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Pier 1 Imports (NYSE:PIR)

Q1 2013 Earnings Call

June 14, 2012 11:00 am ET

Executives

Kelley Buchhorn

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

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

Analysts

John Marrin - Jefferies & Company, Inc., Research Division

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

David Berman - Berman Capital Management LP

Helen Pan - Barclays Capital, Research Division

Simeon Gutman - Crédit Suisse AG, Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

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

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

Denise Chai - BofA Merrill Lynch, Research Division

Operator

Good morning, ladies and gentlemen. This is the Pier 1 Imports First Quarter Conference Call. At the request of Pier 1 Imports, today's conference call is being recorded. [Operator Instructions] I would now like to introduce Kelley Buchhorn, Director of Investor Relations for Pier 1 Imports.

Kelley Buchhorn

Thank you, Ashley, and good morning, everyone. Prior to market open today, we issued a press release which included the detailed financial results for the first quarter ended May 26, 2012. In just a few moments, we will hear comments from Alex and Cary about the financial results and the company's 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and can be identified by the use of words such as may, will, expect, anticipate, believe and any 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 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.

Now I'd like to turn the call over to Alex Smith, our President and Chief Executive Officer. Alex?

Alexander W. Smith

Thanks, Kelley. Good morning, everyone, and thanks for joining us today. Also on the call with us is Cary Turner, our Senior Executive Vice President and Chief Financial Officer. Cary will, of course, provide a detailed review of our first quarter financial results in just a few minutes.

We are very pleased to begin the new fiscal year with another quarter of strong financial performance. In fact, this is our 11th consecutive quarter of comp store sales and profitability gains. Total sales were up 7.9% to $361 million while comp store sales rose 7.2%, reflecting strength throughout all of our merchandise categories and across all geographic regions.

Customers responded well to our outdoor spring and Easter assortments during the early spring month of March and April. In May, our biggest month of the quarter, we achieved strong sales gains surrounding Mother's Day and the Memorial Day weekends, both benefiting from our creative marketing campaigns and an optimal level of promotional offerings.

In the first quarter, we delivered strong gross profit and merchandise margins, drove further improvements in operating margin and posted a 33% increase in earnings per share. At the same time, we returned value to shareholders through share repurchases under our buyback program and our quarterly cash dividend.

Our investments in marketing are certainly helping our business with a media strategy that utilizes creative communication to strengthen our brand positioning and drive traffic. We finesse in realtime our media budget in order to maximize overall customer reach, shifting more of our investments into those vehicles that are driving a higher customer response rate. We had great success with our television campaigns and have plans for this year for national cable television in nearly every month.

For the launch of Pier 1 To-You nearing, we will increase the level of our paid search in digital media, increase the awareness of pier1.com and, more importantly, drive traffic to our sites. Subsequent to the launch of the new pier1.com, we will up the weight of our digital media program more significantly starting early this fall.

You'll remember that in April we announced our new 3-year growth plan designed to drive profitable top line growth, expand our market share and increase shareholder value. Here's an update on some of the key components of the plan.

First and foremost, we are fully prepared to execute the soft launch of our new e-Commerce-enabled website. The launch date is July 28. We have fully redesigned the look, feel and functionality of our site, which will be unveiled in conjunction with the launch of Pier 1 To-You. Excitement and anticipation is, as you may imagine, building throughout the whole organization as the launch date approaches. Our operational teams are in testing, training and implementation phases and we are building and training new customer relations teams specifically to support our e-Commerce business.

The buildout of our fulfillment space is complete. We've begun to receive inventory and we're running capacity and final systems testing. Importantly, our current online trends remain strong with increases in both the number of unique visitors and time spent on the site. Our current initiative Pier 1 To-Go continues to account for about 1% of our comp store sales increases.

Next, related to the previous points, we are working diligently towards the implementation of our new point-of-sale system which we expect to pilot in a handful of stores this fall. Our game plan is to begin integrating the new POS system with e-Commerce by summer of 2013, strengthening our foundation as we build out our multi-channel capabilities.

