Company Analysis and Restructuring Plan MGMT 7711‐001 Turnaround Management Professor Laura Resnikoff Columbia Business School Hamid Benbrahim Rich Bozutto Laurent Grossi Geoff Teillon John Ure Originally Submitted: April 30, 2007 Revised: May 30, 2007 it’s your thing
78
Embed
it’s your thing - Turnaround Management Association · · 2007-09-18Marketing Led Strategy ... office furniture, mattresses and related consumer products. ... Furniture Manufacturer's
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Company Analysis and Restructuring Plan
MGMT 7711‐001 Turnaround Management Professor Laura Resnikoff Columbia Business School
Hamid Benbrahim Rich Bozutto Laurent Grossi Geoff Teillon John Ure
Originally Submitted: April 30, 2007
Revised: May 30, 2007
it’s your thing
Page 2 of 78
Table of Contents
Executive Summary ............................................................................................................................ 4 Overview....................................................................................................................................... 4 Structure of this paper ................................................................................................................... 4 Recommendations ......................................................................................................................... 5 Summary of financial analysis and valuation .................................................................................... 5
Industry outlook and competitive environment .................................................................................... 7 Industry overview and definition..................................................................................................... 7 Furniture Stores............................................................................................................................. 7 Miscellaneous Home Furnishing Stores............................................................................................ 7 Retail Economics............................................................................................................................ 8
Business ............................................................................................................................................ 9 Company overview ........................................................................................................................ 9 Strategy and operations ............................................................................................................... 11 History ........................................................................................................................................ 13 Pricing......................................................................................................................................... 13 Analysis of Historic Annual Letters from CEO.................................................................................. 13 Primal Code Branding Analysis ...................................................................................................... 20 SWOT Analysis............................................................................................................................. 22 Recent Events.............................................................................................................................. 23
Management and governance........................................................................................................... 25 Executive officers and key employees............................................................................................ 25 Board of directors ........................................................................................................................ 27
Discussion of valuations.................................................................................................................... 45 Liquidation value ......................................................................................................................... 45
Discussion of Alternatives ................................................................................................................. 47 Status quo ................................................................................................................................... 47 Cost Savings Strategy ................................................................................................................... 48 Bankruptcy .................................................................................................................................. 48 Marketing Led Strategy ................................................................................................................ 49
Exhibits ........................................................................................................................................... 56 Exhibit I: Current Market Expectations ‐ Income Statement............................................................. 56 Exhibit II: Current Market Expectations – Cash Flow & Estimated Valuation...................................... 57 Exhibit II (Continued): Estimated Valuation .................................................................................... 58 Exhibit III: Current Market Expectations – Balance Sheet................................................................. 59 Exhibit III Continued: Non‐GAAP Presentation of Key Financials – Current Market Expectations Scenario................................................................................................................................................... 60 Exhibit IV: Pro Forma Income Statement – Recommendation Case .................................................. 61 Exhibit V: Pro Forma Cash Flow & Valuation – Recommendation Case ............................................. 62 Exhibit VI: Pro Forma Non‐GAAP Financials – Recommendation Case............................................... 63 Exhibit VII: Primal Branding.......................................................................................................... 64 Exhibit VIII: Comparable Company Analysis ................................................................................... 65 Exhibit IX: Executive Compensation.............................................................................................. 67 Exhibit X: Sample Products........................................................................................................... 70 Exhibit XI: Store Images ............................................................................................................... 77 Exhibit XII: Bibliography and End Notes......................................................................................... 78
Page 4 of 78
Executive Summary
Overview
Pier 1 Imports, Inc. (“Pier 1” or the “Company”) is North America’s largest
specialty retailer of home furnishings, decorations, gifts, and related items. Items are
imported from over 50 different countries around the world and displayed in over 1,200
Pier 1 Imports stores. The specialty retail operations of Pier 1 consist of retail stores
operating under the names "Pier 1 Imports'' and "Pier 1 Kids'', selling a wide variety of
furniture, decorative home furnishings, dining and kitchen goods, bath and bedding
accessories and other specialty items for the home. Many items are one of kind and not
found in other retail stores. Pier 1’s common stock is listed on the New York Stock
Exchange under the symbol PIR.
Pier 1 specializes in direct importing and is one of the world's largest importers
of rattan and brass. 65% of Pier 1’s merchandise is different each year to drive
increased customer traffic as well as a sense of urgency to make a purchase.
Structure of this paper
In this paper we will take the perspective of an advisor to the board of directors,
with a focus on increasing shareholders’ equity and returning Pier 1 to profitability. We
will first review the overall economics and challenges of the retail furniture and
miscellaneous home furnishing industries. Based on our discussion of the industry we
will explore the history of Pier 1 and specific challenges to the company in areas such as
operations, branding, and strategic direction. Next, we will turn our focus to the
management, financing decisions made along the way and competitive advantages.
Finally, we will review alternatives available to the company and give our proposed
recommendations for a successful turnaround.
Page 5 of 78
Recommendations
Pier 1 must take immediate action to close a significant portion of its
underperforming stores in an effort to stabilize its finances and right‐size its SG&A
expenses. Specifically, at least 20% of its current stores are operating at significant
losses without reasonable hope of improvement, and the company can ill afford to
continue to finance such money losing endeavors. Additionally, Pier 1 should look to
monetize its investment in its corporate headquarters. Further, the company has
confused its customers with its numerous and ever changing marketing campaigns, and
must refocus on its core segment of fashionable furnishings at value price points and
avoid price as a basis of differentiation. Finally, there is an unrealized opportunity for
material savings in Pier 1's supply chain through consolidation of suppliers and
implementation of a Total Cost of Ownership approach to supply chain management.
By implementing these specific action plans, Pier 1 can return to profitability in its fiscal
year ending 2009 and achieve reasonable stock appreciation for its shareholders.
Summary of financial analysis and valuation
In preparing our analysis and recommendations we first modeled full pro forma
financials for the current status quo business case, consistent with current analyst and
market expectations (Exhibits I – III). Also, to better enable our in‐dept analysis we
restated the key financials on a non‐GAAP basis to isolate earnings before interest, tax,
depreciation, and rent (EBITDAR) and capitalize both the considerable off‐balance sheet
asset and liability values associated with Pier 1’s portfolio of operating leases (Exhibit
III). Based upon these projections, Pier 1 will not return to profitability until 2012 and
will need to raise additional debt (approx $50M) to finance its operations beginning in
2010. From a valuation perspective, these operating projections do not justify the
current market valuation of Pier 1. Accordingly, we believe that the current equity
prices reflect the option value associated with the possibility of a material turnaround in
excess of industry analyst expectations or a possible strategic take‐over or sale of the
company.
Page 6 of 78
Next, we modeled the significant restructuring actions that we believe are
required to close the bottom 20% of underperforming stores (target 250 closures in
2008) consistent with our recommendations. We projected these results and the post‐
restructuring pro forma financials through 2012 and believe Pier 1’s current liquidity will
be sufficient to sustain it through this restructuring program, after which we expect a
return to positive cash flow. Further, we performed some valuation analysis and
assuming our plan can be effectively executed, we believe the fair value of Pier 1 shares
should be $12 – 18 per share, well above its current levels.
Page 7 of 78
Industry outlook and competitive environment
Industry overview and definition
Pier 1 Imports is considered part of the “Furniture” and “Miscellaneous Home
Furnishings Stores” industries.i
Furniture Storesii
In 2006, over 28,300 establishments engaged in the retail sale of household
furniture. Several bankruptcies in the early 2000s, such as that of Heilig‐Myers, provided
opportunities for independent stores and larger retailers to gain market share. In the
mid 2000’s companies began to offer a more diverse product set than ever before and
began branching out into related products such as glassware and linens.
