Pier 1 2016 Annual Report Download - page 3

Fellow Shareholders:
Fiscal 2016 was our first full year of operating with comprehensive omni-channel capabilities. In just three years we’ve moved
from a ‘bricks-and-mortar only’ retailer with no e-Commerce presence to generating over $300 million of sales through
Pier1.com. In fact, this year Pier1.com ranked 124th on Internet Retailer’s 2016 Top 500 Guide of e-Commerce companies.
It has been a complex and challenging process, but our omni-channel transformation and the establishment of a new business
model were essential for us to compete effectively in the new retail world. In fiscal 2016, we were successful in making further
enhancements to our omni-channel capabilities, enriching our customer’s experience with the Pier 1 Imports brand. However,
headwinds — largely in the form of heightened promotional activity, as well as inefficiencies in our distribution centers related to
elevated inventories — resulted in underperformance from an earnings perspective for the company as a whole. While it was a
challenging year, we emerged stronger and with a clear view of the future.
We’re pleased to say that we have completed the heavy lifting related to our inventory problems and in the process laid the
groundwork to increase the efficiency of our distribution network. We have been aided in this effort by our ongoing commitment
to inventory turn improvements and our single inventory for both stores and e-Commerce.
While the effects of elevated inventory weighed on this past year, we did conclude fiscal 2016 with inventories lower by 15%
year-over-year. Building off of this significant inventory reduction, we generated $164 million of cash from operations, of which we
utilized nearly $100 million to return excess capital to shareholders through a combination of share repurchases and cash
dividends. The balance was reinvested in our growth initiatives, or retained to strengthen our balance sheet.
From an operational standpoint, we made good progress in fiscal 2016. We launched a multi-year real estate optimization plan,
which will help us balance our cost structure and maximize the efficiency of our real estate. We also have a multi-year project
underway to streamline processes across the organization. While we were able to take significant costs out of the business in
fiscal 2016, we expect this project to generate additional savings in future years. Also in fiscal 2016, we launched our customer
relationship management (CRM) program. As part of this initiative, we rebuilt our customer database and added new functionality
that is allowing us to capture more information about customer shopping behavior and spending, while also providing us with the
insights we need to be more effective when we speak to her. This enhanced capability also serves as a foundation to expand our
loyalty program. We already have a highly successful Pier 1 Rewards credit card program, which accounts for approximately 35%
of our sales. To build on this strength we will expand and include a non-tender loyalty option as well. The combination of our new
database, enhanced loyalty program and improved customer relations functionality positions us to drive higher spending among
our existing customers and increase the number of new shoppers entering the Pier 1 Imports family.
When we wrote to you last year we set out six guideposts by which our shareholders can measure our progress. A year later,
each remains highly relevant to our ongoing success. They are:
1. Brand traffic, conversion and average ticket. Our omni-channel strategy is enabling us to capitalize on the needs of our
customers, engaging her regardless of how, when and where she shops. In recent years we have developed an omni-
channel marketing program that encompasses print, digital and social media. Our retention and re-activation programs are
performing well and helping us achieve improved conversion rates and average ticket. In fiscal 2016 known customers
accounted for over 70% of sales; repeat customers accounted for approximately 60% of sales. These are the strongest
numbers in the company’s recent history. While our brand traffic continues to grow, store traffic continues to decline — part
of the changed shopping behavior that is being seen across the retail landscape. This has influenced our decision to invest
incrementally in marketing in fiscal 2017. Most notably, as part of our strategy to drive more casual shopping visits to our
stores, the Pier 1 Imports brand returned to television advertising as of spring 2016.
2. Stores as sales and customer experience centers. Our nationwide footprint remains a critical component of our omni-
channel model and is expected to be a driver of future growth and profitability as we continue to optimize the portfolio and
reduce our store operating costs. While we’ve enjoyed tremendous success in connecting with our customers through
Pier1.com, our network of over 1,000 stores is central to everything we do. Our stores serve as perhaps our best
marketing vehicle, our store associates are outstanding brand ambassadors and simply put, our stores drive sales. Indeed,
well over 90% of our sales touch a store in one way or another, either as an influence to her purchasing decision or a
convenient way to pick up her online purchases.
3. Merchandise margin. Product is always front and center at Pier 1 Imports, and its relevance with the customer is of core
importance to everything we do. To that end, we’re presently evolving our go-to-market strategies to emphasize newness,
as well as key categories such as seasonal and holiday. We’re also developing a strict and well-defined promotional
calendar designed with the expectation that we’ll remain competitive, while delivering on our sales and margin objectives.
Additionally, our lower inventory levels should aid execution and alleviate some of the cost pressures experienced within
our distribution network during fiscal 2016.