We're making great progress with our plans to improve the store portfolio. This quarter, we opened 2 new stores in Redwood City, California, and Brownsville, Texas, and completed one major remodel in Culver City, California. We remain on track this fiscal year to open approximately 20 to 25 new stores, which include 6 to 8 relocations. As we outlined on our last call, we are taking advantage of opportunities in select markets to execute strategic store relocations with the goal of improving our market position and long-term profitability. Our plans also include refurbishments to approximately 100 stores with enhanced merchandise fixture packages and lighting upgrades. The stores we have refurbished thus far are producing positive returns on our investments. Going forward, we will continue to analyze stores and identify those locations that have the greatest potential to provide the highest return on our investments.

We are delighted with the seamless transition of our Pier 1 Imports reward card business to Alliance Data Systems, a leader and innovator in loyalty and marketing solutions, which occurred at the end of March. In May, over 1 million new cards were reissued to existing customers with our new value proposition. The share of business on our rewards card has already grown and sales on the card are up considerably since the transition, with response rates trading ahead of our initial expectations. On average, reward card customers spend 2x to 3x more than non-reward card customers. We believe the opportunity to generate increased traffic and average ticket through the ADS partnership is significant and anticipate it will be one of our key sales drivers going forward.

And lastly, we were thoughtful and careful with respect to our stock buyback activity during the quarter and we paid a $0.04 quarterly cash dividend, both firmly reflecting our commitment to return value to our shareholders.

Looking at the balance of the year, we see a number of key drivers of strong sales and earnings growth. As we announced this morning, we have raised our full year earnings guidance and now expect to deliver earnings per share in the range of 15% to 21%. Certainly, the launch of e-Commerce will play a role in terms of broadening our reach and raising brand awareness. Importantly, our merchant teams are constantly developing and improving the management and development of our assortments, providing our customers with more reasons to shop the Pier 1 Imports brand. Additionally, we have a sharp focus on in-store presentation and customer service, which enables us to provide a unique and differentiated shopping experience for our customers.

I'm in the stores virtually every week and I see firsthand what's working and what's not, how customers are reacting to the assortments and how they're interacting with our associates. We're executing well but always striving to improve our assortments, in-store presentation and customer engagements.

We are pleased that we've been able to drive strong financial results while simultaneously investing in new growth opportunities and also returning value to our shareholders. We are tracking to meet the goals under our 3-year growth plan and look forward to updating you next quarter.

Finally, I would like to thank our Board of Directors for their continued support and confidence and for providing me the opportunity to continue leading our well-loved company. I look forward to working with both my outstanding executive team and our many talented and enthusiastic associates throughout the organization as we drive to extend the reach of the Pier 1 Imports brand and achieve our 3-year growth plan objectives. Together, we work hard and smart each and every day to make Pier 1 Imports a great place for our customers. We have an exciting future ahead of us and we look forward to the many great successes still to come.

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

Charles H. Turner

Thank you, Alex, and good morning, everyone. We are pleased to report another strong quarter of top and bottom line performance.

As Alex said, comp store sales increased 7.2% on top of last year's 10.2% gain, and total sales rose 7.9% to $361.1 million, reflecting increases in both store traffic and average ticket. On a trailing 12-month basis at the end of the quarter, sales per retail square foot were $187, up from $171 per retail square foot at the end of last year's first quarter.

Gross profit improved 12.1% to $150.3 million compared to $134.1 million a year ago and it increased 150 basis points to 41.6% of sales versus 40.1%. Merchandise margins came in at 60.2% in the first quarter. That's up 40 basis points from 59.8% last year and reflects strong input margins, the right balance of regular and promotional pricing and well-managed inventory levels.

Store occupancy costs were $67.2 million compared to $65.9 million and declined as a percent of sales by 110 basis points to 18.6%.