As of 2006, the industry employed about 265,000 people and generated an
annual payroll of $7.37 billion. Consumers spent roughly $48.7 billion within this
industry. On the average, consumers spent $1.1 million per retail store. The industry is
made up of large national chains, regional stores and small independent operations. In
recent years, a growing segment of new retailers has emerged who sell household and
office furniture, mattresses and related consumer products. The retailers include large
discount superstores such as Wal‐Mart and Target, warehouse stores like Sam's Club
and Office Depot and one‐stop department stores such as Sears and J.C. Penney. This
competition made the marketplace a much more difficult one for traditional furniture
stores.
Miscellaneous Home Furnishing Storesiii
Miscellaneous Home Furnishing Stores offer everything needed to furnish a
home from kitchenware to linens and lamps and shades to Venetian blinds and window
shades.
Discount stores, as well as department stores, stock a wide variety of items for
the consumer, and their prices vary with the brand name and the type of store that sells
Page 8 of 78
them. Of the several different types of retailers that sell home furnishings, one of the
fastest growing is the specialty retailer that attracts upscale consumers. These stores
may be independent or part of a chain and provide quality merchandise with moderate
price tags. However, price is not all that attracts customers. Specialty retailers tend to
carry unusual and distinctive items that attract consumers who cannot find them
anywhere else.
Retail Economics
The furniture market is closely tied to the performance of the housing industry.
Furniture sales were down in the early 2000’s, but by 2005 many retailers were seeing
upswings, particularly single‐brand vertical retailers such as LA‐Z‐Boy. Office furniture
also was coming out of its prolonged slump, experiencing growth in 2004 and 2005 for
the first time in several years.
However, in 2006, new home construction was down again and this has highly
impacted the furniture and household goods markets. The Business and Institutional
Furniture Manufacturer's Association (BIFMA), in conjunction with Global Insight,
reported an 8.3 percent decrease in retail sales of office furniture. The slow growth was
due to the sluggish economy, and also the lack of office construction.
Page 9 of 78
Business
Company overview
Pier 1 offers a diverse selection of products consisting of approximately 3,000
items imported from over 40 countries around the world. While the broad categories of
Pier 1's merchandise remain constant, individual items within these product groupings
change frequently in order to meet the demands of customers. The principal categories
of merchandise include the following:
2006 Revenues
Furniture, 40%
Decorative Accessories,
26%
Housewares, 13%
Bed & Bath, 15%
Seasonal, 6%
• Furniture – This product group consists of furniture, furniture pads and pillows to
be used on patios and in living, dining, kitchen and bedroom areas, and in sun
rooms. This product group constituted approximately 40% of Pier 1's total North
American retail sales in fiscal year 2006 and 39% in fiscal years 2005 and 2004.
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
Page 10 of 78
materials, including rattan, pine, beech, rubberwood and selected hardwoods
with either natural, stained or painted finishes. Pier 1 also sells upholstered
furniture.
• Decorative Accessories – This product group constitutes the broadest category of
merchandise in Pier 1's sales mix and contributed approximately 26% to Pier 1's
total North American retail sales in fiscal year 2006, 25% in fiscal year 2005 and
24% in fiscal year 2004. These items are imported from approximately 35
countries and include brass, marble and wood items, as well as lamps, vases,
dried and silk flowers, baskets, wall decorations and numerous other decorative
items. A majority of these products are handcrafted from natural materials.
• Housewares – This product group is imported mainly from the Far East and
Europe and includes ceramics, dinnerware and other functional and decorative
items. These goods accounted for approximately 13% of Pier 1's total North
American retail sales in fiscal years 2006, 2005 and 2004.
• Bed & Bath – This product group is imported mainly from India, Germany,
Thailand and China and is also obtained from domestic sources. This group
includes bath and fragrance products, candles and bedding. These goods
accounted for approximately 15% of Pier 1's total North American retail sales in
fiscal year 2006, 16% in fiscal year 2005 and 18% in fiscal year 2004.
• Seasonal – This product group consists of merchandise for celebrating holidays
and spring/summer entertaining, imported mainly from Europe, Indonesia,
China, the Philippines and India and also obtained from domestic sources. These
items accounted for approximately 6% of Pier 1's total North American retail
sales in fiscal year 2006, 7% in fiscal year 2005 and 6% in fiscal year 2004.
Since June 2000, Pier 1 has operated an e‐commerce Website, which received an
average of 4.3 million visits per month in fiscal 2006, and can be accessed at
www.pier1.com. This site is a significant marketing vehicle for the Company while
providing customers with access to Pier 1 products and services at their convenience, as
Page 11 of 78
well as access to investor relations information. Customers can shop substantially all of
Pier 1's merchandise assortment, as well as purchase gift cards, create and manage
bridal and gift registries, view interactive catalogs, watch the most recent television
commercials, and sign up for marketing e‐mail and direct mail.
Pier 1 Kids stores offer children's furniture and decorative accessories. The
Company started operating Pier 1 Kids stores in March 2001 when it acquired Cargo, a
21 unit retail chain focused on children’s furniture. Cargo was later rebraded as Pier 1
Kids. Pier 1 Kids utilizes an e‐commerce site, which can be accessed at
www.pier1kids.com to attract customers and provide information regarding placing
orders, sale items and store locations.
In fiscal 2006, Pier 1 Imports, Inc. expanded its specialty retail operations by
opening 65 new Pier 1 stores, four new Pier 1 Kids stores and two new international
stores. The Company closed 32 Pier 1 stores and six Pier 1 Kids stores. 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
approximately 40 new Pier 1 stores and close approximately 30 Pier 1 and five Pier 1
Kids stores during 2007. Plans for 2007 also include opening approximately seven new
international stores in Mexico and Puerto Rico, primarily in a store within a store
format. On March 20, 2006, Pier 1 Imports, Inc. announced the sale of its subsidiary
based in the United Kingdom, The Pier Retail Group Limited (The Pier). The Pier operates
45 retail stores in the United Kingdom and Ireland, offering decorative home furnishings
and related items in a setting similar to Pier 1 stores. The Pier operates a distribution
facility near London, England.
Strategy and operationsiv
Pier 1 merchandise largely consists of items that require 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 is not dependent on any particular supplier and has enjoyed long‐
standing relationships with many vendors and agents. The company believes alternative
Page 12 of 78
sources of products could be procured over a relatively short period of time if necessary.
In selecting the source of a product, Pier 1 considers quality, dependability of delivery
and cost. During fiscal 2006, Pier 1 sold merchandise imported from over 40 different
countries with 35% of its sales derived from merchandise produced in China, 14%
derived from merchandise produced in India, 13% derived from merchandise produced
in the United States and 33% derived from merchandise produced in Indonesia, Brazil,
Italy, Thailand, the Philippines, Vietnam and Mexico. The remaining 5% of sales was
from merchandise produced in various Asian, European, Central American, South
American and African countries. Imported merchandise and a portion of domestic
purchases are delivered to the Pier 1 distribution centers, unpacked and made available
for shipment to the various stores in each distribution center's region. Due to the time
delays involved in procuring merchandise from foreign suppliers, Pier 1 maintains a
substantial inventory to assure a sufficient supply of products to its stores.
Pier 1, through certain of its wholly owned subsidiaries, owns a number of
federally registered service marks under which Pier 1 Imports and Pier 1 Kids stores do
business. Additionally, certain subsidiaries of the Company have registered and have
applications pending for the registration of certain other Pier 1 and Pier 1 Kids
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 is 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, discount stores and catalog and
internet retailers. Management believes that the Company competes on the basis of
price, value, rapidly changing merchandise assortments, visual presentations of its
merchandise, customer service and fashion sense. The Company also believes it
remains competitive with other retailers because of its name recognition and
established vendor relationships. The Company believes that its Pier 1 Kids business
Page 13 of 78
offers an opportunity to take advantage of the growing demand for children's furniture
and accessories. The Company allows customers to return merchandise within a
reasonable time after the date of purchase without limitation as to reason, consistent
with industry standard policies. 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 February 25, 2006, the Company employed approximately 18,200 associates
in North America, of which approximately 8,500 were full‐time employees and 9,700
were part‐time employees.
