Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations.
MANAGEMENT OVERVIEW
Introduction
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products in retail stores throughout the U.S. and Canada and online at pier1.com. Fiscal 2019 and 2017 both consisted of 52-week years which ended on March 2, 2019 and February 25, 2017, respectively. Fiscal 2018 consisted of a 53-week year which ended on March 3, 2018. As of March 2, 2019, the Company operated 973 stores in the U.S. and Canada. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the accompanying audited Consolidated Financial Statements and notes thereto, which can be found in Item 8 of this report.
On April 17, 2019, the Company announced that it is implementing an action plan designed to reset its gross margin and cost structure, including reinvesting in the business to reset its assortment strategy, build core competencies and talent, and drive long-term efficiencies. The Company expects to capture efficiencies and drive improvement in the following areas: 1) Revenue and Margin; 2) Marketing and Promotional Effectiveness; 3) Sourcing and Supply Chain; 4) Cost Cutting; and 5) Store Optimization.
Fiscal 2019 net sales decreased 13.7% from the prior year and company comparable sales decreased 11.0% as the average number of stores declined approximately 3.0%. The decline in company comparable sales is a result of lower average customer spend, which is primarily attributable to changes in the Company’s merchandise mix, as well as decreased store traffic. In addition, the decline reflects challenges related to the Company’s marketing program and delays in getting certain products into stores during a large portion of the fiscal year. The Company expects company comparable sales trends to remain soft in the first and second quarters of fiscal 2020, with gradual improvement over the course of the year.
Gross profit for fiscal 2019 was $450.9 million, or 29.0% of sales, compared to $658.1 million, or 36.6% of sales, in fiscal 2018, a decrease of 760 basis points. This decrease reflects lower merchandise margin, as well as 200 basis points of deleverage in store occupancy due to lower sales. The decline in merchandise margin is primarily attributable to lower input margins and increased promotional and clearance activity.
Operating loss for fiscal 2019 was $188.1 million, or (12.1%) of sales, compared to operating income of $28.6 million, or 1.6% of sales, in fiscal 2018. Net loss for fiscal 2019 was $198.8 million, or $(2.46) per share, which includes transformation costs of approximately $19 million primarily related to professional fees and severance costs. Net income for fiscal 2018 was $11.6 million, or $0.14 per share, and adjusted net income (non-GAAP) was $16.8 million, or $0.21 per share. Adjusted net income (non-GAAP) for fiscal 2018 excludes $6.6 million ($5.2 million, or $0.07 per share, net of tax) of expense for legal and regulatory costs relating to a California wage-and-hour matter and an ongoing Consumer Product Safety Commission (“CPSC”) inquiry. EBITDA (earnings before interest, taxes, depreciation and amortization) for fiscal 2019 was $(136.7) million, and includes the transformation costs referred to above. This compares to EBITDA of $82.7 million, and adjusted EBITDA of $89.3 million, in fiscal 2018 as adjusted for the legal and regulatory costs described above. See “
Reconciliation of Non-GAAP Financial Measures
” below.
The Company closed 30 and 15 stores, on a net basis, during fiscal 2019 and fiscal 2018, respectively. The Company is considering closing up to 45 locations in fiscal 2020 as leases expire.
During fiscal 2019
, the Company utilized
$36.4 million of cash for capital expenditures, which was deployed toward technology and infrastructure initiatives, distribution and fulfillment centers and new and existing stores. The Company also made investments in selling, general and administrative (“SG&A”) expenditures in the areas of marketing, corporate services and facilities planning and store operations.
The Company amended its secured Revolving Credit Facility to include a new $50 million FILO Tranche (as such terms are defined in
Note 4
of the
Notes to Consolidated Financial Statements
), which was completed and funded on December 14, 2018, expanding the Revolving Credit Facility from $350 million to $400 million and modifying the borrowing base.
As of March 2, 2019, the Company had $191.0 million outstanding under its $200 million senior secured term loan facility (“Term Loan Facility”) that matures on April 30, 2021, $50 million of borrowings under the FILO Tranche and no cash borrowings under the revolving portion of the Revolving Credit Facility. See
“Liquidity and Capital Resources
—
Revolving Credit Facility” and “Liquidity and Capital Resources
—
Term Loan Facility”
below for more information.
On December 18, 2018, Alasdair B. James, the Company’s former President and Chief Executive Officer, stepped down from the Company, and the Board of Directors of the Company appointed Cheryl A. Bachelder, a director of the Company, to the position of Interim Chief Executive Officer effective immediately. Ms. Bachelder continues to serve as a member of the Board of Directors.
On December 19, 2018, the Company announced that the Board of Directors initiated a process to evaluate a full range of strategic alternatives to enhance shareholder value and retained Credit Suisse to assist in that effort.
20
Overview of Business
The Company’s key financial and operational indicators used by management to evaluate the performance of the business include the following (trends for these indicators are explained in the comparative discussions below).
Key Performance Indicators
|
|
2019
|
|
|
2018
|
(1)
|
|
2017
|
|
Total sales decline
|
|
|
(13.7
|
%)
|
|
|
(1.6
|
%)
|
|
|
(3.4
|
%)
|
Company comparable sales decline
(2)
|
|
|
(11.0
|
%)
|
|
|
(2.0
|
%)
|
|
|
(1.0
|
%)
|
Gross profit as a % of sales
|
|
|
29.0
|
%
|
|
|
36.6
|
%
|
|
|
38.1
|
%
|
SG&A expenses as a % of sales
|
|
|
37.8
|
%
|
|
|
32.0
|
%
|
|
|
31.8
|
%
|
Operating income (loss) as a % of sales
|
|
|
(12.1
|
%)
|
|
|
1.6
|
%
|
|
|
3.3
|
%
|
Net income (loss) (in millions)
|
|
$
|
(198.8
|
)
|
|
$
|
11.6
|
|
|
$
|
30.1
|
|
Net income (loss) as a % of sales
|
|
|
(12.8
|
%)
|
|
|
0.6
|
%
|
|
|
1.6
|
%
|
EBITDA (in millions)
(3)
|
|
$
|
(136.7
|
)
|
|
$
|
82.7
|
|
|
$
|
110.6
|
|
EBITDA as a % of sales
(3)
|
|
|
(8.8
|
%)
|
|
|
4.6
|
%
|
|
|
6.0
|
%
|
Total retail square footage (in thousands)
|
|
|
7,693
|
|
|
|
7,934
|
|
|
|
8,048
|
|
(1)
|
Fiscal 2018 consisted of a 53-week year. All other fiscal years presented reflect a 52-week year.
|
(2)
|
All fiscal years were calculated on a 52-week basis.
|
(3)
|
See "Reconciliation of Non-GAAP Financial Measures."
|
Company Comparable Sales Calculation
—
The company comparable sales calculation includes all in-store sales, including orders placed online inside the store, 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. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the 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 Company’s established definition as described above.
FISCAL YEARS ENDED MARCH 2, 2019 AND MARCH 3, 2018
Net Sales
Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during fiscal 2019 were $1.553 billion for the 52-week period, a decrease of 13.7%, from $1.799 billion in the prior 53-week fiscal year. At the end of fiscal 2019, the Company operated 30 fewer stores than at the end of fiscal 2018. Company comparable sales (on a 52-week basis) for fiscal 2019 decreased 11.0% as compared to prior year.
The decline in company comparable sales is a result of lower average customer spend, which is primarily attributable to changes in the Company’s merchandise mix, as well as decreased store traffic. In addition, the decline reflects challenges related to the Company’s marketing program and delays in getting certain products into stores during a large portion of the fiscal year.
The Company
expects company comparable sales trends to remain soft in the first and second quarters of fiscal 2020, with gradual improvement over the course of the year.
Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. The year-over-year change in the value of the Canadian Dollar, relative to the U.S. Dollar, negatively impacted net sales by approximately 10 basis points and had no impact on company comparable sales. Sales on the Pier 1 rewards credit card comprised 32.4% of U.S. sales for fiscal 2019, compared to 36.6% in fiscal 2018. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.
The decrease in net sales for fiscal 2019 was comprised of the following components (in thousands):
|
|
Net Sales
|
|
Net sales for fiscal 2018
(1)
|
|
$
|
1,798,522
|
|
Incremental sales growth (decline) from:
|
|
|
|
|
Company comparable sales
(2)
|
|
|
(191,883
|
)
|
New stores opened during fiscal 2019
|
|
|
23
|
|
Stores opened during fiscal 2018
|
|
|
3,105
|
|
Closed stores and other
(2)
|
|
|
(56,829
|
)
|
Net sales for fiscal 2019
(1)
|
|
$
|
1,552,938
|
|
(1)
|
Fiscal 2018 consisted of a 53-week year, compared to a 52-week year for fiscal 2019. Net sales for fiscal 2018 included approximately $27.5 million from the 53
rd
week.
|
(
2
)
Comparable store sales for the 53
rd
week of fiscal 2018 are included in Closed Stores and Other.
21
A summary reconciliation of the Company’s stores open at the beginning of fiscal 201
9
and 201
8
to the number open at the end of each period is as follows (openings and closings include relocated stores):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
Open at February 25, 2017
|
|
|
941
|
|
|
|
77
|
|
|
|
1,018
|
|
Openings
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Closings
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
Open at March 3, 2018
|
|
|
928
|
|
|
|
75
|
|
|
|
1,003
|
|
Openings
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Closings
|
|
|
(23
|
)
|
|
|
(8
|
)
|
|
|
(31
|
)
|
Open at March 2, 2019
|
|
|
906
|
|
|
|
67
|
|
|
|
973
|
|
Gross Profit
Gross profit for fiscal 2019 was $450.9 million, or 29.0% of sales, compared to $658.1 million, or 36.6% of sales, in fiscal 2018, a decrease of 760 basis points. This decrease reflects lower merchandise margin, as well as 200 basis points of deleverage in store occupancy due to lower sales. The decline in merchandise margin is primarily attributable to lower input margins and increased promotional and clearance activity.
SG&A Expenses, Depreciation and Operating Income (Loss)
SG&A expenses were $587.5 million in fiscal 2019, compared to $576.0 million in fiscal 2018. As a percentage of sales, SG&A expenses were 37.8% in fiscal 2019 compared to 32.0% in fiscal 2018.
SG&A expenses are summarized in the table below (in millions):
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
|
Expense
|
|
|
% Sales
|
|
|
Expense
|
|
|
% Sales
|
|
Compensation for operations
|
|
$
|
241.7
|
|
|
|
15.6
|
%
|
|
$
|
239.9
|
|
|
|
13.3
|
%
|
Operational expenses
|
|
|
82.9
|
|
|
|
5.3
|
%
|
|
|
88.8
|
|
|
|
4.9
|
%
|
Marketing
|
|
|
118.4
|
|
|
|
7.6
|
%
|
|
|
105.6
|
|
|
|
5.9
|
%
|
Other selling, general and administrative
|
|
|
144.4
|
|
|
|
9.3
|
%
|
|
|
141.6
|
|
|
|
7.9
|
%
|
Total selling, general and administrative
|
|
$
|
587.5
|
|
|
|
37.8
|
%
|
|
$
|
576.0
|
|
|
|
32.0
|
%
|
For fiscal 2019, marketing expenses included planned investments related to the Company’s brand relaunch, which were offset by ongoing expense discipline throughout the organization. Fiscal 2019 SG&A expenses include transformation costs of approximately $19 million primarily related to professional fees and severance costs. SG&A expenses for fiscal 2018 include expenses for legal and regulatory costs related to a California wage-and-hour matter and an ongoing CPSC inquiry, as well as investments in brand consulting totaling approximately $12 million.
Depreciation for fiscal 2019 was $51.5 million, compared to $53.6 million in fiscal 2018. The decrease was primarily attributable to assets becoming fully depreciated and asset retirements, partially offset by additions.
Operating loss for fiscal 2019 was $188.1 million, or (12.1%) of sales, compared to operating income of $28.6 million, or 1.6% of sales, for fiscal 2018.
Income Taxes
The income tax benefit for fiscal 2019 was $2.5 million, compared to income tax provision of $6.3 million in fiscal 2018. The effective tax rate for fiscal 2019 was 1.3%, compared to 35.0% for fiscal 2018. The change in income tax provision (benefit) and the lower effective tax rate for fiscal 2019 primarily relates to the Company’s pre-tax loss in fiscal 2019, compared to pre-tax income in the prior year, offset by the reassessment of the realizability of its deferred tax assets and the ability to recognize deferred tax assets for losses generated in fiscal 2019. The effective tax rate for fiscal 2018 was also impacted by certain non-deductible items recognized during the second quarter of fiscal 2018, including the CPSC matter referenced above, partially offset by certain favorable discrete items related to state income tax benefits and the provisional remeasurement of the Company’s federal deferred tax assets and liabilities. See
Note 7
of the
Consolidated Financial Statements
for additional information.
Net Income (Loss) and EBITDA
Net loss in fiscal 2019, which consisted of 52 weeks, was $198.8 million, or $(2.46) per share, which includes transformation costs of approximately $19 million primarily related to professional fees and severance costs. Net income in fiscal 2018, which consisted of 53 weeks, was $11.6 million, or $0.14 per share, and adjusted net income (non-GAAP), which excludes the legal and regulatory costs referenced above, totaled $16.8 million, or $0.21 per share. EBITDA for fiscal 2019 was $(136.7) million, and includes the transformation costs referred to above.
This compares to EBITDA of $82.7 million, and adjusted EBITDA of $89.3 million, in fiscal 2018 as adjusted for legal and regulatory costs described above.
See “
Reconciliation of Non-GAAP Financial Measures.”
