| PIER 1 IMPORTS INC/DE Item 1A Risk Factors |
| The following information describes certain significant risks and uncertainties inherent in the Company’s business that should be carefully considered, along with other information contained elsewhere in this report and in other filings, when making an investment decision with respect to the Company |
| If one or more of these risks actually occurs, the impact on the Company’s operations, financial position, or liquidity could be material and the business could be harmed substantially |
| 7 _________________________________________________________________ [58]Table of Contents Strategic Risks and Strategy Execution Risks The Company must be able to anticipate, identify and respond to changing trends and customer preferences for home furnishings |
| The success of the Company’s specialty retail business depends upon its ability to predict trends in home furnishings consistently and to provide merchandise that satisfies consumer demand in a timely manner |
| Consumer preferences often change and may not be reasonably predicted |
| A majority of the Company’s merchandise is manufactured, purchased and imported from countries around the world and is typically ordered well in advance of the applicable selling season |
| Extended lead times of four to twelve months may make it difficult to respond rapidly to changes in consumer demand and as a result the Company may be unable to react quickly and source needed merchandise |
| Also, the Company’s vendors may not have the ability to handle its increased demand for product |
| The seasonal nature of the specialty home furnishing business leads the Company to purchase and requires it to carry a significant amount of inventory prior to its peak selling season |
| As a result, the Company may be vulnerable to changes in evolving home furnishing trends, customer preferences, pricing shifts, and may misjudge the timing and selection of merchandise purchases |
| The Company’s failure to anticipate, predict and respond in a timely manner to changing home furnishing trends could lead to lower sales and additional promotional discounts and clearance markdowns in an effort to clear merchandise, which could have a negative impact on merchandise margins and in turn the results of operations |
| Failure to control merchandise returns could negatively impact the business |
| The Company has established a provision for estimated merchandise returns based upon historical experience and other known factors |
| If actual returns are greater than those projected by management, additional sales returns could be recorded in the future |
| Also, to the extent that returned merchandise is damaged, the Company may not receive full retail value from the resale of the returned merchandise |
| Introductions of new merchandise, changes in merchandise mix, merchandise quality issues, changes in consumer confidence, or other competitive and general economic conditions may cause actual returns to exceed the provision for estimated merchandise returns |
| An increase in merchandise returns that exceeds the Company’s current provisions could negatively impact the business and operating results |
| The success of the business is dependent on factors affecting consumer spending that are not controllable by the Company |
| Consumer spending, including spending for the home and home-related furnishings, are dependent upon factors that include but are not limited to general economic conditions, levels of employment, disposable consumer income, prevailing interest rates, consumer debt, costs of fuel, recession and fears of recession, war and fears of war, inclement weather, tax rates and rate increases, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security |
| Unfavorable changes in factors affecting discretionary spending could reduce demand for the Company’s products and therefore lower sales and negatively impact the business and its operating results |
| The Company intends to expand its direct to consumer business in an effort to continue to grow and may face challenges that may cause these expansion plans to fail |
| The Company currently operates an e-commerce web site which serves as a marketing vehicle for the business and provides consumers access to its products and services at their convenience |
| The Company believes its introduction of the catalog business has allowed it to focus on cross-channel integration and to more effectively utilize its web site to reach new and existing customers |
| The Company plans to fully integrate its direct to consumer business by the end of fiscal 2007 with the introduction of delivery of products direct to the customer’s home or to their local Pier 1 store, at their request |
| The newest channel of direct to consumer business is expected to play a more critical role to the growth of the business and will complement the Company’s current retail locations, e-commerce web site and catalog business |
| 8 _________________________________________________________________ [59]Table of Contents Failure to successfully manage and execute our marketing initiatives could have a negative impact on the business |
| The continued success and growth of the Company has become dependent on improving customer traffic in order to gain sales momentum in its stores and on its e-commerce web site |
| Historically, the Company has utilized various media to reach the consumer and it has experienced varying levels of favorable response to its marketing efforts |
| Often media placement decisions are made months in advance and the Company’s inability to accurately predict its consumers preferred method of communication may negatively impact the business and operating results |
