Pier 1 Banking on Q3 and Q4 as Traffic, Comps Pick up

Pier 1 Imports Inc. bought inventory "less cautiously" for the third and fourth quarters than it had for the first half of this year in anticipation of ongoing improvements going forward.

"We are extremely pleased with the progress we made in quarter two, as our sales and operating results again exceeded our expectations," said Alex Smith, president and ceo, during the home furnishings specialty chain's second quarter earnings call mid-month. "Overall, we feel good about our business — what we've achieved and what is to come. And we have done so much to make our company leaner and more efficient that now is all about growing the top line."

The company, he explained, decided to ramp up its assortment for the second half of 2009 "based on our expectations of a stronger comp store sales trend in the second half of the year, and so far so good."

Less than three weeks into the third quarter, Pier 1 has already begun seeing improvements in traffic and conversion rate, resulting in positive comp store sales so far in September, he said.

"We are especially pleased that our comp store sales increase is outpacing the increase in traffic," he continued. "We are excited by customers' responses to new and repeat merchandise. Our mix in Halloween is selling well, and the initial response to Creature Comforts — our first fall event — is also really good."

By comparison, Pier 1, he said, "bought extremely cautiously for the first two quarters, and less cautiously for the fall and holiday seasons."

During the second quarter, Pier 1 also restructured the balance of its convertible debt.

"This is a big win for our company," Smith said. "We anticipate the new convertible notes will become equity in the short to medium term, at which point we will be substantially debt free and we will be able to make additional investments in both stores and infrastructure."

Also buoying hopes are improvements in Pier 1's furniture and our non-furniture businesses, "which is good news. It means we are no longer under pressure from average ticket declines. So, with very modest improvements to conversion rate and traffic, we will continue to drive positive comp store sales."

Marketing and advertising spend for the third quarter is twice that of the second and about $2 million more than last year, he said, to support the second half of the year.

"We have a strong bedroom event planned for October, and then our holiday assortments will hit the stores after that," he said.

Advertising during the second half will include direct mail, Internet, newspaper and social networking.

"We've also changed our marketing strategy for the day after Thanksgiving, and we are more aggressive than in previous years. Quarter three is the biggest marketing spend of the year to support the holiday spending season."

Pier 1 still expects to close 50 total locations by the end of the current fiscal year. The 19 units that have not yet been shut down will be closed by January and February.

For the quarter ended Aug. 29, Pier 1 reported a net loss of $16 million, or 17 cents per share, an improvement over a net loss of $30 million, or 34 cents per share, in last year's 2Q.

Sales fell 10.3% to $287 million, with a comp decline of 7.6%. Adjusting for currency conversion rates related to the Canadian stores, total comps fell 6.9%.

Merchandise margins were 52% of sales compared to 49% of sales in the same period last year owing to less markdown activity and better initial mark ups.

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