PART I

FORWARD-LOOKING STATEMENTS

Certain statements contained in Item 1, Item 1A, Item 3, Item 7, Item 7A, Item 8 and elsewhere in this report may constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company may also make forward-looking statements in other reports filed with the SEC, in press releases and in material delivered to the Company’s shareholders. Forward looking statements provide current expectations of future events based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments, and other relevant factors. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “believe,” “expect,” “estimate,” “anticipate,” “plan,” “may,” “will,” “intend” and other similar expressions. Management’s expectations and assumptions regarding consumer spending patterns, the Company’s ability to implement planned cost control measures, expected benefits from the real estate optimization initiative, including cost savings and increases in efficiency, and changes in foreign currency values relative to the U.S. Dollar, and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others: an inability to anticipate, identify and respond to changing customer trends and preferences; an inability to identify and successfully implement strategic initiatives; risks related to outsourcing, including disruptions in business and increased costs; an overall decline in the health of the United States economy and its impact on consumer confidence and spending; negative impacts from failure to control merchandise returns; disruptions in the Company’s e-Commerce website; the ability of the Company to source, ship, and deliver items of acceptable quality to its U.S. distribution centers, stores and customers at reasonable prices and rates in a timely fashion; failure to successfully manage and execute the Company’s marketing initiatives; potential impairment charges; an inability to operate in desirable locations at reasonable rental rates; factors affecting consumer spending, including employment levels and disposable income, interest rates, consumer debt levels, fuel and transportation costs and other factors; failure to attract and retain an effective management team or changes in the cost or availability of a suitable workforce; failure to successfully manage omni-channel operations; competition; seasonal variations; increases in costs that are outside the Company’s control; adverse weather conditions or natural disasters; risks related to technology; failure to protect consumer data; failure to successfully implement new information technology systems and enhance existing systems; risks related to cybersecurity; failure to maintain positive brand perception and recognition; regulatory and legal risks; risks related to imported merchandise including the health of global, regional, and local economics and their impact on vendors, manufacturers and merchandise; disruptions in the global credit and equity markets; and risks related to insufficient cash flows and access to capital. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report which may also affect Company operations and performance. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K3

PART I

Item 1. Business.

(a) General Development of Business.

Pier 1 Imports, Inc. was incorporated as a Delaware corporation in 1986. Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. References to “Pier 1 Imports” relate to the Company’s retail locations operatingstores and an e-Commerce website all conducting business under the name Pier 1 Imports^®.Imports.

As of February 25, 2012,28, 2015, the Company had 1,0521,065 stores in the United States and Canada. In fiscal 2012,2015, the Company opened 1530 new Pier 1 Imports stores and closed 937 stores, approximately half of which were relocations. During fiscal 2015, the Company also opened an e-Commerce fulfillment center in Columbus, Ohio, completed one store remodel and added new fixtures in all existing stores. SubjectOn April 8, 2015, the Company announced that it has initiated a plan to changes in the retail environment, availabilityoptimize its store portfolio as part of suitableits ‘1 Pier 1’ strategy to drive growth through its omni-channel platform, reduce store sites,occupancy and lease renewal negotiations, thepayroll costs and improve efficiency. The Company plans to openclose approximately 20 new Pier 1 Imports100 stores over the next three years, primarily through natural lease expirations and close 8 stores during fiscal 2013. During fiscal 2012, the Company also refurbished 125 stores with a new merchandise fixture package and lighting upgrades, completed major remodels at three locations, and added some new fixtures throughout all stores.relocations. The Company operates regional distribution center facilities and fulfillment centers in or near Baltimore, Maryland; Columbus, Ohio; Fort Worth, Texas; Ontario, California; Savannah, Georgia; and Tacoma, Washington.

The Company has an arrangement to supply Grupo Sanborns, S.A. de C.V. (“Grupo Sanborns”) with Pier 1 Imports merchandise to be sold primarily in a “store within a store” format in certain stores operated by Grupo Sanborns’ subsidiaries, Sears Operadora de Mexico, S.A. de C.V. (“Sears Mexico”) and Corporacion de Tiendas Internationales, S.A. de C.V. (“Sears El Salvador”). The agreements with Grupo Sanborns will expire January 1, 2017.2017, unless those agreements are renewed and extended. The agreements are structured in a manner which substantially insulates the Company from currency fluctuations in the value of the Mexican peso. As of February 25, 2012, Pier 1 Imports merchandise was offered in 47 Sears Mexico stores and one Sears El Salvador store. Since Sears Mexico and Sears El Salvador operate these locations, the Company has no employees or real estate obligations in Mexico or El Salvador.

During the third quarter of fiscal 2012, the Company entered into a private-label credit card plan agreement (“Agreement”) with a subsidiary of Alliance Data Systems Corporation (“ADS”). The transfer of ownership to ADS of the private-label credit accounts issued under the Company’s existing private-label credit card program agreement was completed in the first quarter of fiscal 2013. The Agreement has an initial term of seven years that will automatically extend to a term of ten years if certain performance targets are achieved. The Agreement with ADS will provide an enhanced value proposition for the consumer and is expected to drive higher average ticket and transactions.

The Company continues to focus on enhancing its website, www.pier1.com, and its e-Commerce initiative. Pier 1 To-Go, which allows customers to order and reserve merchandise online for pick up and payment at any of the Company’s stores, is fully operational. The Company’s plan to have full e-Commerce functionality by allowing customers to purchase merchandise online, Pier 1 To-You, is progressing and is expected to launch during the summer of 2012.(b) Financial Information about Industry Segments.

In fiscal 2012,2015, the Company conducted business as one operating segment consisting of the retail salesales of decorative home furnishings, furniture, gifts and related items.

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

(c) Narrative Description of Business.

(c)	Narrative Description of Business.

The specialty retail operations of the Company consist of retail stores operatingand an e-Commerce website conducting business under the name “PierPier 1 Imports,” which sell a wide variety of furniture, decorative home furnishings, dining and kitchen goods, candles, gifts and other specialty items for the home.

As of February 25, 2012,28, 2015, the Company operated 971 Pier 1 Imports984 stores in the United States, and 81 Pier 1 Imports stores in Canada. During fiscal 2012, theCanada and an e-Commerce website. The Company also supplied merchandise and licensed the Pier 1 Imports name to Grupo Sanborns, which sold Pier 1 ImportsImports’ merchandise primarily in a “store within a store” format in 47 Sears68 stores in Mexico stores and one store in El Salvador. Pier 1 ImportsImports’ stores in the United States and Canada average approximately 9,900 gross square feet, which includes an average of approximately 7,900 square feet of retail selling space. The stores consist ofare located in freestanding units located near shopping centers or malls and in-line positions in major shopping centers. Pier 1 Imports operates in all major U.S. and Canadian metropolitan areas and many of the primary smaller markets. Pier 1 Imports storesThe Company generally have theirhas its highest sales volumes during November and December as a result of the holiday selling season. In fiscal 2012,2015, net sales of the Company totaled $1.5$1.9 billion.

Pier 1 Imports offers a unique selection of merchandise consisting of more than 6,000 items throughout the year imported from many countries around the world. While the broad categories of Pier 1 Imports’ merchandise remain fairly constant, individual items within these merchandise categories change frequently in order to meet the changing demands and preferences of customers.customers and trends. The principal categories of merchandise include the following:

DECORATIVE ACCESSORIES – — This merchandise group constitutes the broadest category of merchandise in Pier 1 Imports’ sales mix and contributed 61% tohas remained constant at approximately 65% of Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2012, 61% in fiscal year 2011years 2015, 2014 and 60% in fiscal year 2010.

4    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

2013. These itemsgoods are imported primarily from Asian and European countries, as well as someand are also obtained from domestic sources. This merchandise group includes decorative accents and textiles, such as rugs, wall decorations and mirrors, pillows, bedding, lamps, vases, dried and artificial flowers, baskets, ceramics, dinnerware, bathcandles, fragrance, gifts and fragrance products, candles, seasonal and gift items.

FURNITURE – — This merchandise group consists of furniture and furniture cushions to be used in living, dining, office, kitchen and bedroom areas, sunrooms and on patios. Also included in this group are wall decorations and mirrors. This group constituted 39%has remained constant at approximately 35% of Pier 1 Imports’ total U.S. and Canadian retail sales in fiscal year 2012, 39% in fiscal year 2011years 2015, 2014 and 40% in fiscal year 2010.2013. These goods are imported from a variety of countries such as Vietnam, Malaysia, Brazil, Thailand, China, the Philippines, India and Indonesia, and are also obtained from domestic sources. This merchandise group is generally made of metal or handcrafted natural materials, including rattan, pine, beech, rubberwoodacacia, oak, and selected hardwoodsother woods with either natural, stained, painted or upholstered finishes.

