Pier 1 2016 Annual Report Download - page 33

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Merchandise margin represents the result of adding back delivery and fulfillment net costs and store occupancy costs to gross
profit. Contribution from operations represents gross profit, less compensation for operations (which includes store and customer
service payroll) and operational expenses. EBITDA represents earnings before interest, taxes, depreciation and amortization.
Management believes merchandise margin, contribution from operations and EBITDA are meaningful indicators of the Company’s
performance which provide useful information to investors regarding its financial condition and results of operations. Management
uses merchandise margin, contribution from operations and EBITDA, together with financial measures prepared in accordance
with GAAP, to assess the Company’s operating performance, to enhance its understanding of core operating performance and
to compare the Company’s operating performance to other retailers. These non-GAAP financial measures should not be
considered in isolation or used as an alternative to GAAP financial measures and do not purport to be an alternative to net
income or gross profit as a measure of operating performance. A reconciliation of net income to EBITDA to contribution from
operations to merchandise margin is shown below for the fiscal years ended (in millions).
February 27, 2016 February 28, 2015 March 1, 2014
$ Amount % of Sales $ Amount % of Sales $ Amount % of Sales
Merchandise margin (non-GAAP) $1,046.0 55.3% $1,100.1 58.4% $1,067.8 59.6%
Less: Delivery and fulfillment net costs 42.5 2.2% 32.9 1.7% 14.0 0.8%
Store occupancy costs 298.6 15.7% 298.7 15.8% 288.4 16.1%
Gross profit (GAAP) 705.0 37.3% 768.5 40.8% 765.3 42.7%
Less: Compensation for operations 260.2 13.7% 270.4 14.3% 256.4 14.3%
Operational expenses 90.5 4.8% 85.6 4.5% 78.2 4.4%
Contribution from operations (non-GAAP) 354.3 18.7% 412.5 21.9% 430.7 24.0%
Less: Other nonoperating (income)/expense 0.9 0.0% (2.8) (0.1%) (1.0) (0.1%)
Marketing and other SG&A 228.2 12.1% 238.9 12.7% 216.4 12.1%
EBITDA (non-GAAP) 125.2 6.6% 176.3 9.4% 215.4 12.0%
Less: Income tax provision 23.5 1.2% 45.2 2.4% 67.1 3.7%
Interest expense, net 11.1 0.6% 9.6 0.5% 1.8 0.1%
Depreciation 50.9 2.7% 46.3 2.4% 38.9 2.2%
Net income (GAAP) $ 39.6 2.1% $ 75.2 4.0% $ 107.5 6.0%
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash and cash equivalents totaled $115.2 million at the end of fiscal 2016, an increase of $15.2 million from the
fiscal 2015 year-end balance. The increase was primarily due to cash provided by operating activities of $164.0 million, partially
offset by the utilization of cash to fund the Company’s capital investments and to return excess capital to shareholders, including
$51.8 million for capital expenditures, $75.0 million to repurchase shares of the Company’s common stock under the April 2014
program and $23.7 million for cash dividends.
The Company’s cash and cash equivalents totaled $100.1 million at the end of fiscal 2015, a decrease of $26.6 million from the
fiscal 2014 year-end balance of $126.7 million. The decrease was primarily the result of the utilization of cash to support the
Company’s growth plan and return of excess capital to shareholders, including $81.9 million for capital expenditures, $185.5
million to repurchase shares of the Company’s common stock under the board approved share repurchase programs and cash
dividends of $21.6 million. These expenditures were partially offset by cash provided by operating activities of $65.7 million and
net proceeds of $198.0 million from the closing of the Term Loan Facility.
Cash Flows from Operating Activities
Operating activities provided $164.0 million of cash in fiscal 2016, primarily as a result of net income adjusted for non-cash items
as well as a decrease in inventory. Inventory levels at the end of fiscal 2016 were $405.9 million, a decrease of $73.0 million, or
15%, from the end of fiscal 2015. The increase in cash flows from operating activities for fiscal 2016 compared to fiscal 2015 is
due to favorable changes in cash flows primarily related to inventories.
Operating activities provided $65.7 million of cash in fiscal 2015, primarily as a result of $75.2 million of net income and a $26.3
million increase in accounts payable and other liabilities, primarily due to increased purchases of merchandise, offset by a $101.2
PIER 1 IMPORTS, INC. 2016 Form 10-K 27