Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Pier 1 Imports, Inc. (NYSE:PIR)

F4Q 2014 Earnings Conference Call

April 10, 2014 11:00 AM ET

Executives

Alexander W. Smith - President and CEO

Charles H. Turner - SEVP and CFO

Brian Hanley - Director, Investor Relations

Analysts

Budd Bugatch - Raymond James & Associates, Inc.

David Berman - Berman Capital Management

Alan Rifkin - Barclays Capital

Anthony Chukumba - BB&T Capital Markets

Adam Sindler - Deutsche Bank

David Magee - SunTrust Robinson Humphrey, Inc.

Brian Nagel - Oppenheimer & Co. Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the Pier 1 Imports Fiscal 2014 Fourth Quarter and Year-end Earnings Call. At the request of Pier 1 Imports, today’s conference call is being recorded. (Operator Instructions)

I’d now like to introduce Brian Hanley, Director of Investor Relations for Pier 1 Imports. Please go ahead.

Brian Hanley

Thank you, and good morning, everyone. Prior to market open today, we issued a press release, which included the detailed financial results for the fourth quarter and full fiscal year ended March 1, 2014. In just a few moments, we will hear comments from Alex and Cary about the financial results, the financing transactions announced today and the Company's outlook and fiscal 2015 guidance, 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and can be identified by the use of words such as may, will, anticipates, believes, expects, estimates, intends, plans, projects 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 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 forward-looking statements.

The Company will also discuss non-GAAP financial measures on this conference call. Pursuant to the requirements of Regulation G and Item 10E of Regulation S-K, the Company has provided reconciliations of the non-GAAP financial measures to the most recent directly comparable GAAP financial measures in our earnings press release that was issued earlier this morning.

If you do not have a copy of today’s press release, you may obtain one, along with copies of prior press releases and all SEC filings, by linking through to the Investor Relations page of our website, pier1.com.

Now I’d like to turn the call over to Alex Smith, Pier 1 Imports President and Chief Executive Officer. Alex?

Alexander W. Smith

Thank you, Brian. Good morning, everyone, and thank you for being on today’s call. As always I’m joined by Cary Turner, our Senior Executive Vice President and Chief Financial Officer. Also around the table with us are other members of my leadership team.

Fiscal 2014 was a transformational year for Pier 1 Imports, even though we encountered some challenges along the way and concluded with a tough fourth quarter, we made excellent progress in the execution of our 1 Pier 1 strategy as we rapidly evolved from our store only business model to full omni-channel capabilities.

As we previously noted, sales and earnings in the holiday quarter were pressured by the significant weather disruption, two-thirds of our Q4 trading days. This was extremely frustrating given the superior execution on the parts of our teams at all levels of the organization.

I’ve always said that at Pier 1 Imports we know how to do a holiday well and I can tell you with absolute certainty that we were prepared to deliver another great holiday season. If not an A+++, our holiday execution was certainly a strong A. The quarter was disappointing for all of us at Pier 1 Imports and for our investors as well. However, as bumps in the road go, this was navigable and is now behind us.

So we move forward with great confidence and our heads held high. Our ability to operate stores profitably is proven and as we execute our 1 Pier 1 strategy and bring the Pier 1 Imports experience to more and more customers, we will grow our skills and business with confidence. I know that we’ll be successful, because we are ambitious, we're talented, and we've built an optimistic and success focused culture, which will guide our way. Through our 1 Pier 1 strategy, we can maximize our selling opportunities, extend our brand reach and capture greater market share.

In fiscal 2014, our e-Commerce business reached 4% of total sales for the year. It's growing rapidly and yet there is so much untapped potential for us. Traffic to our Web site continues to grow and presently stands at close to 2 million visitors a week. That's nearly double, what it was just one year-ago. But our conversion rates although much improved, are still very modest so our upside is huge.

Our prospects to growth with our market share are practically unlimited. And this is the single most important theme in our prepared remarks today. One of the critical components of 1 Pier 1 is our new POS system, which was fully implemented this past August. Our stores are now positioned to more effectively serve as a gateway to our e-Commerce site.

As you know a central part of our strategy is to operate our stores and e-Commerce sites as mutually supportive and interdependent businesses. We are becoming less and less concerned about where a sale originates, we let our customers choose. Our single focus is to ensure that our customer has an extraordinary experience regardless of how she shops with us.

Our field and store teams have truly embraced this concept. We are delighted that the percentage of our e-Commerce sales that are being placed from the cash wrap PCs in our stores facilitated by our terrific associates. We plan to make ordering from 1 Pier 1 as of from pier1.com even easier in the stores. We have been piloting the use of tablets in-store and plan a rollout during fiscal 2015. Our ability to leverage our stores in this way is a significant competitive advantage.

Through pier1.com we added many more customers. In fiscal 2000 -- in fiscal 2014 and are learning a lot about the shopping preferences and we’re discovering that our omni-channel customers while still small in number are extremely valuable. Customers who shop Pier 1 Imports both in-store and online spend nearly four times our average in-store only customers. When we can convert our customers to in-store and online and engage them through our Rewards card, they spent even more.

