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Article by DailyStocks_admin    (11-10-08 03:57 AM)

Filed with the SEC from Oct 23 to Oct 29:

Pier 1 Imports (PIR)
SCSF Equities reported owning 5,543,579 shares (6.2%) after buying 1,838,454 from Oct. 14 to 16 at $1.47 to $1.49 each.

BUSINESS OVERVIEW

Business .


(a) General Development of Business .

Pier 1 Imports, Inc. was incorporated as a Delaware corporation in 1986. Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. References to “Pier 1 Imports” relate to the Company’s retail locations operating under the name Pier 1 Imports ® . References to “Pier 1 Kids” related to the Company’s retail locations that operated under the name Pier 1 Kids ® .

On March 20, 2006, the Company announced the sale of its subsidiary based in the United Kingdom, The Pier Retail Group Limited (“The Pier”). The Pier has been included in discontinued operations in the Company’s financial statements for fiscal 2007 and prior years. All discussions in this report relate to continuing operations, unless stated otherwise.

In fiscal 2008, the Company opened four new Pier 1 Imports stores located in Chula Vista, California; Peoria, Arizona; Port St. Lucie, Florida; and Tempe, Arizona. The Company closed 83 store locations, including the remaining 36 Pier 1 Kids stores and 22 clearance stores, as well as its direct to consumer business, which included catalog and internet sales. Subject to changes in the retail environment, availability of suitable store sites, lease renewal negotiations and availability of adequate financing, the Company plans to open up to three new Pier 1 Imports stores and close approximately 25 stores during fiscal 2009.

Presently, the Company maintains regional distribution center facilities in or near Baltimore, Maryland; Chicago, Illinois; Columbus, Ohio; Fort Worth, Texas; Ontario, California; Savannah, Georgia; and Tacoma, Washington.

The Company has an arrangement to supply Grupo Sanborns, S.A. de C.V. (“Grupo Sanborns”) with merchandise to be sold primarily in a “store within a store” format in certain stores operated by Grupo Sanborns’ subsidiary, Sears Roebuck de Mexico, S.A. de C.V. (“Sears Mexico”). The agreement with Grupo Sanborns will expire January 1, 2012. The agreement is structured in a manner which substantially insulates the Company from currency fluctuations in the value of the Mexican peso. In fiscal 2008, Grupo Sanborns opened four new “store within a store” locations offering Pier 1 Imports merchandise and closed one free-standing location and one “store within a store” location. As of March 1, 2008, Pier 1 Imports merchandise was offered in 31 Sears Mexico stores. Grupo Sanborns’ expansion plans for fiscal 2009 include opening four new “store within a store” locations and one free-standing location in Mexico to sell Pier 1 Imports merchandise. Since Sears Mexico operates these locations, the Company has no employee or real estate obligations in Mexico.

The Company has a product distribution agreement with Sears Roebuck de Puerto Rico, Inc. (“Sears Puerto Rico”), which allows Sears Puerto Rico to market and sell Pier 1 Imports merchandise in a “store within a store” format in certain Sears Puerto Rico stores. The Company has no employee or real estate obligations in Puerto Rico because Sears Puerto Rico operates these locations. As of March 1, 2008, Pier 1 Imports merchandise was offered in seven Sears Puerto Rico stores. Sears Puerto Rico has no plans for new “store within a store” locations in Puerto Rico during fiscal 2009.

During fiscal 2007, the Company sold its credit card operations, which included its credit card bank located in Omaha, Nebraska, that operated under the name Pier 1 National Bank, N.A. (the “Bank”) to Chase Bank USA, N.A. (“Chase”). The sale was comprised of the Company’s proprietary credit card receivables, certain charged-off accounts and the common stock of the Bank. The Company and Chase have entered into a long-term program agreement. Under this agreement, the Company continues to support the card through marketing programs and receives payments over the life of the agreement for transaction level incentives, marketing support and other program terms.

In August 2007, the Company discontinued its e-commerce business. The Company continues to use its web site, www.pier1.com , for marketing and product information purposes.

(b) Financial Information about Industry Segments .

In fiscal 2008, the Company conducted business as one operating segment consisting of the retail sale of decorative home furnishings, gifts and related items.

Financial information with respect to the Company’s business is found in the Company’s Consolidated Financial Statements, which are set forth in Item 8 herein.


(c) Narrative Description of Business .

The specialty retail operations of the Company consist of retail stores operating under the name “Pier 1 Imports”, selling a wide variety of furniture, wicker, decorative home furnishings, dining and kitchen goods, epicurean products, bath and bedding accessories, candles and other specialty items for the home.

On March 1, 2008, the Company operated 1,034 Pier 1 Imports stores in the United States and 83 Pier 1 Imports stores in Canada. The Company had three remaining franchise agreements to operate stores in the United States that expired in June 2007. During fiscal 2008, the Company supplied merchandise and licensed the Pier 1 Imports name to Grupo Sanborns and Sears Puerto Rico, which sold Pier 1 Imports merchandise primarily in a “store within a store” format in 31 Sears Mexico stores and in seven Sears Puerto Rico stores. Pier 1 Imports stores in the United States and Canada average approximately 9,900 gross square feet, which includes an average of approximately 7,900 square feet of retail selling space. The stores consist of freestanding units located near shopping centers or malls and in-line positions in major shopping centers. Pier 1 Imports operates in all major U.S. metropolitan areas and many of the primary smaller markets. Pier 1 Imports stores generally have their highest sales volumes during November and December as a result of the holiday selling season. In fiscal 2008, net sales of the Company totaled $1.5 billion.

