205,044
Other assets 47,320 46,893 41,981
------------ ------------ ------------
$ 723,898 $ 735,710 $ 664,761
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 132,001 $ 144,110 $ 136,685
------------ ------------ ------------
Total current liabilities 132,001 144,110 136,685
Long-term debt 25,000 25,000 25,000
Other noncurrent liabilities 36,345 34,721 30,040
Shareholders' equity:
Common stock, $1.00 par, 500,000,000 shares authorized,
100,779,000 issued 100,779 100,779 100,779
Paid-in capital 139,544 139,424 140,645
Retained earnings 353,299 344,809 278,592
Cumulative other comprehensive income (3,846) (3,115) (2,259)
Less -- 5,405,000, 4,638,000 and 4,155,000 common
shares in treasury, at cost, respectively (59,165) (49,933) (44,479)
Less -- unearned compensation (59) (85) (242)
------------ ------------ ------------
530,552 531,879 473,036
------------ ------------ ------------
$ 723,898 $ 735,710 $ 664,761
============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
June 2, May 27,
2001 2000
------------ ------------
Cash flow from operating activities:
Net income $ 12,345 $ 16,877
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 10,696 10,372
(Gain) loss on fixed assets 250 3,439
Deferred compensation 1,205 619
Other (610) (619)
Changes in cash from:
Inventories 5,941 (17,125)
Other accounts receivable and other current assets 1,215 (4,205)
Accounts payable and accrued expenses (11,328) 1,419
Other assets (718) (704)
Other liabilities 51 33
------------ ------------
Net cash provided by operating activities 19,047 10,106
------------ ------------
Cash flow from investing activities:
Capital expenditures (10,309) (3,906)
Proceeds from disposition of properties 4,105 194
Beneficial interest in securitized receivables (6,065) 3,943
------------ ------------
Net cash (used in) provided by investing activities (12,269) 231
------------ ------------
Cash flow from financing activities:
Cash dividends (3,855) (2,963)
Purchases of treasury stock (11,747) (21,828)
Proceeds from stock options exercised and
stock purchase plan 2,312 1,362
Repayments of long-term debt -- (15)
------------ ------------
Net cash used in financing activities (13,290) (23,444)
------------ ------------
Change in cash and cash equivalents (6,512) (13,107)
Cash and cash equivalents at beginning of period 46,841 50,376
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Cash and cash equivalents at end of period $ 40,329 $ 37,269
============ ============
The accompanying notes are an integral part of these financial statements.
5
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 2, 2001
(in thousands except per share amounts)
(unaudited)
Cumulative
Common Stock Other
------------------------- Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Income Stock
---------- ---------- ---------- ---------- ------------- ----------
Balance March 3, 2001 96,141 $ 100,779 $ 139,424 $ 344,809 $ (3,115) $ (49,933)
Comprehensive income:
Net income -- -- -- 12,345 -- --
Other comprehensive
income, net of tax:
Currency translation
adjustments -- -- -- -- (731) --
Comprehensive income
Purchases of treasury stock (1,000) -- -- -- -- (11,747)
Restricted stock amortization -- -- -- -- -- --
Exercise of stock options, stock
purchase plan and other 232 -- 120 -- -- 2,515
Cash dividends ($.04 per share) -- -- -- (3,855) -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance June 2, 2001 95,373 $ 100,779 $ 139,544 $ 353,299 $ (3,846) $ (59,165)
========== ========== ========== ========== ========== ==========
Total
Unearned Shareholders'
Compensation Equity
------------ -------------
Balance March 3, 2001 $ (85) $ 531,879
Comprehensive income:
Net income -- 12,345
Other comprehensive
income, net of tax:
Currency translation
adjustments -- (731)
----------
Comprehensive income 11,614
----------
Purchases of treasury stock -- (11,747)
Restricted stock amortization 26 26
Exercise of stock options, stock
purchase plan and other -- 2,635
Cash dividends ($.04 per share) -- (3,855)
---------- ----------
Balance June 2, 2001 $ (59) $ 530,552
========== ==========
The accompanying notes are an integral part of these financial statements.
6
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 2, 2001 AND MAY 27, 2000
(unaudited)
The accompanying unaudited financial statements should be read in conjunction
with the Form 10-K for the year ended March 3, 2001. All adjustments that are,
in the opinion of management, necessary for a fair statement of the financial
position as of June 2, 2001, and the results of operations and cash flows for
the three months ended June 2, 2001 and May 27, 2000 have been made and consist
only of normal recurring adjustments. The results of operations for the three
months ended June 2, 2001 and May 27, 2000 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 27, 2000
have been modified to conform with the June 2, 2001 method of presentation.
