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Pier 1 Imports (NYSE:PIR)

Q3 2012 Earnings Call

December 15, 2011 11:00 am ET

Executives

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

Kelley Buchhorn -

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

Analysts

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

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

David Berman - Berman Capital Management LP

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Mark Rupe - Longbow Research LLC

Simeon Gutman - Crédit Suisse AG, Research Division

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Operator

Good morning, ladies and gentlemen. This is the Pier 1 Imports' Quarterly Conference Call. At the request of Pier 1 Imports, today's conference call is being recorded. [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 W. Smith

Thank you, Carmen. Good morning, everybody, 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.

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

Kelley Buchhorn

Thank you, Alex, and good morning, everyone. Prior to market open today, we issued a press release which included the detailed financial results for the third quarter ended November 26, 2011. In just a few moments, we will hear comments from Alex and Cary about those results, 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 as a result of the 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 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.

I would now like to turn the call over to Cary, who will provide the highlights and an overview of our third quarter financial results. Cary?

Charles H. Turner

Thank you, Kelley. As reported on December 1 and in this morning's press release, comp store sales increased 7% for the third quarter versus last year's comp store sales increase of 10.2% for the same period. Total sales increased 8.2% for the quarter over the same period last year. The third quarter sales growth was driven by increases in store traffic and average ticket, and sales across all merchandise categories were strong.

Pier 1 To-Go sales contributed approximately 1% to the comp store sales increase during the quarter. On a trailing 12-month basis at the end of the quarter, sales per retail square foot were $178, getting closer to our 3-year goal of $200.00 per retail square foot and up from $163 per retail square foot at the end of the third quarter last year. Merchandise margins increased 160 basis points as a percentage of sales to 60.5% of sales compared to 58.9% of sales in the third quarter last year. Merchandise margins continued to be positively impacted by strong input margins, the right balance of regular and promotional pricing and well-managed inventory levels.

Store occupancy costs for the third quarter declined 90 basis points as a percentage of sales from last year and were $66 million or 17.3% of sales. Last year's store occupancy costs were $64 million or 18.2% of sales for the same period.

Gross profit for the quarter improved 250 basis points to 43.2% of sales compared to 40.7% of sales last year. SG&A expenses for the quarter were $128 million or 33.3% of sales compared to last year's SG&A expenses of $118 million or 33.2% of sales for the same period.

As we discussed on our last call, we continued to make investments in marketing expenses and it is the one expense we do not expect to leverage. Even with the incremental marketing investment, variable expenses for the quarter were well leveraged and decreased 60 basis points as a percentage of sales over last year. The increase in fixed expenses primarily resulted from approximately $2 million to $3 million of expenses related to the planned hiring of incremental headcount in support of e-commerce and other growth initiatives for our business, and also additional expense for performance-related pay and other items. We remain prudent and careful as we can to analyze and incur incremental headcount as we go forward.

Operating income for the third quarter improved 50% to $33 million or 8.6% of sales compared to last year's third quarter operating income of $22 million or 6.2% of sales. The improvement in operating income resulted primarily from increases in sales and merchandise margins.

As a reminder, the company's federal net operating loss tax carryforward was fully utilized by the end of last year. The company's effective tax rate in the third quarter this year was 35%. Earnings per share for the third quarter this year were $0.21 per share, which included an income tax provision of $12 million. Last year, third quarter earnings per share were $0.18 per share, which included an income tax provision of only $500,000 due to the company's federal net operating loss tax carryforward position.

Given our improved performance and expectations for the remainder of the fiscal year, we believe it is probable that during the fourth quarter, we will be able to conclude that the realization of all deferred tax assets is more likely than not. Accordingly, it is likely that we will reverse our valuation allowance that was established in fiscal 2007 when we were incurring significant losses and we will record a noncash tax benefit of approximately $60 million or an estimated $0.54 per share during the fourth quarter of the current fiscal year. Of note, this will also increase the net assets and book value of the company by the $0.54 as well.

For the 9 months of the year, operating income improved approximately 69% to $76 million or 7.2% of sales compared to last year's operating income of $45 million or 4.7% of sales for the same period. Total sales increased 9% while comp store sales increased 9.2%. The increases in sales were driven by improvements in store traffic and average ticket. Merchandise margins improved 130 basis points to 59.9% of sales, and store occupancy costs improved 140 basis points to 18.9% of sales. Gross profit therefore improved 270 basis points to 41.1% of sales compared to 38.4% of sales for the first 9 months last year. SG&A expenses were 32.4% of sales compared to 32.3% of sales last year.