Pier 1 Imports offers a unique selection of merchandise consisting of more than 4,000 items imported from over 50 countries around the world. While the broad categories of Pier 1 Imports’ merchandise remain fairly constant, individual items within these product categories change frequently in order to meet the changing demands and preferences of customers. The principal categories of merchandise include the following:

DECORATIVE ACCESSORIES — This product group constitutes the broadest category of merchandise in Pier 1 Imports’ sales mix and contributed approximately 63% to Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2008, 62% in fiscal year 2007 and 60% in fiscal year 2006. These items are imported primarily from Asian and European countries, as well as some domestic sources. This category includes decorative wood accessories, lamps, vases, dried and artificial flowers, baskets, wall decorations, ceramics, dinnerware, bath and fragrance products, candles, bedding, epicurean products, and seasonal and gift items.

FURNITURE — This product group consists of furniture and furniture cushions to be used in living, dining, kitchen and bedroom areas, sunrooms, and on patios. This product group constituted approximately 37% of Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2008, 38% in fiscal year 2007 and 40% in fiscal year 2006. These goods are imported from a variety of countries such as Italy, Malaysia, Brazil, Mexico, China, the Philippines and Indonesia, and are also obtained from domestic sources. The furniture is made of metal or handcrafted natural materials, including rattan, pine, beech, rubberwood and selected hardwoods with either natural, stained, painted or upholstered finishes.

Pier 1 Imports merchandise largely consists of items that feature a significant degree of handcraftsmanship and are mostly imported directly from foreign suppliers. For the most part, the imported merchandise is handcrafted in cottage industries and small factories. Pier 1 Imports is not dependent on any particular supplier and has enjoyed long-standing relationships with many vendors and agents. The Company believes alternative sources of products could be procured over a relatively short period of time, if necessary. In selecting the source of a product, Pier 1 Imports considers quality, dependability of delivery, and cost. During fiscal 2008, Pier 1 Imports sold merchandise imported from over 50 different countries with slightly more than one-third of its sales derived from merchandise produced in China. The remainder of its merchandise is sourced from Indonesia, India and other countries around the world.

Imported merchandise and a portion of domestic purchases are delivered to the Company’s distribution centers, unpacked and made available for shipment to the various stores in each distribution center’s region.

The Company, through one of its wholly owned subsidiaries, owns a number of federally registered trademarks and service marks under which Pier 1 Imports stores do business. Additionally, certain subsidiaries of the Company have registered and have applications pending for the registration of certain other Pier 1 Imports trademarks and service marks in the United States and in numerous foreign countries. The Company believes that its marks have significant value and are important in its marketing efforts. The Company maintains a policy of pursuing registration of its marks and opposing any infringement of its marks.

The Company operates in the highly competitive specialty retail business and competes primarily with specialty sections of large department stores, furniture and decorative home furnishings retailers, small specialty stores, and mass merchandising discounters.

The Company allows customers to return merchandise within a reasonable time after the date of purchase without limitation as to reason. Most returns occur within 30 days of the date of purchase. The Company monitors the level of and stated reasons for returns and maintains a reserve for future returns based on historical experience and other known factors.

On March 1, 2008, the Company employed approximately 16,400 associates in the United States and Canada, of which approximately 6,100 were full-time employees and 10,300 were part-time employees.


(d) Financial Information about Geographic Areas .

Information required by this Item is found in Note 1 of the Notes to the Consolidated Financial Statements .


(e) Available Information .

The Company makes available free of charge through its Internet web site address (www.pier1.com) its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the SEC.

Certain statements contained in Item 1, Item 7 and elsewhere in this report may constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. The Company may also make forward-looking statements in other reports filed with the SEC and in material delivered to the Company’s shareholders. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects” and other similar expressions. Management’s expectations and assumptions regarding planned store openings and closings, financing of Company obligations from operations, success of its marketing, merchandising and store operations strategies, and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, the effects of terrorist attacks or other acts of war, conflicts or war involving the United States or its allies or trading partners, labor strikes, weather conditions or natural disasters, volatility of fuel and utility costs, the general strength of the economy and levels of consumer spending, consumer confidence, the availability of suitable sites for locating stores and distribution centers, availability of a qualified labor force and management, the availability and proper functioning of technology and communications systems supporting the Company’s key business processes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas, and the ability of the Company to source, ship and deliver items from foreign countries to its U.S. distribution centers at reasonable prices and rates and in a timely fashion. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report. The Company assumes no obligation

to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized.

Executive Officers of the Company

ALEXANDER W. SMITH, age 55, has been a director of Pier 1 Imports, has served as President and Chief Executive Officer and has been a member of Pier 1 Imports’ Executive Committee since February 19, 2007. From March 2004 to February 18, 2007, Mr. Smith served as the Senior Executive Vice President, Group President of The TJX Companies, Inc. From 2001 to March 2004, Mr. Smith served as Executive Vice President, Group Executive, International of The TJX Companies, Inc.

CHARLES H. TURNER, age 51, has served as Executive Vice President of the Company since April 2002 and has served as Chief Financial Officer of the Company since August 1999. He served as Senior Vice President of Finance of the Company from August 1999 to April 2002. He served as Senior Vice President of Stores of the Company from August 1994 to August 1999, and served as Controller and Principal Accounting Officer of the Company from January 1992 to August 1994.