NOTE 1 - EARNINGS PER SHARE
Basic earnings per share amounts were determined by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share amounts were similarly computed, but included 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.
The following earnings per share calculations reflect the effect of the
Company's conversion of its 5 3/4% convertible subordinated notes, which were
primarily converted, without interest, on or before March 23, 2000.
See Note 3 of the Notes to Consolidated Financial Statements. Earnings per share
for the three months ended June 2, 2001 and May 27, 2000 are calculated as
follows (in thousands except per share amounts):
Three Months Ended
June 2, May 27,
2001 2000
------------ ------------
Net income (Basic and Diluted) $ 12,345 $ 16,877
============ ============
Average shares outstanding during period:
Basic 95,826 97,030
Plus assumed exercise of stock options 1,509 1,193
Plus assumed conversion of 5 3/4%
subordinated notes to common stock -- 1,309
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Diluted 97,335 99,532
============ ============
Earnings per share:
Basic $ .13 $ .17
============ ============
Diluted $ .13 $ .17
============ ============
7
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three months
ended June 2, 2001 and May 27, 2000 are as follows (in thousands):
Three Months Ended
June 2, May 27,
2001 2000
------------ ------------
Net income $ 12,345 $ 16,877
Foreign currency translation adjustments (731) (723)
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Comprehensive income $ 11,614 $ 16,154
============ ============
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
During the first quarter of fiscal 2001, the Company issued 4,764,450 shares of
common stock upon the conversion of $39,164,000 principal amount of 5 3/4%
convertible subordinated notes.
NOTE 4 - ADOPTION OF NEW ACCOUNTING STANDARDS
In the first quarter of fiscal 2002, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which was amended by SFAS No. 137 and SFAS No. 138. This
statement establishes accounting and reporting guidelines for derivatives and
requires the Company to record all derivatives as assets or liabilities on the
balance sheet at fair value. The Company's use of derivatives is primarily
limited to forward foreign exchange contracts, which the Company uses to
mitigate exposures to changes in foreign currency exchange rates. Upon adoption
of SFAS No. 133, the Company did not designate such derivatives as hedging
instruments; thus, the changes in the fair value of the derivatives will be
included in the consolidated statement of operations. Prior to adoption, the
Company deferred all gains and losses on its derivative contracts and recognized
such gains and losses as an adjustment to the transaction price. The adoption of
SFAS No. 133 did not have a material impact on the Company's consolidated
balance sheets or statements of operations, shareholders' equity and cash flows.
As of June 2, 2001, the Company has recorded a liability of approximately
$369,000 related to the negative fair value of its forward contracts
outstanding.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" in the first quarter of
fiscal 2002. This statement establishes new conditions for a securitization to
be accounted for as a sale of receivables, changes the requirements for an
entity to be a qualifying special-purpose entity and modifies under what
conditions a transferor has retained effective control over transferred assets.
SFAS No. 140 also requires additional disclosures related to securitized
financial assets and retained interests in securitized financial assets, which
the Company reported in its fiscal 2001 Annual Report. The Company has made the
necessary amendments to its securitization agreements and continues to receive
sale treatment for its securitized proprietary credit card receivables. The
implementation of SFAS No. 140 did not have a material impact on the Company's
consolidated balance sheets or statements of operations, shareholders' equity
and cash flows.
8
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
Pier 1 Imports, Inc. (the "Company") is one of North America's largest specialty
retailers of unique decorative home furnishings, gifts and related items for the
home. The Company through certain subsidiaries operates stores in the United
States and Canada under the names "Pier 1 Imports" and "Cargo Furniture and
Home." In the United Kingdom, retail locations operate under the name of "The
Pier." The Company has over 900 retail locations in 48 states, Canada, Puerto
Rico, the United Kingdom, Mexico and Japan with merchandise directly imported
from over 50 countries around the world.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 2002 were up 8.6% to $325.4 million
from $299.5 million for the same period a year ago. Same-store sales for the
first quarter of fiscal 2002 increased 2.8% over last year's comparable period.
In addition to the increases in same-store sales, the increase in net sales was
also attributable to the net increase of 46 North American Pier 1 stores at the
end of the first quarter of fiscal 2002 compared to the end of the same quarter
of fiscal 2001. The North American Pier 1 store count totaled 832 at the end of
the first quarter compared to 786 stores a year ago. During the first quarter,
the Company opened twelve and closed six North American Pier 1 stores. Including
Cargo locations, the worldwide store count across North America, Puerto Rico,
the United Kingdom, Mexico and Japan totaled 904 as of June 2, 2001.
