Pier 1 2013 Annual Report Download - page 30

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Gross Profit
Gross profit, which is calculated by deducting store occupancy costs from merchandise margin dollars,
was 42.5% expressed as a percentage of sales in fiscal 2012, compared to 39.8% a year ago. Merchandise
margins were 59.8% as a percentage of sales, an increase of 120 basis points over 58.6% in fiscal 2011. This
improvement was the result of strong input margins, the right balance of regular and promotional pricing, and
well-managed inventory levels.
Store occupancy costs during fiscal 2012 were $265.9 million or 17.3% of sales, compared to
$262.4 million, or 18.8% of sales during fiscal 2011. Rent, property taxes, utilities and repair and maintenance
expenses were all lower as a percentage of sales.
Operating Expenses and Depreciation
Selling, general and administrative expenses were $475.2 million, or 31.0% of sales in fiscal 2012,
compared to $431.9 million, or 30.9% of sales in fiscal 2011. The increase was primarily due to increases in
payroll resulting from the planned hiring of incremental headcount in support of e-Commerce and other growth
initiatives, additional associate hours at the stores to support the higher sales volume, and additional expense for
performance related pay and other items.
Depreciation and amortization for fiscal 2012 was $21.2 million, representing an increase of
approximately $1.5 million from fiscal 2011. This increase was primarily the result of capital expenditures in
fiscal 2012, partially offset by certain assets becoming fully depreciated and store closures.
In fiscal 2012, the Company recorded operating income of $154.8 million, or 10.1% of sales, compared to
$103.7 million, or 7.4% of sales, for fiscal 2011.
Nonoperating Income and Expense
Nonoperating income for fiscal 2012 was $9.3 million, compared to expense of $0.2 million in fiscal
2011. The increase in net interest income was primarily the result of an increase in deferred gain recognition
related to the renegotiation of the Company’s proprietary credit card agreement with Chase during the fourth
quarter of fiscal 2011. As a result of its agreement with ADS during the third quarter of fiscal 2012, the Company
also revised the amortization period for any remaining deferred gains related to prior transactions with Chase as
appropriate. In addition, interest expense decreased primarily as a result of a lower debt balance in fiscal 2012.
Income Taxes
The Company recorded an income tax benefit of $4.8 million in fiscal 2012 compared to a provision of
$3.4 million in fiscal 2011. During the fourth quarter of fiscal 2012, the Company was able to conclude that
given its improved performance, the realization of its deferred tax assets was more likely than not and
accordingly reversed its valuation allowance and recorded a tax benefit during the period. This benefit was
partially offset by tax expense. During fiscal 2012, the Company recognized federal income tax expense
compared to only minimal amounts of state and foreign tax during fiscal 2011 due to the full valuation
allowance.
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