GREGORY S. HUMENESKY, age 56, has served as Executive Vice President of Human Resources of the Company since February 2005. Prior to joining the Company, he served as Senior Vice President of Human Resources at Zale Corporation from April 1996 to February 2005.

JAY R. JACOBS, age 53, has served as Executive Vice President of Merchandising of the Company since April 2002. He served as Senior Vice President of Merchandising of the Company from May 1995 to April 2002. He served as Vice President of Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from May 1993 to May 1995, and served as Director of Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from July 1991 to May 1993.

SHARON M. LEITE, age 45, has served as Executive Vice President of Store Operations of the Company since September 2007. Prior to joining the Company, she served as Vice President of Store Operations at Bath & Body Works from April 2001 to August 2007.

DAVID A. WALKER, age 57, has served as Executive Vice President of Planning and Allocations of the Company since March 2007. He served as Executive Vice President of Logistics and Allocations/Stores of the Company from December 2006 to March 2007. He served as Executive Vice President of Logistics and Allocations of the Company from April 2002 to December 2006. He served as Senior Vice President of Logistics and Allocations of the Company from September 1999 to April 2002. He served as Vice President of Planning and Allocations of Pier 1 Imports (U.S.), Inc. from January 1994 to September 1999, and served as Director of Merchandise Services of Pier 1 Imports (U.S.), Inc. from October 1989 to January 1994.

MICHAEL A. CARTER, age 49, has served as Senior Vice President, General Counsel and Secretary of the Company since December 2005. He served as Vice President — Legal Affairs of Pier 1 Imports, (U.S.), Inc. from April 1999 to December 2005. He served as Corporate Counsel of Pier 1 Imports (U.S.), Inc. from March 1990 until April 1999. He served as Assistant Secretary of the Company from April 1991 until December 2005.

The officers of the Company are appointed by the Board of Directors, hold office until their successors are elected and qualified and/or until their earlier death, resignation or removal.

None of the above executive officers has any family relationship with any other of such officers or with any director of the Company. None of such officers was selected pursuant to any arrangement or understanding between him and any other person.


MANAGEMENT DISCUSSION FROM LATEST 10K

MANAGEMENT OVERVIEW

Introduction

Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is a global importer and is one of North America’s largest specialty retailers of imported decorative home furnishings and gifts. The Company imports merchandise directly from over 50 countries, and sells a wide variety of furniture collections, wicker, decorative accessories, bed and bath products, candles, housewares and other seasonal assortments in its stores. The Company conducts business as one operating segment. The Company operates stores in the United States and Canada under the name “Pier 1 Imports”, and, for a portion of fiscal 2008 and in prior years “Pier 1 Kids.” In order to focus on its core business, the Company closed all Pier 1 Kids and clearance stores during fiscal 2008. In addition, the Company closed its direct to consumer business, which included e-commerce and catalogs. The termination of these retail concepts has not only allowed for complete focus on the core business, but has also resulted in substantial on-going cost savings.

In April of 2007, the Company outlined a plan to return to profitability that was built on six business priorities. The Company’s management believes that if it executes these business priorities effectively and efficiently as part of its turnaround strategy, the Company will, over time, return to profitability. The Company made significant progress on these goals during fiscal 2008. It began by reviewing all costs and seeking ways to streamline and simplify the organization. Management estimates that on-going savings realized during fiscal 2008 were approximately $125 million. The savings consisted primarily of $53 million in marketing and $46 million in store and administrative payroll with the remainder of the savings from general cost-cutting measures. Management expects to continue to realize these on-going cost savings and anticipates savings in fiscal 2009 to be $160 million on an annual basis compared to fiscal 2007.

During fiscal 2008, the Company continued to conduct reviews of the individual contributions of its existing store portfolio, including all real estate costs in relation to sales. As a result of these reviews, the Company closed 83 stores during fiscal 2008 and plans to close approximately 25 stores during fiscal 2009. The Company opened four stores in fiscal 2008 and plans to open up to three new stores during fiscal 2009. Additionally, in June 2007, the Company announced it was considering all options related to its corporate headquarters in Fort Worth, Texas in order to recoup its investment and minimize its on-going costs. Subsequent to fiscal 2008 year end, the Company entered into an agreement to sell the headquarters building and accompanying land for $104 million. As part of the transaction, the Company will also enter into a lease agreement to rent approximately 250,000 square feet of office space in the building. The transaction is expected to close no later than June 30, 2008.

A key component of the turnaround strategy was strengthening the Company’s merchandise assortment in stores. The Company strengthened its buying department during fiscal 2008 by reassigning tasks, promoting internal talent and hiring new buyers with a variety of backgrounds. Buyers are now able to better focus on merchandise strategy and working with vendors to develop new products. The Company’s merchandise mix now includes a larger selection of both affordable impulse items and small accessory furniture. Additionally, the merchandise planning and allocations teams have been combined under single executive management to facilitate better planning and decision making around the quantitative side of the buying process and to ensure the product is in the appropriate store at the optimal time. Many process improvements and technology implementations have been initiated to make the supply chain more efficient and reduce costs. These initiatives have reduced the lead times required for ordering merchandise, simplified overseas consolidation of merchandise, and improved distribution center-to-store delivery schedules, and will enable the Company to reduce the levels of back stock maintained in the distribution centers, thus reducing carrying costs. The Company currently plans to reduce merchandise levels at the distribution centers by revising its ordering process and reducing future order quantities. The Company will continue working with its business partners and vendors to reduce damage to inventory at every stage of the supply chain, improve the cost and efficiency of overseas consolidation, reduce freight costs, and ensure the timely shipment of merchandise.

