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
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Net sales
|
|
$
|
405,823
|
|
|
$
|
434,992
|
|
|
$
|
824,193
|
|
|
$
|
871,858
|
|
|
|
|
|
|
Cost of sales
|
|
|
260,787
|
|
|
|
280,438
|
|
|
|
530,190
|
|
|
|
547,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
145,036
|
|
|
|
154,554
|
|
|
|
294,003
|
|
|
|
324,093
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
135,777
|
|
|
|
133,415
|
|
|
|
278,501
|
|
|
|
277,002
|
|
Depreciation
|
|
|
13,598
|
|
|
|
12,754
|
|
|
|
27,649
|
|
|
|
25,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,339
|
)
|
|
|
8,385
|
|
|
|
(12,147
|
)
|
|
|
21,943
|
|
|
|
|
|
|
Nonoperating (income) and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, investment income and other
|
|
|
(458
|
)
|
|
|
106
|
|
|
|
(1,239
|
)
|
|
|
(173
|
)
|
Interest expense
|
|
|
3,017
|
|
|
|
3,091
|
|
|
|
6,064
|
|
|
|
6,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,559
|
|
|
|
3,197
|
|
|
|
4,825
|
|
|
|
5,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(6,898
|
)
|
|
|
5,188
|
|
|
|
(16,972
|
)
|
|
|
16,017
|
|
Income tax provision (benefit)
|
|
|
(2,829
|
)
|
|
|
2,022
|
|
|
|
(6,883
|
)
|
|
|
5,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,069
|
)
|
|
$
|
3,166
|
|
|
$
|
(10,089
|
)
|
|
$
|
10,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share:
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,437
|
|
|
|
86,038
|
|
|
|
81,050
|
|
|
|
87,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
80,437
|
|
|
|
86,717
|
|
|
|
81,050
|
|
|
|
87,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Net income (loss)
|
|
$
|
(4,069
|
)
|
|
$
|
3,166
|
|
|
$
|
(10,089
|
)
|
|
$
|
10,040
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
122
|
|
|
|
(2,371
|
)
|
|
|
1,606
|
|
|
|
(2,202
|
)
|
Pension adjustments
|
|
|
363
|
|
|
|
410
|
|
|
|
727
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
485
|
|
|
|
(1,961
|
)
|
|
|
2,333
|
|
|
|
(1,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax
|
|
$
|
(3,584
|
)
|
|
$
|
1,205
|
|
|
$
|
(7,756
|
)
|
|
$
|
8,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
5
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27,
2016
|
|
|
February 27,
2016
|
|
|
August 29,
2015
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including temporary investments of $34,420, $110,413 and $36,979,
respectively
|
|
$
|
38,339
|
|
|
$
|
115,221
|
|
|
$
|
41,114
|
|
Accounts receivable, net
|
|
|
20,760
|
|
|
|
22,639
|
|
|
|
25,583
|
|
Inventories
|
|
|
481,297
|
|
|
|
405,859
|
|
|
|
533,614
|
|
Prepaid expenses and other current assets
|
|
|
43,555
|
|
|
|
31,175
|
|
|
|
35,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
583,951
|
|
|
|
574,894
|
|
|
|
635,935
|
|
|
|
|
|
Properties and equipment, net of accumulated depreciation of $506,160, $481,758 and $463,835,
respectively
|
|
|
195,672
|
|
|
|
207,633
|
|
|
|
212,048
|
|
Other noncurrent assets
|
|
|
35,773
|
|
|
|
36,664
|
|
|
|
39,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
815,396
|
|
|
$
|
819,191
|
|
|
$
|
887,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
82,198
|
|
|
$
|
72,570
|
|
|
$
|
89,707
|
|
Gift cards and other deferred revenue
|
|
|
59,983
|
|
|
|
64,081
|
|
|
|
60,356
|
|
Borrowings under revolving line of credit
|
|
|
20,000
|
|
|
|
|
|
|
|
60,000
|
|
Accrued income taxes payable
|
|
|
54
|
|
|
|
6,324
|
|
|
|
995
|
|
Current portion of long-term debt
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
Other accrued liabilities
|
|
|
103,509
|
|
|
|
101,712
|
|
|
|
100,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
267,744
|
|
|
|
246,687
|
|
|
|
314,034
|
|
|
|
|
|
Long-term debt
|
|
|
199,667
|
|
|
|
200,255
|
|
|
|
200,841
|
|
Other noncurrent liabilities
|
|
|
89,975
|
|
|
|
87,492
|
|
|
|
84,073
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par, 500,000,000 shares authorized, 125,232,000 issued
|
|
|
125
|
|
|
|
125
|
|
|
|
125
|
|
Paid-in capital
|
|
|
187,779
|
|
|
|
211,019
|
|
|
|
206,823
|
|
Retained earnings
|
|
|
708,171
|
|
|
|
729,537
|
|
|
|
711,460
|
|
Cumulative other comprehensive loss
|
|
|
(8,304
|
)
|
|
|
(10,637
|
)
|
|
|
(11,367
|
)
|
Less 41,910,000, 41,760,000 and 38,185,000 common shares in treasury, at cost,
respectively
|
|
|
(629,761
|
)
|
|
|
(645,287
|
)
|
|
|
(618,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
258,010
|
|
|
|
284,757
|
|
|
|
288,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
815,396
|
|
|
$
|
819,191
|
|
|
$
|
887,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
6
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,089
|
)
|
|
$
|
10,040
|
|
Adjustments to reconcile to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
30,457
|
|
|
|
27,495
|
|
Stock-based compensation expense
|
|
|
2,778
|
|
|
|
3,405
|
|
Deferred compensation, net
|
|
|
2,885
|
|
|
|
2,909
|
|
Deferred income taxes
|
|
|
(1,586
|
)
|
|
|
27
|
|
Excess tax benefit from stock-based awards
|
|
|
|
|
|
|
(558
|
)
|
Amortization of deferred gains
|
|
|
(536
|
)
|
|
|
(1,370
|
)
|
Other
|
|
|
3,935
|
|
|
|
311
|
|
Changes in cash from:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(75,438
|
)
|
|
|
(54,771
|
)
|
Prepaid expenses and other assets
|
|
|
(9,430
|
)
|
|
|
13,668
|
|
Accounts payable and other liabilities
|
|
|
9,689
|
|
|
|
(21,037
|
)
|
Accrued income taxes payable, net of payments
|
|
|
(6,270
|
)
|
|
|
(12,465
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(53,605
|
)
|
|
|
(32,346
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(22,781
|
)
|
|
|
(26,065
|
)
|
Proceeds from disposition of properties
|
|
|
49
|
|
|
|
16
|
|
Proceeds from sale of restricted investments
|
|
|
1,913
|
|
|
|
8,615
|
|
Purchase of restricted investments
|
|
|
(765
|
)
|
|
|
(8,177
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(21,584
|
)
|
|
|
(25,611
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
(11,277
|
)
|
|
|
(12,155
|
)
|
Purchases of treasury stock
|
|
|
(10,566
|
)
|
|
|
(50,000
|
)
|
Proceeds from stock options exercised, stock purchase plan and other, net
|
|
|
1,150
|
|
|
|
1,604
|
|
Excess tax benefit from stock-based awards
|
|
|
|
|
|
|
558
|
|
Repayments of long-term debt
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
Borrowings under revolving line of credit
|
|
