NEW YORK, Oct. 14, 2016 /PRNewswire/ -- Alden Global
Capital LLC (together with its affiliates, "Alden"), the largest active shareholder of
Pier 1 Imports, Inc. ("Pier 1" or the "Company") (NYSE: PIR), with
ownership of approximately 9.5% of Pier 1's outstanding shares,
today announced that it has delivered a letter to the Company's
Chairman, Terry London, and the
Company's Board of Directors.
The full text of the letter follows:
October 14, 2016
Pier 1 Imports, Inc.
100 Pier 1 Place
Fort Worth, Texas
76102
Attn: Terry E. London, Chairman of
the Board of Directors
cc: Board of Directors
Dear Terry,
We appreciate you taking the time and giving us the opportunity
to meet with you, Jeff Boyer, and
Mike Carter on September 23, 2016, as well as our subsequent
meeting with management on October 4,
2016 at Pier 1 Imports, Inc. ("Pier 1" or the "Company")
headquarters in Fort Worth. The meetings have been
helpful for us to gain a better understanding of Pier 1, including
the significant value creation opportunities that exist and the
challenges facing the Company. Putting aside our extreme
disappointment with the Company's overreactive adoption of a
shareholder rights plan (the "Poison Pill") on September 27, 2016, just four days after our
initial meeting with you, we look forward to continuing a
constructive and productive dialogue regarding corporate strategy,
the ongoing CEO search process, and the composition of Pier 1's
Board of Directors (the "Board"). We would caution the
Company against taking any further actions to entrench the
Board.
Alden Global Capital LLC, together with its affiliates
("Alden"), has an ownership
interest of approximately 9.5% of the outstanding shares of Pier 1,
making us the Company's largest active shareholder. We do not
believe the current market price of Pier 1 fully reflects its
intrinsic value, in large part due to the Company's deteriorating
operating performance, history of poor capital allocation, and
irresponsible executive compensation. The purpose of this
letter is not only to make our serious concerns explicit for the
Board, but also to outline our views for fellow shareholders
regarding why immediate and meaningful changes are required to
begin rebuilding shareholder confidence.
Pressing and Time Critical Issues at Pier 1
The Company is at a critical juncture in light of the
September 7th announcement
that CEO Alex Smith will step down
at the end of the year and that there is a search currently
underway for a new CEO. The Company's deteriorating
operational performance, as further evidenced by the recent
disappointing first half financial results, adds even greater
urgency to the situation. Shareholder representation on the
Board is imperative in order to ensure that the current CEO search
and hiring process is properly overseen and that shareholders' best
interests are paramount in the boardroom.
Alden's Objective
is to Work Collaboratively with Pier 1 to Reconstitute
the Board and Assist in the CEO Search Process
As we have discussed with you, our strong preference is to work
with Pier 1 to reconstitute the Board and assist in the ongoing CEO
search process. This letter would not have been necessary had
you shown a willingness to work with us to address our concerns
rather than defensively testing our resolve by adopting a Poison
Pill. We have identified several external candidates with the
requisite industry experience, leadership skills, and track record
of creating shareholder value who could ably serve as directors of
Pier 1. We are confident the new CEO will benefit from a Board with
fresh perspectives. Alden is
also well-positioned to assist in the CEO selection process, drive
strategy, and provide a thoughtful perspective on value enhancement
at Pier 1.
Alden Disagrees with the Laissez-Faire Approach to Board
Responsibilities
We disagree with your laissez-faire approach to Board
responsibilities and believe the Company would benefit from the
rigor, direction, and shareholder-alignment that comes with having
an "ownership perspective" on the Board. We therefore request
that the Board immediately appoint (i) Heath Freeman, a representative of Alden, as a director of the Company to assist
with the CEO search and hiring process and (ii) additional
independent and highly qualified directors recommended by
Alden who have the relevant
experience, skill sets, and objectivity to make decisions that are
in the best interests of all Pier 1 shareholders.
Pier 1's Stock Has Consistently Underperformed Under the
Complacent Control of the Current Board
Pier 1's stock has dramatically underperformed peers and the
market over the past 10 years. As shown in the table below,
the Company has trailed its home furnishing peers, 2016
proxy group, and the Russell 3000 by significant margins
during each time period, with 10-year underperformance versus the
Russell 3000 at a staggering 131%.