The Company redirected its marketing dollars in an effort to drive traffic using more cost effective methods. External marketing efforts have been structured to reach new and existing customers through the use of periodic in-home mailers, newspaper inserts, email notifications and web site advertisements. In addition to these efforts, the Company continues to operate its website as a marketing tool with copies of the in-home mailers and product information available to site visitors. The Company is also continuing to leverage its partnership with Chase Bank USA, N.A. (“Chase”) through the Pier 1 Imports preferred credit card to reach existing and identify and target potential new customers. The Company anticipates that marketing expenditures will approximate 4% to 5% of sales for fiscal 2009.

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources relates to continuing operations, unless otherwise stated, and 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. Fiscal 2008 and fiscal 2006 were 52-week years while fiscal 2007 was a 53-week year.

Overview of Business

Stores included in the comparable store sales calculation are those stores that were opened prior to the beginning of the preceding fiscal year and are still open. Also included are stores that were relocated during the year within a specified distance serving the same market, where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store. Stores that are expanded or renovated are excluded from the comparable store sales calculation during the period they are closed for such remodeling. When these stores re-open for business, they are included in the comparable store sales calculation in the first full month after the re-opening if there is no significant change in store size. If there is a significant change in store size, the store continues to be excluded from the calculation until it meets the Company’s established definition of a comparable store.

Comparable store sales in fiscal 2009 are anticipated to include all stores with the exception of the four locations opened during fiscal 2008. Stores closed during fiscal 2009 will be excluded after they are closed.

FISCAL YEARS ENDED MARCH 1, 2008 AND MARCH 3, 2007

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties.

During fiscal 2008, the Company opened four new stores and closed 83 store locations, including all Pier 1 Kids and clearance stores. In addition, the Company closed its direct to consumer business. As of March 1, 2008, the Company operated 1,117 stores in the United States and Canada. The Company continues to evaluate its real estate portfolio on a store-by-store and market-by-market basis and will open or close stores as deemed appropriate. During fiscal 2009, the Company expects to open up to three new Pier 1 Imports stores and close approximately 25 stores.

Gross Profit

Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, was 29.1% in fiscal 2008 compared to 29.2% a year ago. Merchandise margins were 48.5% as a percentage of sales, an increase of 60 basis points over 47.9% in fiscal 2007. Although margins improved overall in fiscal 2008, margins were negatively impacted by the clearance activities related to the liquidation of the Company’s modern craftsmen merchandise, the closure of its Pier 1 Kids stores, clearance stores and its direct to consumer channel. Merchandise margins in fiscal 2007 were negatively impacted by 200 basis points as a result of a $32.5 million inventory write-down. Store occupancy costs during fiscal 2008 were $293.2 million or 19.4% of sales, a decrease of $10.2 million and an increase of 70 basis points over store occupancy costs of $303.4 million or 18.7% of sales during fiscal 2007. The decrease of $10.2 million was due to store closures, while the increase as a percentage of sales was the result of the deleveraging of relatively fixed rental costs over a slightly lower sales base in the remaining open stores.

Operating Expenses, Depreciation and Income Taxes

Selling, general and administrative expenses, including marketing, were $487.9 million or 32.3% of sales in fiscal 2008, a decrease of $161.1 million and 770 basis points from last year’s $649.0 million or 40.0% of sales.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Management Overview



Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is a global importer and is one of North America’s largest specialty retailers of imported decorative home furnishings and gifts. The Company directly imports merchandise from over 50 countries, and sells a wide variety of furniture collections, wicker, decorative accessories, bed and bath products, candles, housewares and other seasonal assortments in its stores. The results of operations for the three and six months ended August 30, 2008 and September 1, 2007 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. The Company conducts business as one operating segment and operates stores in the United States and Canada under the name Pier 1 Imports. As of August 30, 2008, the Company operated 1,112 stores in the United States and Canada.



The Company’s performance during the second quarter of fiscal 2009 was an improvement over the same period in the prior year, but it was not as strong as management had anticipated. The Company attributes the results to both the current challenging economic environment and internal execution. To clear out summer merchandise and prepare the stores for the arrival of fall and harvest assortments, the Company offered deeper discounts than originally planned, especially in markets that were experiencing greater economic difficulties such as Phoenix, Las Vegas, Florida and Atlanta. As a result, the Company did not achieve optimal merchandise margins during the quarter, but will enter the third quarter of fiscal 2009 with clean inventory.



Conversion during the quarter increased over the prior year and there was a slight increase in traffic. However, the Company saw a decrease in average ticket because it’s back-to-school strategy emphasized lower ticket items to the detriment of its furniture business. In addition, sales were negatively impacted during the first half of the year by a reduction in marketing expenditures as the Company shifted the use of approximately $8 million to $12 million marketing dollars to coincide with the critical holiday selling season. In order to continue to increase conversion rates and drive incremental traffic, the Company’s marketing plan for the remainder of the year includes retail mailers with larger circulations than last year, robust email and web advertising, various credit card promotions as well as the reintroduction of television advertising during the months of November and December.



