Pier 1 Imports' (PIR) CEO Alexander Smith on Q1 2015 Results - Earnings Call Transcript

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 |  About: Pier 1 Imports Inc. (PIR)
by: SA Transcripts

Operator

Good morning, ladies and gentlemen, and welcome to the Pier 1 Imports' First Quarter Fiscal 2015 Earnings Call. At the request of Pier 1 Imports, today's conference call is being recorded. [Operator Instructions]

I would now like to introduce Bryan Hanley, Director of Investor Relations for Pier 1 Imports.

Bryan Hanley

Thank you, and good morning, everyone. Prior to the market open today, we issued a press release, which included the detailed financial results for the first quarter ended May 31, 2014. In just a few moments, we will hear comments from Alex and Cary about the financial results, as well as the company's full year outlook 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 projections or 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 projections or 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 projections or statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking projections or 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 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.

Alexander W. Smith

Thanks, Bryan, and good morning, everyone. Joining me on the call today, of course, is Cary Turner, our Senior Executive Vice President and Chief Financial Officer. And with us in the room are members of my senior leadership team.

Last fiscal year was transformational for us, as I said on our last earnings call. This year, the transformation is gaining speed, as we accelerate the execution of our 1 Pier 1 omni-channel strategy. For the first quarter of fiscal '15, we generated strong traffic to the Pier 1 Imports brand and achieved a company comparable sales gain of 6.3% against the backdrop of a challenging retail climate. We are delighted with the dramatic increase in e-Commerce and how the advantages of 1 Pier 1 strategy have been embraced by our customers both new and returning.

First quarter online sales accounted for 9% of our total business, well ahead of where we were trending in the back half of last year. e-Commerce sales increased 260% from the first quarter last year and almost 50% sequentially from the fourth quarter.

When we planned fiscal 2015, we did not expect our customers to engage our brand through Pier1.com with quite this much enthusiasm. We are, of course, responding to this enthusiasm and modifying our plans accordingly. Based on the momentum we are experiencing, we are revising our e-Commerce growth expectations for fiscal 2015 and '16. We now anticipate that we'll achieve e-Commerce sales of over $200 million this year, a number that will see us hit our original target 1 year early. We now see for fiscal 2016 e-Commerce sales exceeding $400 million.

Although our online sales for the quarter were outstanding, overall, the quarter did not unfold as we planned. Store sales and profitability were disappointing, impacted by soft traffic and a higher level of promotional activity than we anticipated. Whether or not this softness in store traffic is represented -- representative of a permanent sea change in customer behavior or a temporary phenomenon, is hard to tell at this stage. However, for the time being, we are planning our business going forward, assuming store sales are more apt to be driven by increases in conversion and ticket, both of which are strong.

For the quarter, our gross profit dollars came in flat to last year, reflecting the additional promotional activity that I just mentioned. In the near term, we expect the pressure on the gross profit rate to continue, and we are adjusting this year's expectations accordingly. We're very frustrated that we do not show year-over-year growth on the bottom line, particularly as our execution was significantly improved over last year. However, there are many positive takeaways from the quarter, not least of which is a strong performance in e-Commerce, which I've mentioned several times already.

Sales from our direct-to-customer business are already as profitable as our stores. This is extremely promising, as we have yet to reap the advantages of scale. With the acceleration of the business in the first quarter, we can see how, over time, profitability of e-Commerce will continue to improve and eventually move ahead of the stores.

Our conversion rates were up in-store. Those customers who visited our stores loved what they found and conversion rate was also up significantly online. What's really exciting to us is how our stores have embraced our online business and are playing a vital role in the marketing of the 1 Pier 1 concept. So for perspective, 25% of our first quarter e-Commerce transactions were generated in our stores. The decision to credit our stores with e-Commerce sales is quickly proving to have been a valuable one. And with the upcoming addition of tablets to complement our existing PCs in-store, we have the potential to drive that percentage even higher.

Another compelling statistic about our customers, approximately 1/3 of those who order from home choose to pickup in-store, presenting us with yet another opportunity to drive incremental sales. 1 Pier 1 is playing out even better than we had planned, and customers are embracing our omni-channel presence with tremendous enthusiasm.