To that end, we acquired a record number of new Rewards credit card holders in fiscal 2014, bringing the total number of cardholders to 2.5 million. We exceeded our short-term penetration target of 30%, which came in at 34.4% for fiscal year 2014. This is a considerable milestone for us, but we see no reason that participation will not continue to improve. In fact, we’re raising the bar higher and now are targeting 35% of sales penetration under the program.

As a side note, we were also seeing that as a group our online only customers are slightly more affluent than our store only customers, which opens us some intriguing avenues for assortments expansion.

As we previously talked about in fiscal 2014, we re-branded and re-launched our Express Request program in-store, which increases the available options for the store shopper very significantly. Customers can choose from an extended range of style, sizes and colors and pick up their purchases in-store within 10 days. Our customers really love this program. It is growing at a tremendous rate and accounted for more than 13% of our total sales last year, up almost $100 million versus fiscal 2013.

Now in the first few weeks of fiscal ’15 Express Request is continuing to remain at an exemplary pace of some 60% over the same period last year and it will continue to expand. Express Request together with pier1.com afford us the opportunity to significantly broaden our assortments going forward for our in-store and online customers alike. For our online customers, Express Request SKUs are simply part of the available assortments.

Through 1 Pier 1, we’ve already been able to provide our customers with many more products to choose from by introducing new categories and offering expanded assortments. We also continue to strengthen our logistics and supply chain and now have the capability to offer our customers multiple delivery options. Most recently we rolled out in-home delivery to the lower 48 states. Our in-home delivery service offers choice of room or complete white glove service and makes the 100% of our SKUs available online including our very powerful Express Request assortments. The average ticket on in-home delivery is in excess of a $1000.

Turning to our Pier 1 Imports stores, in fiscal ’14 we continue to focus on the quality, not the quantity of our real estates. Strengthening the Pier 1 Imports portfolio during the year through new store openings, which were primarily strategic relocations and upgrades to many of our existing locations. In the last three years we have remodeled or refurbished more than half of our portfolio.

Our national footprint has made a major strategic advantage for Pier 1 Imports and our 1 Pier 1 strategy. Our stores extremely profitable in their own right are a gateway to pier1.com and ambassadors for our brand, and as I’ve said, I picked up this role enthusiastically.

We will continue to finesse our real estate strategy as pier1.com gathers strength. Our 1 Pier 1 strategy is about the customer and ensuring the business of flexibility to engage with our customer on a personal level in the way they choose. It’s about making shopping easier and more enjoyable.

As I’ve described, fiscal 2014 was clearly a year of progress, accomplishments, and learning on many fronts. From a financial perspective, in fiscal 2014 our comparable store sales grew 2.4%, gross profit dollars were essentially even with last year at $746 million and earnings per share came in at $1.01 and cash generated from operations was $159 million. These results are not what we expected at the outset of the year and we’re frustrated that we missed the mark.

That said, I’m highly confident that Pier 1 Imports is positioned for substantial growth in the coming years. We are truly at a pivotal point in our 52-year history. We are confident in our vision, we have the resources and infrastructure in place to scale the business, and we’re beginning -- at the beginning of a new chapter as we tap into the enormous potential that our omni-channel strategy gives us.

As you know we’ve generated strong cash flow in recent years. This has enabled us not only to make considerable investments back into the business to drive growth, but also consistently return value to our shareholders through share repurchases and cash dividends.

Including the repurchases made in fiscal 2014 and here in the first part of fiscal 2015, we have now returned over $0.5 billion to our shareholders in the last three years through share repurchases and cash dividends. That equates to about one quarter of our average market capitalization and we're happy to see our share count comfortably below 100 million.

In addition, we just announced our next quarterly cash dividend which we recently raised. This is the third consecutive year of dividends since we reinstated our quarterly dividends. And today we announced our Board of Directors has authorized a new 200 million share repurchase program as a continuation of our long-term capital allocation strategy.

We have demonstrated our commitment to delivering value which is something you can expect to see going forward. We also have a strong track record of growth that we believe we can resume this year. Our first priority of course continues and must be to invest in the business to drive growth. And for fiscal 2015 we’re forecasting a comparable company sales growth, which includes e-Commerce in the high single-digits and earnings per share growth of 15% to 23%.

We are well on track with our goal to have 10% of our business coming from e-Commerce by the end of fiscal 2016 as set out in our three-year growth plan. Under the plan we’ve previously expected to reach $225 of sales per retail square foot and operating margins of 12% by the end of this year, which is our fiscal 2015. We push those targets back by one-year and established new goal of $225 in sales productivity and 11% to 11.5% in operating margin by the end of fiscal 2016. Although we have not yet fully realized the efficiencies of scale and experience, we can already see that our online business will have the very least be as profitable as our stores.

Executing our 1 Pier 1 strategy has required investments over the last three years, in systems, fulfillment centers, call centers and distribution networks. We’ve added to our merchant teams to meet the demand of our fast growing SKU counts. We’ve added to our marketing team and expanded our photography studio and of course the team that manages and drives our online business. We will continue to invest in FY15, but prudently and only when we’re clear that the returns are good or that the workload justifies it. All is required to support the business that will more than double in size.