History
Pier 1 began in 1962 with a single store in San Mateo, California. Since then, they
have grown to over 1,200 locations nationwide.
Pricing
Pier1 has traditionally targeted consumers who are looking for one‐of‐a‐kind
products but who may also be more cost conscious. Due to the fact that Pier 1 suppliers
are in many cases overseas, the company has a need to carry high inventories in
anticipation of seasonal sales. This high inventory, combined with a slowing economic
environment, has lead to a higher number of seasonal sales and discounts to move
inventory as quickly as possible.
Analysis of Historic Annual Letters from CEO
Analyzing the Annual Letters to Shareholders from the CEO, Pier 1 benefited
from a strong economy but lost its way as it rapidly expanded, especially its SG&A in
anticipation of expanding its store growth. Pier 1 continued to expand at a rapid pace
despite the fact that its comparable store sales were declining. Additionally, the former
CEO Marvin Girouard built a trophy for himself by spending $100 million on a new
building development in Texas for the corporate headquarters, which questions the
level of governance the board of directors was providing management. Despite all of
Page 14 of 78
the troubles that have plagued Pier 1 during the last year, the annual letters from the
CEO remain incredibly upbeat on the future of the Company and its new initiatives. It is
clear that Pier 1 was focused on growth, and could not find its brand image, evidenced
by the continuous repositioning efforts of the company. The following chart outlines
the key points the CEO made in his annual letters.
Page 15 of 78
Positives Negatives Growth Plan
1999 Many reasons to be proud, excited and love Pier 1 Imports and its future.
• Marvin Girouard became Chairman and CEO • IT Investments to support Y2K and bridal registry • Credit rating improved to investment grade • Prepared to introduce internet selling next year • New marketing campaign being launched focusing heavily on television
• 80% of stores updated since 3 years ago
2000 A year of change
• Returned Pier 1 to the value philosophy for fun, stylish merchandise
• Lowered prices on many items, mostly in tabletop and accessories
• Focused on sourcing less expensive products • Focused on core business: wicker, candles and tabletop • Furniture was 38% of business • Online shopping opening next summer • Negotiated longer term shipping contracts • New advertising campaign in late summer
• Plan to open 65 – 75 stores a year to accelerate growth
• 90% of stores remodeled over last four years
2001 A sense of individuality
• Successfully revitalized the brand since 1998 change of leadership
• Approaching next phase of growth cycle – systems technology, distribution facilities and outstanding people to support growth
• New national marketing campaign featuring Kirstie Alley • 25.5% increase in sales paid with Pier 1 credit card • Launched new online store at peir1.com, including bridal and gift registry
• Acquired Cargo, a 21 unit retail chain focused on the children’s furniture market o 200 – 300 stores over
next 10 years • Beginning in fiscal 2002, plan to accelerate Pier 1’s store growth o 1,200 – 1,400 stores in
North America
Page 16 of 78
Positives Negatives Growth Plan
2002 Tomorrow’s successful retailers must be customer‐centered with a focus on increasing value Value means not only price, but quality, selection and an engaging shopping experience
• Post September 11th, cocooning influence buoyed sales to another record year
• Repurchased 4 million shares of stock, and board of directors authorized repurchase of up to $150 million of additional shares
• Increased use of direct marketing resulting in raised brand awareness of unique selling position, resulting in significant increase in customer traffic in Pier 1 stores o Proprietary 7.5 million member database o Incentives targeted at most valued customers o Over 250,000 email subscriber database for targeted e‐
marketing • Reviewed current board and company policies to enhance culture of unquestionable integrity and responsibility
• First half of year was difficult, affected by soft economic conditions
• Research has identified more than 500 additional potential sites for Pier 1 which are planned to be developed over the next eight to ten years
• Plan for Cargo store roll‐out, with eight to twelve new stores next year and over 300 in North America over the next ten years
2003 Opened 1000th Pier 1 store
• Peir 1 continues to do as well as or better than many other retailers
• Record sales and earnings • Plan for new warehouse distribution system for each of six warehouses next year
• Began construction of new corporate headquarters in Fort Worth, TX o 20 story office building o 440,000 square feet o $90 million cost
• Integrated use of media and communications to attract customers
• Customer Relationship Marketing for more targeted marketing approach
• Over 1 million email database
• Market weakness that began in 2000 has lasted much longer than everyone expected
• Opened 1000th Pier 1 store • Opened 125 stores
o 114 Pier 1 o 8 Cargokids o 3 store‐within‐store
• Can grow to 250 to 300 Cargokids stores by the end of the decade
• Opened new Savannah, GA distribution facility
Page 17 of 78
Positives Negatives Growth Plan
2004 Implemented positive changes to strengthen business for long term
• Record sales • “Senses” campaign expanded to include Thom Filicia, a famous New York designer
• Added on‐line bridal and gift registry creation • Plan six distinct, new merchandising introductions compared to four in past years
• Increased cash dividend from $.24 per share to $.32 per share
• Repurchased 3.8 million shares of stock for $76 million
• Comparable stores declined 2.2%
• Opened 149 stores • Identified additional retail expansion opportunities to continue to expand Pier 1 beyond 1,500 stores at a rate of 8 to 10% annually
• Cargokids grew to 40 stores • Plan to build Pier 1 credit card holder base
Page 18 of 78
Positives Negatives Growth Plan
2005 Disappointment and repositioning
• Hired Deutsch Inc. advertising agency for creative • Hired OMD Midwest for media‐buying • Implementing major marketing, merchandising and store operations initiatives
• Challenged buyers to design, source and buy more distinct, one‐or‐a‐kind merchandise and offer it with competitive retail pricing
• Sped up cycle to develop and bring new products to market • Plan to offer stronger seasonal assortments to increase “sense of urgency” to shoppers
• Plan to differentiate and broaden range of “Good,” “Better,” and “Best” offerings o “Good” – basic items at everyday values o “Better” – products with higher design and quality for
the price o “Best” – merchandise representing unique, design‐
forward collections that broaden a customer’s expectations
• Reduced number of items in Pier 1 stores by 15% to 20% and aggressively discontinued older merchandise collections to allow stores to present a new, stronger visual presentation with less clutter o Gives merchandise more space o Allows showcasing of featured home furnishings
• Goal – lower inventory levels in stores will ensure an easier and more interesting shopping experience for customers with stronger item focus
• Increased payroll hours in stores to allow time to support new merchandising transitions and spend more time with customers
• Converted Cargokids to Pier 1 Kids branding, resulting in increased traffic and dramatically improved sales
• Comparable stores down 5.8%• Lease accounting changes resulted in a one‐time charge of $.04 per share, but did not impact cash flow
• Completely re‐assessed the company mid‐way through the year
• Terminated five year relationship with advertising agency
• Made decision to slow store growth to improve store‐level productivity and grow operating margins
Page 19 of 78
Positives Negatives Growth Plan
2006 Turnaround strategy ‐ reposition for a return to profitability in the core business
• Sold The Pier (UK subsidiary) stores March 20, 2006 and classified as discontinued operations
• New merchandising – Modern Craftsman – with fashion‐forward color palettes and contemporary styles
• More product‐focused national marketing and advertising campaign
• Technology upgrades to allow new direct to consumer channel through catalog distribution
• Restructured and realigned store operations, buying and administrative functions to cut costs and improve efficiencies throughout the organization
• Issued $165 million of convertible debt • Reevaluated real estate portfolio and decided to accelerate closings of underperforming stores during fiscal 2006 and 2007
• Consolidating back offices of Pier 1 and Pier 1 Kids
• Opened distribution center in Washington
Page 20 of 78
Primal Code Branding Analysisv
Strong brands have seven pieces of code that work together to make them
believable and enduring. These areas are highlighted below and there is additional
information on Primal Branding is in the appendix. The table that follows highlights Pier
1’s failure to develop its primal code, which is partially responsible for its current
operating and financial position. Compared to best of breed, Pier 1’s current Primal
Code requires a large investment. The company has changed its advertising message
several times in the last few years, making it difficult for customers, consumers and
employees to know what the brand Pier 1 means and why they want to be a part of it.
