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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 August 30, 2003
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.
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(Exact name of registrant as specified in its charter)
Delaware 75-1729843
- ------------------------------- --------------------------
(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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 September 29, 2003
- ------------------------------- -------------------------------------------
Common Stock, $1.00 par value 88,932,518
PART I
Item 1. Financial Statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
Aug. 30, Aug. 31, Aug. 30, Aug. 31,
2003 2002 2003 2002
----------- ----------- ------------ ------------
Net sales $ 427,831 $ 410,902 $ 830,543 $ 795,331
Operating costs and expenses:
Cost of sales (including buying and store
occupancy costs) 258,719 245,973 493,234 466,409
Selling, general and administrative expenses 127,725 118,612 253,503 236,945
Depreciation and amortization 12,263 11,329 24,424 22,060
----------- ----------- ------------ ------------
398,707 375,914 771,161 725,414
----------- ----------- ------------ ------------
Operating income 29,124 34,988 59,382 69,917
Nonoperating (income) and expenses:
Interest and investment income (524) (699) (1,161) (1,536)
Interest expense 385 645 1,022 1,203
----------- ----------- ------------ ------------
(139) (54) (139) (333)
----------- ----------- ------------ ------------
Income before income taxes 29,263 35,042 59,521 70,250
Provision for income taxes 10,827 12,969 22,023 25,996
----------- ----------- ------------ ------------
Net income $ 18,436 $ 22,073 $ 37,498 $ 44,254
=========== =========== ============ ============
Earnings per share:
Basic $ .21 $ .24 $ .42 $ .47
=========== =========== ============ ============
Diluted $ .20 $ .23 $ .41 $ .46
=========== =========== ============ ============
Dividends declared per share: $ .08 $ .05 $ .14 $ .10
=========== =========== ============ ============
Average shares outstanding during period:
Basic 89,410 93,032 89,778 93,370
=========== =========== ============ ============
Diluted 91,622 95,471 91,910 96,042
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
August 30, March 1, August 31,
2003 2003 2002
------------- ------------ -------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash, including temporary investments of $175,685,
$225,882 and $137,919, respectively $ 185,888 $ 242,114 $ 149,513
Beneficial interest in securitized receivables 41,856 40,538 40,831
Other accounts receivable, net 10,939 11,420 12,494
Inventories 369,215 333,350 357,252
Prepaid expenses and other current assets 44,129 36,179 40,482
------------- ------------ -------------
Total current assets 652,027 663,601 600,572
Properties, net 245,118 254,503 233,497
Other noncurrent assets 50,373 49,383 47,144
------------- ------------ -------------
$ 947,518 $ 967,487 $ 881,213
============= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and notes payable $ 6,000 $ 393 $ 388
Accounts payable 94,434 76,742 90,346
Gift cards, gift certificates and merchandise credits
outstanding 39,273 37,924 31,061
Accrued income taxes payable 1,446 25,798 12,263
Other accrued liabilities 91,936 102,732 76,920
------------- ------------ -------------
Total current liabilities 233,089 243,589 210,978
Long-term debt 19,000 25,000 25,000
Other noncurrent liabilities 60,134 54,962 47,073
Shareholders' equity:
Common stock, $1.00 par, 500,000,000 shares
authorized, 100,779,000 issued 100,779 100,779 100,779
Paid-in capital 144,456 144,247 144,052
Retained earnings 564,728 539,776 464,808
Cumulative other comprehensive loss (1,222) (2,210) (2,797)
Less -- 11,806,000, 10,045,000 and 8,426,000
common shares in treasury, at cost, respectively (173,446) (138,656) (108,680)
------------- ------------ -------------
635,295 643,936 598,162
------------- ------------ -------------
$ 947,518 $ 967,487 $ 881,213
============= ============ =============
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
August 30, August 31,
2003 2002
------------- ------------
Cash flow from operating activities:
Net income $ 37,498 $ 44,254
Adjustments to reconcile to net cash provided
by (used in) operating activities:
Depreciation and amortization 30,830 26,642
Loss on disposal of fixed assets 417 448
Deferred compensation 4,453 2,967
Tax benefit from options exercised by employees 1,312 4,498
Other 2,395 559
Changes in cash from:
Inventories (35,865) (81,819)
Other accounts receivable, prepaid expenses and
other current assets (4,841) (6,126)
Accounts payable and accrued expenses 7,545 21,917
Accrued income taxes payable (24,352) (17,475)
Other noncurrent assets (1,014) (542)
Other noncurrent liabilities (500) (500)
------------- ------------
Net cash provided by (used in) operating activities 17,878 (5,177)
------------- ------------
Cash flow from investing activities:
Capital expenditures (46,387) (46,598)
Proceeds from disposition of properties 23,506 629
Beneficial interest in securitized receivables (1,918) 3,789
------------- ------------
Net cash used in investing activities (24,799) (42,180)
------------- ------------
Cash flow from financing activities:
Cash dividends (12,546) (9,356)
Purchases of treasury stock (41,554) (40,161)
Proceeds from stock options exercised,