|
23,000
|
|
|
|
63,000
|
|
Repayments of borrowings under revolving line of credit
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,693
|
)
|
|
|
(993
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(76,882
|
)
|
|
|
(58,950
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
115,221
|
|
|
|
100,064
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
38,339
|
|
|
$
|
41,114
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
7
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED AUGUST 27, 2016
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Outstanding
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Comprehensive
Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Shareholders
Equity
|
|
Balance February 27, 2016
|
|
|
83,472
|
|
|
$
|
125
|
|
|
$
|
211,019
|
|
|
$
|
729,537
|
|
|
$
|
(10,637
|
)
|
|
$
|
(645,287
|
)
|
|
$
|
284,757
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,089
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,089
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,333
|
|
|
|
|
|
|
|
2,333
|
|
Purchases of treasury stock
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,566
|
)
|
|
|
(10,566
|
)
|
Stock-based compensation expense
|
|
|
1,509
|
|
|
|
|
|
|
|
(20,812
|
)
|
|
|
|
|
|
|
|
|
|
|
23,590
|
|
|
|
2,778
|
|
Stock purchase plan and other
|
|
|
135
|
|
|
|
|
|
|
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
|
2,502
|
|
|
|
74
|
|
Cash dividends ($0.14 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 27, 2016
|
|
|
83,322
|
|
|
$
|
125
|
|
|
$
|
187,779
|
|
|
$
|
708,171
|
|
|
$
|
(8,304
|
)
|
|
$
|
(629,761
|
)
|
|
$
|
258,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
8
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 27, 2016
AND AUGUST 29, 2015
(unaudited)
Throughout this report, references to the Company include Pier 1 Imports, Inc. and its consolidated subsidiaries. The accompanying
unaudited financial statements should be read in conjunction with the Companys Form 10-K for the year ended February 27, 2016. All adjustments that are, in the opinion of management, necessary for a fair presentation of the Consolidated
Financial Statements contained in this report have been made and consist only of normal recurring adjustments, except as otherwise described herein, if any. Certain items in these Consolidated Financial Statements have been reclassified to
conform to the current period presentation. The results of operations for the three and six months ended August 27, 2016 and August 29, 2015, are not indicative of results to be expected for the fiscal year because of, among other things,
seasonality factors in the retail business. Historically, the strongest sales of the Companys products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as
one operating segment under the name Pier 1 Imports. As of August 27, 2016, the Company had no financial instruments with fair market values that were materially different from their carrying values, unless otherwise disclosed.
NOTE 1 EARNINGS (LOSS) PER SHARE
Basic earnings
(loss) per share amounts were determined by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share amounts were similarly computed, and include the effect, if
dilutive, of the Companys weighted average number of stock options outstanding and shares of unvested restricted stock. As the effect would be antidilutive, 2,214,000 and 2,263,000 outstanding stock options and shares of unvested
restricted stock were excluded from the computation of loss per share for the three and six months ended August 27, 2016. Outstanding stock options totaling 132,000 and 169,000 were excluded from the computation of diluted earnings per share
for the three and six months ended August 29, 2015, as the effect would be antidilutive. Earnings (loss) per share amounts were calculated as follows (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Net income (loss)
|
|
$
|
(4,069
|
)
|
|
$
|
3,166
|
|
|
$
|
(10,089
|
)
|
|
$
|
10,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,437
|
|
|
|
86,038
|
|
|
|
81,050
|
|
|
|
87,167
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
534
|
|
Effect of dilutive restricted stock
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
80,437
|
|
|
|
86,717
|
|
|
|
81,050
|
|
|
|
87,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 MATTERS CONCERNING SHAREHOLDERS EQUITY
Restricted stock compensation -
For the three and six months ended August 27, 2016, the Company recorded compensation expense related to restricted
stock of $1,079,000 and $2,729,000, respectively. For the three and six months ended August 29, 2015, the Company recorded compensation expense related to restricted stock of $1,139,000 and $3,359,000, respectively. As of August 27, 2016, there
was approximately $27,206,000 of total unrecognized compensation expense related to unvested restricted stock that may be recognized over a weighted average period of approximately 1.7 years if certain performance targets are achieved.
Share repurchase program -
During the first six months of fiscal 2017, the Company repurchased 1,794,053 shares of the Companys common stock at a
weighted average cost of $5.89 per share for a total cost of $10,566,000, and $36,610,000 remained available for further share repurchases under the board-approved common stock share repurchase program announced on April 10, 2014 (April 2014
program). As of September 29, 2016, $36,610,000 remained available for further share repurchases of common stock under the April 2014 program.
NOTE 3 LONG-TERM DEBT AND AVAILABLE CREDIT
Revolving Credit Facility -
The Company has a $350,000,000 secured revolving credit facility with a $100,000,000 accordion feature (Revolving
Credit Facility). Credit extensions under the Revolving Credit Facility are limited to the lesser of $350,000,000 or the amount of the calculated borrowing base, which was $388,196,000 as of August 27, 2016. The Company had
$20,000,000 in net cash borrowings and $40,601,000 in letters of credit and bankers acceptances outstanding under the Revolving Credit Facility, with $289,399,000 remaining available for cash borrowings, all as of August 27, 2016. At the
end of the second quarter of fiscal 2017, the $20,000,000 in net cash borrowings bore interest at a weighted average cost of 2.1%.
