Pier 1 2014 Annual Report Download - page 26

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cost of Sales and Gross Profit
Cost of sales were 57.9% expressed as a percentage of sales in fiscal 2014, compared to 56.4% of sales in fiscal 2013. Gross
profit, which is calculated by deducting store occupancy costs from merchandise margin dollars, was 42.1% expressed as a
percentage of sales in fiscal 2014, compared to 43.6% a year ago. The year-over-year gross profit decline as a percentage of
sales was primarily due to higher promotional and clearance activity versus last year and increased sales through the direct-to-
customer channel, which have reduced merchandise margin as compared to stores.
Store occupancy costs during fiscal 2014 were $288.4 million, or 16.3% of sales, compared to $276.5 million, or 16.2% of
sales, during fiscal 2013. Most occupancy costs for the fiscal year remained relatively constant as a percent of sales while rent,
and repair and maintenance increased slightly. Overall, occupancy costs increased in dollars when compared to the same period
last year primarily due to the increase in new store openings.
Operating Expenses and Depreciation
Selling, general and administrative expenses were $531.2 million in fiscal 2014, compared to $513.1 million in fiscal 2013, an
increase of $18.1 million. This increase is largely the result of increases in variable store costs including store payroll and the
continued investment in marketing of 5% of sales. This increase was due in part to the opening of a net ten new stores during
fiscal 2014. In addition, relatively fixed expenses increased as a result of additional headcount and software-related expenses in
support of the Company’s ‘1 Pier 1’ strategy. These increases were partly offset by a decrease in short-term incentives due to
the Company not achieving its profit goals under its short-term incentive plan in fiscal 2014. As a percentage of sales, selling,
general and administrative expenses were 30.0% of sales in fiscal 2014, compared to 30.1% of sales in fiscal 2013.
Depreciation and amortization for fiscal 2014 was $38.9 million, representing an increase of $7.9 million from last year’s
depreciation and amortization expense of $31.0 million. This increase was primarily the result of capital expenditures in fiscal
2014, partially offset by certain assets becoming fully depreciated and store closures.
In fiscal 2014, the Company recorded operating income of $175.5 million, or 9.9% of sales, compared to $199.0 million, or
11.7% of sales, for fiscal 2013.
Nonoperating Income and Expense
Nonoperating expense for fiscal 2014 was $0.9 million, compared to nonoperating income of $2.0 million in fiscal 2013. The
increase in expense was primarily the result of the completion of deferred gain recognition during the first quarter of fiscal 2013
which related to transactions with the Company’s former proprietary credit card provider. Additionally, in conjunction with the
adjustment for uncertain income tax positions discussed below, $2.8 million of accrued interest was reversed during the second
quarter of fiscal 2013.
Income Taxes
The Company had an effective tax rate of 38.4% and recorded an income tax provision of $67.1 million in fiscal 2014 compared
to an effective tax rate of 35.6% and an income tax provision of $71.6 million in fiscal 2013. The increase in the effective tax rate
was primarily due to the favorable impact of the reversal of a portion of the Company’s reserve for uncertain income tax positions
for which the statute of limitations expired during the second quarter of fiscal 2013. The decreased tax provision over the prior
year was due to the Company reporting lower income in fiscal 2014.
Net Income
Net income in fiscal 2014, which consisted of 52 weeks, was $107.5 million, or $1.01 per share. Net income for fiscal 2013,
which consisted of 53 weeks, was $129.4 million, or $1.20 per share, which included the impact of the Company reversing a
portion of its reserve for uncertain income tax positions during the second quarter of fiscal 2013.
22 PIER 1 IMPORTS, INC. 2014 Form 10-K