We're continuing to make significant investments in improving our customer database. Our multi-channel customer continues to grow, up 25% from the fourth quarter. And with the acceleration of e-Commerce, there is, we know, great potential to drive incremental brand traffic by segmenting and customizing our marketing messages based on our customer shopping behavior. We are making great strides in this area, and it is a key priority for us for the remainder of this year.

Our comprehensive marketing programs are inspiring our customers and driving both new and existing consumers to the brand. We're building a strong digital marketing team with new senior hires to ensure we're positioned well in the digital space going forward. Our promotional TV spots in the quarter, which tagged on to our highly successful Find What Speaks to You message, saw great response. We are prepping for a summer clearance message that is much improved relative to last year and begins next Friday.

We are continuing to build out our merchandise assortment, increasing the number of SKUs offered both online-only and through the continued expansion of our highly successful Express Request program. As we move through the summer, the expansion will begin to accelerate, as we build into the peak fall and holiday selling seasons. We're very pleased with the contribution that our online-only SKUs are already making to the total sales volume.

In August, we'll be launching in-store swatch stations that will enable us to showcase the multiple fabrics and finishes available through both Express Request and our e-Commerce site in a more effective way than we do today. The rollout will roughly coincide with our fall indoor furniture book, which drops in the first part of September and should enable us to drive incremental sales in the second half.

We're particularly pleased with the response to our new in-home delivery service. This was rolled out nationwide earlier this year and has quickly gathered momentum. Noteworthy is that the average ticket on in-home delivery purchases has continued to exceed $1,000 since its launch in March.

As we move farther along the omni-channel continuum, we will be mindful of how we direct our resources and capital spending. As we mentioned on our year-end call, among our priorities is a second e-Commerce fulfillment center to accommodate future growth. The build-out of our new facility in Columbus Ohio is underway and slated to open later this summer. This will give us ample time to be ready -- to be online and fully functioning well in advance of our peak holiday selling season.

Additionally, we are pulling forward a number of projects pertaining to customer experience on Pier1.com. These include updates to search in navigation, including recommendations. Also, importantly, we have prioritized site upgrades in support of mobile optimization. This will ensure that our customer can shop Pier 1 Imports when she wants, where she wants, and however she chooses.

Our highly productive portfolio of stores remains a centerpiece of the brand. Going forward, our real estate strategy will evolve in tandem with the expansion of e-Commerce, as we work towards building a best-in-class omni-channel model. The flexibility afforded by our store size and lease tenure, ensures that we'll be able to optimize the portfolios contribution, as we progress under 1 Pier 1.

Creating value for our shareholders is always top of mind. Our strong cash flow and ample liquidity afford us the ability to drive shareholder value through investments that will drive future growth, most notably our 1 Pier 1 strategy, but also dividends and share repurchases.

Notwithstanding short-term results, we feel excited about our market position and the significant opportunity to drive growth through our omni-channel strategy. And we could not have a more dedicated and enthusiastic organization to help us achieve our goals.

Thanks for your attention this morning. Now I'll ask Cary to review our first quarter financial results and discuss our outlook for fiscal 2015. Cary?

Charles H. Turner

Thank you, Alex, and good morning, everyone. While we were very pleased by the continued expansion of sales being driven through Pier1.com, the level of promotions required to drive store traffic impacted our bottom-line results.

For the first quarter, total sales rose 6.1% to $419 million, while company comparable sales increased 6.3%, reflecting increases in total brand traffic, conversion and average ticket. Business improved throughout as the quarter progressed. As you heard from Alex, we're seeing a powerful combination of factors influence our business right now. e-Commerce is growing rapidly, the percentage of Pier1.com sales initiated at the store is growing and the number of online orders being picked up in-store is on the rise. For perspective, comparable-store sales increased in the 4-ish range in the first quarter. It is clear to us at this stage, the comparable-store sales are quickly becoming less and less meaningful in terms of the total picture. As we continue to progress under 1 Pier 1, company comparable sales is the metric we'll be using to measure the strength of the business.

On a trailing 12-month basis at the end of the quarter, sales per retail square foot were $205, up from $202 at the end of fiscal 2014. At the end of the first quarter, sales on the Pier 1 Rewards card accounted for 31.5% of U.S. store sales on a trailing 12-month basis, compared to 30.4% at the end of last year. This program continues to be an increasingly important part of our business and remains a key driver of growth.

