Pier 1 Imports, Inc. F3Q09 (Quarter End 11/29/08) Earnings Call Transcript

Dec.18.08 | About: Pier 1 (PIR)

Pier 1 Imports, Inc. (NYSE:PIR)

F3Q09 Earnings Call

December 18, 2008 11:00 am ET

Executives

Nancy Benson – Director Corporate Finance & Investor Relations

Alexander W. Smith – President, Chief Executive Officer & Director

Charles H. Turner – Chief Financial Officer & Executive Vice President

Analysts

Analyst for Brian Nagel – UBS

Mike Baker – Deutsche Bank

Colin McGranahan – Sanford Bernstein

Budd Bugatch – Raymond James

Operator

This is Pier 1 Imports’ quarterly conference call. At the request of Pier 1 Imports, today’s conference call is being recorded. All lines will be in listen only mode until the question and answer session. I would now like to introduce Mrs. Nancy Benson, Assistant Treasurer and Director of Investor Relations for Pier 1 Imports.

Nancy Benson

Today we will hear from our President and Chief Executive Officer Alex Smith and Executive Vice President and Chief Financial Officer Kerry Turner. The agenda for today’s call will be to hear opening remarks followed by a brief discussion of our third quarter results that were reported earlier today. We will provide an update on our business followed by a question and answer period.

Before we begin, I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities & Exchange Act of 1934 and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases.

Our actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings including our annual report filed on Form 10K for a complete discussion of the major risks and uncertainties that may affect our business.

The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of this morning’s press release, you may obtain one on the investor relations page of our website located at www.Pier1.com. I’d now like to turn the call over to Alex.

Alexander W. Smith

I’m sure by now you’ve all reviewed this morning’s press release. As I said, clearly the sales and income numbers for the quarter were a great disappointment but not a surprise. It will be very easy for anyone in this environment to focus solely on those numbers. However, internally we look at more than just the raw sales and income data to determine the progress that we are making in reconnecting with our customers.

In retail environment such as this, we concentrate on key retail metrics such as traffic, conversion, margin rates and units per transactions. These metrics provide us with a strong indication as to whether our merchandise qualities improved in the mind of our customer, how she perceives our value proposition and the quality of her in store experience.

We know that despite the sales and income results for the quarter, our customers believe our merchandise quality and in store experience are significantly better than they were one year ago. I will talk to this in a little more detail later on but for now I’ll ask Kerry to give you the details of the financial results for the quarter.

Charles H. Turner

Earlier today we reported a loss of $0.41 per share for the third quarter compared to a loss of $0.11 per share for the year ago period. For the first nine months we reported a net loss of $1.12 per share compared to $1.25 for this period last year. EBITDA before special charges was in line with previous guidance and for the quarter was negative $20 million.

For the first nine months, EBTIDA before special charges was -$53 million compared to -$52 last year. Total sales for the third fiscal quarter declined to $301 million from $374 million in the year ago quarter. Comparable store sales for the quarter declined 17.8% and 8.9% for the year-to-date period. Half of the decline in comparable store sales for the third quarter can be attributed to a decline in traffic. The other half is a the result of a decrease in average ticket that was partially offset by increases in conversion rate and units per transaction.

Merchandise margins for the third quarter were 52.5% compared to 53% last year. Store occupancy costs in the quarter were $70 million compared to $72 million last year. During the quarter SG&A expenses were $115 million, a decline of $8 million when compared to the year ago quarter and included special charges, primarily non-cash of $7 million compared to $6 million in the third quarter last year.

Special charges during the quarter included $5 million in store impairments and $2 million in lease termination and other charges. Excluding the special charges, SG&A expenses declined $9 million from the year ago period. The primary drivers of the decreases in costs were savings of approximately $7 million in administrative payroll, $5 million in store payroll and other store expenses offset by an increase in marketing expense of $3 million.

SG&A were $332 million during the first nine months, a decline of $42 million when compared to the year ago period and included special charges of $15 million versus approximately $20 million last year as outlined in the press release earlier today. Excluding the special charges, ongoing SG&A expenses declined $37 million from the year ago period. The primary drivers of the decrease in costs were savings of approximately $9 million in marketing expense, $14 million in store payroll and supplies, $9 million in administrative payroll and $5 million in other general administrative costs.