stock purchase plan and other, net 5,185 11,142
Repayments of notes payable (390) (364)
------------- ------------
Net cash used in financing activities (49,305) (38,739)
------------- ------------
Change in cash and cash equivalents (56,226) (86,096)
Cash and cash equivalents at beginning of period 242,114 235,609
------------- ------------
Cash and cash equivalents at end of period $ 185,888 $ 149,513
============= ============
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 30, 2003
(in thousands except per share amounts)
(unaudited)
Cumulative
Common Stock Other Total
Outstanding Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
----------- --------- --------- -------- ------------- --------- -------------
Balance March 1, 2003 90,685 $ 100,779 $ 144,247 $539,776 $ (2,210) $(138,656) $ 643,936
Comprehensive income:
Net income - - - 37,498 - - 37,498
Other comprehensive
income, net of tax:
Currency translation
adjustments - - - - 988 - 988
----------
Comprehensive income 38,486
----------
Purchases of treasury stock (2,238) - - - - (41,554) (41,554)
Exercise of stock options, stock
purchase plan and other 447 - 209 - - 6,764 6,973
Cash dividends
($.14 per share) - - - (12,546) - - (12,546)
------ --------- --------- -------- ---------- ---------- ----------
Balance August 30, 2003 88,894 $ 100,779 $ 144,456 $564,728 $ (1,222) $ (173,446) $ 635,295
====== ========= ========= ======== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 30, 2003
AND AUGUST 31, 2002
(unaudited)
The accompanying unaudited financial statements should be read in conjunction
with the Form 10-K for the year ended March 1, 2003. All adjustments that are,
in the opinion of management, necessary for a fair statement of the financial
position as of August 30, 2003, and the results of operations and cash flows for
the three and six months ended August 30, 2003 and August 31, 2002 have been
made and consist only of normal recurring adjustments. The results of operations
for the three and six months ended August 30, 2003 and August 31, 2002 are not
indicative of results to be expected for the fiscal year because of, among other
things, seasonality factors in the retail business. The classification of
certain amounts previously reported in the consolidated balance sheet as of
August 31, 2002, and in the consolidated statement of cash flows for the six
months then ended have been modified to conform to the August 30, 2003 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. Stock options for which the exercise price was greater than the
average market price of common shares were not included in the computation of
diluted earnings per share as the effect would be antidilutive. As of August 30,
2003 and August 31, 2002, there were stock options outstanding of 2,767,500 and
305,550, respectively, with exercise prices greater than the average market
price of the Company's common shares. Earnings per share for the three and six
months ended August 30, 2003 and August 31, 2002 are calculated as follows (in
thousands except per share amounts):
Three Months Ended Six Months Ended
Aug. 30, Aug. 31, Aug. 30, Aug. 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (Basic and Diluted) $ 18,436 $ 22,073 $ 37,498 $ 44,254
========== ========== ========== ==========
Average shares outstanding during period:
Basic 89,410 93,032 89,778 93,370
Plus assumed exercise of stock options 2,212 2,439 2,132 2,672
---------- ---------- ---------- ----------
Diluted 91,622 95,471 91,910 96,042
========== ========== ========== ==========
Earnings per share:
Basic $ .21 $ .24 $ .42 $ .47
========== ========== ========== ==========
Diluted $ .20 $ .23 $ .41 $ .46
========== ========== ========== ==========
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three and
six months ended August 30, 2003 and August 31, 2002 are as follows (in
thousands):
Three Months Ended Six Months Ended
Aug. 30, Aug. 31, Aug. 30, Aug. 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $ 18,436 $ 22,073 $ 37,498 $ 44,254
Currency translation adjustments (944) 686 988 1,905
---------- ---------- ---------- ----------
Comprehensive income $ 17,492 $ 22,759 $ 38,486 $ 46,159
========== ========== ========== ==========
NOTE 3 - STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
stock option exercise prices equal to the fair market value of the shares on the
date of grant. The Company accounts for stock option grants under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation (in thousands except per
share amounts):
Three Months Ended Six Months Ended
Aug. 30, Aug. 31, Aug. 30, Aug. 31,
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net income, as reported $ 18,436 $ 22,073 $ 37,498 $ 44,254
Less total stock-based employee
compensation expense determined
under fair value-based method,
net of related tax effects (1,902) (1,301) (3,836) (2,456)
---------- ---------- ----------- -----------
Pro forma net income $ 16,534 $ 20,772 $ 33,662 $ 41,798
========== ========== =========== ===========
Pro forma earnings per share:
Basic $ .18 $ .22 $ .37 $ .45
========== ========== =========== ===========
Diluted $ .18 $ .22 $ .37 $ .44
========== ========== =========== ===========
NOTE 4 - NEW CREDIT FACILITY
In August 2003, the Company replaced its five-year $125 million revolving credit
facility with a comparable three-year $125 million revolving credit facility.