Inventory at the end of the third quarter was in line with management's expectations and totaled $368 million, up 8.7% over the end of the third quarter last year. The increase in inventory resulted from slightly larger purchases of seasonal merchandise to support higher sales and the early receipt of spring merchandise in order to enable the stores to transition and set earlier for spring. We expect inventory to be 3% to 5% above last year end levels by the end of the fiscal year. Management continues to strategically manage its inventory purchases and monitor its inventory levels to keep them in line with consumer demand.

Cash and cash equivalents were $179 million at the end of the third quarter, a $31 million decrease over last year's third quarter balance of $210 million and down $122 million from the end of the fiscal year. The decline in cash from the end of the year is primarily related to the company's share repurchases of its common stock. For the first 9 months, capital expenditures were approximately $40 million. Approximately $26 million has been invested in new and existing stores, with $15 million targeted toward the rollout of new merchandise fixtures and investments made in the relays and remodels. The remainder of the store spend was invested in new stores and the general maintenance of existing stores. The remaining portion of the total capital spend was directed primarily in technology projects and infrastructure initiatives, such as pier1.com and e-commerce; improved claiming, allocations and replenishment systems; labor scheduling optimization; and the replacement of certain legacy systems.

At the beginning of the third quarter, we completed our initial $100 million share repurchase program. Under the completed plan, we repurchase approximately 9.5 million shares or roughly 8% of our common stock. In mid-October, we announced our board authorized a new $100 million share repurchase program and to date, no shares have been repurchased under the current plan, and $100 million remain available for repurchase. Approximately 110 million shares of common stock are currently outstanding.

For the first half of the year, we opened 2 stores and closed 4 stores and then during the third quarter, we opened 11 stores and closed 1 to end the quarter at 1,054 Pier 1 Imports stores, with 973 stores in the U.S. and 81 stores in Canada totaling 8.3 million retail square feet. We plan to open 2 stores and close 4 stores during the fourth quarter and for the full year, we will have net openings of 6 stores to end the year with 1,052 stores.

We have a few updates to provide today to our estimates for the fourth quarter and the fiscal year. Total sales for the fourth quarter will be approximately 1% higher than comp store sales due to the new store openings. Merchandise margins for the fourth quarter will be approximately 59% of sales. Occupancy costs for the fourth quarter will increase approximately $2 million from last year's fourth quarter.

Variable expenses of SG&A will increase at a rate of approximately 1/2 of the sales gain and will be leveraged, while fixed expenses will increase approximately $3 million to $4 million from the same period last year. The increase in fixed expenses during the fourth quarter is primarily related to the planned incremental headcount I discussed earlier and some additional performance-related pay.

Marketing expense for the year will be approximately $75 million. Cash flow generated from operations will be used in part to fund capital expenditures this year of approximately $60 million. Therefore, depreciation will increase at a slightly higher pace in the fourth quarter as capital projects are completed. The company's effective tax rate for the fourth quarter will be in a range of 35% to 37% of pretax income before recording the anticipated onetime tax benefit I mentioned earlier. And finally, fully diluted weighted average shares outstanding are estimated to be approximately 111 million shares in the fourth quarter and 114.4 million shares for the year.

Now I would like to turn it back over to Al.

Alexander W. Smith

Thanks, Cary. Well, we are very pleased with the results of our quarter and feeling good about our fourth quarter and also next year. Sales are robust, merchandise margins are strong, operating margins are growing. The quality of our product, our in-store experience and our website are all resonating with our customers. Our growth plan is on track, and we are executing our enhanced business model with increasing finesse. We continue to invest in the successful marketing initiatives which are driving customers to our stores and to our website. And of course, we are investing in our people, building strength and agility to both support our new e-commerce business and keep the momentum going in our stores.

We have now achieved 9 consecutive quarters of comp store sales gains and a 3-year third quarter cumulative comp store sales growth of nearly 31%. Sales were consistent across all categories during the quarter, and we were well positioned as we headed into the second half of November leading up to the Thanksgiving weekend, the gateway to the holiday season.

Comp store sales for our 3-day event increased 10% from last year and were achieved with modest levels of discounts. Our marketing for the weekend was well balanced and emphasized Pier 1 To-Go for the first time. We enjoyed a significant increase in total web traffic and unique visitors over last year, and conversion rates 2 to 3 times higher than our previous average. On Cyber Monday alone, Pier 1 To-Go contributed 2% to the sales for the day, a good result. More on this in a moment.

