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Pier 1 Imports, Inc. (NYSE:PIR)

F4Q09 Earnings Call

April 7, 2009 11:00 am ET

Executives

Nancy Benson – Assistant Treasurer and Investor Relations

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

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

Analysts

Budd Bugatch - Raymond James

Operator

Good morning, ladies and gentlemen. This is Pier 1 Imports quarterly conference call. (Operator Instructions)

I would now like to introduce Nancy Benson, Assistant Treasurer and Director of Investor Relations for Pier 1 Imports. Ms. Benson, you may begin.

Nancy Benson

Good morning, everyone, and thank you for joining us this morning.

Today we will hear from our President and Chief Executive Officer, Alex Smith, and Executive Vice President and Chief Financial Officer, Cary Turner, who will discuss the financial results of the fourth quarter and fiscal year ended February 28, 2009, which were reported earlier today.

Before we begin this call I need 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 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 10-K 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, which is located at Pier1.com.

I would now like to turn the call over to Alex.

Alexander W. Smith

Thanks, Nancy. Good morning, everyone.

Well, I think we can agree that fiscal 2009 did not go according to plan. We began the year expecting to see improvements in merchandise margin, report of modest comp and potentially break even. Until last August we were on track.

Whilst we did report an overall margin improvement, it was not to the scale that we had hoped. The recession has hit us hard and as a result delayed our return to profitability. As a result of the economic environment, what we initially expected to be a three-year turnaround is going to take longer.

But before we discuss the overall business and our strategies for fiscal 2010, I'd like Cary to take you through the results of the fourth quarter and fiscal year.

Charles H. Turner

Thank you, Alex.

Earlier today we reported a loss of $0.33 per share for the fourth quarter compared to earnings of $0.16 per share for the year ago period. For the year we reported a net loss of $1.45 per share compared to $1.09 per share last year.

Total sales for the fourth quarter declined to $389 million from $437 million in the year ago quarter. Comparable store sales for the quarter declined 9.7% and 9.2% for the year. The weakening of the Canadian dollar relative to the U.S. dollar contributed to the decline in comparable store sales by approximately 150 basis points for the fourth quarter and 50 basis points for the year.

Merchandise margins for the fourth quarter were 44.3% compared to 48% in last year's fourth quarter. For the year, merchandise margins were 49% compared to 48.5% last year.

Store occupancy costs in the quarter of $71 million were flat compared to last year. For the year, store occupancy costs were $284 million, declining from $293 million last year primarily due to the reduction in store count.

During the fourth quarter SG&A expenses were $122 million, a net increase of $7 million when compared to the year ago quarter. SG&A expenses consisted primarily of $17 million in marketing, $74 million in payroll, and $31 million in other G&A costs. During the quarter SG&A expenses also included special charges of $9 million resulting from store-level asset impairments, store closing costs, and severance charges. Overall, the net increase in SG&A primarily related to an increase in special charges and marketing offset by a reduction in payroll and other G&A costs when compared to the fourth quarter last year.

For the year, SG&A expenses were $454 million, a decline of $34 million when compared to the year ago period, and consisted of $288 million in payroll, $59 million in marketing, and $107 million in other G&A costs. SG&A expenses also included special charges of $23 million, primarily related to store-level asset impairments, store closing costs and severance and other charges.

Our continued focus on the timing and appropriate level of purchases and our conservative plan for the first half of fiscal 2010 resulted in inventory at the end of the year of $316 million compared to $412 million at the end of last year. Inventory per square foot was $37 versus $47 per square foot last year. We expect inventory during fiscal 2010 to be in a range between $300 and $340 million, with seasonal fluctuations similar to last year's trends, and to end the year at approximately $300 million.

As we told you in February, we plan to shut down operations of our Chicago distribution center and we will cease operations prior to the end of the first quarter. The closing of this distribution center will help to further reduce our supply chain cost.

At the end of the year, cash and cash equivalents were $156 million. In addition, the company's secured credit facility had a calculated borrowing base of $202 million. After taking into account all reserve amounts and outstanding line of credit of $84 million, $85 million remain available for cash borrowings. The $84 million of outstanding line of credit compared to $121 million at the end of last year.

The use of our line of credit continues to be lower than last year, a direct result of a decreased reliance on trade line of credit. We did not utilize the secured credit facility during fiscal 2009 for any purpose other than line of credit. Taking into account both the cash and cash equivalents and the availability under the line of credit for cash borrowings, our total liquidity at the end of the fiscal year was $241 million.