The new agreement contains substantially similar terms as the previous agreement
and has certain restrictive covenants requiring, among other things, the
maintenance of certain financial ratios (including debt to net cash flow and
fixed charge coverage) and minimum tangible net worth. The new credit facility
bears a floating interest rate (currently LIBOR plus 1.0%) based on the
Company's corporate debt rating, and as of the end of the second quarter of
fiscal 2004, there were no borrowings under the credit agreement.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. SFAS 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133, clarifies when a derivative contains a financing component, amends the
definition of an "underlying" to conform it to the language used in FASB
Interpretation No. 45, "Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" and amends
certain other existing pronouncements. The Company has only limited involvement
with derivative financial instruments, does not use them for trading purposes
and is not a party to any leveraged derivatives. However, the Company
periodically enters into forward exchange contracts to hedge some of its foreign
currency exposure. The Company also uses contracts to hedge its exposure
associated with the repatriation of funds from its Canadian operations. For
financial accounting purposes, the Company does not designate such contracts as
hedges. The Company does not anticipate that the adoption of SFAS No. 149 will
have an impact on its consolidated balance sheets or 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". In the United Kingdom,
retail locations operate under the name "The Pier." The Company has over 1,100
retail locations in 50 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):
Three Months Ended Six Months Ended
August 30, August 31, August 30, August 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Pier 1 Imports stores $ 407,595 $ 393,679 $ 792,178 $ 763,243
The Pier 11,919 10,805 23,118 19,800
Cargokids stores 4,553 2,795 8,434 5,549
Internet 2,024 1,459 3,739 2,368
Other (1) 1,740 2,164 3,074 4,371
----------- --------- --------- ---------
Net Sales $ 427,831 $ 410,902 $ 830,543 $ 795,331
=========== ========= ========= =========
(1) Other sales consisted of wholesale sales and royalties received from
franchise stores and from Sears de Mexico S.A., and Cargokids' contract
sales. As of August 30, 2003, Cargokids no longer sells merchandise under
wholesale contracts.
The Company recorded net sales of $427.8 million for the second quarter of
fiscal 2004, an increase of $16.9 million or 4.1% over last year's second
quarter net sales of $410.9 million. Net sales for the first six months of
fiscal 2004 improved 4.4% to $830.5 million from $795.3 million for the same
period a year ago. Comparable store sales decreased 4.2% and 3.8% for the
quarter and year-to-date periods, respectively. The Company believes that the
declines in comparable store sales were the result of a variety of factors,
including difficult comparisons to last year's comparable store sales gains for
the quarter and year-to-date periods of 5.8% and 7.4%, respectively. Although
the Company had increases in average ticket during both periods, decreased
traffic and conversion rates throughout the first half of fiscal 2004 also
contributed to the decline in comparable store sales. Concerns during the first
half of the fiscal year regarding uncertain domestic economic conditions and
continuing global unrest led the Company to execute a conservative approach with
regards to inventory planning, focusing on replenishment of existing merchandise
rather than adding new and innovative merchandise in hopes of limiting excess
capacity and the risk of potential markdowns. The Company believes that this
conservative inventory approach was a factor that led to decreased sales during
the quarter, and consequently, the Company has now accelerated the flow of new
merchandise to its stores. For the first six months of fiscal 2004, the
continued decline in consumer confidence along
with the factors discussed above for the second quarter, the high comparable
store sales during the same period last year and the decline in customer traffic
and conversion rates as discussed above, contributed to the decline in
year-to-date comparable store sales.
