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Pier 1 Imports (NYSE:PIR)

Q4 2011 Earnings Call

April 07, 2011 11:00 am ET

Executives

Alexander Smith - Chief Executive Officer, President, Director and Member of Executive Committee

Charles Turner - Chief Financial Officer, Executive Vice President of Finance and Treasurer

Kelley Buchhorn -

Analysts

John Barrett - Columbia Management

Jennifer Milan - Sterne Agee & Leach Inc.

Budd Bugatch - Raymond James & Associates, Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

David Berman - Berman Capital

Anthony Chukumba - BB&T Capital Markets

Simeon Gutman - Goldman Sachs

Brian Nagel - Oppenheimer & Co. Inc.

Operator

Good morning, ladies and gentlemen. This is the Pier 1 Imports quarterly conference call. [Operator Instructions] I would now like to introduce Mr. Alex Smith, President and Chief Executive Officer for Pier 1 Imports. Mr. Smith, you may begin.

Alexander Smith

Thanks, Thea. Good morning, everyone, and thanks for joining us today. Cary Turner, our Executive Vice President and Chief Financial Officer, is with me today, as is Kelley Buchhorn, our Director of Investor Relations.

As you already know, we announced our fourth quarter and fiscal year results earlier this morning. We also announced our board-approved three-year growth plan, formulated to drive sales, increase profitability and maximize shareholder value.

In just a few minutes, Cary will go over the highlights of our fourth quarter and year-end results. I will follow by briefly touching on our exceptional year just ended. But most of my prepared remarks today are about our growth plan and what our well-off company will look like in three to five years time.

As always, before we begin, I will ask Kelley to read to you the Safe Harbor Statement. Kelley?

Kelley Buchhorn

Thank you, Alex, and good morning, everyone. Prior to market open today, we issued two press releases. One included the detailed financial results for the fourth quarter and fiscal year ended February 26, 2011. And one included details of the company's board-approved three-year growth plan.

In just a few moments, we will hear comments from Alex and Cary about the financial results and growth initiatives, followed by a question-and-answer period.

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

Our actual results and future financial conditions may differ materially from those expressed in any such forward-looking statements and 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 our forward-looking statements.

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

I would now like to turn the call over to Cary who will provide the highlights of our fourth quarter and fiscal year results. Cary?

Charles Turner

Thank you, Kelley. As reported in this morning's financial results press release, total sales for the fourth quarter increased 7.7% over the same period last year, and comp store sales increased 8.9% for the quarter on top of last year's fourth quarter comp store sales increase of 6.5%.

The sales increases resulted primarily from increases in store traffic, conversion rate and average ticket.

Merchandise margins for the quarter increased $27.9 million to $249 million or 58.4% of sales compared to 55.8% of sales last year, an increase of 260 basis points.

Merchandise margins continue to be positively impacted by lower markdown activity, strong input margins and well-managed inventory levels.

Store occupancy costs for the quarter were 15.6% of sales compared to 16.9% of sales in the fourth quarter last year.

Store occupancy cost declined $500,000 this quarter compared to last year. This was primarily attributable to the reduced store count since the end of the fourth quarter last year coupled with the benefit from favorable rent negotiations.

Gross profit for the quarter improved 390 basis points to 42.8% of sales compared to 38.9% of sales last year.

As detailed in the table in today's press release, SG&A expenses totaled $119 million for the fourth quarter compared to $113 million last year.

As a percentage of sales, SG&A expenses for the quarter declined 60 basis points to 27.9% of sales compared to last year's 28.5% of sales for the same period.

Operating income for the fourth quarter was $58.4 million or 13.7% of sales compared to last year's fourth quarter operating income of $36 million or 9.1% of sales.

Total sales for the fiscal year increased 8.2% over last year, and comp store sales increased 10.9% compared to a comp store sales increase of 1.5% last year. As stated earlier, comp store sales increases were driven by improvements in traffic, conversion rate and average ticket.

At the end of the year, sales per retail square foot for the trailing 12 months were $168, up from $152 per square foot at the end of last year.

Merchandise margins for the year improved 380 basis points to a record 58.6% of sales compared to 54.8% of sales last year.

Store occupancy cost declined $4.8 million to $262.4 million and were 18.8% of sales versus 20.7% of sales last year.

For the year, gross profit improved 570 basis points to 39.8% of sales compared to 34.1% of sales last year.

SG&A expenses for the year were $431.9 million or 30.9% of sales compared to $421.2 million or 32.6% of sales last year, a 170 basis point improvement. Although the company had claimed increases in favorable expenses during the latter part of the year, overall SG&A expenses were effectively levered.

Operating income improved $107 million to $103.7 million compared to an operating loss of $3.3 million last fiscal year.

Sales and merchandise margin increases and the company's focus on leveraging expenses resulted in the overall improvement in operating income.

Inventory at the end of the year was $311.8 million, slightly below last year's inventory levels of $313.5 million.

Management continues to strategically manage its inventory purchases and monitor its inventory levels to keep them in line with consumer demand.