SG&A expenses for the first quarter leveraged 40 basis points coming in at $116.3 million or 32.2% of sales versus $109.2 million or 32.6% for the same period last year. Variable expenses for the quarter decreased 40 basis points, primarily resulting from the leveraging of store payroll. As many of you know, we have maintained a highly disciplined approach to expense control over the past 3 years and anticipate that we'll continue to leverage variable expenses throughout the remainder of this year.

Marketing expenses came in at $17.9 million or 5% of sales compared to $16.3 million or 4.9% of sales in the first quarter of last year. We have planned a shift in the timing of certain marketing expenses between the second and third quarters this year, and therefore, marketing expenses are planned to increase about 30 basis points as a percentage of sales in the second quarter compared to the same period last year. Similarly, we expect third quarter marketing expenses to decrease approximately 30 basis points year-over-year. As we previously noted, we expect to maintain our current rate of spending and anticipate that full year marketing expenditures will be approximately 5% of sales.

Fixed expenses during the quarter were 9.3% of sales, essentially flat as a percentage of sales compared to last year. Administrative payroll increased $2.9 million or 30 basis points versus a year ago primarily due to planned investments in headcount to support our upcoming e-Commerce launch and other growth initiatives. For the second quarter, we expect year-over-year increases of approximately $3 million to $4 million in fixed expenses to support these growth initiatives.

First quarter operating income improved 38% to $27.4 million versus $19.9 million last year, while operating margin rose 170 basis points to 7.6% from 5.9% a year ago. Nonoperating income was $0.6 million in the first quarter this year compared to $1.8 million in the first quarter of last year. As Alex noted, we transitioned to ADS, our new rewards card provider, at the end of March. Prior to that transition, we had been recording a noncash amortization of a deferred gain associated with the company's former rewards card provider contract. The decline in nonoperating income this quarter is related to the completion of the contract and the amortization of the gains.

Net income in the first quarter was $17.8 million or $0.16 per share compared to $14.1 million or $0.12 per share last year. The effective tax rate for fiscal 2013 should approximately be 35% to 36% of pretax income.

Turning to the balance sheet. Inventory at the end of the first quarter was in line with management's expectations and totaled $333.5 million, up 5.8% versus a year ago. At the end of the second quarter, inventories are planned to be up approximately 10% from last year's second quarter. The planned increase is related to, one, additional inventory to support our new e-Commerce business; two, earlier receipts of Halloween Harvest and holiday merchandise; and three, an increase in certain categories where sell-throughs have been particularly strong. We expect inventory to be slightly above last year's levels at the end of fiscal 2013.

The company remains in strong financial condition and ended the quarter with $217.9 million of cash and cash equivalents and no cash borrowings under the $300 million credit facility. In May, the company paid approximately $4 million in cash dividends. During the quarter, we utilized $48.7 million of cash to repurchase 2.9 million shares of common stock at an average cost of $17 per share. Since the end of the quarter, we have repurchased an additional 450,000 shares for $7.1 million. To date, we have repurchased a total of 3.3 million shares at a weighted average cost of $16.85 and a total cost of $55.9 million. Under the 100 million share repurchase plan, approximately 44.1 million shares remain available to repurchase, and there are approximately 107.3 million shares of common stock currently outstanding.

Capital expenditures in the first quarter totaled $12.2 million. Of that amount, $7.1 million was deployed towards the opening of 2 new Pier 1 Imports stores, 1 major remodel, new merchandise fixtures and lighting, other leasehold improvements and costs associated with the buildout of our e-Commerce fulfillment space located in our Mansfield, Texas, distribution center. The remaining $5.1 million in capital spending was deployed to technology and infrastructure initiatives, including e-Commerce and our new point-of-sale system. We continue to expect total capital expenditures to be in the range of $70 million to $75 million for fiscal 2013, with roughly 1/2 allocated to stores and the other 1/2 allocated to technology and infrastructure. As we move further into the year, we anticipate that depreciation and amortization expense will increase slightly above first quarter levels as we invest additional capital into our stores and technology.