The Company ended the second quarter of fiscal 2009 with a strong balance sheet that included $191.1 million in cash. This cash position was the result of operating cash inflows of $1.2 million as well as proceeds of $102.4 million from the sale of the Company’s corporate headquarters building and accompanying land. The Company continues to focus on balancing inventory levels with the flow of new products and adjusting the timing of purchases to receive inventory closer to when it is actually needed and maintaining optimal store levels. The Company is constantly re-evaluating and readjusting its inventory strategy to achieve and maintain this balance. In addition, the Company will continue to focus on maximizing merchandise margin dollars, improving conversion rates and increasing average ticket. The current macro-economic environment will continue to impact the Company’s turnaround strategy, but the Company will continue to focus on what it

can control, continuing to make the Company more efficient and cost effective in every way. Cost savings, particularly in the supply chain, will continue to offset any increases in merchandise costs resulting from increased fuel costs and general inflationary pressures.



The Company’s management believes that the success of the Company’s turnaround will best be measured by two key metrics: merchandise margin and operating profit. Year-over-year comparisons of these metrics will provide better insight into the Company’s progress in a challenging retail environment. The Company’s ability to improve profitability will depend on maintaining traffic levels that are at least neutral compared to the prior year. During the month of September, traffic was down 8% and comparable store sales declined 11.7% compared to the same month in the prior year. Assuming these trends continue, the Company will not meet current analysts’ consensus on earnings estimates for the second half of fiscal 2009.



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 for the three and six months ended August 30, 2008 and September 1, 2007:

Net Sales – Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery service revenues and wholesale sales and royalties. Sales by retail concept during the period were as follows (in thousands):

Gross Profit – Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, increased 150 basis points to 26.9% for the second quarter of fiscal 2009, and increased 270 basis points to 27.6% for the first six months of fiscal 2009. As a percentage of sales, merchandise margins increased 230 basis points for the second quarter and 400 basis points for the six-month period ended August 30, 2008, from the comparable periods a year ago. This increase was primarily the result of the Company’s disciplined focus to generate gross margin dollars during the current year. Margins were impacted by the semi-annual clearance in July 2008 followed by deeper than anticipated markdowns on outdoor furniture and garden accessories in August 2008, especially in markets experiencing greater economic difficulties such as Phoenix, Las Vegas, Florida and Atlanta. The Company’s merchandising efforts and decreased use of promotional events during the first half of fiscal 2009 compared to the prior year had a positive impact. On a comparable store basis, merchandise margin dollars increased approximately 1% for the quarter and 1.6% year-to-date over the same periods last year. Comparable store merchandise margins are determined on a basis similar to comparable store sales.



Store occupancy costs for the quarter were $72.0 million, or 22.5% of sales, a $2.6 million decrease compared to last year’s second quarter store occupancy expense of $74.6 million. Year-to-date, store occupancy costs were $143.4 million, or 22.7% of sales, a decrease of $6.2 million compared to the same period last year.



Operating Expenses, Depreciation and Income Taxes – Selling, general and administrative expenses for the second quarter of fiscal 2009 were $107.0 million, or 33.4% of sales, a decrease of $10.4 million, or 70 basis points as a percentage of sales, from the same quarter last year. Year-to-date selling, general and administrative expenses were $216.4 million, or 34.3% of sales, a decrease of $33.2 million or 130 basis points as a percentage of sales. Selling, general and administrative expenses for the quarter and year-to-date periods included the following charges summarized in the tables below (in thousands):

Expenses that fluctuate proportionately to some degree with sales and number of stores, such as store payroll, marketing, store supplies and other related expenses decreased $6.5 million from the same quarter last year and $21.5 million year-to-date. Store payroll decreased $1.0 million for the quarter and $5.7 million year-to-date primarily as a result of a decrease in total number of stores as well as a planned reduction in store staffing levels. Marketing expenditures decreased $4.0 million for the quarter and $12.1 million year-to-date as a result of an absence of television advertising after the second quarter of fiscal 2008, as well as a shift in marketing expenditures to the second half of fiscal 2009, when marketing dollars will have the most impact during the holiday selling season. The Company anticipates total marketing expenditures for fiscal 2009 to be approximately 4% of sales. Other variable expenses, primarily supplies and equipment rental, decreased $1.5 million for the quarter and $3.7 million for the year-to-date period.



Relatively fixed selling, general and administrative expenses decreased $3.9 million from the same quarter last year and $11.7 million year-to-date from the same period as last year, primarily as a result of less impairment charges and lease termination costs in the current year. In addition, severance and outplacement costs decreased $1.0 million for the quarter and $2.6 million for the year-to-date period,

primarily as a result of expenses incurred in the prior year related to a reduction in work force at the Company’s home office without a comparable reduction in the current year. These decreases were partially offset by $1.7 million in expenses related to the Company’s withdrawn proposal to acquire all of the outstanding common stock shares of Cost Plus, Inc.



Depreciation and amortization expense for the second quarter and year-to-date periods was $7.5 million and $16.2 million, respectively, compared to $10.4 million and $21.0 million for the same periods last year. The decreases were primarily the result of store closures and the sale of the home office building and related assets during the second quarter of fiscal 2009.



The operating loss for the quarter was $28.4 million compared to $40.4 million for last year’s second quarter. For the first half of fiscal 2009, operating losses totaled $58.9 million compared to $95.9 million for the same period last year.



