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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

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

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

Simeon Gutman - Crédit Suisse AG, Research Division

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

Alan M. Rifkin - Barclays Capital, Research Division

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

Pier 1 Imports (PIR) Q2 2013 Earnings Call September 13, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Pier 1 Imports Second Quarter Fiscal 2013 Earnings 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, and good morning, everyone. Prior to market open today, we issued a press release, which included the detailed financial results for the second quarter ended August 25, 2012. In just a few moments, we will hear comments from Alex and Cary about the financial results and the company's growth initiative, 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 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. 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.

The company will also discuss non-GAAP financial measures on this conference call. Pursuant to the requirements of Regulation G and Item 10E of Regulation SK, the company has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings press release that was issued earlier this morning. If you do not have a copy of today's press release, you may obtain one, along with copies of the 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 today is Cary Turner, of course, our Senior Executive Vice President and Chief Financial Officer. And in a few moments, Cary will provide a detailed review of our second quarter financial results and updated earnings guidance for the year.

We're very pleased with our strong second quarter financial performance, which marks our 12th consecutive quarter of significant comp store sales gains and profitability increases. During the period, we delivered a comp store sales increase of 6.7%, achieved operating margins of 8.8% and grew non-GAAP earnings per share by 36%. Our talented and hardworking associates with their exceptional drive and their focus on creating an increasingly prosperous Pier 1 Imports have delivered consistent top and bottom line growth, expanded our market share and allowed us to return value to our shareholders through stock purchases and cash dividends.

In the second quarter of fiscal 2013, total sales increased 8.3%. Throughout the period, business trends grew increasingly strong as customers responded favorably to all our product categories, including outdoor and summer. By early August, our stores had transitioned to the new season, and we are set with our fabulous fall Halloween and Harvest merchandise. Early reads on these assortments have been positive. Merchandise margins remained strong, reaching 60.1% in the second quarter. We continue to carefully and thoughtfully analyze the right balance of regular promotion and clearance pricing in order to maximize merchandise margin dollars while offering our customers newness, exclusive quality merchandise and a strong value proposition.

During the quarter, we had fewer clearance markdowns compared to last year, which afforded us the opportunity to deliver more promotional pricing to our customers, whom, we all know, in this current environment, are still looking for a good deal. Our approach delivered both an improved margin rate and more merchandise margin dollars.

Let's now spend some time on what may be the single most important project in the history of our company and certainly the largest and most complex. It is, of course, our new e-Commerce-enabled, fully redesigned website, pier1.com. We are very proud of the new site, which successfully launched just over 6 weeks ago, on time and on budget. The transformation is significant and truly remarkable. We view this successful launch as a major milestone, which positions the business to grow into a true multichannel organization.

We laid out a plan 2 years ago to design and develop a best-in-class website that would be fully reflective of our brand, our stores and who we are. Our plan called for the launch of our new website in the summer of 2012. So that's what we did. And here we are, up and running after 24 months of hard work and dedication by associates throughout the organization, as well as the commitment of our external business partners.

Now that we've accomplished this monumental task in true Pier 1 Imports fashion, we're anxious to take things to the next level. We are now in a great position to build, over time, an important new business. There are a number of compelling features on our new site, including design and decor ideas and our newly unveiled 'get inspired' and 'Learn how' content section. And importantly, the treasure hunt feel that Pier 1 Imports stores have been renowned for since our founding in 1962 can also be found on our website. I know many of you have already been to the new site, and for those who haven't yet, I encourage you to explore, discover and hopefully, shop.

From an operations perspective, our platform is very stable, and our fulfillment center is running smoothly and efficiently. Customer response has been positive. Site traffic is increasing, and we're well underway with plans for increased functionality, new features and additional enhancements in both the short and the long term and of course, more new products, always more new products. We've already made improvements to the site since our launch, and although they may not be obvious or prominent, they are indeed enhancing the customer experience.

We've also made significant progress with another channel that our customers can shop. I'm happy to tell you that we launched our new mobile site just this past week, and as with our regular site, plans are already in the works to enhance functionality and features.

