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Pier 1 stumbles in Q2; profits down 16.5%

Giving up some of the ground it gained in a long-running rally, Pier 1 Imports reported second-quarter profits fell by 16.5 percent, to $18.4 million from $22.1 million last year, squeezed by thinning margins and higher costs.

Sales at the home furnishings specialty chain moved up by 4.1 percent, to $427.8 million from $410.9 million last year. But the crucial gauge of same-store sales dropped by 4.2 percent.

Putting earnings under pressure, in addition to the weakening comps, costs climbed higher when measured as a percentage of sales by 100 basis points, or 1.0 percentage points, to 29.9 percent from 28.9 percent a year ago. Measured in absolute dollars, costs grew substantially faster than sales, climbing by 7.7 percent, to $127.7 million from $118.6 million last year, pulling $9.1 million away from the bottom line.

Adding an extra layer of pressure, average gross margin thinned by 60 basis points, or six-tenths of a percentage point, to 39.5 percent from 40.1 percent a year ago. But helped by overall sales growth, gross margin dollars still improved by 2.5 percent, to $169.1 million from $164.9 million.

The retailer pared its interest expense by 40.3 percent, to $385,000 from $645,000. But acting as an offset, miscellaneous income slipped 25.0 percent, to $524,000 from $699,000.

Marvin Girouard, chairman and ceo, said, "Traffic and transactions were down, and average ticket grew during the second quarter over the year-ago period. Although the macroeconomic environment improved slowly throughout the summer, our customer traffic counts remained below last year."

Focusing on margins, he commented, "Merchandise margins during the second quarter increased over last year, primarily due to less clearance activity vs. the year-ago period." But, he added, "Gross profit as a percentage of sales was lower during the second quarter compared to last year due to the effect of fixed store occupancy costs on negative comparable store sales for the period."

Inventories remained under control, rising slower than the rate of sales and edging up by 3.3 percent, to $369.2 million from $357.3 million. But that may have hurt the top line, said Girouard. "At the beginning of this year, due to global unrest and uncertain domestic economic conditions, we were intentionally conservative on inventories, which in hindsight cost us planned sales, he noted. "We now have accelerated orders and encouraged vendors to ship early or on time in order to build inventories and increase the level of new, exciting merchandise in stores."

Pier 1 Imports Inc.

Qtr. 8/30 (x000) 2003 2002 % change
Sales $427,831 $410,902 4.1
Oper. income (EBIT) 41,387 46,317 -10.6
Net income 18,436 22,073 -16.5
Per share (diluted) 0.20 0.23 -13.0
Average gross margin 39.5% 40.1%
SG&A expenses 29.9% 28.9%
Six months
Sales 830,543 795,331 4.4
Oper. income (EBIT) 83,806 91,977 -8.9
Net income 37,498 44,254 -15.3
Per share (diluted) 0.41 0.46 -10.9
Average gross margin 40.6% 41.4%
SG&A expenses 30.5% 29.8%


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