| Risks Related to Profitable Growth The Company’s success depends, in part, on its ability to find desirable new locations at reasonable rental rates and close underperforming stores at or before the conclusion of their lease terms |
| Historically, the continued growth of the business has been highly dependent on opening and operating new stores at a reasonable profit |
| While management is currently executing a very disciplined growth strategy, the Company will continue to pursue new store locations |
| The ability to continue to open additional stores successfully will depend upon a number of factors, many of which are beyond the Company’s control, including identification and availability of suitable store locations; negotiation of favorable lease terms; securing required governmental permits and approvals; availability of construction materials and labor at reasonable prices; obtaining financing on acceptable terms; and general economic conditions |
| For a majority of the Company’s current store base, a large portion of a stores’ operating expense is its costs associated with leasing the location |
| Management actively monitors individual store performance to ensure stores can remain profitable or have the ability to rebound to a profitable state |
| Current locations may not continue to be desirable as demographics may adversely change and we may choose to close an underperforming store before its lease expires |
| If management chooses to close an existing store before its lease expiration, the Company could suffer operating losses until the lease term expires or until the lease arrangement has been restructured or the lease obligation has been settled |
| Failure to attract and retain an effective management team or changes in the costs or availability of a suitable workforce to manage and support the Company’s stores and distribution facilities could adversely affect the business |
| The Company’s success is dependent, in a large part, on being able to successfully attract, motivate and retain a qualified management team and employees |
| Sourcing qualified candidates to fill important positions within the Company, especially management, in the highly competitive retail environment may prove to be a challenge |
| The inability to recruit and retain such individuals could result in turnover in our stores and distribution facilities, which could have an adverse effect on the business |
| Management will continue to assess the Company’s compensation structure in an effort to attract future qualified candidates or retain current experienced management team members |
| Occasionally the Company experiences union organizing activities in its non-unionized distribution facilities |
| These types of activities may result in work slowdowns or stoppages and higher labor costs |
| Any increase in costs associated with labor organization at our distribution facilities could result in higher costs to distribute inventory and could negatively impact merchandise margins |
| Factors affecting the general strength of the economy, should they decline, could result in reduced consumer demand for the Company’s products |
| The Company’s successful execution relies on customer demand for its merchandise, which is affected by factors that are impacted by prevailing economic conditions |
| A general slowdown in the United States economy and an uncertain economic outlook may adversely affect consumer spending which in turn could 9 _________________________________________________________________ [60]Table of Contents result in lower sales and unfavorable operating results |
| A prolonged economic downturn could have a material adverse effect on the business, and its financial condition and results of operations |
| The Company operates in a highly competitive retail environment with companies offering similar merchandise to ours, and if customers are lost to our competitors, sales could decline |
| The Company’s retail locations, e-commerce web site and direct mail catalog business operate in the highly competitive specialty retail business competing with specialty sections of large department stores, home furnishing stores, small specialty stores, discount stores and catalog and Internet retailers |
| Management believes that in addition to competing for sales, it competes on the basis of pricing and quality of products, constantly changing merchandise assortment, visual presentation of its merchandise and customer service |
| The Company also believes its Pier 1 operations are competitive with other retailers due to brand awareness and name recognition, established vendor relationships and the extent and variety of the merchandise offered |
| The level of competition is not anticipated to decrease and if the Company is unable to maintain a competitive position, it could experience negative pressure on retail prices which in turn could result in reduced merchandise margins and operating results |
| Increases in certain operating costs that are not entirely controllable by the Company may have a significant impact on the Company’s profitability |
| The Company needs to manage its operating costs effectively and continue to look for opportunities to reduce these costs |
| Such costs include; rent, fuel and utility costs, delivery expenses, postage, advertising media and production costs (including the cost of paper and printing), and costs of obtaining commercial insurance |
| The Company’s business is subject to seasonal variations, with a significant portion of its sales and earnings occurring during two months of the year |
| Approximately 25prca of the Company’s sales generally occur during the November-December holiday selling season |