Page 21 of 78
Primal Branding Analysis Definition Best of Breed Pier 1 Today Goal
Creation Story The who and why, often involving a mythic quest. The creation story is the first step in providing answers to why people should care about you, your product or service.
GE, Disney, United States of America, Microsoft
Pier 1 started as a single store in San Mateo, California in 1962. The store’s first customers were post‐World War II baby boomers looking for beanbag chairs, love beads and incense.
Who started Pier 1? Why did they start it?
Creed A set of core principles that you believe in and what you want others to believe about you. Defining, understanding and communicating your mission to your customers and employees are the goal of a creed.
“Just do it.” (Nike), “All Men [and women] are created equal” (USA), “The Third Place” (Starbucks)
“it’s your thing” Currently does not speak to Pier 1’s strengths or provide a succinct message. Needs to be reworked.
Icons Quick concentrations of meaning that cause your brand identity and brand values to spontaneously resonate.
Nike swoosh, Coke bottle, smell of Cinnabons
Papasan chair, candles, Kirstie Alley
Icons need to be refreshed and developed with longevity in mind. Papasan chair is dated, candles are a commodity product and Kirstie Alley is out of the spotlight.
Rituals The repeated interactions people have with your enterprise.
Fourth of July parades, stopping at Starbucks, searching on Google
Shop the sale, return gifts received from Pier 1
Shop for all home/novelty gifts at Pier 1. Browse Pier 1 whenever in the neighborhood.
Pagans / Nonbelievers Part of saying who you are and what you stand for is also declaring what you do not stand for.
Apple/Microsoft, Yankees/Red Sox, Democrats/Republicans, New York/LA, Coke/7Up
Pier 1 has plenty of these today! Pottery Barn, Target, Bed, Bath & Beyond
Provide product offerings which will grab a greater percentage of customers’ share of dollar spend.
Sacred Words A set of specialized words that must be learned before people can belong.
Grande, Big Mac, iPod, lol None Need to develop.
Leader The person who is the catalyst, risk taker, visionary, iconoclast who set out against all the odds to re‐create the world according to their own sense of self, community and opportunity.
Richard Branson, Bill Gates, Dr. Martin Luther King, Oprah
Alex Smith New CEO, has an opportunity to be the leader by embracing change and communicating Pier 1 brand message to all constituents.
Page 22 of 78
SWOT Analysis
Strengths
Opportunities Threats
Weaknesses
• Underperforming locations drag profitability
• Gross margin below 30% (40% is a realistic target)
• Significant CAPEX spends to stay afloat
• Strength of management team and corporate governance is questionable given recent performance and lack of accountability (with the exception of the recent CEO change)
• Continued lost market share to old and new competitors
• Trade areas move away from Pier 1 locations as Target and Wal‐Mart stores build new centers
• Lack of product differentiation relative to competition and lower priced competitors such as Target
• Underperforming stores continue to burn cash and drag Company’s energy, distracting from focus on strong stores
• Offer the customer a selection of ever‐changing, unique merchandise priced at a value, innovative marketing, a fun and relaxing shopping experience and outstanding customer service
• Competitive advantage – offering customers new merchandise at a value
• Develop and communicate brand message for customers, suppliers and vendors
• Analysis of distribution facilities and inefficiencies
• Analysis of pricing opportunities
• Analysis of total cost of ownership with a focus on working with suppliers to reduce overall costs and increase gross margin
• Third party real estate market assessment through a combination of Buxton and Geoview geo mapping services
• Close underperforming stores
Top industrydriversSWOTAnalysis
‐
‐
+
+
Page 23 of 78
Recent Events
On April 9, 2007, a Schedule 13D was filed by Elliott Asset Management LLC
(“Elliott”), a hedge fund and beneficial owner of 5.5% of Pier 1’s common stock,
whereby Elliott pressured the Board of Directors to present a turnaround plan for Pier 1.
Elliott also provided their recommendations about store closings, SG&A expenses and
more turnover on the Board of Directors.
On March 30, 2007 Pier 1 announced that it had cut 175 jobs at its headquarters
and field offices, which would eventually save $17 million per year.
On March 22, 2007 Pier 1 announced that James Hoak planned to leave the
board when his term expires in the coming year. The number of directors is being
increased from seven to eight, and Cece Smith and Robert B. Holland, III have been
nominated to stand for election. Given Ms. Smith’s retail background, she appears to be
a strong director candidate; however, we question the addition of Mr. Holland and his
lack of retail experience.
On January 30, 2007, Pier 1 announced that Marvin Girouard, its Chairman and
Chief Executive Officer, would retire on February 19, 2007 and that Alex W. Smith would
become President and Chief Executive Officer.
Over the past year Pier 1 management has begun to divest specific non‐core
assets in what would appear to be both an attempt to limit its focus to its core U.S.
business and raise cash to sustain its negative operating cash flow.
On March 20, 2006, Pier 1 sold its UK & Ireland based subsidiary (The Pier) to
Palli Limited for approximately $15M, and appropriate restated the associated financial
results in all prior years as discontinued operations.
Credit Card Operations
On November 21, 2006, Pier 1 completed the sale of its private‐label credit card
operations and all outstanding receivables to Chase Bank for $155M in cash. At the time
of the sale the credit card portfolio included nearly one million accounts with total
receivables of approximately $140M. In addition, the two companies entered into a
long‐term agreement in which Chase will continue to provide credit cards and
Page 24 of 78
associated support to Pier 1 customers, while providing specific payments to Pier 1
based upon account activity.
This arrangement allowed Pier 1 to monetize the value of the credit card
portfolio and associated business without impacting its customers. This sale represents
an optimal outcome given Pier 1’s current financial position and need for cash. In the
past, prior to this sale, Pier 1 frequently securitized and sold its credit card receivables
to raise cash.
Page 25 of 78
Management and governance
Executive officers and key employees
Alex W. Smith (Chief Executive Officer, President and Director)
Before being named CEO and President of Pier 1 in 2007, Alex Smith was Senior
Executive Vice President, Group President of The Tjx Companies Inc. since March 29,
2004. Mr. Smith served as Executive Vice President and Group Executive, International
of TJX Companies Inc. from 2001 to March 29, 2004. Mr. Smith was responsibilities for
The Marmaxx Group, The Tjx Companies Inc.'s HomeGoods division, and the California
Buying Office and oversight of the European Buying Offices. Mr. Smith was Managing
Director of T.K. Maxx from 1995 to 2001. He was Managing Director of Lane Crawford
from 1994 to 1995, Managing Director of Owen Owen plc from 1990 to 1993 and
Merchandise Director from 1987 to 1990.
Charles H. Turner (CFO, Executive Vice President ‐ Finance and Treasurer)
Charles H. Turner has been Executive Vice President, Finance of Pier 1 since April
2002 and Chief Financial Officer and Treasurer since August 1999. Mr. Turner served as
Senior Vice President of Finance of Pier 1 from August 1999 to April 2002. He served as
Senior Vice President of Stores of Pier 1 from August 1994 to August 1999, and served
as Controller and Principal Accounting Officer of Pier 1 from January 1992 to August
1994. He has served as a Director of Elder Beerman Stores Corp. since 2000.
Susan E. Barle (Principal Accounting Officer)
Susan Barley has been promoted to Senior VP of Finance. Barley started at Pier 1
in 1976, when she was hired as Assistant Controller for the Accounting department. She
was promoted to VP/Controller in 1994 and became VP of Finance in 1999.