Investment is putting pressure on our near-term operating margin percent target. Our goal is to deliver profitable growth, but at the same time we must balance profit in the near-term with making the investments necessary to sustain growth into the future. Sales growth in fiscal 2015 will be substantial.

Looking at the key sales growth drivers for this year: first, we’re expanding our assortments, specifically we are planning to quadruple the number of SKUs available online. Our e-Commerce side provides a highly efficient method for increasing our assortments and testing new products and categories such as bedding. This year our customers will see expanded sizes and colors in rugs, wall art, mirrors, wall décor among others. She will also see additional sizes, functions, and colors across all furniture categories including an expanded assortment of outdoor furniture and textiles.

By the end of fiscal ’15 we expect our total SKU count to be in the region of 11,000, a 30% increase over the 8,500 that we ended fiscal 2014 with. We know that increased breadth of assortments is a big driver of online sales. Fortunately, because we run our business with a single inventory and our planning and allocation capabilities are so sophisticated, we expect our inventory growth to be well controlled as it was in fiscal 2014. Our merchandise and field teams are well prepared for this level of expansion.

To support our growth, we will continue to build greater flexibility and capacity into our distribution network. I've already mentioned in-home delivery. The big news for fiscal 2015 is that with the growth we’re experiencing online, we have brought forward the building of our second fulfillment center by a year. Our new facility in close proximity to our Columbus, Ohio DC will be operational in the fall of this year, freeing up capacity and giving us redundancy. We are also actively developing a strategy to utilize all of our DCs as fulfillment centers for large items further leveraging our single inventory.

Traffic to pier1.com continues to grow at a rapid pace. As I mentioned earlier, today we’re averaging close to 2 million visitors per week and with the Easter build and some decent weather, our Pier 1 Imports stores are also enjoying good traffic. Our customers love coming into our stores to get inspired and receive expert advice from our associates. She can go online and get inspiration from our photographs, editorial pieces and expanded products offerings.

Our 1 Pier 1 strategy puts our merchandise at her fingertips whenever she wants to shop with us, whether its in-store, at home or on the go. Our Easter products has sold through much quicker than last year and initial response to our expanded outdoor assortment is just where we hoped it would be.

It is of the utmost importance that as our business grows and evolves under 1 Pier 1, our marketing strategy stays one step ahead, just as we’ve done with other aspects of the business, we continually invest in marketing and also in the people who bring our brands to life.

I was extremely pleased to be able to welcome Eric Hunter to my leadership team last year. He brings with him considerable experience in brand strategy, digital and multi-brand marketing. Working with a talented marketing team, Eric's experience will allow us to make great strides in support of 1 Pier 1.

Our marketing plan combines both retention strategies for current customers and acquisition strategies to ensure that we always have new customers joining the brand. We carefully balance our marketing investments across vehicles to best engage with our customers. We recently launched a new television campaign, a continuation of our Find What Speaks to You campaign from the last few years, but with a fresh twist that will inspire customers to shop with us.

In order to continue to drive conversion and gain market share in the e-Commerce space, we’re implementing a stronger digital marketing plan for fiscal ’15. The digital marketing plan -- the digital marketing team focuses on e-mail, social, mobile, display, search engine optimization, and much more. It sounds like a lot than it is. And as we progress under our 1 Pier 1 strategy, its size and relevance to our overall plan will keep step. And remember digital marketing not only drives traffic to pier1.com, but importantly to our stores as well. As we move forward, we will continue to invest 5% of sales into marketing.

We are extremely proud of our Web site, but also realistic. We know we have much to add in terms of functionality. We also know that the curation of our unique and special products needs to get better. We need to do a full justice to our amazing assortments. We also need to make sure that our site is attractive on tablet as it is on PCs. These are all priorities for to fiscal ’15. The development of our online business is thrilling and exceeding our original expectations.

An exciting addition coming to our stores this year is a newly developed swatch station where customers can browse ideas for fabric color and design. We believe this will help leverage Express Request and pier1.com driving incremental sales to our already strong growth furniture and textile businesses and lending a footing to new and expanded assortments. Customers will also be able to order swatches online starting in the early fall.

Turning now to our stores, fiscal 2015 will mark the third and final year under our capital allocation program designed to upgrade the quality of our real estate. We made tremendous progress during the first two years driving greater productivity out of our store and generating strong returns on our investments. In fiscal 2015 we plan to open approximately 30 new stores and close 25, most of which will be relocations.

We are embarking on what we expect will be a successful year. We are a fundamentally different company from where we were when I joined Pier 1 Imports in 2007. We have nurtured a strong and talented organization at all levels. We have returned value to our shareholders through share repurchase and cash dividends, and we demonstrate our ability to deliver strong growth in sales, earnings, and operating cash flow.

Strategically, I believe we’re in the best shape we’ve ever been and look forward to a year of strong growth in fiscal 2015. Our Board of Directors shares our conviction, which is evidenced by the additional 200 million share repurchase authorization which we announced today.

We have wonderful talented and dedicated associates at Pier 1 Imports and I want to thank them all for what they do, for our well loved company everyday. Now here is Cary.

