Pier 1 2015 Annual Report Download - page 29

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
58.0% of sales, compared to $1.048 billion, or 59.2%, 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. Beginning in the third quarter of fiscal 2015 the Company refined its promotional strategy, utilizing a
more targeted approach to promotions, with reduced frequency and depth of all-Company coupons and a more balanced mix
between full price and promotional selling. Store occupancy costs during fiscal 2015 were leveraged at 16.0% of sales,
compared to 16.3% during fiscal 2014.
Operating Expenses and Depreciation
Selling, general and administrative expenses were $576.1 million in fiscal 2015, compared to $531.2 million in fiscal 2014, an
increase of $44.9 million. As a percentage of sales, selling, general and administrative expenses were 30.9% of sales in fiscal
2015, compared to 30.0% in fiscal 2014.
Selling, general and administrative expenses for fiscal years 2015 and 2014 included charges summarized in the table below (in
millions):
52 Weeks Ended
February 28, 2015 March 1, 2014
Expense % Sales Expense % Sales
Compensation for operations $270.4 14.5% $256.4 14.5%
Operational expenses 66.8 3.6% 58.5 3.3%
Marketing 101.0 5.4% 90.2 5.1%
Other selling, general and administrative 137.9 7.4% 126.2 7.1%
Total selling, general and administrative $576.1 30.9% $531.2 30.0%
The year-over-year increase both in dollars and as a percentage of sales was primarily attributable to planned increases in
marketing expenses and planned growth in headcount and associated costs to expand the Company’s organizational capabilities
in support of its ‘1 Pier 1’ strategy.
Depreciation and amortization for fiscal 2015 was $46.3 million compared to $38.9 million in fiscal 2014. This increase was
primarily the result of additional capital expenditures in recent fiscal years coupled with incremental expenditures deployed
towards technology, which typically depreciate over a shorter time period compared to other depreciable assets, and store
closures.
In fiscal 2015, the Company recorded operating income of $127.3 million, or 6.8% of sales, compared to $175.5 million, or
9.9% of sales, for fiscal 2014.
Nonoperating Income and Expense
Nonoperating expense for fiscal 2015 was $6.9 million, compared to $0.9 million in fiscal 2014. This increase was primarily the
result of interest on borrowings under the Term Loan Facility (entered into in April 2014) and related expenses of approximately
$8.4 million, partially offset by gains on the settlement of life insurance policies.
Income Taxes
The Company had an effective tax rate of 37.6% and recorded income tax expense of $45.2 million in fiscal 2015 compared to
an effective tax rate of 38.4% and income tax expense of $67.1 million in fiscal 2014. The decrease in the effective tax rate was
primarily due to certain non-recurring favorable permanent differences and other discrete items occurring during the fiscal year.
The decrease in income tax expense compared to the prior year was primarily due to the Company’s lower income before
income taxes in fiscal 2015.
Net Income and EBITDA
Net income in 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. Fiscal year 2015 EBITDA (earnings before
interest, taxes, depreciation, and amortization) was $176.3 million compared to $215.4 million in fiscal 2014. See “Reconciliation
of Non-GAAP Financial Measures” below.
PIER 1 IMPORTS, INC. 2015 Form 10-K 23