Pier 1 ImportsImports’ merchandise largely consists of items that feature a significant degree of handcraftsmanship and are mostly imported directly from foreign suppliers. For the most part, the imported merchandise is handcrafted in cottage industries and small factories. Pier 1 Imports has enjoyedenjoys long-standing relationships with many vendors and agents and is not dependent on any particular supplier. The Company believes alternative sources of merchandise could be procured over a reasonable period of time, if necessary. In selecting the source of merchandise, Pier 1 Imports considers quality, dependability of delivery and cost. During fiscal 2012,2015, Pier 1 Imports sold merchandise imported from many different countries with approximately 57.5%59% of its sales derived from merchandise produced in China.China, 14% in India and 18% collectively in Vietnam, Indonesia and the United States. The remainder of its merchandise is sourced from India, Vietnam, Indonesia, the United States and other countries around the world.

Imported and domestic merchandise is delivered to the Company’s distribution centers, where merchandise is received, allocated and shipped to the various stores in each distribution center’s region.region, fulfillment centers or delivered directly to customers.

The Company owns a number of federally registered trademarks and service marks under which Pier 1 Imports stores conductconducts business. Additionally, the Company has registered and has applications pending for the registration of certain other Pier 1 Imports trademarks and service marks in the United States, Canada and other foreign countries. The Company believes that its marks have significant value and are important in its marketing efforts. The Company maintains aCompany’s policy of pursuingis to pursue registration of its marks and opposingoppose any infringement of its marks.

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

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

On February 25, 2012,28, 2015, the Company employed approximately 19,70024,000 associates in the United States and Canada, of which approximately 3,5005,000 were full-time employees and 16,20019,000 were part-time employees.

(d) Financial Information about Geographic Areas.

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

(e) Available Information.

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

Certain statements contained in Item 1, Item 1A, Item 7, Item 7A, Item 8 and elsewhere in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company may also make forward-looking statements in other reports filed with the SEC and in material delivered to the Company’s shareholders. Forward-looking statements provide current expectations of future events based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments, and other relevant factors. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects” and other similar expressions. Management’s expectations and assumptions regarding planned store openings and closings, financing of Company obligations from operations, success of its marketing, merchandising and store operations strategies, the development and implementation of its e-Commerce business, and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, the effects of terrorist attacks or other acts of war, conflicts or war involving the United States or its allies or trading partners, labor strikes, weather conditions or natural disasters, volatility of fuel and utility costs, the actions taken by the United States and other countries to stimulate the economy, the general strength of the economy and levels of consumer spending, consumer confidence, suitable store sites and

distribution center locations, the availability of a qualified labor force and management, the availability and proper functioning of technology and communications systems supporting the Company’s key business processes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas, and the ability of the Company to source, ship and deliver items of acceptable quality to its U.S. distribution centers at reasonable prices and rates and in a timely fashion. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report which may also affect Company operations and performance. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized.

Executive Officers of the Company

ALEXANDER W. SMITH, age 59,62, joined the Company as President and Chief Executive Officer in February 2007. Prior to joining the Company, Mr. Smith served as group presidentGroup President of the TJX Companies, Inc., where he oversaw the operations and development of Home Goods, Marshalls, TJ Maxx, andplus a number of corporate functions. He was instrumental in the development of the TK Maxx stores in Great Britain and also ran theirits international operations.

CHARLES H. TURNER,

PIER 1 IMPORTS, INC.ï  2015 Form 10-K5

MICHAEL R. BENKEL, age 55,46, was named Executive Vice President of Planning and Allocations in April 2012. He joined the organization in September 2008 as Senior Vice President of Planning and Allocations. Prior to joining the Company, he spent 11 years at Williams-Sonoma Inc. in continuously advancing positions in the Pottery Barn Retail Stores division, including Vice President of Inventory Management, Director – Inventory Management, and as a home furnishings and furniture buyer.

LAURA A. COFFEY, age 48, was named Executive Vice President of the Company in April 2012 and has servedbegan serving as Interim Chief Financial Officer of the Company since August 1999. Mr. Turnerin February 2015. Ms. Coffey has served the Company for twenty years in key executive capacities within the organization for 18 years in various capacities, including Executive Vice President, Senior Vice President of StoresPlanning, Senior Vice President of Business Development and Controller. Mr. TurnerStrategic Planning and Senior Vice President of Finance. Ms. Coffey first became an officer of the Company in 1992 when he was named2005 and served as Principal Accounting Officer.Officer from 2008 to 2011. Prior to joining the Company, he was Group Controller for JC Penneyshe held various positions with Alcon Laboratories and a Senior Manager for KPMG, Peat Marwick.LLP.

CATHERINE DAVID, age 48,51, joined the organization in August 2009 as Executive Vice President of Merchandising. Prior to her current role, Ms. David served as President and Chief Operating Officer of Kirkland’s Inc. and Vice President and General Manager with Sears Essential,Essentials, Sears Grand and The Great Indoors. Ms. David also previously served the Target Corporation for thirteen13 years in various positions including Vice President and General Manager of target.direct and various positions in the buying, planning and stores divisions.

GREGORY S. HUMENESKY, age 60,63, was named Executive Vice President of Human Resources of the Company in February 2005. Prior to his current position, he served in various human resource positions for other retailers, including ten years as Senior Vice President of Human Resources at Zale Corporation and twenty-one21 years in various positions of increasing importanceresponsibility at Macys.Macy’s.

ERIC W. HUNTER, age 41, was named Executive Vice President of Marketing in September 2013. Prior to joining the Company, Mr. Hunter served as Senior Vice President of Marketing and Acting Chief Marketing Officer with JCPenney Company from February 2012 to July 2013, and as Chief Marketing Officer and Group President with Kellwood Company from March 2009 until February 2012. Mr. Hunter also served in various positions with PMK/HBH/Momentum Worldwide and Creative Artists Agency.

SHARON M. LEITE, age 49,52, was named Executive Vice President of Sales and Customer Experience in January 2014. She joined the organization in August 2007 as Executive Vice President of Stores. Prior to joining the Company, she spent eight years at Bath & Body Works, six years as Vice President of Store Operations and two years in other leadership roles. Before joining Bath & Body Works, Ms. Leite held various operations positions with several prominent retailers, including Gap, Inc., The Walt Disney Company and Limited, Inc.

MICHAEL R. BENKEL,A. CARTER, age 43,56, was named Executive Vice President of Planning and Allocations in April 2012. He joined the organization in September 2008 as Senior Vice President, Compliance and General Counsel, Secretary of Planning and Allocations.the Company in January 2014. Prior to joining the Company,that and since December 2005, he spent eleven years at Williams-Sonoma Inc. in continuously advancing positions in the Pottery Barn Retail Stores division, including Vice President of Inventory Management, Director – Inventory Management, andserved as a home furnishings and furniture buyer.

MICHAEL A. CARTER, age 53, was named Senior Vice President, General Counsel and Secretary of the Company in December 2005.Company. Mr. Carter has served within the organization for twenty-two25 years in various

leadership capacities, including Vice President –— Legal Affairs, and Corporate Counsel. Mr. Carter first became an officer of the Company in 1991 when he was named Assistant Secretary.1991. Mr. Carter is a licensed attorney in the State of Texas. Prior to joining the Company, Mr. Carter practiced law with the Fort Worth, Texas law firm of Brackett and Ellis, LLP.

LAURA A. COFFEY,ANDREW LAUDATO, age 45,48, was named Senior Vice President of Business Development and Strategic PlanningChief Information Officer in January 2011. Ms. Coffey has served withinApril 2002. He joined the organization for fifteen years in various capacities, including most recentlyAugust 2000 as Senior Vice President of Finance. Ms. Coffey first became an officer of the Company in 2005 and was named Principal Accounting Officer in 2008.Information Services. Prior to joining the Company shehe held various positions of increasing responsibility with Alcon Laboratoriesthe Limited, Inc., Bath & Body Works, LLC, Express, Inc., and KPMG, LLP.

DONALD L. KINNISON, age 54, was named Senior Vice President of Marketing and Visual Merchandising in March 2008. Mr. Kinnison has served within the organization for twenty-two years in various capacities, including Vice President of Visual Merchandising and Merchandise Support and Director, Visual Merchandising. Prior to joining the Company, Mr. Kinnison held various positions with May Company and Federated Department Stores.Jo-Ann Stores, LLC.

The executive officers of the Company are elected by the Board of Directors and hold office until their successors are elected or appointed and qualified or until their earlier resignation or removal. None of the above executive officers has any family relationship with any other of such officers or with any director of the Company. None of such officers was selected pursuant to any arrangement or understanding between her or him and any other person, except for Mr. Smith, who pursuant to his employment agreement with the Company, serves as President and Chief Executive Officer.Officer pursuant to an employment agreement with the Company.

Item 1A. Risk Factors.

The Company’s business is subject to risk. The following discussion, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes, sets forth the most significant risks and uncertainties that management believes could adversely affect the Company’s business, financial condition or results of operations. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also have a material adverse effect on the Company’s business, financial condition or results of operations. There is no assurance that this discussion covers all potential risks that may be faced by the Company. The occurrence of the described risks could cause the Company’s results to differ materially from those described in the forward-looking statements included elsewhere in this report, and could have a material adverse effect on the Company’s business, financial condition or results of operations.

