Pier 1 Imports, Inc. (PIR)

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Industry: Consumer Services
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Pier 1 Imports (PIR)

Q2 2012 Earnings Call

September 15, 2011 11:00 am ET

Executives

Alexander W. Smith - Chief Executive Officer, President, Director and Member of Executive Committee

Charles H. Turner - Chief Financial Officer, Executive Vice President of Finance and Treasurer

Kelley Buchhorn -

Analysts

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Mark Rupe - Longbow Research LLC

Alan M. Rifkin - Barclays Capital, Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Jennifer Milan - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen. This is the Pier 1 Imports Quarterly Conference Call. At the request of Pier 1 Imports, today's call is being recorded. [Operator Instructions] I would now like to introduce Mr. Alex Smith, President and Chief Executive Officer for Pier 1 Imports. Mr. Smith, you may begin.

Alexander W. Smith

Thanks, Sarah. Good morning, everyone, and thanks for joining us today. Cary Turner, our Executive Vice President and Chief Financial Officer, is with me; as is Kelley Buchhorn, our Director of Investor Relations. As always, before we begin, I will ask Kelley to read you the Safe Harbor Statement.

Kelley?

Kelley Buchhorn

Thank you, Alex, and good morning, everyone. Prior to market open today, we issued a press release which included the detailed financial results for the second quarter ended August 27, 2011. In just a few moments, we will hear comments from Alex and Cary about those results, followed by a question-and-answer period.

Before we begin, I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases. Our actual results and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings, including our Annual Report on Form 10-K, for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release you may obtain one, along with copies of prior press releases and all SEC filings, by linking through to the Investor Relations page of our website, pier1.com.

I would now like to turn the call over to Cary, who will provide the highlights and an overview of our second quarter financial results. Cary?

Charles H. Turner

Thank you, Kelley. As reported in this morning's press release, comp store sales increased 10.8% for the second quarter versus last year comp store sales increase of 11.2% for the same period. Total sales increased 9.6% for the quarter over the same period last year. Increases in store traffic and average ticket were the key drivers during the quarter, contributing to our sales growth and sales across all categories were strong. On a trailing 12-month basis at the end of the second quarter, sales per retail square foot were $175, up from $159 per retail square foot at the end of the second quarter last year.

Merchandise margins increased 110 basis points as a percentage of sales to 59.4% of sales compared to 58.3% of sales in the second quarter last year. Merchandise margins continued to be positively impacted by strong input margins, the proper amount of promotional and turns pricing and well-managed inventory levels. Store occupancy costs for the second quarter declined 160 basis points as a percentage of sales from last year and were $67.2 million, or 19.8% of sales. Last year's store occupancy costs were $66.3 million, or 21.4% of sales for the same period.

Gross profit for the quarter improved 270 basis points to 39.6% of sales compared to 36.9% of sales last year.

SG&A expenses for the quarter were $105.8 million, or 31.1% of sales compared to last year's SG&A expenses of $94.3 million, or 30.4% of sales for the same period. As we discussed in our call last quarter, we increased our marketing expense for the second quarter by approximately $3 million, making investments primarily in the incremental television and radio advertising. Excluding the incremental marketing investment, variable and total SG&A expenses decreased as a percentage of sales over last year. Store payroll expense as a percentage of sales was leveraged in the second quarter, although not as much as it could have been. We elected to include additional levels of store associates in the store bonus pool to be rewarded when individual store performance is above expectations, and we believe it helped.

Fixed expenses increased slightly and primarily resulted from the hiring of planned incremental headcount in support of e-commerce and other growth initiatives for our business.

Operating income for the second quarter improved approximately 56% to $23.7 million, or 7% of sales compared to last year's second quarter operating income of $15.2 million, or 4.9% of sales. The improvement in operating income resulted primarily from increases in sales and merchandise margins.

As a reminder, the company's federal operating loss tax carryforward was fully utilized at the end of last fiscal year. The company's effective tax rate in the second quarter this year was 35% and going forward, the effective tax rate is expected to be in the range of 35% to 37% for the remainder of the year.

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