During the first quarter, we opened 2 stores, ending the quarter with 1,054 Pier 1 Imports stores. That includes 973 locations in the U.S. and 81 in Canada for a total of 8.3 million retail square feet. During the remainder of fiscal 2013, we plan to open approximately 5 to 7 stores in the second quarter, 9 to 11 in the third quarter and 4 to 5 stores in the fourth quarter. We plan to close 6 to 8 stores ratably throughout the remainder of the fiscal year. As Alex stated, strategic relocations within existing markets is an important part of our real estate strategy and provides us with meaningful opportunity to improve sales productivity and store profitability while at the same time capturing additional market share.

Turning now to our outlook for the remainder of the year. As we noted in this morning's press release, we are raising our expectations for earnings per share and providing the following guidance for fiscal 2013 on a 52-week basis.

First, we expect to achieve comp store sales growth in the mid-single-digit range. Earnings per share are now expected to be in the range of $1.08 to $1.14, representing year-over-year growth of 15% to 21%. That compares to our previously issued guidance for earnings per share in the range of $1.06 to $1.12.

As a reminder, this fiscal year includes 53 weeks of operating results. We expect the 53rd week to contribute approximately $25 million to total sales and $0.01 to $0.02 to earnings per share. And as I noted earlier, capital expenditures are expected to approximately be $70 million to $75 million.

Thank you for your continued interest in Pier 1 Imports. And I will now ask the operator to please open the call to questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Marrin with Jefferies.

John Marrin - Jefferies & Company, Inc., Research Division

Can you guys talk for a moment about how you're feeling about the performance of stores that you opened last year?

Alexander W. Smith

Go ahead.

Charles H. Turner

No -- we're very pleased with the stores we opened last year and we continue to see that they come out of the gate very strongly. And we're particularly pleased with the relocations. I would say all the relocations we've opened have performed probably at least 20% better than the stores that were in those markets.

Operator

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

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

The first question I wanted to ask is more directed, I guess, towards to Cary. Just on expenses, Cary. So in the last few quarters, we've had extra expenses now as we -- due -- related to the forthcoming launch of your e-Commerce effort. So how should we think about -- as we look over the next few quarters or the balance of '12, how should we think about how those expenses are basically going to fall into the quarters?

Charles H. Turner

Well, I think I've tried to give you that picture. One, we're going to -- in terms of variable expenses, we're definitely going to leverage them, except for marketing, which will be up some 30 basis points from last year, and in terms of fixed expenses for the second quarter, add $3 million to $4 million for this quarter. And then as we go out -- we started building the expense structure really in the back half of last year, so -- and also, we'll start getting some sales. So it'll be comparable to last year's numbers.

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

So there were no case to be closed. There was no expense -- or should we say, start-up costs in there for e-Commerce essentially go away once it's launched?

Charles H. Turner

The real start-up costs are really that $3 million to $4 million that we're talking about in terms of planned additional headcount, and the other costs are really being capitalized.

Alexander W. Smith

Okay, I mean the federal chunk, in capital, as Cary said. I mean, obviously, all the fulfillment center and the --- and all the systems pieces is capitalized.

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

Got it, got it. And then the second question I have, with respect to the buyback. You guys bought back a nice chunk of stock here just recently. Going forward -- I know that commentary before has been -- you had the $100 million authorization, which was basically, you said, opportunistic. I mean, is it still -- do you still look at the balance of that as opportunistic? Or do you think there's maybe more of a kind of a steady buyback here now until it's completed?

Alexander W. Smith

That's a great question, Brian, and we've been debating that internally as to whether, like you say, just to sort of dive into the market when we think it's -- we're a little low. And I can't give you a definitive answer to that, but what I can say to you is it is a topic that we're going to be discussing fairly, fairly shortly with the board. So once we've resolved what our strategy is going to be about it, we'll certainly let you know. But it's on our minds.

Operator

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

David Berman - Berman Capital Management LP

Just wondering if you could embellish, please, on the Internet strategies. Some retail -- I think you've mentioned before that you expect, over 5 years, Internet to be 10% perhaps of sales, which, I mean, I think you probably can do that. How do you expect that to ramp up? And how do you see the Street sort of looking at this as well?