On February 15 of this year, all of the company's outstanding 6.375% convertible senior notes, due 2036, were paid in full, and so long-term debt at the end of the year was $9.5 million, solely comprised of an industrial revenue bond tied to our Mansfield distribution center.

At the end of the year, cash and cash equivalents were $301.5 million, a $113.6 million increase over last year-end's balance of $187.9 million.

For the year, capital expenditures were approximately $31 million, which were funded by cash flow generated from operations. The company invested approximately half of this spend in technology such as enhancing planning and allocations analytics, upgrading the store's data network to a faster and more cost-effective platform and store equipment investment such as PCs at the cash rack. The other half was spent in existing stores.

The company invested a portion of this spend in new merchandise fixtures with prototypes tested in approximately 60 stores. The new fixtures are designed to raise inventory density and increase sales productivity in certain departments throughout the store.

These fixtures also open up the look of the store, which enhances the shopping experience of our customers through improved visibility and accessibility to our merchandise. The return on these investments has shown positive results with sales increases achieved in these stores above the company average and many good comments from customers. Therefore, as Alex will discuss shortly, as part of the three-year growth plan, the company will expand the rollout of these new store fixtures this fiscal year, being prudent with its investments and directing capital first to those stores with the highest productivity potential.

During the fourth quarter, we closed one store, ending the year with 1,046 Pier 1 Imports stores with 967 stores in the U.S. and 79 stores in Canada, totaling 8.2 million retail square feet.

This coming fiscal year, we plan to open approximately 12 stores and close seven for a net of five store openings.

On Monday this week, the company amended and restated its existing $300 million secured revolving credit facility. The amended and reinstated $300 million facility has a five-year term and includes a $100 million accordion future. The facility will be used for general corporate purposes, although the company expects to continue funding its working capital requirements with cash flow from operations.

March comp store sales increased 11.3% compared to a 19.4% comp store sales increase in March last year, even with the Easter holiday falling later in April this year.

Merchandise margins as a percent of sales for March are approximately the same as last year.

We also have a few updates to provide on the first quarter and fiscal year 2012. Total sales for the year will be approximately 1% more than comp store sales primarily because of the planned net increase in store count between last year and this year.

Merchandise margins for the first quarter should be approximately the same as last year's first quarter merchandise margins, and merchandise margins for the full year should be in the 58% of sales range.

Occupancy cost for the year will be slightly higher than last year by approximately $3 million. SG&A expenses will increase somewhat but will continue to be leveraged as total sales increase.

Fixed expenses will be a couple million dollars higher in each quarter, while variable expenses will increase at a rate equal to approximately one half of the comparable store sales gain.

Cash flow generated from operations will be used in part to fund capital expenditures this year of approximately $50 million to $60 million, which is part of the company's three-year growth plan. Therefore, depreciation will increase slightly over last year. Non-operating income net of interest expense in fiscal 2012 will be slightly positive.

The company utilized in full its net operating loss federal tax carryforward in fiscal 2011. And therefore, the effective tax rate for fiscal 2012, starting with the first quarter, should be approximately 37% of pretax income.

And finally, inventory levels by the end of fiscal 2012 will be at or near inventory levels at the end of fiscal 2011.

Now I'd like to turn it back over to Al.

Alexander Smith

Thanks, Cary. As I stated earlier, fiscal 2011 was an exceptional year for Pier 1 Imports. We passed two major milestones: Annual operating income for the first time in six years and net income in each of the four quarters. The creativity, rigor and steadfastness that we have embedded into our company has served us well.

Our commitment to achieving profitability has remained strong each and every day. Our focus never changed, even through the tough economic times. We have executed our initiatives and strategies extremely well. And when the economy started to improve, we are in a good position. And as I've said many times before, we continue to build our business one customer and one SKU at a time.

Our impactful and brand right marketing, our terrific merchandise assortments and a great in-store shopping experience are resonating with our loyal and many new customers.

Store traffic conversion rate and average ticket improvements drove our top line growth. As Cary mentioned earlier, comp store sales in the fourth quarter increased 8.9% on top of the 6.5% comp store sales increase last year and, on a four-year cumulative basis, have increased 8.2%. Comp store sales for the year increased 10.9% and, on a three- and four-year cumulative basis, have increased 3.2% and 1 1/2%, respectively.

The first quarter of fiscal 2012 is off to a good start with March comp store sales increasing 11.3%; this on top of last year's March comp store sales increase of 19.4%.

We are seeing strength throughout the entire store, not only with our Easter spring and outdoor merchandise assortments, but our non-seasonal assortments as well.

As you know, fiscal 2011 merchandise margins will surpass company historical highs. Going forward, we feel very confident that merchandise margins in the 58% range can be sustained. Our initial markups are strong, and we continue to benefit from the significant improvements to our supply chain that we've made over the last few years.

Our buyer's ability to create compelling assortments continues to improve. And coupled with our strong inventory management, the inherent markdown risk on our inventory is well controlled. Our strong planning and allocation team, using improved systems, is making a significant contribution to driving sales and minimizing markdowns.