At the Companys
option, borrowings bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the LIBOR rate plus a spread varying from 125 to 175 basis points per year, depending on the amount then borrowed under the
Revolving Credit Facility, or (b) the prime rate (as defined in the Revolving Credit Facility) plus a spread varying from 25 to 75 basis points per year, depending on the amount then borrowed under the Revolving Credit Facility.
Term Loan Facility -
The Company has a senior secured term loan facility that matures on April 30, 2021 (Term Loan Facility). As of
August 27, 2016, February 27, 2016 and August 29, 2015, the Company had $196,000,000, $197,000,000 and $198,000,000 outstanding, respectively, under the Term Loan Facility with carrying values of $192,271,000, $192,865,000 and $193,456,000,
respectively, net of unamortized discounts and debt issuance costs.
The fair value of the Term Loan Facility was approximately $182,035,000 as of August
27, 2016, which was measured using the quoted market price. The Term Loan Facility was classified as Level 2 based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include quoted prices in
active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the asset or liability.
NOTE 4 DEFINED BENEFIT PLANS
The Company maintains supplemental retirement plans for certain of its executive officers. These plans provide that upon death, disability, reaching
retirement age or certain termination events, a participant will receive benefits based on highest compensation, years of service and years of plan participation. The plans are not funded and thus have no plan assets.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Benefit costs are determined using actuarial cost methods to estimate the total benefits ultimately payable
to executive officers, and this cost is allocated to the respective service periods. The actuarial assumptions used to calculate benefit costs are reviewed annually or in the event of a material change in the plans or participation in the
plans. The components of net periodic benefit cost are shown in the table below (in thousands). The amortization of amounts related to unrecognized prior service cost and net actuarial loss was reclassified out of other comprehensive
income (loss) as a component of net periodic benefit cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
386
|
|
|
$
|
367
|
|
|
$
|
773
|
|
|
$
|
734
|
|
Interest cost
|
|
|
194
|
|
|
|
159
|
|
|
|
387
|
|
|
|
317
|
|
Amortization of unrecognized prior service cost
|
|
|
15
|
|
|
|
15
|
|
|
|
30
|
|
|
|
30
|
|
Amortization of net actuarial loss
|
|
|
450
|
|
|
|
348
|
|
|
|
900
|
|
|
|
697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,045
|
|
|
$
|
889
|
|
|
$
|
2,090
|
|
|
$
|
1,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts with Customers (Topic 606).
During fiscal 2017, additional ASUs were issued related to this
revenue guidance. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations.
This amendment is intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and Licensing,
which clarifies the implementation guidance on
identifying performance obligations. The above ASUs are effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018. The Company is continuing to evaluate the impact of the adoption of this guidance
on its financial statements.
In April 2015, the FASB issued ASU 2015-05,
Customers Accounting for Cloud Computing Costs.
The
standard provides more specific guidance related to how companies account for cloud computing costs. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2017. The adoption of this standard does not
currently have a material impact on the Companys financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash
Flows (Topic 230).
The standard is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The ASU is effective for the Company beginning in fiscal
2019. Early adoption is permitted with retrospective application. The Company is continuing to evaluate the impact of the adoption of this guidance on its financial statements.
NOTE 6 SUBSEQUENT EVENTS
Termination Agreement
-
Subsequent to quarter end, on September 2, 2016, the Company and Alexander W. Smith, the Companys President and Chief Executive Officer, mutually agreed that Mr. Smiths employment with the Company will terminate effective December
31, 2016, or such earlier date as either of the parties may elect, subject to required notice. The parties entered into a Mutual Termination Agreement and General Release dated September 2, 2016 (the Termination Agreement) setting
forth various agreements and understandings between the parties regarding the termination of Mr. Smiths employment, including that Mr. Smiths employment agreement dated June 13, 2012 will not be renewed. As a result of these events,
the Company will record additional expense in the third quarter of fiscal 2017 related to the accelerated vesting of certain restricted stock awards of approximately $3,900,000 and cash severance of $2,500,000 payable to Mr. Smith in accordance with
the Termination Agreement. In addition, the Company will record a curtailment expense related to revised defined benefit plan assumptions of approximately $1,500,000 during the third quarter of fiscal 2017, and a settlement expense of
approximately $2,500,000 during the fourth quarter of fiscal 2017. Mr. Smith will receive his defined benefit plan payout of approximately $24,000,000 as a lump sum distribution during fiscal 2018.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Rights Agreement -
Subsequent to quarter end, the Companys Board of Directors adopted a
Shareholder Rights Protection Agreement (Rights Agreement) effective September 27, 2016, and declared a dividend of one right (a Right) on each outstanding share of the Companys common stock, payable to holders of
record as of the close of business on October 7, 2016.
In general terms, the Rights restrict any person or group from acquiring beneficial ownership of
10% or more of the Companys outstanding common stock (including certain derivative securities whose value is based on the common stock) after the date of the announcement of the adoption of the Rights Agreement. The Rights will not prevent a
takeover of the Company, but may cause substantial dilution to acquirers of 10% or more of the Companys common stock, which may block or render more difficult a merger, tender offer or other business combination involving the Company that is
not supported by the Board of Directors.
Each Right entitles the holder to purchase a fraction of a share of the Companys participating junior
preferred stock having economic and voting terms similar to one share of the Companys common stock at an exercise price of $17.50 per Right after the Rights become exercisable or, in the alternative, to purchase a number of shares of common
stock from the Company having an aggregate market value (as defined in the Rights Agreement) equal to twice the exercise price for an amount in cash equal to the exercise price. The Rights become exercisable if any person or group acquires 10% or
more of the Companys common stock (in which case, they would become an acquiring person) or announces a tender offer for the Company, subject to certain exceptions set forth in the Rights Agreement. Shareholders who
beneficially owned 10% or more of the Companys common stock immediately prior to the announcement of the Rights Agreement will not be an acquiring person unless they acquire beneficial ownership of an additional 1% of the
Companys outstanding common stock.
The Rights will expire on the close of business following the Companys 2017 annual shareholders meeting,
unless earlier redeemed or exchanged, and unless the Rights Agreement is approved for extension by the shareholders, in which case the Rights would expire on a later date approved by the shareholders.
12
PART I
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
The
following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the Companys Consolidated Financial Statements as of February 27, 2016, and for the fiscal
year then ended, the related Notes to Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations, all contained in the Companys Annual Report on Form 10-K for the fiscal
year ended February 27, 2016.