First, a few words on how we position ourselves for the 3-day Thanksgiving event. We believe it is very important to respect the time our associates and their families have with each other during one of the small number of days our stores are closed during the year. Many have already asked about next year's Thanksgiving weekend, and whether we plan to open our stores earlier to keep up with what seems, regrettably, to be a growing trend in the retail industry. Our view is that the holiday season is a marathon, not a sprint. Although the Thanksgiving weekend is important and a great psychological boost if it goes well, as a percentage of the holiday season it is quite modest. We believe that maintaining the right balance of promotional offerings throughout the entire holiday selling season, combined with compelling full-priced holiday assortments will drive customers to our stores throughout December and provide a consistent build of sales leading up to Christmas.

Now let's talk about this December specifically. As we reported this morning, we will announce December sales on January the 5th. However, I'm pleased to tell you, sales have been strong in the first half of the month. Traffic and average ticket are both up over the same period last December, and we expect this positive trend to continue. We headed into the holiday season, as planned, with a high level of seasonal inventory to support sales growth, a strategy that is playing out well. Sell through rates of our holiday merchandise are ahead of the same time last year, and so we see no incremental markdown liability.

We also expect to benefit from the planned earlier receipts of spring merchandise, which will allow us to transition our sales floor more effectively than in previous years. Merchandise margins for the third quarter were 60.5% of sales. Yes, you heard me say it. I just said the 6 word. But in all seriousness, we are extremely pleased with our merchandise margin results. The right balance of regular and promotional pricing was instrumental this quarter in maximizing merchandise margin dollars. And as I've said many times in the past, we are confident in the strength and sustainability of our merchandise margins and striving to achieve the right balance of sales, margin rate and merchandise margin dollars is a continuous process.

The investment we made in marketing, with a media strategy designed to drive both new and repeat business is working well. Traffic is increasing to both our stores and website, where we are achieving record numbers of unique visitors, nearly 20% more than this time last year and with a record 1.2 million unique visitors each week since the Thanksgiving holiday weekend. Pier 1 To-Go is contributing nicely to our top line growth, and we're also pleased with the influence that pier1.com is having on our in-store shoppers. We plan to actively market Pier 1 To-Go as we move forward into next year and as we launch Pier 1 To-You next summer. The launch is on course and on time. Our major partners are all in place, and our expanded team is focusing on developing a wonderful site and online shopping experience that will take the Pier 1 brand experience to more customers.

As we move from the research and planning phase to the implementation phase of this major initiative, you can feel the excitement level in the building grow day by day. We feel really good about the prospects for Pier 1 To-You and fully expect our new business to add significantly to sales and bottom line. We will continue to build the organization needed to support the timely and successful launch of that new business but to reinforce what Cary mentioned a few moments ago, we will be prudent and thoughtful as to both the timing and the magnitude of additional costs.

As we announced in October, we have selected a new credit card provider and will relaunch our new Pier 1 reward cards next spring. We are excited about our new partnership and look forward to the opportunity to gain new cardholders and increase our sales potential with our existing cardholders.

Just 8 months ago, we laid out a 3-year growth plan designed to drive sales, further increase profitability and return value to shareholders. This time last year we were in the midst of developing that very plan, which would enable us to continue building strength and sustainability into our business as we develop into a best-in-class multichannel retailer. We've completed our initial $100 million share repurchase program, repurchasing 8% of our common stock. We believe we made a very good investment for our shareholders, given that we bought at an average weighted cost of $10.53 per share. As you know, our board has authorized a new $100 million program. Our plans are to carefully continue analyzing the optimal timing and pricing in which to repurchase shares going forward to maximize the greatest return for our shareholders.

We remain focused on our growth plan on 2 primary fronts. First, we are investing in our stores with new locations, remodels, refurbishments and new merchandise fixture programs. All of which are aimed at enhancing in-store experience and sales productivity. We are very encouraged by the results of our 13 new stores, which are achieving or exceeding the pro forma sales projections. The 3 fully remodeled stores are also delivering extremely good results, especially our Manhattan store which some of you saw on the store tour in November. Our stores throughout the entire chain look great with the integration of the new merchandise fixtures into the holiday visual layout. We are achieving what we set out to do and are pleased with the payback so far.