Moving down the income statement. First quarter gross profit was $168 million, which was relatively flat to last year. As a percentage of sales, gross profit declined 240 basis points to 40%. 150 basis points of the decline is attributable to a promotional cadence that was higher than planned, with the balance resulting from the shift in our channel mix. We were pleased the leverage store occupancy cost [ph] by 30 basis points, which came in at $73.5 million or 17.6% of sales compared to $70.6 million or 17.9% last year.

For the second quarter, we expect gross profit as a percentage of sales to deleverage on the order of about 100 basis points compared to the second quarter of last year. This is reflective of the acceleration of e-Commerce, as well as the promotional and clearance activity during the quarter. While we do expect to leverage occupancy, it will not be enough to offset the year-over-year impact at the merchandise margin level.

Looking at expenses, we continue to exercise prudence in managing our overall cost structure. SG&A for the first quarter leveraged 40 basis points, coming in at $131 million or 31.4% of sales. That compares to $125 million or 31.8% of sales for the same period last year. Variable expenses were $90 million or 21.6% of sales compared to $86.9 million or 22% of sales last year. The 40 basis point improvement was primarily related to the leveraging of store payroll.

For the quarter, marketing expenses were in line with our expectations at 5.3% of sales, up 10 basis points from the first quarter of last year. We are planning marketing dollars in the second quarter to be comparable to the first quarter of this year. The year-over-year incremental spend is principally in support of digital marketing efforts and mailers. We continue to expect that the full-year marketing spend will be approximately 5% of sales.

Fixed expenses during the quarter were $41 million compared to $39 million last year. As a percentage of sales, fixed expenses were flat to last year at 9.8%. The dollar increase is primarily attributable to planned growth in headcount to scale e-Commerce and expand our organizational capabilities.

Looking at expenses for the balance of the year, as Alex mentioned, we plan to continue to prudently invest in support of the growth of 1 Pier 1. To that end in the second quarter, we are planning for total SG&A to be approximately $6 million to $7 million higher than the first quarter of this year. The increase is primarily attributable to the investment of hiring from 1 Pier 1 and startup costs related to the new Columbus fulfillment center. We believe that higher sales volumes in the third and fourth quarters will allow us to achieve slightly better expense leverage and achieve greater earnings power in the back half of the year.

First quarter EBITDA was $36.4 million compared to $42.3 million last year. Depreciation increased to $10.4 million, up from $8.9 million 1 year ago. For the full year, we expect depreciation and amortization to be approximately $47 million.

Operating income was $25.8 million versus $33.2 million in the same period last year. For the first quarter, interest expense totaled $2 million compared to $750,000 last year. The increase is primarily attributable to the company's new 7-year $200 million senior secured term loan, which closed at the end of April.

Taxes for the first quarter were $9 million, representing a rate of 37.5%. Net income for the first quarter was $15.1 million or $0.16 per share, which compares to $20.3 million or $0.19 per share last year.

Moving to the balance sheet. Inventory at the end of the first quarter was in line with our expectations and totaled $417 million, up 9% versus 1 year ago. Having one inventory is allowing us to be more efficient. Inventories at the end of the second quarter are planned to be up in the mid-teens, reflecting our expanded SKU count in support of the Express Request and the e-Commerce growth, as well as the receipt of merchandise a little bit earlier this year. The company paid approximately $5.5 million in cash dividends during the quarter and utilized $107 million to repurchase 5.7 million shares of common stock.

Since the end of the quarter, we have repurchased an additional 390,000 shares at a cost of $6.8 million. Under the April 2014 $200 million share repurchase program, $182 million remains available for future repurchases. Currently, there are approximately 93.5 million shares of common stock outstanding.

Capital expenditures in the first quarter totaled $15.3 million. Of that amount, $7.4 million was utilized for technology and infrastructure initiatives, including e-Commerce and the build-out of our new fulfillment center in Columbus. The remaining $7.9 million was deployed toward the opening of new Pier 1 Imports stores, new merchandise fixtures and lightings for existing stores and other leasehold improvements and equipment. Capital expenditures for the year will be approximately $80 million.