During the quarter, the Company continued to implement its long-term growth
strategy by opening 34 and closing 13 Pier 1 stores and opening six and closing
one Cargokids stores, which resulted in an overall increase of 2.8% in total
retail square footage during the quarter and an increase of 10.1% over the
second quarter of fiscal year 2003. During the first six months of fiscal 2004,
the Company opened 46 and closed 18 North American Pier 1 stores and opened nine
and closed two Cargokids stores, which resulted in an increase of 3.6% in total
retail square footage from the beginning of fiscal 2004. The North American Pier
1 store count totaled 1,028 at the end of the second quarter compared to 949
stores a year ago. Including Cargokids and all other worldwide locations, the
Company's store count totaled 1,109 at the end of the second quarter of fiscal
2004.
A summary reconciliation of the Company's stores open at the beginning of fiscal
2004 to the number open at the end of the second quarter follows (openings and
closings include relocated stores):
Pier 1 North
American International (1) Cargokids Total
------------- ----------------- --------- --------
Open at March 1, 2003 1,000 49 25 1,074
Openings 46 - 9 55
Closings (18) - (2) (20)
----- -- -- -----
Open at August 30, 2003 1,028 49 32 1,109
===== == == =====
(1) International stores were located in Puerto Rico, the United Kingdom
and Mexico.
Net sales on the Company's proprietary credit card during the second quarter of
fiscal 2004 were $107.3 million, flat compared to $107.4 million during last
year's second quarter. Year-to-date proprietary credit card sales totaled $214.0
million, an increase of 2.7% over the same period last year. Second quarter
proprietary credit card sales comprised 27.6% of U.S. store sales versus 28.4%
in the same period last fiscal year, while year-to-date proprietary credit card
sales have remained flat when compared to the same period last year at 28.3% of
total U.S. store sales. For the first six months of fiscal 2004, average ticket
on the proprietary credit card was $166 compared to $163 for the same period
last year. Although the proprietary credit card generates modest income, it
primarily serves as a tool for marketing and communication to the Company's most
loyal customers.
Gross profit after related buying and store occupancy costs, expressed as a
percentage of sales, decreased 60 basis points to 39.5% for the second quarter
of fiscal 2004 and decreased nearly 80 basis points to 40.6% for the first half
of fiscal 2004. As a percentage of sales, merchandise margins increased 50 basis
points for both the second quarter and the six-month period ended August 30,
2003 over the comparable periods a year ago. This increase was primarily the
result of a decrease in clearance activity during the quarter compared to the
same period last year. Year-to-date merchandise margins also benefited from
slightly higher initial markups. The Company believes that margin rates for the
remainder of fiscal 2004 may decline from fiscal 2003 rates, as the sales mix
may be slightly more promotional. Store occupancy costs, as a percentage of
sales, increased 110 basis points and 120 basis points for the quarter and
year-to-date periods, respectively, and was primarily a result of relatively
fixed rental costs spread over a lower sales base and also from an increase in
the percentage of total sales from newer stores, for which occupancy costs as a
percentage of sales tend to be slightly higher until the stores reach maturity.
Selling, general and administrative expenses for the second quarter of fiscal
2004 were $127.7 million, an increase over the same quarter last year of $9.1
million or 100 basis points as a percentage of sales. Year-to-date selling,
general and administrative expenses were $253.5 million, an increase of $16.6
million or 70 basis points as a
percentage of sales. Expenses that normally grow proportionately with sales and
number of stores, such as store payroll, marketing, store supplies and equipment
rental, increased $6.1 million and $7.9 million for the quarter and year-to-date
periods, respectively. As a percentage of sales, these variable expenses
increased 65 basis points for the second quarter and 10 basis points
year-to-date. Store payroll has been well managed and increased $1.5 million yet
declined 20 basis points as a percentage of sales for the quarter, primarily as
a result of decreased bonus accruals. For the first half of fiscal 2004, store
payroll increased $3.8 million and declined 10 basis points as a percentage of
sales. Marketing expenses increased $3.7 million and $3.5 million for the
quarter and year-to-date periods, respectively, representing increases of 70
basis points for the quarter and 20 basis points year-to-date, expressed as a
percentage of sales. Increases in marketing expenses during the quarter resulted
primarily from timing of advertising placements and an increase in spending on
newspaper inserts. Although the timing of the Company's marketing expenditures
fluctuates between fiscal quarters, the Company anticipates total expenditures
for fiscal 2004 to be comparable to last year's levels as a percentage of sales
at 4.5% to 4.6% of sales. Other variable expenses, including supplies and
equipment rental increased $0.9 million or 15 basis points for the quarter, yet
remained flat at 2.3% of sales for the year-to-date period. Non-variable
selling, general and administrative expenses increased $3.1 million and $8.6
million during the second quarter and year-to-date periods, respectively. As a
percentage of sales, these fixed expenses increased 35 basis points for the
quarter and 60 basis points for the year-to-date period partially because of the
deleveraging impact of negative comparable store sales in both periods.