We are investing in technology in addition to the new pier1.com. We are investing in a new POS system that will allow for seamless customer experience no matter how she visits and shops with us, whether in stores or online. I've spoken before about the many advantage and efficiencies that will be realized with the new POS system. However, the key investment return will be our ability to gain realtime visibility of our customers and provide for seamless a transaction across stores and online, a significant advantage for our store teams when interacting with our customers.

We have made terrific progress in executing our growth plan and are confident that our brand will continue to strengthen as we gain market share. Next year, we will celebrate some important historical milestones. 2012 is our golden anniversary. It will be 50 years since our first store opened in San Mateo, California in 1962. We have a second important anniversary next year. On November the 28th, it'll be 40 years since our first day on the New York Stock Exchange, and we will do our utmost to make 2012 another great year for our shareholders. We gain strength and inspiration from our long history, admiring the achievements of those who came before us and determined to do our part to ensure that the Pier 1 Imports star shines brightly in another 50 years, when future custodians celebrate our centenary.

Lastly, I would like to thank our wonderful Pier 1 associates who work so hard and smart day in and day out to build sustainable success into our well-loved company. Thank you for listening to us today and for your continued interest in Pier 1 Imports. Merry Christmas, happy holidays and a very peaceful new year.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And 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 ask about the early spring receipts of merchandise. As you flow goods to the stores sooner this year, what's the potential impact of that on merchandise margins?

Alexander W. Smith

Well, the answer to that is it depends what percentage of our sales during January and February are full price versus clearance. I mean our projections at the moment, Matt, are that our clearance percentage in the first 2 months of the year is going to be really very -- not significantly different from last year, maybe a little better. So we do expect to do -- see a bigger percentage of our sales on full price. I think really the biggest impact of getting spring in early is going to be sort of really kick starting the start of next fiscal year starting in March because we've always been a little bit -- we've always done a great transition from summer into fall, but our transitions from January, February clearance into spring have always been a little scrappy. So we do see some upside there.

Charles H. Turner

And Matt, remember, this year's Chinese new year is one of the earliest in the last probably 10, 15 years, so that's another reason we're bringing this in.

Alexander W. Smith

Absolutely, yes.

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

Okay. Great. And then secondly, on the administrative payroll line, is there -- do we expect another step up in e-com-related hiring or is this sort of the bulk of it and then next year, that line becomes a little more flattish?

Alexander W. Smith

Well, I think what you're going to see is -- by the way, what we've decided to do is as we move through the fourth quarter, we're going to break out these incremental costs for you all, so you can see what the underlying profitability would've been if we weren't launching the e-com business, and then see the incremental cost on top of that. There's going to be a little more hiring in the first part of the year, without doubt, then as we start sort of trading in the second part of the year, we'll get a little bit of leverage from that. But then it won't be until we move into fiscal '14 that we're going to fully leverage those extra costs.

Charles H. Turner

So Matt, I'd add, from last year's and like I said for the fourth quarter, another $2 million to $3 million in the first and second.

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

That's helpful. And then lastly, could you just give us an update on the POS rollout in terms of the timing of that? And I guess, any -- along the same lines, any costs that we should be thinking about?

Charles H. Turner

The -- we're on plan with the rollout of POS. We're going to bring it in-house and probably have a test next summer and fall, and then we'll roll it out after the Christmas season because we don't want to have any receivable [ph] or what have you. So by this time next year, we'll start rolling it out, and we'll keep you updated as we go forward.

Operator

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

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

So my first question is somewhat of a follow-up to, I think, Matt's question on the spending side in e-commerce, but as we think about as we approach the launch of Pier 1 To-You, you've already articulated the, sort of the incremental investment you've made on, I guess, personnel. But will you -- would there also be an uptick in marketing spend? Or will this be a -- will there be more of a kind of a shift within your marketing spend towards that e-commerce effort?

Alexander W. Smith

I think there's going to be a shift, obviously, to focus customers on the fact that you can now buy online. In truth, as we go live next year, I mean we will just -- initially, we'll just put it out there because obviously we want to do it as a fairly soft launch so we can kind of stress test it throughout the back half of the year. But we have no plans to raise our marketing spend above the 5% that we've talked about.

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

Okay. That's helpful. Then my second question with respect to the kind of early receipt of the spring merchandise, so as I hear -- just to be clear, I think at least in part you're doing this in anticipation of having less holiday clearance product now than you had in prior years. Is that correct?