As we previously reported, on March 20th a foreign subsidiary of the company entered in a privately negotiated agreement to purchase $79 million of the company's outstanding 6.375% convertible senior notes. The notes were acquired at a purchase price of $27 million, including accrued interest. The foreign subsidiary previously intends to hold the convertible notes until maturity. As a result, we have reduced outstanding debt on a consolidated basis by $79 million and will record a gain of approximately $50 million on this transaction during the first quarter of fiscal 2010.

We closed 16 Pier 1 Import stores in the fourth quarter and 26 in total for the year. We ended the year with 1,092 Pier 1 Import stores, with 1,011 stores in the U.S. and 81 stores in Canada. Year to date, capital expenditures totaled $13 million and were primarily spent on existing stores and fixtures. We expect capital expenditures to be approximately $7 million in fiscal 2010.

As you are aware, we have been working with our landlords to improve our store contribution rates by negotiating store rental reductions. As of today we have been able to achieve $6 million in rental reductions for fiscal 2010. We have not limited ourselves to only those stores with negative contribution, but we are working with all of our landlords. In some cases, however, if rental reductions cannot be reached, we will be forced to close those locations.

To date we have reached termination agreements on 20 locations and have closed another two without agreements which will result in store closing costs of $6 million, of which $4 million will be incurred in the first quarter. With the help of our landlords, we will continue to try and reach rental reductions wherever possible and as a result of our efforts to date, we now expect that we will have to close no more than 80 stores in total compared to the 125 originally reported.

I'd now like to turn it back over to Alex.

Alexander W. Smith

Thanks, Cary.

As I said in my opening comments, it is obvious that the recession has delayed our return to profitability. We originally anticipated money again this fiscal year, but now believe this has been delayed by around two years. We are disappointed by this, but not thrown off balance or unnerved. If anything, this recession has sharpened our resolve and caused us to be even more driven to improve the execution of our business priorities every single day. Our business priorities, which as you know speak to great merchandise, great stores and a lean and efficient infrastructure, are unchanged.

We are pleased with the improve execution that we achieved in all areas of the business in FY '09. The downturn in the economy has masked these improvements, but our assortments are increasingly on target, our store presentation and standards of service continue to improve. Our headcounts and costs continue to fall. These improvements are helping us weather the storm. For example, without the improvements in our assortments we would not have been able to reduce our inventory so substantially without jeopardizing sales even further.

We are seeing meaningful increases in the percentage of our sales generated by repeat and continuity SKUs, which is helping us to reduce our markdown exposure going forward. This has only been possible because we are buying more accurately and more of what we buy is hitting the target.

Stores continue to improve conversion rates due to improved selling skills and instore presentation, and consequently we were able to partially offset the falling traffic and lower average ticket, which we spoke about on the last call.

In FY '10, even with the recessionary business climate, we will continue to evolve and finesse our assortments. We will continue to test new products and roll out those tests that are successful. However, we have forecast sales very cautiously for the first half of the year and a little less cautiously for the second half of the year and will purchase accordingly.

Our goal for this year is to keep the stores full and our distribution centers flowing goods quickly. We will have some SKU reductions, but the treasure hunt feel of our stores will remain.

Looking at the mix of merchandise, we are pleased that furniture still accounts for around 40% of our revenues. Furniture sales have been quite resilient recently and we are expecting to maintain this balance throughout the year. This helps our average ticket, which has stabilized since the beginning of 2009. Our traffic has also stabilized since the turn of the year and our conversion rates remain consistent.

In terms of comparable store sales, we are no longer seeing those large double-digit declines that we experienced in some months of the third and fourth quarters. March comp store sales were minus 9.7%, which is by no means good, but they were in line with our budget.

March sales continue to be negatively impacted by Canadian conversion rate fluctuations, which for March equated to roughly 1.7% of the negative comp. In other words, the comp in our U.S. stores was minus 8%.

March merchandise margin was encouraging at around 52%, which exceeded our budget. As a consequence of more accurate buying, lower supply chain costs, clean inventory and support from our loyal network of agents and vendors, we do not expect to be under margin pressure this coming fiscal year. In fact, we are anticipating an improvement in merchandise margin over last year.

