PIER 1 IMPORTS INC/DE - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended June 1, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number 1-7832

PIER 1 IMPORTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 75-1729843
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

301 Commerce Street, Suite 600, Fort Worth, Texas 76102
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(Address of principal executive offices, including zip code)

(817) 252-8000
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(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Shares outstanding as of July 2, 2002
- ----------------------------- -------------------------------------
Common Stock, $1.00 par value 93,478,527

PART I

Item 1. Financial Statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 1, 2002
(in thousands except per share amounts)
(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 1, 2002 AND JUNE 2, 2001
(unaudited)

The accompanying unaudited financial statements should be read in conjunction
with the Company's Form 10-K for the year ended March 2, 2002. All adjustments
that are, in the opinion of management, necessary for a fair statement of the
financial position as of June 1, 2002, and the results of operations and cash
flows for the three months ended June 1, 2002 and June 2, 2001 have been made
and consist only of normal recurring adjustments. The results of operations for
the three months ended June 1, 2002 and June 2, 2001 are not indicative of
results to be expected for the fiscal year because of, among other things,
seasonality factors in the retail business. The classifications of certain
amounts previously reported in the Company's consolidated financial statements
as of and for the three months ended June 2, 2001 have been modified to conform
with the June 1, 2002 method of presentation.

NOTE 1 - EARNINGS PER SHARE

Basic earnings per share amounts were determined by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share amounts were similarly computed, but included the effect,
when dilutive, of the Company's weighted average number of stock options
outstanding. Earnings per share for the three months ended June 1, 2002 and June
2, 2001 are calculated as follows (in thousands except per share amounts):

NOTE 2 - COMPREHENSIVE INCOME

The components of comprehensive income, net of related tax, for the three months
ended June 1, 2002 and June 2, 2001 were as follows (in thousands):

NOTE 3 - ADOPTION OF NEW ACCOUNTING STANDARDS

In the first quarter of fiscal 2003, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which supersedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible
Assets." This statement addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 also provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives will not
be amortized, but will rather be tested for impairment upon adoption and on an
annual basis thereafter. The Company is required to complete this initial
impairment test of goodwill by August 31, 2002. The adoption of SFAS No. 142
during the first quarter of fiscal 2003 did not have a material impact on the
Company's consolidated balance sheets or its statements of operations,
shareholders' equity and cash flows. The impact of the non-amortization
provisions of SFAS No. 142, if applied beginning in the first quarter of fiscal
2002, would have been net income of $12,389,000 versus reported net income of
$12,345,000 and basic and diluted earnings per share would have remained at
$0.13 per share.

In the first quarter of fiscal 2003, the Company also adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 with additional guidance on estimating cash flows
when performing a recoverability test, requires that a long-lived asset to be
disposed of, other than by sale, be classified as "held and used" until it is
disposed of and establishes more restrictive criteria to classify an asset as
"held for sale." SFAS No. 144 also supersedes APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," regarding the disposal of a segment of a business and extends the
reporting of a discontinued operation to a "component of an entity" and requires
the operating losses thereon to be recognized in the period in which they occur.
The adoption of SFAS No. 144 did not have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.

PART I

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

GENERAL

Pier 1 Imports, Inc. (the "Company") is one of North America's largest specialty
retailers of unique decorative home furnishings, gifts and related items for the
home. The Company, through certain subsidiaries, operates stores in North
America under the names "Pier 1 Imports" and "Cargokids!" ("Cargokids"). In the
United Kingdom, retail locations operate under the name "The Pier." The Company
has nearly 1,000 retail locations in 48 states, Canada, Puerto Rico, the United
Kingdom and Mexico with merchandise directly imported from over 40 countries
around the world.

RESULTS OF OPERATIONS

Net sales consisted almost entirely of sales to retail customers net of
discounts and returns, but also included wholesale sales and royalties received
from franchise stores and joint ventures, and delivery service revenues. Sales
by retail concept during the period were as follows (in thousands):

(1) Other sales consisted of wholesale sales and royalties received from
franchise stores, international joint ventures in Mexico and Puerto Rico,
and Cargokids' contract and dealer sales. Fiscal 2002 amounts also included
sales from the Company's franchise stores in Japan.