Pier 1 Trades at a Meaningful Discount to
Peers
Pier 1 has a strong brand, extensive store footprint, and many
loyal customers. However, shareholders have suffered through
numerous periods of missed expectations and poor operating
results. As shown below, Pier 1 trades at a meaningful discount
relative to peers. We believe the discounted valuation
is due to investors' concerns over the Company's deteriorating
operating performance and the lack of urgency in developing a
clear strategy to improve Pier 1's results.
Operating Performance Significantly Below 2013
Investor Day Targets
At Pier 1's last investor day on May 7,
2013, over three years ago, management disclosed short- and
long-term targets and outlined operational improvements that would
allow the Company to meet these targets. In the three
years since the investor day, Pier 1 has significantly
underperformed operationally relative to its fiscal year 2013
results and the targets set by management. During this time, the
CEO has been generously compensated reflecting a stunning lack of
alignment with the Company's performance which we elaborate on
later in this letter. The table below details the targets set
by management in 2013 and where the business stands
today.
EBITDA Margin Continues to Deteriorate
Under this Board's watch, EBITDA has declined by more than 45%
from approximately $230 million in
FY2013[i] to $125 million
in FY2016[i] despite a slight increase in
revenue. Unfortunately, the Company's first half
financial results have only heightened our concerns as EBITDA
degradation accelerated with a year-over-year decline of
65%.
While various factors have challenged the home furnishing space
and put pressure on margins across the peer group, Pier 1's EBITDA
margin was 540 basis points lower than its peer average in the
fiscal year ending February 27, 2016.
Maintaining the status quo is clearly untenable.
Pier 1's Stock Price has Fallen 75% During Terry London's
Tenure as Chairman
Mr. London, since you have served as Chairman, Pier 1's stock
price has gone from around $16.00 to
around $4.00, representing a
massive and alarming decline of approximately 75%. Over
this same period, you have earned approximately $1 million in Board fees (and approximately
$2 million since you joined the Board
in 2003).[ii]
Remaining Board Collectively Owns a Measly 0.5% of the
Company[iii]
We find it deeply troubling that the Board, excluding the
departing CEO, collectively owns 0.5% of the outstanding
shares. We are also concerned that you have served on the
Board since 2003 and as Chairman since June
2012, yet own just 0.2% of Pier 1's outstanding
shares.[iv] Notably, in your 13 years on the
Board you have never directly purchased a share of Pier 1 common
stock.
On average, Pier 1's non-employee directors earned $173,125 in cash for Board and committee service
for fiscal 2016. It is no wonder that Board members seem
more intent on protecting their lucrative positions than serving
the best interests of shareholders.
Alden's 9.5% Stake
Represents 18x the Aggregate Ownership of the Entire Remaining
Board
We believe the shareholders, as the true owners of the Company,
require immediate representation at the Board level to ensure that
all decisions are being made with their best interests in
mind. Alden's stake in
the Company represents 18x what the entire Board, excluding
the departing CEO, collectively owns and 40x your
interest.
It seems apparent to us that with so little "skin in the game"
and not enough confidence in the Company to engage in meaningful
stock purchases, the Board does not have the same commitment to
shareholder value as we do.
Poison Pill Appears to Entrench Board Rather than
Protect Shareholders
The Board's adoption of the Poison Pill was a clear overreaction
to our involvement and further evidences that you may be more
interested in protecting your director positions and fees than
working constructively with one of your largest shareholders on
ways to meaningfully enhance shareholder value.
Reckless Share Repurchases
Share repurchase plans authorized by the Board have massively
destroyed shareholder value at Pier 1. Over the past five
years, the Board has approved five share repurchase plans allowing
the Company to spend over $650
million of shareholders' capital to repurchase shares at an
average price of $15.00.[v] Those shares are now
worth approximately $4.30 which means
in total, this "investment" has destroyed almost $500 million of shareholder value and generated a
70% loss.
These share repurchases have caused significant damage to the
Company as it went from a net cash position of just under
$300 million at the end of FY2011 to
net debt of approximately $85 million
at the end of FY2016. We are perplexed that the Board and
management have recently decided to curb additional share
repurchases at a time when they strategically make much more sense
given the steep decline in stock price.
Share Repurchases Not Reflective of CEO and CFO Actions in
the Market
While the Company was recklessly repurchasing shares, spending
over $650 million and destroying
almost $500 million of shareholder
value, CEO Smith and the former CFO Turner were handsomely
profiting by selling shares in the open
market.[vi] We do not understand what the
Board was thinking when it approved these share repurchase
plans.