Expenses are prudently and carefully managed. We control our expenses and leverage efficiencies extremely well. And as we move forward, we will analyze the ongoing needs of the business, and we will continue to exercise diligence with incremental spend in those areas that will directly benefit top and bottom line growth. This will include judiciously adding headcount.

It's now been four years since we began our journey to profitability and beyond; hard to believe. Throughout the last four years, we have been steadfast in our three great obsessions: great merchandise, great stores and a lean and efficient infrastructure. That said, each of the last four years has had its own theme.

2007 was all about rightsizing the business, establishing our business priorities and positioning us for a turnaround.

Years two and three, 2008 and 2009, were dominated by going into traveling through and coming out of the terrible recession and all the work we did to make sure that we exited the recession in a stronger position than when we entered it, which we did.

Year four, fiscal 2011 that we reported on today, was the year we changed from playing defense to playing offense.

For the past four years, we've been talking to you about returning our company to profitability and beyond. Well, profitability has been achieved, and so it is time to retire that phrase as we now start to write the next chapter beyond profitability.

We are extremely well positioned to build on our profitability. We have a successful future ahead of us. As I said, we have embedded both creativity and rigor deep into our business. And now it's time to extend our reach. We plan to grow sales and profitability by maintaining the performance trajectory of our Pier 1 Imports stores, the bedrock of our profitability and, at the same time, develop an online business which will bring new customers to the Pier 1 Imports experience and give existing customers more reasons to shop.

Our healthy cash position, strong balance sheet and ongoing cash generation allows us to invest in that successful future. We have evaluated very carefully where and how much investment should be made. Driving sales, improving productivity and increasing profitability to maximize shareholder value is our objective.

Goals are being set to achieve sales of $200 per retail square foot and operating margin of at least 10% of sales within three years and, within five years, have an online business that contributes at least 10% of revenues.

Our three-year board-approved growth plan announced today will help make these goals a reality. We plan to invest $200 million into capital initiatives over the next three years, which will help us to sustain both top and bottom line growth. We also announced today an initial $100 million share repurchase program. Our recent successes, the strength of our balance sheet and ongoing cash generation enable us both to reinvest in our company and return value to our shareholders.

Over the coming years, we will grow from a single brand, bricks-and-mortar retailer into a multichannel retailer with assortments and brand reach significantly enhanced from where we are today. We will do it carefully. We will do it thoughtfully and at an appropriate pace.

Evolution, not revolution is our mantra. The investments we make in our stores, our technology and our evolution into a best-in-class multichannel retailer will greatly assist us in the achievement of our goals and improve our competitive position as we continue to take market share.

Let's now talk in more detail of where our $200 million of capital will be strategically invested. As I've already said, reinvesting capital into our business to improve our competitive position both in store and through e-commerce is what this is all about. Our spend will be targeted at those areas which make the greatest contribution to the achievements of our goals.

First, as we evolve into a best-in-class multichannel retailer, we will continue to invest in our entry to e-commerce. Our investments to date have proved successful. Incremental visits to our website have increased by 15% to 20% since this time last year. Our search engine optimization is much better. And the look, feel and content of our website, pier1.com, have all significantly improved. We launched in-store merchandise availability on our website this past October. And today, 15% of visitors to our site utilize this functionality to locate merchandise at their local Pier 1 store.

Our site-to-store e-com initiative called Pier 1.2Go is in full test mode with family and friends program today. We will test regionally in May and plan to fully launch Pier 1.2Go on our website in late spring.

As a reminder, Pier 1.2Go will allow customers to order and reserve merchandise online and pick up and pay in-store.

We are pleased to tell you that the timetable for the next phase of our entry into full e-commerce functionality called Pier 1.2You has been moved up to early summer of 2012. Pier 1.2You will enable our customers to fully purchase merchandise online from our site and allow flexibility for multiple delivery options.

We are carefully and strategically planning for our entry into the e-commerce channel. It will be done right, step by step, providing our customers an exciting and consistent shopping experience, whether they are shopping online, in our stores or eventually from mobile devices, whether they are shopping the existing assortments or new assortments.

Once we have full online e-commerce functionality live by next summer, our assortments will, of course, grow. We have many, many opportunities to extend the reach of our well-loved Pier 1 Imports brand through both category expansion and new categories which are not currently part of our assortment. Within five years, we foresee our online channel contributing at least 10% of revenues.

Our stores are the engine room of our profitability. It is essential that our stores do not fall behind those of our competitors. Over the past few years, our capital spend in our existing stores has been much lower than historical levels. We have, in essence, underspent for all the reasons you know about.

As we move forward, we want to increase sales productivity and maximize returns at each and every one of our Pier 1 Imports stores. Therefore, the capital expenditures allocated to our existing stores included in the three-year growth plan are aimed at achieving these objectives. The investments we make over the next three years in new fixtures, store remodels and leasehold improvements will impact roughly 90% of our existing stores.

A portion of our store investments will be allocated to new merchandise fixtures. As Cary mentioned earlier, we have recently tested new fixtures in 60 stores with overall initial results showing improvements in sales and profitability.