22
FISCAL YEARS
ENDED MARCH 3, 2018 AND FEBRUARY 25, 2017
Net Sales
Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during fiscal years 2018 and 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Retail sales
|
|
$
|
1,785,989
|
|
|
$
|
1,816,402
|
|
Other
(1)
|
|
|
12,533
|
|
|
|
12,044
|
|
Net sales
|
|
$
|
1,798,522
|
|
|
$
|
1,828,446
|
|
(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 in Mexico and El Salvador and online in Mexico. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage.
|
Net sales during fiscal 2018 were $1.799 billion for the 53-week period, a decrease of 1.6%, from $1.828 billion in the prior 52-week fiscal year. At the end of fiscal 2018, the Company operated 15 fewer stores than at the end of fiscal 2017. Company comparable sales for fiscal 2018 (on a 52-week basis) decreased 2.0% as compared to prior year, primarily resulting from decreased store traffic and average ticket, partially offset by higher conversion.
Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. The year-over-year change in the value of the Canadian Dollar, relative to the U.S. Dollar, positively impacted net sales and company comparable sales by approximately 20 basis points and 10 basis points, respectively, in fiscal 2018. Sales on the Pier 1 rewards credit card comprised 36.6% of U.S. sales for both fiscal 2018 and fiscal 2017. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.
The decrease in net sales for fiscal 2018 was comprised of the following components (in thousands):
|
|
Net Sales
|
|
Net sales for fiscal 2017
|
|
$
|
1,828,446
|
|
Incremental sales growth (decline) from:
|
|
|
|
|
Company comparable sales
(1)
|
|
|
(36,029
|
)
|
New stores opened during fiscal 2018
|
|
|
1,213
|
|
Stores opened during fiscal 2017
|
|
|
1,409
|
|
Closed stores and other
(1)
|
|
|
3,483
|
|
Net sales for fiscal 2018
|
|
$
|
1,798,522
|
|
(1)
|
Comparable store sales for the 53rd week of fiscal 2018 are included in Closed Stores and Other.
|
A summary reconciliation of the Company’s stores open at the beginning of fiscal 2018 and 2017 to the number open at the end of each period is as follows (openings and closings include relocated stores):
|
|
United
States
|
|
|
Canada
|
|
|
Total
|
|
Open at February 27, 2016
|
|
|
953
|
|
|
|
79
|
|
|
|
1,032
|
|
Openings
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
Closings
|
|
|
(19
|
)
|
|
|
(2
|
)
|
|
|
(21
|
)
|
Open at February 25, 2017
|
|
|
941
|
|
|
|
77
|
|
|
|
1,018
|
|
Openings
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Closings
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
Open at March 3, 2018
|
|
|
928
|
|
|
|
75
|
|
|
|
1,003
|
|
Gross Profit and Merchandise Margin
Gross profit for fiscal 2018 was $658.1 million, or 36.6% of sales, compared to $697.3 million, or 38.1% of sales, in fiscal 2017, a decrease of 150 basis points. The year-over-year decline in merchandise margin is primarily attributable to higher promotional activity, partially offset by supply chain cost savings. Store occupancy costs decreased in dollars during fiscal 2018; however, as a percentage of sales, these costs deleveraged to 16.2% compared to 16.0% during fiscal 2017 as a result of lower sales.
23
SG&A
Expenses, Depreciation and Operating Income
SG&A expenses were $576.0 million in fiscal 2018, compared to $581.8 million in fiscal 2017. As a percentage of sales, SG&A expenses were 32.0% in fiscal 2018 compared to 31.8% in fiscal 2017. SG&A expenses are summarized in the table below (in millions):
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
|
|
Expense
|
|
|
% Sales
|
|
|
Expense
|
|
|
% Sales
|
|
Compensation for operations
|
|
$
|
239.9
|
|
|
|
13.3
|
%
|
|
$
|
249.7
|
|
|
|
13.7
|
%
|
Operational expenses
|
|
|
88.8
|
|
|
|
4.9
|
%
|
|
|
87.6
|
|
|
|
4.8
|
%
|
Marketing
|
|
|
105.6
|
|
|
|
5.9
|
%
|
|
|
104.4
|
|
|
|
5.7
|
%
|
Other selling, general and administrative
|
|
|
141.6
|
|
|
|
7.9
|
%
|
|
|
140.1
|
|
|
|
7.7
|
%
|
Total selling, general and administrative
|
|
$
|
576.0
|
|
|
|
32.0
|
%
|
|
$
|
581.8
|
|
|
|
31.8
|
%
|
The year-over-year decrease in the dollar amount of SG&A expenses was primarily attributable to reductions in store compensation. The decrease was primarily offset by approximately $12 million for legal and regulatory costs related to a California wage-and-hour matter and an ongoing CPSC inquiry (referenced in
Note 8
of the
Consolidated Financial Statements – Commitments and Contingencies
), as well as investments in brand consulting. Other selling, general and administrative expenses in fiscal 2017 include approximately $6 million of costs associated with the departure of the Company’s former CEO and approximately $7 million for incremental legal and advisory fees, CEO transition costs, including CEO search fees and retention program awards to executives, and certain costs for subleasing portions of the corporate headquarters.
Depreciation for fiscal 2018 was $53.6 million, compared to $54.6 million in fiscal 2017. The decrease was primarily attributable to assets becoming fully depreciated, partially offset by additions and accelerated depreciation for certain assets.
In fiscal 2018, the Company recorded operating income of $28.6 million, or 1.6% of sales, compared to $60.9 million, or 3.3% of sales, for fiscal 2017.
Income Taxes
The income tax provision for fiscal 2018 was $6.3 million, compared to $15.1 million in fiscal 2017. The decrease was primarily due to the Company’s lower income before income taxes in fiscal 2018. The effective tax rate for fiscal 2018 was 35.0%, compared to 33.4% for fiscal 2017. The higher effective tax rate primarily relates to the impact of certain non-deductible items recognized in the second quarter of fiscal 2018, including the CPSC matter referenced above, partially offset by certain favorable discrete items related to state income tax benefits and the provisional remeasurement of the Company’s federal deferred tax assets and liabilities.
The Tax Cuts and Jobs Act of 2017 (“Tax Act”), as signed by the President of the United States on December 22, 2017, significantly revised U.S. tax law. See
Note 7
to the
Consolidated Financial Statements
for additional information.
Net Income and EBITDA
Net income in fiscal 2018, which consisted of 53 weeks, was $11.6 million, or $0.14 per share. Adjusted net income (non-GAAP) for fiscal 2018, which excludes the legal and regulatory costs referenced above, totaled $16.8 million, or $0.21 per share. For fiscal 2017, which consisted of 52 weeks, net income was $30.1 million, or $0.37 per share, and adjusted net income (non-GAAP) was $35.7 million, or $0.44 per share. Adjusted net income for the fiscal 2017 period excludes costs related to the departure of the Company’s former CEO and the related tax benefit. EBITDA for fiscal 2018 was $82.7 million and adjusted EBITDA was $89.3 million after excluding the legal and regulatory costs referenced above. This compares to EBITDA of $110.6 million, and adjusted EBITDA of $120.4 million, in fiscal 2017 as adjusted for costs related to the departure of a former CEO who left the Company during fiscal 2017. 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
Annual Report on Form 10-K
references non-GAAP financial measures including adjusted net income (loss), adjusted earnings (loss) per share, EBITDA and adjusted EBITDA.
The Company believes the non-GAAP financial measures referenced in this
Annual Report on Form 10-K
allow management and investors to understand and compare results in a more consistent manner for the fiscal years ended March 2, 2019, March 3, 2018 and February 25, 2017. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented.
EBITDA represents earnings before interest, taxes, depreciation and amortization. Management believes EBITDA is a meaningful indicator of the Company’s performance which provides useful information to investors regarding its financial condition and results of operations. Management uses EBITDA, together with financial measures prepared in accordance with GAAP, to assess the Company’s operating performance, to enhance its understanding of core operating performance and to compare the Company’s operating performance to other retailers. EBITDA should not be considered in isolation or used as an alternative to GAAP financial measures and
24
does not purport to be an alternative to net inc
ome (loss) as a measure of o
perating performance. A reconciliation of
net income (loss)
to
EBITDA is shown below for the
periods indicated
(in millions).
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
|
|
$ Amount
|
|
|
% of Sales
|
|
|
$ Amount
|
|
|
% of Sales
|
|
|
$ Amount
|
|
|
% of Sales
|
|
Net income (loss) (GAAP)
|
|
$
|
(198.8
|
)
|
|
|
(12.8
|
%)
|
|
$
|
11.6
|
|
|
|
0.6
|
%
|
|
$
|
30.1
|
|
|
|
1.6
|
%
|
Add back: Income tax provision (benefit)
|
|
|
(2.5
|
)
|
|
|
(0.2
|
%)
|
|
|
6.3
|
|
|
|
0.4
|
%
|
|
|
15.1
|
|
|
|
0.9
|
%
|
Interest expense, net
|
|
|
13.2
|
|
|
|
0.8
|
%
|
|
|
11.2
|
|
|
|
0.6
|
%
|
|
|
10.7
|
|
|
|
0.6
|
%
|
Depreciation
|
|
|
51.5
|
|
|
|
3.3
|
%
|
|
|
53.6
|
|
|
|
3.0
|
%
|
|
|
54.6
|
|
|
|
3.0
|
%
|
EBITDA (non-GAAP)
|
|
$
|
(136.7
|
)
|
|
|
(8.8
|
%)
|
|
$
|
82.7
|
|
|
|
4.6
|
%
|
|
$
|
110.6
|
|
|
|
6.0
|
%
|
This Annual Report on Form 10-K also references adjusted net income (loss), adjusted earnings (loss) per share and adjusted EBITDA, each of which excludes legal and regulatory costs related to a California wage-and-hour matter and an ongoing CPSC inquiry in fiscal 2018 and costs related to the departure of the Company’s former CEO in fiscal 2017. Management believes these non-GAAP financial measures are useful in comparing the Company’s year-over-year operating performance and should be considered supplemental and not a substitute for the Company’s net income (loss) and earnings (loss) per share results reported in accordance with GAAP for the periods presented. A reconciliation of net income (loss), earnings (loss) per share and EBITDA to adjusted net income (loss), adjusted earnings (loss) per share and adjusted EBITDA, respectively, is shown below (in millions except per share amounts).
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
Net income (loss) (GAAP)
|
|
$
|
(198.8
|
)
|
|
$
|
11.6
|
|
|
$
|
30.1
|
|
Add back: CEO departure-related costs, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
5.6
|
|
Legal and regulatory matters, net of tax
|
|
|
—
|
|
|
|
5.2
|
|
|
|
—
|
|
Adjusted net income (loss) (non-GAAP)
|
|
$
|
(198.8
|
)
|
|
$
|
16.8
|
|
|
$
|
35.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share (GAAP)
|
|
$
|
(2.46
|
)
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
Add back: CEO departure-related costs, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
0.07
|
|
Legal and regulatory matters, net of tax
|
|
|
—
|
|
|
|
0.07
|
|
|
|
—
|
|
Adjusted earnings (loss) per share (non-GAAP)
|
|
$
|
(2.46
|
)
|
|
$
|
0.21
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (non-GAAP)
|
|
$
|
(136.7
|
)
|
|
$
|
82.7
|
|
|
$
|
110.6
|
|
Add back: CEO departure-related costs
|
|
|
—
|
|
|
|
—
|
|
|
|
9.8
|
|
Legal and regulatory matters
|
|
|
—
|
|
|
|
6.6
|
|
|
|
—
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
(136.7
|
)
|
|
$
|
89.3
|
|
|
$
|
120.4
|
|
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash and cash equivalents totaled $54.9 million at the end of fiscal 2019, a decrease of $80.5 million from the fiscal 2018 year-end balance
. The decrease was primarily the result of cash used in operating activities of $98.8 million and the utilization of cash to fund the Company’s capital expenditures of $36.4 million
, partially offset by borrowings of $50.0 million under the FILO Tranche of the Revolving Credit Facility. See
Note 4
of the
Notes to Consolidated Financial Statements
for additional information.
The Company’s cash and cash equivalents totaled $135.4 million at the end of fiscal 2018, a decrease of $19.1 million from the fiscal 2017 year-end balance. The decrease was primarily due to the utilization of cash to fund the Company’s capital expenditures of $53.2 million, and to return excess capital to shareholders, including $22.3 million for cash dividends and $10.0 million to repurchase shares of the Company’s common stock under the April 2014 program, partially offset by cash provided by operating activities of $65.8 million.
Cash Flows from Operating Activities
Operating activities used $98.8 million of cash in fiscal 2019,
primarily as a result of a net loss of $198.8 million,
partially offset by adjustments for non-cash items and an increase in accounts payable and other liabilities. The increase in accounts payable from the fiscal 2018 year end primarily resulted from changes in trade terms with certain vendors. Inventory levels at the end of fiscal 2019 were $347.6 million, essentially flat compared to the $347.4 million balance at the end of fiscal 2018.
Operating activities provided $65.8 million of cash in fiscal 2018,
primarily as a result of net income adjusted for non-cash items
as well as a decrease in inventory. These items were partially offset by an increase in federal and state income tax payments and a supplemental retirement plan lump sum distribution payment of approximately $24 million to a former CEO who left the Company during fiscal 2017. Inventory levels at the end of fiscal 2018 were $347.4 million, a decrease of $53.5 million, or 13.4%, from the end of fiscal 2017.
