PIER 1 IMPORTS, INC. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the 13 and 39 weeks endedNovember 30, 2019 , as compared to the 13 and 39 weeks endedDecember 1, 2018 , should be read in conjunction with the Company's unaudited Consolidated Financial Statements and related Notes to Consolidated Financial Statements, which are included in this Quarterly Report on Form 10-Q in Item 1 Financial Statements. In addition, the following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the Company's Consolidated Financial Statements as ofMarch 2, 2019 , and for the fiscal year then ended, the related Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, all contained in the Annual Report on Form 10K ofPier 1 Imports, Inc. for the fiscal year endedMarch 2, 2019 . MANAGEMENT OVERVIEWPier 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 theU.S. andCanada and online at pier1.com. The Company conducts business as one operating segment. As ofNovember 30, 2019 , the Company operated 942 stores in theU.S. andCanada . The results of operations for the 13 and 39 weeks endedNovember 30, 2019 andDecember 1, 2018 , are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company's products have occurred during the holiday season beginning in November and continuing through December. During the third quarter of fiscal 2020, net sales decreased 13.3% from the prior year third quarter and company comparable sales decreased 11.4% compared to the third quarter of fiscal 2019; the Company estimates that the shift of certain holiday selling days, which were included in last year's fiscal third quarter, negatively impacted the third quarter of fiscal 2020 company comparable sales by approximately 650 basis points. The impact of this timing shift is expected to reverse in the fourth quarter of fiscal 2020. The decline in company comparable sales was primarily a result of lower traffic. Gross profit for the third quarter of fiscal 2020 was$110.3 million , or 30.8% of sales, compared to$130.5 million , or 31.6% of sales, in the same period last year, a decrease of 80 basis points. The decrease in gross profit as a percentage of sales primarily reflected increased promotional and clearance activity compared to the same period last year, as well as 190 basis points of deleverage in store occupancy costs due to lower sales. The Company remains on track to realize approximately$90 million of selling, general and administrative ("SG&A") cost cutting initiatives for fiscal 2020, but continues to incur substantial transformation and advisory costs, which reduced the bottom-line benefit of the progress made in cost cutting during the third quarter of fiscal 2020. Operating loss for the third quarter of fiscal 2020 was$53.3 million , or (14.8%) of sales, compared to$28.9 million , or (7.0%) of sales, for the same period last year. For the third quarter of fiscal 2020, the Company reported a net loss of$59.0 million , or$(14.15) per share, which includes transformation costs of approximately$10 million primarily related to professional fees, and a non-cash charge of$14.1 million related to impairment of long-lived store assets, compared to a net loss of$50.4 million , or$(12.49) per share, for the third quarter of fiscal 2019. Per share figures reflect the Company's 1-for-20 reverse stock split effected onJune 20, 2019 . EBITDA (earnings before interest, taxes, depreciation and amortization) for the third quarter of fiscal 2020 was$(41.0) million and includes the transformation costs and impairment charge referred to above. This compares to EBITDA of$(16.9) million in the same period last year. See "Reconciliation of Non-GAAP Financial Measures" below. As ofNovember 30, 2019 , the Company had$11.1 million of cash and cash equivalents,$189.5 million outstanding under its senior secured term loan facility,$96.0 million of cash borrowings under its$350 million secured revolving credit facility ("Revolving Credit Facility"),$50.0 million of borrowings under its first-in, last-out tranche ("FILO Tranche") and$14.2 million in cash borrowings outstanding under loans secured by Company owned life insurance ("COLI"). See Note 4 of the Notes to Consolidated Financial Statements for additional information. OnNovember 4, 2019 , the Board of Directors of the Company appointedRobert J. Riesbeck to the position of Chief Executive Officer andMr. Riesbeck was elected as a member of the Board of Directors, effective immediately.Mr. Riesbeck will also continue to serve as the Chief Financial Officer of the Company.Cheryl A. Bachelder , the Company's former Interim Chief Executive Officer, stepped down from the Company and will continue to serve as a member of the Board of Directors. OnNovember 4, 2019 , the Board of Directors appointedDonna N. Colaco to serve as President of the Company, effective immediately.