Net sales on the Company's proprietary credit card totaled $96.1 million for the
first three months of fiscal 2002, an increase of $13.8 million, or 16.8%, over
proprietary credit card sales of $82.2 million for the same period last fiscal
year. Proprietary credit card sales accounted for 32.3% of total U.S. store
sales in the first quarter of fiscal 2002 versus 29.6% of sales in the year
earlier period. The Company continues to increase sales on its proprietary
credit card by opening new accounts and developing customer loyalty through
marketing promotions targeted to cardholders.
Gross profit, after related buying and store occupancy costs, expressed as a
percentage of sales, decreased 80 basis points for the first quarter of fiscal
2002 from the same period last year. Merchandise margins for the first quarter
were 55.3% of sales, a decline of 60 basis points when compared to the same
period a year ago. The Company has recently experienced higher than usual sales
of promotional merchandise as a percentage of total sales, resulting in a
decline in merchandise margins. The Company believes this change in consumer
behavior to be a result of worsening general economic conditions and declines in
consumer confidence. Additionally, store occupancy expense increased 20 basis
points as a percentage of sales due to slightly negative leveraging of sales.
Selling, general and administrative expenses, including marketing, were 32.1% of
sales for the first quarter of fiscal 2002, a 230 basis point increase over last
year's first quarter expenses of 29.8% of sales. In total dollars, expenses for
the quarter increased $15.2 million over the same quarter last year to $104.5
million. Store payroll was well-controlled at $41.8 million, a modest increase
when compared to the same period a year ago and remained flat as a percentage of
sales for the first quarter. Marketing expense was $22.6 million, or 6.9% of
sales, for the quarter due to the Company's new television advertising campaign,
which began in March. The timing of the Company's marketing expenditures
fluctuates between fiscal quarters. In addition, marketing expenses for the
quarter were higher than
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planned as a percentage of sales because sales fell below the Company's
expectation. Despite this increase in marketing expenditures during the first
quarter, the Company anticipates expenditures for the year in total to be
approximately 4.5% of sales, which will be comparable to last year's levels as a
percentage of sales. All other selling, general and administrative expenses
increased $8.3 million over last year to $40.1 million for the first quarter. A
majority of the increase in these expenses was due to an increase in non-store
payroll, which was partly the result of an enhancement to the field management
structure to provide for future growth.
Operating income decreased $7.2 million, or 26.9%, to $19.7 million for the
first quarter of fiscal 2002 compared to $27.0 million in the first quarter of
fiscal 2001.
The Company's effective income tax rate for fiscal 2002 is estimated at 37%,
consistent with the first quarter of fiscal 2001.
Net income for the first quarter of fiscal 2002 totaled $12.3 million,
representing 3.8% of sales, or $.13 per share on a diluted basis. Net income for
the first quarter of fiscal 2001 was 5.6% of sales and totaled $16.9 million, or
$.17 per share on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
Net income, adjusted for non-cash and non-operating related items, was $23.9
million and served as the Company's primary source of operating cash for the
three months ended June 2, 2001. As a result of the Company's commitment to
manage inventory levels, the change in inventory for the first quarter provided
cash of $5.9 million, compared to a use of cash of $17.1 million in last year's
first quarter for increases in inventories. As planned, current year inventory
levels increased 6.6% over last year's first quarter balance to support current
sales projections and store openings for the second and third quarters of this
fiscal year. Additionally, a decrease in accounts payable and accrued expenses
for the year reduced operating cash flow by $11.3 million.
During the first three months of fiscal 2002, the Company spent a net of $12.3
million in investing activities. Of this amount, capital expenditures were $10.3
million, a majority of which was used for new and existing store development.
Continuing to experience favorable sales trends on its proprietary credit card,
the Company recorded a net increase of $6.1 million in the beneficial interest
in securitized receivables. Partially offsetting these uses of cash were
proceeds from the disposition of properties totaling $4.1 million
Financing activities for the first quarter used a net of $13.3 million of the
Company's cash resources. During the quarter, the Company repurchased one
million shares of its common stock for $11.7 million. Subsequent to the end of
the first quarter, the Company repurchased an additional 325,000 shares of its
common stock for $3.6 million leaving 5.5 million shares remaining authorized
for repurchase under the previously approved Board of Directors program. During
the first quarter, cash dividends paid to shareholders totaled $3.9 million.
Other financing activities, primarily the exercise of stock options, provided
cash of $2.3 million.
The Company's minimum operating lease commitments remaining for fiscal 2002 are
$107.9 million. The present value of total future minimum operating lease
commitments discounted at 10% was $650.5 million at the fiscal 2002 first
quarter-end. These amounts include a three year obligation for a new 135,000
square foot facility for the relocation of Cargo's administrative offices and
distribution center. The Company expects this relocation to improve operational
efficiencies and provide room for future expansion. The Company expects to fund
all operating lease commitments from operating cash flow.