Alexander W. Smith

Well, I think the problem we have at the moment is that we have no Internet business. And so after July 28 and from there on, we're going to get a whole lot wiser, a whole lot quicker. I mean, we're certainly very optimistic about it. And as I think we've said in previous calls, our -- the -- our first job is to put online the existing Pier 1 Imports assortments. Our second job will be to add additional categories that we don't normally sell in the store and expand the existing categories. And then the third job will be to leverage the Pier 1 Imports into whole new areas. So there's kind of 3 prongs to that. We've set what we think our -- in our 3-year plan, we think, is a very achievable number. But that's kind of not -- that's not the number we're sort of aiming to sort of hit, and sit back. We think there's considerable upside.

David Berman - Berman Capital Management LP

Interesting. And do you intend to include the same-store sales in the comps, or not? Have you decided on that?

Alexander W. Smith

As far as reporting is concerned, we are not going to include our direct-to-consumer business in our comp store sale calculation, no. What...

David Berman - Berman Capital Management LP

And this is picked up from the store?

Alexander W. Smith

Sorry?

David Berman - Berman Capital Management LP

If it's picked up from the store, will you include it then?

Alexander W. Smith

Yes, yes. And what we are doing, which I think is important to know, we are working on a way to -- this is for internal consumption only, to credit the stores with the sales that come from the trade areas surrounding that store because we really want them to feel that it is all one company and that they have a stake in encouraging our online business...

David Berman - Berman Capital Management LP

So at the end of July, you're probably going to have a soft opening, I'd imagine. And when do you expect to start ramping it up, start marketing it and letting people know that you're actually sitting through it and all that kind of stuff? And what are you going to do?

Alexander W. Smith

It'll be a gradual process as we move through the fall. I think we'll probably -- you'll probably notice it most as we move into holiday. But as I said in our -- in the prepared remarks, once we get into fall, we certainly are going to switch more of our marketing dollars into digital media just to highlight the fact that we're open and ready for business.

David Berman - Berman Capital Management LP

Okay. So one final question based on, I guess, looking compared to what you expect. What do you think the cannibalization might be for the stores with the Internet?

Alexander W. Smith

I -- in truth, I just don't know. I mean, there's going to be some. I don't think it's going to be significant because one of the great joys of shopping at Pier 1 Imports is that whole sensory experience: You have to be in our stores and have touched it, feel it, smell it. So I don't -- I think that's what our customers tell us they like and that they're not going to stop doing that. But there's bound to be a little, I guess.

Charles H. Turner

And Dave, the flip side of that is really we're anticipating a fair amount of people picking up the product at the stores so they don't have to incur a shipping cost. And if that number is relatively high, then we're taking advantage of our existing store base that much more.

Alexander W. Smith

Yes, yes...

David Berman - Berman Capital Management LP

That could be as high as 50%, right?

Charles H. Turner

We hope so.

Operator

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

Helen Pan - Barclays Capital, Research Division

This is actually Helen Pan filling in for Alan. I was wondering if you could comment on the kind of the promotional environment in this sector, as well as online competition, especially as you gear up to launch your new website, and also what you plan to do with shipping and pricing online versus stores.

Alexander W. Smith

Okay. Is that Helen?

Helen Pan - Barclays Capital, Research Division

Yes.

Alexander W. Smith

Helen, well, on the promotional environment, I don't think it's changed very significantly. It doesn't feel much different to us than it felt last year in terms of what our competitors are doing. I think we all know that the consumer has been a little more cautious, but I don't think that has resulted in retailers being any more aggressive about their promotional activities. So to me, it feels pretty much steady as she goes. As far as online, there was 2 question. What was the first one?

Helen Pan - Barclays Capital, Research Division

The shipping and also pricing online versus in stores.