As previously announced, the Company is currently in the process of evaluating a full range of strategic alternatives. That work is ongoing, with no formal conclusion at this time.
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In order to better align its business with the current operating environment,
the Company intends to reduce its store footprint by up to 450 locations. To
reflect the revised store footprint, the Company also plans to close certain
distribution centers and reduce its corporate expenses, including headcount. See
Part II, Item 5. Other Information of this Quarterly Report on Form 10-Q for
additional information regarding these actions.
Results of Operations
Management reviews a number of key performance indicators to evaluate the
Company's financial performance. The following table summarizes those key
performance indicators:
13 Weeks Ended 39 Weeks Ended
November 30, December 1, November 30, December 1,
Key Performance Indicators 2019 2018 2019 2018
Total sales decline (13.3 %) (11.9 %) (14.3 %) (11.3 %)
Company comparable sales
decline (11.4 %) (10.5 %) (12.5 %) (10.1 %)
Gross profit as a % of sales 30.8 % 31.6 % 24.5 % 30.2 %
SG&A expenses as a % of sales 42.2 % 35.6 % 43.6 % 37.6 %
Operating loss as a % of
sales (14.8 %) (7.0 %) (22.8 %) (10.8 %)
Net loss (in millions) $ (59.0 ) $ (50.4 ) $ (241.2 ) $ (130.0 )
Net loss as a % of sales (16.4 %) (12.2 %) (24.7 %) (11.4 %)
EBITDA (in millions) (1) $ (41.0 ) $ (16.9 ) $ (186.1 ) $ (84.8 )
EBITDA as a % of sales (1) (11.4 %) (4.1 %) (19.0 %) (7.4 %)
Total retail square footage
(in thousands) 7,447 7,809 7,447 7,809
(1) 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.Net Sales - Net sales consisted almost entirely of sales to retail customers, net of discounts, returns and sales tax, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales for the third quarter of fiscal 2020 were$358.4 million , a decrease of 13.3%, compared to$413.2 million for the third quarter of fiscal 2019. At the end of the third quarter of fiscal 2020, the Company operated 45 fewer stores than at the end of the third quarter of fiscal 2019. Company comparable sales for the third quarter of fiscal 2020 decreased 11.4%, compared to the third quarter of fiscal 2019. The decline in company comparable sales was primarily a result of lower traffic. Net sales for the year-to-date period of fiscal 2020 were$977.3 million , a decrease of 14.3%, compared to$1.140 billion for the same period in fiscal 2019. Company comparable sales for the year-to-date period of fiscal 2020 decreased 12.5%, compared to the same period last year. The decline in company comparable sales was a result of lower average customer spend primarily attributable to changes in the Company's merchandise mix, as well as decreased store traffic. See Note 6 of the Notes to Consolidated Financial Statements for additional information. Sales at the Company's Canadian stores are subject to fluctuations in currency conversion rates. For the third quarter of fiscal 2020, the year-over-year change in the value of the Canadian Dollar, relative to theU.S. Dollar, negatively impacted net sales and company comparable sales by approximately 10 basis points. For the year-to-date period of fiscal 2020, the year-over-year change in the value of the Canadian Dollar, relative to theU.S. Dollar, negatively impacted net sales by approximately 10 basis points and company comparable sales by approximately 20 basis points. Sales on the Pier 1 credit card comprised 30.1% ofU.S. sales for the trailing twelve months endedNovember 30, 2019 , compared to 33.2% for the comparable period in fiscal 2019. The Company's proprietary credit card program provides both economic and strategic benefits to the Company. The decrease in net sales for the period was comprised of the following components (in thousands): Net Sales Net sales for the 39 weeks ended December 1, 2018$ 1,140,432 Incremental sales decline from: Company comparable sales (137,883 ) New stores opened during fiscal 2020 - Closed stores and other (25,219 ) Net sales for the 39 weeks ended November 30, 2019$ 977,330 18
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A summary reconciliation of the Company's stores open at the beginning of fiscal
2020 to the number open at the end of the third quarter of fiscal 2020 is as
follows:
United States Canada Total
Open at March 2, 2019 906 67 973
Openings - - -
Closings (30 ) (1 ) (31 )
Open at November 30, 2019 876 66 942
Gross Profit - For the third quarter of fiscal 2020, gross profit was $110.3
million , or 30.8% of sales, compared to $130.5 million , or 31.6% of sales, for
the same period last year, a decrease of 80 basis points. The decrease in gross
profit as percentage of sales primarily reflected increased promotional and
clearance activity compared to the same period last year, as well as 190 basis
points of deleverage in store occupancy costs due to lower sales. For the
year-to-date period of fiscal 2020, gross profit was $239.9 million , or 24.5% of
sales, compared to $344.1 million , or 30.2% of sales, for the same period last
year, a decrease of 570 basis points.