Charles H. Turner

Thank you, Alex, and good morning, everyone. First, touching on the fourth quarter, total sales for the 13 week period was $516 million, representing a decline of 6.5% versus the 14-week period from last year. As a reminder, we estimate the 53rd week in fiscal ’13 contributed approximately $29 million to total sales and $0.03 to earnings per share. Fourth quarter comparable store sales declined 4.6% on the 13-week basis. After adjusting for the calendar shift comparable store sales for the 13-week ended March 1, 2014 increased 60 basis points versus the 13-week ended March 2, 2013.

Fourth quarter gross profit decreased to $214 million compared to $255 million last year. As a percentage of sales gross profit came in at 41.6% versus 46.2% a year ago, approximately one-third of this decline is attributable to a de-leveraging of occupancy which was $73.2 million or 14.2% of sales compared to $70.5 million or 12.8% of sales last year. The remaining two-thirds of the decline is primarily due to a higher mix of e-Commerce sales for the quarter coupled with an increased level of promotional activity and the clearing of seasonal inventory which was more than anticipated due to the weather disruptions. However this allowed us to enter fiscal 2015 in a clean inventory position.

Turning to expenditures, we maintained strict control over cost during the fourth quarter, especially variable expenses which as a percentage of sales were relatively flat year-over-year. In addition relatively fixed expenses improved approximately 40 basis points as a percentage of sales compared to last year primarily due to the company not achieving its profit goals under a short-term incentive program. Fourth quarter SG&A expense totaled $134 million compared to $145 million a year-ago, and as a percentage of sales SG&A leveraged slightly to 26.0%.

Net income for the 13-week period was $43 million or $0.41 per share. During the fourth quarter we opened three stores and closed five for a total of 27 store opening and 17 closings in fiscal 2014. We ended the year with 172 Pier 1 import stores including 991 locations in the U.S. and 81 in Canada for a total of 8.5 million retail square feet. For the full-year total sales increased 5.7% compared to the 52-weeks ended February 23rd, 2013. Comparable store sales increased 2.4% on the 52-week basis.

Sales productivity for the year came in at $202 per retail square foot. That’s up from $198 at the end of fiscal 2013. This year we expect to make great strives against our near term goal and to reach $225 per square foot that we now anticipate will hit in fiscal 2016. Sales on the Pier 1 Rewards card at the end of the year remained robust and accounted for 30.4% of U.S. sales up from 25.7% at the end of last year.

As Alex mentioned, this exceeded our initial Rewards card penetration goal of 30%. As we continue to expand our card holder base and more effectively engage those customers through the use of personalized marketing, we believe sales penetration can reach 35% of sales. Returning to the income statement full-year gross profit was essentially flat at $746 million compared to $743 million for the 53-weeks last year. As a percentage of sales gross profit declined by 150 basis points to 42.1%.

For fiscal 2015, we expect gross profit as a percentage of sales to be approximately flat or slightly better than fiscal 2014. We believe the growth in sales will enable us to leverage occupancy and offset the drag on the merchandised margin rate that will result from both a continued promotional stance for the foreseeable future and an increased percentage of the business being derived from our direct to customer sales through pier1.com.

SG&A expenses for the year were $531 million compared to $513 million last year. As a percentage of sales SG&A leveraged slightly by 10 basis points, again this leverage was primarily attributable to the company not meeting it's profit goals under the short-term incentive program I touched upon earlier. Full-year marketing spend was on plan at approximately 5.1% of sales.

The company generated full-year EBITDA in excess of $200 million. In fiscal 2014 EBITDA came in at 2015 million which compares to $232 million in the prior-year. Depreciation and amortization was $39 million for the full-year and is expected to be about $47 million in fiscal 2015. Operating income for the year was $176 million or 9.9% of sales compared to $199 million or 11.7% of sales last year.

Turning to the balance sheet, inventory at the end of the fourth quarter totaled $378 million up 6.1% versus last year. That level is in line with the expectations we laid out at the end of the third quarter. We are planning for growth in inventories to be generally in line with the growth in sales at the end of fiscal 2015. The company remains in strong financial condition and ended the year with $127 million of cash and cash equivalents and no cash borrowings under our $350 million credit facility.

In fiscal 2014 generated strong cash flow from operations of $159 million. The company paid approximately $22 million in cash dividends during the year and utilized approximately $200 million to repurchase 9.3% of its common stock. Subsequent to yearend we have utilized an additional $90 million to repurchase another 4.5% of shares outstanding.

As Alex pointed out we’ve now returned a little over half a billion dollars to share holders in the last three years through cash dividends and share repurchases. And with respect to share repurchases the weighted average cost across all these programs has been $16.55. As demonstrated with the execution of our repurchases we have taken care to be opportunistic with respect to our share price valuation.

As we announced in today's press release, we made the strategic decision to seek a $200 million senior secured Term Loan “B” facility. We believe this will further enhance our capital structure and provide us with greater flexibility as we continue to utilize our cash flow to make strategic investments to drive future growth while also retaining the liquidity to continue returning cash for our shareholders over the long-term.

