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Pier 1 Margins Thin

Still leaking red ink as its sales slip and margins wither, Pier 1 Imports recorded a sharply worsening first-quarter loss of $56.4 million, more than twice the size of a year-ago deficit of $23.2 million.

Sales at the home furnishings outlet continued to fall, but at a slower pace than in the recent past. Sales declined by 5.2%, to $356.4 million from $376.1 million. Same-store sales fell by 5.4%, marking an improvement over the big double-digit declines the retailer has recorded over the past two years.

Taking the biggest bite out of the bottom line, average gross margin was eroded by 930 basis points, or 9.3 percentage points, to 24.5% from 33.8% during the same period a year ago. Squeezing margins was the aggressive liquidation of "modern craftsmen" merchandise, the company said.

Margin rot more than offset deep cuts in costs, which continue to drop cash to the bottom line. Measured as a percentage of sales, costs were whittled down by 210 basis points, or 2.1 percentage points, to 37.1% from 39.2%. Measured in real dollars, costs were cut 10.5%, to $132.1 million from $147.6 million, generating a cash savings of $15.5 million.

The company said it saved about $9 million in marketing expenses, another $6 million in store payroll, and $4 million more in other costs. Those savings were partially offset by $3.5 million in severance and outplacement costs tied to workforce reduction.

Alex Smith, ceo, said that without that $3.5 million in one-time costs and the margin malaise from liquidation of otherwise un-sellable goods, "the pre-tax loss for the first quarter would have been more in line with the pre-tax loss for the year-ago period."

In another prop to the bottom line, inventory was reduced by 6.5%, to $334.1 million from $357.3 million last year, saving the company another $23.1 million. But taking a modest bite out of the bottom line, interest expense crept up by 14.7%, to $4.0 million from $3.5 million, costing the retailer an extra $506,000.

Even with all its merchandising and financial problems over the past two years, the operation still remains something of a cash cow, just not as fat as in the past. Even after this quarter's deep $56.4 million loss, the company was sitting on $152.0 million in cash. But that was off by 35.4% from a hoard of $235.2 million in last year's first quarter.

PIER 1 IMPORTS INC.

Qtr. 6/2 (x000) 2007 2006 % change
(loss)
a. First quarter results include $2.9 million in interest and investment income, up 0.7% from the same period a year ago; miscellaneous income of $248,000; and an income tax provision of $97,000, compared with a tax benefit of $11.7 million during the prior-year quarter.
Sales $356,375 $376,092 -5.2
Oper. income (EBIT) (55,504) (33,955)
Net income (56,378)a (23,172)a
Per share (diluted) (0.64) (0.27)
Average gross margin 24.5% 33.8%
SG&A expenses 37.1% 39.2%


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