During the first quarter, we opened 9 stores and closed 14. A number of these were relocations. We ended the period with 1,067 Pier 1 Imports stores, including 986 locations in the U.S. and 81 in Canada, for a total of 8.4 million retail square feet. Our real estate strategy continues to be focused on quality versus quantity. Our location and store economics provide us with a great deal of flexibility, affording us the ability to maximize the portfolio as e-Commerce continues to grow.

And finally, as we noted in our press release earlier today, we are revising our full-year earnings per share guidance slightly downward. Our financial guidance for the fiscal 2015 is now as follows: comparable company sales growth, which includes e-Commerce, in the high single-digit range; SG&A expense relatively flat as a percentage of sales compared to fiscal 2014; EBITDA growth in the range of 9% to 14% compared to previous guidance for growth of 11% to 17%; earnings per share in the range of $1.14 to $1.22, utilizing a fully diluted share count of 95 million shares, representing year-over-year growth of 13% to 21% compared to previous guidance of $1.16 to $1.24. Additionally, for modeling purposes, you should continue to assume interest expense of approximately $11 million and an effective annual tax rate of 39%.

As you think about the cadence of earnings this year, there are some other factors to consider. First, as I mentioned earlier, we expect to see second quarter gross profit deleverage as a percentage of sales compared to the second quarter of last year. Second, we will be up against easier comparisons in the third and fourth quarter, as we begin to lap the disruptive weather and more aggressive promotional cadence of last year. Third, we believe the initiatives we're putting in place earlier in the year will help drive sales, particularly during our peak holiday season. And lastly, we anticipate that e-Commerce will continue to accelerate, with the most significant opportunity coming in the all-important fourth quarter.

Thank you for your continued interest in our company. And I will now ask Melissa, to please open the call for questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Nemer with Wells Fargo Securities.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

First, I wanted to dig a little deeper on the gross margin pressure, and I'm wondering if that's primarily driven by the blend of full price versus clearance or if there's anything happening in terms of category mix or margins within categories?

Alexander W. Smith

Matt, so in terms of the pressure, it's not so much the markdown pressure. I mean, we continue to run a very clean inventory, as I know you know. So it's really the promotional markdown, the temporary sale markdowns that we take in our monthly promotional cadence. So that's really where the pressure comes from. Do you want to add to that, Cary?

Charles H. Turner

I would say, she is definitely being driven towards a deal, the amount of sales that are promotional are higher than what we're seeing with our inventory and it's just how she is shopping right now.

Alexander W. Smith

In terms of the category mix, Matt, we're sort of pretty agnostic about the mix of categories. Our initial mark on the -- are pretty similar across the whole assortment.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay. And then as a follow-up to that, do you think that it is primarily a customer issue where she's looking for a deal? Or is there something really competitive out there that is also impacting you?

Alexander W. Smith

Well, I think that's one and the same thing actually. I mean, I think you've seen it from everybody else's results as they flowed in, in the quarter. I mean there's no doubt about it that the customer wants to save on the initial pricing. And as you know, with Pier 1, we tried for a long time to stay out of following the rest of the market, but that proved really, really hard to do, if you're going to maintain your market share. So now we're in there with the rest of the pack promoting away.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay. And then just lastly, the buyback program, is that a 10b5 program that you had sort of prearranged prior to the quarter? Or are you kind of making those decisions real time?

Alexander W. Smith

We do some and some. We have both a lot of stock back under the 10b5. But sometimes, we just go in and out of the market, depending on what's happening to the price.

Charles H. Turner

When the windows are open.

Alexander W. Smith

When the Windows are open.

Operator

Your next question comes from the line of Budd Bugatch with Raymond James.

David Vargas

This is David Vargas on for Budd. A couple of questions. Last quarter, you gave comp store guidance for the full year '15 of mid-single digits. I was just wondering if that still stands. I know you're trying to move to a company comparable -- company comp guidance.

Charles H. Turner

Well, as you heard me say, if we look at the first quarter, the comp store gain was a 4-ish number, but it's really getting -- the fact that 25% of the online business is coming from the stores and 30% of the online business is being picked up in the store, we're just going to focus on the comparable company comp.

David Vargas

Okay. All right. And going off of that, would you be able to give an idea of where you expect total revenue growth, maybe for the year to be, and for next quarters? I don't know if you had mentioned that already.

Charles H. Turner

We didn't mention for the quarter, but if you take a look, I would use the company comp number and adjust it just ever so slightly for the new stores.