Turning now to capital expenditures, full-year spending totaled $80 million, of that amount roughly half was deployed towards the opening of new stores, store remodels and refurbishments. The remaining half was utilized for technology in infrastructure initiatives including our new point of sale system. We anticipate the similar level of spending in fiscal 2015 which includes investment in stores and technology that are designed to maximize our real estate portfolio and facilitate our Pier 1 omni-channel strategy. As Alex mentioned based on the strong trajectory of e-Commerce, we're leasing space and opening a second fulfillment center in Columbus, Ohio which is expected to come online this fall.

Now I’ll turn to our outlook for fiscal 2015. We are planning for significant growth in sales, EBITDA and earnings per share. We expect to achieve comp store sales growth in the mid-single digit range, comparable company sales growth which includes e-Commerce in the high-single digit range. SG&A expense to be relatively flat as a percentage of sales for fiscal 2014, EBITDA growth in the range of 11% to 17%, earnings per share in the range of $1.16 to $1.24 utilizing a diluted share count of $96 million which represents year-over-year growth of 15% to 23%. And additionally for modeling purposes you should assume interest expense of approximately $11 million and then an effective annual tax rate of 39%.

As always our goal is to deliver profitable growth while continuing to make investments that will sustain growth well into the future. Striking that balance allows us to create shareholder value over the long-term. I will echo Alex’s sentiment and express my appreciation to all of our associates for the dedication and commitment they demonstrate day in and day out.

Now I’ll ask Laurel to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Budd Bugatch of Raymond James. Your line is open.

Budd Bugatch - Raymond James & Associates, Inc.

Good morning Alex, good morning, Cary and everybody here.

Alexander W. Smith

Hi, Budd.

Budd Bugatch - Raymond James & Associates, Inc.

Thank you for taking my questions. I just want to make sure I understand the definitions, Cary, since we’re seeing some new definitions of total comparable store sales or comparable store sales and total comparable company sales, make sure what the base of comparable company sales, how do we define that?

Charles H. Turner

Basically it's going to be the comp store sales and the e-Commerce business now that we have the two full years of the business in the e-Commerce business.

Budd Bugatch - Raymond James & Associates, Inc.

And e-Commerce in the fourth quarter, did you give that number of -- I know you had it for the year at 4%. Earlier didn’t you say it was 5%?

Charles H. Turner

Correct.

Budd Bugatch - Raymond James & Associates, Inc.

So it's 5% for the fourth quarter, and can you give us a dollar number for the year?

Charles H. Turner

I’d have to get back to you.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. And I want to make sure on the SG&A, I understand for the fourth quarter what were the components of it. I may have missed the bonus reversal or the short-term incentive plan, how much was that or how did that affect the SG&A in the fourth quarter?

Charles H. Turner

Well it wasn’t necessary the reversal, it was more of that, we only paid out a very small portion of it, so that was the benefit to SG&A.

Budd Bugatch - Raymond James & Associates, Inc.

And did you quantify that, could you …

Charles H. Turner

For the past year it was much bigger piece.

Budd Bugatch - Raymond James & Associates, Inc.

And how did it compare year-over-year then?

Charles H. Turner

All of it was significantly down.

Budd Bugatch - Raymond James & Associates, Inc.

And can you give us any quantification of that?

Charles H. Turner

Call it $8 million to $10 million.

Budd Bugatch - Raymond James & Associates, Inc.

Okay, all right. Thank you. And on gross margin for next year, you talked about SG&A being flat. How should we think about merchandize margin or the components and you’ve got -- you’ve got 30 new stores, 25 that you’re giving up for a net new of 5 and then the new occupancy, how will that look for the year in -- in the year?

Charles H. Turner

Well like I said we’re really trying to get everyone focused on gross profit as a percent of sales because there is so many moving parts between margins and occupancy.

Alexander W. Smith

I think Budd we’re not going to, we can’t split that out and it becomes too difficult. But directionally I can tell you that if we look at the merchandize margin just in the stores, we expect to see some improvements there over LY. So, that will be a plus to the merchandize margin. But of course the merchandize margin or the e-Comm business which has got the fulfillment costs and it's going to drag the overall number down. So, you really don’t get a clear picture just looking at the merchandize margin as a total company level. But we are expecting to have a lower markdown percentage as a percent of sales and we’re going to manage very, very carefully our promotional discounts.

Budd Bugatch - Raymond James & Associates, Inc.

Well make sure, I understand Alex your interest and Cary your interest in getting people to focus on the overall margin. But you do report occupancy and buying as a separate line item, are you going to continue to still do that?

Charles H. Turner

Yes, so for rough numbers, take occupancy up some $12 million.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. And if I was right in the fourth quarter -- if my math was right for your $73.2 million then the merchandize margin with the competitive set got to around 55.8%, is that about right?

Charles H. Turner

That’s about right. But remember it was primarily due to additional promotion, but more importantly due to the increased clearance yet with the seasonal bids.

Budd Bugatch - Raymond James & Associates, Inc.

I understand. And did you quantify that at all or would you be willing to, what that might have been?

Charles H. Turner

No.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. All right, I’ll let others -- well thank you very much for taking my questions.