Cash Flows from Investing Activities
During fiscal 2019, the Company’s investing activities used $29.3 million of cash, primarily related to
capital e
xpenditures of $36.4 million, which were deployed toward technology and infrastructure initiatives, distribution and fulfillment centers and new and existing stores, partially offset by net restricted investment activity. Capital spend in fiscal 2020 is expected to be approximately $30 million.
25
During fiscal 2018, the Company’s investing activities used $51.6 million of cash.
Total capital e
xpenditures in fiscal 2018 were $53.2 million, which were deployed toward technology and infrastructure initiatives, new and existing stores, and distribution and fulfillment centers.
Cash Flows from Financing Activities
Financing activities for fiscal 2019 provided $48.2 million of cash, primarily resulting from borrowings of $50.0 million under the FILO Tranche of the Revolving Credit Facility, partially offset by cash outflows for repayments of long-term debt and debt issuance costs.
Financing activities for fiscal 2018 used $33.3 million of cash, primarily resulting from cash outflows of $22.3 million for the payment of
quarterly cash dividends of $0.07 per share per quarter for each quarter of fiscal 2018, and $10.0 million for
repurchases of the Company’s common stock pursuant to the April 2014 program
. See “
Share Repurchase Program
” below for more information.
Revolving Credit Facility
In December 2018, the Company amended its Revolving Credit Facility to include a new $50.0 million FILO Tranche. The Revolving Credit Facility continues to be secured primarily by the Company’s eligible merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and by a second lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions.
During fiscal 2019, the Company had
$50.0 million in
cash borrowings from the FILO Tranche referenced above and no cash borrowings under the revolving portion of the 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 $279.6 million as of March 2, 2019. Under the Revolving Credit Facility, the Company had $41.6 million in letters of credit and bankers’ acceptances outstanding, with $238.0 million remaining available for cash borrowings, all as of March 2, 2019. See
Note 4
of the
Notes to Consolidated Financial Statements
for more information regarding the Revolving Credit Facility and the FILO Tranche.
Term Loan Facility
The Company has a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of March 2, 2019, the Company had $191.0 million outstanding under the Term Loan Facility with a carrying value of $189.3 million, net of unamortized discounts and debt issuance costs. See
Note 4
of the
Notes to Consolidated Financial Statements
for more information regarding the Term Loan Facility.
Share Repurchase Program
The Company discontinued share repurchases under the April 2014 program in April 2018. No share repurchases were made during fiscal 2019.
During fiscal 2018, the Company repurchased 1,926,602 shares of its common stock under the April 2014 program at a weighted average cost of $5.19 per share for a total cost of $10.0 million. As of March 3, 2018, the Company had repurchased 16,390,090 shares of its common stock under the April 2014 program at a weighted average cost of $10.58 per share for a total cost of $173.4 million and $26.6 million remained available for further share repurchases.
26
Contractual
Obligations
A summary of the Company’s contractual obligations and other commercial commitments as of March 2, 2019, is listed below (in thousands):
|
|
|
|
|
|
Amount of Commitment per Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Operating leases
|
|
$
|
928,481
|
|
|
$
|
225,845
|
|
|
$
|
353,966
|
|
|
$
|
210,116
|
|
|
$
|
138,554
|
|
Purchase obligations
(1)
|
|
|
80,177
|
|
|
|
80,177
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Standby letters of credit
(2)
|
|
|
31,927
|
|
|
|
31,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Industrial revenue bonds
(2)
|
|
|
9,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,500
|
|
Interest on industrial revenue bonds
(3)
|
|
|
1,296
|
|
|
|
167
|
|
|
|
334
|
|
|
|
334
|
|
|
|
461
|
|
Interest and related fees on Revolving Credit Facility
(4)
|
|
|
4,217
|
|
|
|
1,291
|
|
|
|
2,583
|
|
|
|
343
|
|
|
|
—
|
|
FILO Tranche
(5)
|
|
|
50,000
|
|
|
|
—
|
|
|
|
3,063
|
|
|
|
46,937
|
|
|
|
—
|
|
Interest and related fees on FILO Tranche
(5)
|
|
|
14,650
|
|
|
|
4,628
|
|
|
|
8,851
|
|
|
|
1,171
|
|
|
|
—
|
|
Term loan facility
(6)
|
|
|
191,000
|
|
|
|
2,000
|
|
|
|
189,000
|
|
|
|
—
|
|
|
|
—
|
|
Interest and related fees on term loan facility
(6)
|
|
|
26,278
|
|
|
|
12,192
|
|
|
|
14,086
|
|
|
|
—
|
|
|
|
—
|
|
Other obligations
(7) (8)
|
|
|
20,257
|
|
|
|
4,226
|
|
|
|
2,440
|
|
|
|
2,192
|
|
|
|
11,399
|
|
Total
|
|
$
|
1,357,783
|
|
|
$
|
362,453
|
|
|
$
|
574,323
|
|
|
$
|
261,093
|
|
|
$
|
159,914
|
|
(1)
|
As of March 2, 2019, the Company had approximately $80.2 million of outstanding purchase orders, which were primarily related to merchandise inventory. Such orders are generally cancelable at the discretion of the Company until the order has been shipped. The table above excludes certain executory contracts for goods and services that tend to be recurring in nature and similar in amount year over year.
|
(2)
|
The Company also has an outstanding standby letter of credit totaling $9.7 million related to the Company's industrial revenue bonds. This amount is excluded from the table above as it is not incremental to the Company's total outstanding commitments.
|
(3)
|
The interest rates on the Company's industrial revenue bonds are variable and reset weekly. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 2019 year end and exclude fees for the related standby letter of credit, as these fees are included in interest and related fees on the Revolving Credit Facility.
|
(4)
|
Represents estimated commitment fees for trade and standby letters of credit, and unused balance fees on the Company's Revolving Credit Facility. Fees are calculated based upon balances at fiscal 2019 year end and the applicable rates in effect under the terms of the Revolving Credit Facility.
|
(5
)
|
The interest rates on the Company's FILO Loan and ABL Term Loan included in the FILO Tranche are variable. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 2019 year end. Beginning June 30, 2020, a principal reduction in the amount of approximately $0.4 million will be made on the last day of each calendar quarter. The FILO Loan and ABL Term Loan included in the FILO Tranche mature on June 2, 2022.
|
(
6
)
|
The interest rates on the Company's Term Loan Facility are variable. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 2019 year end. Currently, a principal reduction in the amount of $0.5 million is made on the last day of each calendar quarter, reducing principal by $2.0 million annually. The Term Loan Facility matures on April 30, 2021.
|
(
7
)
|
Other obligations include various commitments including the Company's liability under its unfunded retirement plans.
|
(
8
)
|
Excluded from this table, but recorded on the Company's balance sheet, is the portion of reserves for unrecognized tax benefits of $3.7 million for which the Company is not reasonably able to estimate when or if cash settlement with the respective taxing authority will occur.
|
The Company has an umbrella trust which was established for the purpose of setting aside funds to be used to settle certain benefit plan obligations. The trusts’ assets are included in other noncurrent assets and are comprised of investments and life insurance policies. The investments totaled $5.1 million and $9.8 million at March 2, 2019 and March 3, 2018, respectively. The investments were held primarily in mutual funds and are stated at fair value. The trust owns and is the beneficiary of life insurance policies on the lives of former key executives. The cash surrender value of the policies was approximately $6.3 million and $6.2 million as of March 2, 2019 and March 3, 2018, respectively, and the death benefit was approximately $11.4 million as of March 2, 2019 and March 3, 2018.
In addition, the Company owns and is the beneficiary of a number of insurance policies on the lives of former key executives that were unrestricted as to use at the end of fiscal 2019. The cash surrender value of the unrestricted policies was approximately $14.3 million and $14.1 million at March 2, 2019 and March 3, 2018, respectively, and was included in other noncurrent assets. These policies had a death benefit of approximately $20.5 million and $20.4 million as of March 2, 2019 and March 3, 2018, respectively. At the discretion of the Company’s Board of Directors, contributions of cash or unrestricted life insurance policies may be made to the trust.
Sources and Uses of Working Capital
The Company’s sources of working capital for fiscal 2019 were primarily cash from operations, available cash balances, improved vendor payment terms and the $50 million FILO Tranche. The Company’s sources for liquidity include cash from operations, available cash balances and, as needed, borrowings against the Company’s Revolving Credit Facility. The Company’s current plans for fiscal 2020 include a capital expenditure plan lower than fiscal 2019 and planned savings from margin improvement and cost cutting partially offset by reinvestments to reset the assortment strategy, build core competencies and talent and drive long-term efficiencies. The Company does not presently anticipate any other significant cash outflows in fiscal 2020 other than those discussed herein or those occurring in the normal course of business
.
The Company’s key drivers of cash flows are sales, management of inventory levels, vendor payment terms, management of expenses and capital expenditures. The Company’s focus is on improving brand proposition, driving sales growth and capturing operating efficiencies. While there can be no assurance that the Company will return to positive cash flows or profitability, given the Company’s current cash position, expected operating cash flows and borrowings available under the Revolving Credit Facility, the Company expects to have sufficient liquidity to fund its obligations, including debt-related payments and capital expenditure requirements, through the next 12 months.
27
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases, letters of credit and purchase obligations discussed above, the Company has no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Historically, actual results have not varied materially from the Company’s estimates. The Company does not currently anticipate a significant change in its assumptions related to these estimates. Actual results may differ from these estimates under different assumptions or conditions. The Company’s significant accounting policies can be found in
Note 1
of the
Notes to Consolidated Financial Statements
. The policies and estimates discussed below include the financial statement elements that are judgmental and are material to the Company’s financial statements. Unless specifically addressed below, the Company does not believe that its critical accounting policies subject the Company to market risk exposure that would be considered material, and, as a result, has not provided a sensitivity analysis. The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered most critical are as follows:
Revenue recognition
—
Revenue
is recognized upon customer receipt or delivery for retail sales. A reserve has been established for estimated merchandise returns based upon historical experience and other known factors.
Should actual returns differ from the Company’s estimated reserve for merchandise returns, revisions to the estimate may be required.
The Company’s revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties.
Amounts charged to customers for shipping and handling are included in net sales.
Gift cards
—
Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as payment. Prior to fiscal 2019, gift card breakage was estimated and recorded as income based upon an analysis of the Company’s historical data and expected trends in redemption patterns and represented the remaining non-escheatable unused portion of the gift card liability for which the likelihood of redemption was
remote. During fiscal 2019, the Company adopted new revenue recognition guidance and began recognizing gift card breakage over the expected redemption period rather than when the likelihood of redemption was remote. If actual redemption patterns vary from the Company’s estimates or if laws or regulations change, actual gift card breakage may differ from the amounts recorded.
Inventories
—
The Company’s inventory is comprised of finished merchandise and is stated at the lower of weighted average cost and net realizable value. The calculation of cost includes merchandise purchases, the costs to bring the merchandise to distribution centers, warehousing and handling expenditures, and distributing and delivering merchandise to stores and fulfillment centers (direct and indirect). These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying amount of the inventory. The Company reviews its inventory levels in order to identify slow-moving merchandise and uses merchandise markdowns to sell such merchandise, as needed. Since the determination of net realizable value of inventory involves both estimation and judgment with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.
The Company recognizes known inventory losses, shortages and damages when incurred and maintains a reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded.
The amount of the reserve is estimated based on historical experience from the results of its physical inventories.
Inventory is physically counted at substantially all locations at least once in each twelve-month period, at which time actual results are reflected in the financial statements. Physical counts were taken at substantially all stores and distribution and fulfillment centers during each period presented in the financial statements. Although inventory shrinkage rates have not fluctuated significantly in recent years, should actual rates differ from the Company’s estimates, revisions to the inventory shrinkage expense may be required.
Insurance provision
—
The Company maintains insurance for workers’ compensation and general liability claims with deductibles of $1.0 million and $0.5 million per occurrence, respectively. The liability recorded for such claims is determined by estimating the total future claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims loss development factors as well as information obtained from and projections made by the Company’s broker, actuary, insurance carriers and third-party claims administrators. The recorded liabilities for workers’ compensation and general liability claims include claims occurring in prior years but not yet settled and reserves for fees.
The assumptions made in determining the above estimates are reviewed monthly and the liability adjusted accordingly as new facts are developed. Changes in circumstances and conditions affecting the assumptions used in determining the liabilities could cause actual results to differ from the Company’s recorded amounts.
Income taxes
—
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are recorded in the Company’s consolidated balance sheets and are classified as noncurrent. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered including past operating results, estimates of future income and tax planning strategies. The Company is subject to income tax in many jurisdictions, including the United States, various
28
states, provinces, localities and foreig
n countries, for which the Company records estimated reserves for unrecognized tax benefits for both domestic and foreign income tax issues. At any point in time, multiple tax years are subject to audit by these various jurisdictions. The timing of these a
udits and negotiations with taxing authorities may affect the ultimate settlement of these issues. If different assumptions had been used, the Company’s tax expense or benefit, assets and liabilities could have varied from recorded amounts. If actual resul
ts differ from estimated results or if the Company adjusts these assumptions in the future, the Company may need to adjust its reserves for unrecognized tax benefits or its deferred tax assets or liabilities, which could impact its effective tax rate.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the Company during the preceding three fiscal years. However, the Company’s management cannot be certain of the effect inflation may have on the Company’s operations in the future.
29
Item 8. Financial Statement
s and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Pier 1 Imports, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pier 1 Imports, Inc. (the Company) as of March 2, 2019 and March 3, 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows, for each of the three years in the period ended March 2, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 2, 2019 and March 3, 2018, and the results of its operations and its cash flows for each of the three years in the period ended March 2, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 2, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 29, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for gift card breakage in the first quarter of fiscal year 2019 in connection with the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.