Management Overview
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the Company) is the original global importer of home décor and
furniture. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products in its stores and through the Companys website,
Pier1.com. The results of operations for the three and six months ended August 27, 2016 and August 29, 2015, are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail
business. Historically, the strongest sales of the Companys products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment. As of
August 27, 2016, the Company operated 1,023 stores in the United States and Canada.
Over the past several years, the Company has transformed from a
brick-and-mortar retailer to an omni-channel retailer, with the objective of seamless integration across stores, desktop and mobile devices. As part of its transformation to an omni-channel retailer the Company re-launched its e-Commerce
capabilities including its website, Pier1.com, during fiscal 2013. The Companys focus through the 1 Pier 1 omni-channel strategy is to ensure that customers have an extraordinary experience, regardless of how they
shop. By enabling the customer to interact with the brand both in-store and online, the Company expects to maximize selling opportunities, extend brand reach and capture greater market share. The 1 Pier 1 strategy required
investment in systems, distribution and fulfillment centers, call centers, distribution network and store development, including new in-store selling tools such as swatch stations, computers and tablets. This strategy also includes a continuing
commitment to return excess capital to shareholders through share repurchases and cash dividends.
During the second quarter of fiscal 2017, net sales
decreased 6.7% from the prior year and company comparable sales decreased 4.3%. The company comparable sales decrease for the second quarter of fiscal 2017 resulted primarily from decreased in-store activity, partially offset by an increase in
online direct-to-customer sales. During the second quarter of fiscal 2017, e-Commerce sales accounted for approximately 20% of net sales compared to 17% in the same period of the previous fiscal year. A significant portion of e-Commerce
sales touch the retail stores, either by originating on in-store PCs and tablets, or through in-store pick-up.
Gross profit for the second quarter of
fiscal 2017 was $145.0 million, or 35.7% of sales, compared to $154.6 million, or 35.5% of sales, in the same period last year, an increase of 20 basis points. For the second quarter of fiscal 2017, merchandise margin (the result of adding back
delivery and fulfillment net costs and store occupancy costs to gross profit see
Reconciliation of Non-GAAP Financial Measures
) was $229.8 million, or 56.6% of sales, compared to $239.8 million, or 55.1% of sales, for
the same period last year. The year-over-year increase in merchandise margin as a percentage of sales is primarily attributable to a more balanced promotional strategy and improved operational execution within the Companys distribution
centers. Delivery and fulfillment net costs for the second quarter of fiscal 2017 were $10.6 million, or 2.6% of sales, compared to $9.6 million, or 2.2% of sales, in the same period last year. The increase primarily reflects the increase
in direct-to-customer sales as compared to prior year. To the extent these sales have grown and continue to grow, delivery and fulfillment net costs have also increased and are expected to continue to increase. Store occupancy costs
decreased in dollars during the second quarter of fiscal 2017; however, as a percentage of sales, these costs deleveraged to 18.3% compared to 17.4% during the same period last year as a result of lower sales.
Operating loss for the second quarter of fiscal 2017 was $4.3 million, or (1.1%) of sales, compared to operating income of $8.4 million, or 1.9% of sales, for
the same period in the prior year. Net loss for the second quarter of fiscal 2017 was $4.1
13
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
million, or ($0.05) per diluted share, compared to net income of $3.2 million, or $0.04 per diluted share, for the second quarter of fiscal 2016. EBITDA (earnings before interest, taxes,
depreciation and amortization see
Reconciliation of Non-GAAP Financial Measures
) for the second quarter of fiscal 2017 was $9.5 million, compared to $20.9 million in the second quarter of fiscal 2016.
As the Companys transition to an omni-channel retailer continues to mature, strategies and plans are being enhanced to address sales trends, restore
merchandise margin and reduce costs across the organization. These include, but are not limited to: improving merchandise assortments; enhancing marketing programs; optimizing the real estate portfolio; reducing store and administrative
expenses; improving supply chain efficiencies; managing inventory levels; improving promotional effectiveness; and managing capital expenditures. Profitability in fiscal 2017 has been and will continue to be challenged by store traffic
declines, increases in media spending, additional delivery and fulfillment net costs and expected promotional and clearance activity. Increased costs attributable to prior distribution center network inefficiencies, reflected in fiscal 2017
first-half results, are not expected to impact the second half of fiscal 2017.
The Company has set out several key guideposts by which to measure the
Companys performance in achieving its objectives, which are:
|
1.
|
Brand traffic, conversion and average ticket;
|
|
2.
|
Stores as sales and customer experience centers;
|
|
3.
|
Merchandise margin and gross profit;
|
|
4.
|
Fulfillment and home delivery;
|
|
5.
|
Selling, general and administrative expenses; and
|
The Company is on track to close approximately 15 to 20 stores by the end of fiscal
2017. These closures are consistent with, and a part of the real estate optimization plan previously announced by the Company. The real estate optimization plan includes three parts: (1) closure of approximately 100 stores over a three to
four fiscal-year period commencing in fiscal 2016, primarily through natural lease expirations and relocations; (2) a more modest new store opening and relocation program; and (3) ongoing renegotiations of rent commitments.
During the first six months of fiscal 2017, the Company utilized $22.8 million for capital expenditures, which was deployed toward the opening of new stores,
other leasehold improvements and technology and infrastructure initiatives. The Company expects total capital expenditures to be approximately $45 million in fiscal 2017 to support ongoing investments in technology, stores and distribution
centers.
On April 10, 2014, the Company announced a $200 million board-approved common stock share repurchase program (April 2014
program). During the first six months of fiscal 2017, the Company repurchased 1,794,053 shares of its common stock under the April 2014 program at a weighted average cost of $5.89 per share for a total cost of $10.6
million. Subsequent to quarter end, through September 29, 2016, there were no share repurchases, and $36.6 million remained available for further repurchases under the program. During the first six months of fiscal 2017, the Company paid
quarterly cash dividends totaling approximately $11.3 million. On September 28, 2016, subsequent to quarter end, the Company announced a $0.07 per share quarterly cash dividend payable on November 2, 2016, to shareholders of record on October
19, 2016.
Subsequent to quarter end, on September 2, 2016, the Company and Alexander W. Smith, the Companys President and Chief Executive Officer,
mutually agreed that Mr. Smiths employment with the Company will terminate effective December 31, 2016, or such earlier date as either of the parties may elect, subject to required notice. The parties entered into a Mutual Termination
Agreement and General Release dated September 2, 2016 (the Termination Agreement) setting forth various agreements and understandings between the parties regarding the termination of Mr. Smiths employment, including that Mr.
