Pier 1 2016 Annual Report Download - page 26

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
MANAGEMENT OVERVIEW
Introduction
Pier 1 Imports, Inc. is the original global importer of home décor and furniture. The Company directly imports merchandise from
many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products
in its stores and through the Company’s website, Pier1.com. As of February 27, 2016, the Company operated 1,032 stores in
the United States and Canada. The following discussion and analysis of financial condition, results of operations, and liquidity and
capital resources should be read in conjunction with the accompanying audited Consolidated Financial Statements and notes
thereto, which can be found in Item 8 of this report.
Over the past several years, the Company has transformed from a brick-and-mortar retailer to an omni-channel retailer, with the
objective of seamless integration across stores, desktop and mobile devices. As part of its transformation to an omni-channel
retailer the Company re-launched its e-Commerce capabilities including its website, Pier1.com, during fiscal 2013. The
Company’s focus through the ‘1 Pier 1’ omni-channel strategy is to ensure that customers have an extraordinary experience,
regardless of how they shop. By enabling the customer to interact with the brand both in-store and online, the Company expects
to maximize selling opportunities, extend brand reach and capture greater market share. The ‘1 Pier 1’ strategy required
investment in systems, distribution and fulfillment centers, call centers, distribution network and store development, including new
in-store selling tools such as swatch stations, computers and tablets. This strategy also includes a continuing commitment to
return excess capital to shareholders through share repurchases and cash dividends.
Fiscal 2015 capped a multi-year period of heavy investment for the Company in support of its transformation to an omni-channel
retailer, including investment in systems, distribution and fulfillment centers, call centers, distribution network and store
development. In fiscal 2016, the Company moderated capital expenditures by over one-third to $51.8 million, from $81.9 million
in fiscal 2015. During fiscal 2016 capital expenditures were deployed toward infrastructure and technology development,
including the customer data excellence initiative, supply chain upgrades, existing store improvements and 17 new store
openings. Capital expenditures in fiscal 2017 are expected to be approximately $55 million to support ongoing investments in
technology, stores and distribution centers.
Fiscal 2016 net sales increased 0.4% from the prior year and company comparable sales increased 0.7%. The increases were
primarily attributable to the increase in e-Commerce sales, specifically increases in online traffic, online conversion and average
ticket compared to last year. During fiscal 2016, e-Commerce sales accounted for 16.1% of net sales compared to 11.1% in the
previous fiscal year. E-Commerce sales were the primary driver of total sales growth in fiscal 2016, and the Company expects
this trend to continue in fiscal 2017. A significant portion of e-Commerce sales touch the retail stores, either by originating on in-
store PCs and tablets, or through in-store pick-up. As e-Commerce sales have grown, and to the extent they continue to grow,
delivery and fulfillment net costs have also increased and are expected to continue to increase. The Company began to leverage
these costs as a percentage of fulfilled sales in fiscal 2016.
Gross profit for fiscal 2016 was $705.0 million, or 37.3% of sales, compared to $768.5 million, or 40.8% of sales, in the same
period last year, a decline of 350 basis points. Merchandise margin (the result of adding back delivery and fulfillment net costs
and store occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $1.046 billion for fiscal
2016, or 55.3% of sales, compared to $1.100 billion, or 58.4% of sales for fiscal 2015. The year-over-year decline in
merchandise margin as a percentage of sales was primarily attributable to promotional and clearance activity and inventory-
related inefficiencies within the Company’s distribution center network. Store occupancy costs during fiscal 2016 were leveraged
slightly at 15.7% of sales, compared to 15.8% during fiscal 2015.
Operating income for fiscal 2016 was 4.0% of sales, compared to 6.8% in fiscal 2015. Fiscal 2016 EBITDA (earnings before
interest, taxes, depreciation and amortization — see “Reconciliation of Non-GAAP Financial Measures”) was $125.2 million
compared to $176.3 million in fiscal 2015. Net income for fiscal 2016 was $39.6 million, or $0.46 per diluted share, compared
to $75.2 million, or $0.82 per diluted share for fiscal 2015.
As the Company’s transition to an omni-channel retailer continues to mature, strategies and plans have been initiated and
enhanced to drive meaningful top-line sales growth, restore merchandise margin and reduce costs across the organization.
These include, but are not limited to: improving merchandise assortments; enhancing marketing programs; optimizing the real
20 PIER 1 IMPORTS, INC. 2016 Form 10-K