Fort Worth, Texas
April 29, 2019
31
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
Net sales
|
|
$
|
1,552,938
|
|
|
$
|
1,798,522
|
|
|
$
|
1,828,446
|
|
Cost of sales
|
|
|
1,102,035
|
|
|
|
1,140,372
|
|
|
|
1,131,138
|
|
Gross profit
|
|
|
450,903
|
|
|
|
658,150
|
|
|
|
697,308
|
|
Selling, general and administrative expenses
|
|
|
587,459
|
|
|
|
575,953
|
|
|
|
581,770
|
|
Depreciation
|
|
|
51,529
|
|
|
|
53,603
|
|
|
|
54,603
|
|
Operating income (loss)
|
|
|
(188,085
|
)
|
|
|
28,594
|
|
|
|
60,935
|
|
Nonoperating (income) and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, investment income and other
|
|
|
(2,000
|
)
|
|
|
(1,665
|
)
|
|
|
3,603
|
|
Interest expense
|
|
|
15,294
|
|
|
|
12,362
|
|
|
|
12,073
|
|
|
|
|
13,294
|
|
|
|
10,697
|
|
|
|
15,676
|
|
Income (loss) before income taxes
|
|
|
(201,379
|
)
|
|
|
17,897
|
|
|
|
45,259
|
|
Income tax provision (benefit)
|
|
|
(2,546
|
)
|
|
|
6,271
|
|
|
|
15,130
|
|
Net income (loss)
|
|
$
|
(198,833
|
)
|
|
$
|
11,626
|
|
|
$
|
30,129
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.46
|
)
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
(2.46
|
)
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
Dividends declared per share:
|
|
$
|
—
|
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
Average shares outstanding during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,708
|
|
|
|
80,223
|
|
|
|
80,919
|
|
Diluted
|
|
|
80,708
|
|
|
|
80,254
|
|
|
|
80,984
|
|
The accompanying notes are an integral part of these financial statements.
32
Pier 1 Imports, Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
Net income (loss)
|
|
$
|
(198,833
|
)
|
|
$
|
11,626
|
|
|
$
|
30,129
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments,
net of taxes of $0, $(167) and $60, respectively
|
|
|
(1,096
|
)
|
|
|
396
|
|
|
|
1,274
|
|
Pension adjustments, net of taxes of $0, $293 and $(1,243), respectively
|
|
|
712
|
|
|
|
(459
|
)
|
|
|
1,949
|
|
Other comprehensive income (loss)
|
|
|
(384
|
)
|
|
|
(63
|
)
|
|
|
3,223
|
|
Comprehensive income (loss)
|
|
$
|
(199,217
|
)
|
|
$
|
11,563
|
|
|
$
|
33,352
|
|
The accompanying notes are an integral part of these financial statements.
33
Pier 1 Imports, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
|
|
March 2,
2019
|
|
|
March 3,
2018
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including temporary investments of $49,532 and $115,456, respectively
|
|
$
|
54,878
|
|
|
$
|
135,379
|
|
Accounts receivable, net of allowance for doubtful accounts of $251 and $236, respectively
|
|
|
21,189
|
|
|
|
22,149
|
|
Inventories
|
|
|
347,584
|
|
|
|
347,440
|
|
Prepaid expenses and other current assets
|
|
|
49,876
|
|
|
|
48,794
|
|
Total current assets
|
|
|
473,527
|
|
|
|
553,762
|
|
Properties and equipment, net
|
|
|
149,356
|
|
|
|
178,767
|
|
Other noncurrent assets
|
|
|
33,407
|
|
|
|
39,790
|
|
|
|
$
|
656,290
|
|
|
$
|
772,319
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
121,969
|
|
|
$
|
71,279
|
|
Gift cards and other deferred revenue
|
|
|
37,655
|
|
|
|
55,281
|
|
Accrued income taxes payable
|
|
|
302
|
|
|
|
2,301
|
|
Current portion of long-term debt
|
|
|
2,000
|
|
|
|
2,000
|
|
Other accrued liabilities
|
|
|
107,539
|
|
|
|
106,268
|
|
Total current liabilities
|
|
|
269,465
|
|
|
|
237,129
|
|
Long-term debt
|
|
|
245,624
|
|
|
|
197,906
|
|
Other noncurrent liabilities
|
|
|
51,672
|
|
|
|
59,714
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par, 500,000,000 shares authorized, 125,232,000 issued
|
|
|
125
|
|
|
|
125
|
|
Paid-in capital
|
|
|
138,350
|
|
|
|
168,424
|
|
Retained earnings
|
|
|
534,419
|
|
|
|
726,232
|
|
Cumulative other comprehensive loss
|
|
|
(7,861
|
)
|
|
|
(7,477
|
)
|
Less — 39,618,000 and 41,974,000 common shares in treasury, at cost, respectively
|
|
|
(575,504
|
)
|
|
|
(609,734
|
)
|
Total shareholders' equity
|
|
|
89,529
|
|
|
|
277,570
|
|
|
|
$
|
656,290
|
|
|
$
|
772,319
|
|
The accompanying notes are an integral part of these financial statements.
34
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
March 2, 2019
|
|
|
March 3, 2018
|
|
|
February 25, 2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(198,833
|
)
|
|
$
|
11,626
|
|
|
$
|
30,129
|
|
Adjustments to reconcile to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
59,523
|
|
|
|
61,430
|
|
|
|
60,504
|
|
Stock-based compensation expense
|
|
|
2,756
|
|
|
|
3,809
|
|
|
|
8,228
|
|
Deferred compensation, net
|
|
|
4,169
|
|
|
|
2,414
|
|
|
|
8,438
|
|
Deferred income taxes
|
|
|
(3,071
|
)
|
|
|
6,012
|
|
|
|
(19,645
|
)
|
Excess tax benefit from stock-based awards
|
|
|
—
|
|
|
|
—
|
|
|
|
(312
|
)
|
Other
|
|
|
3,615
|
|
|
|
2,111
|
|
|
|
8,301
|
|
Changes in cash from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(540
|
)
|
|
|
53,536
|
|
|
|
4,883
|
|
Prepaid expenses and other assets
|
|
|
3,348
|
|
|
|
(17,546
|
)
|
|
|
863
|
|
Accounts payable and other liabilities
|
|
|
32,249
|
|
|
|
(33,829
|
)
|
|
|
(5,697
|
)
|
Accrued income taxes payable, net of payments
|
|
|
(2,014
|
)
|
|
|
(23,757
|
)
|
|
|
20,046
|
|
Net cash provided by (used in) operating activities
|
|
|
(98,798
|
)
|
|
|
65,806
|
|
|
|
115,738
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(36,444
|
)
|
|
|
(53,249
|
)
|
|
|
(44,181
|
)
|
Proceeds from disposition of properties
|
|
|
2,058
|
|
|
|
160
|
|
|
|
74
|
|
Proceeds from sale of restricted investments
|
|
|
12,063
|
|
|
|
27,562
|
|
|
|
3,409
|
|
Purchase of restricted investments
|
|
|
(6,927
|
)
|
|
|
(26,082
|
)
|
|
|
(2,375
|
)
|
Net cash used in investing activities
|
|
|
(29,250
|
)
|
|
|
(51,609
|
)
|
|
|
(43,073
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
—
|
|
|
|
(22,294
|
)
|
|
|
(22,501
|
)
|
Purchases of treasury stock
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
(10,566
|
)
|
Stock purchase plan and other, net
|
|
|
1,400
|
|
|
|
2,307
|
|
|
|
1,329
|
|
Excess tax benefit from stock-based awards
|
|
|
—
|
|
|
|
—
|
|
|
|
312
|
|
Repayments of long-term debt
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
Debt issuance costs
|
|
|
(1,170
|
)
|
|
|
(1,291
|
)
|
|
|
—
|
|
Borrowings under revolving line of credit
|
|
|
—
|
|
|
|
8,000
|
|
|
|
38,000
|
|
Repayments of borrowings under revolving line of credit
|
|
|
—
|
|
|
|
(8,000
|
)
|
|
|
(38,000
|
)
|
Borrowings under FILO/ABL Term Loan
|
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
|
48,230
|
|
|
|
(33,278
|
)
|
|
|
(33,426
|
)
|
Effect of exchange rate changes on cash
|
|
|
(683
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in cash and cash equivalents
|
|
|
(80,501
|
)
|
|
|
(19,081
|
)
|
|
|
39,239
|
|
Cash and cash equivalents at beginning of period
|
|
|
135,379
|
|
|
|
154,460
|
|
|
|
115,221
|
|
Cash and cash equivalents at end of period
|
|
$
|
54,878
|
|
|
$
|
135,379
|
|
|
$
|
154,460
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,668
|
|
|
$
|
11,750
|
|
|
$
|
12,219
|
|
Income taxes paid, net of refunds
|
|
$
|
2,864
|
|
|
$
|
24,388
|
|
|
$
|
13,077
|
|
The accompanying notes are an integral part of these financial statements.
35
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Cumulative
Other
Comprehensive
Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Total
Shareholders'
Equity
|
|
Balance February 27, 2016
|
|
|
83,472
|
|
|
$
|
125
|
|
|
$
|
211,019
|
|
|
$
|
729,537
|
|
|
$
|
(10,637
|
)
|
|
$
|
(645,287
|
)
|
|
$
|
284,757
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,129
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,223
|
|
|
|
—
|
|
|
|
3,223
|
|
Purchases of treasury stock
|
|
|
(1,794
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,566
|
)
|
|
|
(10,566
|
)
|
Stock-based compensation expense
|
|
|
1,302
|
|
|
|
—
|
|
|
|
(12,077
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
20,305
|
|
|
|
8,228
|
|
Exercise of stock options, stock
purchase plan, and other
|
|
|
202
|
|
|
|
—
|
|
|
|
(7,441
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
6,199
|
|
|
|
(1,242
|
)
|
Cash dividends ($0.28 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,501
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,501
|
)
|
Balance February 25, 2017
|
|
|
83,182
|
|
|
$
|
125
|
|
|
$
|
191,501
|
|
|
$
|
737,165
|
|
|
$
|
(7,414
|
)
|
|
$
|
(629,349
|
)
|
|
$
|
292,028
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,626
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(63
|
)
|
|
|
—
|
|
|
|
(63
|
)
|
Purchases of treasury stock
|
|
|
(1,927
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Stock-based compensation expense
|
|
|
1,648
|
|
|
|
—
|
|
|
|
(19,845
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
23,654
|
|
|
|
3,809
|
|
Stock purchase plan and other
|
|
|
355
|
|
|
|
—
|
|
|
|
(3,232
|
)
|
|
|
(265
|
)
|
|
|
—
|
|
|
|
5,961
|
|
|
|
2,464
|
|
Cash dividends ($0.28 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,294
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,294
|
)
|
Balance March 3, 2018
|
|
|
83,258
|
|
|
$
|
125
|
|
|
$
|
168,424
|
|
|
$
|
726,232
|
|
|
$
|
(7,477
|
)
|
|
$
|
(609,734
|
)
|
|
$
|
277,570
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(198,833
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(198,833
|
)
|
Cumulative effect of accounting change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,020
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(384
|
)
|
|
|
—
|
|
|
|
(384
|
)
|
Stock-based compensation expense
|
|
|
1,309
|
|
|
|
—
|
|
|
|
(14,591
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
17,347
|
|
|
|
2,756
|
|
Stock purchase plan and other
|
|
|
1,047
|
|
|
|
—
|
|
|
|
(15,483
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
16,883
|
|
|
|
1,400
|
|
Balance March 2, 2019
|
|
|
85,614
|
|
|
$
|
125
|
|
|
$
|
138,350
|
|
|
$
|
534,419
|
|
|
$
|
(7,861
|
)
|
|
$
|
(575,504
|
)
|
|
$
|
89,529
|
|
The accompanying notes are an integral part of these financial statements
.
36
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
—
Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products in retail stores throughout the U.S. and Canada and online at
www.pier1.com.
Additionally, the Company has an arrangement to supply merchandise to be sold in “store within a store” locations in Mexico and El Salvador and online in Mexico that are operated by Sears Operadora de Mexico, S.A. de C.V. and Corporacion de Tiendas Internationales, S.A. de C.V., respectively.
Basis of consolidation
—
The consolidated financial statements of the Company include the accounts of all subsidiaries, and all intercompany transactions and balances have been eliminated upon consolidation.
Segment information
—
The Company is a specialty retailer that offers a broad range of products in its stores and on its website and conducts business as one operating segment.
During fiscal 2019, 2018 and 2017, the Company’s domestic operations provided approximately 94% of its net sales and approximately 6% was provided by stores in Canada. As of March 2, 2019, March 3, 2018 and February 25, 2017, $3,918,000, $3,107,000 and $3,244,000, respectively, of the Company’s long-lived assets, net of accumulated depreciation, were located in Canada. There were no long-lived assets in Mexico or El Salvador during any period.
Use of estimates
— Preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
— Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.
Fiscal periods
— The Company utilizes 5-4-4 (week) quarterly accounting periods with the fiscal year ending on the Saturday closest to February 28th. Fiscal 2019 ended March 2, 2019, fiscal 2018 ended March 3, 2018, and fiscal 2017 ended February 25, 2017. Both fiscal 2019 and 2017 consisted of 52-week years and fiscal 2018 was a 53-week year.
Cash and cash equivalents, including temporary investments
—
The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents, except for those investments that are restricted and have been set aside in trusts to satisfy retirement obligations and are classified as non-current assets. As of March 2, 2019 and March 3, 2018, the Company’s short-term investments classified as cash equivalents included investments primarily in mutual funds totaling $49,532,000 and $115,456,000, respectively. The effect of foreign currency exchange rate fluctuations on cash was not material.