Page 26 of 78
Michael A. Carter (Senior Vice President , General Counsel and Corporate Secretary)
Michael A. Carter serves as Senior Vice President, General Counsel and
Corporate Secretary of Pier 1.
Phil E. Schneider (Executive Vice President – Marketing)
Phil E. Schneider has been the Executive Vice President of Marketing of Pier 1
since April 2002. Mr. Schneider served as Senior Vice President of Marketing of Pier 1
from May 1993 to April 2002, and served as Vice President of Advertising of Pier 1 from
January 1988 to May 1993.
Gregory S. Humenesky (Executive Vice President of Human Resources)
Gregory S. Humenesky has been Executive Vice President, Human Resources of
Pier 1 since February 2005. Prior to joining Pier 1, Mr. Humenesky served as Senior Vice
President of Human Resources at Zale Corporation from April 1996 to February 2005.
Jay R. Jacobs (Executive Vice President – Merchandising)
Jay R. Jacobs has been the Executive Vice President of Merchandising of Pier 1
since April 2002. Mr. Jacobs served as Senior Vice President of Merchandising of Pier 1
from May 1995 to April 2002. He served as Vice President of Divisional Merchandising
of Pier 1 from May 1993 to May 1995, and served as Director of Divisional
Merchandising of Pier 1 from July 1991 to May 1993.
J. Rodney Lawrence (Executive Vice President of Legal Affairs)
J. Rodney Lawrence has been the Executive Vice President of Legal Affairs of Pier
1 since April 2002 and has served as Secretary of Pier 1 since November 1985. Mr.
Lawrence served as Senior Vice President of Legal Affairs of Pier 1 from June 1992 to
April 2002, and served as Vice President of Legal Affairs of Pier 1 from November 1985
to June 1992.
Page 27 of 78
David A. Walker (Executive Vice President of Logistics & Allocations)
David A. Walker has been the Executive Vice President of Logistics and
Allocations of Pier 1 since April 2002. Mr. Walker served as Senior Vice President of
Logistics and Allocations of Pier 1 from September 1999 to April 2002. He served as Vice
President of Planning and Allocations of Pier 1 from January 1994 to September 1999,
and served as Director of Merchandise Services of Pier 1 from October 1989 to January
1994.
Board of directorsvi
Committees
AgeDirector Since Title Audit Compensation Governance Executive Nominating
Tom M. Thomas 65 1998 Chairman C X C XAlex W. Smith 54 2007 CEO, President and DirectorJames M. Hoak, Jr. 63 1991 Director C C X CJohn H. Burgoyne 65 1999 Director XMichael R. Ferrari 67 1999 Director XKaren W. Katz 50 2001 Director X X XTerry E. London 57 2003 Director X Tom M. Thomas (Chairman, Chairman of Executive & Compensation Committee and
Member of Nominating & Corporate Governance Committee)
Tom M. Thomas served as Senior Partner of Kolodey, Thomas & Blackwood, a
law firm, since September 2001. Mr. Thomas served as Senior Partner of Thomas &
Culp, L.L.P., a law firm, from 1994 to August 2001. Mr. Thomas has been Chairman of
Pier 1 since February 9, 2007 and Independent Director since September 1998.
Alex W. Smith (Chief Executive Officer, President and Director)
Before being named CEO and President of Pier 1 in 2007, Alex Smith was Senior
Executive Vice President, Group President of The Tjx Companies Inc. since March 29,
2004. Mr. Smith served as Executive Vice President and Group Executive, International
of TJX Companies Inc. from 2001 to March 29, 2004. Mr. Smith was responsibilities for
The Marmaxx Group, The Tjx Companies Inc.'s HomeGoods division, and the California
Buying Office and oversight of the European Buying Offices. Mr. Smith was Managing
Page 28 of 78
Director of T.K. Maxx from 1995 to 2001. He was Managing Director of Lane Crawford
from 1994 to 1995, Managing Director of Owen Owen plc from 1990 to 1993 and
Merchandise Director from 1987 to 1990.
James M. Hoak, Jr. (Plans to resign from Board when his term expires; Director,
Chairman of Audit Committee, Chairman of Nominating & Corporate Governance
Committee and Member of Executive Committee)
Mr. James M. Hoak, Jr. is the Chairman and Chief Executive Officer at Hoak
Media Corporation since September 1991 and is one of the premier media
entrepreneurs. He also serves as a Value Added Partner of CIC Partners. In 1971, Mr.
Hoak founded Heritage Communications, Inc. In 1991, he co‐founded Crown Media, Inc.
to acquire and operate cable systems, which they sold in 1995. Mr. Hoak served as the
Chief Executive Officer and Chairman of Crown Media, Inc. from February 1991 to
January 1995. From 1971 to 1987, he served as a Chief Executive Officer and President
of Heritage Communications, Inc. and Chairman and Chief Executive Officer from August
1987 to December 1990. Prior to this, Mr. Hoak founded Heritage Media Corporation in
1987 to purchase radio and television properties of Heritage Communications. He is the
Founder and Chairman of the American Association of Entrepreneurs. Mr. Hoak has
been involved with numerous other communications businesses. He has over 30 years
of experience as an entrepreneur, operator, investor and Chief Executive Officer in
various industries. Mr. Hoak has been the Chairman of Hoak Media since its formation
in August 2003. He is a Chairman of the Board at Chaparral Steel Company and serves
on the Executive Committee. He has been a Director of Texas Industries Inc. since 1995.
Mr. Hoak has been a Director of Pier 1 since September 1991 and is Chairman of the
Nominating and Audit Committees and member of the Executive Committee. He has
been a Director of Grande Communications Holdings Inc. since February 2000 and
member of its Finance Committee. Mr. Hoak is a Director Nominee of Panamsat Holding
Corp. and Director of Midwest Resources, Inc.; Texas Industries; Grande
Communications; and HBW Holdings, Inc. He served as a Chairman of HBW Holdings,
Page 29 of 78
Inc. from July 1996 to November 1999 and Heritage Media Corporation from its
inception in August 1987 until its sale in August 1997. Mr. Hoak served as a Director of
TeleCorp PCS Inc. since the merger in November 13, 2000; PanAmSat Holding Corp.
(formerly Panamsat Corp.) from May 1997 to August 2004; Heritage Media Corporation;
and Dynamex, Inc. He was a Governor of the American Stock Exchange. Mr. Hoak
received a B.A. from Yale University in 1966 and a J.D. from Stanford University School
of Law in 1969.
John H. Burgoyne (Independent Director and Member of Compensation Committee)
John H. Burgoyne has been a independent Director of Pier 1 since February 1999
and is a member of the Compensation Committee. Mr. Burgoyne has served as
President of Burgoyne and Associates (an international consulting firm) since March
1996. From May 1995 to March 1996, Mr. Burgoyne served as the General Manager of
IBM's Travel Industry sector for their Asia Pacific Region. Prior to that time, he served as
the President and General Manager of IBM China Corporation Ltd.
Michael R. Ferrari (Independent Director and Member of Audit Committee)
Michael R. Ferrari has been a Director of Pier 1 since February 1999 and is a
member of the Audit Committee. Dr. Ferrari has served as Senior Vice President and
Managing Director of the higher education practice of EFL Associates, an Executive
search firm, since May 2003. He is also the President of Ferrari and Associates LLC, a
higher education consulting firm he established in May 2003. Dr. Ferrari was granted
the title of Chancellor Emeritus of Texas Christian University by the universitys board of
trustees on June 1, 2003. Dr. Ferrari served as Chancellor of Texas Christian University
and Professor of Management in the M. J. Neeley School of Business at Texas Christian
University from July 1998 through May 2003. From 1985 to 1998, he served as
President of Drake University.