To be crystal clear, the Board authorized the Company to spend
over $650 million to buy Pier 1 stock
with borrowed money, leveraging the Company's balance sheet while
management was selling a significant amount of their own shares in
the open market. This was not simply a hands-off approach to
governance but, inattention and carelessness on the Board's
part.
Irresponsible Compensation and Severance Packages
During CEO Smith's tenure, Pier 1's stock has declined from
approximately $6.50 to $4.00
representing value destruction of more than 35%, yet he has been
paid over $70 million pursuant to
employment agreements negotiated by the
Board.[vii]
We have serious concerns with the Board's history of executive
compensation and contract negotiations due to its inability to
align shareholder and management interests. To be specific,
the Board negotiated employment agreements that allowed for more
than $8.5 million in payments to
former CFO Turner after he left the company in 2015 and will result
in cash payments of $26.5 million to
CEO Smith when he departs at year-end.[viii]
Compare this total of $35
million spent on two executive departures to the
approximately $23 million Pier
1 pays in dividends to ALL SHAREHOLDERS on an annual
basis.
Compensation Not Aligned with Performance
CEO Smith will also benefit from the accelerated vesting of
approximately 741,000 shares when he steps down, the majority of
which are performance-based for targets that the CEO DID NOT
ACHEIVE.[ix]
Since Smith signed his first employment agreement just 9.5 years
ago, the Board has granted him stock and options representing more
than a startling 5% of the Company.[x] Even more
concerning, over 65% of the equity awarded to Smith has NOT
been based on performance.
Institutional Shareholder Services Inc. ("ISS"), a leading proxy
voting advisory firm, appears to share our concerns finding a "High
concern with respect to the alignment of CEO pay and company
performance, relative to a group of companies of similar industry
and size" and noting that "CEO pay has outranked company TSR
performance over the last three years, relative to reasonably
comparable peers." The ISS Pay for Performance Evaluation
indicates that Pier 1's CEO pay has been more than 2x the median of
its peers for the last five years, reaching almost 5x its peer
median in 2013.
ISS also expressed concerns that any changes to compensation
plans would not apply to the CEO as his compensation was
"governed by the problematic guarantees in [CEO Smith's]
employment agreement" but noted "the fact that he will not
accept an equity grant in 2017 does mitigate the concerns regarding
awards that are outsized and not substantiated by performance."
However, we now know that CEO Smith will be leaving at
year end and will benefit from ALL the "outsized", unearned, and
undeserved awards that this Board negotiated. Clearly
this Board should NOT be negotiating any more employment
agreements.
The Board Cannot Be Trusted to Protect the Best Interests of
Pier 1 Shareholders
Under your leadership, the Board has failed to protect the best
interests of shareholders and instead, has demonstrated a clear
inability to make intelligent compensation decisions and work with
management to implement effective capital allocation
strategies. The Board's broken capital allocation strategy
alone has lost shareholders nearly $500
million yet the Board has not shared in this pain as they
collectively own such a de minimis amount of Pier 1's
stock. The Board has not only destroyed significant
shareholder value but has presided over an extended period of poor
stock price performance, poor operating performance, and a
substantial deterioration in EBITDA margins.
This Board seems to be asking shareholders to have patience and
trust its ability to appropriately oversee the Company during this
critical time. Unfortunately, the Board's troubling track
record of taking actions contrary to the interests of Pier 1
shareholders, as we have detailed herein, demonstrates why we have
lost confidence in this Board. It is therefore imperative that the
Board be reconstituted immediately to ensure that the current
CEO search process is properly overseen and that shareholders' best
interests are paramount in the boardroom.
*
*
*
It is time for this Board to prove to its shareholders its
commitment to protecting and enhancing shareholder value.
With the right leadership, alignment of interests, and governance
in place, we are confident Pier 1 can be turned around and deliver
substantial value for all stakeholders. As the largest active
shareholder, Alden's interests are
aligned with the interests of all shareholders. At this
critical juncture, the Board should acknowledge Pier 1's recent
shortcomings and work with us to voluntarily reconstitute the Board
in the manner we have recommended. If the Board refuses to engage
with us in good faith and in a timely fashion in this regard, we
will be forced to pursue other avenues to protect the value of our
investment, including a consent solicitation seeking the removal
and replacement of current Board members. We hope any such action
will ultimately prove unnecessary and look forward to receiving a
response in an expeditious manner.