Alexander W. Smith

So, as for pricing versus in stores, everything will be priced the same as in stores. It's very important to us. We're talking about building a broad franchise here, which is based on our customers being able to shop where they want and when they want. And it's very important that the experience that they have is similar as we can make it whether they're shopping in store or online. Obviously, a big piece of that is maintaining price parity between the stores and the -- the stores and online. As far as shipping is concerned, we are going to give our customers options. They will be able to pick up in store, in which case their shipping costs will be 0, or they will be able to pay and have it deliver. We don't have any plans for large amounts of free shipping or things like that. To me, free shipping is just a markdown. I mean, people call it free shipping. It's not. It's a discount, it's a markdown. And we're not reckless with markdowns and discounts in our stores business. We're certainly not going to be in our online business.

Operator

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

Simeon Gutman - Crédit Suisse AG, Research Division

Alex, just a quick follow-up on some comments you just mentioned a minute ago on the macro because there's been -- I guess the data is coming in a little more uncertain and there's -- some more is reentering the picture. Do you have any -- are you -- are there any changes that are visible to you either through data, some of the categories or anecdotes in your business?

Alexander W. Smith

It's kind of really hard to read on a day-to-day basis. I would say 2 things. Firstly, in our prepared remarks, we alluded to the right balance of promotional activity, and certainly that activity is necessary. I think you've heard me say, sort of going back over previous calls, if the consumer got very strong, we would be able to dial back our safe pricing strategies, and that would flow through into merchandise margin increases. Now is certainly not the time to do that. We have to maintain the sort of balance we have at the moment. So in that respect, I think the customer is a little bit cautious. The other thing I would say happens, and you will have heard this from other retailers that you've talked to, after these big holiday weekends such as Mother's Day and Memorial Day, there's -- you get this little lull for a few days afterwards, a sort of buyer's remorse, if you like, which we didn't see when the economy was stronger. So we're still seeing that happen. So I do believe that customers still have a sense as, "How many dollars have I got to spend?” and when it's spent, it's spent. So I don't know whether that helps you any, but that's kind of as we see it. Cary, do you want to add to that?

Charles H. Turner

Yes. What I would say to it, what we continued to see we've probably seen it for the last 18 months. We're planning on the environment to stay about the same. And what we see is a balance of 50% is either promotional or clearance and the other 50% is regular price.

Alexander W. Smith

Yes.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay, that's helpful. And then just a question on marketing dollars, and thanks for the color on that, Cary, between the quarters. The 5% number, I think -- or it's been said a few times that you don't expect to leverage. The Internet business will obviously be above that, right? No sales, and there'll be marketing dollars. So you're just simply shifting dollars away from, I guess, brick-and-mortar, and there still should be a halo from that, and that you're going to put dollars towards the Internet. Is that the right way to think about it? And why -- or are you -- or is there some nervousness that, as you put money towards Internet and you de-emphasize the brick-and-mortar, there will be some impact there?

Alexander W. Smith

Well, nervousness, 0. As far as -- I don't want to overplay this. We're not talking about moving sort of 30% of our -- maybe I didn't make that clear enough, so I apologize. We're talking about relatively small adjustments in terms of our total media spend from what we've got at the moment towards digital. But again, I really want to emphasize this: We are not thinking in terms of, "Here's what we do to support stores. Here's what we do to support the online." What we're trying to do is to optimize the support of both. I mean, we love all our children and we want to do the best by all of them. And in the short term, we've got 1,054 -- 1,053 stores which needs to be looked after. So we are absolutely not going to jeopardize that.

Charles H. Turner

And what we continue to find is, the more you spend on social media the more you need to spend on television and radio because they need something to talk about.

Alexander W. Smith

Yes.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And just one item to clarify. Cary, you mentioned in response to someone's question, I think I caught it right, $3 million to $4 million of fixed expenses incremental from here. And is that...

Charles H. Turner

From last year.

Simeon Gutman - Crédit Suisse AG, Research Division

From last year, okay. So just relative to what you previously said, is that a change, or is that the same?

Charles H. Turner

No, that's the same. And so you saw this first quarter we were up just, what, $2.9 million.