Increases in non-variable selling, general and administrative expenses during
the quarter also resulted from higher workers' compensation expense and general
insurance costs, a trend that is expected to continue for the remainder of the
fiscal year. Similarly, year-to-date increases in non-variable selling, general
and administrative expenses resulted from increases in general taxes, workers'
compensation and other types of general insurance expense, and technology costs.
Depreciation and amortization expense for the second quarter of fiscal 2004 was
$12.3 million, an increase of $0.9 million, or 10 basis points as a percentage
of sales, over last year's second quarter depreciation and amortization expense.
For the first half of fiscal 2004, depreciation and amortization expense
increased $2.4 million, or 10 basis points as a percentage of sales, to $24.4
million over last year's first six months. These increases were largely
attributable to an overall increase in the number of stores open at the end of
the second quarter of fiscal 2004 compared to the end of the second quarter of
fiscal 2003 and to depreciation expense on information systems technology and
related software applications that were implemented subsequent to last year's
second quarter.
Operating income decreased 16.8% to $29.1 million for the second quarter of
fiscal 2004 from $35.0 million for the second quarter of fiscal 2003. For the
first six months of fiscal 2004, operating income decreased 15.1% to $59.4
million from $69.9 million for the same period last year. As a percentage of
sales, operating income for the second quarter decreased to 6.8% from 8.5% for
the same period a year ago. Year-to-date, operating income decreased to 7.1% of
sales versus 8.8% of sales for the comparable period last year.
The Company's effective income tax rate for fiscal 2004 is estimated at 37%,
consistent with fiscal 2003.
Net income for the second quarter of fiscal 2004 was $18.4 million, or $.20 per
diluted share, compared to net income of $22.1 million, or $.23 per diluted
share, for the second quarter of fiscal 2003. Net income for the first six
months of fiscal 2004 was $37.5 million, or $.41 per diluted share, compared to
net income of $44.3 million, or $.46 per diluted share, for the first six months
of fiscal 2003. Net income for the quarter and year-to-date periods decreased
16.5% and 15.3%, respectively, and earnings per diluted share for the quarter
and year-to-date periods decreased 13.0% and 10.9%, respectively, compared to
the same periods last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter of fiscal 2004 with $185.9 million in cash
and temporary investments compared to $149.5 million a year ago. Operating
activities in the first half of fiscal 2004 provided $17.9 million of cash
versus using $5.2 million during the same period last year. The change in
operating cash flow was primarily the result of a decrease in the rate of
inventory growth during the first six months of fiscal 2004, when inventory
increased $35.9 million compared to last year's increase of $81.8 million in the
comparable period. Inventories at the end of the second quarter of fiscal 2004
were $369.2 million, an increase of 3.3% from last year's second quarter
inventory balance of $357.3 million, yet declined 6% to $44 per retail square
foot at this year's second quarter-end from $47 per retail square foot a year
ago for North American stores. During the second quarter of fiscal 2004, the
Company began accelerating the flow of new merchandise into stores and inventory
balances at the end of the third quarter of fiscal 2004 are expected to be
almost even with last year's third quarter on a per square foot basis. Accrued
income taxes decreased $24.4 million during the first half of fiscal 2004,
primarily as a result of estimated tax payments.