Alexander W. Smith

I would say it's a combination of things. It is partly the fact that our clearance has, as you know, has continued to decrease year-over-year, so we can't support high levels of sales of clearance merchandise. So you're absolutely right, Brian. That's part of it. The second part of it also, what we've alluded to which is our transitions from -- have not been that pretty as we go from winter into spring. And then the third part of it is just very pragmatic. We want that merchandise here before Chinese new year. Believe me, there's nothing more frustrating than knowing that your merchandise is sitting somewhere overseas and everybody's gone home, and you can't get it for another month. So we feel once it's here and in our DCs, we feel a little more tranquil than if it's not here.

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

Right. So then follow-up to that, I mean, again, it's a high-quality problem we have. But as we think about that early selling season next year, how do you strategize around potentially having less markdown product, which has historically acted as a traffic driver for your stores in that period?

Alexander W. Smith

Well, we just focus on our spring marketing and decide -- the merchant team works with the marketing and the planning team, and we decide what we want our floor set to be and what we want to promote in our marketing activity, and we kind of take it all from there.

Charles H. Turner

I mean the key, it provides us, maybe we can do a little bit more promotional marketing.

Operator

And your next question comes from the line of David Berman with Berman Capital Management.

David Berman - Berman Capital Management LP

A few things here. The first thing has to do with the stock buyback; as a long-term shareholder, I thank you for not buying back and using any of the $100 million just because we know it's not your money. It's the company's money, and it's good custodianship. And I'd rather see the cash grow, so I presume that was your thinking and waiting for the right opportunities and maybe even doing a onetime dividend at one point.

Alexander W. Smith

Well, as we've spoken before, we're very cognizant that we want to return money to the shareholders in the right way, and we're very happy with the $100 million we've done so far. And we'll continue to chat with the board about other ways to return our, I won't call it excess cash, but our -- the cash that's the shareholders money that we have and return that to them.

David Berman - Berman Capital Management LP

Okay. Well, if you can bear that in mind in the board meeting, we'd appreciate a onetime dividend or building the cash. The second question has to do with store hours. If you could just comment on, there's this trend towards being open stores all the time. I'm not a fan of that at all. I think it's bad for quality of life and doesn't really help retailers. Curious what's your take on this and if you feel like you might be forced to open up stores for longer periods of time?

Alexander W. Smith

Do you know, thanks for that because we really don't. I mean we opened on Thanksgiving at sort of 8:00-ish depending on where we were, but even then, our traffic on those days really doesn't get going till later in the day. Our customers are really not going to get up, miss breakfast and kind of run into our store. That's just not the way our customers are, so we probably benefit a little more from staying open late than opening early. But as I said in the prepared remarks, we want our associates to have a nice Thanksgiving at home with their family and be able to spend -- have a little lie-in in the morning and not rush into work. So we have no intention of extending our hours over that weekend, it just -- it makes no economic sense. And I think, I don't want to go on at length, but I think it's questionable if you even do the math. If you take December in totality, whether you really actually gain anything from it.

David Berman - Berman Capital Management LP

No, I understand, but the only concern would be if someone else who does something somewhat similar to you is open or they'll take out a few more incremental sales from you. That's the only issue.

Alexander W. Smith

Yes. We don't believe so.

David Berman - Berman Capital Management LP

Okay. The third question has to do with my favorite subject of inventory. Your press release and your comments were that inventory are very well controlled, that your gross margin of greater than 60% is somewhat because of well-controlled inventories. Now by my analysis, your inventories have grown at a slower pace than sales for the last umpteen quarters, which has been fantastic, right? Last quarter your inventories grew at 5% year-over-year, sales up 10%. This is the first quarter in a while where inventories have grown up slightly faster than sales, correct? Inventories up 9% year-over-year, revenue is up 8% year-over-year. So what I'm thinking here is, I mean, my sense is that you guys would rather see inventories growing at a slower rate than sales and continue that trend, and I'm just wondering if that was all brought in late in the quarter for the higher sales that you expect now. And as we expect a higher -- a stronger December than what you originally expected and what your thinking was there?