Operator

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

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Wanted to just ask about the new private-label card. Appreciate the prepared remarks that you gave, Alex. In the short term, is there any -- was there any negative effect from switching it over? And then as it really gets out there and the customers have this new card, what kind of impact are you expecting in the coming months and quarters?

Alexander W. Smith

Brad, when you do a change-over like this, you always in a sense, you -- that the guys did a magnificent job in terms of planning it, but your heart's always in your mouth a little bit until it happens. But I have to say it just went superbly. I mean, we got no complaints to speak of. It just all went incredibly smoothly. Everybody did an outstanding job. So kudos to the team here and kudos to ADS. In terms of -- what were you saying, in terms of promoting it? Yes, I...

Charles H. Turner

Yes. I would say the best way to think about it, Brad, is, the last 2 years, the --- our rewards card has been 21% of the business. Our short-term goal, we anticipate it to go up to about 25% of the business and then ultimately getting closer to 30% of the business, which is the level it was at when we actually owned the receivable and drove that business.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

So -- and if I understand correctly, Cary, so the customer spending on this card is spent at a higher average level, so that should help sales. You do not incur a MasterCard or Visa processing fee so that should improve the profitability. But what -- are there offsets to that in terms of the promotional spend to get this, the customer spending on this card? What are some of the puts and takes as we look at this opportunity?

Charles H. Turner

No, no, there's also a transactional amount that we get from ADS on every sale. And -- but in addition to that, there is an offset where for every $1 she gets a point and for every $200 she spends she gets a $20 gift certificate to spend at -- in her next visit.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

But on the whole...

Charles H. Turner

So we want to drive frequency and average ticket.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

But on the whole, it is very much a net positive, isn't it?

Alexander W. Smith

But on the whole, it's totally a positive. There's no downside to this at all.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Perfect. Thank you for the clarification. If I could just squeeze in 2 housekeeping items. Cary, as we forecast the kind of net income and other expense line item, I think there was about $9 million last year, what are you expecting for this year?

Charles H. Turner

I would just say, for each quarter, use what happened in the first quarter.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And then lastly, what was the share count at the end of the quarter, do you have that handy?

Charles H. Turner

Well, we said it's just slightly higher than 107 million. And going forward, I would, for the fully diluted, use 108 million, 109 million for now.

Operator

And your next question comes from the line of Matthew Nemer with Wells Fargo Securities.

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

So just a few questions on e-Commerce. The first is -- you talked to the expected increase in inventory next quarter. Can you give any more color on how much of the 3 drivers of that is e-Comm, is it split 1/3, 1/3, 1/3? Or should e-Comm be maybe as much as 1/2 of that expected inventory increase?

Alexander W. Smith

I don't think we'd want to split it out in detail for you, but I think, if you use 1/3, 1/3, 1/3 you're not going to be too far wrong.

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

Okay. And then as a follow-up to that, can you talk to how much volume your current e-Commerce distribution infrastructure at launch can support? And at what point would you need to potentially go to 3PLs to supplement that?

Alexander W. Smith

Well, let me say this: It can support significantly more than we're anticipating doing in the first couple of years. So once we see how this business is going forward, we have gotten more than enough time to build out our second facility. And indeed, I mean, we already have space identified within our existing network.

Charles H. Turner

Yes, so we're not talking about going out to any PL.

Alexander W. Smith

No.

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

Okay, great. And then just lastly, and this is probably farther out into the future, but we noticed that one of your IT vendors has the capability to do -- offer ship-from-store, and I'm wondering if that's on the table and at what point we might see that. And are the stores set up for that? Is there enough room to package small items and send them out? Is -- are there enough labor hours to do something like that?

Alexander W. Smith

No, that's not on any plan that we've looked at. I mean, I think it would be hideously inefficient.

Charles H. Turner

I mean, Matt, the nice thing is we have Pier 1 To-Go, which you can basically order online and pick up that inventory that's in the store. So that's an aspect of that, that we already have.