Page 30 of 78
Karen W. Katz (Independent Director, Member of Compensation Committee and
Member of Nominating & Corporate Governance Committee)
Karen W. Katz has been President and Chief Executive Officer of Neiman Marcus
Stores, a subsidiary of Neiman Marcus Group Inc. since December 2002. Mrs. Katz
served as President and Chief Executive Officer of Neiman Marcus Direct (a division of
the Neiman Marcus Group) from May 2000 to December 2002. She served as Executive
Vice President of Neiman Marcus Stores from February 1998 to May 2000 and served as
Senior Vice President from September 1996 to February 1998. She served as Vice
President and General Manager of the Dallas NorthPark Neiman Marcus store prior
thereto. She has been an Independent Director of Pier 1 since June 2001 and serves as a
Member of the Nominating and Audit Committees. She served as a Director of Neiman
Marcus Stores from September 1996 to February 1998.
Terry E. London (Independent Director and Member of Audit Committee)
Terry E. London has been President of London Partners LLC since July 2001. Mr.
London established London Partners LLC, a private equity investment firm in 2000.
From May 1997 to July 2000, he served as President and Chief Executive Officer Gaylord
Entertainment Company (“Gaylord”) (hospitality and attractions, creative content and
interactive media). He served as an Executive Vice President and Chief Operating
Officer of Gaylord from March 1997 to May 1997. He served as Chief Financial and
Administrative Officer of Gaylord Entertainment from 1991 to 1997. Mr. London has
been an Independent Director of Pier 1 Imports Inc., since September 25, 2003. Mr.
London has been a Director of Johnson Outdoors Inc. since 1999. He served as a
Director of Gaylord Entertainment Company from May 1997 to July 2000.
We consider only 5 of the 7 board members to be independent. The
independent board members include Hoak, Burgoyne, Ferrari, Katz and London. As
chairman and CEO, we do not consider Alex W. Smith to be independent. The final
board member, Tom Thomas, is a shareholder in a law firm who currently provides legal
Page 31 of 78
services for Pier 1. However, his firm provided less that 2% of the total legal work last
year and Mr. Thomas is less than a 10% shareholder in his company. Although the
relationship between Mr. Thomas and the law firm was deemed to be immaterial by the
board although he is considered to not be independent.
Discussion of financial condition
Historic Stock Performancevii
Pier 1’s stock has fallen significantly from the beginning of 2005 through 2007, losing
approximately two‐thirds of its value, following a relatively flat performance the prior
three years. From 1999 to 2002 Pier 1’s stock appreciated significantly as management
pushed its growth initiatives and opened new stores which led to many of the problems
the Company is now facing.
Page 32 of 78
1 Year Stock Performance
1 Year Price Performance
-
20.0
40.0
60.0
80.0
100.0
120.0
Comparable Companies Pier 1 Imports Inc. (NYSE:PIR) S&P 500 Index
Comparable Companies: BBBY, WSM, HVT, CPWM, KIRK, JEN and BBA.
Page 33 of 78
5 Year Stock Performance
5 Year Price Performance
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Comparable Companies Pier 1 Imports Inc. (NYSE:PIR) S&P 500 Index
Comparable Companies: BBBY, WSM, HVT, CPWM, KIRK, JEN and BBA.
Page 34 of 78
10 Year Stock Performance
10 Year Price Performance
-
100.0
200.0
300.0
400.0
500.0
600.0
Comparable Companies Pier 1 Imports Inc. (NYSE:PIR) S&P 500 Index
Comparable Companies: BBBY, WSM, HVT, CPWM, KIRK, JEN and BBA.
Page 35 of 78
Company Financial Performance
Operating performance has deteriorated significantly over the past several years
as Pier 1 has lost $40 million and $227 million in its 2006 and 2007 fiscal years,
respectively, following several years of consistent profitability.
ANNUAL INCOME STATEMENT ($M) 02/28/04 02/26/05 02/25/06 3/3/2007
Net Sales 1,868 1,825 1,777 1,623 Cost of Goods Sold 1,087 1,122 1,175 1,149 Gross Profit 782 704 602 474 SG&A Expense 542 605 645 700
Operating Income / (Loss) 240 98 (43) (226)
Non-Operating Income (51) 3 4 14 Interest Expense 2 2 3 16 Prov. For Inc. Taxes 69 36 (14) (1)
Income / (Loss) from Continuing Ops 118 63 (27) (227)
Compared to comparable companies, Pier 1, operating performance has
significantly underperformed the best of class companies such as Williams‐Sonoma and
Haverty Furniture, and is 18% below the mean for gross margin. The recommendations
that follow are focused on Pier 1 exceeding the average operating performance of its
comparable companies.viii
Company Name Gross EBITDA EBIT Net IncomeBed Bath & Beyond Inc. 42.8 15.4 13.4 9.0 Williams-Sonoma Inc. (NYSE:WSM) 40.0 13.4 9.8 5.6 Haverty Furniture Companies Inc. 49.7 5.6 3.0 1.9 Cost Plus Inc. (NasdaqNM:CPWM) 30.9 3.3 0.1 (0.6) Kirkland's Inc. (NasdaqNM:KIRK) 31.4 3.9 0.0 (0.0) Bombay Company Inc. (NYSE:BBA) 22.5 (3.8) (7.1) (9.8) Jennifer Convertibles Inc. (AMEX:JEN) 31.0 3.6 3.0 3.2
High 49.7 15.4 13.4 9.0 Low 22.5 (3.8) (7.1) (9.8) Mean 35.5 5.9 3.2 1.3 Median 31.4 3.9 3.0 1.9
Pier 1 Imports Inc. (NYSE:PIR) 29.2 (4.5) (8.4) (14.0)
LTM Margin (%)
Page 37 of 78
As the chart below depicts, Pier 1 has significantly increased its store count from 1999 to 2006. Ideally, for a project of this type we would want to analyze the operating data of each store and understand the successful stores and the losers who should be closed.
Store Growth
824
76 41
859
7621 25
931
11530
1,016
12525
1,116
14944
1,221
12142
1,300
71 3238
1,301
-
200
400
600
800
1,000
1,200
1,400
1,600
2/27/1
999
Open
Closed
2/26/2
000
Open
Acquis
ition
Closed
3/3/20
01Ope
nClos
ed3/2
/2002
Open
Closed
3/1/20
03Ope
nClos
ed2/2
8/200
4Ope
nClos
ed2/2
6/200
5Ope
nDive
stitur
eClos
ed2/2
5/200
6
Page 38 of 78
As is the case with most retailers, same store sales represent a key performance
metric given they most accurately reflect the overall health of the brand by excluding
the often material impact of new store openings and/or closings. In the case of Pier 1,
same store sales declined 7.1% for fiscal 2006 and 6.1% for fiscal 2005, representing the
core performance problem driving the overall revenue deterioration. Directly below is a
summary bridge of year‐to‐year revenue dynamics, which highlights the impact of
declining same store sales relative to new store growth and lost revenue from closed
stores. Clearly, the growth from the new stores has been inadequate to offset the
decline in existing stores.
($s millions) 2006
New stores opened during fiscal 2006 46 Sotres opened during fiscal 2005 59 Same Store Sales (115)Closed Stores (39)
Net Decrease in Sales (49)
Change in Revenue YtY
Page 39 of 78
Year‐to‐Year Change in Revenue (in millions)
1,806
8986 96
60 4659 115
39
1,777
154
1,6231,825
$-
$500
$1,000
$1,500
$2,000
$2,500
2004
New sto
res - 2
005
New sto
res - 2
004
Compa
rable
stores
Closed
stores
and o
ther
2005
New sto
res - 2
006
New sto
res - 2
005
Compa
rable
stores
Closed
stores
and o
ther
2006
Net ch
ange
2007
Page 40 of 78
Pier 1 has made significant capital expenditures in the last few years as it has
increased its store base. In 2006, Pier 1 made $51 million of capital expenditures, $31.5
million of which were for fixtures and leasehold improvements, $15.8 million were for
information systems enhancements and $3.5 million were for distribution centers.