The new fixtures have been designed to give the stores a more open look and feel, allowing our merchandise assortments to be visible and accessible, enhancing the shopping experience for our customers.

Many of the newly designed merchandise fixtures are mobile. And so time and cost will be saved by our store teams during merchandise resets and seasonal changes.

The rollout of new store fixtures will evolve over the next three years. Some stores will get full sets of new fixtures while others will get only a subset. Initially, we will direct new merchandise fixture sets to stores with the highest upside potential and, consequently, the greatest return on investments.

Incidentally, as another test, we recently analyzed the new merchandise layout in 28 of our stores using existing store fixtures. The layout in these stores was aligned similar to the configuration of the 60 stores with the new fixtures. Although we achieved slight increases in sales and productivity overall in these 28 stores, they were not near to the magnitude of those achieving stores for the new merchandise fixture sets.

We have also tested customer reaction to the new layout and fixturing through market research. The results were overwhelmingly positive. The battery of store attributes that we routinely research against showed significant improvements from our standard fixtures and layouts.

Additionally, the number of customers expressing an intention to revisit and recommend Pier 1 Imports was very much higher than we usually see in our research.

Capital will also be invested in some store remodels over the next three years. Again, we will of course direct these investments to those stores with the strongest potential for sales and store contribution growth.

In most cases, store remodel plans will consist of improvements and upgrades which can be carried out without business interruption. We do, however, have plans to undergo major remodel and construction efforts such as new flooring, complete new lighting and possible structure enhancements in approximately five of our stores.

We have talked to you before about increasing the size of our store base over the next few years. Today, we have close to 1,050 Pier 1 Imports stores throughout the United States and Canada. Some opportunities do exist for additional stores where we have gaps in our coverage, but we are not talking about a large number. We feel the optimal size of the Pier 1 Imports store base is approximately 1,100 stores or about another 50.

Our net store growth initiatives will span the next five years with around 80 new store openings and the closure of approximately 30 stores, bringing us to that 1,100 number. Most of the closures will be due to a relocation within an existing market.

The third part of our investment plan is investing in technology other than that needed for e-commerce. Let's talk about points of sale. It has been a little over 20 years since the initial implementation of our current POS system. Times have changed since then just a little. Technology has significantly improved, and the enhanced feature and functionality that is now possible with a modernized system comes at a far more attractive cost than would have been possible before.

Our three-year growth plan includes investing in a new point-of-sale system. Although many advantages and efficiencies will be realized with the new POS system, the key investment return will be our ability to gain real-time visibility of our customers and provide for seamless transaction across our multichannels, no matter where in the channel the transaction has occurred. This is a distinct advantage for our store teams when interacting face to face with our customers.

We are very cognizant of the complexities involved in new POS systems and have built extra time into both our RFP process at the front end and testing at the back end to guarantee flawless execution.

Half of our investment allocation will be to invest in technology and infrastructure development other than point-of-sale and e-commerce. Keep in mind that our technology spend for the last two years has been small, yet innovative. During our turnaround, our technology spend was focused in areas such as global supply chain automation and enhancements, improving merchandise planning and allocation analytics and gaining efficiencies throughout the organization. We have done some terrific things but have been constrained in making more of the efficiency improvements we want to because of our self-imposed capital restraints.

Now with more funding and with the rapid advancements in technology making projects more affordable, we can invest in areas that will support our business objectives. For example, replacing legacy systems, enhancing current systems to improve analytics and adding new software for labor optimization, which will drive customer conversion whilst reducing payroll costs.

To summarize, the capital investments we make over the next few years will drive sales, increase productivity and improve profitability to maximize returns to our shareholders. These investments, of course, support our key business priorities and objectives and our now four great obsessions: great merchandise, great stores, a great online shopping experience and a lean and efficient infrastructure, and are intended to secure ongoing profit improvement for our well-loved company.

Moving on, much thought and discussion went into analyzing the future cash needs of our business. The ongoing generation of cash enables us to both reinvest in the business, as well as returning capital to shareholders, all the while maintaining a healthy level of cash on our balance sheet. Significant research and analysis went into establishing what our cash cushion should be, the appropriate level of investments and how much we should return to our shareholders.

The outcome is a very clearly defined capital allocation policy we are setting out today. which supports our business plan and gives shareholders visibility as to how we intend to use the cash generated by the business.

First and foremost, we will continue to reinvest in the growth and future of our company. We will maintain financial flexibility and deploy capital when appropriate as opportunities arise. Our ongoing investments will support the priorities and objectives of the business, but they must have solid and realizable returns.

In addition to reinvesting in our business, we will utilize excess cash to return value to our shareholders in the form of share repurchases. We are very pleased with our board's decision and approval of a $100 million initial share repurchase program.

We are very confident in the future growth and continued profitability of the company. And our investments will continue to strengthen every aspect of our business and provide the greatest return and value to our shareholders.