As we've mentioned on prior calls, we are employing a "crawl, walk, run" strategy. And given the momentum and strength of our Pier 1 Imports stores, we have the time to grow the latest addition to our Pier 1 Imports family. We don't need to compromise the potential or risk the quality of our execution by pushing our fledgling business too hard, too soon.

Our current priority is the implementation of our new POS system. Once again, we pulled together a cross-functional team comprised of highly dedicated associates throughout the organization and have aligned them with key business partners within the industry. The new POS system also requires back-of-house improvement, which will streamline our infrastructure and help us move more processes off the mainframe.

Over the past several months, we have been developing and testing the new system in preparation for the launch of our pilot program in a handful of stores beginning towards the end of the year. Once the successful pilot has been executed, we will commence an all-store rollout of the new POS system next year, with plans to begin e-Commerce integration by autumn of 2013. We will then have the ability to gain real-time visibility of customer activity and provide a truly seamless shopping experience for our customers, whether in store or online. So now we have 2 powerful growth vehicles that are mutually supportive of each other: our enhanced store portfolio of 100 -- 1,058 Pier 1 Imports stores and our new online business.

This fall, we'll be engaging our customers in new ways, utilizing innovative marketing programs to drive traffic to both our stores and websites. Our marketing team has developed a new creative approach for our fall campaign that combines aspirational brand positioning and promotional activity. Increasingly, our print vehicles will call out pier1.com. Also, our national cable television ads started back up at the beginning of September, reaching our successful and popular "Find What Speaks to You" campaign. They also call out the new pier1.com. And as we move further into the fall and get closer to the important holiday selling season, we will be more aggressive with driving traffic to our sites.

Turning to our store portfolio. Our investments in remodels and refurbishments are improving the shopping experience in our stores with stronger visual presentation and improved ambience. Our store teams are doing a great job with our in-store service and customer engagements. We always strive to surprise and delight our customers and offer special shopping experience, knowing that if we do a good job, they will always come back.

Three stores are currently in the process of being fully remodeled and will be reopened within the next 3 to 4 weeks, ahead of the holiday selling season. And we recently completed the refurbishment of approximately 50 stores, with enhanced merchandise fixture packages and lighting upgrades, and we plan to refurbish an additional 50 stores postholiday. By the end of the fiscal year, we should be about 50% complete with the refurbishments for the entire portfolio.

We're on track with our plans to open approximately 20 to 25 new stores this fiscal year. We closed 1 store during the quarter and opened 5 new Pier 1 Imports stores, including our second location in Manhattan at 65th and Third. Our ability to successfully and profitably operate stores in metropolitan trade areas represents yet another potential opportunity to grow our store base. The new Manhattan store is just one of our -- just of a handful of 3-level stores in our portfolio, and it is absolutely beautiful. If you are in the city and have an opportunity to visit the store, we'd love to hear your feedback. We also opened new locations in California, New Jersey, Hawaii and Texas, and all have opened strong.

Looking ahead to the second half of the year, we feel the business is ideally positioned to continue the positive operating momentum of the past 12 quarters. We've built strength and sustainability into our business, and we've enhanced the Pier 1 Imports' business model to a level of sophistication previously undreamed of. We're better than we've ever been as creators of exclusive trend-right products, as efficient importers and operators of exceptional retail stores. Now we're going to get really good as online merchants. We're gaining market share, reaching new customers each and every day and bringing them to Pier 1 -- to the Pier 1 experience and brand. We fully expect, with our 2 powerful growth vehicles, to achieve continued growth and long-term success.

Thanks for your attention this morning. Now I'll ask Cary to review our second 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 sales and earnings growth. As Alex mentioned, second quarter comp store sales increased 6.7% on top of last year's 10.8% gain, and total sales have increased 8.3% to $367.6 million, reflecting increased store traffic and average ticket. On a trailing 12-month basis at the end of the quarter, sales per retail square foot were $190, up from $175 per retail square foot at the end of last year's second quarter.