Alexander W. Smith

Well, the incremental inventory over last year has really got 3 components to it. The -- a small amount is just an increase in our -- in the inventory levels of our reorder merchandise. That's the smallest part of it. Then as we talked about the incremental holiday merchandise, we made the decision to increase our inventory on our holiday purchasing back in January. And in January this year, we'll be making our decisions about holiday purchasing for next year. So those decisions are made way, way in advance based on how we feel about the business. And then the last part of it is those early, early spring receipts. But when we think about the business, what we try and do is make the like-for-like businesses, make the inventory work a little harder and then when we say, "Okay, we think we have a business opportunity here or more potential here," then we layer in that inventory on top. So I mean, I think it's pretty well controlled. I'm not really...

Charles H. Turner

And David, like I said by the end of the year, it'll probably only be up 3% to 5%.

Alexander W. Smith

Yes.

David Berman - Berman Capital Management LP

Okay. So in other words, it is helping or you do see it as helping this strong holiday season as you're seeing it.

Alexander W. Smith

Oh my God, yes. Because don't forget, on our holiday business, David, a percentage of our business comes from onetime buys than in the normal part of the...

David Berman - Berman Capital Management LP

Alex, that would imply that your same-store sales for the month of December should be higher than what the run rate was in the quarter before that.

Alexander W. Smith

I lost that, sorry.

Charles H. Turner

Let's get through December. We still have a lot of December to go.

Alexander W. Smith

We'll tell you on January.

Operator

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

Budd Bugatch - Raymond James & Associates, Inc., Research Division

I guess my first question is related to the marketing spend. You've set that $75 million target out now consistently for a while. I think that makes the fourth quarter look flat to last year at about $18.6 million if we do the math just to get to that $75 million. Is that the way -- is that the right way to think about it, Cary?

Charles H. Turner

Yes. I mean remember, we're off TV now. We spent the money in the early part of December, and now we get back into the regular cadence. And I think I said it earlier that we believe the marketing dollars are working just harder than they did last year, so it's flat. But in terms of the number of impressions, et cetera, that you're going to see, it's probably up a good 10% to 15%.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Okay. I think the results would bear -- would agree with you on that. My second question is a little longer time frame. Any time frame now to any thoughts or re-thoughts on the time frame to get to $200 a foot? Well, we've got it like middle of the year, after next. What do you think it can get there?

Alexander W. Smith

Well, I think we can do the same math as you can, Budd. And I think -- and I don't want to be sort of cute about my answer. But I mean I think if we continue to see good momentum in the sales as we move through next fiscal year and today sitting here, we're pretty optimistic. Then clearly, we're going to get there sooner rather than later. I think in our own thinking now, I mean, I know we put that out there as a number but we've sort of stopped thinking of that as a particular sort of target or number. We're just kind of thinking of how we just keep that curve moving through to whatever it's going to be in the long term.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

I hope you get there and beyond, as you say, sooner than later. Lastly, for me, just making sure I understand on the tax issue and thinking about it going forward, I understand the reversal, and Cary, you and I beat that thing to death over the last couple of years as to when that would happen. But the 35% to 37% normalized, what should we think about next year as kind of a rate? And what would be the difference between the 35% and 37%? I hope that, at least, you can give us a little bit of a guidance on that.

Charles H. Turner

No, I would model 35% to 37% as we go forward and probably after that next year, probably model a little bit higher than 35%, take it up 37% to 38%. It's just some other tax events are coming up next year that'll provide it to be a little lower than as we go forward and of course, it's all contingent on what the tax code does.

Operator

Your next question comes from the line of Mark Rupe with Longbow Research.

Mark Rupe - Longbow Research LLC

Alex, in the past I know that you've shifted some more of your media spend towards acquiring new customers. Just curious to see what the traffic levels that you're experiencing now, whether there's any quantifiable or anecdotal evidence that your strategies there are -- it's acquiring new customers.

Alexander W. Smith

Oh yes. I mean, I think we said in the prepared remarks that we've seen nice upticks in our traffic, so the problem is always you can never say, is it 100% the marketing or is it some of the marketing and some of the things we're doing in store, and some are being -- are sort of building reputations. So and of course -- and the answer is, of course, it's all of those things. But we do think the acquisition strategy is working nicely for us.

Mark Rupe - Longbow Research LLC

Okay. And then on the Pier 1 To-Go, is there any way to identify or any way you've identified whether it's an existing customer or not or new customer?

Alexander W. Smith

No, that's really, really hard to do, so I can't answer you there. Only anecdotally, to say that the stores will tell us that its -- some are regular customers and some are new, but I couldn't give you a sensible number.