David Vargas

Okay. And I didn't see it in the press release, but was there any -- do you have an estimate or give us some idea of what other income might have been for the quarter, royalties, et cetera?

Charles H. Turner

No, it's de minimis.

Operator

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

Alan M. Rifkin - Barclays Capital, Research Division

Do you think the level of promotions, Alex, is more a reflection of the channel shift? Or do you think it's more a reflection of the environment that we're in?

Alexander W. Smith

Oh, no. I mean, absolutely, it's a reflection of the environment, Alan. I mean, we just -- I mean, we said it in all the prepared remarks, and then as Cary just alluded to, what we're seeing, even within our promotional pricing, we're seeing that -- how can I explain this? We put a fairly fixed amount of our inventory on promotion every month. And what we're seeing now is that it's over-indexing much more than we're accustomed to in terms of a percent to our sales. I think that's the best way I can put it.

Alan M. Rifkin - Barclays Capital, Research Division

Okay, if you look at your long-term guidance, you're essentially, by our estimate, doubling the e-Commerce contribution from about 10% of fiscal '16 revenues, which implied $200 million to now $400 million, which by our estimate implies about 20% of revenues. Why would that significant increase in contribution from e-Commerce not result in a higher EBIT margin goal for fiscal '16?

Alexander W. Smith

Well, for fiscal '16, we haven't actually said anything about fiscal '16. I mean, you're right about the percentage. I mean, that's pretty much the way the math works. But we said nothing about the profitability yet in '16.

Alan M. Rifkin - Barclays Capital, Research Division

Unless I'm mistaken, did you not say that your EBIT margins would be 11% to 11.5% by fiscal '16?

Charles H. Turner

Yes, and right now, we're continuing to keep that guidance.

Alexander W. Smith

Did I say -- okay, I'm sorry.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. But if I may, should we...

Charles H. Turner

Remember, that the biggest thing is, yes, we're getting the incremental sales, but we also have the incremental headcount that we need to manage this business.

Alan M. Rifkin - Barclays Capital, Research Division

Right. But Cary, should we be thinking about, as e-Commerce continues to grow, and certainly it's exceeding your expectations, does there come a point in time where that will be more accretive to EBIT margins than that same dollar generated on the brick-and-mortar side?

Alexander W. Smith

Oh, I see where you're going. Yes, absolutely, and we said that in the -- yes, in the prepared remarks. So we're pretty confident that as we scale it out and the way it's going to flow through is the online business will be more profitable than the stores business.

Charles H. Turner

But I don't see that for next year.

Operator

Your next question comes from the line of Adam Sindler of Deutsche Bank.

Adam H. Sindler - Deutsche Bank AG, Research Division

I was hoping you could help us walk through the brand comp math. Alex, I just -- can you just confirm that you did say in your prepared remarks the growth rate was 270% year-on-year?

Alexander W. Smith

260%.

Adam H. Sindler - Deutsche Bank AG, Research Division

260%. Okay. So if about 9% of your business grows at 200. So I get -- when you're looking at your -- the internal calculation, do you use just total percent of sales, average percent of sales? Because I'm having a very hard time getting from a 6 brand comp with only 33% coming from in-store, to how the sort of store, which is the brick-and-mortar plus the pickup in store, is anywhere even close to 4. I mean, by my calculations, retail was down almost as much as it was last quarter.

Alexander W. Smith

No, I think maybe the best thing to do -- if you call Cary afterwards, he'll kind of walk you through line by line and do the math. I think that's probably the best way to tackle that.

Adam H. Sindler - Deutsche Bank AG, Research Division

Okay. Okay. So just one more, broadly, then. I know you guys talked about last quarter moving to a more of a 20% off anything in the store on the promotional sort of initiatives you have this year. Have you moved to that in the first quarter? And what was the response that you saw after that?

Alexander W. Smith

Well, that's a very good question. We did do some more generic percentages off, as you know. I would say, our sort of view on that was mixed. Some categories works really well. Some categories work less well. I think what we came back to is we're still going to do a little bit of that, but we find that our SKU-specific pricing is more effective for us because we can direct the customer spending a little more accurately. So we did it, but I don't think you're going to see us doing it wholesale for the rest of the year.