Net sales for the first quarter of fiscal 2003 were up 18.1% to $384.4 million
from $325.4 million for the same period a year ago. Same-store sales for the
first quarter of fiscal 2003 increased 9.5% over last year's comparable period.
The Company believes its marketing programs continue to drive sales and resulted
in an increase in customer traffic of approximately 8% and an increased average
ticket of 1% during the quarter when compared to the same quarter last year. The
momentum from the latter half of fiscal 2002 carried over into the first quarter
of fiscal 2003 and the Company benefited from increasing consumer confidence and
a continued favorable response to its value-oriented merchandise.

In addition, the increase in net sales was also attributable to the net increase
of 93 new North American Pier 1 stores at the end of the first quarter of fiscal
2003 compared to the end of the same quarter of fiscal 2002. This increase in
net sales was partially offset by a reduction in sales due to the Company's
discontinued operations in Japan, the termination of one franchise store
agreement, and lower contract sales at Cargokids as management shifted its focus
to concentrate on retail sales. The North American Pier 1 store count totaled
925 at the end of the first quarter compared to 832 stores a year ago. During
the first quarter, the Company opened 25 and closed ten North American Pier 1
stores, which resulted in

an increase of 2.0% in total square footage during the quarter and an increase
of 11.8% over the same quarter last year. Including Cargokids locations, the
worldwide store count across North America, Puerto Rico, the United Kingdom and
Mexico totaled 989 as of June 1, 2002.

A summary reconciliation of the Company's stores open at the beginning of fiscal
2003 to the number open at the end of the first quarter follows (openings and
closings include relocated stores):

(1) International stores were located in Puerto Rico, the United Kingdom and
Mexico.

Net sales on the Company's proprietary credit card totaled $100.9 million for
the first three months of fiscal 2003, an increase of $4.8 million, or 5.0%,
over proprietary credit card sales of $96.1 million for the same period last
fiscal year. Proprietary credit card sales accounted for 28.3% of total U.S.
store sales in the first quarter of fiscal 2003 versus 32.0% of sales in the
year earlier period. Although proprietary credit card sales declined as a
percentage of total U.S. store sales, the proprietary cardholders spent an
average of $166 per transaction during the quarter, an increase of 2.7% when
compared to $162 per transaction during the same period last year. The Company
continues to increase total sales on its proprietary credit card by opening new
accounts and developing customer loyalty through marketing promotions targeted
to cardholders, including deferred payment options on larger purchases.

Gross profit, after related buying and store occupancy costs, expressed as a
percentage of sales, improved 120 basis points to 42.7% for the first quarter of
fiscal 2003. As a percentage of sales, merchandise margins for the quarter
improved 65 basis points over last year's first quarter. Although the Company's
promotional calendar during the first quarter of fiscal 2003 was similar to the
same quarter last year, a higher percentage of sales was generated from
regularly priced merchandise than from sale merchandise. Additionally, store
occupancy costs as a percentage of sales improved 55 basis points for the
quarter to 13.3% of sales as a result of leveraging relatively fixed rental
costs over a higher sales base.

Selling, general and administrative expenses, including marketing, were 30.8% of
sales for the first quarter of fiscal 2003, a 130 basis point decrease from last
year's first quarter expenses of 32.1% of sales. In total dollars, expenses for
the quarter increased $13.8 million to $118.3 million from $104.5 million for
the same quarter last year. Expenses that normally increase proportionately with
sales and number of stores, such as store payroll, equipment rental, supplies
and marketing expenses, were $82.5 million, an increase of $9.5 million over the
same quarter last year. These variable expenses were well controlled and
declined nearly 100 basis points to 21.5% of sales. Store payroll including
bonus increased $10.2 million, or 70 basis points as a percentage of sales,
which was largely the result of an increase in store bonuses, which are awarded
based on sales gains over the prior year. This increase in store payroll was
more than offset by the reduction and leveraging of marketing and leveraging of
equipment rental and supplies expenses. Marketing expense was $21.8 million, or
5.7% of sales during the first quarter of fiscal 2003, compared to $22.6
million, or 6.9% of sales for the same quarter last year when the new television
campaign featuring Kirstie Alley was launched. Although the timing of the
Company's marketing expenditures fluctuates between fiscal quarters, the Company
anticipates total expenditures for the year to be comparable to last year's
levels as a percentage of sales at

