Pier 1 2007 Annual Report Download - page 27

(1) Total store count included 43 Pier 1 Kids stores and 34 clearance stores at February 25, 2006.
(2) Discontinued operations relate to The Pier.
(3) The Company supplied merchandise and licensed the Pier 1 name to Sears Roebuck de Mexico, S.A. de C.V. and Sears Roebuck de
Puerto Rico, Inc., which sell Pier 1 merchandise in a “store within a store” format. At the end of fiscal 2006, there were 26 and seven
locations in Mexico and Puerto Rico, respectively.
The Company’s proprietary credit card generated net sales of $422.5 million for fiscal 2006, a decrease
of $38.7 million or 8.4% over fiscal 2005 proprietary credit card sales of $461.2 million. Sales on the
proprietary credit card were 25.7% for fiscal 2006 of U.S. store sales compared to 27.1% in fiscal 2005.
Average ticket on the Company’s proprietary credit card increased to $163 during fiscal 2006 from $159
during fiscal 2005. At the end of the second quarter of fiscal 2006, in an effort to stimulate sales, the
Company began to offer a 12-month, no interest promotion on larger purchases as well as supporting special
incentives for store associates to encourage customers to open new proprietary credit card accounts. While the
proprietary credit card generated modest income, it primarily served as a tool for marketing and communica-
tion to the Company’s most loyal customers.
Gross Profit
Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, was
33.9% in fiscal 2006 compared to 38.5% in fiscal 2005. Merchandise margins, as a percentage of sales,
declined from 53.1% in fiscal 2005 to 50.2% in fiscal 2006, a decrease of 290 basis points. The decline in
merchandise margin rates resulted primarily from the Company’s continued use of discounts and markdowns
to stimulate sales as well as make way for new and unique merchandise lines. Store occupancy costs during
fiscal 2006 were $290.4 million or 16.3% of sales, an increase of $24.1 million and 170 basis points over
store occupancy costs of $266.3 million or 14.6% of sales during fiscal 2005. The increase was primarily due
to an inability to leverage relatively fixed rental costs over a lower sales base.
Operating Expenses, Depreciation and Income Taxes
Selling, general and administrative expenses, including marketing, comprised 33.1% of sales in fiscal
2006, an increase of 300 basis points over fiscal 2005’s 30.1% of sales. In total dollars, selling, general and
administrative expenses increased $38.6 million in fiscal 2006 over fiscal 2005, with $34.1 million of the
increase attributable to expenses that normally vary with sales and number of new stores, such as marketing,
store payroll, supplies, and equipment rental. These variable expenses increased 250 basis points as a
percentage of sales for fiscal 2006 compared to fiscal 2005. Despite the negative comparable store sales in
fiscal 2006, the Company intentionally did not decrease store payroll hours in an effort to maintain minimum
staffing levels and continue to provide good customer service. In addition, the Company was unable to
leverage certain fixed portions of store payroll costs over the lower sales base. In an effort to increase
customer traffic to its stores, marketing expenditures during fiscal 2006 were planned to increase over fiscal
2005 and were up $16.0 million to 5.8% of sales, an increase of 105 basis points expressed as a percentage of
sales. From October 2004 through February 2005, the Company discontinued its television advertising
campaign because management viewed it as ineffective at increasing customer traffic and driving sales. During
fiscal 2006, the Company re-launched a national television advertising campaign and distributed two nation-
wide catalogs while discontinuing its newspaper insert programs. Store supplies and equipment rental increased
$2.6 million and 20 basis points as a percentage of sales.
Relatively fixed selling, general and administrative expenses increased $4.6 million in fiscal 2006, or
50 basis points as a percentage of sales, over fiscal 2005. Other occupancy expenses (excluding store and
distribution center occupancy expenses) increased $4.9 million or 30 basis points, primarily as a result of
impairment charges of $5.8 million recognized on long-lived store-level assets compared to impairment
charges in fiscal 2005 of $0.4 million. In addition, the Company had a $1.0 million write-off of the remaining
book value of fixed assets and intangibles associated with early store closures in fiscal 2006. These non-cash
charges were partially offset by a $2.3 million savings in home office rental expense as the corporate
headquarters were rented for a portion of fiscal 2005 but were owned for all of fiscal 2006. Lease accounting
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