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Pier One Bids for Cost Plus

Pier 1 still "has a job to do" in convincing its shareholders and those of Cost Plus that combining the companies would be a sound transaction, Pier 1's chief acknowledged during the company's shareholder meeting late last week.

"We haven't yet got everybody to understand the value of this deal," said Alex Smith, president and ceo.

Smith said he had spoken to shareholders who professed to be against the acquisition, only to learn they had never visited a Cost Plus store.

Cost Plus's board has rejected Pier 1's unsolicited, stock-for-stock acquisition offer. Pier 1 is offering a 0.6 share of Pier 1 common stock for 1.0 share of Cost Plus common stock . Cost Plus's board deemed it "not attractive," "distracting and ill-timed." The board asserted Cost Plus has significant liquidity.

Pier 1 is arguing that its $450 million asset-based lending facility will provide plenty of liquidity to grow both retail concepts, especially as it projects cutting some $50 million out of Cost Plus's overhead. Pier 1 has reported slicing $160 million from its own operations over the past year.

Each chain has been seeking a turnaround; each posted a loss in 2007. Pier 1, with 1,034 stores, recorded a net loss of $96.0 million on sales of $1.5 billion. Cost Plus, which currently operates 296 stores in 33 states, lost $55.5 million on sales of $1.0 billion.

Smith told Pier 1 shareholders last week they need to understand "we all have skin in this." Pier 1's board members are compensated in Pier 1 stock, he said, and his own compensation is heavily provided by stock.

"We're all going into this to increase shareholder value," he said.

Since Pier 1 announced the offer June 6, its stock value has fallen from $7.10 to $5.01 as of mid-day June 20. Smith told shareholders the board had expected some fluctuation after the announcement, although not quite to the degree that took place.

The shareholder meeting took place a day after Pier 1 reported a net loss of $32.8 million, or $0.37 per share, for the first quarter ended May 31 — tightened from the loss of $56.4 million, or $0.64 per share, in the same period one year ago.

Net sales fell 13.0% to $310.0 million from $356.4 million. Comps were down 5.4%, the company said — but stressed that comps in the third month, May, were up 7.5%.

Pier 1 slashed its SG&A costs in the quarter to $109.4 million, or 35.3% of sales, from $132.1 million, or 37.1% of sales — a convincing cut of 220 basis points. The company said the main elements were a reduction of $8.2 million in marketing expense, $4.6 million in store payroll, and $6.9 million "in other general administrative costs."

This was enough to reduce the operating loss before interest and taxes (EBIT) to $30.4 million from $55.5 million in the year-ago quarter. Pier 1 has also hacked away at inventory levels, and earlier this month sold its headquarters building — which generated about $100 million in fresh cash.

Smith told analysts during the June 19 quarterly conference call that the 1,116-store chain is on pace to return to operational profitability.

"Customers like what we're doing," said Smith, pointing to two merchandising gainers in the quarter: the new impulse item department and the expanded low-ticket department.

Notably, Pier 1 cut its first-quarter marketing outlay by 40%, as it plans a major shift of advertising to the second half of 2008.

Smith asked that questions on the proposed Cost Plus acquisition be deferred, and there were none. He said that the "naught-point-six shares" offer was a move by Pier 1 "to create a stronger and more competitive company."

Although the company doesn't publicize specific forecasts, Pier 1 projects a modest net income before special charges for the full year. That's contingent, it said, "upon achieving expected results during the holiday selling period November through January."

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