Pier 1 2015 Annual Report Download - page 26

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
MANAGEMENT OVERVIEW
Introduction
Pier 1 Imports, Inc. is the original global importer of home décor and furniture. The Company directly imports merchandise from
many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products
in its stores and through the Company’s website, pier1.com. As of February 28, 2015, the Company operated 1,065 stores in
the United States and Canada. Fiscal 2015 and 2014 consisted of 52-week years and fiscal 2013 was a 53-week year. The
following discussion and analysis of financial condition, results of operations and liquidity and capital resources should be read in
conjunction with the accompanying audited Consolidated Financial Statements and notes thereto, which can be found in Item 8
of this report.
Fiscal 2015 capped a multi-year period of heavy investment for the Company in support of its transformation to an omni-channel
retailer. Over the past several years, the Company built an operating and growth platform with seamless integration across stores,
desktop and mobile devices. Through the ‘1 Pier 1’ strategy, the Company expects to maximize selling opportunities, extend
brand reach and capture greater market share. The Company’s focus is to ensure that customers have an extraordinary
experience, regardless of how they shop. The ‘1 Pier 1’ strategy has required investment in systems, distribution and fulfillment
centers, call centers, distribution networks and store development including new in-store selling tools, such as swatch stations,
computers and tablets. To support the growth, the Company has built greater flexibility and capacity into its distribution networks
including in-store pick-up, parcel and in-home delivery. The ‘1 Pier 1’ strategy also includes returning excess capital to
shareholders through share repurchases and quarterly cash dividends.
During fiscal 2015, e-Commerce sales accounted for 11.0% of net sales compared to 4.0% in the previous fiscal year.
Approximately 60% of the Company’s e-Commerce sales touched the retail stores, either by originating on in-store PCs and
tablets, or through in-store pick-up capability. In fiscal 2015, e-Commerce sales were the primary driver of total sales growth. As
a result, the Company has identified a need to optimize its real estate portfolio, targeting specific stores, in order to improve
overall profitability. The Company has identified approximately 100 stores it plans to close over the next three fiscal years,
primarily through natural lease expirations and relocations. The Company is planning a more modest new store opening and
relocation program, and by the end of fiscal 2018 expects to operate just under 1,000 retail stores.
Fiscal 2015 net sales increased 5.3% from the prior year and company comparable sales increased 4.7%. The increases were
primarily attributable to increases in brand traffic, store and online conversion, and average ticket compared to last year.
Management believes that sales will continue to improve as a result of its unique and special merchandise assortments, superior
omni-channel experience and improvements to its marketing strategy.
Gross profit for fiscal 2015 was $749.7 million, or 40.2% of sales compared to $745.6 million, or 42.1% of sales in the same
period last year, a decline of 190 basis points. Merchandise margin (the result of adding back delivery, fulfillment and store
occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $1.081 billion for fiscal 2015, or
58.0% of sales, compared to $1.048 billion, or 59.2% of sales for fiscal 2014. The decline in merchandise margin as a
percentage of sales was primarily attributable to increased promotional activity in the first half of fiscal 2015 and incremental
unplanned supply chain expenses during the fourth quarter of fiscal 2015 primarily related to the distribution centers, which
resulted from higher than normal inventory levels. Store occupancy costs during fiscal 2015 were leveraged at 16.0% of sales,
compared to 16.3% during fiscal 2014.
Operating income for fiscal 2015 was 6.8% of sales, compared to 9.9% in fiscal 2014. Fiscal year 2015 EBITDA (earnings before
interest, taxes, depreciation, and amortization) was $176.3 million compared to $215.4 million in fiscal 2014. Net income for
fiscal 2015 was $75.2 million, or $0.82 per diluted share, compared to $107.5 million, or $1.01 per diluted share for fiscal 2014.
In fiscal 2015, non-GAAP adjusted net income, excluding the after-tax effect of retirement related expenses for the Company’s
former chief financial officer, was $77.2 million, or $0.84 per diluted share. See “Reconciliation of Non-GAAP Financial Measures”
for more information.
Capital expenditures for fiscal 2015 totaled $81.9 million, compared to $80.3 in fiscal 2014, which were deployed toward the
opening of 30 new stores, new merchandise fixtures for existing stores, other leasehold improvements, and technology and
20 PIER 1 IMPORTS, INC. 2015 Form 10-K