The Company continues to provide a valuation allowance against all deferred tax assets. As a result, the Company did not record a federal or state tax benefit on its operating loss for the first six months of fiscal 2009. Minimal provisions for state and foreign income tax were made for the period. As of August 30, 2008, the Company had tax loss carryforwards of greater than $200.0 million. These loss carryforwards, with expirations beginning in fiscal year 2027, can be utilized to offset future income for U.S. federal tax purposes.


Net Loss – During the second quarter of fiscal 2009, the Company recorded a net loss of $30.2 million, or $0.34 per share, compared to $43.4 million, or $0.49 per share, for the same period last year. Net loss for the first six months of fiscal 2009 was $63.0 million, or $0.71 per share, compared to $99.8 million, or $1.14 per share, for the first half of fiscal 2008.


Inventory – Inventory levels at the end of the second quarter of fiscal 2009 were $379.1 million, down $32.7 million or 7.9%, from inventory levels at the end of fiscal 2008. This decrease was due in part to clearance activity during the second quarter of fiscal 2009 to ensure that inventory was clean and ready for the receipt of fall and holiday merchandise. At the end of the second quarter of fiscal 2009, inventory per retail square foot was $43 compared to $42 at the end of the second quarter of fiscal 2008 and $47 at fiscal 2008 year end. Inventory levels increased $4.6 million, or 1.2%, from the second quarter of fiscal 2008. The Company anticipates that inventory per store will begin to increase as the holiday selling season gets closer and will decline at year end. Inventory levels at the distribution centers have declined during the quarter as inventory continues to be shifted to the stores. This decrease at the distribution centers allowed the Company to exit approximately 350,000 square feet of outside distribution center space during the second quarter of fiscal 2009. Current inventory levels are in line with the Company’s plan for the fiscal year. The Company expects inventory to be approximately $410 million at the end of the third quarter of fiscal 2009 and expects to end the fiscal year with inventory levels of approximately $350 million to $360 million compared to $412 million at fiscal 2008 year end.


Liquidity and Capital Resources


The Company ended the second quarter of fiscal 2009 with $191.1 million in cash and temporary investments compared to $121.9 million a year ago. Operating activities in the first six months of fiscal 2009 provided $1.2 million of cash, primarily as a result of a reduction in inventory and the collection of a $12.4 million income tax refund, including related interest, partially offset by the Company’s net loss.



During the first half of fiscal 2009, investing activities provided $95.2 million compared to $6.6 million during the same period last year. During the second quarter of fiscal 2009, the Company sold its corporate headquarters building and accompanying land to Chesapeake Plaza, L.L.C., an affiliate of

Chesapeake Energy Corporation, for net proceeds of $102.4 million. This cash inflow was partially offset by capital expenditures of $7.2 million in fiscal 2009 compared to $2.7 million in fiscal 2008, consisting primarily of $2.8 million for fixtures, equipment, and leasehold improvements for existing stores, $2.7 million related to home office leasehold improvements, $0.8 million related to the Company’s distribution centers and $0.9 million for information systems’ enhancements. Capital expenditures for fiscal 2009 are expected to be approximately $15 million to $17 million.



Financing activities for the first six months of fiscal 2009 provided a net $1.3 million of the Company’s cash, primarily related to the Company’s stock purchase plan.



At the end of the second quarter, the Company’s minimum operating lease commitments remaining for fiscal 2009 were $117.2 million. The present value of total existing minimum operating lease commitments discounted at 10% was $803.1 million at the fiscal 2009 second quarter-end.



As part of the sale of the Company’s home office building and accompanying land, the Company entered into a lease agreement to rent office space in the building. The lease has a primary term of seven years beginning on June 9, 2008, with one three-year renewal option and provisions for terminating the lease at the end of the fifth lease year. The estimated impact of this lease on the Company’s contractual obligations, as presented in the Company’s Annual Report on Form 10-K for the year ended March 1, 2008, is an increase in operating leases of approximately $4.7 million, $12.2 million, $13.1 million and $4.4 million for the periods of less than one year, one to three years, three to five years and more than five years, respectively.



Working capital requirements are expected to be funded from available cash balances, cash generated from the operations of the Company, and if required, borrowings against lines of credit. The Company’s bank facilities at the end of the second quarter of fiscal 2009 included a $325 million credit facility, which was secured by the Company’s eligible merchandise inventory and third-party credit card receivables; the Company owned real estate was removed from the borrowing base in June 2008. As of August 30, 2008, the Company had no outstanding cash borrowings and had utilized $103.6 million in letters of credit and bankers’ acceptances. The Company will not be required to comply with debt covenants under the facility unless the availability under such agreement is less than $32.5 million. The Company does not anticipate falling below this minimum availability in the foreseeable future. As of August 30, 2008, the Company’s calculated borrowing base was $252.7 million. After excluding the required minimum $32.5 million from the borrowing base, $116.6 million remained available for cash borrowings. The Company was in compliance with required debt covenants at the end of the second quarter of fiscal 2009. Given the Company’s cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund ongoing operational obligations and capital expenditure requirements.



New Accounting Pronouncements



In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, “ Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “ Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants . ” Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP will be applied retrospectively to all periods presented. FSP APB 14-1 is effective for the Company at the beginning of fiscal year 2010. The Company is currently evaluating the impact of the adoption on its financial statements.