SG&A Expenses, Depreciation and Operating Loss - For the third quarter of fiscal
2020, SG&A expenses were $151.4 million , or 42.2% of sales, compared to $147.0
million , or 35.6% of sales, for the same period in fiscal 2019. SG&A expenses
for the year-to-date period of fiscal 2020 were $426.3 million , or 43.6% of
sales, compared to $428.7 million , or 37.6% of sales, for the same period in
fiscal 2019. For the third quarter and year-to-date period of fiscal 2020,
reductions in marketing expenses, compensation for operations and operational
expenses were offset by increases in other SG&A and impairment expenses. SG&A
expenses for the third quarter and year-to-date period of fiscal 2020 include
transformation costs of approximately $10 million and $36 million , respectively,
primarily related to professional fees. SG&A expenses are summarized in the
table below (in millions):
13 Weeks Ended 39 Weeks Ended
November 30, 2019 December 1, 2018 November 30, 2019 December 1, 2018
Expense % of Sales Expense % of Sales Expense % of Sales Expense % of Sales
Compensation for operations $ 54.7 15.3 % $ 61.0
14.8 % $ 167.1 17.1 % $ 176.6 15.5 %
Operational expenses 14.7 4.1 % 19.8 4.8 % 51.4 5.3 % 60.2 5.3 %
Marketing 25.2 7.0 % 35.4 8.6 % 64.1 6.6 % 95.5 8.4 %
Other selling, general and
administrative 42.7 11.9 % 30.8 7.5 % 125.0 12.8 % 96.4 8.5 %
Impairment 14.1 3.9 % - 0.0 % 18.7 1.9 % - 0.0 %
Total selling, general and
administrative $ 151.4 42.2 % $ 147.0 35.6 % $ 426.3 43.6 % $ 428.7 37.6 %
The Company remains on track to realize approximately $90 million of SG&A cost
cutting initiatives for fiscal 2020, but continues to incur substantial
transformation and advisory costs, which reduced the bottom-line benefit of the
progress made in cost cutting during the third quarter of fiscal 2020.
Depreciation expense for the third quarter of fiscal 2020 was $12.2 million ,
compared to $12.4 million for the same period last year. Depreciation expense
for the year-to-date period of fiscal 2020 was $36.6 million , compared to $38.1
million for the same period last year. The decrease was primarily due to certain
assets becoming fully depreciated and asset retirements, partially offset by
additions.
Operating loss for the third quarter of fiscal 2020 was $53.3 million , or
(14.8%) of sales, compared to $28.9 million , or (7.0%) of sales, for the same
period last year. Operating loss for the year-to-date period of fiscal 2020 was
$222.9 million , or (22.8%) of sales, compared to operating loss of $122.8
million , or (10.8%) of sales, for the same period last year.