| Failure to predict consumer demand correctly during these months could result in lost sales or gross margin erosion if merchandise must be marked down to clear inventory |
| The Company’s business may be harmed by adverse weather conditions and natural disasters |
| Natural disasters such as earthquakes, weather phenomena, and events causing infrastructure failures could adversely affect any of the Company’s retail locations, distribution centers, administrative facilities, ports, or locations of its suppliers domestically and in foreign countries |
| Risks Associated with Dependence on Technology The Company is heavily dependent on various kinds of technology in the operation of its business |
| Failure of any critical software applications, technology infrastructure, telecommunications, data communications, or networks could have a material adverse effect on the Company’s ability to manage the merchandise supply chain, sell products, accomplish payment functions or report financial data |
| Some business processes that are dependent on technology are outsourced to third parties |
| Such processes include gift card tracking and authorization, credit card authorization and processing, catalog and e-commerce fulfillment, insurance claims processing, processing and payment of payroll outside the United States, and record keeping for retirement plans |
| The Company makes a diligent effort to insure that all providers of outsourced services observe proper internal control practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur |
| Failure of third parties to provide adequate services could have an adverse effect on the Company’s results of operations, liquidity, or ability to accomplish its financial and management reporting |
| 10 _________________________________________________________________ [61]Table of Contents Regulatory Risks The Company is subject to laws and regulatory requirements in many jurisdictions |
| Changes in these laws and requirements may result in additional costs to the Company, including the costs of compliance as well as potential penalties for non-compliance |
| The Company operates in many local, state, and federal taxing jurisdictions, including foreign countries |
| In most of these jurisdictions the Company is required to collect state and local sales taxes at the point of sale and remit them to the appropriate taxing authority |
| The Company is also subject to income taxes, excise taxes, franchise taxes, and other special taxes |
| The Company is also required to maintain various kinds of business and commercial licenses to operate its stores and other facilities |
| Rates of taxation are beyond the Company’s control, and increases in such rates or taxation methods and rules could have a material impact on the Company’s profitability |
| Failure to comply with laws concerning the collection and remittance of taxes and with licensing requirements could also subject the Company to financial penalties or business interruptions |
| Local, state, and federal legislation also has a potential material effect on the Company’s profitability or ability to operate its business |
| Compliance with certain legislation carries with it significant costs |
| The Company is subject to oversight by many governmental agencies in the course of operating its business because of its numerous locations, large number of employees, contact with consumers, granting of credit, and importation and exportation of product |
| Insuring compliance with regulations may cause the Company to incur significant expenses, including the costs associated with periodic audits |
| Failure to comply may also cause additional costs in the form of penalties |
| Risks Associated with International Trade As a retailer of imported merchandise, the Company is subject to certain risks that typically do not affect retailers of domestically produced merchandise |
| The Company usually orders merchandise from four to twelve months in advance of delivery and generally pays for the merchandise at the time it is loaded for transport to designated United States destinations |
| Global political unrest, war, threats of war, terrorist acts or threats, especially threats to foreign and US ports, could affect the Company’s ability to import merchandise from certain countries |
| Fluctuations in foreign currency exchange rates, restrictions on the convertibility of the dollar and other currencies, duties, taxes and other charges on imports, dock strikes, import quota systems and other restrictions sometimes placed on foreign trade can affect the price, delivery and availability of imported merchandise as well as exports to the Company’s stores in other countries |
| The inability to import products from certain countries, unavailability of adequate shipping capacity at reasonable rates, or the imposition of significant tariffs could have a material adverse effect on the results of operations of the Company |
| Freight costs contribute a substantial amount to the cost of imported merchandise |
| Monitoring of foreign vendors’ compliance with United States laws and Company standards, including quality standards, is more difficult than monitoring of domestic vendors |
| The United States government has the authority to enforce trade agreements, resolve trade disputes, and open foreign markets to United States goods and services |
| The United States government may also impose trade sanctions on foreign countries that are deemed to violate trade agreements or maintain laws or practices that are unjustifiable and restrict United States commerce |