Charles H. Turner

What we do know is we are very pleased with the number of new applicants within rewards card. We are very pleased. Even though we're towards the end of working with our old partner, we're very happy. By springtime we'll be working with a new partner, but we continue to see the new accounts going up, which is encouraging.

Mark Rupe - Longbow Research LLC

Very much so. Okay. And then, I know you commented that you're off TV now, back to the normal cadence. In the past several quarters, I know there's been some incremental media kind of initiatives or spending. As we look into the New Year, I know it's probably too early, but should we assume that there would be continued kind of media leverage on your side?

Alexander W. Smith

Well, when we get into next year, I think the cadence is -- the cadence in terms of our print is pretty similar to last year. There will be some incremental TV in the spring of next year.

Operator

Your next question comes from the line of Simeon Gutman with Credit Suisse.

Simeon Gutman - Crédit Suisse AG, Research Division

On gross margins, I guess congratulations on breaking the 60% sound barrier, my question is that we still get the sense that there's a lot of progress still to be made on the planning, inventory planning and the markdown management. And so even if product margins don't go up any more, it feels like there is -- there are drivers to push the -- at least the gross margin a little bit higher. And I don't know how you think about that sort of putting some of the savings back into price or if we should sustainably see that go up.

Alexander W. Smith

Well, I mean you're right. We think about it all the time, and we always look at retail values versus our competitors. So sometimes the merchants will decide to take a slightly lower buyers markup to give it a sharp price, sometimes they don't. They feel they can take the merchandise margins. So we -- those sort of decisions are made really on a SKU-by-SKU basis, and so long as the whole thing comes out okay, but that's the way we manage the business. But you're right, there may be a little bit more to come out of markdown over time. But it's not going to be sort of 2 and 3 percentage points that you've seen over the last couple of years. I mean it's going to be smaller increments going forward.

Charles H. Turner

And I think, remember Simeon, it's a balance. And we're really striving to maximize merchandise margin dollars and the resultant is the margin rate, so...

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then on the Pier 1 To-Go, you mentioned a couple items, Cary, in the last question. I was going to ask if there was anything positive, negative that you've seen so far that surprised you. I think you mentioned new customers. Can you just talk about the composition of what people are buying if the mix is any different or unusual? And then I have a follow-up.

Alexander W. Smith

I wouldn't describe it unusual. The transaction value is higher, the units per transaction are higher. We -- the things that sell well in the store are selling well through Pier 1 To-Go but not necessarily sort of perfectly lined up. So it's not that they're our #1 SKU in the store is our #1 SKU for Pier 1 To-Go. So we've seen a little bit of sort of different sorts in those top sort of 50 or 100 SKUs, but it's nothing that tells us that it's in any way a sort of fundamentally different business because it really isn't.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then one more on expenses, on the store payroll, it looks like it grew slower and leveraged more in this quarter than previous. And I think you opened more stores. And so I was just curious what changed there, if anything happened.

Alexander W. Smith

I think really, just the store team just continue to execute better and better, and they're getting much smarter at planning and using their payroll dollars and...

Charles H. Turner

And the systems are helping, too. The labor optimization scheduler is kicking in, and we anticipate to be able to utilize more hours on the sales floor, maximizing sales as opposed to just doing nonproductive work.

Alexander W. Smith

Yes. But thanks for highlighting that, because that's -- they have done a very nice job.

Operator

Your next question comes from the line of Vincent Sinisi with Bank of America.

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

Wanted to ask you guys a bit more about your store investments. I know that at this point you have remodeled stores which, Alex, you mentioned are doing very well. But then you've made some different investments to different extremes in many of your other stores. Wondering if you could just give us some more color around what type of lifts you're seeing from the various stages of these remodels or just overall enhancements. And going forward, if you have any type of strategy you could share in terms of the number of let's say, fully remodeled versus just parts of and what pace that will be.

Alexander W. Smith

Okay. Thanks. In terms of numbers of stores, I think when we release our fourth quarter results and start to talk about next year, we'll give you some fairly specific details about how many stores we intend to remodel next year and how many are going to be refurbished. Our plans are -- we're just kind of nailing those plans down at the moment. I really don't want to give you specific details as to the uplifts we've seen. The only thing I will say is that the uplift in the totally refurbished stores is more substantial as you would hope and expect than the remodel stores. So I mean, it's working as it should where we make a big investment, and we think it's the right thing to do and there's upside in the store, then we make that big capital investment and we're certainly seeing good, really terrific returns. So Cary, do you want to...