6    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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.décor and furniture.

The success of the Company’s specialty retail business depends largely 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 may be ordered well in advance of the applicable selling season. Extended lead times 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. In addition, the Company’s vendors may not have the ability to handle its increased demand for product.product or speed of replenishment. The seasonal nature of the 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 evolving home furnishing trends, changes in customer preferences, and 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 discounts and markdowns in an effort to clear merchandise, which could have a negative impact on merchandise margins and, in turn, the results of operations.

Failure by the Company to identify and successfully implement strategic initiatives could have a negative impact on the Company.

The Company’s strategies for long-term growth, strategic plans and capital allocation strategies are dependent on the Company’s ability to identify and successfully implement those items.initiatives. If these initiativesthey are not properly

identified, developed and successfully executed, the implementation of such initiatives may negatively impact the Company’s business operations and financial results. While the Company believes these disruptions would be short-term, it is unknown whether thetheir adverse impact wouldcould be material.

The successCompany outsources certain business processes to third-party vendors and has certain business relationships that subject the Company to risks, including disruptions in business and increased costs.

The Company outsources numerous business processes to third parties including gift card tracking and authorization, credit card authorization and processing, store schedule visibility and time/attendance tracking, store maintenance services, maintenance and support of the business is dependent on factors affecting consumer spending that are not controllable by the Company.

Consumer spending, including spending for the homeCompany’s website and home-related furnishings, are further dependent upon factors other than general economic conditions (bothe-Commerce platform, certain marketing services, insurance claims processing, customs filings and reporting, domestic and international),ocean freight including certain processing functions, shipment and include, among others, levelsdelivery of customer orders including in-home delivery, certain merchandise compliance functions including testing, certain payroll processing and various tax filings, record keeping for certain employment disposable consumer income, prevailing interest rates, consumer debt, costsbenefits including retirement plans and the stock purchase plan, and third party vendor auditing. In addition, the Company also has business relationships with third parties to provide essential services such as the extension of fuel, inflation, recessioncredit to its customers and fearsmaintenance of recessionthe Pier 1 rewards credit card program. The Company makes a diligent effort to ensure that all providers of these services are observing proper internal control and business continuity practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services or actual recession periods, war and fears of war, pandemics, inclement weather, tax rates and rate increases, consumer confidence in future economic conditions and political conditions (including the possibility of a governmental shut down), 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 impactinability to arrange for alternative providers on favorable terms in a timely manner could have a negative effect on the business and itsCompany’s financial results.

An overall decline in the health of the economy in the United States economyor Canada and its impact on consumer confidence and spending could negatively impact the Company’s results of operations.financial results.

The recessionrecessions experienced by the United States in recentvarious years resulted in a significant decline inadversely affected the market value of domestic and foreign companies, adversely affecting thediscretionary spending, savings and investments of United States consumers. The resulting deterioration in consumer confidence and spending during thatthose recessionary periodperiods resulted in consumers sacrificingreducing or eliminating their purchases of discretionary items, including the Company’s merchandise, which negatively impacted the Company’s financial results during those years. Such a recessionrecessions could occur again and could have a similar, if not worse,significant impact on the Company’s financial results.

Failure to control merchandise returns could negatively impact the business.business and financial results.

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 reductions of revenue 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

PIER 1 IMPORTS, INC.ï  2015 Form 10-K7

resale of the returned merchandise. Introductions of new merchandise, changes in merchandise mix, associate selling behavior, merchandise quality issues, changes to the Company’s return policy, e-Commerce return behavior, changes in consumer confidence, new delivery channels/methods 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 financial results.

A disruption in the operation of the domestic portion of the Company’s supply chain, or the e-Commerce website, could impact itsthe Company’s ability to deliver merchandise to its stores and customers, which could impact its sales and results of operations.

The Company maintains regional distribution centers in Maryland, Ohio, Texas, California, Georgia and Washington. At these distribution centers, merchandise is received, allocated, and shipped to the Company’s stores.stores and customers, and at the Company’s fulfillment centers in Ohio and Texas, e-Commerce orders are fulfilled. Major catastrophic events such as natural disasters, fire or flooding, malfunction or disruption of the information systems, a disruption in communication services or power outages, or shipping problemsinterruptions (including labor issues at the ports) could result indelay distribution delays of merchandise to the Company’s stores and customers. Such disruptions could have a negative impact on the Company’s sales and results of operations.

The Company outsources certain business processes to third-party vendors and has certain business relationships that subject the Company to risks, including disruptions in business and increased costs.

The Company outsources some business processes to third parties including gift card tracking and authorization, credit card authorization and processing, store scheduling and time and attendance, insurance claims processing, U.S. customs filings and reporting, ocean freight processing, certain payroll processing and tax filings, and record keeping for retirement plans. In addition, the Company also has business relationships with third parties to provide essential services such as the extension of credit to its customers and maintenance of the Company’s rewards program, and the Company is establishing many new vendor relationships to support its e-Commerce growth initiatives. The Company makes a diligent effort to ensure that all providers of these services are observing 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 or the Company’s inability to arrange for alternative providers on favorable terms in a timely manner could have a negative effect on the Company’s financial results.

Factors that may or may not be controllable by the Company may negatively affect the Company’s financial results.

Increases in the Company’s expenses that are beyond the Company’s control including items such as increases in fuel and transportation costs, higher interest rates, increases in losses from damaged merchandise, inflation, fluctuations in foreign currency rates, higher costs of labor, labor disputes around the world, increases in insurance and healthcare, increases in postage and media costs, higher tax rates and changes in laws and regulations, including accounting standards, may negatively impact the Company’s financial results.

Failure to successfully manage and execute the Company’s marketing initiatives could have a negative impact on the business.Company’s business and results of operations.

The success and growth of the Company is partially dependentdepends on generating customer traffic in order to gainproduce sales momentum in its stores and drive traffic tothrough the Company’s e-Commerce website. Successful marketing efforts require the ability to obtain customer information and to reach customers through their desired mode of communication utilizing various media outlets. Media placement decisions are generally made months in advance of the scheduled release date. While gathering information about customers, the Company must consider the customers’ desire for privacy and the need to comply with applicable laws and regulations. Any future changes in privacy laws or their interpretation or enforcement by courts and governmental agencies could adversely impact our ability to market to customers. The Company’s inability to obtain and use customer information, accurately predict and respect its consumers’customers’ preferences, to utilize the desired modemodes of communication, or to ensure availability of advertised products may negatively impact the business and operating results.

Changes to estimates related to the Company’s property and equipment, or financial results that are lower than its current estimates at certain store locations and determinations to close under-performing stores, may cause the Company to incur impairment charges on certain long-lived assets.assets, negatively affecting its financial results.

The Company makes certain accounting estimates and projections with regards to individual store operations as well as overall Company performance in connection with its impairment analyses for long-lived assets in accordance with applicable accounting guidance. An impairment charge is required when the carrying value of thean asset exceeds the estimated fair value orexpected undiscounted future cash flows of the asset. The projection of future cash flows used in this analysis requires the use of judgment and a number of estimates and projections of future operating results. If actual results differ from the Company’s estimates, additional charges for asset impairments may be required in the future. If impairment charges are significant, the Company’s financial results could be negatively affected.

Risks Related to Store Profitability

The Company’s success depends, in part, on its ability to operate in desirable locations at reasonable rental rates and to close underperforming stores at or before the conclusion of their lease terms.

The profitability of the business is dependentdepends on operating the current store base at a reasonable profit, opening and operating new stores at a reasonable profit, and identifying and closing underperforming stores. For a majority of the Company’s current store base, a large portion of a store’s operating expense is the cost associated with leasing the location. Management actively monitors individual store performance and attempts to negotiate rent reductionsfavorable lease expenses 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 the Company’s omni-channel strategy evolves or demographics change, and the Company may choose to close an underperforming storestores before its lease expiresexpiration and incur lease termination costs associated with those closings. On April 8, 2015, the Company announced that closing.it had initiated a plan to optimize its store portfolio as part of its ‘1 Pier 1’ strategy to drive growth through its omni-channel platform, reduce occupancy and payroll costs and improve efficiency. The Company’s inability to achieve the desired cost reduction and

8    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

improved efficiencies could negatively impact the Company’s future growth and earnings. The Company cannot give assurance that opening new stores or an increase in closing underperforming stores will result in greater profits.

The success of the business depends on factors affecting consumer spending that are not controllable by the Company.

Consumer spending, including spending for the home and home-related furnishings, depends upon many factors beyond general economic conditions (both domestic and international), including, among others, levels of employment, disposable consumer income, prevailing interest rates, changes in the housing market, consumer debt, costs of fuel and other energy sources, inflation, fears of recession or actual recession periods, war and fears of war, pandemics, inclement weather, tax rates and rate increases, consumer confidence in future economic conditions and global, national, regional and local political conditions (including the possibility of a governmental shut down), and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary spending could reduce demand for the Company’s products, resulting in lower sales and negatively impact the business and its financial results.