approximately 4.5% of sales. All other selling, general and administrative
expenses increased $4.3 million over last year to $35.8 million for the first
quarter, but declined approximately 35 basis points as a percentage of sales.
Non-store bonuses, which are awarded based on Company profitability, increased
$2.6 million and general liability and workers compensation insurance increased
$1.5 million. All other non-variable expenses were leveraged as a percentage of
sales during the quarter when compared to the same quarter last year.

Operating income increased 77.1% to $34.9 million for the first quarter of
fiscal 2003 from $19.7 million for the first quarter of fiscal 2002. For the
first three months of fiscal 2003, operating income was 9.1% of sales compared
to 6.1% a year ago.

The Company's effective income tax rate for fiscal 2003 is estimated at 37%,
consistent with fiscal 2002.

Net income for the first quarter of fiscal 2003 was $22.2 million, representing
5.8% of sales or $.23 per diluted share, compared to net income of $12.3
million, representing 3.8% of sales or $.13 per diluted share, for the first
quarter of fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

The Company ended the first quarter of fiscal 2003 with $195.7 million of cash
compared to $40.3 million a year ago. Net income, adjusted for non-cash and
non-operating related items, was $36.8 million and served as the Company's
primary source of operating cash for the three months ended June 1, 2002.
Operating activities in the first quarter of fiscal 2003 used $10.6 million of
cash versus providing $20.0 million during the same period last year. The change
in cash flow was primarily the result of an increase of $28.0 million in
inventories during the first three months of fiscal 2003 compared to a decline
in inventory levels last year of $5.9 million in the comparable quarter.
Inventory increased in the current year's first quarter as a result of 15 net
new Pier 1 stores since the end of fiscal 2002 along with 93 net new Pier 1
stores from a year ago. The Company's ability to better manage its inventory
levels resulted in comparable average inventory at the store level and a
reduction at the distribution centers when compared to last year's inventory
levels. The Company believes its current inventory levels are positioned to
accommodate new store growth projections and comparable store gains projected
for the second and third quarters of this fiscal year. The Company also used
$10.1 million in operating cash for reductions in accounts payable and accrued
liabilities primarily resulting from estimated tax payments made in the first
quarter.

During the first three months of the fiscal year, the Company spent a net of
$21.5 million in investing activities as shown on the consolidated statement of
cash flows. Capital expenditures were $25.6 million and consisted primarily of
land purchases for the replacement of one of the Company's current distribution
centers and for the Company's future headquarters along with new and existing
store development and investments in information systems. Through the first
quarter of fiscal 2003, the Company's beneficial interest in securitized
receivables decreased $3.7 million.

Financing activities for the first three months of fiscal 2003 used a net $7.8
million of the Company's cash resources. During the quarter, the Board of
Directors authorized share repurchases of up to $150 million of the Company's
common stock. This authorization replaced the previously authorized 2.8 million
shares that were remaining for repurchase at the end of fiscal 2002. During the
first quarter of fiscal 2003, the Company repurchased 581,500 shares of its
common stock for $12.7 million including fees under this newly approved plan and
as of July 2, 2002, the Company had repurchased an additional 290,000 shares for
$6.2 million including fees leaving $131.1 million remaining authorized for
repurchase. Dividend payments totaled $4.7 million for the first quarter, and
other financing activities, primarily the exercise of stock options, provided
cash of $9.6 million.