During the first six months of fiscal 2004, the Company spent a net $24.8
million in investing activities. Capital expenditures were $46.4 million and
consisted primarily of fixtures, equipment, and leasehold improvements for new
and existing Pier 1 and Cargokids stores and the new distribution facility
located in Savannah, Georgia, information systems' enhancements, and new
corporate headquarters construction costs. Capital expenditures for fiscal 2004
are expected to be approximately $100 million, net of the $23.5 million in
proceeds received during the first quarter of fiscal 2004 from the
sale-leaseback of the new Savannah distribution facility. The Company remains on
plan to open approximately 85 net new Pier 1 stores in the United States and
Canada, and approximately 25 net new Cargokids stores in the southeastern region
of the United States.
The Company's beneficial interest in securitized receivables increased $1.3
million through the first half of fiscal 2004 primarily as a result of an
increase in the total receivables portfolio from $136.3 million at fiscal 2003
year-end to $138.9 million at the end of the second quarter of fiscal 2004. The
increased proprietary credit card receivables resulted from an increase in total
credit card sales. The Company has continued to have $100 million of these
beneficial interests held by outside parties and all proprietary credit card
receivables were securitized at both fiscal 2003 year-end and the end of the
second quarter of fiscal 2004.
Financing activities for the first six months of fiscal 2004 used a net $49.3
million of the Company's cash resources. Year-to-date, the Company repurchased
2,238,000 shares of its common stock for $41.6 million, including fees, leaving
$112.4 million remaining authorized for repurchase under the stock buyback
program approved by the Board of Directors during the first quarter of fiscal
2004. Dividend payments totaled $12.5 million, or $.14 per share, for the first
half of fiscal 2004, and other financing activities, primarily the exercise of
stock options, provided cash of $4.8 million.
The Company's minimum operating lease commitments remaining for fiscal 2004 were
$102.2 million. The present value of total existing minimum operating lease
commitments discounted at 10% was $863.8 million at the fiscal 2004 second
quarter-end.
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. In August 2003, the Company replaced its five-year $125 million
revolving credit facility with a comparable three-year $125 million revolving
credit facility. The new agreement contains substantially similar terms as the
previous agreement and has certain restrictive covenants requiring, among other
things, the maintenance of certain financial ratios (including debt to net cash
flow and fixed charge coverage) and minimum tangible net worth. The new credit
facility bears a floating interest rate (currently LIBOR plus 1.0%) based on the
Company's corporate debt rating. The previous credit agreement has had no
borrowings outstanding since the fourth quarter of fiscal 2001, and as of the
end of the second quarter of fiscal 2004, there were no borrowings under the new
credit agreement. The Company also has other long-term and short-term bank
facilities used principally for the issuance of letters of credit totaling
$158.4 million, of which $34.7 million was available at August 30, 2003. The
Company's current ratio was 2.8 to 1 at the end of the second
quarter of fiscal 2004 compared to 2.7 to 1 at the end of fiscal year 2003.
On September 25, 2003, the Company declared a cash dividend of $.08 per share
payable on November 19, 2003 to shareholders of record on November 5, 2003. 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, the effects of terrorist
attacks or other acts of war, conflicts or war involving the United States or
its allies or trading partners, labor strikes, weather conditions that may
affect sales, volatility of fuel and utility costs, the general strength of the
economy and levels of consumer spending, consumer confidence, 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 availability
and proper functioning of technology and communications systems supporting the
Company's key business processes, 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 source, ship and deliver
items from foreign countries to its U.S. distribution centers at reasonable
prices and 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 1, 2003, 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 I
Item 4. Controls and Procedures.
As required by Exchange Act Rules 13a-15 and 15d-15, an evaluation was conducted
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of August 30, 2003, and based on this evaluation the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of such date to ensure that
information required to be disclosed by the Company in its reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
There has not been any change in the Company's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits See Exhibit Index.
(b) Reports on Form 8-K
On September 18, 2003, the Company furnished a Current Report
on form 8-K containing an earnings release that reported
results of operations for the quarter ended August 30, 2003.
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: October 9, 2003 By: /s/ Marvin J. Girouard
-----------------------------------------------
Marvin J. Girouard, Chairman of the Board
and Chief Executive Officer
Date: October 9, 2003 By: /s/ Charles H. Turner
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Charles H. Turner, Executive Vice President,
Chief Financial Officer and Treasurer
Date: October 9, 2003 By: /s/ Susan E. Barley
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Susan E. Barley, Principal Accounting Officer
Exhibit Index
Exhibit No. Description
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10.1 Revolving Credit Agreement, dated August 22, 2003, among the Company, certain of its
subsidiaries, Wells Fargo Bank, NA, Bank of America, NA, JPMorgan Chase Bank and others.
31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.