Failure to attract and retain an effective management team or changes in the costscost or availability of a suitable workforce to manage and support the Company’s stores, distribution and distribution facilitiesfulfillment centers and e-Commerce website could negatively affect the Company’s business.

The Company’s success is dependent,depends, in a large part, on being able to successfully attract, motivate and retain a qualified management team and employees.associates. 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 the home office, stores, and the distribution facilities,and fulfillment centers, which could have a negative effect on the business. Management will continue to assess the Company’s compensation and benefit program in an effort to attract future qualified candidates and retain current experienced management team members. The focus of the Company’s overall compensation program encourages management to take a balanced approach on maintaining the Company’s profitability. The Company’sCompany does not believe that its compensation policies, principles, objectives and practices are not structured to promote inappropriate risk taking by employees; however, there are no assurancesits executives nor inappropriate risk taking by its associates whose behavior would be most affected by performance-based incentives. The Company believes that employees will not engage in taking risksthe focus of its overall compensation program encourages its associates to take a balanced approach that could negatively impact the Company.focuses on increasing and sustaining Pier 1 Imports’ profitability.

Occasionally the Company experiences union organizing activities in non-unionized distribution facilities. Similar activities could also occur in the stores. These types of activities may result in work slowdowns or stoppages, higher labor costs and higher labor costs.operating expenses. Any increase in costs associated with labor organization at distribution facilities could result in higher costs to distribute inventory and could negatively impact merchandise margins.

Failure to successfully manage the Company’s omni-channel operations could negatively affect the Company’s business.

The Company successfully executed the launch of its e-Commerce website in the United States during fiscal 2013, and in fiscal 2015 the Company continued to implement its omni-channel strategy, ‘1 Pier 1’. Successful execution of the omni-channel initiatives depends on the Company’s ability to maintain uninterrupted availability of the Company’s website and supporting applications, adequate and accurate inventory levels, timely fulfillment of customer orders, accurate shipping of undamaged product and coordination of those activities within the Company’s retail stores. In addition, the Company’s call center must maintain a high standard of customer care. Failure to successfully manage these processes may negatively impact sales, result in the loss of customers, and damage the Company’s reputation.

The Company operates in a highly competitive retail environment with companies offering similar merchandise, and ifmerchandise. If customers are lost to the Company’s competitors, sales could decline.

The Company operates in the highly competitive specialty retail business competing with specialty sections of large department stores, home furnishing stores,retailers, small specialty stores, e-commerce retailers and mass merchandising discounters. Management believes that as itthe Company is competing for sales it does so on the basis of style, pricing and quality of products, constantly changing merchandise assortment, visual presentation of its merchandise and customer service. The Company could also experienceexperiences added short-term competition when other retailers are liquidatingliquidate merchandise for various reasons. If the Company is unable to maintain a competitive position, it could experience negative pressure on retail prices and loss of customers, which in turn could result in reduced merchandise margins and operating results.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K9

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 25% of the Company’sThe Company generally has its highest sales generally occurvolumes during the November-DecemberNovember and December holiday selling season. FailureSevere weather or failure to predict consumer demand correctly during these months could result in lost sales or gross margin erosion if merchandise must be marked down significantly to clear inventory.

Failure to successfully manageFactors that may or may not be controllable by the Company’s e-Commerce operations couldCompany may negatively affect the business.Company’s financial results.

The Company plans to have full e-Commerce functionalityIncreases in the United States during fiscal 2013. Successful operation of the e-Commerce initiatives will be dependent onCompany’s costs that are beyond the Company’s ability to maintain uninterrupted availabilitycontrol, including items such as increases in fuel and transportation costs, higher interest rates, increases in losses from damaged merchandise, inflation, litigation, fluctuations in foreign currency exchange rates, higher costs of labor, labor disputes around the Company’s websiteworld, increases in the costs of insurance and supporting applications, adequate inventory levels,healthcare, increases in postage and timely fulfillment of customer orders. Failure to successfully manage this processmedia costs, higher tax rates and complying with changes in laws and regulations, including accounting standards, may negatively impact sales, result in the loss of customers, and damage the Company’s reputation.financial results.

The Company’s business may be harmed by adverse weather conditions and natural disasters.

Extreme or undesirable weather can negatively affect customer traffic in retail stores as well as customer shopping behavior. Natural disasters such as earthquakes, weather phenomena, and events causing infrastructure failures could negatively affect any of the Company’s retail locations,‘1 Pier 1’ operations, including its distribution and fulfillment centers, administrative facilities, ports,logistical infrastructures, or locationsoperations 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 including software-as-a-service and “cloud” operations, technology infrastructure, telecommunications, data communications, data storage equipment, or networks could have a negative effect, including additional expense, on the Company’s ability to manage the merchandise supply chain, sell merchandise, accomplish payment functions, report financial data or manage labor and staffing. Although the Company maintains off-site data backups, a concentration of technology-related risk exists in the Company’s headquarters located in Fort Worth, Texas.

Failure to protect the integrity and security of individually identifiable data of the Company’s customers and employeesassociates could expose the Company to litigation and/or regulatory action and damage the Company’s reputation.

The Company receives and maintains certain personal information aboutof its customers, vendors and employees.associates. The collection and use of this information by the Company is regulated at the international, national, federal and stateother political subdivision levels, and is subject to certain contractual restrictions in third party contracts.agreements. Although the Company has implemented processes to collect and protect the integrity and security of personal information, there can be no assurance that this information will not be obtained by unauthorized persons, or collected or used inappropriately. If the security and information systems of the Company or of its internal or external business associatespartners are compromised or its internal or external business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons, or collected or used inappropriately, it could negatively affect the Company’s reputation and marketing initiatives, as well as operations and financial results, and could result in litigation and/or regulatory action against the Company orincluding the imposition of penalties.penalties and fines. In addition, a compromise of the Company’s systems could result in a disruption to operations and require expanded resources to remediate, investigate, correct and upgrade systems. As privacy and information security laws and regulations change, the Company maywill incur additional costs to ensure it remainsremain in compliance.

Failure to successfully implement new information technology systems and enhance existing systems could negatively impact the business and its financial results.

As part of the Company’s three-year growth plan, theThe Company is investingregularly invests in new information technology systems and implementingimplements modifications and upgrades to existing systems. These investments include replacing legacy systems, making changes to existing systems, andbuilding redundancies, acquiring new systems and hardware with updated functionality.functionality and “cloud”-based solutions such as software-as-a-service

10    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

solutions and data storage. The Company believes it is taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. However, there can be no assurance the Company has anticipated all potential risks and failurerisks. Failure to successfully implement these initiatives could negatively impact the business and its financial results.

The Company’s business operations including the expansion of the Company’s e-Commerce business haswebsite, are subject to inherent cybersecurity risks that may disrupt its business.business and negatively impact the Company’s financial results and reputation.

The Company’s strategic plans to have full e-Commerce functionality in the United States may increasehas increased the Company’s exposure to cybersecurity risks. A compromise of its security systems could result in a service disruption, or customers’, associates’ or vendors’ personal information or the Company’s proprietary information being obtained by unauthorized users. Although the Company has implemented processes to mitigate the risks of security breaches and cyber incidents, there can be no assurance that such an attack will not occur. Any breach of the Company’s security could result in violation of privacy laws, potential litigation or regulatory action, and a loss of consumer confidence in its security measures, all of which could have a negative impact on the Company’s financial results and its reputation.

Failure to maintain positive brand perception and recognition could have a negative impact on the Company’s financial results and reputation.

Maintaining a good reputation is critical to the Company’s business. The considerable expansion in the use of social media over recent years has increased the risk that the Company’s reputation could be negatively impacted in a short amount of time. If the Company is unable to quickly and effectively respond to occurrences of negative publicity through social media or otherwise, it may suffer declines in customer loyalty and traffic, vendor relationship issues, diversion of management’s time to respond and other adverse effects, all of which could negatively impact the Company’s financial results and its reputation.

Regulatory Risks

The Company is subject to laws and regulatory requirements in many jurisdictions. Changes in these laws and requirements, or interpretations of them, may result in additional costs to the Company, including the costs of compliance as well as potential penalties and fines for non-compliance.

Legislation on a local, regional, state, national or nationalglobal level has the potential to have a negative 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 and quasi-governmental agencies in the course of operating its business because of its numerous locations, large number of employees,associates, contact with consumers and importation and exportation of product. In addition, the Company is subject to regulations regarding consumer product quality and safety standards. Complying with regulations may cause the Company to incur significant expenses, including the costs associated with periodic audits. Failure to comply may also result in damage to the Company’s reputation or additional costs in the form of penalties.litigation, financial penalties and fines or business interruptions.

The Company operates in many 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 themsuch taxes to the appropriate taxing authority. The Company is also subject to income taxes, excise taxes, franchise taxes, payroll 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 negative impact on the Company’s financial results. Failure to comply with laws concerning the collection and remittance of taxes and with licensing requirements could also subject the Company to financial penalties and fines or business interruptions.