Our promotional stance will be more aggressive, but balanced to ensure that we still have an appropriate focus on assortments and brand as well as price. Any increase in promotional discounts will be offset by lower markdown.

Our network of vendors, some of whom are exclusive to us, continues to be a strength. We are seeing some lower costs compared to six months ago and thus are able to sharpen our price points or expand markup as we go through the year. Our payment terms, which have improved significantly in the last 12 months, remain the same.

In terms of SG&A costs, we are still focused on finding ways to be more efficient in taking task and process out of the business. We expect that our SG&A costs will be lower than last year, with the exception of marketing. Marketing is so critical in these difficult times and our marketing dollars were spent very wisely last year. This year we will continue to look for efficiencies in production and creative costs to ensure that as big a percentage as possible of our precious marketing spend goes into media. In fiscal 2010 we will spend just around $60 million, which, as I said, is in line with last year.

We know our goal of returning Pier 1 Imports to sustainable profitability requires that we generate positive comparable store sales. All of our business priorities keep us focused on the things that will ultimately generate them. We are seeing improvements in conversion rates and we are seeing the average ticket move closer to last year. However, until the combination of traffic, conversion and ticket moves our comp store sales into positive territory, none of us will be happy.

It's a battle; there's no doubt about it. But some things are worth fighting for, and a successful Pier 1 Imports is one of them. We believe this internally and so do our external business partners. We are appreciative of the support and encouragement that they give us.

Lastly, I want to thank our great team of associates, whose enthusiastic and cheerful approach to business makes this a special place to work.

Thank you for listening today, and we'll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Budd Bugatch - Raymond James.

Budd Bugatch - Raymond James

Alex, you've done a great job in reducing inventories down to that $316 million level. Can you give us a flavor of the quality of the inventory now, of stores versus DCs, age of the inventory? Do you still have the over amount of clearance left in that inventory?

Alexander W. Smith

Budd, a couple of things on that. Of the $100 million or so that we took out of inventory compared to last year, the vast majority of that came out of the DCs. So if you look at our average store inventory, it's really not substantially changed since this time last year. And that was really what we were trying to do, to keep the stores full and well merchandised and take the excess out of the DCs.

In terms of the complexion of our inventory, we monitor that very carefully and we have significantly less markdown in our total inventory at cost than we did this time last year.

Budd Bugatch - Raymond James

Do you have a feel that you want to disclose for how much the markdown costs fourth quarter or for 2008 totally?

Alexander W. Smith

No, not really. I mean, we discount our [inaudible] by two things, the promotional markdown and the markdown on slow-selling goods, and we don't really separate that out.

Budd Bugatch - Raymond James

You had said you would think this year merchandise margin will be higher than the 49% of last year. Do hazard to give us a feel of quantification of how high it might be? Will it be at the 52% level that you were getting in the first quarter?

Alexander W. Smith

I'll update you as we go through the year. It's kind of early days.

Budd Bugatch - Raymond James

On cash flow, Cary, thoughts about where cash flow might wind up for the year?

And just kind of a nit question on the geography of the gain on the repurchase of debt - does that move out of operating cash flow and into financing?

Charles H. Turner

Well, on the convert question, it's non-cash really. But we'll definitely be spiking that item out on a separate line.

In terms of cash flow, I think we have our internal budget but, as you know, it's dependent on many, many things. And right now I'm just not going to do that forecast now.

Budd Bugatch - Raymond James

Can you give us a feel of the vendor concentration of the company in terms of how many vendors you have or what percentage maybe the maximum vendor is of purchases or sales?

Alexander W. Smith

We've got a lot of vendors and, like all companies, there's a sort of 80/20 rule with that vendor mix. But there's no one vendor who is disproportionately large to our turnover if that's kind of what you're looking for.

Budd Bugatch - Raymond James

Yes, I was hoping to get a number of what that one vendor exceeds, some percentage of purchases or sales.

Alexander W. Smith

No. No. But it's a small number.

Operator

At this time there are no more questions. Would you like to make any closing remarks?

Alexander W. Smith

No, that's fine. Thank you for listening today. If anybody wants to talk to Cary or I, we'll be in the office. Thank you very much and we'll talk to you next time.

Operator

Thank you for participating in today's Pier 1 fourth quarter earnings release. You may now disconnect.

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Source: Pier 1 Imports, Inc. F4Q09 (Qtr End 2/28/09) Earnings Call Transcript
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