Sincerely,
Heath Freeman
Alden Global Capital LLC
Endnotes:
[i] EBITDA as reported by the Company. FY2013 and FY2016
represent the fiscal years ending March 2,
2013 and February 27, 2016,
respectively.
[ii] Includes fees deferred by the Chairman pursuant to the Pier
1 Imports Director Deferred Stock Unit Program.
[iii] Remaining Board refers to all current Board members
excluding CEO Smith who will be leaving the Company and Board at
year-end. Aggregate ownership is the sum of all shares owned
by each Board member excluding the CEO per the 2016 Proxy divided
by shares outstanding per the Company's 10-Q for the period ending
August 27, 2016.
[iv] Chairman's ownership based on shares disclosed in the
2016 Proxy and shares outstanding per the Company's 10-Q for the
period ending August 27, 2016.
[v] Share repurchases through August 27,
2016 according to Company filings. The Board approved
repurchase plans on 3/25/2011 for
$100 million, 10/13/2011 for $100
million, 12/13/2012 for
$100 million, 10/18/2013 for $200
million, and 4/10/2014 for
$200 million.
[vi] According to Form 4 filings and pursuant to 10b5-1 stock
trading plans adopted by CEO Smith and former CFO Turner.
From August 2012 through December 2013, CEO Smith sold 1,056,000 shares at
an average price of approximately $21.40. To sell these shares, CEO Smith
exercised 1,056,000 options with a strike price of $6.69 resulting in a $15.5
million profit; the options were granted to Smith pursuant
to his February 19, 2007 employment
agreement and expire on February 19,
2017. From April 2011 through
January 2015, former CFO Turner sold
443,000 shares and options representing more than half of his
ownership interest in Pier 1.
[vii] Total compensation of $73.5
million for fiscal years 2007-2016 as reported
in Company proxy filings; reflects stock awards using the
stock price at the time of the grant or at the time the options
were earned.
[viii] Former CFO Turner received a lump-sum payment of
$1.08 million pursuant to his
March 2015 Retirement Agreement and
General Release filed as Exhibit 10.21 to the FY2015 10-K and an
additional $7.57 million in
August 2015 pursuant to Pier 1
Imports' Supplemental Retirement Plan as disclosed in the 2015
Proxy. Current CEO Smith will receive a severance amount equal to
two times his base salary or $2.5
million pursuant to an employment agreement dated
June 13, 2012 and an additional
$24 million during FY2018 pursuant to
his accumulated benefit under the Supplemental Retirement Plan as
disclosed in the Company's 10-Q for the period ending August 27, 2016.
[ix] According to the Company's 2016 proxy statement, CEO Smith
had 740,840 restricted shares, as of February 27, 2016, that had not vested comprised
of 180,000 time-based stock awards and 560,840 unearned
performance-based awards. Pursuant to CEO Smith's most recent
employment agreement, he will receive all shares underlying these
awards upon his departure despite the fact that such awards either
(i) did not vest given the failure to meet previous targets or (ii)
will not have vested upon his departure since they are tied to
future periods of employment and/or future performance targets.
[x] Pursuant to CEO Smith's first employment
agreement dated February 19,
2007, he could receive up to 3,000,000 in options with an
exercise price of $6.69 and an
expiration date of February 2017. He received 1,000,000
time-based options which vested in February
2008 for his continuous employment through February
2009. The remaining 2,000,000 options were based on
achieving performance targets for FY2009 and FY2010; he received
1,000,000 options for meeting FY2010 targets. Pursuant
to CEO Smith's 2010 employment contract, he received
937,500 time-based stock awards and up to 562,500 performance-based
awards, which were earned. Pursuant to his 2012 contract, he
would receive 540,000 time-based awards through FY2018 and had
the potential to earn up to 585,000 performance-based awards.
Smith is leaving during FY2017 but will receive the remaining
unvested time base awards as well as the unearned
performance-based awards.
About Alden Global Capital LLC
Alden is a New York based investment firm focused on deep
value, catalyst driven investing.
Investor contacts:
Heath Freeman, (212) 418-6879
Jennifer Wild, (212) 888-5514
Media contact:
Joe Checkler
212-931-6144
Jcheckler@peppercomm.com
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SOURCE Alden Global Capital LLC