Risks Associated with International Trade

As aan importer and retailer of imported merchandise, the Company is subject to certain risks that typically do not affect retailers of domestically produced merchandise.

The Company maymust order merchandise well in advance of delivery and generally takes title to the merchandise at the time it is loaded for transport to designated U.S. destinations. Global political unrest, war, threats of war, terrorist acts or threats, especially threats to foreign and U.S. ports and piracy, disruption in the operation of the international portion of the Company’s supply

PIER 1 IMPORTS, INC.ï  2015 Form 10-K11

chain, labor unrest or natural disasters could adversely affect the Company’s ability to import merchandise from certain countries. FluctuationsAlthough the Company pays for the vast majority of its merchandise in U.S. dollars, fluctuations in foreign currency exchange rates and the relative value of the U.S. dollar, restrictions on the convertibility of the dollar and other currencies, duties, preferential trade agreements including general system of preferences, taxes and other charges on imports, rising labor costs and cost of living in foreign countries, dock strikes, worker 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 merchandise from China and other countries, unavailability of adequate shipping capacity at reasonable rates, or the imposition of significant tariffs could have

a negative effect on the financial results of the Company. FreightOcean carriage and freight costs contribute a substantial amount to the cost of imported merchandise. Monitoring of foreign vendors’ compliance with applicable laws and Company standards, including quality and safety standards and social compliance issues, is more difficult than monitoring of domestic vendors.

Governmental agencies have the authority to enforce trade agreements, resolve trade disputes and control market access to goods and services. Governments may also impose trade sanctions on foreign countries that are deemedfound to violate trade agreements or maintain laws or practices that are unjustifiable and restrict commerce. In these situations, governments may increase duties on imports from one or more foreign countries. In this event, theThe Company could be negatively affected by the imposition of trade sanctions.

In addition,The governments of the governmentscountries in which the Company does business maintain a variety of additional international trade laws under which the Company’s ability to import may be affected from time to time, including antidumping laws, countervailing duty laws, safeguardssafeguard laws, and laws designed to protect intellectual property rights. Although the Company may not be directly involved in a particular trade 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 such disputes.

In particular, because theThe Company imports merchandise from countries around the world the Companyand as a result may be affected from time to time by antidumping petitions filed with the United States Commerce Department and International Trade Commission by U.S. 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 possiblyreducing gross profits or increasing the Company’s price to consumers.consumers of the affected products. 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.

InDispute resolution processes 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 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 to be beneficial to its business. Any type of sanction on imports is likely to increase the Company’s import costs or limit the availability of merchandise purchased from sanctioned countries. In that case, the Company may be required to seek similar merchandise from other countries.countries on terms that could be materially less favorable.

Risks Relating to Liquidity

Insufficient cash flows from operations could result in the substantial utilization of the Company’s secured revolving credit facility or similar financing, which may limit the Company’s ability to conduct certain activities.

The Company maintains a secured revolving credit facility to enable it to issue merchandise and special purpose standby letters of credit as well as to fund working capital requirements. Borrowings under the secured revolving credit facility are subject to a borrowing base calculation consisting of a percentage of certain eligible assets of the Company and are subject to advance rates and commercially reasonable reserves. Substantial utilization of the available borrowing base will result in various restrictions on the Company, including restrictions on the ability of the Company to repurchase its common stock or pay dividends and an increase in the lender’s control over the Company’s cash accounts.See Note 4 of the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s secured revolving credit facility and term loan facility. The Company entered into the Term Loan Facility on April 30, 2014. The proceeds of borrowing under the facility were used for general corporate purposes, including working capital needs, capital expenditures, and share repurchases and dividends permitted under the Term Loan Facility. Those borrowings have increased the Company’s interest expense and financial leverage. The Term Loan Facility contains a number of affirmative and restrictive covenants that may also limit the Company’s

12    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

actions. Significant decreases in cash flows from operations could result in the Company borrowing increased amounts under its credit facilities to fund operational needs and increased utilization of letters of credit. These actions could result in the Company being subject to increased restrictions as described above and increase interest expense and overall leverage.

A disruption in the global credit and equity markets could negatively impact the Company’s ability to obtain financing on acceptable terms.

In the future, the Company could become dependent on the availability of adequate capital to fund its operations. Disruption in the global credit and equity markets and future disruptions in the financial markets could negatively affect the Company’s ability to enter into new financing agreements or obtain funding through the issuancesale of Company securities. A decline in economic conditions could also result in difficulties for financial institutions and other parties that the Company does business with, which could potentially affect the Company’s ability to access financing under existing arrangements or to otherwise recover amounts as they become due under the Company’s contractual agreements. The inability of the Company to obtain financing as needed on acceptable terms in order to fund its operations may have a negative impact on the Company’s business and financial results.

Insufficient cash flows from operations could result in the substantial utilization of the Company’s secured credit facility, which may limit the Company’s ability to conduct certain activities.Item 1B. Unresolved Staff Comments.

The Company maintains a secured credit facility to enable it to issue merchandise and special purpose standby letters of credit as well as to fund working capital requirements. Borrowings under the credit facility are subject to a borrowing base calculation consisting of a percentage of certain eligible assets of the Company and is subject to advance rates and commercially reasonable reserves. Substantial utilization of the availability under the borrowing base will result in various restrictions on the Company, including restrictions on the ability of the Company to repurchase its common stock or pay dividends and dominion over the Company’s cash accounts.See Note 5 to the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s secured credit facility. Significant decreases in cash flow from operations and investing could result in the Company borrowing increased amounts under the credit facility to fund operational needs and increased utilization of letters of credit. These could result in the Company being subject to the above restrictions.

None.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K13

Item 2. Properties.

The Company leases its corporate headquarters, retail stores and the majority of its retail stores, warehousesdistribution and regional spaces.fulfillment centers. The Company has an operating lease for its corporate headquarters located in Fort Worth, Texas, which isincluded approximately 460,000363,000 square feet of office space located in Fort Worth, Texas. Asas of February 25, 2012, the present value of the Company’s minimum future operating lease commitments discounted at 10% totaled approximately $638.6 million.28, 2015. The following table sets forth the distribution of Pier 1 Imports’Company’s U.S. and Canadian stores by state and province as of February 25, 2012:28, 2015:

United States
Alabama			13			Louisiana			15				Ohio				28
Alaska			2			Maine			2				Oklahoma				7
Arizona			24			Maryland			22				Oregon				14
Arkansas			8			Massachusetts			21				Pennsylvania				38
California			114			Michigan			33				Rhode Island				3
Colorado			15			Minnesota			18				South Carolina				15
Connecticut			19			Mississippi			6				South Dakota				2
Delaware			4			Missouri			19				Tennessee				17
Florida			73			Montana			6				Texas				78
Georgia			27			Nebraska			4				Utah				8
Hawaii			7			Nevada			8				Vermont				1
Idaho			6			New Hampshire			6				Virginia				34
Illinois			40			New Jersey			35				Washington				28
Indiana			17			New Mexico			5				West Virginia				5
Iowa			9			New York			50				Wisconsin				20
Kansas			8			North Carolina			35				Wyoming				1
Kentucky			11			North Dakota			3
Canada
Alberta			12			New Brunswick			2				Ontario				34
British Columbia			13			Newfoundland			1				Quebec				13
Manitoba			2			Nova Scotia			2				Saskatchewan				2

The Company currently owns or leases distribution and fulfillment center space of approximately 3.64.9 million square feet. The Company also acquires temporary distribution center space from time to time through short-term leases. As of February 25, 2012,28, 2015, the Company owned or leased under operating leases the following warehouse properties, which include distribution and/or fulfillment centers in or near the following cities:

Subsequent to February 28, 2015, the Company leased additional distribution center space in Baltimore, Maryland and Ontario, California.

14    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

The

Item 3. Legal Proceedings.

During fiscal years 2015, 2014 and 2013, there were various claims, lawsuits, inquiries and pending actions against the Company is a partyand its subsidiaries incident to various legal proceedings and claims in the ordinary courseoperations of its business. The Company believesconsiders these matters to be ordinary and routine in nature. The Company maintains liability insurance against most of these matters. It is the opinion of management, after consultation with counsel, that the outcomeultimate resolution of thesesuch matters will not have a material adverse effect, either individually or in aggregate, on itsthe Company’s consolidated financial position, results of operations or liquidity.

Item 4. Mine Safety Disclosures.

Not applicable.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K15

PART II

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Prices of Common Stock

The following table shows the high and low closing sale prices of the Company’s common stock on the New York Stock Exchange (the “NYSE”(“NYSE”), as reported in the consolidated transaction reporting system for each quarter of fiscal 20122015 and 2011.2014.

Number of Holders of Record

The Company’s common stock is traded on the NYSE under the symbol “PIR”.“PIR.” As of April 18, 2012,27, 2015, there were approximately 9,0007,000 shareholders of record of the Company’s common stock.