Alexander W. Smith

You're welcome Budd. Thank you.

Operator

Your next question comes from the line of David Berman of Berman Capital. Please go ahead.

Charles H. Turner

Good morning, David.

David Berman - Berman Capital Management

Hi guys, I am pleased to see a bit of stabilization there in the sales of the weather and that’s good news. I wanted to focus on the Internet for a second. Just based on the previous questioning that it is opposite of your business in the last quarter, and I think it's going to be 10% that’s the goal at the end of 2015, that’s correct, yeah?

Alexander W. Smith

Yes.

Charles H. Turner

2016.

David Berman - Berman Capital Management

So what percentage is growth rate, I understand it's a low base, but what specific growth rate are you expecting? Is that -- are you running at about like 90%, 100% right now 80%, 90%, 100%?

Alexander W. Smith

Yes, we expect our e-Comm business to at least double this year.

David Berman - Berman Capital Management

And is that the run rate that you’ve been seeing in the last quarter. I don’t know if you mentioned that, forgive me.

Alexander W. Smith

Yes.

David Berman - Berman Capital Management

And what are you seeing, if you can embellish a little more in the type of products that do well and also talk a little bit about what's -- you expected to do well or what didn’t do well, and what did do well, like what are you learning about that?

Well and I think we’ve talked a little bit about this before. We’re seeing over-indexing on some departments. The two standouts are our rug department and our curtain department where the percent of e-Comm business is significantly higher than the percent of store business. And there are others that’s over indexed and there are some departments particularly the low ticket pickup products which is slightly under indexed. So, we are seeing our online business is more geared towards higher average unit retail than our store business.

David Berman - Berman Capital Management

And in terms of the margins, are those -- are the products that are doing well, high or low margins, what's the profitability like and related what was the profitability like for the Internet?

The profitability is just fine. I mean in fact we sell a little less clearance online than we sell in the stores. So the overall to the blended merchandized margin, before the fulfillment centers it’s a little bit higher than the stores.

David Berman - Berman Capital Management

Right, right. And the profitability, the margins, can you quantify the numbers for us in terms of the contribution of margins to the business?

Not really. I think what I’d just like to do is to, is just sort of reemphasize the point that I made in the prepared remarks which is, this is early days, we still haven't got full benefits of a large scale business. But we are already certain that the profitability of our online business will be at least, and I want to kind of underline at least as profitable as our store business. I think that’s considering that our stores are so profitable, I think that’s a pretty important thing to think about.

David Berman - Berman Capital Management

Right, right.

Charles H. Turner

I think that because of all that we’re agnostic as to which channel she decides to shop on. And we’ll get the profitable sales through both channels.

David Berman - Berman Capital Management

Okay, all right. Well good luck in that guys. Thanks a lot. Good luck.

Alexander W. Smith

Okay, David. Thank you.

David Berman - Berman Capital Management

Thank you very much.

Operator

Your next question comes from the line of Alan Rifkin of Barclays. Your line is open.

Alan Rifkin - Barclays Capital

Thank you very much for taking my questions.

Alexander W. Smith

Good morning, Alan.

Alan Rifkin - Barclays Capital

Hello. How are you?

Alexander W. Smith

Good.

Alan Rifkin - Barclays Capital

So, certainly the effects of the weather are certainly well documented, but maybe Alex can you share a little bit more color on exactly why you’re pushing out your three year goals?

Alexander W. Smith

I think it's really just a rebasing of the numbers Alan, there’s nothing sinister in it. There’s no, frankly deep thought in it, it's just we ended last year where we ended it and so we just thought it's prudent to just move them out a year. But I wouldn’t sort of read anything of great significance into that. We just wanted to make sure we updated everybody on our three year plan.

Charles H. Turner

So Alan, right now we’re at $202 a square foot. And we think it's going to take -- maybe we can get there sooner than the end of fiscal ’16, but for now I think I don’t want people building a model that says, we get there this year.

Alan Rifkin - Barclays Capital

Right. Although two successive years of mid-single digit comps should take you from $202 to $200 a quarter in two years, is that the right thing?

Charles H. Turner

That’s where we are.

Alan Rifkin - Barclays Capital

Right, okay. Hey Cary, on the gross margin line of the approximate 320 basis point decline that’s not occupancy. How is that broken down between height in promotions and the e-Commerce effect?

Charles H. Turner

We didn’t break that out.

Alan Rifkin - Barclays Capital

Okay. Is there any estimate on your part as to when e-Commerce will no longer be dilutive to gross margins, if you hit your 10% e-Commerce goal, will gross margin still be deteriorating in that?

Charles H. Turner

I think we’ll get a little bit closer and as we see what happens with this year and next and we see efficiency that we expect as we get scale we’ll be able to give more clearing numbers.

Alan Rifkin - Barclays Capital

Okay. And just one last question if I may, you folks pointed out the adverse effect in your key markets and two thirds of the days. How many stores in total are in these key markets that you define as that?

Alexander W. Smith

I don’t think we define key markets. I think what we said was 75% -- what we said was 75% of our quarter for trading days were impacted in some way. So, we get a lot of stores everywhere. So many markets are key markets for us and I know all of them got blasted.