Liquidity Analysis
Pier 1 has consistently maintained a significant balance of cash and/or
marketable securities of approximately $200M over the past 5 years, likely in
recognition of the risks inherent to the retail industry given the volatility in consumer
tastes and fixed cost structure. Despite its recent poor performance, Pier 1
management has been able to generate additional cash to sustain this cash reserve
through the sale of its credit card operations in the fall of 2006, and finished its 2007
fiscal year (ended 3/3/07) with $167M of cash on hand. Based upon analyst estimates
and the company’s current cash burn‐rate, we project that this cash on hand should be
sufficient to sustain operations for at least 12 ‐ 18 months (raw projections indicate 2
years, however we believe there may be additional risk and seasonal working capital
requirements).
($M) 2008 2009 2010
Beginning Cash 167 74 13
-Less Net Cash Flow (93) (61) (40)
Ending Cash Balance 74 13 (27)
Projected Cash Burn
Also of note, Pier 1 ceased paying dividends in November 2006 and we do not
expect that management will resume payments until performance improves
significantly, alleviating $35M of prior cash flow obligations until operations can be
stabilized. Further, Pier 1 did execute a modest share buyback (250,000 shares for $4M)
in 2006. Although, $107M of authorized share repurchases remains available, we do
not expect that management will continue this activity given the current financial
condition (these assumptions included in above ‘cash burn’ projection).
Page 41 of 78
Finally, Pier 1’s business does have a moderate seasonal skew, as 25% of full year
revenue is earned in November and December. Accordingly, significant working capital
is required to support the necessary inventory build‐up in September – October. Given
the company’s current strong cash position, we do not believe that the 2007 holiday
season will present a liquidity problem, however if overall performance does not
improve the 2008 holiday season will likely represent a potential tipping point in which
Pier 1 will require additional financing.
Ratings Analysis
Pier 1 debt is currently rated Caa1, after receiving four downgrades within the
last two years consistent with the company’s deteriorating performance and continued
outlook of additional losses in the near‐term.
Date Action Rating
1/17/2007 Downgrade Caa1
9/21/2006 Downgrade B3
2/15/2006 Downgrade B1
9/19/2005 Downgrade Ba2
8/13/1998 Upgrade Baa3
Moody's Rating s Over Time
Capital Structure
In addition to its working capital revolver, Pier 1 has a relatively simple capital
structure given its business model is primarily dependent upon operating leases
(discussed further below) to finance store growth versus traditional debt and equity
financing. Below is a summary of equity and long‐term debt components.
Page 42 of 78
EQUITYMarket Value
-Current Share Price (4/20) 7.76 -Shares Outstanding ('000s) 87,395 Equity Value / Mkt Cap ($M) 678
Operating Income / (Loss) (226,041) (44,686) 129,661
Non-Operating Income 14,223 14,223 Interest Expense 16,116 16,116 Income Before Taxes (227,934) (44,686) 127,768 Prov. For Inc. Taxes (885) (885) Income / (Loss) from Continuing Operations (227,049) (44,686) 128,653
Sales Growth YtY% 6% -2% -3% -9% -2% 2% 4% 5% 5%Gross Profit Margin 42% 39% 34% 29% 34% 35% 36% 38% 39%SG&A as %Sales 29% 33% 36% 43% 41% 40% 38% 37% 35% Notes: 1. Projections for 2008 & 2009 based upon Cowen & Company March 8, 2007 earnings model estimates 2. Modest improvement assumed in out years (2010 – 2012) with sustained revenue growth of 4‐5% per year and 1pt / year improvements in gross margin and SG&A as a percent of revenue 3. Non‐operating income and Interest expense held constant (no change to capital structure).
Discounted Cash Flow - Enterprise Value Discounted Cash Flow - Value per Share
Terminal EBIT Multiple
WA
CC
Exhibit II Notes: 1. Net Income based upon prior Income Statement (Exhibit I) 2. Gradual decline in depreciation extrapolated into out years based upon 2007 actual results and slowing store expansion 3. Change in current assets / liabilities based upon projected Balance Sheet (Exhibit III) 4. Projected CAPEX was gradually increased to prior 2006 historical levels (only modest new store openings assumed 5. No additional asset sales assumed; No change to capital structure assumed (no early debt redemption assumed)
Page 58 of 78
Exhibit II (Continued): Estimated Valuation
Terminal Value Considerations – We examined several competitors and determined the average Enterprise Value to EBIT multiple to be 11.0. However, given Pier 1’s weaker relative brand we negatively skewed our range of terminal multiples resulting in the 8.0 to 12.0 range reflected in the prior (and later) exhibits.
Bed, Bath, Beyond William Sonoma Cost Plus
Ent Value ($B) 10.7 3.7 0.395EBIT ($B) 0.9 0.3 0.038
EBIT Multiple 11.7 10.9 10.5
Average 11.0 WACC Considerations – We calculated the WACC for Pier 1 to be 8.7% using the traditional CAPM model, but believed this value to be low given the considerable risk and uncertainty going forward (not reflected in historical beta) and judgmentally skewed our range of WACC values higher, resulting in the 8% - 12% range reflected in the prior (and later) exhibits.
Accounts Payable %Sales 5% 6% 6% 6% 6% 6% 6% 6% 6%Accured Expense %Sales 5% 5% 5% 7% 7% 7% 7% 7% 7%Deferred Revenue %Sales 3% 4% 5% 4% 4% 4% 4% 4% 4% Exhibit III Notes: 1. Key assumptions (Receivables / Inventory / Accounts Payable / Accrued Expense / Deferred Revenue) as % of sales noted in ‘Key Trend’ Section 2. Cash balance was allowed to go negative in 2010 to avoid explicitly declaring funding source; based upon current projections additional financing would be required in 2010 – 2012 to sustain
operations, however the magnitude of this borrowing is not so significant to warrant significant consideration (interest not material to impact projections). 3. Depreciation, CAPEX, and change in cash balance tied to prior (Exhibit II) Cash flow projections 4. No change in capital structure (no early debt redemption) assumed; changes in retained earnings reflect net income from Exhibit I (no dividends assumed). 5. Depreciation, CAPEX, and change in cash balance tied to prior (Exhibit II) Cash flow projections 6. No change in capital structure (no early debt redemption) assumed; changes in retained earnings reflect net income from Exhibit I (no dividends assumed).
Page 60 of 78
Exhibit III Continued: Non‐GAAP Presentation of Key Financials – Current Market Expectations Scenario
Memo: # Stores (Year-end) 1,083 1,150 1,183 1,200 (Est) 1,150 (Est) 1,100 (Est) 1,100 (Est) 1,100 (Est) 1,100 (Est) Exhibit III Notes: 1. Income statement adjusted to reflect Earnings Before Interest Taxes Depreciation Amortization and Rental (EBITDAR) costs to better reflect actual product margins without the impact of fixed
rental expense which has been treated similar to debt service. 2. Value of lease minimum lease obligations capitalized (10% discount rate) as a debt obligation with an equal and offsetting fixed asset value (conservatism dictates that possible asset value in
excess of lease obligations not be realized).