Income Taxes - The income tax provision for the third quarter of fiscal 2020 was
$0.3 million , compared to $17.9 million during the same period in the prior
fiscal year. The effective tax rate for the third quarter of fiscal 2020 was
(0.4%), compared to (54.9%) in the same period during fiscal 2019. The income
tax provision for the first 39 weeks of fiscal 2020 was $3.0 million , compared
to an income tax benefit of $2.3 million during the same period in the prior
fiscal year. The effective tax rate for the first 39 weeks of fiscal 2020 was
(1.2%), compared to 1.8% for the same period during fiscal 2019. The change in
income tax provision for the third quarter of fiscal 2020 compared to the third
quarter of fiscal 2019 primarily relates to valuation allowances established in
fiscal year 2019. During the second quarter of fiscal 2020, the Company recorded
an additional valuation allowance of $2.6 million related to certain state
jurisdictions based upon the determination that it was not more likely than not
that such assets would be realized. See Note 7 of the Notes to Consolidated
Financial Statements for additional information.
Net Loss and EBITDA - For the third quarter of fiscal 2020, the Company reported
a net loss of $59.0 million , or $(14.15) per share, which includes
transformation costs of approximately $10 million primarily related to
professional fees and a non-cash charge of $14.1 million related to impairment
of long-lived store assets. This compares to a net loss of $50.4 million , or
$(12.49) per share, for the same period in fiscal 2019. For the first 39 weeks
of fiscal 2020, the Company reported a net loss of $241.2 million , or $(58.36)
per share, which includes transformation costs of approximately $36 million
primarily related to professional fees and a non-cash charge of $18.7 million
related to impairment of long-lived store assets. This compares to a net loss of
$130.0 million , or $(32.31) per share, for the same period in fiscal 2019. Per
share figures reflect the Company's 1-for-20 reverse stock split effected on
June 20, 2019 . EBITDA for the third quarter of fiscal 2020 was $(41.0) million ,
compared to $(16.9) million for the same period in fiscal 2019. For the first 39
weeks of fiscal 2020, EBITDA was $(186.1) million , compared to $(84.8) million ,
for the same period last year. EBITDA for the third quarter and first 39 weeks
of fiscal 2020 includes the transformation costs and impairment charges referred
to above. See "Reconciliation of Non-GAAP Financial Measures" below.
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--------------------------------------------------------------------------------RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The Company reports its financial results in accordance with
The Company believes that EBITDA allows management and investors to understand
and compare results in a more consistent manner for the 13-week and 39-week
periods ended
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 does not purport to be an alternative
to net income (loss) as a measure of operating performance. A reconciliation of
net loss to EBITDA is shown below (in millions).
13 Weeks Ended 39 Weeks Ended
November 30, 2019 December 1, 2018 November 30, 2019 December 1, 2018
$ Amount % of Sales $ Amount % of Sales $ Amount % of Sales $ Amount % of Sales
Net loss (GAAP) $ (59.0 ) (16.4 %) $ (50.4 ) (12.2 %) $ (241.2 ) (24.7 %) $ (130.0 ) (11.4 %)
Add back: Income tax provision
(benefit) 0.3 0.1 % 17.9 4.3 % 3.0 0.3 % (2.3 ) (0.2 %)
Interest expense, net 5.5 1.5 % 3.3 0.8 % 15.6 1.6 % 9.5 0.8 %
Depreciation 12.2 3.4 % 12.4 3.0 % 36.6 3.7 % 38.1 3.4 %
EBITDA (non-GAAP) $ (41.0 ) (11.4 %) $ (16.9 ) (4.1 %) $ (186.1 ) (19.0 %) $ (84.8 ) (7.4 %)
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the third quarter of fiscal 2020 with$11.1 million in cash and cash equivalents, compared to$54.9 million at the end of fiscal 2019 and$71.1 million at the end of the third quarter of fiscal 2019. The decrease from the end of fiscal 2019 was primarily the result of cash used in operating activities of$145.9 million and the utilization of cash to fund the Company's capital expenditures of$10.1 million , partially offset by net cash borrowings of$96.0 million under the Revolving Credit Facility and$14.2 million under COLI loans.