Operator

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

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

My question -- I had one question on e-Commerce. You mentioned that you're going to be sort of overhauling the website in advance of launching Pier 1 To-You, and I was just wondering if you can just give us a little bit of color in terms of what exactly that's going to entail. I mean, is that going to be changes to the look of the website, the functionality, the search or sort of all of the above? And then my second question was just -- so you got over the 60% merchandise margin. I know that's sort of been a sort of a taboo. And I guess, just how are you thinking about merchandise margin? You're still sort of -- it's still going to be sort of that 59%, 60%, and what are you thinking? Maybe if we can push a little bit harder than that.

Alexander W. Smith

Thanks, Anthony. As far as the new website is concerned, it is of course a brand-new website on a brand-new platform, and all those things that you listed out will be new and improved. I mean, it's going to look better, the search is going to be better. There's obviously a ton more functionality on it compared to what we've got at the moment. So I think you're really going to love it, actually. It is extremely pretty and attractive website. As far as margin is concerned, well, I'd go back to the comments which we had earlier about the sort of the environment and the amounts of promotional pricing. The first 2 components of merchandise margin, the first 2 big ones in terms of what we buy at, that is pretty stable. So the buyer's margin, which you guys don't see, is strong and stable. The first decreaser of that is, of course, markdown, and our markdown percentage has moved down very significantly over the last few years. But I think we're getting to a point now where we kind of like the level of markdown in a sense that it's -- we give ourselves enough flexibility to clear out all the slow-selling merchandise in a timely manner and bring in new merchandise. So we don't see a lot -- see very big decreases in that, which leaves us with the promotional pricing part. And I think that's going to stay at or around the current levels until we see a much stronger tailwind from the economy.

Charles H. Turner

So I think everybody has to remember: We do not plan to a rate. We plan to margin dollars. And if we can generate additional incremental sales and have a margin that's in that 59% to 60% range, we'll be very, very happy.

Operator

And your last question comes from the line of Denise Chai with Bank of America.

Denise Chai - BofA Merrill Lynch, Research Division

It's Denise Chai, Bank of America Merrill Lynch. You mentioned that your relocated stores have been performing at least 20% better than the stores that were in those markets before, so could you give us an update on the kind of comp lift you're seeing from refurbished and reconfigured stores?

Charles H. Turner

The -- we definitely see a lift, and we're not going to give you the exact dollar amount. What I'd tell everybody is we have learned an awful lot about how important lighting is to our concept and we continue to look at improving the lighting in all the stores. The refurbishments that we've done, Alex said we did the one in Culver City, we're definitely getting a very strong lift. It's like opening up brand-new store. But I will also say, we've mentioned that we're touching 100 or so stores this year and not every store is created equal. If a store has the potential, we'll put all the new fixtures in, but if a store -- maybe it just needs a nice paint job and some improvement in the lighting and not all the fixtures. So it's all relative to what we anticipate getting.

Alexander W. Smith

I think the other thing I'd say just to add to -- gravy to what Cary said is, for the most part, the stores we relocate in these are the ones which are underperforming the chain, anyway. So if you can take a store that was -- let's say it was doing 0 or minus 2 when the chain was doing sort of plus 7, if we can bring that relo store effectively up to the chain average, well, it moves the average up. So it's -- I mean, it is a -- they are great moves for us. Because the ones we're relocating are pretty old and tired stores.

Charles H. Turner

So remember, last year there was 6 of them, and this year it's going to be 6 to 8. So it's not a meaningful impact in total.

Denise Chai - BofA Merrill Lynch, Research Division

And then I just want to ask one more time on the incremental admin spend for e-Commerce. So you mentioned second quarter would be up $3 million or $4 million, but in the second half, given that you've started the ramp in spending in the second half of last year, will we see the dollar spend flatten out? Or can you just give us a little bit more color around that?

Charles H. Turner

Yes, the spend should flatten out. It might be up $1 million or so, but it's -- you won't see it.

Alexander W. Smith

Okay, everybody, well, thank you very much for your questions and listening us today. And we'll be back in a few months. Thank you very much.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.

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