Smiths employment agreement dated June 13, 2012 will not be renewed. As a result of these events, the Company will record additional expense in fiscal 2017 related to the accelerated vesting of certain restricted stock awards, revised
defined benefit plan assumptions and cash severance payable to Mr. Smith in accordance with the Termination Agreement. See
Note 6 of the Notes to Consolidated Financial Statements
for additional discussion.
Subsequent to quarter end, the Companys Board of Directors adopted a Shareholder Rights Protection Agreement (Rights Agreement) effective
September 27, 2016, and declared a dividend of one right (a Right) on each outstanding share of the Companys common stock, payable to holders of record as of the close of business on October 7, 2016.
14
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
In general terms, the Rights restrict any person or group from acquiring beneficial ownership of 10% or more
of the Companys outstanding common stock (including certain derivative securities whose value is based on the common stock) after the date of the announcement of the adoption of the Rights Agreement. The Rights will not prevent a takeover of
the Company, but may cause substantial dilution to acquirers of 10% or more of the Companys common stock, which may block or render more difficult a merger, tender offer or other business combination involving the Company that is not supported
by the Board of Directors.
Each Right entitles the holder to purchase a fraction of a share of the Companys participating junior preferred stock
having economic and voting terms similar to one share of the Companys common stock at an exercise price of $17.50 per Right after the Rights become exercisable or, in the alternative, to purchase a number of shares of common stock from the
Company having an aggregate market value (as defined in the Rights Agreement) equal to twice the exercise price for an amount in cash equal to the exercise price. The Rights become exercisable if any person or group acquires 10% or more of the
Companys common stock (in which case, they would become an acquiring person) or announces a tender offer for the Company, subject to certain exceptions set forth in the Rights Agreement. Shareholders who beneficially owned 10%
or more of the Companys common stock immediately prior to the announcement of the Rights Agreement will not be an acquiring person unless they acquire beneficial ownership of an additional 1% of the Companys outstanding
common stock.
The Rights will expire on the close of business following the Companys 2017 annual shareholders meeting, unless earlier redeemed or
exchanged, and unless the Rights Agreement is approved for extension by the shareholders, in which case the Rights would expire on a later date approved by the shareholders.
Results of Operations
Management reviews a number of key
performance indicators to evaluate the Companys financial performance. The following table summarizes those key performance indicators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Key Performance Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales growth (decline)
|
|
|
(6.7
|
%)
|
|
|
2.7
|
%
|
|
|
(5.5
|
%)
|
|
|
2.9
|
%
|
Company comparable sales growth (decline)
|
|
|
(4.3
|
%)
|
|
|
2.5
|
%
|
|
|
(3.4
|
%)
|
|
|
2.2
|
%
|
Gross profit as a % of sales
|
|
|
35.7
|
%
|
|
|
35.5
|
%
|
|
|
35.7
|
%
|
|
|
37.2
|
%
|
Selling, general and administrative expenses as a % of sales
|
|
|
33.5
|
%
|
|
|
30.7
|
%
|
|
|
33.8
|
%
|
|
|
31.8
|
%
|
Operating income (loss) as a % of sales
|
|
|
(1.1
|
%)
|
|
|
1.9
|
%
|
|
|
(1.5
|
%)
|
|
|
2.5
|
%
|
Net income (loss) (in millions)
|
|
|
($4.1
|
)
|
|
|
$3.2
|
|
|
|
($10.1
|
)
|
|
|
$10.0
|
|
Net income (loss) as a % of sales
|
|
|
(1.0
|
%)
|
|
|
0.7
|
%
|
|
|
(1.2
|
%)
|
|
|
1.2
|
%
|
EBITDA (in millions)
(1)
|
|
|
$9.5
|
|
|
|
$20.9
|
|
|
|
$16.2
|
|
|
|
$47.0
|
|
EBITDA as a % of sales
|
|
|
2.3
|
%
|
|
|
4.8
|
%
|
|
|
2.0
|
%
|
|
|
5.4
|
%
|
Total retail square footage (in thousands)
|
|
|
8,088
|
|
|
|
8,324
|
|
|
|
8,088
|
|
|
|
8,324
|
|
(1)
|
See reconciliation of Net Income to EBITDA in
Reconciliation of Non-GAAP Financial Measures.
|
Company Comparable Sales Calculation -
The company comparable sales calculation includes all in-store sales, including direct-to-customer (as defined
below), provided that the store was open prior to the beginning of the preceding fiscal year and was still open at period end. In addition, company comparable sales include all orders placed online outside of a store as direct-to-customer
sales. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the
15
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
following: the new store is within a specified distance serving the same market, no significant change in store size, and no significant overlap or gap between the store closing and
reopening. Such stores are included in the company comparable sales calculation in the first full month after the reopening. If a relocated or remodeled store does not meet the above criteria, it is excluded from the calculation until it
meets the Companys established definition as described above.
Net Sales -
Net sales consisted almost entirely of sales to retail customers,
net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Net sales during the period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Retail sales
|
|
$
|
402,365
|
|
|
$
|
431,494
|
|
|
$
|
817,046
|
|
|
$
|
864,150
|
|
Other
(1)
|
|
|
3,458
|
|
|
|
3,498
|
|
|
|
7,147
|
|
|
|
7,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
405,823
|
|
|
$
|
434,992
|
|
|
$
|
824,193
|
|
|
$
|
871,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a store within a store format. Other sales consisted
primarily of these wholesale sales and royalties received from Grupo Sanborns and gift card breakage.
|
Net sales for the second quarter of
fiscal 2017 were $405.8 million, a decrease of 6.7%, compared to $435.0 million for the second quarter of fiscal 2016. Company comparable sales for the second quarter of fiscal 2017 decreased 4.3% compared to the same period last year primarily
resulting from decreased in-store activity, partially offset by an increase in online direct-to-customer sales (as defined below). Net sales for the year-to-date period of fiscal 2017 were $824.2 million, a decrease of 5.5%, compared to $871.9
million for the first six months of fiscal 2016. Company comparable sales for the year-to-date period of fiscal 2017 decreased 3.4% compared to the same period last year primarily resulting from decreased in-store activity, partially offset by
an increase in online direct-to-customer sales (as defined below).