Adam H. Sindler - Deutsche Bank AG, Research Division

Okay. And then just sticking with that for a moment, as we look to the second quarter, we remember that last year was definitely much more promotional on the, I guess, the outdoor patio furniture, the seasonal business, than you guys had expected. As we look to this year, just from a sort of sitting in my chair looking outside the window type of thing, weather seems to be a little worse this year than last year, a little bit cooler, a little bit rainier. How is your outlook for the promotional environment on clearance for outdoor patio furniture in the second quarter, I guess, relative to last year?

Alexander W. Smith

Well, I mean you're right about the weather at the beginning of the season. And if you sort of think about the whole season, we told you at the end of Q4 that the warm weather stores had done extremely well on outdoor, which they did. As we moved into Q1, it was a really slow start for all the reasons that you can imagine. But it really picked up momentum as we got towards Memorial Day and we've really had a terrific time on outdoor from, I guess, really the week before Memorial Day and it's still doing very nicely. We are being more aggressive than last year in terms of how we clear out the SKUs that we're not going forward with so that we're good and clean for when Harvest and Halloween ships.

Adam H. Sindler - Deutsche Bank AG, Research Division

Okay. And just as you are growing 9% of total sales well ahead of expectations, and I'm very well familiar with the sort of thought process around building teams as they get to a certain percent of sales, are you seeing that happen a bit quicker than you expected? Are certain categories growing faster? And is this why we need the incremental headcount in e-Commerce? In the buying brand [indiscernible].

Alexander W. Smith

Well, so much of the e-Commerce is based on number of SKUs. And as we've talked to you that we're building the SKU base very rapidly. And every SKU that we have creates a lot of work in terms of photography and art direction and creating the product base and so on and so forth. There's a lot of kind of transactional work that needs to be done. But more than that, I think when you heard us talk about the database, I mean, we understand that some of our competitors are much further down the road than we are in terms of the sophistication with which they can manage and manipulate their customer database. So we're really playing catch-up on that, but we're playing catch-up pretty aggressively, and that is another piece of the investment.

Operator

Your next question comes from the line of Cristina Fernandez with Telsey Advisory Group.

Cristina Fernández - Telsey Advisory Group LLC

I wanted to go back to the question on e-Commerce profitability. If you're assuming e-Commerce is margin-neutral next year, even with the doubling in sales, I mean, what makes you comfortable that you can get to that 11%, 11.5% operating margin target with the pressure you're seeing on the gross profit this year?

Charles H. Turner

Well, you have the gross profit, but when you continue down the income statement, you don't have the store payroll, et cetera. And also, remember, with our e-Commerce business, we're running the business as one. So we have a matrix organization. So we don't have a SILO organization built into the expenses as well. So we -- as we look at -- if you want to call it contribution from either channel, we're agnostic as to how she's shopping.

Cristina Fernández - Telsey Advisory Group LLC

Right. But then that means that for next year, if I'm looking at the EBIT lines by channel that most of the improvement is going come from the store level to get to that target? Or is it both?

Charles H. Turner

No, it'll come from both and the leveraging of the total sales.

Cristina Fernández - Telsey Advisory Group LLC

And then secondly, with e-Commerce penetration accelerating so rapidly, I mean, what -- I mean, at what point do you -- would you reevaluate your store strategy and think about the need to operate over 1,000 stores?

Alexander W. Smith

Cristina, that's a very good question. And of course, we evaluate that strategy on an ongoing basis. But again, as we said in the prepared remarks, we are very fortunate with the flexibility that we have with our real estate, both in terms of the store size and the way we're able to move in and out of leases on a fairly short-term basis. So you can be sure that as we look at the strength of our online business in parallel with that, we are thinking how many stores we need to go with it. But don't forget, the stores are just a very powerful vehicle for online. We've already reached a remarkably high number in terms of how much of our online sales is generated through the stores and you know about the pick up in stores. So we see the stores really as not just revenue generators in terms of brick-and-mortar POS sales, but also as an important part of our 1 Pier 1 strategy.

Charles H. Turner

And as I said in the prepared remarks, we're looking at quality not quantity. So I think the best thing to think about is you won't see us having a fill in store, or just to have another store in a market. We're really looking at each individual market and seeing exactly how many and where those stores should be to gain market share.