Second quarter gross profit improved 12.7% to $151.5 million compared to $134.5 million a year ago, reflecting an increase of 160 basis points or 41.2% of sales versus 39.6%. Merchandise margins came in at 60.1% in the second quarter and were up 70 basis points from 59.4% last year. The improvement, as Alex mentioned earlier, resulted primarily from less clearance markdowns compared to last year.

Store occupancy costs were $69.4 million compared to $67.2 million and declined as a percentage of sales by 90 basis points to 18.9%. SG&A expenses for the second quarter leveraged 60 basis points coming in at $112 million or 30.5% of sales versus $105.8 million or 31.1% of sales for the same period last year. Variable expenses were $81.8 million or 22.3% of sales this year compared to $75.2 million or 22.1% of sales last year. Store salaries were leveraged as a percentage of sales for the quarter, and marketing expenses, as planned, were up 30 basis points to 4.3% of sales. For the full year, we continue to expect that marketing expenditures will approximate 5% of sales.

Fixed expenses during the period were $30.2 million compared to $30.6 million last year. Our ability to effectively manage SG&A expenses helped to offset the planned increases in costs associated with the launch of e-Commerce and other growth initiatives. As always, we will maintain our disciplined approach to cost. We have continued to demonstrate and anticipate that we'll continue to leverage SG&A expenses in both the third and fourth quarters.

Second quarter operating income improved 36% to $32.3 million versus $23.7 million last year, while operating margin increased 180 basis points to 8.8% of sales from 7% a year ago. During the second quarter of this year, the company reversed $5.9 million of its reserve for uncertain income tax positions for which the statute of limitations expired. Additionally, the company reversed $2.8 million of accrued interest related to this uncertain tax position. As noted in our press release, the adjustments related to the income tax benefit and the reversal of accrued interest provided a $0.05 per share benefit to earnings in the second quarter.

Net income in the second quarter was $22.2 million or $0.24 per share. Utilizing an effective tax rate of approximately 35.6% and excluding the reversal of the accrued interest I just mentioned, the company's adjusted net income on a non-GAAP basis for the second quarter was $20.7 million or $0.19 per share, which reflects a 36% increase versus $0.14 per share last year. The effective tax rate for fiscal 2013 is expected to be approximately 35% to 36% of pretax income. For the third and fourth quarters of this fiscal year, the effective tax rate is expected to be approximately 38% to 39%.

Turning to the balance sheet. Inventory at the end of the second quarter totaled $420.8 million. That's up 13.5% versus a year ago and is in line with our expectations. As we noted on our first quarter earnings call, the planned increase in inventory was primarily due to additional inventory for the company's new e-Commerce business and slightly larger purchases of merchandise in select categories, including seasonal goods to support higher sales. At the end of the third quarter, inventories are planned to be up approximately 10% from last year's third quarter.

The company remains in strong financial condition and ended the quarter with $115.1 million of cash and cash equivalents and no cash borrowings under our $300 million credit facility. In August, the company paid approximately $4 million in cash dividends. During the quarter, we utilized $30.6 million of cash to repurchase approximately 1.9 million shares of common stock at an average weighted cost of $16.20 per share.

To date this year, we have repurchased approximately 4.8 million shares at a weighted average cost of $16.68 and a total cost of $79.3 million. Under the current $100 million share repurchase plan, approximately $20.7 million remains available for repurchase. Approximately 106.2 million shares of common stock are currently outstanding compared to 109.5 million shares 1 year ago and 117.2 million shares 2 years ago.

Capital expenditures in the second quarter totaled $25.6 million. Of that amount, $17 million was deployed toward the opening of the 5 new Pier 1 Imports stores, new merchandise fixtures and lighting in approximately 50 refurbished locations, new impulse merchandise fixtures rolled out to all stores and other leasehold improvements and equipment. The company also invested $1.3 million associated with the build-out of our e-Commerce fulfillment space. The remaining $7.3 million in capital spending was spent on 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 half allocated to stores and the other half allocated to technology and infrastructure. As we move into the back half of the year, we anticipate that depreciation and amortization expense will be at or slightly above the second quarter levels as we continue investing additional capital into our stores and technology.

During the second quarter, we opened 5 stores and closed 1, ending the period with 1,058 Pier 1 Imports stores. That includes 977 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 6 to 9 stores in the third quarter and 7 to 9 stores in the fourth quarter. We plan to close 5 to 7 stores ratably throughout the remainder of the fiscal year. These closures are strategic relocations within existing markets, which is an important part of our real estate strategy and continue to provide us with a meaningful opportunity to improve sales productivity and store profitability while, at the same time, capturing additional market share.

Our partnership with Alliance Data is progressing very well. We just finished our first full quarter with our new rewards card and value proposition. The share of business on the rewards card continues to increase, with response rates pacing ahead of our initial expectations. Customers are responding favorably to the loyalty program associated with the card. And as we move forward, we can utilize data from ADS to design specific promotions and incentives aimed at engaging our most valued reward card customers. We believe the opportunity to generate increased traffic and frequency is significant, with the rewards card expected to be a key sales growth driver over the next couple of years.

And finally, turning to our outlook for the full year, we have updated our expectations for earnings per share, as we reported in our earnings release earlier this morning, and we are providing the following guidance for fiscal 2013 on a 52-week basis. We expect to achieve comp store sales growth in the mid-single digit range. Earnings per share on a GAAP basis are expected to be in the range of $1.15 to $1.21. On a non-GAAP basis, earnings per share are expected to be in the range of $1.10 to $1.16, representing year-over-year growth of 17% to 23%. That compares to our previously issued guidance for earnings per share on a non-GAAP basis in the range of $1.08 to $1.14. And as I just noted, capital expenditures are expected to be approximately $70 million to $75 million.

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 per earnings per share.

Thank you for your continued interest in our company. I'll now ask the operator to open the call for questions at this time.

Question-and-Answer Session

Operator

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

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

Congratulations on the e-Commerce launch. The site looks great. I just wanted to ask a question about the site. It looks like you're already starting to offer some online-only SKUs. And I'm wondering if you can talk to the cadence of adding additional categories or SKUs that are online-only.

Alexander W. Smith

Sure. I mean, you must have looked really carefully to find them because there really are not that many at the moment. But our plan is to -- as we move through the fall of this year, we'll start adding just a few online-only SKUs. And then as we move into next spring and summer, you'll start to see extensions to some of our existing categories on an online-only basis. And then towards the summer into the fall of next year, you'll start to see some new categories that we don't have in the stores at the current time. So it's going to be a gradual process, and we're going about it very thoughtfully as we've said in the prepared remarks. But yes, it's -- we're on the way.

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

Great. And then in terms of the new credit card agreement, could you just talk to the consumer response that you saw during the quarter around rolling out, the mailing of new cards. Any change in sort of the new card activation rate or credit line increases? And then when -- what's the timeline do you think that, that penetration will get back to around 30%?

Alexander W. Smith

Cary?

Charles H. Turner

Well, as I said in the remarks, we're very happy with the response rate. One, in terms of -- I have to thank our store associates who are really getting behind the launch of the card and with ADS really doing a nice launch. And we've seen it being -- the response is very favorable. Our approval rates are higher than what we saw the last 2 years with the old program provider, and we're just encouraged. I think our short-term goal sometime this year or into next year is more like 25% of sales because remember we're coming from a level of about 21% of sales. And slowly but surely, we'll inch up from 25% up to 30%.

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

Okay, great. And then just lastly, looking at the extra week, can you just help us understand why the incremental margins on that week would be so low? If I look at the revenue and EPS numbers you provided, you get back into an SG&A rate that's quite a bit higher than what it would be either for that quarter or for the full year.

Charles H. Turner

No, remember also you're probably not using the right margin because now it's -- remember, February is our slowest month of the year.

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

So the gross margin actually would be quite a bit lower...

Charles H. Turner

There's not just as much leverage there as the rest of the year.

Operator

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

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

TJ filling in for Budd this morning. Congrats on the quarter and on the website. Let me add that it does look -- it looks great to us as well. My first question though is actually on some of the store refurbishments. We've talked a while about trying to get some metrics around the performance of maybe a couple of the earlier buckets of stores. I know it was too soon a couple of quarters ago. But is there any way we can parse out the incremental performance or the improved performance that you're seeing from some of these refurbished stores in any way?

Alexander W. Smith

Not really, TJ. I mean, I think that information is really too specific and proprietary. But what I can reassure you of is that we look at those numbers very carefully, and we're very anxious not to overinvest in our stores. So we're not, I think as we've said before, treating all stores equally. The ones who are getting the most investments are the stores where we think there's the most upside in terms of improvements in sales and store contribution. And stores with a lower potential are getting a correspondingly lower investment. But I think it just all plays into whether you're looking at the store refurbishments or whether you're looking at the reloads or whether you're looking at the merchandise. I mean, it just all plays into our ability to sustain the growth in the business that we keep talking to you about.

Charles H. Turner

I would only add 2 things. One, some of this spending is going to all stores and then is somewhat defensive in nature because we didn't spend much money 3, 4, 5 years ago. And the other thing is the new fixtures won't sell anything if the product's not right on, and so you need everything. And that's the main reason why we're not breaking it out. With retail, you need to have the right product and the right store experience.

Thomas J. McConville - Raymond James & Associates, Inc., Research Division

That's a fair point, Cary, and the merchandise is certainly there, as we're seeing. If -- then, if I move to the website, we talked about the merchandise here. Alex, can you give us a big-picture sense maybe of what you think the incremental customer looks like on the website? Is it someone who's materially different than your core customer is now? Is it someone who might have gone to the store otherwise? Can you give us a sense for what your plans are or what you're envisioning there?

Alexander W. Smith

Sure. I mean, I think the first thing I want to say is it is really very, very early days. I mean, this thing has only been going a matter of weeks, as you know. And so our knowledge and our data is going to build over time. What I would say to you is in terms of the way they're spending and what they're purchasing is we're not seeing a huge difference between what sells well in the store and what sells well on the web, so -- which is what we anticipated. So to the sense that we are appealing to customers with the same aesthetic, that's pretty much as we thought it would be. There's no doubt that we are driving a lot of people to the stores. Any time you spend time in stores, there's always somebody who comes in clutching a handful of screen prints. So I think we're getting a benefit of driving more traffic to the stores from the site. And I think the other interesting thing is, and we'll probably tell you a little bit more about this at the end of the third quarter, is just to look at the balance of those customers who are actually opting for the home delivery versus those who are going into the store to pick up, and that's also a very kind of interesting ratio that we're watching very carefully. But no, without rambling too much, I guess in essence what I'm saying is I think it's the same customer. In terms of our mindset, it's not actually the same customers, which is what we hoped it would be.

Operator

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

Simeon Gutman - Crédit Suisse AG, Research Division

So just wanted to add congratulations, again, to Alex and Cary on the website launch. One quick question on the housing world. I think we're starting to see some hopeful signs for the entire housing complex. It's early, but can you speak either through the mix of products you're selling or from the searches that you're seeing online, any evidence of that? I don't know if you'd see some of the furniture products being looked at more than others.

Alexander W. Smith

Cary, do you want to take that?

Charles H. Turner

Yes, Simeon, when we see -- I think we've tried to tell everybody we really don't see the tie to the housing data as strong as other macro data like consumer confidence and other things. For the primary reason -- one thing I would say is, if we do get an improvement in housing, it's going to be a tailwind, but it's probably going to be a tailwind over, call it, 3 years or so. Not everybody does everything to their house on day 1. It takes them some time, and right now, they're thinking through who's coming for Thanksgiving and maybe I need to look at the dining room and maybe the bedroom. But it happens over a couple of years.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then second question on -- I guess, 2 parts, on the POS rollout and the rewards card. Can you just talk about, on both sides what's not getting done today? So on the POS, what are you missing sort of on the margin improvement side or stores over-ordering or under-ordering? How much sharper will that allow you to be? And then on the rewards card, how much of targeting is being done today? Is it coming from -- going from 0 to being able to have full capability? Or is it going from some point you've already started at?

Charles H. Turner

Okay. First on the point of sale, we already have all the data, and we've been very happy with our point-of-sale register for the last 22 years. We've gotten our money's worth, and the real reason we have to switch is, number one, to ensure that the omni channel, meaning point of sale and Internet business and mobile, is all seamless to the consumer, and that's the primary reason. And as we roll out, we'll probably give you other specifics as to some benefits we're seeing. In terms of ADS, I think the targeted marketing really hasn't started yet. Really what we needed to do first was re-emboss all the cards, make sure all the customers now have new ADS cards and not using their old Chase cards and just start making sure they're aware of the new program. The new loyalty program has been tweaked a little, and we think more people will be rewarded with this new change.

Alexander W. Smith

The only thing I'd just like to say about the POS, I mean, even if we weren't doing this to link in with the online, there'd still be very good reasons for doing it because the 22-year-old system is somewhat clunky and hard to use. The new system will be much, much easier and much faster for the store associates, so our transaction times are going to go down. And also, what we think is a benefit is going to be we will allow -- it will allow us to have some of our less experienced associates on the registers, meaning that we can have our more experienced associates on the sales floor. So I mean, I think there are very tangible benefits over and above the ones that Cary has just talked you through.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay, that's helpful, Alex. Can I just sneak in one last one on cotton and margin? Last year, I don't think it was really a factor for the business, at least, we didn't see it. But this year, there is easier compares, especially going into the back half. Is that -- could it be a tailwind? Or is it a nonevent for your business?

Alexander W. Smith

Well, nothing that impacts costs is a nonevent, but I would say prices of commodities get lost in for us in all the other costs, in terms of currency exchange rates and labor costs and shipping costs. I mean, raw materials is a relatively small percentage of our finished goods. So it's -- we're always conscious of these things, our buyers are cognizant of them, and it helps them in terms of negotiation. But it's not going to move that merchandise margin up to 65%.

Operator

Your next question comes from the line of Denise Chai with Bank of America.

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

It's Vince Sinisi in for Denise, and let me add my congratulations as well on the quarter and the launch. I wanted to ask, of course, first question just some additional questions about your e-Commerce launch. If you guys could just provide any additional commentary around -- and I know it's early, but just kind of site traffic trends that you've seen post launching of the e-Commerce functionality. And then, also any commentary around your at-home delivery, if that has been, so far, going well?

Alexander W. Smith

Well, we're really pleased with our site traffic, and I think we mentioned that somewhere in the prepared remarks. So we're seeing sustained and substantial increased traffic to the website, which has to be a plus. In terms of the home delivery, again, as we talked about the fact that our fulfillment center is working extremely well, we've have little or no customer complaints in terms of the quality of our delivery. So I think we've done a pretty good job actually.

Vincent J. Sinisi - BofA Merrill Lynch, Research Division

Okay. And just one follow-up. You mentioned about later in the year you'll continue to have some site enhancements upcoming, as well as new products. Anything else you can tell us there in terms of will they be more of things that consumers won't really see on the site or will it be certainly noticeable and will the products be largely expansions of your current categories or anything really new and different from what you currently have?

Alexander W. Smith

Well, in terms of the product expansion, I think as I said just a little while ago, we're going to start with expansions of our existing assortments, leveraging off our core strengths, if you like. But then, following on behind that will be brand-new categories, and then ultimately, who knows? In terms of the improved -- I won't say improved. The additional functionality and features, some of that is going to be fine-tuning, which is the customer won't actually see it happen, but it'll just make the experience easier for her. Some of it will be very significant additions to the functionality, and we'll describe that to you as and when we've kind of nailed down the exact dates.