Translation of foreign currencies
—
Assets and liabilities of foreign operations are translated into U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included as a separate component of shareholders' equity and are included in other comprehensive income (loss). As of March 2, 2019, March 3, 2018 and February 25, 2017, the Company had cumulative other comprehensive loss balances, net of tax, of $(9,150,000), $(8,054,000) and $(8,450,000), respectively, related to cumulative translation adjustments. The adjustments for currency translation during fiscal 2019, 2018 and 2017, resulted in other comprehensive income (loss), net of tax, as applicable, of $(1,096,000), $396,000 and $1,274,000, respectively.
Concentrations of risk
—
The Company has risk of geographic concentration with respect to sourcing the Company’s inventory purchases. However, the Company believes alternative merchandise sources could be procured over a reasonable period of time. Pier 1 Imports sells merchandise imported from many countries, with approximately 60% of its sales derived from merchandise produced in China, 16% derived from merchandise produced in India and 17% collectively derived from merchandise produced in Vietnam, the United States and Indonesia. The remaining sales were from merchandise produced in various other countries around the world.
Financial instruments
—
The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. There were no assets or liabilities with a fair value significantly different from the recorded value as of March 2, 2019 or March 3, 2018, unless otherwise disclosed
.
The Company may utilize various financial instruments to manage interest rate and market risk associated with its on- and off-balance sheet commitments.
Accounts receivable
—
The Company’s accounts receivable are stated at carrying value less an allowance for doubtful accounts. These receivables consist largely of third-party credit card receivables for which collection is reasonably assured. The remaining receivables are periodically evaluated for collectability and an allowance for doubtful accounts is recorded as appropriate.
Inventories
—
The Company’s inventory is comprised of finished merchandise and is stated at the lower of weighted average cost and net realizable value.
The calculation of cost includes merchandise purchases, the costs to bring the merchandise to distribution centers, warehousing and handling expenditures, and distributing and delivering merchandise to stores and fulfillment centers (direct and indirect). These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory.
37
The Company recognizes known inventory losses, shortages and damages when incurred and maintains a reserve for estimated shrinkage since the last physical count, when actual shrinkage was recorded. The amount of
the reserve is estimated based on historical experience from the results of its physical inventories. The reserves for estimated shrinkage at the end of fiscal 201
9
and 201
8
were $
3,069
,000 and $4,
020
,000, respectively
.
Properties and equipment, net
—
Buildings, equipment, furniture and fixtures, and leasehold improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight‑line method over estimated remaining useful lives of the assets, generally 30 years for buildings and three to ten years for equipment, furniture and fixtures, and three to five years for computer software. Depreciation of improvements to leased properties is based upon the shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation for
assets utilized in acquiring, warehousing, distributing and fulfilling inventory
is included in cost of sales. All other depreciation costs are included in depreciation and were $51,529,000, $53,603,000 and $54,603,000 in fiscal 2019, 2018 and 2017, respectively.
Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to income.
Long-lived assets are reviewed for impairment at least annually or whenever an event or change in circumstances indicates that their carrying values may not be recoverable. If the impairment analysis indicates that the carrying value of the assets exceeds the sum of the expected undiscounted cash flows, the assets may be considered impaired. For store level long-lived assets, expected cash flows are determined based on management’s estimate of future sales, merchandise margin rates and expenses over the remaining expected terms of the leases. Impairment, if any, is recorded in the period in which the impairment occurred. The Company recorded impairment charges of $1,261,000 in fiscal 2019 and $2,934,000 in fiscal 2017, which were included in selling, general and administrative (“SG&A”) expenses. The Company recorded no material impairment charges in fiscal 2018. As the projection of future cash flows requires the use of judgment and estimates, if actual results differ from the Company’s estimates, additional charges for asset impairments may be recorded in the future.
Insurance provision
— The Company maintains insurance for workers’ compensation and general liability claims with deductibles of $1,000,000 and $500,000 per occurrence, respectively. The liability recorded for such claims is determined by estimating the total future claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims loss development factors as well as information obtained from and projections made by the Company’s broker, actuary, insurance carriers and third-party claims administrators. The recorded liabilities for workers’ compensation and general liability claims include claims occurring in prior years but not yet settled and reserves for fees. The recorded liability for workers’ compensation claims and fees was $26,682,000 and $25,316,000 at March 2, 2019 and March 3, 2018, respectively. The recorded liability for general liability claims and fees was $6,683,000 and $6,687,000 at March 2, 2019 and March 3, 2018, respectively.
Revenue recognition
—
Revenue is recognized upon customer receipt or delivery for retail sales. The Company’s revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties.
Amounts charged to customers for shipping and handling are included in net sales.
A reserve has been established for estimated merchandise returns based upon historical experience and other known factors. The Company adopted Accounting Standards Update (“ASU”) No. 2014-09 (see
New Accounting Standards
below) in the first quarter of fiscal 2019 which required a change in the presentation of the reserve for estimated merchandise returns on the consolidated balance sheet. The reserve was previously recorded net of the value of returned merchandise, but is now presented on a gross basis with an offset recorded to other current assets. At March 2, 2019, the gross reserve for estimated merchandise returns was $4,137,000. The net reserve for estimated merchandise returns at the end of fiscal 2018 was $2,805,000
.
Cost of sales
—
Cost of sales includes, from acquisition to store delivery, all cost of merchandise sold as well as store occupancy costs. The cost of merchandise sold includes product costs, freight and logistics charges, agent fees, duties, distribution and fulfillment expenses, shipping and packaging, inventory reserves for shrinkage and slow-moving inventory, and other costs necessary to bring the inventory to its final location. These costs include depreciation of long-lived assets utilized in acquiring, warehousing, fulfilling and distributing inventory.
Gift cards
— Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as payment. Prior to fiscal 2019, gift card breakage was estimated and recorded as income based upon an analysis of the Company’s historical data and expected trends in redemption patterns and represented the remaining non-escheatable unused portion of the gift card liability for which the likelihood of redemption was remote. For fiscal 2018 and 2017, estimated gift card breakage was recognized 30 months after the original issuance. During fiscal 2019, the Company adopted new revenue recognition guidance and began recognizing gift card breakage over the expected redemption period rather than when the likelihood of redemption was remote. If actual redemption patterns vary from the Company’s estimates or if laws or regulations change, actual gift card breakage may differ from the amounts recorded. Estimated gift card breakage recorded to revenue was $3,728,000, $4,875,000 and $4,825,000 in fiscal 2019, 2018 and 2017, respectively.
Leases
—
The Company leases certain property consisting principally of retail stores, warehouses, its corporate headquarters and material handling and office equipment under operating leases expiring through fiscal 2030. Most retail store locations were leased for primary terms of ten years with varying renewal options and rent escalation clauses. Escalations occurring during the primary terms of the leases are included in the calculation of the future minimum lease payments, and the rent expense related to these leases is recognized on a straight-line basis over the lease term, including free rent periods prior to the opening of its locations.
The portion of rent expense applicable to a location before opening is included in SG&A expenses. Once opened for business, rent expense is included in cost of sales. Certain leases provide for additional rental payments based on a percentage of sales in excess of a specified base. This additio
nal rent is accrued when it appears probable that the sales will exceed the specified base. Construction allowances received from landlords are initially recorded as lease liabilities and amortized as a reduction of rental expense over the primary lease term.
38
Advertising costs
—
Advertising p
roduction costs are expensed the first time the advertising occurs and all other advertising costs are expensed as incurred. Advertising costs primarily include event and seasonal mailers, radio, newspaper, television and digital advertising and were $
111,
197
,000, $
99,568
,000 and $
101,780
,000 in fiscal 201
9
, 201
8
and 201
7
, respectively. Prepaid advertising at the end of fiscal years 201
9
and 201
8
was $
1,584
,000 and $3,
01
2,000, respectively
.
Income taxes
—
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets and liabilities are recorded in the Company’s consolidated balance sheets and are classified as noncurrent.
A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In assessing the need for a valuation allowance, all available evidence is considered including past operating results, estimates of future income and tax planning strategies. The Company is subject to income tax in many jurisdictions, including the United States, various states, provinces, localities and foreign countries, for which the Company records estimated reserves for unrecognized tax benefits for both domestic
and foreign income tax issues. At any point in time, multiple tax years are subject to audit by these various jurisdictions. However, the timing of these audits and negotiations with taxing authorities may yield results different from those currently estimated. See
Note 7
of the
Notes to Consolidated Financial Statements
for further discussion
.
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, and have included the effect, if dilutive, of the Company's weighted average number of stock options outstanding and shares of unvested restricted stock.
Earnings per share amounts were calculated as follows (in thousands except per share amounts):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
(198,833
|
)
|
|
$
|
11,626
|
|
|
$
|
30,129
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,708
|
|
|
|
80,223
|
|
|
|
80,919
|
|
Effect of dilutive stock options
|
|
|
—
|
|
|
|
1
|
|
|
|
17
|
|
Effect of dilutive restricted stock
|
|
|
—
|
|
|
|
30
|
|
|
|
48
|
|
Diluted
|
|
|
80,708
|
|
|
|
80,254
|
|
|
|
80,984
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.46
|
)
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
(2.46
|
)
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
Stock-based awards totaling 3,555,000 were excluded from the computation of earnings per share for fiscal 2019 as the effect would be antidilutive.
Outstanding stock options totaling 361,523 for fiscal 2018 and 900,933 for fiscal 2017 were excluded from the computation of earnings per share, as the effect would be antidilutive.
Stock-based compensation
—
The Company’s stock-based compensation relates to stock options, restricted stock awards, restricted stock units and director deferred stock units. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for any unvested stock option awards, restricted stock awards and restricted stock units on a straight-line basis or ratably over the requisite service period. Stock option exercise prices equal the fair market value of the shares on the date of the grant. The fair value of stock options is calculated using a Black-Scholes option pricing model.
For time-based and most performance-based restricted stock awards, compensation expense is measured and recorded using the closing price of the Company’s common stock on the date of grant. If the date of grant for stock options or restricted stock awards occurs on a day when the Company’s common stock is not traded, the closing price on the last trading day before the date of grant is used. Performance-based shares vest upon the Company satisfying certain performance targets.
The Company records compensation expense for these awards with a performance condition when it is probable that the condition will be achieved. Forfeitures of stock-based awards are recognized as they occur. The compensation expense ultimately recognized, if any, related to these awards will equal the grant date fair value for the number of shares for which the performance condition has been satisfied.
See
Note 6
of the
Notes to Consolidated Financial Statements
for further discussion
.
New accounting standards
—
Accounting Standards — Recently Adopted:
ASU 2014-09
—
Revenue from Contracts with Customers (Topic 606)
Revenue Recognition
— The Company
adopted ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606),”
in the first quarter of fiscal 2019, using the modified retrospective approach. As a result, the Company
recorded a cumulative adjustment to increase retained earnings and decrease gift cards and other deferred revenue by
$9,444,000 ($7,020,000, net of tax)
related to the acceleration in the timing of recognizing gift card breakage revenue. The Company now recognizes gift card breakage revenue over the expected redemption period rather than when the likelihood of redemption is remote.
The new standard required a change in the presentation of the reserve for estimated merchandise returns on the consolidated balance sheet, which was previously recorded net of the value of returned merchandise, but is now presented on a gross basis. During the first quarter of fiscal 2019, the Company recorded an adjustment of $2,216,000 to present the reserve on a gross basis, with an offset recorded to other current assets. The gross reserve for estimated merchandise returns at March 2, 2019 was $4,137,000. For fiscal 2019, the Company recognized revenue of $14,439,000 for gift card redemptions. Prior to recognition as revenue, these amounts were included in gift
39
cards and other deferred revenue on the Company’s consolidated balance sheet as of March 3, 20
18.
As of March 2, 2019, gift cards and other deferred revenue on the Company’s consolidated balance sheet totaled $
37,655,000
. A majority of this amount is expected to be recognized in revenue during fiscal 2020.
Disaggregated Revenues
—
Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage.
Net sales during fiscal years 2019 and 2018 were as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Retail sales
|
|
$
|
1,541,745
|
|
|
$
|
1,785,989
|
|
Other
(1)
|
|
|
11,193
|
|
|
|
12,533
|
|
Net sales
|
|
$
|
1,552,938
|
|
|
$
|
1,798,522
|
|
(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 in Mexico and El Salvador and online in Mexico. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns, as well as gift card breakage.
|
ASU 2016-15
—
Statement of Cash Flows (Topic 230)
In August 2016, the Financial Accounting Standards Board (“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 Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2016-16
—
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”
This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with modified retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2016-18
—
Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash.”
The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 with retrospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2017-07
—
Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07,
“Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”
The new guidance requires the service cost component of the net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization. Other components will be presented separately from the line items that include the service cost and outside of any subtotal of operating income, if one is presented. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019. The guidance on the presentation of the components of net periodic benefit cost requires retrospective application. The guidance limiting the capitalization of net periodic benefit cost requires prospective application. The adoption of this guidance did not have a material impact on the Company’s financial statements.
ASU 2017-09
—
Compensation — Stock Compensation
(Topic 718):
Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, “
Scope of Modification Accounting.
” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The Company adopted the provisions of this guidance in the first quarter of fiscal 2019 on a prospective basis. The
adoption
of this guidance did not have a material impact on the Company’s financial statements.