Operator

Your next question comes from the line of Joan Storms with Wedbush Securities.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

I wanted to ask again about sort of -- and I'm sorry to beat a dead horse, but on the gross margin and you took down the guidance by $0.02. I'm sure your plan might've been a little bit below where the Street was on average within the first quarter, but how did -- like to account for like that shortfall, do you think -- I guess the question is you talked about the gross margin being under pressure near term, but you feel like now you'll be able to offset that more with the accelerated sales and the easier compares in the back half. I know you were trying to go over the cadence of that, Cary.

Charles H. Turner

Yes. As I said, in the first quarter, the promotional cadence hurt the margin by about 150 basis points. I think when we look at the second quarter, gross profit will be down probably 100 basis points, some because the additional promotions and clearance, but probably even more so, the channel mix change. And then as we go into the back half, it probably should be a little less. But we'll update everybody as we go through.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then just remind us in the second quarter last year, you do not have enough marketing geared towards the promotion -- the end of summer sale, when everyone else is promoting as well, you guys did not market that. And so you missed out on some store traffic. And then so, how are you prepared to deal with that this year?

Alexander W. Smith

Well, we try not to make the same mistake twice. So we've got a much more aggressive plan this year, Joan, around summer clearance. It's already kicking into gear now. The sale posters are up in the windows. We have some very powerful promotional TV spots, especially around July 4. So you can expect to see us much more aggressive in our marketing of the summer clearance period.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then the fall inventory starts to come in right around the same time, towards the end of that?

Alexander W. Smith

Yes. Yes. Yes. Starts to flow in, sort of August-ish.

Operator

Your last question comes from the line of Brian Nagel with Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

A bigger-picture question on promotion, the promotional activity that you discussed in the press release and the prepared comments. But I'm having a tough time making sense of it. Because as I think about Pier 1 and the overall environment, you've had this phenomenal recovery story over the past several years, and now -- at least in my mind, to a large extent, Pier 1 operated above promotions. You were using promotions in your store, clearance activity to drive traffic, but very, very selectively. And if I think about the consumer right now, and you may have a better idea of this than I do, but it seems to me the consumer should be in a better shape now than the consumer was maybe 1, 2, 3 years ago. So I guess the question, obviously, what's actually driving this promotional activity that now is weighing upon Pier 1? And as you think about who's leading this, is Pier 1 more of a leader or a follower in the activity?

Alexander W. Smith

Well, I mean, I think there's some interesting discussion points in there. I think we could talk about it for hours. I mean, I think to sum it up, I think we, and I don't mean Pier 1, I think the industry generally is somewhat a victim of its own activity in that we have trained the customer to expect a degree of off-pricing and because everybody does it, everybody does it and then she expects it and it just -- it becomes a habit. I think that's a piece of it. In terms of whether we're the follower or the initiator, no, we're absolutely the follower. Again, you put it very well. We try to -- we tried and succeeded relatively well to hang back from this for a long time, but you'll recall, when we released our Q3 earnings last year, we talked about this a lot and the conclusion we came to, Brian, is that we just couldn't be -- we couldn't afford to be giving away market share. And so we started, really, our more aggressive stance on promotional activity in Q3 last year, and it's continued Q3, Q4 and into Q1. Truthfully, I wish it wasn't -- it wasn't this. And I wish we could -- and we'll try to, over time, to pull back on it. And I don't want to sound too negative about this, but we are where we are in terms of the competitive environment. And our job is to, we think, preserve our market share.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

So at the risk of overthinking this, with how the dynamic right now, it seems to me as I think about when Pier 1 started to see the pressures of comp -- pressures of promotional competition, it's coincided with the launch or the growth of the e-Commerce effort. So are those 2 -- I guess the question I'm working towards is, does going online in a more aggressive way make you more susceptible to industry-wide promotions?

Alexander W. Smith

I don't think so, I really don't. I mean, because the online, the pure online merchants, the omni-channel merchants, the pure brick-and-mortar ones, I mean frankly, they all behave in pretty much the same way. So I don't think there's any cause-and-effect there.

All right. Well that's the last question. Thanks, everybody, for joining us today. And we look forward to talking to you at the end of Q2. Thank you.

Charles H. Turner

Thank you.

Alexander W. Smith

Thank you, Melissa.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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