During the third quarter the company continued to focus on the timing and appropriate level of purchases resulting in inventory at the end of the quarter of $399 million, an improvement over previous expectations of $410 million and compared to $433 million at the end of the third quarter last year. We expect to end the year with approximately $350 million of inventory.

At the end of the third quarter, cash and cash equivalents were $117 million. Including credit card receivables of $15 million at the end of the quarter, we began the fourth quarter with approximately $132 million in cash and cash equivalents. Additionally, at the end of the quarter, the company’s secured credit facility had a calculated borrowing base of $275 million. After taking in to account all reserve amounts and outstanding letters of credit of $93 million, $150 million remained available for cash borrowings.

The $93 million of outstanding letters of credit compared to $160 million last year. The usage of our line of credit continues to be significantly lower compared to last year, a direct result of decreased reliance on trade letters of credit. We have made no changes to our vendor payment terms during the quarter and we continue to work with our key vendors to maintain maximum flexibility.

Taking in to account both the cash and cash equivalents and the availability under the line of credit for cash borrowings, our total liquidity as of the end of the third quarter was $282 million. We feel very fortunate that we do not have any concerns regarding the availability of our secured credit facility. Year-to-date, capital expenditures totaled approximately $11 million and were primarily spent on existing stores and fixtures.

Capital expenditures for the year are expected to be $15 million. During the quarter we closed four Pier 1 Import stores. We ended the quarter with 1,108 Pier 1 Import stores with 1,026 stores in the US and 82 stores in Canada. Closings for the year are now expected to be approximately 25 to 30 stores.

On December 15, 2008 we received notice from the New York Stock Exchange that we are not in compliance with the continued listing at the average closing price of our common stock over a consecutive 30 day trading period was less than $1. Our business operations, SEC reporting requirements, credit agreement and other debt obligations are not affected by this notification. The company’s stock remains listed on the NYSE.

Our board of directors has met and is considering all strategic measures. Our board is cognoscente of the need in these difficult times to maintain optimal liquidity. Now, I’d like to turn it back to Alex.

Alexander W. Smith

When I took over as CEO of this company nearly two years ago, my plan was simple, halve the $200 million loss in year one, breakeven in year two and make a profit in year three. Until August of this year we were on track. You know as well as I do what has happened since then so our plans have been considerably slowed down.

Returning Pier 1 to profitability was, even in a neutral environment, going to be a lot of work. Keeping the Pier1 Imports show on the road through a major recession is, how can I put this, well, a lot more work. But, some things are worth fighting for and a healthy and successful Pier 1 Imports is one of them.

We have one of the most well loved an recognized brands in the United States. This is not just our view, it’s what external research tells us. So, here we are in a miserable recession. Meanwhile, as I said in my earlier remarks, the stores are looking really good. Both our merchandise assortment and in store experience are significantly improved over last year as is evidenced by the outstanding conversion rates we have seen over the last 20 successive weeks.

As we previously told you, our customers have certainly gravitated to the most affordable part of our collections and the new impulse assortments. They are a strength and without then we would certainly be facing bigger revenue decreases. Our furniture sales have of course in this economy decreased as a percentage of the total business but not as drastically as you may think. What is extremely encouraging is that a significant number of the SKUs we introduced this fall hit the bull’s-eye right in the middle which has created the opportunity to repeat new best sellers with confidence.

This is not a situation we’ve been in for some time. These repeats will hit the stores in the spring. Furniture remains an important part of our business both for the short and long term and more importantly when the economy picks up. As you know, we’ve been testing quite a lot and we’re pleased that many of our tests are working well and will be rolled out to a greater number of stores next year. Our extended kitchenware range and photo frames would be two examples.

We are also pleased with our extended food assortments. We have learned a lot about our customer’s preference in the last few months and we’ll continue to develop our food business next year. To compliment our food assortment, we have just started testing wine in five stores and look forward to seeing how this plays out as we expand the tests during next year.