The Companys e-Commerce sales accounted for approximately 20% and 17% of net
sales for the three and six months ended August 27, 2016 and August 29, 2015, respectively. E-Commerce sales are comprised of customer orders placed online which were shipped directly to the customer (direct-to-customer) or were
picked up by the customer at a store location.
Sales at the Companys Canadian stores are subject to fluctuations in currency conversion
rates. The year-over-year decline in the value of the Canadian Dollar, relative to the U.S. Dollar, negatively impacted net sales and company comparable sales by approximately 10 basis points for the current quarter and 20 basis points for the
year-to-date period. Sales on the Pier 1 credit card comprised 34.5% of U.S. sales for the trailing twelve months ended August 27, 2016, compared to 33.4% for the comparable period in fiscal 2016. The Companys proprietary credit card
program provides both economic and strategic benefits to the Company.
16
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
The decrease in net sales for the period was comprised of the following incremental components (in
thousands):
|
|
|
|
|
|
|
Net Sales
|
|
Net sales for the six months ended August 29, 2015
|
|
$
|
871,858
|
|
Incremental sales growth (decline) from:
|
|
|
|
|
Company comparable sales
|
|
|
(28,297
|
)
|
New stores opened during fiscal 2017
|
|
|
1,338
|
|
Stores opened during fiscal 2016
|
|
|
6,734
|
|
Closed stores and other
|
|
|
(27,440
|
)
|
|
|
|
|
|
Net sales for the six months ended August 27, 2016
|
|
$
|
824,193
|
|
|
|
|
|
|
A summary reconciliation of the Companys stores open at the beginning of fiscal 2017 to the number open at the end of
the second quarter is as follows (openings and closings include relocated stores):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
Open at February 27, 2016
|
|
|
953
|
|
|
|
79
|
|
|
|
1,032
|
|
Openings
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Closings
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open at August 27, 2016
(1)
|
|
|
944
|
|
|
|
79
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a store within a store format. At August 27, 2016, there were
73 locations in Mexico and one in El Salvador. These locations are excluded from the table above.
|
Merchandise Margin and Gross Profit -
In the second quarter of fiscal 2017, gross profit was 35.7% of sales compared to 35.5% of sales for the same
period last year, an increase of 20 basis points. In the first six months of fiscal 2017, gross profit was 35.7% of sales compared to 37.2% of sales for the same period last year, a decline of 150 basis points. Merchandise margin (see
Reconciliation of Non-GAAP Financial Measures
) in the second quarter of fiscal 2017 was $229.8 million, or 56.6% of sales, compared to $239.8 million, or 55.1% of sales, for the same period last year. The year-over-year
increase in merchandise margin as a percentage of sales is primarily due to a more balanced promotional strategy and improved operational execution within the Companys distribution centers. For the first six months of fiscal 2017,
merchandise margin was $462.3 million, or 56.1% of sales, compared to $492.7 million, or 56.5% of sales, for the same period last year. The year-over-year decline in merchandise margin is primarily due to clearance activity which occurred in the
first quarter of fiscal 2017. Delivery and fulfillment net costs for the second quarter of fiscal 2017 were $10.6 million, or 2.6% of sales, compared to $9.6 million, or 2.2% of sales, in the same period last year. Delivery and fulfillment
net costs for the first six months of fiscal 2017 were $21.4 million, or 2.6% of sales, compared to $18.4 million, or 2.1% of sales, in the same period last year. The increase is primarily attributable to the increase in direct-to-customer sales as
compared to prior year. Store occupancy costs decreased in dollars during the second quarter of fiscal 2017; however, as a percentage of sales, these costs deleveraged to 18.3% compared to 17.4% during the same period last year as a result of
lower sales. Store occupancy costs decreased in dollars for the first six months of fiscal 2017; however, as a percentage of sales, these costs deleveraged to 17.8% compared to 17.2% during the same period last year as a result of lower sales.
Selling, General & Administrative Expenses, Depreciation and Operating Income
- In the second quarter of fiscal 2017, selling, general and
administrative (SG&A) expenses were $135.8 million, compared to $133.4 million for the same period in fiscal 2016. As a percentage of sales, SG&A expenses were 33.5% in the second quarter of fiscal 2017, compared to 30.7%
for the same period in fiscal 2016. Year-to-date SG&A expenses were $278.5 million, compared to $277.0 million for the same period in fiscal 2016. As a percentage of sales, SG&A expenses were 33.8% for the first six months of
fiscal 2017 compared to 31.8% for the same period in fiscal 2016.
17
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
SG&A expenses are summarized in the tables below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
Expense
|
|
|
% of Sales
|
|
|
Expense
|
|
|
% of Sales
|
|
Compensation for operations
|
|
$
|
61.5
|
|
|
|
15.1
|
%
|
|
$
|
63.3
|
|
|
|
14.6
|
%
|
Operational expenses
|
|
|
22.1
|
|
|
|
5.4
|
%
|
|
|
22.7
|
|
|
|
5.2
|
%
|
Marketing
|
|
|
19.1
|
|
|
|
4.7
|
%
|
|
|
16.7
|
|
|
|
3.9
|
%
|
Other selling, general and administrative
|
|
|
33.2
|
|
|
|
8.2
|
%
|
|
|
30.7
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
135.8
|
|
|
|
33.5
|
%
|
|
$
|
133.4
|
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
Expense
|
|
|
% of Sales
|
|
|
Expense
|
|
|
% of Sales
|
|
Compensation for operations
|
|
$
|
121.7
|
|
|
|
14.8
|
%
|
|
$
|
127.7
|
|
|
|
14.6
|
%
|
Operational expenses
|
|
|
42.1
|
|
|
|
5.1
|
%
|
|
|
43.1
|
|
|
|
4.9
|
%
|
Marketing
|
|
|
47.7
|
|
|
|
5.8
|
%
|
|
|
39.1
|
|
|
|
4.5
|
%
|
Other selling, general and administrative
|
|
|
67.0
|
|
|
|
8.1
|
%
|
|
|
67.1
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
278.5
|
|
|
|
33.8
|
%
|
|
$
|
277.0
|
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in total SG&A expenses for the second quarter of fiscal 2017 was primarily attributable to a $4.8 million
increase in marketing and other selling, general and administrative expenses, partially offset by a $2.4 million decrease in store payroll and operational expenses. The increase in total SG&A expenses for the first six months of fiscal 2017 was
primarily attributable to an $8.6 million increase in marketing, partially offset by a $7.0 million decrease in store payroll and operational expenses. Other selling, general and administrative expenses for the first six months of fiscal 2017 were
lowered by a reduction in corporate headquarters payroll and benefits. These payroll savings were offset primarily by increases in consulting and legal fees and certain lease costs for the corporate headquarters.
