Pier 1 2009 Annual Report Download - page 27

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT OVERVIEW
Introduction
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the ‘‘Company’’) is a global
importer and is one of North America’s largest specialty retailers of imported decorative home
furnishings and gifts. The Company directly imports merchandise from over 50 countries, and sells a
wide variety of decorative accessories, furniture collections, bed and bath products, candles, housewares
and other seasonal assortments in its stores. The Company conducts business as one operating segment.
The Company operates stores in the United States and Canada under the name ‘‘Pier 1 Imports’’ and,
for a portion of fiscal 2008 and in prior years, ‘‘Pier 1 Kids.’’ As of February 28, 2009, the Company
operated 1,092 stores in the United States and Canada.
Since April 2007, the Company has been executing a turnaround strategy that is built on key
business priorities. Over the first year, fiscal 2008, the Company was able to execute its strategy
successfully, revitalizing its merchandise offering, significantly cutting costs, and ultimately reporting its
first quarterly profit in two years in the fourth quarter of fiscal 2008. Management anticipated that the
Company would continue to see improvements throughout fiscal 2009. As a result of the dramatic
changes in the economic environment, fiscal year 2009 did not turn out the way the Company had
anticipated.
During the second half of fiscal 2009, the U.S. economy significantly deteriorated as a result of the
disruption in the credit and financial markets which created an environment of uncertainty for
consumers. During this time of economic turmoil, consumers sacrificed purchases of discretionary
items, including the Company’s merchandise, which adversely affected the Company’s sales and
financial performance. Management believes that the current economic recession has delayed the
Company’s return to profitability and now expects that its turnaround plan will take approximately two
years longer than originally anticipated.
For the year, comparable store sales declined 9.2%. The decline in sales was primarily the result of
a reduction in traffic and average ticket, offset slightly by increases in conversion rate and units per
transaction. Merchandise margins for the year improved slightly to 49.0% of sales. Improvements in the
margin over last year were primarily the result of less aggressive liquidation of inventory as compared
to fiscal 2008, especially when comparing the first quarter of each year. Despite the slowdown in the
economy, the Company anticipates that it will be able to maintain or improve merchandise margins
during fiscal 2010 as it began the year with significantly reduced and clean inventory. Changes in the
Company’s merchandise assortments have allowed the Company to maintain lower inventory levels
without significantly jeopardizing sales.
One of the key components of the Company’s turnaround plan was improving its merchandise
offering. To accomplish this, the Company doubled the size of its buying staff during fiscal 2008. As
these buyers became more familiar with the Pier 1 Imports customer and traveled to meet with the vast
network of vendors and agents during fiscal 2009, the Company’s merchandise offering improved, began
to resonate with customers and once again reflected the quirky and unique style that is synonymous
with the Company’s brand. This was evident throughout the year as the conversion rate levels
consistently improved. Management expects that it will continuously evolve and finesse the Company’s
merchandise offering and continue to test new products to ensure that the ‘‘treasure hunt’’ feel of its
stores is maintained.
The Company believes that it can continue to reduce costs in the supply chain as a result of
declining fuel costs and lower ocean freight rates. Additionally, costs in the supply chain will be
reduced as the Company ceases operations in its Chicago distribution facility in the first quarter of
fiscal 2010.
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