As far as holiday sales are concerned we have, not surprisingly, discounted more than I would have liked. But, it is less than many others in our sector and our merchandise margins remain strong. As you are expecting, our marketing spend increases this quarter as we rolled out our Christmas campaign. While we must wait until January to know the actual research results of the campaign, we have some early signs indicating that our decision to save marketing for the holiday season was a good one.

First, and most importantly, our traffic declines in December are not as drastic as they were in October and November. We’ve used all mediums in our campaign this holiday season including newspaper inserts, retail mailers, email and web advertising and cable television. We are very proud of the creativity of our television ad. If you have seen it, then you know that it features a little class car Christmas tree ornament which has become a sort of iconic celebrity.

While our stores sold out of the ornament very quickly, it is now being offered at a significant premium on eBay. As of today, our plans going forward are to continue to spend marketing dollars in a similar pattern as we did this year. Looking ahead, we are assuming that the current reduced level of consumer spending will continue next year. As such, we are planning our business accordingly to ensure that we maximize our revenues, minimize costs and preserve our liquidity.

What we are doing in these very turbulent times are finding the best ways to capitalize on our strengths. We have a hard working and talented team of associates, a strong net work of exclusive agents and exclusive vendors, loyal customers and a very healthy balance sheet. The downturn in the economy presents new opportunities for us to work closely with our partner suppliers and landlords with the objective of improving merchandise margins and reducing our real estate costs.

We are continuously taking a hard look at every aspect of our business in terms of process and costs. We will monitor very closely the timing and amount of our merchandise purchases. We want to be prudent but we also need to be careful not to reduce our inventory to an unhealthy level. We believe that we will be able to maintain healthy merchandise margins despite the slowdown.

We are already achieving significant reductions in merchandise costs from vendors given the significant slowdown in their economies. We are also very confident in our ability to further reduce costs in the supply chain. With declining fuel costs as well as increased ocean carrier capacity, we believe that we’ll be able to negotiate more favorable terms with our ocean freight carriers. We also believe that we will be able to lower costs in the area of domestic transportation.

Another significant area of opportunity is in our real estate costs. We know that in this environment landlords are more likely to make concessions than they were a year ago. Over the next 12 months we have approximately 200 store leases that have a renewal or termination option. We have already started to achieve reductions and rental rates on renewal and we intend to continue to use these opportunities to affect additional reductions.

Although we’re going to be somewhat more conservative, our priorities remain the same, to continue to improve both the quality of our merchandise offering and the in store experience while we continue to develop a leaner and more efficient infrastructure. Fortunately, with the liquidity we gained from the sale of our headquarters and with the cost savings we have made and will make, we have even looking at our most pessimistic view next year, the wherewithal to manage our way through this downturn.

So, one final thought I want to leave you with, we know and are on top of all the pressures and issues that Pier 1 Imports has to deal with. However, we will not be deflected from improving and moving our business forward. Our business priorities which speak to great merchandise, great stores and a lean and efficient infrastructure will not change. We continue to hold ourselves accountable for improving the standards of execution and everything we do.

We will fight our way through this recession and when it ends, which it will, we are determined that Pier 1 Imports will be well positioned to take advantage of increased economic activity. Finally, before we open up for questions, I want to take this moment to wish you all a wonderful holiday season, a very merry Christmas and I also want to take this opportunity to thank our associates for their contribution to Pier 1 Imports.

We’re now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Brian Nagel – UBS.

Analyst for Brian Nagel – UBS

You indicated that you continue to look for ways to better control costs, have you considered further store closures?

Charles H. Turner

As we’ve been doing for the last year, we’re going to be looking at every single lease, we’re going to be looking at every single opportunity. The best situation we would have is to close zero stores as we continue to negotiate with our landlords but, I think right now we don’t have a definitive number of what that will be.

Analyst for Brian Nagel – UBS

Also, you recently restarted TV advertising and you mentioned before that you saw an impact, higher traffic in December from November, is any of this attributed to that TV advertising?

Alexander W. Smith

What I said in my prepared remarks is the traffic declines in December have been smaller on a percentage basis than the traffic declines we saw in October/November. The traffic in absolute terms clearly goes up very significantly in December anyway. We think the marketing has played a piece in all of that.