Charles H. Turner

And to reiterate -- yes, to reiterate, when we look at the business in California and Florida we saw mid-single digit comps.

Alan Rifkin - Barclays Capital

Okay, that’s what I was looking for. Okay, thank you all very much.

Alexander W. Smith

You are welcome.

Operator

Your next question comes from the line of Anthony Chukumba with BB&T Capital Markets. Your line is open.

Anthony Chukumba - BB&T Capital Markets

Thanks for taking the question. Good morning. I had a question in terms of the guidance. So, the $1.16 to $1.24, it's based on fully diluted share count of 96 million shares. So, I mean the larger we purchase 90 million of stock so far quarter to date, so am I right to assume that essentially you’re envisioning the $1.16 to $1.24 assumes no additional share repurchase activity for the remainder of this year?

Charles H. Turner

Correct.

Anthony Chukumba - BB&T Capital Markets

Okay. I just wanted to clarify that. All right, thank you guys.

Charles H. Turner

And that’s just for modeling purposes and we’ll continue to update people as the share count changes.

Anthony Chukumba - BB&T Capital Markets

Okay, that’s helpful. Thank you.

Alexander W. Smith

Thanks Anthony.

Operator

Your next question comes from the line of Adam Sindler with Deutsche Bank. Please go ahead.

Adam Sindler - Deutsche Bank

Hi, good morning. Hope everyone is doing well?

Alexander W. Smith

Yes.

Adam Sindler - Deutsche Bank

Couple of questions, Cary, just couple of housekeeping; on the SG&A front as a percentage of sales comment; that is only expenses excluding D&A, correct?

Charles H. Turner

Yes. And the D&A is a separate line item.

Adam Sindler - Deutsche Bank

Okay. But I just want to make sure, because sometimes you report the total expense number. And then on the flat SG&A, is higher incentive comp a big piece of that and then I guess the following is, what else would potentially drive flat SG&A on a high single digit brand comp?

Charles H. Turner

So, we’re going to see variable expenses being leveraged, especially store payroll and other store related expenses. And then the relatively fixed expenses with that there will be some de-leveraging, but net-net in total, total SG&A will be flat to slightly better.

Adam Sindler - Deutsche Bank

Okay. But just on the de-leverage of the fixed, is that because of further investments in e-Commerce or simply a more conservative outlook given sort of the run rate over the last several years?

Charles H. Turner

So it's in continuing investment in people as Alex mentioned and also the incentive comp piece.

Adam Sindler - Deutsche Bank

Okay. And that, it just adds e-Commerce gross I know you like to have buying, planning, allocating teams fully staffed as certain categories get to 5%. Is that part of the further personal growth?

Charles H. Turner

Well, absolutely. You heard Alex say, most of the hiring that we’re doing is with e-Commerce related activity, be it in planning, be it in additional buyers, marketing et cetera.

Adam Sindler - Deutsche Bank

Got it. Thank you so much guys. I appreciate it.

Alexander W. Smith

Thank you.

Operator

Your next question comes from the line of David Magee of SunTrust. Please go ahead.

David Magee - SunTrust Robinson Humphrey, Inc.

Hi, everybody, good morning.

Alexander W. Smith

Hi, David.

David Magee - SunTrust Robinson Humphrey, Inc.

Can you tell me what your assumption is regarding the rate of improvement in online conversions given, I guess what would drive that this year would be the assortment expansion?

Alexander W. Smith

Well, I won't give you the specific exact numbers we’re planning, but what I would say is when we set this out we can see that we’re going to get conversion improvement from probably 8 or 9 different sort of line items. And some of it is about improvements to the size in terms of, additional functionality, and just a better user experience, so that’s the piece of it. Some of it is going to come from additional SKUs, that’s the piece of it. Some of it's going to come from the great work that the stores are doing in terms of creating online orders through the cash wrap PC, that’s the piece of it. So, it kind of goes sort of on and on in that vein and that gets us to a conversion rate this year that we think in this fiscal year which we think will be significantly higher than last year.

David Magee - SunTrust Robinson Humphrey, Inc.

Thank you, Alex. Cary, do you plan to have debt on balance sheet at yearend of this next year?

Charles H. Turner

Yes. And it will be as we announced with that Term Loan “B”.

David Magee - SunTrust Robinson Humphrey, Inc.

Right, okay. And then, with regard to the same store sales number in the quarter been impacted by a pretty big amount by the calendar shift 500 bps, was there a give back in a different quarter that was sort of an offset?

Charles H. Turner

No, the fourth quarter is really the most impacted.

David Magee - SunTrust Robinson Humphrey, Inc.

Okay, so the third quarter wasn’t helped by that same variable?

Charles H. Turner

No.

David Magee - SunTrust Robinson Humphrey, Inc.

Okay, great. Thank you, guys.

Alexander W. Smith

All right. Thank you.

Operator

Your next question comes from the line of Joan Storms of Wedbush. Please go ahead.

Alexander W. Smith

Hello. Laurel, we’ll move on. As Joan comes on we’ll take it later on.