SEC Disclosure Update
In August 2018, the U.S. Securities and Exchange Commission ("SEC") adopted final rules under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending and expanding certain disclosure requirements. The rules require, among other things, that registrants include in their interim financial statements a reconciliation of changes in shareholders’ equity in the notes or as a separate statement that reconciles the beginning balance to the ending balance of each caption in shareholders’ equity for each period for which an income statement is required to be filed. The Company applied the new SEC disclosure requirements to the Consolidated Statements of Shareholders’ Equity in the third quarter of fiscal 2019 on a retrospective basis.
40
Accounting Stand
ards
—
Pending Adoption:
ASU 2016-02
—
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, “
Leases (Topic 842),
” which provides new guidance on accounting for leases and requires lessees to recognize a right-of-use asset and lease liability for most leases on the balance sheet. The Company leases its corporate headquarters, retail stores and the majority of its distribution and fulfillment centers; therefore, this ASU is expected to have a material impact on the Company’s consolidated balance sheets, but is not expected to have a material impact on the consolidated statements of operations or consolidated statements of cash flows. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
The Company will adopt this ASU and related amendments beginning in the first quarter of fiscal 2020 and will elect certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allows the Company to not reassess whether existing contracts contain leases, the lease classification of existing leases, or initial direct costs for existing leases. The Company will also elect the transition option that allows entities to only apply the ASU at the adoption date and not apply the provisions to comparative periods. The Company will elect not to separate lease and non-lease components and not to recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. Management is utilizing a third party to assist with the incremental borrowing rate calculation. The Company will not elect the hindsight practical expedient. A complete population of contracts that meet the definition of a lease under ASU 2016-02 has been identified. The Company has also established new processes and internal controls and implemented a new lease system to assist with its compliance with ASU 2016-02.
ASU 2018-02
—
Income Statement
—
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “
Income Statement
—
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
” ASU 2018-02 gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that have been stranded in accumulated OCI as a result of the remeasurement of deferred taxes to reflect the lower federal income tax rate enacted as part of the Tax Cuts and Jobs Act of 2017. ASU 2018-02 requires entities to make new disclosures, regardless of whether they elect to reclassify tax effects. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. Early adoption in any period is permitted. ASU 2018-02 can be applied either retrospectively or in the period of adoption. ASU 2018-02 is effective for the Company beginning in fiscal 2020. The Company is evaluating the impact of the adoption of ASU 2018-02 on its financial statements, but does not expect it to have a material impact.
ASU 2018-14
—
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,”
which makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans.
The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU 2018-14 is effective for the Company beginning in fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2018-14 on its financial statements, but does not expect it to have a material impact.
ASU 2018-15
—
I
ntangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15,
“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,”
requiring a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 is effective for the Company beginning in fiscal 2021. The Company is evaluating the impact of the adoption of ASU 2018-15 on its financial statements, but does not expect it to have a material impact.
NOTE 2 – PROPERTIES AND EQUIPMENT, NET
Properties and equipment, net are summarized as follows at March 2, 2019 and March 3, 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
535
|
|
|
$
|
535
|
|
Buildings
|
|
|
8,077
|
|
|
|
8,077
|
|
Equipment, furniture, fixtures and other
|
|
|
357,433
|
|
|
|
367,171
|
|
Leasehold improvements
|
|
|
198,637
|
|
|
|
216,687
|
|
Computer software
|
|
|
140,826
|
|
|
|
137,815
|
|
Projects in progress
|
|
|
274
|
|
|
|
2,959
|
|
|
|
|
705,782
|
|
|
|
733,244
|
|
Less accumulated depreciation
|
|
|
556,426
|
|
|
|
554,477
|
|
Properties and equipment, net
|
|
$
|
149,356
|
|
|
$
|
178,767
|
|
41
NOTE 3 – OTHER ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES
The following is a summary of other accrued liabilities and other noncurrent liabilities at March 2, 2019 and March 3, 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
Accrued payroll and other employee-related liabilities
|
|
$
|
57,033
|
|
|
$
|
56,336
|
|
Accrued taxes, other than income
|
|
|
21,728
|
|
|
|
24,414
|
|
Rent-related liabilities
|
|
|
8,518
|
|
|
|
8,755
|
|
Other
|
|
|
20,260
|
|
|
|
16,763
|
|
Other accrued liabilities
|
|
$
|
107,539
|
|
|
$
|
106,268
|
|
Rent-related liabilities
|
|
$
|
33,353
|
|
|
$
|
33,993
|
|
Deferred gains
|
|
|
1,933
|
|
|
|
2,516
|
|
Retirement benefits
|
|
|
11,816
|
|
|
|
18,512
|
|
Other
|
|
|
4,570
|
|
|
|
4,693
|
|
Other noncurrent liabilities
|
|
$
|
51,672
|
|
|
$
|
59,714
|
|
NOTE 4 – LONG-TERM DEBT AND AVAILABLE CREDIT
Industrial Revenue Bonds
— The Company has industrial revenue bonds outstanding totaling $9,500,000 at March 2, 2019 and March 3, 2018. The Company’s industrial revenue bonds have been outstanding since fiscal 1987. Proceeds were used to construct warehouse/distribution facilities. The loan agreements and related tax-exempt bonds mature in the year 2026. The Company’s interest rates on the loans are based on the bond interest rates, which are market driven, reset weekly and are similar to other tax-exempt municipal debt issues. The Company’s weighted average effective interest rate, including standby letter of credit fees, was 3.1%, 2.8% and 2.2% for fiscal 2019, 2018 and 2017, respectively.
Revolving
Credit Facility
— At the end of fiscal 2018, and through the third quarter of fiscal 2019, the Company had a $350,000,000 secured revolving credit facility with a $150,000,000 accordion feature that matures on June 2, 2022 (“Revolving Credit Facility”).
The Revolving Credit Facility is secured primarily by the Company's eligible merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and by a second lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions. At the Company’s option, borrowings will bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the adjusted LIBOR rate as defined in the Revolving Credit Facility plus a spread varying from 125 to 150 basis points per annum, 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 50 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility. The Company pays a fee ranging from 125 to 150 basis points per year for standby letters of credit depending on the average daily availability as defined by the facility, 62.5 to 75.0 basis points per year for trade letters of credit, and a commitment fee of 25 basis points per year for any unused amounts. As of March 2, 2019 and March 3, 2018, the fee for standby letters of credit was 125 basis points per year and 62.5 basis points per year for trade letters of credit. In addition, the Company will pay, when applicable, letter of credit fronting fees on the amount of letters of credit outstanding.
The Revolving Credit Facility includes a requirement that the Company has minimum availability equal to the greater of 10% of the line cap, as defined under the Revolving Credit Facility, or $30,000,000. The Company’s Revolving Credit Facility may limit the ability of the Company to, among other things, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase capital stock, make certain acquisitions or investments, incur or permit to exist certain liens, enter into transactions with affiliates or sell the Company’s assets to, or merge or consolidate with or into, another company, in each case, subject to certain exceptions. The Company will not be restricted from paying certain dividends unless credit extensions on the line result in availability over a specified period of time that is projected to be less than 15.0% of the lesser of either $400,000,000 or the calculated borrowing base plus the outstanding amount under the FILO Tranche (as defined below), subject to the Company meeting a fixed charge coverage requirement when availability over the same specified period of time is projected to be less than 20.0% of the lesser of either $400,000,000 or the calculated borrowing base plus the outstanding amount under the FILO Tranche.
On December 14, 2018, the Company amended its Revolving Credit Facility to include a new $50,000,000 first-in, last-out tranche (“FILO Tranche”). The FILO Tranche, which was completed and funded on December 14, 2018, expands the Revolving Credit Facility from $350,000,000 to $400,000,000 and modifies the borrowing base. The FILO Tranche includes a $15,000,000 first-in, last-out loan (“FILO Loan”), subject to a borrowing base, which bears interest at either the adjusted LIBOR rate plus 300 basis points per annum or the prime rate plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the Revolving Credit Facility. The FILO Tranche also includes a $35,000,000 term loan (“ABL Term Loan”), subject to a borrowing base, which bears interest at the adjusted LIBOR rate plus 800 basis points per annum, and which will amortize in equal quarterly installments of 1.25% of the original principal amount thereof commencing on June 30, 2020. The FILO Tranche is a term loan and does not revolve. The Company’s weighted average effective interest rate, including fees, for the FILO Tranche was 10.2% for fiscal 2019. The maturity date of each of the FILO Loan and the ABL Term Loan is June 2, 2022. The proceeds of the FILO Loan and the ABL Term Loan were used for working capital, capital expenditures and general corporate purposes. The FILO Tranche amendment did not result in any other material changes to the Revolving Credit Facility.
42
During fiscal 2019, the Company had
no cash borrowings under the revolving portion of the Revolving Credit Facility and
$50,000,000
in
cash
borrowings
under
the FILO Loan and ABL Term Loan referenced above
. As of March 2, 2019, the
carrying value of
the FILO Loan and ABL Term Loan was
$48,912,000, net of debt issuance costs
.
During fiscal 201
8
and 201
7
the Company repaid all cash borrowings
un
der the 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, as defined by the agreement, which was $
279,630,0
00 as of March
2
, 201
9
. The borrowing base calculation is subject to advance rates and commercially reasonable availability reserves. As of March
2
, 201
9
, the Company utilized approximately $
41,641
,000 in letters of credit and b
ankers’ acceptances against the
Revolving Credit F
acility. Of the outstanding balance, approximately $
22,926
,000 related to a standby letter of credit for the Company’s workers’ compensation and general liability insurance policies, $
9,715
,000 related to a standby letter of credit related to the Company’s
industrial revenue bonds and $
9,000
,000 related to other miscellaneous standby letters of credit. After excluding the $
41,641
,000 in utilized letters of credit and bankers’ acceptances from the borrowing base, $
237,988
,000 remained available for cash borr
owings.
Term Loan Facility
— The Company entered into the senior secured term loan facility (“Term Loan Facility”) on April 30, 2014. The Term Loan Facility matures on April 30, 2021, and is secured by a second lien on all assets subject to a first lien under the Revolving Credit Facility and a first lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions. At the Company’s option, borrowings under the Term Loan Facility will bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the LIBOR rate as defined in the Term Loan Facility subject to a 1% floor plus 350 basis points per year or (b) the base rate as defined in the Term Loan Facility subject to a 2% floor plus 250 basis points per year. The Company’s weighted average effective interest rate, including fees, was 6.6% for fiscal 2019. As of March 2, 2019, the Company had $191,000,000 in borrowings under the Term Loan Facility with a carrying value of $189,290,000, net of unamortized discounts and debt issuance costs. The proceeds of the loan were used for general corporate purposes, including working capital needs, capital expenditures, and share repurchases and dividends permitted under the Term Loan Facility. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the loans, with the balance due at final maturity. The Company is subject to an annual excess cash flow repayment requirement, as defined in the Term Loan Facility. At the Company’s option, and subject to the requirements and provisions of the Term Loan Facility, the Company can prepay the Term Loan Facility at any time. The fair value of the amount outstanding under the Term Loan Facility was approximately $138,834,000 as of March 2, 2019, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchy 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.
The Term Loan Facility includes restrictions on the Company’s ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase shares of the Company’s capital stock, make certain acquisitions or investments, materially change the business of the Company, incur or permit to exist certain liens, enter into transactions with affiliates or sell the Company’s assets to, or merge or consolidate with or into, another company, in each case subject to certain exceptions. The Term Loan Facility does not require the Company to comply with any financial maintenance covenants, but contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default. The Term Loan Facility provides for incremental facilities, subject to certain conditions, including the meeting of certain leverage ratio requirements as defined therein, to the extent such facilities exceed an incremental $200,000,000.
The Term Loan Facility matures as follows (in thousands):
Fiscal Year
|
|
Amount
|
|
2020
|
|
$
|
2,000
|
|
2021
|
|
|
2,000
|
|
2022
|
|
|
187,000
|
|
Total
|
|
|
191,000
|
|
Debt Issuance Costs
|
|
|
(1,108
|
)
|
Debt Discount
|
|
|
(602
|
)
|
Total
|
|
$
|
189,290
|
|
43
NOTE 5 – EMPLOYEE BENEFIT PLANS
The Company offers a qualified defined contribution employee retirement plan to all of its full- and part-time personnel who are at least 18 years old and have been employed for a minimum of 60 days. During fiscal 2019, employees received a matching Company contribution on the first 8% of eligible compensation contributed, for a total Company contribution of up to 4%. During fiscal 2018 and 2017 employees received a matching Company contribution on the first 5% of eligible compensation contributed, for a total Company contribution of up to 3%. Company contributions to the plan were $3,147,000, $3,164,000 and $2,958,000 in fiscal 2019, 2018 and 2017, respectively.
In addition, the Company offers non-qualified deferred compensation plans (“Non-Qualified Plans”) for the purpose of providing deferred compensation for certain employees. The Company's expense for the Non-Qualified Plans was $273,000, $1,915,000 and $2,347,000 for fiscal 2019, 2018 and 2017, respectively. The Company has trusts established for the purpose of setting aside funds to settle certain obligations of the Non-Qualified Plans, and contributed $2,003,000 and used $7,059,000 to satisfy a portion of retirement obligations during fiscal 2019. The Company also contributed $2,429,000 and used $3,909,000 to satisfy a portion of retirement obligations during fiscal 2018. The trusts’ assets are included in other noncurrent assets and are comprised of investments and life insurance policies on the lives of former key executives. As of March 2, 2019 and March 3, 2018, the trusts’ investments had an aggregate value of $5,141,000 and $9,825,000, respectively, and were held primarily in mutual funds. All investments held in the trusts are valued at fair value using Level 1 Inputs, which are unadjusted quoted prices in active markets for identical assets or liabilities. The Company has accounted for the restricted investments as trading securities. The life insurance policies held in the trusts had cash surrender values of $6,340,000 and $6,209,000, and death benefits of $11,409,000 and $11,392,000 as of March 2, 2019 and March 3, 2018, respectively. The trusts’ assets are restricted and may only be used to satisfy obligations to the Non-Qualified Plans’ participants.