Depreciation expense for the second quarter of fiscal 2017 was $13.6 million, compared to $12.8 million in the same period last year. Depreciation
expense for the first six months of fiscal 2017 was $27.6 million, compared to $25.1 million in the same period last year. The increase was primarily the result of additional capital expenditures in recent fiscal years.
Operating loss for the second quarter of fiscal 2017 was $4.3 million, or (1.1%) of sales, compared to operating income of $8.4 million, or 1.9% of sales, for
the same period last year. Operating loss for the first six months of fiscal 2017 was $12.1 million, or (1.5%) of sales, compared to operating income of $21.9 million, or 2.5% of sales, for the same period last year.
Nonoperating Income and Expenses -
During the first six months of fiscal 2017, nonoperating expenses were $4.8 million, compared to $5.9 million for
the same period in fiscal 2016. The change was primarily related to unrealized gains and losses on certain investments which were favorable compared to prior year.
Income Taxes -
The income tax benefit for the second quarter of fiscal 2017 was $2.8 million, compared to the income tax provision of $2.0 million
during the same period in the prior fiscal year. The income tax benefit is the result of the Companys pre-tax loss generated in the second quarter of fiscal 2017. The effective tax rate for the second quarter of fiscal 2017 was
41.0%, compared to 39.0% in the same period during fiscal 2016. The increase in the effective tax rate for the second quarter of fiscal 2017 primarily relates to lower earnings for fiscal 2017. The income tax benefit for the first half of
fiscal 2017 was $6.9 million, compared to the income tax provision of $6.0 million during the same period in the prior fiscal year. The income tax benefit is the result of the Companys pre-tax loss generated in the first half of fiscal
2017. The effective tax rate for the first half of fiscal 2017 was 40.6%, compared to 37.3% in the same period during fiscal 2016. The increase in the effective tax rate for the first half of fiscal 2017 primarily relates to certain favorable
discrete items occurring in the first half of fiscal 2016 and lower earnings for fiscal 2017.
Net Income (Loss) and EBITDA
- For the second
quarter of fiscal 2017, the Company reported a net loss of $4.1 million, or ($0.05) per diluted share, compared to net income of $3.2 million, or $0.04 per diluted share, for the same period last year. For the first half of fiscal 2017, the
Company reported a net loss of $10.1 million, or ($0.12) per diluted share, compared to net
18
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
income of $10.0 million, or $0.11 per diluted share, for the same period last year. EBITDA was $9.5 million for the second quarter of fiscal 2017 compared to $20.9 million for the same
period last year. EBITDA was $16.2 million for the first six months of fiscal 2017 compared to $47.0 million for the same period last year. See
Reconciliation of Non-GAAP Financial Measures.
Reconciliation of Non-GAAP Financial Measures
The
Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). This Quarterly Report on Form 10-Q references non-GAAP financial measures including merchandise margin, EBITDA and
contribution from operations.
The Company believes the non-GAAP financial measures referenced in this Quarterly Report on Form 10-Q allow management and
investors to understand and compare results in a more consistent manner for the three and six-month periods ended August 27, 2016 and August 29, 2015. Non-GAAP financial measures should be considered supplemental and not a substitute for the
Companys results reported in accordance with GAAP for the periods presented.
Merchandise margin represents the result of adding back delivery and
fulfillment net costs and store occupancy costs to gross profit. Contribution from operations represents gross profit, less compensation for operations (which includes store and customer service payroll) and operational expenses. EBITDA
represents earnings before interest, taxes, depreciation and amortization. Management believes merchandise margin, contribution from operations and EBITDA are meaningful indicators of the Companys performance which provide useful
information to investors regarding its financial condition and results of operations. Management uses merchandise margin, contribution from operations and EBITDA, together with financial measures prepared in accordance with GAAP, to assess the
Companys operating performance, to enhance its understanding of core operating performance and to compare the Companys operating performance to other retailers. These non-GAAP financial measures should not be considered in isolation
or used as an alternative to GAAP financial measures and do not purport to be an alternative to net income (loss) or gross profit as a measure of operating performance. A reconciliation of net income (loss) to EBITDA to contribution from
operations to merchandise margin is shown below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
$ Amount
|
|
|
% of Sales
|
|
|
$ Amount
|
|
|
% of Sales
|
|
|
$ Amount
|
|
|
% of Sales
|
|
|
$ Amount
|
|
|
% of Sales
|
|
Merchandise margin (non-GAAP)
|
|
$
|
229.8
|
|
|
|
56.6
|
%
|
|
$
|
239.8
|
|
|
|
55.1
|
%
|
|
$
|
462.3
|
|
|
|
56.1
|
%
|
|
$
|
492.7
|
|
|
|
56.5
|
%
|
|
|
|
|
|
|
|
|
|
Less: Delivery and fulfillment net costs
|
|
|
10.6
|
|
|
|
2.6
|
%
|
|
|
9.6
|
|
|
|
2.2
|
%
|
|
|
21.4
|
|
|
|
2.6
|
%
|
|
|
18.4
|
|
|
|
2.1
|
%
|
Store occupancy costs
|
|
|
74.2
|
|
|
|
18.3
|
%
|
|
|
75.6
|
|
|
|
17.4
|
%
|
|
|
146.9
|
|
|
|
17.8
|
%
|
|
|
150.2
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (GAAP)
|
|
|
145.0
|
|
|
|
35.7
|
%
|
|
|
154.6
|
|
|
|
35.5
|
%
|
|
|
294.0
|
|
|
|
35.7
|
%
|
|
|
324.1
|
|
|
|
37.2
|
%
|
|
|
|
|
|
|
|
|
|
Less: Compensation for operations
|
|
|
61.5
|
|
|
|
15.1
|
%
|
|
|
63.3
|
|
|
|
14.6
|
%
|
|
|
121.7
|
|
|
|
14.8
|
%
|
|
|
127.7
|
|
|
|
14.6
|
%
|
Operational expenses
|
|
|
22.1
|
|
|
|
5.4
|
%
|
|
|
22.7
|
|
|
|
5.2
|
%
|
|
|
42.1
|
|
|
|
5.1
|
%
|
|
|
43.1
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from operations (non-GAAP)
|
|
|
61.5
|
|
|
|
15.2
|
%
|
|
|
68.5
|
|
|
|
15.7
|
%
|
|
|
130.2
|
|
|
|
15.8
|
%
|
|
|
153.3
|
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
Less: Other nonoperating (income) expense