Charles H. Turner

Next question.

Operator

Your next question comes from the line of Brian Nagel of Oppenheimer. Please go ahead.

Brian Nagel - Oppenheimer & Co. Inc.

Hi, good morning.

Alexander W. Smith

Hi, Brian.

Brian Nagel - Oppenheimer & Co. Inc.

Thanks for taking my questions. So, maybe a couple relatively, I guess somewhat bigger picture questions. First off, with respect to the shift in longer term guidance, pushing out some of the targets by a year or so. Is it easy to identify, if we look at 2014 the guidance now versus what the guidance was previously, how much incremental investment -- what's the actual amount of incremental investment associated with either your online build-out or some of the other initiatives that’s now in those numbers?

Alexander W. Smith

Are you talking about, sorry Brian I am a bit confused. Are you talking about our earnings guidance or our guidance on the three year plan?

Brian Nagel - Oppenheimer & Co. Inc.

Well I guess I mean in both. I mean since we look at, essentially you moved your targets out a bit. Is there a piece as we look at 2014 that was actually incremental spending here in 2014 that wasn’t in the guidance when you previously articulated?

Charles H. Turner

Yes, so it's primarily in two places. The fixed SG&A expenses they’re up more than what we had thought just because of the additional headcount. But the biggest impact is really the depreciation and that’s coming through with the capital expenditures that we spent over the last couple of years that’s $75 million to $80 million.

Brian Nagel - Oppenheimer & Co. Inc.

Okay. And a second question, with respect to taking some debt on here. You guys have done such a great job with recovery and through that process you had a very un-levered balance sheet, you generate a lot of cash. The question is, why now? The discussions with you and board, why take on, again it's a modest amount of debt, why take it on now?

Alexander W. Smith

I think that’s very simple. I mean when we look at the prospects for Pier 1 and we look at our strategy and we see what we can achieve over the next few years. And then we look at the way where we have been valued recently. We just think that buying stock at the current price is a terrific deal for our shareholders and we wanted to take advantage of it. I mean, as we’ve been in the past, we try and be opportunistic about these things.

Charles H. Turner

But I think more importantly, number one, you said it was the prudent amount and number two, it just gives us a lot more flexibility to be able to invest in people, invest in capital and return the capital to shareholders.

Brian Nagel - Oppenheimer & Co. Inc.

Got it. Then one final question with respect to online, as the online businesses continuing to grow and I think in response to some of the questions you talked about the profile of sales, but have you learned anything more about the customer? Who is shopping online? Is it indeed a new customer to Pier 1 or is it someone that was shopping your stores may now also be shopping online, any new data there?

Alexander W. Smith

Oh yes, I mean we’ve tons of new data everyday and the answer is it’s some and some and some. I think I alluded in my prepared remarks to those customers who shop us online and in-store and so, those -- some of those are new customers and we have converted them from online only customers to both. But if you look at our online business in totality, the biggest percentage of our online business is coming from customers who only are shopping us online as far as we know. I mean you know to the 100% match back. So the answer is yes, a lot of new customers.

Brian Nagel - Oppenheimer & Co. Inc.

Well, thank you.

Alexander W. Smith

Okay, Brian. Thanks.

Operator

And the last question will come from the -- pardon me, and the last question will come from the line of Brad Thomas of KeyBanc Capital. Your line is open.

Bradley Thomas - KeyBanc Capital Markets Inc.

Hey, thanks. Good morning, Alex and Cary.

Alexander W. Smith

Hi, Brad.

Bradley Thomas - KeyBanc Capital Markets Inc.

Just wanted to follow-up on some of the commentary about the first quarter that you made Alex, you talked about the Easter sell through being quicker than it is in last year, I think you said you were pleased with the outdoor sell through being on plan. Just as we think about comp expectations for the first quarter and I assume that just beyond plan with the mid single-digit guidance, and then from a margin perspective anything that you would call out in particular for us to look for in the first quarter here?

Alexander W. Smith

No, I don't think there is anything particular. No, not really. I think it's -- thank goodness, well hopefully it's going to be a normal quarter with the Easter shift I think has been good because Easter in April is always better than Easter in March. So that's good and once we are through Easter the calendar actually hurray, is actually like-for-like for the rest of the fiscal year.

Bradley Thomas - KeyBanc Capital Markets Inc.

Good. And then just one more question on the guidance, Cary. Just as we bridge this the revenue guidance high single-digits, the EBITDA guidance, a 11% to 17% and that’s with gross margin flattish, SG&A flattish, just curious where you’re getting leverage to get that better EBITDA growth?

Charles H. Turner

Well it is really with the increase in sales and you will see that it does come down and we do leverage some of the fixed costs like occupancy and depreciation somewhat fixed as well.

Bradley Thomas - KeyBanc Capital Markets Inc.

Got you. Thanks so much and good luck.

Charles H. Turner

Thanks.

Alexander W. Smith

Okay. Thank you very much. Well, I think that’s all the questions we got. Laurel, thanks for doing this for us and we will be back to talk to you all at the end of the first quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pier 1 Imports' CEO Discusses F4Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts