Pier 1 2010 Annual Report Download - page 25

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 many 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 and operates stores in the United States and Canada
under the name Pier 1 Imports. As of February 27, 2010, the Company operated 1,054 stores in the United States
and Canada.
In April 2007, the Company implemented a turnaround strategy built upon key business priorities. Since
that time, management has successfully executed its plan to improve the merchandise assortment, reduce
inventory levels, increase merchandise margins and reduce operational costs. Although the recession delayed the
planned results, management believes its efforts have resulted in stronger vendor and customer relationships, a
significantly stronger balance sheet and a leaner, more efficient organization. The efforts of the Company since
2007 have resulted in higher merchandise margins, better leveraged operating expenses, and more recently in
comparable store sales gains and operating income.
Comparable store sales during fiscal 2010 increased 1.5% compared to a decline of 9.2% in fiscal 2009.
Comparable store sales during the first half of fiscal 2010 declined 7.5%, but increased 9.7% over the last six
months of the year. Excluding the January clearance event, traffic increased over the second half of the year,
positively affecting comparable store sales. Additionally, the Company experienced increases in average ticket,
conversion rate, and average unit retail. Helping to drive these sales increases was the increase in total sales on
the Company’s privately branded loyalty card, resulting from the Company’s joint marketing agreement with
Chase. During fiscal 2010, sales on the Pier 1 rewards card increased to 24.1% of U.S. store sales from 21.8% in
fiscal 2009. The Company will continue to work with Chase in fiscal 2011 to develop dynamic marketing
promotions aimed at the Company’s growing rewards card business.
Merchandise margins for fiscal 2010 were 54.8% compared to 49.0% in fiscal 2009. This improvement
was the result of reduced markdowns, lower supply chain costs and more advantageous vendor costs. As part of
its effort to improve merchandise offerings, the Company implemented improved and more sophisticated
analysis of its inventory purchases that help control levels of initial purchase quantities and the timing and
quantities of re-order merchandise. This strategy resulted in improved rates of sale, fewer markdowns and shorter
clearance sale periods. Management believes it has significantly reduced future markdown risk, and as a result,
expects merchandise margins will continue to be strong.
During fiscal 2010, the Company worked to reduce overall occupancy costs by negotiating with its
landlords to reduce rents, or when necessary, close unprofitable stores at the lowest possible cost. This initiative
resulted in substantial cost reductions and the closure of only 38 locations, significantly less than originally
estimated. The reduction in store closures was a direct result of the favorable rent reductions with the landlords.
In addition to cost savings through the real estate initiatives, the Company’s continued focus on controlling
expenditures company-wide resulted in a reduction of $32.3 million in selling, general and administrative costs
when compared to fiscal 2009. Selling, general and administrative costs as a percentage of sales declined to
32.6% from 34.3% in fiscal 2009. The Company expects to continue to see further leveraging of expenses as
sales continue to increase.
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