Dividends

The Company did not pay anydeclared cash dividends of $0.06 per share in each of the quarters of fiscal years 2012, 2011 or 2010.2015, which totaled $21.6 million in cash dividends paid during fiscal 2015. The Company declared cash dividends of $0.05 per share in each of the first three quarters of fiscal 2014, and declared a cash dividend of $0.06 per share in the fourth quarter of fiscal 2014, which totaled $21.7 million in cash dividends paid during fiscal 2014. On April 5, 2012,8, 2015, subsequent to year end, the Company’s Board of Directors declaredCompany announced a $0.04$0.07 per share quarterly cash dividend on the Company’s outstanding shares of common stock. The $0.04$0.07 per share quarterly cash dividend will be paid on May 2, 20126, 2015, to shareholders of record on April 18, 2012.22, 2015. The Company’s decision to pay a cash dividend policy will dependdepends upon the earnings, financial condition and capital needs of the Company and other factors deemed relevant by the Company’s Board of Directors.

As of February 25, 2012,28, 2015, the Company was not restrictedprecluded from paying cash dividends or repurchasing the Company’s common stock under itsthe secured revolving credit facility from paying certain dividends.(“Revolving Credit Facility”) or the senior secured term loan facility (“Term Loan Facility”). The Company’s secured credit facilityRevolving Credit Facility may limit certain investments and, in some instances, limit payment of cash dividends and repurchases of the Company’s common stock. The Company will not be restricted from paying certain dividends unless credit extensions on the Revolving Credit Facility line result in availability over a specified period of time that is projected to be less than 20%17.5% of the lesser of either $300,000,000$350.0 million or the calculated borrowing base, subject to the Company meeting a fixed charge coverage requirement when availability over the same specified period of time is projected to be less than 50%30.0% of the lesser of either $300,000,000$350.0 million or the calculated borrowing base. Additionally, the Term Loan Facility includes restrictions on the Company’s ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, or redeem or

16    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

repurchase shares of the Company’s capital stock, make certain acquisitions or investments, materially change the business of the Company, incur or permit to exist certain liens, enter into transactions with affiliates or sell the Company’s assets to, or merge or consolidate with or into, another company, in each case subject to certain exceptions. See Note 5 to4 of the Notes to Consolidated Financial Statements for furtheradditional discussion ofregarding the Company’s secured credit facility.Revolving Credit Facility and Term Loan Facility.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On March 25, 2011, the Board of Directors authorized an initial $100.0 million for repurchases of the Company’s common stock. As of September 6, 2011, the Company had completed this $100.0 million initial share repurchase program and purchased a total of 9,498,650 shares of its common stock at a weighted average cost of $10.53 per share. On October 13, 2011, the Board of Directors authorized a new $100.0 million share repurchase program and $100.0 million remained available for repurchase at the end of fiscal 2012. There were no

November 30, 2014 through February 28, 2015 — The following table provides information with respect to purchases of common stock of the Company made during the three months ended February 25, 2012,28, 2015, by Pier 1 Imports, Inc. or any “affiliated purchaser” of Pier 1 Imports, Inc., as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

Subsequent to year end,

Period		Total Number of Shares Purchased (1)				Average Price Paid per Share (including fees) (2)				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)				Approximate Dollar Value of Shares that May Yet Be Purchased Under  the Plans or Programs (3)
Nov. 30, 2014 through Jan. 3, 2015			418,200			$	13.70				418,200			$	122,551,377
Jan. 4, 2015 through Jan. 31, 2015			25,200				14.88				25,200				122,176,217
Feb. 1, 2015 through Feb. 28, 2015			64,453				—				—				122,176,217
			507,853			$	13.77				443,400			$	122,176,217

(1)	Totals include 64,453 shares of the Company’s common stock acquired during the fourth quarter of fiscal 2015 from associates to satisfy tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans.

(2)	Excludes average price paid per share for 64,453 shares identified in footnote 1 above. Average price per share of those shares equals the fair market value of the shares on the date of vesting of the restricted stock.

(3)	On April 10, 2014, the Company announced a $200 million share repurchase program. There was no expiration date on the program and during the period covered by the table, no determination was made by the Company to suspend or cancel purchases under the program.

Fiscal years 2015, 2014 and 2013 —The following table summarizes the Company’s total share repurchases during fiscal 2015, 2014 and 2013:

										Shares Purchased
Date Program Announced		Authorized Amount				Date Completed				Fiscal Year 2015				Fiscal Year 2014				Fiscal Year 2013				Weighted Average Cost				Remaining Available as of February 28, 2015
Oct. 14, 2011		$	100,000,000				Dec. 14, 2012				—				—				5,822,142			$	17.18			$	—
Dec. 13, 2012			100,000,000				Sep. 30, 2013				—				4,525,805				—				22.10				—
Oct. 18, 2013			200,000,000				Apr. 10, 2014				5,071,812				5,262,452				—				19.35				—
Apr. 10, 2014			200,000,000								5,208,500				—				—				14.94				122,176,217

During fiscal 2015, the Company utilized a total of $15.2 million to repurchase 845,400acquired 200,657 shares of the Company’sits common stock at a weighted average price per share, including fees, of $17.93 and as of April 20, 2012, $84.8 million remained available for repurchase under the program. There is no expiration date on the current authorization and no determination has been made by the Company to suspend or cancel purchases under the program.

During fiscal 2012, 195,130 shares of the Company’s common stock were acquired from employeesassociates to satisfy tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans.

During fiscal 2015, the Company repurchased shares for a total cost of $173.9 million. Subsequent to year end, through April 24, 2015, under the April 2014 $200 million program, the Company utilized a total of $5.1 million to repurchase 383,000 shares of the Company’s common stock at a weighted average price per share of $13.26 and $117.1 million remained available for further share repurchases of common stock under that program.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K17

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ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER  MATTERS AND     ISSUER PURCHASES OF EQUITY SECURITIES.

Performance Graph

The following graph compares the five-year cumulative total shareholder return for the Company’s common stock against the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Retail Stores Composite Index. The annual changes for the five-year period shown on the graph are based on the assumption, as required by the SEC’sSEC rules, that $100 had been invested in the Company’s stock and in each index on March 3, 2007,February 27, 2010, and that dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on February 25, 2012.28, 2015. The information used in the graph below was obtained from Bloomberg L.P.

PIER 1 IMPORTS, INC. STOCK PERFORMANCE GRAPH

 

18    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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Item 6.
								Selected Financial Data.  ITEM 6. SELECTED FINANCIAL DATA.

Item 6. Selected Financial Data.

FINANCIAL SUMMARY

 

		Year Ended
		2012						2011						2010						2009						2008
			($ in millions except per share amounts)
SUMMARY OF OPERATIONS:
Net sales		$	1,533.6					$	1,396.5						1,290.9						1,320.7						1,511.8
Gross profit		$	651.2					$	555.4						440.4						363.5						439.6
Selling, general and administrative expenses		$	475.2					$	431.9						421.2						453.5						487.9
Depreciation and amortization		$	21.2					$	19.7						22.5						30.6						39.8
Operating income (loss)		$	154.8					$	103.7						(3.3	)					(120.6	)					(88.1	)
Operating income (loss) as a % of sales			10.1%						7.4%						(0.3%	)					(9.1%	)					(5.8%	)
Nonoperating (income) and expenses, net(1)		$	(9.3	)				$	0.2						(35.3	)					8.1						5.3
Income (loss) before income taxes		$	164.1					$	103.5						32.1						(128.6	)					(93.4	)
Net income (loss)(2)		$	168.9					$	100.1						86.8						(129.3	)					(96.0	)
PER SHARE AMOUNTS:
Basic earnings (loss)		$	1.50					$	.86						.86						(1.45	)					(1.09	)
Diluted earnings (loss)		$	1.48					$	.85						.86						(1.45	)					(1.09	)
Shareholders’ equity		$	4.31					$	3.51						3.01						1.62						3.04
OTHER FINANCIAL DATA:
Working capital		$	404.9					$	415.6						316.7						299.9						307.3
Current ratio			2.7						2.8						2.3						2.3						2.1
Total assets		$	823.4					$	743.6						643.0						655.5						821.9
Long-term debt(3)		$	9.5					$	9.5						19.0						184.0						184.0
Shareholders’ equity		$	493.6					$	412.9						303.1						144.3						267.7
Weighted average diluted shares outstanding (millions) (4)			114.4						117.5						100.7						88.9						88.1
Effective tax rate (%) (2)			(2.9	)					3.3						(171.0	)					(0.5	)					(2.8	)