CONF CALL

Nancy Benson

Today we will hear from our President and Chief Executive, Alex Smith, and Executive Vice President and Chief Financial Officer, Cary Turner. The agenda for today’s call will be to hear opening remarks followed by a brief discussion of our second quarter results that were reported earlier today. We will provide an update on our business 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 21(e) 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 the result of many factors that may be outside of our control. Please refer to our SEC filings including our annual report filed on Form 10K 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 this morning’s press release, you may obtain one on the Investor Relations page of our website located at www.pier1.com.

Now for an update on our business I would like to turn the call over to Alex.

Alexander W. Smith

Let me start by saying that our second quarter results were not what we had hoped, in part because of the challenging economic environment and in part because of our own errors. There is nothing we can do to affect the economy but we can impact the position of our execution and all parts of our business. And we are focused on that as we return our company to profitability and beyond.

Cary, take them through the numbers.

Charles H. Turner

Earlier today we reported a net loss of $0.34 per share for the second quarter compared to a loss of $0.49 per share for the year ago period. For the first six months we reported a net loss of $0.71 per share compared to $1.14 for this period last year.

Total sales for the second fiscal quarter declined to $320 million from $345 million in the year ago quarter primarily as a result of decreased store count as well as the elimination of ancillary businesses. Comp store sales for the quarter declined 1.7% and 3.9% for the year-to-date period. Comparable store sales during the quarter were impacted by increases in conversion rates and units per transaction as well as a reduction in average ticket. Comparable store sales were further negatively impacted by a reduction in marketing expenses in the second quarter of $4 million or 29% less than the same period last year.

As previously indicated, the company has repositioned the use of its marketing dollars to coincide with the critical holiday season. $2 million in marketing expense has been moved into the third quarter and $6 million has been added to December compared to last year. For the first six months marketing expenditures were $12 million or 35% less than last year.

Merchandise margins for the second quarter were 49.3% compared to 47.0% last year. Merchandise margins during the quarter were impacted by the semi-annual clearance that occurred in July as well as the deeper-than-anticipated markdowns on outdoor furniture and gardening accessories. The impact on margin was especially evident in markets experiencing greater economic difficulties such as Phoenix, Las Vegas, Florida and Atlanta. Excluding the categories of gardening accessories and outdoor furniture, our merchandise margins for the quarter would have been 100 basis points better and more in line with our expectations. On a comparable store basis merchandise margin dollars increased approximately 1% over last year.

Store occupancy costs in the quarter were $72 million compared to $75 million last year. Overall gross profit dollars were $86 million compared to approximately $87 million last year.

During the second quarter selling, general and administrative expenses were $107 million a decline of $10.4 million when compared to the year ago quarter. SG&A during the quarter included special charges of $5 million compared to $7.4 million in the second quarter last year. Special charges included the one-time costs related to the withdrawn offer to acquire Cost Plus of $1.7 million, lease termination charges of $2.4 million primarily related to the exit of distribution warehouse space, and $900,000 in severance and other charges. Excluding these charges, ongoing SG&A expenses declined $8 million from the year ago period. The primary decrease in costs were savings of approximately $4 million in marketing expense, $1 million in store payroll, and $3 million in other general costs.

During the quarter the company’s semi-annual sale was targeted at clearing seasonal and discontinued inventory. In addition, the company continued its efforts to receive merchandise closer to the actual need. As a result inventory at the end of the quarter was $379 million approximately $20 million below the previous projection. Inventory levels will build throughout the third quarter as the holiday season approaches and the company now expends to end the third quarter with inventory levels of $410 million, $20 million below last year. We anticipate continued reductions in inventory when compared on a year-over-year basis and now expect year-end inventory levels of $350 million to $360 million compared to $412 million last year.

In terms of liquidity, as of the end of the second quarter cash and cash equivalents were $191 million. At the beginning of the second quarter we completed the sale of our corporate headquarters and received net cash proceeds of approximately $102 million. Net cash provided by operating activities for the first six months was approximately $1 million versus the usage of approximately $53 million over the same period last year.

In addition, as of the end of the second quarter we had $104 million in outstanding letters of credit compared to $166 million last year. The usage of our line of credit has decreased significantly over last year as we have negotiated better terms with a large percentage of our merchandise vendors moving more of them to open account and therefore reducing our reliance on documentary letters of credit.

Year-to-date capital expenditures totaled approximately $7.2 million and were primarily spent on the existing stores and fixtures. Capital expenditures for the year are now expected to be in the range of $15 million to $17 million.

Currently our tax net operating loss carry forward is over $200 million. During the quarter we closed four Pier 1 Import stores. We ended the quarter with 1,112 Pier 1 Import stores with 1,030 stores in the US and 82 stores in Canada. Closings for the year are now expected to be approximately 20 stores.

Given the difficulties and uncertainties surrounding the macroeconomic environment we will not provide guidance for the remainder of this fiscal year and are withdrawing the previous guidance. We believe that the success of our turnaround will be best measured by two key metrics: Merchandise margin and operating profit.

Year-over-year comparisons of these metrics will provide better insight into our progress in this challenging retail environment. Results for the second half of the year will depend on maintaining current traffic levels. Assuming traffic levels similar to those seen in the second quarter, modest improvements over last year in the key metrics are expected throughout the second half of this year.

Now I’d like to turn it back over to Alex.