Cash Flows from Operating Activities
During the first 39 weeks of fiscal 2020, operating activities used
Cash Flows from Investing Activities
During the first 39 weeks of fiscal 2020, investing activities used$7.3 million of cash, which were primarily related to capital expenditures of$10.1 million deployed toward technology and infrastructure initiatives and existing stores, partially offset by net restricted investment activity. Of those capital expenditures,$1.8 million related to timing differences between receipt of fixed asset purchases and cash payment of invoices. Capital spend in fiscal 2020 is expected to be approximately$15 million .
Cash Flows from Financing Activities
During the first 39 weeks of fiscal 2020, financing activities provided$109.3 million of cash, primarily resulting from net cash borrowings of$96.0 million under the Revolving Credit Facility and$14.2 million under COLI loans.
Revolving Credit Facility
The Company has a$350 million secured revolving credit facility that matures onJune 2, 2022 . Credit extensions under the Revolving Credit Facility are limited to the lesser of$350.0 million or the amount of the calculated borrowing base, as defined in the Revolving Credit Facility, which was$301.0 million as ofNovember 30, 2019 . The Company had$96.0 million in cash borrowings and$46.5 million in letters of credit outstanding under the Revolving Credit Facility, with$158.5 million remaining available for cash borrowings, all as ofNovember 30, 2019 . The Revolving Credit Facility includes a$50 million FILO Tranche. The FILO Tranche expands the Revolving Credit Facility to$400 million and modifies the borrowing base. As ofNovember 30, 2019 , the Company had$50.0 million outstanding under the FILO Tranche with a carrying value of$49.1 million , net of debt issuance costs. See Note 4 of the Notes to Consolidated Financial Statements for additional information. 20 --------------------------------------------------------------------------------
On
Term Loan Facility The Company has a senior secured term loan facility that matures onApril 30, 2021 ("Term Loan Facility"). As ofNovember 30, 2019 , the Company had$189.5 million outstanding under the Term Loan Facility with a carrying value of$188.4 million , net of unamortized discounts and debt issuance costs. See Note 4 of the Notes to Consolidated Financial Statements for additional information.
Company Owned Life Insurance Loans
During the second quarter of fiscal 2020, the Company entered into loans secured by COLI policies on former key executives. As ofNovember 30, 2019 , the Company had$14.2 million in cash borrowings outstanding under the COLI loans. The loans will mature when the related policies become payable in accordance with the provisions of the policy. See Note 4 of the Notes to Consolidated Financial Statements for additional information.
Sources of Working Capital
The Company's sources of working capital include cash from operations, available cash balances, the COLI policies and, as needed, borrowings against the Company's Revolving Credit Facility. The Company's key drivers of cash flows are sales, management of inventory levels, vendor payment terms, management of expenses and capital expenditures. Given the Company's current cash position, expected operating cash flows and borrowings available under the Revolving Credit Facility, the Company has substantial doubt regarding its ability to have sufficient liquidity to fund its obligations and working capital needs through the next 12 months.
However, the Company is taking a number of actions to support its ongoing transformation including cost cutting, lowering capital expenditures, seeking additional capital and reducing its store footprint including related distribution centers and corporate headquarter support. The Company will continue to seek reductions in rental obligations with landlords in its determination of the appropriate footprint.
The consolidated financial statements for the 13 and 39 weeks endedNovember 30, 2019 , have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that may result from the outcome of this going concern uncertainty as the Company believes that completion or substantial completion of the actions discussed above would alleviate or eliminate the substantial doubt. However, as the actions above have not been finalized or fully executed as of the date of this report, they cannot be deemed probable of mitigating substantial doubt. Accordingly, substantial doubt is deemed to exist about the Company's ability to continue as a going concern. If the Company's independent registered public accounting firm includes a qualification or exception regarding the Company's ability to continue as a going concern in its audit report and opinion regarding the Company's annual consolidated financial statements, without an amendment from its lenders, an event of default under existing debt agreements would be triggered.
IMPACT OF INFLATION
Inflation has not had a significant impact on the operations of the Company.
However, the Company's management cannot be certain of the effect inflation may
have on the Company's operations in the future.
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