Page 61 of 78
Exhibit IV: Pro Forma Income Statement – Recommendation Case INCOME STATEMENT ($M) 02/28/04 02/26/05 02/25/06 3/3/2007 3/2008E 3/2009E 3/2010E 3/2011E 3/2012E
Sales Growth YtY% 6% -2% -3% -9% -20% 5% 5% 5% 5%Gross Profit Margin 42% 39% 34% 29% 40% 40% 40% 40% 40%SG&A as %Sales 29% 33% 36% 43% 30% 30% 30% 30% 30% Exhibit IV Notes: 1. Significant restructuring (closure of 250 stores) assumed in early fiscal 2008. All sales activity for closed stores and resulting one‐time charge reflected as discontinued ops (Total $200M net of
tax charge assumed). 2. Revenue growth post restructuring assumed to be a modest +5% YtY; gross margin and SG&A as a percentage of revenues held constant post restructuring in projections. 3. Sale of corporate headquarters for $100M, (assumed at book value) in 2008 with partial lease‐back included within SG&A.
Page 62 of 78
Exhibit V: Pro Forma Cash Flow & Valuation – Recommendation Case
CDiscounted Cash Flow - Enterprise Value Discounted Cash Flow - Value per Share
Terminal EBIT Multiple
Exhibit V Notes: 1. Enterprise value is based upon discounted cash flows, including terminal value, less long‐term debt plus excess cash (any balance above $30M) 2. Shares outstanding assumed to be unchanged given halt of buyback activity; further given low stock price dilution via employee stock options is also unlikely. 3. $200M restructuring charge assumed to represent actual cash outlays (lease termination fees & employee severance payments) and inventory & capital write‐offs associated with closed stores;
no write‐down of intangible assets included
Page 63 of 78
Exhibit VI: Pro Forma Non‐GAAP Financials – Recommendation Case
Exhibit VI Notes: 1. Income statement adjusted to reflect Earnings before Interest Taxes Depreciation Amortization and Rental (EBITDAR) costs to better reflect actual product margins without the impact of fixed
rental expense which has been treated similar to debt service. 2. Value of lease minimum lease obligations capitalized (10% discount rate) as a debt obligation with an equal and offsetting fixed asset value. 3. Net operating loss (NOL) carry‐forwards utilized in 2009 and 2010 and result in positive adjustments to cash flow.
Page 64 of 78
Exhibit VII: Primal Branding
From Primal Branding by Patrick Hanlon, pp. 9‐10:
All belief systems have seven pieces of code that work together to make them believable.
The more pieces, the more believable the belief system becomes. When products and services
have all seven pieces of code (the creation story; the creed; the icons; the rituals; the pagans, or
nonbelievers; the sacred words; and the leader), they become a meaningful part of our culture.
They become the Googles and Nikes of the world. When causes have all seven pieces of code,
they become the civil rights movement, the women’s movement, or the global fight against AIDS.
When civic communities have all seven pieces of code, they become sizzling communities like
New York City and Las Vegas. When personalities have the seven pieces of code in place, they
become Oprah, Andy Warhol, or U2.
Certainly there have been remarkable products in the past, worthy causes and persons
with extraordinary talent. But for some reason they fell short in the public imagination. When
you consider that nine out of ten new products never survive in the marketplace, you have to
consider that something else is in play beyond terrific innovation, distribution, and price point.
This is no longer inexplicable. They simply did not have the pieces of primal code. Having the
primal code is why brands seize the public imagination while their competitors are relegated to
second place commodities and transactions.
…the seven pieces of primal code…together create a sustainable belief system that
provides the unarticulated, intangible emotional glue that attracts people and helps them feel
that they belong. This sense of belonging manifests itself in evangelist tribes, cults, members of
political parties, product geeks and enthusiasts.
Page 65 of 78
Exhibit VIII: Comparable Company Analysis ($ in millions, except per share data)
Company NameStock Price
(Most Recent)SharesOutst. Market Cap Net Debt TEV
Tang BV/Share LTM as of Revenue EBITDA EBIT EPS Revenue EBITDA EPS
Bed Bath & Beyond Inc. $41.64 283.4 $11,799.9 $(988.3) $10,811.6 $9.35 Mar-3-2007 $6,617.4 $1,022.4 $889.4 $2.085 $7,244.1 $1,140.0 $2.380Williams-Sonoma Inc. (NYSE:WSM) 35.39 110.2 3,898.6 (246.8) 3,651.8 10.48 Jan-28-2007 3,727.5 499.3 364.2 1.789 3,975.9 466.1 1.798Haverty Furniture Companies Inc. 13.15 22.7 298.3 38.3 336.7 12.87 Dec-31-2006 861.9 47.9 26.2 0.589 830.4 36.0 0.570Cost Plus Inc. (NasdaqNM:CPWM) 9.93 22.1 219.3 179.3 398.6 13.00 Oct-28-2006 1,010.6 33.7 1.2 (0.284) 1,082.9 33.4 (0.147)Kirkland's Inc. (NasdaqNM:KIRK) 4.98 19.6 97.7 (25.4) 72.3 3.47 Feb-3-2007 446.8 17.5 0.0 (0.007) 447.0 16.7 (0.008)Bombay Company Inc. (NYSE:BBA) 1.21 36.4 44.0 37.9 81.9 2.31 Feb-3-2007 536.3 (20.1) (38.1) (1.460) 501.0 (9.9) (0.593)Jennifer Convertibles Inc. (AMEX:JEN) 4.74 6.9 32.5 (16.4) 16.1 0.68 Feb-24-2007 137.9 5.0 4.1 0.501 NA NA NA
Alex Smith, the new CEO, receives $1 million of salary per year plus a bonus and stock options based on the Company’s performance and shareholder value creation. Name Title 2004 2005 2006
Girouard, Marvin J. Former Chairman of the Board, Chief Executive Officer and Member of Executive Committee
Long Term Incentive Plan - - -All Others 25,014 25,421 25,271
Total Compensation 312,560 326,150 582,440
Page 70 of 78
Exhibit X: Sample Products
Artificial Lemon A lemon so lifelike, even we had to look twice. But while it looks fresh-picked, this fab faux is actually handcrafted of clay and Styrofoam, with tiny glass beads just beneath the surface to create its amazingly realistic texture.
Page 71 of 78
Balinese Entertainment Center Hand-carved meranti wood panels and hand-painted detailing reflect exquisite artisanship. With adjustable shelves, wood pole, and generous interior dimensions, there is ample room for clothing or a large TV. A Pier 1 exclusive.
Page 72 of 78
Canyon Stripe Dinnerware The Painted Desert, re-imagined as a modern dinnerware collection, and created with bands of hand-applied color, layers of luminous glaze, and novel square shapes. Dishwasher safe.
Crazy Weave Placemats The art of table-setting can be fun and free-style with these Abstract-style placemats. To create the novel effect of light and line, we’ve woven natural rattan over a metal frame. The unexpected touch of luxury: a subtle, shimmering gold wash finish. Simply wipe with a dry cloth to keep clean. A Pier 1 exclusive.
Page 73 of 78
Page 74 of 78
Page 75 of 78
Shoe Jewelry Boxes Add a splash of color and organize at the same time with our Funky Shoe Jewelry Boxes made of resin.
Page 76 of 78
Page 77 of 78
Exhibit XI: Store Images
Page 78 of 78
Exhibit XII: Bibliography and End Notes
Capital IQ Pier 1 10K and 10Q Filings 1999 ‐ 2006 Pier 1 Schedule 13D April 3, 2007 Primal Branding by Patrick Hanlon Cowen & Company, Piper Jaffray and Morgan Keegan equity research reports i Business and Company Resource Center; Thompson / Gale; 2007 ii SIC Code 512 Encyclopedia of American Industries. Online Edition. Thomson Gale, 2007 iii "Miscellaneous Home Furnishings Stores." Encyclopedia of American Industries. Online Edition. Thomson Gale, 2007.(SICs: 5719) iv Pier 1 2006 Annual Report v More information on Primal Branding can be found in the appendix. The foundation of this section is based on Primal Branding by Patrick Hanlon. vi Source: Capital IQ. vii Capital IQ. viii Comparable data from Capital IQ. ix Buxton and Geoview are two modeling and mapping services to identify strategically optimized retail locations. x Capital IQ