The Company also owns and is the beneficiary of a number of life insurance policies on the lives of former key executives that are unrestricted as to use. At the discretion of the Company’s Board of Directors, such policies could be contributed to the trusts described above or to the trusts established for the purpose of setting aside funds to be used to satisfy obligations arising from supplemental retirement plans. The cash surrender value of the unrestricted policies was $14,346,000 and $14,077,000, and the death benefit was $20,539,000 and $20,388,000 as of March 2, 2019 and March 3, 2018, respectively. The cash surrender value of these policies is included in other noncurrent assets.
NOTE 6 – MATTERS CONCERNING SHAREHOLDERS' EQUITY
Stock Incentive Plan
—
The Pier 1 Imports, Inc. 2015 Stock Incentive Plan (“2015 Plan”) was approved by the shareholders on June 25, 2015. The aggregate number of shares available for issuance under the 2015 Plan included (i) a new authorization of 2,500,000 shares, plus (ii) 2,507,407 shares that remained available for grant under the Pier 1 Imports, Inc. 2006 Stock Incentive Plan (“2006 Plan”) as of June 25, 2015, increased by the number of shares subject to outstanding awards under the 2006 Plan as of June 25, 2015, which was 3,009,974 shares that cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent that they are exercised for or settled in vested and non-forfeitable shares of common stock or that are withheld for payment of applicable employment taxes and/or withholding obligations of an award), plus (iii) 4,000,000 shares approved by the shareholders on June 22, 2017, in the First Amendment to the 2015 Plan, subject to adjustment in the event of stock splits and certain other corporate events. As of March 2, 2019, there were a total of 6,590,046 shares available for issuance under the 2015 Plan.
Restricted stock awarded to certain employees
— During fiscal 2019, the Company awarded long-term incentive awards under the 2015 Plan to certain employees. Fiscal 2019 long-term incentive awards were comprised of restricted stock grants that were divided between time-based and performance-based awards. The majority of time-based shares vest in substantially equal amounts over a three-year period beginning on the first anniversary of the award date provided that the participant is employed by the Company on the vesting date. The performance-based shares
may vest following the end of fiscal 2021 if the Company achieves certain targeted levels of performance measures established in fiscal 2019.
Vesting of the performance-based shares is conditioned upon the participant being employed on the date of filing of the Company’s fiscal 2021 Annual Report on Form 10-K with the
SEC
.
Restricted stock compensation expense
—
Compensation expense for restricted stock was $2,916,000, $3,612,000 and $8,180,000 in fiscal 2019, 2018 and 2017, respectively. Fiscal 2019 compensation expense includes expense related to director restricted stock units. See “
Director Restricted Stock Units
” below for more information. Fiscal 2017 includes additional expense of $3,908,000 for the accelerated vesting of unvested restricted stock awards related to the departure of the Company’s former CEO in fiscal 2017. In accordance with accounting guidelines, the Company expenses time-based restricted shares over the requisite service period. For performance-based awards, expense is recognized based on the probability of the Company achieving performance targets. For fiscal 2019, 2018 and 2017, the target levels of performance measures were not achieved and all or a portion of eligible restricted shares did not vest. As of March 2, 2019, there was $11,401,000 of total unrecognized compensation expense related to restricted stock that may be recognized over a weighted average period of approximately
1.3
years.
The total fair value of restricted stock awards vested was $1,382,000, $2,112,000 and $3,671,000 in fiscal 2019, 2018 and 2017, respectively.
The Company realized a total tax benefit related to stock-based compensation of $326,000, $736,000 and $1,783,000 during fiscal 2019, 2018 and 2017, respectively. There was no excess tax benefit recorded for fiscal 2019 or fiscal 2018. For fiscal 2017, $312,000 was recorded as excess tax benefits. See
Note 7
of the
Notes to Consolidated Financial Statements
for additional discussion of income taxes
.
As of March 2, 2019 and March 3, 2018, the Company had 5,148,666 and 4,049,614 unvested shares of restricted stock outstanding, respectively.
During fiscal 2019, 5,398,420 shares of restricted stock were awarded, 542,913 shares of restricted stock vested, and 3,756,455 shares of restricted stock were forfeited. The weighted average fair market value at the date of grant of the restricted stock shares awarded during fiscal 2019 was $1.81 per share.
44
Stock options
—
Stock o
ptions were granted at exercise prices equal to t
he fair market value
of the Company’s common stock on
the date of grant.
Stock o
ptions currently exercisable issued under both the 2006 Plan and the 2015 Plan vest over a period of four years
.
Stock options
have a term of ten years from the grant date
and
will be fully vested upon death, disability or retirement of the associate. The Compensation Committee of the Board of Directors serves as the administrative committee of the 2006 Plan and 2015 Plan and has the discretion to take certain actions with respe
ct to stock options, such as accelerating the vesting, upon certain corporate changes (as defined in the 2006 Plan and 2015 Plan).
A summary of stock option transactions related to the Company’s stock option grants during the three fiscal years is as follows
:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Exercisable Shares
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Fair Value
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
at Date of
|
|
|
Number
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Grant
|
|
|
of Shares
|
|
|
Price
|
|
Outstanding at February 27, 2016
|
|
|
1,210,548
|
|
|
$
|
7.34
|
|
|
|
|
|
|
|
1,176,974
|
|
|
$
|
7.06
|
|
Options granted
|
|
|
23,000
|
|
|
|
6.99
|
|
|
$
|
2.85
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(966,500
|
)
|
|
|
6.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(142,248
|
)
|
|
|
10.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 25, 2017
|
|
|
124,800
|
|
|
|
8.50
|
|
|
|
|
|
|
|
107,800
|
|
|
|
8.22
|
|
Options granted
|
|
|
320,469
|
|
|
|
6.68
|
|
|
|
3.21
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(40,000
|
)
|
|
|
7.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 3, 2018
|
|
|
405,269
|
|
|
|
7.13
|
|
|
|
|
|
|
|
73,250
|
|
|
|
8.76
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
(371,844
|
)
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 2, 2019
|
|
|
33,425
|
|
|
|
11.39
|
|
|
|
|
|
|
|
23,850
|
|
|
|
12.92
|
|
For options outstanding at March 2, 2019
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Shares
|
|
|
Exercise Price-
|
|
|
|
Total
|
|
|
Exercise
|
|
|
Life (in
|
|
|
Currently
|
|
|
Exercisable
|
|
Ranges of Exercise Prices
|
|
Shares
|
|
|
Price
|
|
|
years)
|
|
|
Exercisable
|
|
|
Shares
|
|
$6.59 — $11.47
|
|
|
21,225
|
|
|
$
|
7.60
|
|
|
|
5.39
|
|
|
|
12,725
|
|
|
$
|
8.15
|
|
$14.04 — $23.19
|
|
|
12,200
|
|
|
|
17.99
|
|
|
|
4.75
|
|
|
|
11,125
|
|
|
|
18.37
|
|
As of March 2, 2019, the weighted average remaining contractual term for outstanding and exercisable options was 5.2 years and 4.2 years, respectively. There was no aggregate intrinsic value for outstanding or exercisable options at the end of fiscal 2019 or fiscal 2018. The total intrinsic value of options exercised for fiscal 2017 was approximately $1,137,000. The intrinsic value of a stock option is the amount by which the market value of the underlying common stock exceeds the exercise price of the option. There were no options exercised in fiscal years 2019 and 2018.
At March 2, 2019, there was approximately $6,000 of total unrecognized compensation expense related to unvested stock option awards, which is expected to be recognized over a weighted average period of 1.7 years. The fair value of the stock options is amortized as compensation expense over the vesting periods of the options. The Company recorded stock-based compensation expense related to stock options of approximately $(160,000), $197,000 and $48,000
in fiscal 2019, 2018 and 2017, respectively.
Director deferred stock units
—
The 2015 Plan and certain prior plans authorize director deferred stock unit awards to non-employee directors. Directors can elect to defer all or a portion of their cash director's fees into a deferred stock unit account. The annual retainer fees deferred (other than committee chairman and chairman of the board annual retainers) received a 25% matching contribution from the Company in the form of director deferred stock units. There were 750,000 shares and 707,500 shares deferred, but not delivered, as of March 2, 2019 and March 3, 2018, respectively. During fiscal 2019, approximately 116,800 director deferred stock units were granted, 74,300 units were delivered and no units were cancelled. Compensation expense for the director deferred stock awards was $191,000, $806,000 and $834,000 in fiscal 2019, 2018 and 2017, respectively.
Director restricted stock units
—
The 2015 Plan authorizes director restricted stock unit awards to non-employee directors. The annual retainer fees for directors include restricted stock units having a value of $100,000. The restricted stock units vest over a one-year period. During fiscal 2019, approximately 332,570 director restricted stock units were granted, no units were vested and no units were forfeited. Compensation expense for the director restricted stock units was $610,000 in fiscal 2019. The weighted average fair market value at the date of grant of the restricted stock units awarded during fiscal 2019 was $2.78 per share.
45
Stock purchase plan
—
Substantially all Company
associates and all non-employee directors are eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which the Company's common stock is purchased on behalf of participants at market prices through regular payroll deductions. Each as
sociate may contribute up to 20% of the eligible portions of compensation, and non-employee directors may contribute up to 100% of their director compensation. The Company contributes an amount equal to 25% of the participant’s contributions. Company contr
ibutions to the
stock purchase
plan were $
29
0
,000, $3
51
,000 and $
363
,000 in fiscal years 201
9
, 201
8
and 201
7
, respectively.
Preferred Stock
—
As of March 2, 2019, the Company’s restated certificate of incorporation authorized 20,000,000 shares of preferred stock having a par value of $1.00 per share to be issued. No such shares have been issued.
Dividends
— The Company did not pay cash dividends in fiscal 2019. The Company paid cash dividends of $22,294,000 and $22,501,000 in fiscal years 2018 and 2017, respectively. The Company discontinued the Company’s common stock dividend in April 2018.
Shares reserved for future issuances
— As of March 2, 2019, the Company had approximately 7,706,046 shares of common stock reserved for future issuances under the stock plans. This amount includes stock options outstanding, director deferred stock units, director restricted stock units and shares available for future grant.
Share repurchase plan
— The following table summarizes the Company’s total repurchases of its common stock under the $200 million board-approved share repurchase program announced on April 10, 2014 (“April 2014 program”), for each of the last three fiscal years:
|
|
|
|
|
|
Shares Purchased
|
|
|
|
|
|
|
|
|
|
Date Program Announced
|
|
Authorized
Amount
|
|
|
Fiscal
2019
|
|
|
Fiscal
2018
|
|
|
Fiscal
2017
|
|
|
Weighted
Average
Cost
|
|
|
Remaining
Available as of
March 2, 2019
|
|
Apr. 10, 2014
|
|
$
|
200,000,000
|
|
|
|
—
|
|
|
|
1,926,602
|
|
|
|
1,794,053
|
|
|
$
|
10.58
|
|
(1)
|
$
|
26,610,135
|
|
(1)
|
Represents weighted average cost for all share repurchases under the April 2014 program.
|
The Company discontinued share repurchases under the April 2014 program in April 2018.
NOTE 7 – INCOME TAXES
The components of income (loss) before income taxes for each of the last three fiscal years, by tax jurisdiction, were as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
(204,181
|
)
|
|
$
|
13,882
|
|
|
$
|
39,818
|
|
Foreign
|
|
|
2,802
|
|
|
|
4,015
|
|
|
|
5,441
|
|
Income (loss) before income taxes
|
|
$
|
(201,379
|
)
|
|
$
|
17,897
|
|
|
$
|
45,259
|
|
The provision (benefit) for income taxes for each of the last three fiscal years consisted of (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(933
|
)
|
|
$
|
549
|
|
|
$
|
30,062
|
|
Deferred
|
|
|
(4,248
|
)
|
|
|
5,742
|
|
|
|
(17,842
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,075
|
|
|
|
(701
|
)
|
|
|
3,491
|
|
Deferred
|
|
|
1,190
|
|
|
|
270
|
|
|
|
(1,803
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
352
|
|
|
|
411
|
|
|
|
1,222
|
|
Deferred
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
Total income tax provision (benefit)
|
|
$
|
(2,546
|
)
|
|
$
|
6,271
|
|
|
$
|
15,130
|
|
46
During the third quarter of fiscal 2019, the Company established a valuation allowance of $20,761,000 related to deferred tax assets. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than
not that such assets will be realized. When the need for a valuation allowance is assessed, the Company considers all available positive and negative evidence. Recent cumulative losses were
determined to be
significant negative evidence
that
management con
sidered in determining it was not more likely than not that certain of its deferred tax assets would be realized, resulting in an increase to the Company’s valuation allowance.
The Tax Cuts and Jobs Act of 2017 (“Tax Act”), enacted in December 2017, revised many aspects of the U.S. corporate income tax including, but not limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a limitation on the deductibility of net interest expense, a 100% immediate deduction for certain new investments placed in service before 2023, and the modification or repeal of many business deductions and credits, including the limitation on deductions for certain executive compensation arrangements under Section 162(m) of the Internal Revenue Code. SEC Staff Accounting Bulletin (“SAB”) 118 allowed the Company to provide a provisional estimate of the impact of the Tax Act due to the complexities involved in accounting for its enactment. SAB 118 provides a measurement period that should not extend beyond one year from the enactment of the Tax Act to complete the accounting under ASC 740,
Income Taxes
.