|
|
|
(0.2
|
)
|
|
|
0.0
|
%
|
|
|
0.2
|
|
|
|
0.1
|
%
|
|
|
(0.7
|
)
|
|
|
(0.1
|
%)
|
|
|
0.1
|
|
|
|
0.0
|
%
|
Marketing and other SG&A
|
|
|
52.2
|
|
|
|
12.9
|
%
|
|
|
47.4
|
|
|
|
10.9
|
%
|
|
|
114.7
|
|
|
|
13.9
|
%
|
|
|
106.2
|
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (non-GAAP)
|
|
|
9.5
|
|
|
|
2.3
|
%
|
|
|
20.9
|
|
|
|
4.8
|
%
|
|
|
16.2
|
|
|
|
2.0
|
%
|
|
|
47.0
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
Less: Income tax provision (benefit)
|
|
|
(2.8
|
)
|
|
|
(0.7
|
%)
|
|
|
2.0
|
|
|
|
0.5
|
%
|
|
|
(6.9
|
)
|
|
|
(0.9
|
%)
|
|
|
6.0
|
|
|
|
0.6
|
%
|
Interest expense, net
|
|
|
2.8
|
|
|
|
0.7
|
%
|
|
|
3.0
|
|
|
|
0.7
|
%
|
|
|
5.6
|
|
|
|
0.7
|
%
|
|
|
5.9
|
|
|
|
0.7
|
%
|
Depreciation
|
|
|
13.6
|
|
|
|
3.3
|
%
|
|
|
12.8
|
|
|
|
2.9
|
%
|
|
|
27.6
|
|
|
|
3.4
|
%
|
|
|
25.1
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (GAAP)
|
|
$
|
(4.1
|
)
|
|
|
(1.0
|
%)
|
|
$
|
3.2
|
|
|
|
0.7
|
%
|
|
$
|
(10.1
|
)
|
|
|
(1.2
|
%)
|
|
$
|
10.0
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
Liquidity and Capital Resources
The Company ended the first six months of fiscal 2017 with $38.3 million in cash and cash equivalents, compared to $115.2 million at the end of fiscal 2016 and
$41.1 million at the end of the first six months of fiscal 2016. The decrease from the end of fiscal 2016 was primarily the result of the utilization of cash in operating activities of $53.6 million. The Company also utilized cash to fund
capital investments and to return excess capital to shareholders, including $22.8 million for capital expenditures, $11.3 million for cash dividends and $10.6 million to repurchase shares of the Companys common stock under the April 2014
program. These amounts were partially offset by $20.0 million in net cash borrowings under the Companys secured revolving credit facility.
Cash Flows from Operating Activities
Operating
activities in the first six months of fiscal 2017 used $53.6 million of cash, primarily as a result of an increase in inventory and a net loss of $10.1 million, partially offset by adjustments for non-cash items. Inventory levels at the end of
the second quarter of fiscal 2017 were $481.3 million, an increase of $75.4 million, or 18.6%, from the end of fiscal 2016. The increase in inventories was primarily due to the seasonal build of inventory for the fall and holiday selling
seasons. Inventory levels at the end of the second quarter of fiscal 2017 decreased approximately 10% from $533.6 million at the end of the second quarter last year.
Cash Flows from Investing Activities
During the first
six months of fiscal 2017, investing activities used $21.6 million, which was primarily related to capital expenditures deployed toward the opening of new stores, other leasehold improvements, and technology and infrastructure initiatives. The
Company expects total capital expenditures to be approximately $45 million in fiscal 2017 to support ongoing investments in technology, stores and distribution centers.
Cash Flows from Financing Activities
During the first
six months of fiscal 2017, financing activities used $1.7 million, primarily resulting from cash outflows of $11.3 million for the payment of dividends and $10.6 million for repurchases of the Companys common stock pursuant to the April 2014
program, partially offset by $20.0 million in net cash borrowings under the secured revolving credit facility. See
Share Repurchase Program
and
Revolving Credit Facility
below for more information.
Revolving Credit Facility
The Company has a $350 million
secured revolving credit facility with a $100 million accordion feature (Revolving Credit Facility). Credit extensions under the Revolving Credit Facility are limited to the lesser of $350.0 million or the amount of the calculated
borrowing base, which was $388.2 million as of August 27, 2016. The Company had $20.0 million in net cash borrowings and $40.6 million in letters of credit and bankers acceptances outstanding under the Revolving Credit Facility, with
$289.4 million remaining available for cash borrowings, all as of August 27, 2016.
Term Loan Facility
The Company has a senior secured term loan facility that matures on April 30, 2021 (Term Loan Facility). As of August 27, 2016, the Company
had $196.0 million outstanding under the Term Loan Facility with a carrying value of $192.3 million, net of unamortized discounts and debt issuance costs. The fair value of the Term Loan Facility was approximately $182.0 million as of August
27, 2016, which was measured at fair value using the quoted market price. The Term Loan Facility was classified as Level 2 based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include
quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Share Repurchase Program
During the first half of fiscal 2017, the Company repurchased 1,794,053 shares of its common stock at a weighted average cost of $5.89 per share for a total
cost of $10.6 million under the April 2014 program, and $36.6 million remained available for further repurchases. As of September 29, 2016, $36.6 million remained available for further share repurchases of common stock under the program.
20
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
(continued)
|
Dividends Payable
On September 28, 2016, subsequent to quarter end, the Company announced a $0.07 per share quarterly cash dividend on the Companys outstanding shares of
common stock. The $0.07 quarterly cash dividend will be paid on November 2, 2016, to shareholders of record on October 19, 2016.
Sources of
Working Capital
Working capital requirements are expected to be funded with cash from operations, available cash balances and, as required, borrowings
against the Companys Revolving Credit Facility and Term Loan Facility. Given the Companys cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund its obligations for the
foreseeable future, including debt-related payments, capital expenditure requirements, cash dividends, share repurchases and the retirement-related payment of approximately $24 million related to the planned departure of the Companys Chief
Executive Officer.
Impact of Inflation
Inflation
has not had a significant impact on the operations of the Company. However, the Companys management cannot be certain of the effect inflation may have on the Companys operations in the future.