		Year Ended
		2015				2014				2013(1)				2012				2011
		($ in millions except per share amounts)
SUMMARY OF OPERATIONS:
Net sales		$	1,865.8				1,771.7				1,704.9				1,533.6				1,396.5
Gross profit		$	749.7				745.6				743.1				651.2				555.4
Selling, general and administrative expenses		$	576.1				531.2				513.1				475.2				431.9
Depreciation and amortization		$	46.3				38.9				31.0				21.2				19.7
Operating income		$	127.3				175.5				199.0				154.8				103.7
Operating income as a % of sales			6.8	%			9.9	%			11.7	%			10.1	%			7.4	%
Nonoperating (income) and expenses, net(4)		$	6.9				0.9				(2.0	)			(9.3	)			0.2
Income before income taxes		$	120.4				174.6				201.0				164.1				103.5
Net income(2)		$	75.2				107.5				129.4				168.9				100.1
PER SHARE AMOUNTS:
Basic earnings		$	0.83				1.03				1.22				1.50				0.86
Diluted earnings		$	0.82				1.01				1.20				1.48				0.85
Cash dividends declared		$	0.24				0.21				0.17				—				—
OTHER FINANCIAL DATA:
Working capital(3)		$	365.4				310.5				410.8				404.9				415.6
Current ratio			2.3				2.2				2.7				2.7				2.8
Total assets		$	910.2				803.6				857.2				823.4				743.6
Long-term debt(4)		$	204.7				9.5				9.5				9.5				9.5
Shareholders’ equity		$	337.3				449.4				537.1				493.6				412.9
Weighted average diluted shares outstanding (millions)(5)			92.1				106.2				108.3				114.4				117.5
Effective tax rate (%) (2)			37.6	%			38.4	%			35.6	%			(2.9	%)			3.3	%

 

(1)

Nonoperating income for fiscal 2010 included a gain of $49.6 million related to the debt transactions during the year. This gain was paritally offset by $18.3 million in related expenses.See detailed discussion in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.Nonoperating income in fiscal 2010 also included a $10.0 million payment received as a resultFiscal 2013 consisted of a foreign litigation settlement.53-week year. All other fiscal years presented reflect a 52-week year.

(2)

During the fourth quarter of fiscal 2012, the Company was able to conclude that given its improved performance, the realization of its deferred tax assets was more likely than not and accordingly reversed substantially all of its valuation allowance.See Management’s Discussion and Analysis in Item 7 for further discussion of the financial impact of this change in the valuation allowance. In fiscal 2010, the Company recorded and received a $55.9 million tax benefit as a result of a tax law change allowing additional carryback of the Company’s net operating losses. In fiscal yearsyear 2011, 2010, 2009 and 2008, the Company recorded minimal state and foreign tax provisions and provided a valuation allowance on the deferred tax asset arising during those periods.See detailed discussion in Note 9 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.period.

(3)	The reduction in working capital in fiscal 2014 was primarily the result of increased share repurchases compared to fiscal 2013.

(4)

The Company’s consolidated long-term debt was reducedand related interest expense (which is included in nonoperating (income) and expenses, net) increased significantly duringin fiscal 2011 and 20102015 as a result of multiple debt transactions.See detailed discussion in Note 5 ofborrowings under the Notes to the Consolidated Financial Statements contained in Item 8 of this report.Company’s $200 million senior secured term loan facility.

(4)(5)

The increasedecrease in shares outstanding induring fiscal 20112015, 2014, 2013 and 20102012 was primarily the result of the Company issuing approximately 24.5 million shares ofCompany’s Board-approved common stock related toshare repurchase programs. Under these programs, the conversion of its convertible debt duringCompany repurchased 10,280,312; 9,788,257; 5,822,142 and 9,498,650 shares in fiscal 2010.See detailed discussion in Note 5 of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.2015, 2014, 2013 and 2012, respectively.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K19

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Item  ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT OVERVIEW

Introduction

Pier 1 Imports, IncInc. is onethe original global importer of North America’s largest specialty retailers of decorative home furnishingsdécor and gifts.furniture. The Company directly imports merchandise from many countries, and sells a wide variety of decorative accessories, furniture, candles, housewares, gifts and seasonal products in its stores. Thestores and through the Company’s website, pier1.com. As of February 28, 2015, the Company conducts business as one operating segment and operatesoperated 1,065 stores in the United States and Canada under the name Pier 1 Imports. AsCanada. Fiscal 2015 and 2014 consisted of February 25, 2012, the Company operated 1,052 stores in the United States52-week years and Canada.

During the first quarter of fiscal 2012, the Company announced2013 was a three-year growth plan designed to drive sales, further improve profitability and deliver shareholder value. Under the three-year growth plan, the Company established the following financial targets: sales per retail square foot of $200, operating margins of at least 10% and within five years, an online sales contribution of at least 10% of total revenues. The plan also included investing $200 million of capital in improvements to the Pier 1 Imports store portfolio, infrastructure enhancements, and the acceleration of e-Commerce initiatives. Additionally, the Company’s Board of Directors approved a $100 million initial share repurchase program. The Company is pleased with the significant progress and accomplishments under the first year of the plan and as a result, has adopted a new three-year plan that includes increased financial goals, as detailed further below.

Fiscal 2012 total sales increased 9.8% and comparable store sales increased 9.5% compared to the prior53-week year. The increases were primarily attributable to increases in store traffic and average ticket versus last year. Sales per retail square foot were $184 for fiscal 2012, compared to $168 in fiscal 2011. Management believes that the Company’s sales will continue to improve as a result of its unique and special merchandise assortments and superior in-store experience.

Merchandise margins for fiscal 2012 were 59.8% of sales compared to 58.6% of sales in fiscal 2011. This improvement was the result of strong input margins, the right balance of regular and promotional pricing, and well-managed inventory. Store occupancy costs during fiscal 2012 were $265.9 million, or 17.3% of sales, compared to $262.4 million, or 18.8% of sales, during fiscal 2011. Gross profit for fiscal 2012 was 42.5% as a percentage of sales, compared to 39.8% in fiscal 2011.

Operating income for fiscal 2012 was 10.1% of sales, exceeding the Company’s three-year goal of 10%, compared to 7.4% of sales in fiscal 2011. The year-over-year improvement was primarily due to increases in sales and merchandise margins.

During fiscal 2012, the Company deployed $62.3 million toward capital expenditures, including $33.8 million for new store openings and improvements to the Pier 1 Imports store portfolio, as well as $28.5 million for infrastructure enhancements. During fiscal 2012, the Company opened 15 new Pier 1 Imports stores, refurbished 125 existing stores with an enhanced merchandise fixture package and new lighting upgrades, completed major remodels at three existing locations and added new merchandise fixtures throughout all Pier 1 Imports stores. The Company’s strategy to remodel and refurbish existing stores is significantly improving the shopping experience for Pier 1 Imports customers and driving increases in sales productivity. The Company is also focused on strengthening its infrastructure through strategic investments in technology and systems designed to drive improvements in processes, efficiencies and analytics throughout the organization. In fiscal 2012, the Company invested in initiatives such as the initial planning and development stage of the Company’s e-Commerce platform, improved planning and allocation and replenishment systems, a new labor scheduling optimization tool, and the replacement of certain legacy systems.

The Company remains committed to evolving into a multi-channel retailer. In the first half of fiscal 2012, the Company launched Pier 1 To-Go, the initial phase of the Company’s e-Commerce initiative, which allows customers to order and reserve merchandise online for pick up and payment at any of the Company’s stores. The Company continues to make investments to improve its online presence and e-Commerce functionality as it prepares for the launch of Pier 1 To-You in late July 2012. Pier 1 To-You is the Company’s site-to-customer initiative which will allow customers to purchase merchandise online and choose from multiple delivery options. The Company is also implementing a new point-of-sale (“POS”) system and plans for an initial rollout in fall 2012, followed by an all store rollout post-holiday. The new POS system is an important component of the Company’s e-Commerce initiative and is expected to facilitate a seamless transaction across all shopping channels by summer 2013.

The Company’s initial share repurchase program was completed on September 6, 2011, resulting in the repurchase of approximately 8% of the Company’s common stock outstanding. A total of 9,498,650 shares of its common stock were repurchased at a weighted average cost of $10.53 per share for a total cost of $100.0 million. On October 13, 2011, the Company’s Board of Directors authorized a new $100 million share repurchase program.

As a result of the Company’s strong financial performance during fiscal 2012, the Company announced a new three-year growth plan on April 5, 2012. In conjunction with the new three-year plan, the Company elevated its financial goals and now expects to achieve sales of $225 per retail square foot and an operating margin of at least 12% by fiscal 2015. In addition, the Company maintains that online sales will contribute at least 10% of total revenues by fiscal 2016.

The key objectives under the new plan include investing $200 million in capital over the next three years as the Company continues evolving into a multi-channel retailer. Investments include building a best-in-class e-Commerce platform and implementing a new POS system, improving the Company’s store portfolio, and strengthening the Company’s infrastructure through investments in technology. The plan also includes returning value to shareholders through share repurchases and quarterly cash dividends.

Over the next three years, the Company will continue to invest in new store openings, store remodels, new merchandise fixtures, lighting upgrades, and other leasehold improvements. Additionally, the plan also includes strategic store relocations in major markets where increased sales productivity and store profitability opportunities exist. In addition to investments related to e-Commerce and POS, the Company’s new growth plan also includes investments in technology and systems to continue improving processes, efficiencies, and analytics throughout the organization.