Alexander W. Smith

What we find most frustrating about our second quarter results is they should have been better. We started the quarter with a nice gross margin dollar improvement in June and July but had a disappointing August. As we told you in our release, there were two things we should have done better.

Firstly, we miscalculated the markdown cadence required to clear our outdoor furniture and garden accessories by the end of Labor Day weekend, which we needed to do so that the stores would be ready to receive our fall and harvest assortment. In the end we sold more than we had planned at 50% and 75% off and less at 25% and 30% off. Thus we took our medicine, cleaned house, and our merchandise margin percentage has rebounded well.

The second thing we did wrong was to have a flawed back-to-school strategy. The emphasis in our marketing and in our stores was primarily on lower ticket items to the detriment of our furniture business. Consequently we saw a bigger decrease in average ticket than planned. Frankly, we did a better job last year in terms of store setup and execution for back-to-school.

Having said all of that, we are now ready for the important fall and holiday selling seasons. For the balance of the year we will as always focus on our business priorities which we’ve talked about on previous occasions. These priorities speak to great merchandise, great stores and a cost-efficient and effective infrastructure. We are pleased with the look and feel of our holiday merchandise assortment which we know are stronger than last year.

We have returned to our historically successful market positioning, updated and reinterpreted for today’s customer. Our expanded and revitalized merchant team is growing more experienced and each season more and more of our products are on target and resonating with our customers. We are confident going forward that their selection decisions will continue to get closer to the bull’s-eye.

The units and repeat business driving departments such as gifts, jewelry and stationery which we introduced last fall continue to do well. We are expanding both of these areas as we move into this fall. Our tabletops which as you know has been disappointing is now trading well and showing sales and margin dollar improvement.

We have maintained our furniture business at around the magical 40% but as I previously mentioned we did not optimize our sales of that shelving and casual seating for back-to-school. We are however very pleased by the number of new furniture introductions that have made it to our best-seller reports over the last few weeks.

We will also continue to test new product areas that speak to the Pier 1 Imports customer. This holiday season you will see a selection of new categories. One example, kitchen tools and gadgets is a natural expansion of our storage and serving assortment.

Other retailers closing down has also created some new opportunities. One of them is nutcrackers. Pier 1 Imports has never had a nutcracker assortment and we expect them to be a good addition to our Christmas décor. Additionally, we are going to be offering customers a national brand for the first time as we introduce Yankee candles to our assortment.

Obviously in this environment inventory control gains an even bigger emphasis than in normal times and I am pleased to tell you that our inventory levels are slightly lower than we had originally planned. Of course it is very important to continue to balance inventory levels with the flow of new SKUs, and we will constantly re-evaluate and readjust to achieve and maintain this balance.

Going into the back half of this year we feel confident that we’ll be able to achieve the merchandise margin percentage we expect. We are also confident that we will be able to hold or improve our conversion rates as well as units per transaction.

What we cannot say with any certainty is what will happen to traffic. We believe that the improvement to traffic we saw in the second quarter is due to both effective marketing and word of mouth. The marketing decisions we have made will support traffic in the second half. We have a solid plan which includes retail mailers with larger circulations than last year, newspaper inserts also with greater circulations than last year, robust email and web advertising, credit card promotions as well as the reintroduction of television advertising. Our television advertising will begin mid-November and will carry through December 22. Our ads will air on cable and satellite channels; not on network television. The only celebrity they will feature is our merchandise.

Having said all of this, we are obviously concerned that all of the external negative influences on traffic may negate all the positive ones that we have created internally.

We’ve continued our dedication to making our company more efficient and cost efficient in every way. Our company is leaner and more efficient in every part of our business than it was 12 months ago. G&A and supply chain savings have provided direct improvements to our bottom line and are helping to protect initial markups in spite of cost pressures. Ongoing additional cost savings opportunities exist within our supply chain. These savings will primarily help us to continue to offset any increase in merchandise costs resulting from increased fuel costs and general inflationary pressures.

In terms of real estate, the downturn in the retail environment has provided opportunity for us and we have been able to negotiate with some of our landlords more favorable lease renewal rates. We will continue to review opportunities for us to enter new and growing markets while keeping a watchful eye on those locations where continuing to operate may not make financial sense.

Earlier this week we had around 60 stores that were closed and many more affected by Hurricane Ike. 10 stores remain closed today. Additionally, many of these markets remain without power. We have of course seen an immediate short-term impact on our September sales but we anticipate that most of the closed stores will be reopened within the next few weeks. And I’d just like to take a moment to send a word of appreciation to all of our employees affected by this storm and to offer a word of support as they work hard to restore our stores as well as their own lives to some sense of normality.

As we announced yesterday, my senior team continues to get stronger as we combine our premier talents with new talent. Michael Benkel has joined us as Senior Vice President of Planning & Allocations. He brings with him solid retail experience, most recently 11 years of experience with Pottery Barn.

In closing I want to reiterate that we are happy with our merchandise assortment, conversion rate and unit sales growth. Our costs are buttoned down. We have a strong balance sheet. Our profitability in the second half of the year is going to be a function of customer traffic between now and Christmas. We have a dedicated team and we are working smarter all the time. We know what great execution looks like and we are striving to achieve it. The economic headwinds have certainly slowed down our turnaround and may continue to do so, but they will not blow us off course and we have not changed our strategy: Great merchandise, great stores and a cost-efficient and effective infrastructure.

We are now happy to answer your questions.

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