| In these situations the United States government may increase duties on imports into the United States from one or more foreign countries |
| In this event, Pier 1 could be adversely affected by the imposition of trade sanctions |
| In addition, the United States maintains in effect a variety of additional international trade laws under which the Company’s ability to import may be affected from time to time, including, but not limited to, the antidumping law, the countervailing duty law, the safeguards law, and laws designed to protect intellectual property rights |
| Although the Company may not be directly involved in a particular trade 11 _________________________________________________________________ [62]Table of Contents dispute under any of these laws, its ability to import, or the terms and conditions under which it can continue to import, may be affected by the outcome of that dispute |
| In particular, because the Company imports merchandise from countries around the world, the Company may be affected from time to time by antidumping petitions filed with the United States Commerce Department and International Trade Commission by United States producers of competing products alleging that foreign manufacturers are selling their own products at prices in the United States that are less than the prices that they charge in their home country market or in third country markets or at less than their cost of production |
| Such petitions, if successful, could significantly increase the United States import duties on those products |
| In that event, the Company might possibly decide to pay the increased duties, thereby possibly increasing the Company’s price to consumers |
| Alternatively, the Company might decide to source the product or a similar product from a different country not subject to increased duties or else discontinue the importation and sale of the product |
| In recent years, dispute resolution processes have been utilized to resolve disputes regarding market access between the European Union, China, the United States and other countries |
| In some instances these trade disputes can lead to the threats by countries of sanctions against each other, which can include import prohibitions and increased duty rates on imported items |
| The Company considers any agreement that reduces tariff and non-tariff barriers in international trade beneficial to its business |
| Any type of sanction on imports is likely to increase the Company’s import costs or limit the availability of products purchased from sanctioned countries |
| In that case, the Company may be required to seek similar products from other countries |
| Risks Relating to Liquidity Insufficient cash flows from operations could result in the substantial utilization of the Company’s secured credit facility which may impose certain financial covenants |
| The Company maintains a secured credit facility to enable it to issue merchandise and special purpose standby letters of credit as well as occasionally to fund working capital requirements |
| Borrowings under the credit facility are subject to a borrowing base calculation consisting of a percentage of eligible inventory and third party credit card receivables |
| Substantial utilization of the availability under the borrowing base will result in various restrictions on the Company including: restricting the ability of the Company to repurchase its common stock or pay dividends, dominion over the Company’s cash accounts, and requiring compliance with a minimum fixed charge coverage ratio |
| While the Company does not anticipate the use of the facility for working capital purposes in the next twelve months, significant decreases in cash flow from operations and investing could result in the Company’s borrowing increased amounts under the credit facility to fund operational needs and potentially being subjected to these limitations |
| Changes in the Company’s credit rating may result in a significant decrease in cash available for the Company’s use |
| The Company’s credit card securitization program, which is more fully described in the Notes to the Consolidated Financial Statements included in Item 8 of this report, requires that the Company maintain a minimum credit rating |
| Should the Company have its credit rating fall more than one notch, or have its rating withdrawn, the certificate holders (as described in the Notes to Consolidated Financial Statements set forth in Item 8 herein) would be entitled to retain funds collected on the outstanding credit card receivables until the certificate holders have been repaid amounts owed |
| To avoid such an event, the Company’s non-consolidated subsidiary would endeavor to amend the securitization agreement to lower the minimum acceptable credit rating or eliminate the rating requirement |
| In the past, the Company’s non-consolidated subsidiary has been able to amend its securitization agreement as needed; however, there are no assurances that future amendments will be obtainable |
| If such an event were not avoided, it could negatively impact the Company’s liquidity position as it would reduce the non-consolidated subsidiary’s funds available to purchase newly generated proprietary credit card receivables from the Company and 12 _________________________________________________________________ [63]Table of Contents could further result in defaults under other agreements, including the Company’s secured credit facility |
| A default under the secured credit facility that remains uncured or that was not waived by the lenders would cause severe limitations on the Company’s ability to issue letters of credit or borrow funds to cover operational needs, which would negatively impact the business |