Pier 1 2008 Annual Report Download - page 40

Concentrations of risk — The Company has some degree of risk concentration with respect to sourcing
the Company’s inventory purchases. However, the Company believes alternative sources of products could be
procured over a relatively short period of time. Pier 1 Imports sells merchandise imported from over 50
different countries, with 39% of its sales derived from merchandise produced in China, 15% derived from
merchandise produced in Indonesia, 14% derived from merchandise produced in India, 10% derived from
merchandise produced in the United States and 19% derived from merchandise produced in Vietnam, Thailand,
Brazil, the Philippines, Italy and Mexico. The remaining 3% of sales was from merchandise produced in
various Asian, European, Central American, South American, African countries and Canada.
Financial instruments — The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Other than the 6.375% convertible senior notes,
there were no assets or liabilities with a fair value significantly different from the recorded value as of
March 1, 2008 and March 3, 2007. The fair value of these notes was $133,650,000 and $156,712,000 based on
quoted market values as of March 1, 2008 and March 3, 2007, respectively. Changes in the market interest
rates and other factors affecting convertible notes affect the fair value of the Company’s fixed rate notes, but
do not affect the Company’s financial position, results of operations or cash flows related to these instruments.
Risk management instruments: The Company may utilize various financial instruments to manage
interest rate and market risk associated with its on- and off-balance sheet commitments.
From time to time, the Company hedges certain commitments denominated in foreign currencies through
the purchase of forward contracts. The forward contracts are purchased to cover a portion of commitments to
buy merchandise for resale. The Company also, on occasion, uses contracts to hedge its exposure associated
with the repatriation of funds from its Canadian operations. At March 1, 2008 and March 3, 2007, there were
no outstanding contracts to hedge exposure associated with the Company’s merchandise purchases denomi-
nated in foreign currencies or the repatriation of Canadian funds. For financial accounting purposes, the
Company does not designate such contracts as hedges. Thus, changes in the fair value of both types of forward
contracts would be included in the Company’s consolidated statements of operations. Both the changes in fair
value and settlement of these contracts are included in cost of sales for forwards related to merchandise
purchases and in selling, general and administrative expense for the contracts associated with the repatriation
of Canadian funds.
When the Company enters into forward foreign currency exchange contracts it enters into them with
major financial institutions and continually monitors its positions with, and the credit quality of, these
counterparties to such financial instruments.
Beneficial interest in securitized receivables — As of March 1, 2008 and March 3, 2007, the Company
had no beneficial interest since it allowed its securitization agreement to expire. Prior to the expiration of this
agreement, the Company securitized its entire portfolio of proprietary credit card receivables, except an
immaterial amount of those that failed certain eligibility requirements, to a special-purpose wholly owned
subsidiary, Funding, which transferred the receivables to the Pier 1 Imports Credit Card Master Trust (the
“Master Trust”). Neither Funding nor the Master Trust were consolidated by the Company, as the Master Trust
met the requirements of a qualifying special-purpose entity under Statement of Financial Accounting Standards
(“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” The Master Trust issued beneficial interests that represent undivided interests in the assets of the
Master Trust consisting of the transferred receivables and all cash flows from collections of such receivables.
The beneficial interests included certain interests retained by Funding, which were represented by Class B
Certificates, and the residual interest in the Master Trust (the excess of the principal amount of receivables
held in the Master Trust over the portion represented by the certificates sold to third-party investors and the
Class B Certificates). Gain or loss on the sale of receivables depended in part on the previous carrying amount
of the financial assets involved in the transfer, allocated between the assets sold and the retained interests
based on their relative fair value at the date of transfer.
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)