Working capital requirements are expected to continue to be funded through cash
flow from operations, bank lines of credit and sales of proprietary credit card
receivables. The Company's bank facilities
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consist of a $125 million revolving credit facility, which expires November
2003, all of which was available at the end of the first quarter of fiscal 2002.
Additionally, the Company has other long-term and short-term bank facilities
used principally for the issuance of letters of credit totaling $148.9 million,
of which $60.8 million was available at fiscal 2002 first quarter-end. The
Company's current ratio was 3.6 to 1 at the end of the first quarter of fiscal
2002 compared to 3.3 to 1 at the end of fiscal year 2001.
In June 2001, the Company declared a cash dividend of $.04 per share payable on
August 15, 2001 to shareholders of record on August 1, 2001. The Company
currently expects to continue to pay cash dividends in the future but to retain
most of its future earnings for expansion of the Company's business.
In 1997, the Company securitized its entire portfolio of proprietary credit card
receivables (the "Receivables"). On a daily basis, the Company sells all
eligible Receivables to a master trust and receives payment for these
receivables in cash funded from undistributed principal collections from
Receivables in this trust. Beginning in October 2001, a portion of these
principal collections will be used to amortize the outstanding balance of $50
million of the trust's Series 1997-1 Certificates (the "Certificates"), which
mature in May 2002, and will not be available to fund the purchase of new
receivables being transferred from the Company. As of the end of the first
quarter of fiscal 2002, the Company had made preliminary arrangements to enter
into a new securitization agreement which will replace these Certificates prior
to October 2001 and will allow the Company to securitize an additional $40 to
$50 million of its proprietary credit card receivables.
Management believes the funds provided from operations, available lines of
credit and sales of the Company's proprietary credit card receivables will be
sufficient to meet the Company's expected cash requirements for the next fiscal
year.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this quarterly report, except for historical
information contained herein, may constitute "forward-looking statements" that
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements. The
Company may also make forward-looking statements in other reports filed with the
Securities and Exchange Commission and in material delivered to the Company's
shareholders. Forward-looking statements provide current expectations of future
events based on certain assumptions. These statements encompass information that
does not directly relate to any historical or current fact and often may be
identified with words such as "anticipates," "believes," "expects," "estimates,"
"intends," "plans," "projects" and other similar expressions. Management's
expectations and assumptions regarding planned store openings, financing of
Company obligations from operations and other future results are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements. Risks and uncertainties that may affect Company
operations and performance include, among others, weather conditions that may
affect sales, the general strength of the economy and levels of consumer
spending, the availability of new sites for expansion along with sufficient
labor to facilitate growth, the strength of new home construction and sales of
existing homes, the ability of the Company to import merchandise from foreign
countries without significantly restrictive tariffs, duties or quotas and the
ability of the Company to ship items from foreign countries at reasonable rates
in timely fashion. The foregoing risks and uncertainties are in addition to
others discussed elsewhere in this quarterly report. The Company assumes no
obligation to update or otherwise revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied will not be realized. Additional information concerning these risks
and uncertainties is contained in the Company's Annual Report on Form 10-K for
the year ended March 3, 2001, as filed with the Securities and Exchange
Commission.
11
IMPACT OF INFLATION
Inflation has not had a significant impact on the operations of the Company.
12
PART II
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held June 28, 2001 for the
purpose of electing seven (7) Directors to hold office until the next Annual
Meeting of Shareholders and to vote on the proposed amendment to the Pier 1
Imports, Inc. Stock Purchase Plan. The result of the election follows:
Director Election:
Director For Withheld
------------------ ---------- ----------
Marvin J. Girouard 64,022,189 23,531,608
James M. Hoak, Jr 87,214,017 339,780
Tom M. Thomas 87,218,048 335,749
John H. Burgoyne 87,191,575 362,222
Michael R. Ferrari 87,215,231 338,566
James D. Carreker 87,193,411 360,386
Karen W. Katz 87,190,113 363,684
Proposed amendment to the Pier 1 Imports, Inc. Stock Purchase Plan:
For Against Abstain
------------------ ---------- ----------
82,957,966 3,804,145 791,686
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits None.
(b) Reports on Form 8-K None.
13
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 13, 2001 By: /s/ Marvin J. Girouard
----------------------------------------------
Marvin J. Girouard, Chairman of the Board
and Chief Executive Officer
Date: July 13, 2001 By: /s/ Charles H. Turner
----------------------------------------------
Charles H. Turner, Senior Vice President,
Chief Financial Officer and Treasurer
Date: July 13, 2001 By: /s/ Susan E. Barley
----------------------------------------------
Susan E. Barley, Principal Accounting Officer