In January of this year, changes were made organizationally to support our growth initiatives of driving sales, increasing profitability and maximizing shareholder value through top and bottom line growth. A new department was created, business development and strategic planning, to lead and coordinate in equal proportions our new initiatives, making sure that we execute them flawlessly. The initial focus of this new team will be the continued development and successful timely implementation of our entry into e-commerce.

In addition, a store planning and property development department was created to support the development plans and successful execution of the new store fixtures, remodels and other leasehold improvements discussed earlier. We have also made some important decisions about how we will manage our business over the next few years. Most fundamentally, we will not let our company become siloed. Every function in the organization will be involved in all parts of our business, working towards achieving our goals. We are one company.

I would like to thank our talented and dedicated associates in our stores, our distribution centers and home office. It's also important to acknowledge our fabulous vendors and agents and all of our many partners who helped to make this past year a success and who will help us to make our future even better.

Thank you for listening to us today. Thank you for your continued interest in Pier 1 Imports. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Brian Nagel with Oppenheimer.

Brian Nagel - Oppenheimer & Co. Inc.

Couple of questions, if I could. First off, just on the March comp commentary, maybe to get a better idea of how we should think about the acceleration we saw just recently. I mean, last year, you called out as we looked at March in 2010, maybe I think it was a four to give percentage point impact by the Easter shift. I know it's difficult because it's early, but are you still seeing -- the question is, this year, are you seeing a similar type shift in sales given the later timing of Easter?

Alexander Smith

Brian, it's the 7th of April. We've got a couple of weeks to go yet. But I mean, let me answer that the other way around. There's nothing that we've seen that would cause us to think things are in any different from the way they've been so far. I mean, everything's pretty much on track.

Brian Nagel - Oppenheimer & Co. Inc.

Okay. That helps. Again, we're just looking to see how they're having any doubt [ph]. And then the second question I wanted to ask you, and I know this is a topic we've discussed quite a bit, but just the input costs, we're now a few months since the last report, and maybe, Cary, if you have anything new on -- how's your ongoing discussions with your vendors and your sourcing costs and how Pier 1 will manage through those?

Alexander Smith

This is the dreaded inflation word. Okay, well, listen, first of all, let me tell you that we have an incredibly good handle on everything that happens at our business. So we can tell you what the price changes are in our FOB costs, we can just change it, tell you what the price changes are in our landed costs, we can tell you what the price changes are of inventory and we can tell you what the price changes are going out the door. And what feeds through into average retail is not just a combination of inflation. It's a combination of how little we mark down or how much we mark down. And it's a combination of the flecks of the various departments and in terms of the average ticket. So there's a lot going on in terms of our average unit retail and our average ticket. So I think that's the first thing I want everybody to understand. It's not just one thing. The second thing I want to reiterate is don't forget the inflation we're talking about is only applied to the FOB cost. An FOB is only a percentage of our final cost. And our shipping and supply chain costs are all looking pretty good, frankly. So we're not seeing the inflation refreshes there. Having said all that, of course we are seeing price inflation. But as I said before, it is country specific. It is region within company specific, it is department specific, it is category specific and it's SKU specific. So our approach hasn't changed. We look at every reorder SKU, and if the vendor wants a price increase, we debate it and discuss it. And sometimes, we accept a price. Sometimes, we don't. Sometimes, we'll discontinue a SKU if the vendor wants too much money. Sometimes, we'll put an average retail up. In terms of our new SKUs, every SKU is a separate negotiation. And we -- the buyers' job is to decide what retail they can afford for a particular item and then decide what they can afford to pay for it. So it's an incredibly complex and it's an incredibly -- and it's an ongoing thing that happens day in and day out. But listen, our job is to manage these issues. That's what we do and inflation and input costs is just another variable that we deal with.

Operator

The next question will come from Budd Bugatch with Raymond James.

Budd Bugatch - Raymond James & Associates, Inc.

The marketing that you're going to do going forward is obviously going to have now an impact of your e-commerce. Can you kind of go through what you're thinking about marketing? I think this year, you ended at about 4.8% of sales. Talk a little bit about where that goes as a percentage of sales and also talk about what you see as the character of marketing going forward.

Alexander Smith

Yes, surely, this is a nice question. Well first of all, in terms of marketing as a percent of sales, we have no intentions of ratcheting that down. Our plan today is to let our marketing spend float up as our revenues increase, and we think that's very, very important. So we're not looking for any leverage there. As far as our ongoing marketing campaign is concerned, we're committed to the main constituents that we've been doing the last few years. It's based on -- it's really based on three key things. It's based on our books and our mailings and on radio and TV. And as you know, we have been incredibly pleased with the response we've got through radio and TV and, where possible, we're finding dollars to increase the amount of our media spend that we put into TV and radio. And you'll see that playing out throughout this year. Our spring, we've actually been on radio already this year, and we're going into our first TV flight at the beginning of May. Now as far as going back online is concerned, we've obviously started to have discussions about that. Pier 1.2Go will be effectively marketed through our website and call out in our books. That's a very important part of it. When we get to the spring, summer of 2012 and we're back fully online, we do anticipate that we will have to support the launch of a full e-com with a little heavier-weight print certainly initially. But those plans are by no means fleshed out in detail yet.