In fiscal year 2018, the Company recorded provisional income tax benefits of $323,000 related to the impact of the Tax Act on deferred tax balances. As allowed by SAB 118, the Company completed its accounting for the income tax effects of the Tax Act and recognized additional benefits of $392,000 in the fourth quarter of fiscal 2019.
The differences between income taxes at the statutory federal income tax rate of 21% in fiscal 2019, 32.7% in fiscal 2018 and
35% in fiscal 2017, and income tax reported in the consolidated statements of operations were as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Tax provision at statutory federal income tax rate
|
|
$
|
(42,290
|
)
|
|
$
|
5,852
|
|
|
$
|
15,841
|
|
State income taxes, net of federal provision (benefit)
|
|
|
(4,272
|
)
|
|
|
664
|
|
|
|
352
|
|
Change in valuation allowance
|
|
|
45,199
|
|
|
|
263
|
|
|
|
168
|
|
Foreign income taxes
|
|
|
370
|
|
|
|
411
|
|
|
|
1,222
|
|
Foreign and other tax credits
|
|
|
(50
|
)
|
|
|
(772
|
)
|
|
|
(2,161
|
)
|
Non-deductible penalty
|
|
|
2
|
|
|
|
1,021
|
|
|
|
40
|
|
Remeasurement of U.S. federal deferred tax assets and liabilities
|
|
|
(392
|
)
|
|
|
(323
|
)
|
|
|
—
|
|
Share-based compensation shortfall
|
|
|
528
|
|
|
|
436
|
|
|
|
—
|
|
Uncertain tax positions
|
|
|
(689
|
)
|
|
|
(1,482
|
)
|
|
|
825
|
|
Other, net
|
|
|
(952
|
)
|
|
|
201
|
|
|
|
(1,157
|
)
|
Provision (benefit) for income taxes
|
|
$
|
(2,546
|
)
|
|
$
|
6,271
|
|
|
$
|
15,130
|
|
Effective tax rate
|
|
|
1.3
|
%
|
|
|
35.0
|
%
|
|
|
33.4
|
%
|
Deferred tax assets and liabilities at March 2, 2019 and March 3, 2018, were comprised of the following (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
7,632
|
|
|
$
|
9,707
|
|
Net operating loss carryforward
|
|
|
33,409
|
|
|
|
—
|
|
Accrued average rent
|
|
|
9,875
|
|
|
|
9,764
|
|
Self insurance reserves
|
|
|
8,254
|
|
|
|
7,857
|
|
Cumulative foreign currency translation
|
|
|
1,976
|
|
|
|
1,588
|
|
Deferred revenue and revenue reserves
|
|
|
4,568
|
|
|
|
3,584
|
|
Business interest expense limitation
|
|
|
3,361
|
|
|
|
—
|
|
Foreign - Properties and equipment, net
|
|
|
1,004
|
|
|
|
—
|
|
Foreign – Inventory
|
|
|
86
|
|
|
|
—
|
|
Foreign and other tax credits
|
|
|
1,662
|
|
|
|
1,822
|
|
Other
|
|
|
2,057
|
|
|
|
3,650
|
|
Total deferred tax assets
|
|
$
|
73,884
|
|
|
$
|
37,972
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
|
$
|
(8,364
|
)
|
|
$
|
(14,070
|
)
|
Inventory
|
|
|
(11,719
|
)
|
|
|
(13,578
|
)
|
Store supplies
|
|
|
(2,613
|
)
|
|
|
(2,393
|
)
|
Deferred gain on debt repurchase
|
|
|
—
|
|
|
|
(2,199
|
)
|
Other
|
|
|
(596
|
)
|
|
|
(957
|
)
|
Total deferred tax liabilities
|
|
$
|
(23,292
|
)
|
|
$
|
(33,197
|
)
|
Valuation allowance
|
|
$
|
(46,507
|
)
|
|
$
|
(1,308
|
)
|
Net deferred tax assets
(1)
|
|
$
|
4,085
|
|
|
$
|
3,467
|
|
(1)
|
For fiscal 2019 and 2018, state deferred tax assets were $2,609 and $4,354, respectively, and federal and foreign deferred tax assets were $1,476 and $0, respectively.
|
Federal net operating loss carryforwards at March 2, 2019 and March 3, 2018, were $140,088,000 and $0, respectively. The federal losses can be carried forward indefinitely and are subject to a full valuation allowance. State net operating loss carryforwards at March 2, 2019 and March 3, 2018, were $71,454,000 and $12,816,000, respectively. If certain substantial changes in the entity’s ownership occur, there would be an annual limitation on the amount of the carryforward(s) that can be utilized. The total unrecognized tax benefits related to state net operating losses were $250,000 and $205,000 at March 2, 2019 and March 3, 2018, respectively. State loss
47
carryforwards vary as to the carryforward period and will expire from fiscal 2020 through fiscal 203
9
.
The Company believes that it is not more likely than not that the benefit from cert
ain state loss carryforwards will be realized. Accordingly, the Company has provided a valuation allowance of $4,231,000 and $0 with respect to the deferred tax assets relating to these state loss carryforwards as of March 2, 2019 and March 3, 2018, respec
tively.
Deferred tax assets related to state tax credits at March
2
, 201
9
and
March 3, 2018
, were $
1,972
,000 and $
2,152
,000, respectively.
The total
unrecognized tax benefits
related to state tax credits
at March 2, 2019 and March 3, 2018,
were $192,000 a
nd $330,000
, respectively
.
State tax credit carryforwards vary as to the carryforward period and will expire from fiscal 2024 through fiscal 203
9
.
The Company believes that it is not more likely than not that the benefit from certain state tax credits
will
be realized. Accordingly, the Company has provided a valuation allowance of $
1,600
,000
and $
1,308
,000 with respect to the deferred tax assets relating to these state tax credits as of March
2
, 201
9
and
March 3, 2018
, respectively.
The Company is subject to taxation in the United States and various state, provincial, local and foreign (primarily Canadian) jurisdictions. With few exceptions, as of fiscal 2019, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2016. Certain tax years prior to fiscal 2016 are subject to examination by certain state and foreign jurisdictions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for uncertain tax positions is as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Unrecognized tax benefits - beginning balance
|
|
$
|
4,906
|
|
|
$
|
6,990
|
|
|
$
|
2,551
|
|
Gross increases — tax positions in current period
|
|
|
—
|
|
|
|
219
|
|
|
|
4,643
|
|
Gross increases — tax positions in prior period
|
|
|
455
|
|
|
|
47
|
|
|
|
225
|
|
Gross decreases — tax positions in prior period
|
|
|
(157
|
)
|
|
|
(2,065
|
)
|
|
|
(320
|
)
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
(83
|
)
|
Expiration of statute of limitations
|
|
|
(697
|
)
|
|
|
(285
|
)
|
|
|
(26
|
)
|
Unrecognized tax benefits — ending balance
|
|
$
|
4,507
|
|
|
$
|
4,906
|
|
|
$
|
6,990
|
|
As of March 2, 2019 and March 3, 2018, the Company had total unrecognized tax benefits of $4,507,000 and $4,906,000, respectively, the majority of which would, if recognized, affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to state income tax settlements or expirations of statutes.
Interest associated with unrecognized tax benefits is recorded in nonoperating (income) and expenses. Penalties associated with unrecognized tax benefits are recorded in SG&A expenses. The Company recorded expenses for tax interest and penalties, net of refunds, of $28,000, $118,000 and $142,000 in fiscal 2019, 2018 and 2017, respectively. The Company had accrued penalties and interest of $747,000 and $602,000 at March 2, 2019 and March 3, 2018, respectively
.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Leases -
At March 2, 2019, the Company had the following minimum lease commitments and future subtenant receipts in the years indicated (in thousands):
Fiscal Year
|
|
Operating
Leases
|
|
|
Subtenant
Income
|
|
2020
|
|
$
|
225,845
|
|
|
$
|
1,658
|
|
2021
|
|
|
192,690
|
|
|
|
1,874
|
|
2022
|
|
|
161,276
|
|
|
|
1,977
|
|
2023
|
|
|
123,940
|
|
|
|
1,601
|
|
2024
|
|
|
86,176
|
|
|
|
1,243
|
|
Thereafter
|
|
|
138,554
|
|
|
|
3,211
|
|
Total lease commitments
|
|
$
|
928,481
|
|
|
$
|
11,564
|
|
Rental expense, which includes distribution and fulfillment center space and corporate headquarters, was $256,236,000, $261,889,000 and $264,735,000 in fiscal 2019, 2018 and 2017, respectively. These amounts include contingent rentals of $171,000, $238,000 and $223,000, based upon a percentage of sales, and net of sublease incomes totaling $1,448,000, $1,199,000 and $646,000 in fiscal 2019, 2018 and 2017, respectively.
Legal matters
— Putative class action complaints were filed in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between April 10, 2014 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants' alleged violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys' fees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. On June 25, 2018, the court granted the Company’s motion to dismiss the amended complaint, with prejudice. The plaintiffs subsequently filed a notice of
48
appeal and
a related appellate brief
and
the Company file
d
its reply brief in January 2019.
The court has scheduled oral arguments on June 12, 2019.
Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this
lawsuit is without merit and intends to defend against it vigorously.
The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the Consumer Product Safety Commission (“CPSC”). In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The Company responded to the inquiry and cooperated with the CPSC. On September 20, 2017, the Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. On October 27, 2017, the Company submitted its response to the CPSC letter. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. The CPSC has responded to the Company’s letter and generally declined to accept the Company’s position. The Company entered into settlement discussions with the CPSC during the third quarter of fiscal 2019 that are ongoing. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2,000,000 to $6,200,000. While the Company anticipates that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay.
The Company was a defendant in lawsuits in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits sought unspecified monetary damages, injunctive relief and attorneys’ fees. The Company settled these cases as expected on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company recognized expense of
$6,600,000
in the second quarter of fiscal 2018 attributable to the legal and regulatory proceedings described in this paragraph and the preceding paragraph as a component of selling, general and administrative expenses.
There are various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operation of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Note and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity.
NOTE 9 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended March 2, 2019 and March 3, 2018, is set forth below (in thousands except per share amounts):
|
|
Quarter Ended
|
|
Fiscal 2019
|
|
6/2/2018
|
|
|
9/1/2018
|
|
|
12/1/2018
|
|
|
3/2/2019
(1)
|
|
Net sales
|
|
$
|
371,864
|
|
|
|
355,336
|
|
|
|
413,232
|
|
|
|
412,506
|
|
Gross profit
|
|
$
|
120,139
|
|
|
|
93,506
|
|
|
|
130,492
|
|
|
|
106,766
|
|
SG&A expenses
|
|
$
|
138,580
|
|
|
|
143,149
|
|
|
|
147,012
|
|
|
|
158,718
|
|
Operating loss
|
|
$
|
(31,341
|
)
|
|
|
(62,466
|
)
|
|
|
(28,943
|
)
|
|
|
(65,335
|
)
|
Net loss
|
|
$
|
(28,503
|
)
|
|
|
(51,088
|
)
|
|
|
(50,441
|
)
|
|
|
(68,801
|
)
|
Average shares outstanding — basic
|
|
|
80,187
|
|
|
|
80,554
|
|
|
|
80,784
|
|
|
|
81,305
|
|
Average shares outstanding — diluted
|
|
|
80,187
|
|
|
|
80,554
|
|
|
|
80,784
|
|
|
|
81,305
|
|
Basic loss per share
|
|
$
|
(0.36
|
)
|
|
|
(0.63
|
)
|
|
|
(0.62
|
)
|
|
|
(0.85
|
)
|
Diluted loss per share
|
|
$
|
(0.36
|
)
|
|
|
(0.63
|
)
|
|
|
(0.62
|
)
|
|
|
(0.85
|
)
|
|
|
Quarter Ended
|
|
Fiscal 2018
|
|
5/27/2017
|
|
|
8/26/2017
|
|
|
11/25/2017
|
|
|
3/3/2018
(1)
|
|
Net sales
|
|
$
|
409,525
|
|
|
|
407,607
|
|
|
|
469,161
|
|
|
|
512,229
|
|
Gross profit
|
|
$
|
151,597
|
|
|
|
140,164
|
|
|
|
176,676
|
|
|
|
189,713
|
|
SG&A expenses
|
|
$
|
140,195
|
|
|
|
138,087
|
|
|
|
150,395
|
|
|
|
147,909
|
|
Operating income (loss)
|
|
$
|
(2,321
|
)
|
|
|
(11,340
|
)
|
|
|
13,448
|
|
|
|
28,174
|
|
Net income (loss)
|
|
$
|
(2,986
|
)
|
|
|
(7,823
|
)
|
|
|
7,381
|
|
|
|
15,054
|
|
Average shares outstanding — basic
|
|
|
81,080
|
|
|
|
80,350
|
|
|
|
79,658
|
|
|
|
79,835
|
|
Average shares outstanding — diluted
|
|
|
81,080
|
|
|
|
80,350
|
|
|
|
79,658
|
|
|
|
79,854
|
|
Basic earnings (loss) per share
|
|
$
|
(0.04
|
)
|
|
|
(0.10
|
)
|
|
|
0.09
|
|
|
|
0.19
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.04
|
)
|
|
|
(0.10
|
)
|
|
|
0.09
|
|
|
|
0.19
|
|
(1)
|
The quarter ended March 2, 2019 consisted of 13 weeks, compared to 14 weeks for the quarter ended March 3, 2018.
|
49