Now, we do our tracking so by the end of January we will have some definitive information on that and based on that definitive information we’ll decide what we want to do in terms of TV advertising next year.

Operator

Our next question comes from Mike Baker – Deutsche Bank.

Mike Baker – Deutsche Bank

My question is really on the capital structure and the use of cash. You’ll end this year with certainly probably more cash than you have now after the fourth quarter, any thoughts about buying some of your stock, buying in some of your debt, etc. and just the need to stay liquid. Kerry, I think what you said is we’ll see how it gets through the holiday season but you must have decent visibility in to that now with Christmas six days away.

I’m wondering if we can expect any action there? I guess I’d put it in the context of the quote in your press release that you plan on curing the deficiency of your stock being less than $1. So, does any of that cure require you to change your capital structure?

Alexander W. Smith

Actually the first thing I want to say is in dollars, we’re barely half way through December, interestingly just the way it falls.

Charles H. Turner

And the way it builds.

Alexander W. Smith

We’ve got about 50% of our December revenues still to go so in fact we don’t have complete transparency until right at the end of the month. But listen, you know as well as I do all the things that we as a responsible management and a responsible board will be looking at. We’re looking at all the things you expect us to be looking at. But, I really can’t say more than that at this stage and I’m sure you understand why.

Mike Baker – Deutsche Bank

I guess we’ll just look forward to any announcement or lack thereof in that case. Let me ask one more question then if I could, you said a few times now that traffic trends were less negative in December than they were. Can we say the same thing about the same store sales trend?

Charles H. Turner

As we said we’re only 50% there.

Mike Baker – Deutsche Bank

Any comment at all then on how Black Friday was? That whole weekend relative to expectations?

Alexander W. Smith

Our traffic trends are still negative but they are less negative than they were in October and November. Our conversion rates are just really good and I think just anecdotally you might be interested to know that I think yesterday I believe we achieved the highest conversion rate we’ve ever achieved in this company. So, those that are coming in are really liking what we see, that’s on the plus side.

On the, I don’t know if it’s negative side, it’s just a fact is what I said in our third quarter call, what I said in our press release and I’ll say it again, our customers are shopping the lower end of our assortments so our units per transaction are going up as well which is another good news. But, people are not spending as freely, that’s just a fact of the matter.

Operator

Your next question comes from Colin McGranahan – Sanford Bernstein.

Colin McGranahan – Sanford Bernstein

First question is just kind of simple, what are the remedies for the listing requirement? Is it as simple as can you do a four to one reverse split? I had the pleasure this morning of reading through the ongoing listing requirements so I’d also be curious as to what your listing qualification is. Is it a earnings test qualification?

Alexander W. Smith

Well listen, given all our ongoing discussions with New York Stock Exchange, it really wouldn’t be appropriate for us to sort of talk about this anymore. I would love to, I’d love to chat to you about all the options, all the things we can and cannot do but I’m being glared at so you’ll have to make do with that.

Colin McGranahan – Sanford Bernstein

Am I reading the covert appropriately that you do have to have a listing or JP Morgan has a right to an early termination?

Alexander W. Smith

I think my answer to that question is the same to the previous one. It’s just not appropriate for us to talk about all that stuff at the moment.

Colin McGranahan – Sanford Bernstein

Merchandise margins, it sounds like you’re relatively pleased with the rate. It sounds like you’re getting some cost reductions, certainly that’s going to help. Last year the fourth quarter had not a fantastic merchandise margin and I’m wondering you think you can do better than that even in this environment as you move in to the fourth quarter this year?

Alexander W. Smith

The answer to that is it depends. If you remember last year I think we told you we gave quite a lot back in terms of clearance so we eroded our margin in January and February compared to what we banked in December. Our inventories are cleaner than last year as you heard so theoretically we should see a stronger GP rate in the fourth quarter.

However, and here’s the big caveat, we don’t know how the consumer is going to behave in January and February. If she’s out in responsible numbers then I think we’re okay. If she really closes her wallet after the first week of the sale, then like everybody else we’ll end up discounting more to clean our inventories. So, I really don’t know is the short answer to that.