Budd Bugatch - Raymond James & Associates, Inc.

And you've talked about expanding classifications as you expand your e-commerce, and I suspect you won't divulge what specific classifications you're looking at. But maybe you could give us some guidelines, and if you want to disclose any particular classifications, we're all ears. But maybe what are the guidelines...

Alexander Smith

I've got some of my senior team in the room with me today, and they're all stifling their laughter at the thought that we would do that. But no -- but listen, we can talk in generalities here because we know we're constrained by space in the stores. And if you just take 40% of our business, which is furniture, how many sofas can you get in a Pier 1 Imports store? It's not very many. So you don't have to think very hard to think where we could extend our furniture assortments. And I'll just tell you anecdotally why one of the reasons we feel so confident about that. We already have a sort of -- I don't know what I would call it, but a sort of quasi -- well it's not an online business. But we do, as you know, have this reserve purchase function in our stores where our customers can go and browse our furniture book. And the stores will order them SKUs which are not on display in that particular store. And we continue to be extremely pleased. I'm not talking about a huge number here, but directionally, it's very important that customers are very happy to go into a store and say they see a dining table in one color option and they want it in another; they'll let the store order it for them. So that kind of bodes very well for us, I think. In terms of the non-furniture businesses, again, you know as well as I do that the categories that we're not in and where we have potential to expand our reach.

Operator

The next question will come from David Berman with Berman Capital.

David Berman - Berman Capital

I just wanted to ask you, just one of the things you mentioned were the fixtures were helping your same-store sales and your business, and that you'd rolled it out to a few stores. I was wondering how many stores you've done that to and how much exactly, roughly, whatever, is that helping your same-store sales. That's the first question.

Charles Turner

Well, David, we're not going to give you the specifics of that. What we have seen is enough evidence to say that this is definitely enhancing the business and enhancing the comp store sales by an amount that can give us a payback of, call it two years.

David Berman - Berman Capital

Can you say how many -- what percentage roughly of the stores you put it through? Is it a really small amount or is it...

Charles Turner

Yes, we've only done 60.

David Berman - Berman Capital

I see. Okay. So that's something that's done and probably won't help quite a bit.

Charles Turner

Yes.

David Berman - Berman Capital

And then as far as your inventory is concerned, I was impressed that your inventories are very well controlled, I mean, compared to prior quarters especially as well. And I was just wondering if you can embellish on that what you're doing differently to control that so well. And at the same time, your payables are down, you're only 21 days, and I would imagine you could get maybe 30 days or something, and I was wondering if you could talk about those things.

Charles Turner

Okay. On the inventory levels, I think you've seen us, over the last year and a half, just be very prudent. And when we see the need, we are able to increase the flow of purchase orders and, therefore, increase the purchases but, at the same time, keep the inventory flat, and we anticipate that for at least the near future. I think in terms of the payable issue, the biggest issue is we brought product in earlier this year to allow for Chinese New Year disruption, and that's why you're seeing the...

Operator

The next question will come from Simeon Gutman with Credit Suisse.

Simeon Gutman - Goldman Sachs

First, Cary, I don't know the big picture if you can talk to how the investments may impact the expense structure of the company over the next couple years, and if it's as simple as sort of the guidance that you gave roughly for the components for next year. Is that the typical flow-through for the next three in light of these investments?

Charles Turner

Yes, it is approximately. And then the other issue is just depreciation will go up a bit as we start depreciating those.

Simeon Gutman - Goldman Sachs

And it was a couple million per quarter in terms of the relatively fixed.

Charles Turner

Yes.

Simeon Gutman - Goldman Sachs

Okay. And then second, on the distribution infrastructure related to e-commerce, can you talk to how you're thinking about how orders will be fulfilled? Is it going bit through existing store DCs, a new e-commerce facility or through third-party?

Alexander Smith

David, this is Alex. Well, luckily, we -- as you know, we have our network of distribution centers. Our plan is initially to fulfill e-com through local DC, our Mansfield DC, which is significantly bigger than we need it to be for our retail business. We are very keen to keep one inventory, and fulfilling lightness through our own distribution center will allow us to keep one inventory, which we think is very important to the control of the business. If, over the next five to 10 years, the business takes off very significantly, then we'll obviously add sort of multiple fulfillment sites in. But that's our initial thought.

Simeon Gutman - Goldman Sachs

Okay. And then last question, I'll just make it two parts to stop asking. One, on the CapEx related to some of the, I guess, open concept or new fixture elements. Can you just put some parameters around it? I realize the average may be influenced by a very wide range, but if there is an average CapEx per sort of remodel that we can think about. And then second, on the share buyback, it looks like -- I guess you were trying to indicate that the program may have already begun, if I have the ending share count right. But what time frame may that be completed in? Because obviously the cash flow of the business looks like it can support even something that's, for example, if you finish within a year, you can probably just renew and keep going from there.

Alexander Smith

Actually it hasn't begun; it can't. It can begin as of tomorrow, we can start it.

Charles Turner

In terms of the fixtures per store, it's a wide range. Not all stores are equal. And so we're really looking at a lot of different permutations of how to spend that money. And as we said, I think the biggest amount of money will be spent on those stores that have the maximum potential to drive incremental sales. So it's really all over the board in what we see, and that's why we're visiting every store and being very pragmatic about it. In terms of the share repurchase, as we get into it a little bit more, we'll give you more updates as we continue.

Simeon Gutman - Goldman Sachs

On sort of the worst -- not worst case, but on the most involved remodel where you're doing floors, you're doing fixtures and you're doing just about everything, what is a rough -- can you give you give us some type of rough number to think about?

Charles Turner

Well, the range is, I would say, the smallest amount of zero because, as we said, only 90% are going to be touched. And then for instance 15th and 5th, it may be as much $1 million. But that store needs it, and we'll get the payback. We just re-upped another 10 years on that store.

Operator

The next question will come from Brad Thomas with KeyBanc Capital Markets.

Bradley Thomas - KeyBanc Capital Markets Inc.

I just wanted to follow up on the sales outlook and the goal of $200 a square foot. My math suggests that this implies a mid-single digit comp over the next couple years. I was hoping, Alex, if you could just talk a little bit more about what you're willing to achieve from a ticket standpoint, a traffic standpoint, breakdown between new versus existing customers. I mean, what are really the goals to keep pushing sales per square foot up here?

Alexander Smith

Well, the first thing that's going to continue to drive the business forward is that we continue to improve our merchandise assortments. We continue to improve the way we flow and manage that assortment in stores and of course that we continue to improve all aspects of the in-store experience, by which I mean the presentation and the merchandising, which we've been talking about a lot today, but equally important, the quality of service, the level of attentiveness that our customers receive from our store associates. So I mean, that's what's going to help with some terrific marketing. I mean, that's going to be what keeps us going. In terms of the components, you look to these numbers as much as we have, Brad, and you can see that it takes relatively small incremental changes in traffic and average ticket and conversion to get you to those middle single-digit comps. So there is nothing that we look at in terms of our sales equation where we think wow, that's a big number. They all look well within the realms of extreme reasonableness.

Charles Turner

So to get to the $200, to say it a little different, we see incremental coming [ph] from all three components: traffic, conversion rate and average ticket.

Budd Bugatch - Raymond James & Associates, Inc.

That's helpful. And then, Cary, just a follow-up on the guidance for merchandise margins. I know that you all talked about some of the inflation that you're seeing. Could you just help to reconcile a little bit more what the puts and takes are for that 58% number for 2011?

Charles Turner

Well, we ended the year at 58.6%. And we said in the 58% range, and what we're looking at is we're not sure how promotional we may have to be in the future a little bit and that may pull the margin down from a 58.6% down to 58%, or we'll just be able to stay there. But right now, we just want, as Alex said, we just feel the 58% range is what's sustainable.

Bradley Thomas - KeyBanc Capital Markets Inc.

Okay. Just one last follow-up then on the goal for 10% of revenue to come from the online channel. I'm assuming that, that would be both Pier 1.2You as well as Pier 1.2Go. Is that a fair assumption?

Alexander Smith

Yes, that's fair. Yes.

Operator

The next question will come from Anthony Chukumba with BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

I had a couple questions. First question, are you seeing any sort of differences among different geographies or product categories in terms of the comp increase? In other words, is one part of the country maybe a little bit stronger? And is one particular product category a little bit stronger or, vice versa, weaker?

Alexander Smith

Anthony, as we said in the prepared remarks, in terms of this year, well, last year as well, I can speak to both. I think one of the reasons that we have had such good consistent performance is that we are seeing the strength in our assortments across the stores. So our business has not been held up by one or two or three or four departments. We are seeing sales and profitability improvements in every category across the stores and that continues, and that's a very important part of our strategy to make sure we keep that balance. In terms of the geography, all that regional stuff that we saw throughout the recession really is way behind us now. And we see a much, much more consistent performance across the geographies. Taking out the weather impacts, which occur all the time, but if you look at the underlying trends, we're pretty good across the country.

Anthony Chukumba - BB&T Capital Markets

Okay, that's helpful. And then my last question, you've talked a lot about how you can manage product cost inflation and that makes a lot of sense. I guess what I was wondering is, have you had to increase prices on a significant or even a relatively small percentage of your assortment? And what has been the customer reaction when you have had to take price increases?

Alexander Smith

The answer to that is we have raised prices on some individual SKUs. I would describe it as a few items. And when we have done that, our revenues have certainly stayed the same and in most cases, our units have stayed the same as well. But I want to emphasize this once more so everybody's clear: We don't have any kind of peanut butter approach to these things. We make all our decisions on a SKU by SKU basis.

Operator

The next question will come from Jennifer Milan with Sterne Agee.

Jennifer Milan - Sterne Agee & Leach Inc.

I was wondering if you could talk a little bit in terms of the competitive landscape, anything that you're seeing. You probably saw that Bed, Bath and Beyond also reported a big upside surprise last night. So just anything that you're seeing in terms of the consumer or the competitive landscape.

