Pier 1 2007 Annual Report Download - page 9

Strategic Risks and Strategy Execution Risks
The Company’s turnaround strategy may cause a disruption in operations and may not be successful.
The Company announced a strategy in April 2007, described in Item 7, for returning the Company to
profitability. The turnaround strategy may negatively impact the Company’s operations, which could include
disruptions from the realignment of operational functions within the home office, changes in the store
administration reporting structure, and changes in the Company’s product assortments or marketing strategies.
These changes could adversely affect the Company’s business operations and financial results. While the
Company believes any disruptions would be short-term, it is unknown whether the impact would be material.
In addition, if the Company’s turnaround strategy is not successful, or if it is not executed effectively, the
Company’s business operations and financial results could be adversely affected.
The Company must be able to anticipate, identify and respond to changing trends and customer
preferences for home furnishings.
The success of the Company’s specialty retail business depends upon its ability to predict trends in home
furnishings consistently and to provide merchandise that satisfies consumer demand in a timely manner.
Consumer preferences often change and may not be reasonably predicted. A majority of the Company’s
merchandise is manufactured, purchased and imported from countries around the world and is typically
ordered well in advance of the applicable selling season. Extended lead times may make it difficult to respond
rapidly to changes in consumer demand and as a result, the Company may be unable to react quickly and
source needed merchandise. In addition, the Company’s vendors may not have the ability to handle its
increased demand for product. The seasonal nature of the business leads the Company to purchase and requires
it to carry a significant amount of inventory prior to its peak selling season. As a result, the Company may be
vulnerable to changes in evolving home furnishing trends, customer preferences, and pricing shifts, and may
misjudge the timing and selection of merchandise purchases. The Company’s failure to anticipate, predict and
respond in a timely manner to changing home furnishing trends could lead to lower sales and additional
discounts and markdowns in an effort to clear merchandise, which could have a negative impact on
merchandise margins and in turn the results of operations.
Failure to control merchandise returns could negatively impact the business.
The Company has established a provision for estimated merchandise returns based upon historical
experience and other known factors. If actual returns are greater than those projected by management,
additional reductions of revenue could be recorded in the future. Also, to the extent that returned merchandise
is damaged, the Company may not receive full retail value from the resale of the returned merchandise.
Introductions of new merchandise, changes in merchandise mix, merchandise quality issues, changes in
consumer confidence, or other competitive and general economic conditions may cause actual returns to
exceed the provision for estimated merchandise returns. An increase in merchandise returns that exceeds the
Company’s current provisions could negatively impact the business and operating results.
A disruption in the operation of the domestic portion of the Company’s supply chain could impact its
ability to deliver merchandise to its stores and customers, which could impact its sales and results of
operations.
The Company maintains regional distribution centers in Maryland, Illinois, Ohio, Texas, California,
Georgia and Washington. At these distribution centers, merchandise is received, allocated, and shipped to the
Company’s stores. Additionally, the Company has outsourced the distribution of merchandise ordered through
its e-commerce website to a third party who maintains its own distribution center in Tennessee. Major
catastrophic events such as fire or flooding, malfunction or disruption of the information systems, or shipping
problems could result in distribution delays of merchandise to the Company’s stores and customers. Such
disruptions could have a negative impact on the Company’s sales and results of operations.
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