Operator

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

Alan M. Rifkin - Barclays Capital, Research Division

With the rollout of e-Commerce, to use your words, Alex, it's been the largest, most complex endeavor this company has undertaken in a long time, what was the magnitude of the startup cost that were expensed in the quarter that probably impacted your SG&A line?

Alexander W. Smith

That's sounds like a Cary question, Alan. Here he is.

Charles H. Turner

I think we told you it's a couple of million dollars. And then the other costs went into CapEx and will be depreciated.

Alan M. Rifkin - Barclays Capital, Research Division

Okay, Cary. And then on the marketing line, I believe you said that, that line item actually delevered in the quarter. Could you maybe just provide a little bit more color as to why that was with such a strong comp? Is it more of a function of accelerated marketing on the e-Commerce side? And then if you were...

Charles H. Turner

No, I think we told you at the end of the first quarter that it would be up about 30 basis points, and it was. Some of it was timing, some of it is just seeing opportunities to spend a little bit more, and we were very happy with the spend.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. If it hits your 5% of revenues for the year, Cary, should we -- what magnitude of leverage should we expect in the third and fourth quarter on the marketing side?

Charles H. Turner

It all depends on sales, Alan.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. Well, if I could just prod a little further. Whatever sales you're expecting when you say it should be 5% of revenues, if you were to hit that number?

Charles H. Turner

Let me look at it a little bit more, I'll get back to you.

Operator

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

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

Just a follow-up on the website. Over the last several quarters, you guys have been breaking out the contribution from Pier 1 To-Go. Are you still seeing an incremental lift as we start to anniversary that launch? And what do you -- what kind of tailwind are we seeing to comps? And what do you think that's going to be in the back half of the year?

Alexander W. Smith

The problem -- it was not a problem. The issue is, Brad, it's not going to be an apples with apples because, if you remember, the old Pier 1 To-Go was an order online, pick up and pay in store. With the new site, you actually have to pay online and then pick up in store. So it's a slightly different model than we previously had. So what that means is we get a higher percentage of those who order, so they pay, come in and pick it up, than we did with the old model. But we're still -- but it is still a very positive driver in terms of our comps absolutely.

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

Great. And then just on the merchandising front, I believe this summer you had planned to roll out some more impulse items. Can you just talk a little bit about the success you're seeing there and any other new merchandising plans for the back half of the year in stores?

Charles H. Turner

Yes, as you heard on my remarks, we did put in new fixtures for the impulse items. To be honest with you, Brad, that was really at the end of the quarter, and so this initiative of driving units per transaction, it's really a second half initiative.

Alexander W. Smith

Yes. But the initial thoughts in store, I mean, you -- as always, we gauge our success a lot by the reaction of the store teams, and they certainly are very pleased with the new fixturing. Anecdotally, they're telling us it's starting to work, so we're pretty optimistic.

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

Great. And if I could squeeze in one more follow-up on Alan's earlier question about the cost for the new website. I recognize you have a number of capital plans for this year and next year. As we move into 2013, would you think that some of those expenses are leverageable? Or are there incremental investments that you think we should plan on making? How should we think of the onetime nature, if you will, of some of the costs you've made this year?

Alexander W. Smith

Well, I think, it's some and some [ph]. I mean, we are certainly going to continue to invest in the business, both in terms of home office payroll and in terms of payroll, which gets capitalized. I mean, it is our intention. And Cary can just talk a little bit all about this to sort of keep the balances as best we can, so that we continue to leverage our expenses. On an ongoing basis, I mean, that's our starting position. But do you want to say a little bit more?

Charles H. Turner

No, and I was going to say I think you will see there's no -- at least not at this point, we don't anticipate any big onetime items coming up in SG&A. And as I said earlier, I anticipate SG&A as a percentage of sales will definitely leverage in the third and fourth quarter and will continue to in the next 2 years.

Operator

And at this time, there are no further questions.

Alexander W. Smith

Okay, Sarah. Thank you very much for hosting the call today. Thank you, everybody, for joining us, and we'll talk to you next time. Thank you.

Operator

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

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