Colin McGranahan – Sanford Bernstein

Just on the inventory side then, coming in a little bit better than you had thought even though the pace of sales decelerated. It sounds like you were able to cut your receipts or otherwise adjust the incoming flow, is that correct?

Alexander W. Smith

Yes.

Charles H. Turner

And also Colin remember the most important thing as we go in to the downturn in the economy is what is the appropriate purchases as we go forward. The number one thing we as a management team is focused on is our inventory levels. So, we are definitely focused on hitting that $350 million number as we head in to next year and if anything has to give it will be margin.

Colin McGranahan – Sanford Bernstein

The AP to inventory ration, the degradation there was that at all affected by the timing of the quarter ending just after Black Friday?

Charles H. Turner

Yes, a little.

Colin McGranahan – Sanford Bernstein

Final question is kind of long term here, as I look out a couple of years and hopefully the recession will have ended, given where the productivity on a per foot level, it’s increasingly difficult to make the business acceptably profitable at the current SG&A level, the current dollars of SG&A. I know you’ve done a fabulous job of really reducing that, you’ve taking all the fat out, probably some muscle and bone, but as you’re thinking long term about what an acceptable level of profitability is, is there anything else you can do to restructure the SG&A dollars other than close stores?

Alexander W. Smith

Well, I think there are two components to that question. Firstly, in terms of reducing SG&A, I mean we will continue to look at that. Don’t forget, cost reduction goes in line with efficiency improvements and where we can take out process and find efficiencies in the way we do things, that allows us to take out costs. Thanks for the compliments on what we’ve done so far but we’re not finished and we’ll continue to look at that.

Operator

Your final question will come from Budd Bugatch – Raymond James.

Budd Bugatch – Raymond James

My question piggybacks a little bit on Colin’s, you had told us I think when we pre-released it, I think October traffic was down about 10% and now it’s running a little bit better than that, is that the way I understand that? Declines are less than that 10%?

Alexander W. Smith

That’s what it means.

Budd Bugatch – Raymond James

Last year in December you posted a 1.3% positive comp with a better conversion and I guess down traffic as well, as we look at that would it be silly to expect a positive comp in December for this year?

Alexander W. Smith

Well, you know I’ve written Santa Claus my letter and I’ve asked for comp store increases but I think it’s very, very – well, it’s impossible, we won’t get them Budd. The reason we won’t get them is because of the trade down in the ticket. Last year if you recall, we actually also increased our ticket price, our average transaction value and that helped to move the comp. This year with the way the customer is shopping at the lower end of those assortments, the math just doesn’t work.

Budd Bugatch – Raymond James

On the idea of margin, last year about 48.1% for the fourth quarter, as you said appropriately you had thrown a lot of product at the stores trying to see what worked and what didn’t work and you gave a lot of clearance back. I was wondering if you could characterize the inventory right now as a percentage of inventory that you view is clearance today versus a percentage of inventory last year that would have been clearance at this point in time.

Alexander W. Smith

Well, I can’t tell you that because as we pointed out earlier we’re only half way through December. We’ve got an awful lot of Christmas tree ornaments to sell between now and Christmas Eve.

Budd Bugatch – Raymond James

But you do think you can achieve a better merchandise margin next year in the fourth quarter than the 48.1?

Alexander W. Smith

The answer is still the same Budd which is it really depends on how the customer behaves after that first week in January. We know the first week in January will be busy because it always is. If the customer stays out and about shopping for bargains, then we won’t have to discount as much and we’ll hopefully get some benefit. If she disappears back home then we’ll have to discount a little more so it really all depends.

Budd Bugatch – Raymond James

Finally, for the last couple of years furniture has been about 38% of total revenues, what do you think it winds up this year? And, is 38% your real target? Is that a reasonable target?

Charles H. Turner

What’s interesting Budd, that number stays about the same. We’re really seeing that the consumer – and furniture has always been a very important part of our whole proposition. So, as we go forward as Alex said, we do expect furniture to stay where it is.

Operator

Ladies and gentlemen thank you for participating in today’s Pier 1 Imports conference call. You may now disconnect.

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