Pier 1 Bullet Harder to Bite

Don Hogsett, September 18, 2006

Hit by a fistful of one-time charges, and with sales sliding, margins thinning and costs and interest expense both soaring higher, Pier 1 Imports danced closer to the edge of the tar pit, recording a second-quarter loss of $73.1 million, more than seven times the size of a year-ago loss of $10.2 million.

Unable to find the merchandise mix or presentation to draw consumers through its doors, sales remained in freefall, falling 12.5% to $370.7 million, an unnerving shortfall of $53.0 million from a year-ago level of $423.7 million. As bad as that sounds, it gets even worse, as the acid-test measure of same-store sales dropped by 14.8% for the quarter, worsening steadily through the first six months of the year. By contrast, six-month comps fell at a slower pace of 10.9%.

Acting as a drag on the bottom line, the retailer recorded a total of $37.7 million in mostly non-cash, one-time charges covering a number of issues, including the valuation of deferred tax assets; the settlement of labor litigation; store-level asset impairment; the cost of relocating Pier 1 Kid's headquarters and warehousing; and the cost of stock-based compensation.

But even pulling out all the one-time charges, the retailer still lost $29.3 million from continuing operations, almost 5 times the size of the prior-year loss of $6.4 million.

Virtually every key operating metric soured during the second quarter. In addition to the sliding sales, average gross margin thinned by 340 basis points, or 3.4 percentage points, to 28.5% from 31.9% a year ago. At the same time, costs rocketed higher when measured as a percentage of dwindling sales, up 940 basis points, or 9.4 percentage points, to 41.3% of sales from 31.9% last year. Even as sales plummeted by 12.5%, costs measured in absolute dollars jumped up by 13.5%, to $153.1 million from $135.0 million during the same period a year ago, costing the company $18.2 million more.

The inventory picture was mixed. Stockpiles looked controlled, compared with year-ago levels, declining by 14.9% to $404.1 million from $474.9 million in August 2005. But over the last six months, as sales progressively weakened, stockpiles actually got out of whack once again, jumping up by 9.5% from $369.0 million in February.

Pier 1 imports inc.

Qtr. 8/26 (x000) 2006 2005 % Change
Sales $370,698 $423,675 -12.5
Oper. income (EBIT) (61,252) (14,002) --
Net income (73,059) (10,185) --
Per share (diluted) (0.84) (0.12) --
Average gross margin 28.5% 31.9% --
SG&A expenses 41.3% 31.9% --

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