At the end of the first quarter, the Company's minimum operating lease
commitments remaining for fiscal 2003 were $125.6 million. The present value of
total existing minimum operating lease commitments discounted at 10% was $757.6
million at the end of the first quarter of fiscal 2003.

Working capital requirements are expected to continue to be funded through cash
flow from operations, bank lines of credit and sales of proprietary credit card
receivables. The Company's bank facilities consist of a $125 million revolving
credit facility, which expires November 2003, all of which was available at the
end of the first quarter of fiscal 2003. Additionally, the Company has other
long-term and short-term bank facilities used principally for the issuance of
letters of credit totaling $153.8 million, of which $34.7 million was available
at June 1, 2002. The Company's current ratio was 3.1 to 1 at the end of the
first quarter of fiscal 2003 compared to 2.9 to 1 at the end of fiscal year
2002.

In June 2002, the Company declared a cash dividend of $.05 per share payable on
August 21, 2002 to shareholders of record on August 7, 2002. The Company
currently expects to continue to pay cash dividends in the future but to retain
most of its future earnings for expansion of the Company's business.

Management believes the funds provided from operations, available lines of
credit and sales of the Company's proprietary credit card receivables will be
sufficient to meet the Company's expected cash requirements for the next fiscal
year.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this quarterly report, except for historical
information contained herein, may constitute "forward-looking statements" that
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements. The
Company may also make forward-looking statements in other reports filed with the
Securities and Exchange Commission and in material delivered to the Company's
shareholders. Forward-looking statements provide current expectations of future
events based on certain assumptions. These statements encompass information that
does not directly relate to any historical or current fact and often may be
identified with words such as "anticipates," "believes," "expects," "estimates,"
"intends," "plans," "projects" and other similar expressions. Management's
expectations and assumptions regarding planned store openings, financing of
Company obligations from operations and other future results are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements. Risks and uncertainties that may affect Company
operations and performance include, among others, terrorist attacks and other
acts of war, labor strikes, weather conditions that may affect sales, the
general strength of the economy and levels of consumer spending, the
availability of new sites for expansion along with sufficient labor to
facilitate growth, the strength of new home construction and sales of existing
homes, the ability of the Company to import merchandise from foreign countries
without significantly restrictive tariffs, duties or quotas and the ability of
the Company to ship and deliver items from foreign countries to its U.S.
distribution centers at reasonable rates and in a timely fashion. The foregoing
risks and uncertainties are in addition to others discussed elsewhere in this
quarterly report. The Company assumes no obligation to update or otherwise
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied will not be realized.
Additional information concerning these risks and uncertainties is contained in
the Company's Annual Report on Form 10-K for the year ended March 2, 2002, as
filed with the Securities and Exchange Commission.

IMPACT OF INFLATION

Inflation has not had a significant impact on the operations of the Company.

PART II

Item 4. Submission of Matters to a Vote of Security Holders.

The Annual Meeting of Shareholders of the Company was held June 27, 2002 for the
purpose of electing seven (7) Directors to hold office until the next Annual
Meeting of Shareholders, to vote on the proposed amendment to the Company's 1999
Stock Plan, and to consider and vote upon the adoption of the Company's Senior
Management Bonus Plan as amended. The result of the election follows:

Director Election:

Proposed amendment to the Pier 1 Imports, Inc. 1999 Stock Plan:

Proposed adoption of Pier 1 Imports, Inc. Senior Management Bonus Plan:

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits See Exhibit Index.

(b) Reports on Form 8-K None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PIER 1 IMPORTS, INC. (Registrant)

Date: July 11, 2002 By: /s/ Marvin J. Girouard
---------------------------------------------
Marvin J. Girouard, Chairman of the Board
and Chief Executive Officer

Date: July 11, 2002 By: /s/ Charles H. Turner
---------------------------------------------
Charles H. Turner, Executive Vice President,
Chief Financial Officer and Treasurer

Date: July 11, 2002 By: /s/ Susan E. Barley
---------------------------------------------
Susan E. Barley, Principal Accounting Officer

EXHIBIT INDEX