Charles H. Turner

Yes, the other thing I'd just reiterate and remember with our real estate program and looking at the portfolio we also view, as part of this, when we're doing relocations. If we have a store that's in a strip center that's going down, we'd much rather move it 2 miles somewhere and really get the benefit of better co-tenancy, so that's in the mix as well and we'll probably give you, as Alex said, a more comprehensive view in the fourth quarter call.

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then just one quick follow-up. If you guys could give us an update in terms of your percentage of goods that are at the regular price versus promotional and if there's any disparity among categories, that'd be helpful.

Charles H. Turner

No, I think we've said before, we're still seeing it be about 50-50, 50% regular price and 50% promotional and clearance. And as we look out into next year, we don't see that changing. And by category, it's about even.

Operator

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

This is actually Jason standing in for Brad this morning. You had said previously on the Pier 1 To-Go that you have seen people building their basket once they get into the stores, picking up additional items. We're just wondering is that something that you're still seeing? And if you can kind of discuss the ramp of the Pier 1 To-Go in terms of where you expected it, maybe 8 -- 9 months, 6 months ago.

Alexander W. Smith

The answer is yes, absolutely, and that's something we measure. We get numbers all the time on that, and we've seen really no change in that. We're getting nice upsells from pretty much all the Pier 1 To-Go customers. What was the second piece, Jason?

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Just how is the ramp. As you thought about it, maybe 6 to 9 months ago, how was it kind of playing out in the last quarter or so?

Charles H. Turner

I think the pleasing thing is, as the sales ramp up seasonally, we have seen the sales for Pier 1 To-Go ramp up the same way, so it continues to be that 1% of the comp.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

And that 1% of the comp, you said that people are adding to the basket, does that include the items that they're picking up in sales or when you factor in that maybe extra pillow or so, does that go up to 1.5% or 2%?

Charles H. Turner

No, the whole transaction is the 1%.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Okay. And then the only other question we had was as you look at merchandise margin, we're now at 60%, as you go out to 2012, is there room for that to maybe expand or is that something that you maybe give back a little of that or keep it at 60 or how is -- how are you thinking about that merchandise margin over the next 12 months or so?

Alexander W. Smith

Yes, I think, let's just say we -- it's going to -- how can I put this -- I mean, the 60% is...

Charles H. Turner

We don't plan for 60%.

Alexander W. Smith

We don't plan for the 60%, I think is the best way to put it. So it -- to go back to what Cary said, what we're trying to do always is to optimize the merchandise margin dollars, which is a function of our sales, it's a function of our markdown activity and it's a function of our limited time offers. So we're always kind of playing around with those numbers as I said to try and make sure that we optimize the dollar margin amount. So it's going to kind of hover around the numbers that it is at the moment, but we don't sit down and say, "How can we make sure we have a 60% merchandise margin this quarter?" We sit down and say, "What do we have to do to get the most out of this business in terms of dollars this quarter?" So that's kind of the way we think about it.

Operator

And your final question comes from the line of Anthony Chukumba with BB&T Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

This question is somewhat related to an earlier question in terms of the remodels and the new store openings. It sounds like you have been pretty happy with the early results of the remodels and new store openings, and I guess does that change your thinking at all in terms of the number of new store openings and remodels or the timing of new store openings and remodels?

Alexander W. Smith

Okay. Thanks for that. Well, the answer to that, of course, is yes, and we think about that all the time. As I said earlier, we're just trying to really to solidify our plans now so we can get into next year's program pretty early. So yes, I mean what we also, though, have to factor into this is how much we can physically cope with as an organization. So you're not going to see us, for example, double the number, because we would just trip up and do a bad job on the execution. So I think you might see the numbers go up a little bit based on what we've seen, but really we're seeing this as a sort of 3 to 5-year plan, and we don't need to get it all done in 1 year.

Charles H. Turner

And the other thing I'd say is we're going to tweak -- we know there are some additional fixtures we want to roll out to all stores. But similar to what I've said in the past, not all stores are created equal. The potential uplift is not equal and therefore, the amount of the investment per store will not be equal. And so we're just going to tweak that, but given where we are today helps us solidify our plans for the next 2 or 3 years.

Alexander W. Smith

Okay, everybody, thanks very much for listening to us today, and we'll see you next time. Thank you.

Charles H. Turner

Take care.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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