Alexander Smith

Well, not really. I mean, we would never comment on our competitors. All I would say is this: There's a lot of companies run by a lot of very smart people, and they're all working extremely hard to make their businesses better. So we're kind of very respectful of our competition, and we watch a pretty broad set of other retailers and online retailers to see what they're doing. And we see that they're often getting better at what they do.

Jennifer Milan - Sterne Agee & Leach Inc.

Okay. And then can you elaborate at all in terms of the timing for TV? I believe the TV for spring this year, which I think you said is starting in early May, is incremental and it's something you haven't done in a number of years. Can you talk a little bit about your plans for the balance of the year?

Alexander Smith

The May is not incremental, actually. We did do TV last May. This is certainly going to be better TV. I mean, we're very excited about the creative concepts that we've seen. And we will be on TV in the back end of the year -- well, in the second half of the year, we'll be on TV in the fall and we will be on TV for Christmas. And there'll also be additional radio flights as well.

Jennifer Milan - Sterne Agee & Leach Inc.

Okay. So pretty consistent actually to what you did this -- in FY '11.

Alexander Smith

Yes, pretty much. I mean, we may extend a day or two here or there, and we may have a bit of wait here and take -- so we're always finessing the media buy, as you would expect us to do. But if you would just consider it to be broadly like-for-like, then that's pretty -- you won't go far wrong.

Jennifer Milan - Sterne Agee & Leach Inc.

Okay. And then in terms of e-commerce, will you be initially be shipping only to the U.S.? Or will that include Canada? And are you looking at other countries potentially? I know, it's obviously very far down.

Alexander Smith

Oh my God, give it a break. I mean, we haven't...

Jennifer Milan - Sterne Agee & Leach Inc.

Well, Canada.

Alexander Smith

So look at what we said about sort of carefully and one step at a time and evolution not revolution. We'll start with the U.S. When we've got that kind of all thick and tidy [ph] and we're happy with it, we'll think about what to do next.

Jennifer Milan - Sterne Agee & Leach Inc.

Okay. And two quick questions: Can you just talk about where you are in terms of your buys right now? I think like in early March, you had been starting to work on your holiday buys.

Alexander Smith

Yes, sure. I mean, I think -- I'm looking at Michael [Benkel] is in the room -- I think holiday is pretty much put to bed, isn't it? Yes, so holiday's done. We're sort of -- and we're now thinking about next spring.

Operator

The next question will come from John Barrett with Columbia Management.

John Barrett - Columbia Management

I have just a couple quick ones, Alex, for you and one for Cary. In your guidance going to getting to $200 in sales per square foot, do you assume any cannibalization from your e-commerce initiative?

Alexander Smith

Good question. The Pier 1.2Go, we see is that as accretive to comp store sales because they'll have to go in store and purchase. And when we get to the online business, you know, we haven't modeled it out in terms of some cannibalization. Realistically, it was going to be a bit. But we think that will be offset by all the incremental sales that we get through extended categories and so on, so...

Charles Turner

So the $200 a square foot is really what's coming through the store.

John Barrett - Columbia Management

Okay. You mentioned in the release, Alex, and you mentioned on the call a couple of times the extension of the brand, potentially into some new categories. That's interesting, knowing your history and where you're from. Could you elaborate on that a little bit? Or give us any insight into what type of categories?

Alexander Smith

Well, not really. I mean, I think as I answered it earlier, some of it will be just a larger SKU base in existing categories, and I cited when, to Budd's question, furniture. And then when we're thinking of non-furniture, there are -- if you look at our stores, there's a number of categories where we don't play at all where we think there is opportunity. But the great thing about all of this is if you think of the whole spectrum of the categories in home furnishings and then look at what little old Pier 1 Imports does, there's a lot we're not touching. So I mean, I think the world is our oyster, really. We can, once we're online, we can do whatever we want to do.

John Barrett - Columbia Management

Does any category stand out? I mean just...

Alexander Smith

Yes, but none I'm going to share with you today.

John Barrett - Columbia Management

Okay. Cary, on the $200 million over three years, just given your CapEx guidance for '11, is year two the heavy spend year of those three in terms of CapEx?

Charles Turner

I would just say it's about the same, two and three.

John Barrett - Columbia Management

Okay, cool. And the expectation to lever SG&A on, I mean, I think Brad had mentioned, if you sort of pencil out the math, a mid-single digit comp over the next few years. So the expectation is that your SG&A per store, SG&A per square foot, however you want to say it, will be lower than that. I mean, that looks to me -- on my math, your SG&A per store was up around 5% this year. So you expect that to be lower than that despite these investments.

Charles Turner

Well we'll keep on tweaking that. And but right now, we perceive that if you use that model, you'll get to where we have enough latitude to move around. There may be some switches between variable and fixed. But in total, SG&A expenses will be levered.

Alexander Smith

I think we'll call it a day there. Thank you for joining us, everybody. We'll talk to you in a few months.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.

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