As of February 25, 2012, no shares had been repurchased under the Company’s current share repurchase program and $100 million remained available for repurchase. Subsequent to year end, the Company utilized a total of $15.2 million to repurchase 845,400 shares of the Company’s common stock at a weighted average price per share, including fees, of $17.93 and as of April 20, 2012, $84.8 million remained available for repurchase under the program. In addition, on April 5, 2012, the Company’s Board of Directors declared a $0.04 per share quarterly cash dividend on the Company’s outstanding shares of common stock as of April 18, 2012, which is payable on May 2, 2012.

The following discussion and analysis of financial condition, results of operations and liquidity and capital resources should be read in conjunction with the accompanying audited Consolidated Financial Statements and notes thereto, which can be found in Item 8 of this report.

Fiscal 2015 capped a multi-year period of heavy investment for the Company in support of its transformation to an omni-channel retailer. Over the past several years, 2010, 2011,the Company built an operating and 2012growth platform with seamless integration across stores, desktop and mobile devices. Through the ‘1 Pier 1’ strategy, the Company expects to maximize selling opportunities, extend brand reach and capture greater market share. The Company’s focus is to ensure that customers have an extraordinary experience, regardless of how they shop. The ‘1 Pier 1’ strategy has required investment in systems, distribution and fulfillment centers, call centers, distribution networks and store development including new in-store selling tools, such as swatch stations, computers and tablets. To support the growth, the Company has built greater flexibility and capacity into its distribution networks including in-store pick-up, parcel and in-home delivery. The ‘1 Pier 1’ strategy also includes returning excess capital to shareholders through share repurchases and quarterly cash dividends.

During fiscal 2015, e-Commerce sales accounted for 11.0% of net sales compared to 4.0% in the previous fiscal year. Approximately 60% of the Company’s e-Commerce sales touched the retail stores, either by originating on in-store PCs and tablets, or through in-store pick-up capability. In fiscal 2015, e-Commerce sales were all 52-weekthe primary driver of total sales growth. As a result, the Company has identified a need to optimize its real estate portfolio, targeting specific stores, in order to improve overall profitability. The Company has identified approximately 100 stores it plans to close over the next three fiscal years, however,primarily through natural lease expirations and relocations. The Company is planning a more modest new store opening and relocation program, and by the end of fiscal 2018 expects to operate just under 1,000 retail stores.

Fiscal 2015 net sales increased 5.3% from the prior year and company comparable sales increased 4.7%. The increases were primarily attributable to increases in brand traffic, store and online conversion, and average ticket compared to last year. Management believes that sales will continue to improve as a result of its unique and special merchandise assortments, superior omni-channel experience and improvements to its marketing strategy.

Gross profit for fiscal 2015 was $749.7 million, or 40.2% of sales compared to $745.6 million, or 42.1% of sales in the same period last year, a decline of 190 basis points. Merchandise margin (the result of adding back delivery, fulfillment and store occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $1.081 billion for fiscal 2015, or 58.0% of sales, compared to $1.048 billion, or 59.2% of sales for fiscal 2014. The decline in merchandise margin as a percentage of sales was primarily attributable to increased promotional activity in the first half of fiscal 2015 and incremental unplanned supply chain expenses during the fourth quarter of fiscal 2015 primarily related to the distribution centers, which resulted from higher than normal inventory levels. Store occupancy costs during fiscal 2015 were leveraged at 16.0% of sales, compared to 16.3% during fiscal 2014.

Operating income for fiscal 2015 was 6.8% of sales, compared to 9.9% in fiscal 2014. Fiscal year 2015 EBITDA (earnings before interest, taxes, depreciation, and amortization) was $176.3 million compared to $215.4 million in fiscal 2014. Net income for fiscal 2015 was $75.2 million, or $0.82 per diluted share, compared to $107.5 million, or $1.01 per diluted share for fiscal 2014. In fiscal 2015, non-GAAP adjusted net income, excluding the after-tax effect of retirement related expenses for the Company’s former chief financial officer, was $77.2 million, or $0.84 per diluted share. See “Reconciliation of Non-GAAP Financial Measures” for more information.

Capital expenditures for fiscal 2015 totaled $81.9 million, compared to $80.3 in fiscal 2014, which were deployed toward the opening of 30 new stores, new merchandise fixtures for existing stores, other leasehold improvements, and technology and

20    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

infrastructure initiatives, including the completion of the Company’s fulfillment center in Columbus, Ohio and enhancements to the Company’s e-Commerce platform. Capital expenditures in fiscal 2016 are expected to be $60 million, lower by approximately 27% compared to fiscal 2015.

The Company entered into a $200 million Term Loan Facility in April 2014, which matures in 2021. Borrowings under this facility strengthen the Company’s capital structure and provide added flexibility to invest for future profitable growth and continue the return of excess capital to shareholders. As of February 28, 2015, the Company had $199.0 million outstanding under this facility. See “Liquidity and Capital Resources — Revolving Credit Facility and Term Loan Facility” below for more information.

The Company’s share repurchase program announced on October 18, 2013, will bewas completed on April 10, 2014, with total repurchases during fiscal 2015 of 5,071,812 shares of the Company’s common stock at a 53-week year.weighted average cost of $18.95 per share for a total cost of $96.1 million. On April 10, 2014, the Company announced a $200 million common stock share repurchase program. As of February 28, 2015, the Company had repurchased 5,208,500 shares of its common stock under the April 2014 program at a weighted average cost of $14.94 per share for a total cost of $77.8 million, and $122.2 million remained available for further repurchases. Subsequent to year end, through April 24, 2015, under the April 2014 $200 million program, the Company utilized a total of $5.1 million to repurchase 383,000 shares of the Company’s common stock at a weighted average price per share of $13.26 and $117.1 million remained available for further repurchases under that program. On April 8, 2015, subsequent to year end, the Company announced a $0.07 per share quarterly cash dividend on the Company’s outstanding shares of common stock to shareholders of record on April 22, 2015, which is payable on May 6, 2015. The $0.07 per share quarterly cash dividend represented a 17% increase from the quarterly cash dividend paid in the prior quarter.

Overview of Business

The Company’s key financial and operational indicators used by management to evaluate the performance of the business include the following (trends for these indicators are explained in the comparative discussions of this section)below):

 

Key Performance Indicators		2012				2011				2010
Total sales growth (decline)			9.8%				8.2%				(2.3%)
Comparable stores sales growth			9.5%				10.9%				1.5%
Sales per average retail square foot		$	184			$	168			$	152
Merchandise margins as a % of sales			59.8%				58.6%				54.8%
Gross profit as a % of sales			42.5%				39.8%				34.1%
Selling, general and administrative expenses as a % of sales			31.0%				30.9%				32.6%
Operating income (loss) as a % of sales			10.1%				7.4%				(0.3%)
Net income as a % of sales			11.0%				7.2%				6.7%
Inventory per retail square foot		$	39			$	38			$	38
Total retail square footage (in thousands)			8,271				8,232				8,290
Total retail square footage increase (decline)			0.5%				(0.7%)				(3.4%)

Key Performance Indicators		2015				2014				2013
Total sales growth			5.3	%			3.9	%			11.2	%
Company comparable sales growth			4.7	%			2.4	%			7.5	%
Gross profit as a % of sales			40.2	%			42.1	%			43.6	%
Selling, general and administrative expenses as a % of sales			30.9	%			30.0	%			30.1	%
EBITDA (in millions)(1)		$	176.3			$	215.4			$	232.0
EBITDA as a % of sales			9.5	%			12.2	%			13.6	%
Operating income as a % of sales			6.8	%			9.9	%			11.7	%
Net income as a % of sales			4.0	%			6.1	%			7.6	%
Total retail square footage (in thousands)			8,405				8,451				8,358

(1)	See reconciliation of Net Income to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) in Reconciliation of Non-GAAP Financial Measures.

StoresCompany Comparable Sales Calculation — For the fiscal 2015 over fiscal 2014 comparison, the company comparable sales calculation included sales that were fulfilled, ordered or sold in a store, provided that the store was open prior to the beginning of the preceding fiscal year and was still open at period end. In addition, orders placed online as direct-to-customer sales (as defined below) were included in the comparable storecalculation, as a result of direct-to-customer sales calculation are those stores that have been open sincebeing active prior to the beginning of the preceding fiscal year. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the following: the new store is within a specified distance serving the same market, no significant change in store size, and no significant overlap or gap between the store closing and reopening. Such stores are included in the company comparable store sales calculation in the first full month after the re-opening.reopening. If a relocated or remodeled store does not meet the above criteria, it is excluded from the calculation until it meets the Company’s established definition of aas described above.

For the fiscal 2014 over fiscal 2013 comparison, the sales included in the company comparable store.sales calculation were determined in the same manner as above, except that direct-to-customer sales were excluded because those sales did not meet the criteria for inclusion at that time.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K21

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

FISCAL YEARS ENDED FEBRUARY 25, 201228, 2015 AND FEBRUARY 26, 2011MARCH 1, 2014

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Net sales by retail concept during fiscal years 2015 and 2014 were as follows (in thousands):

		2015				2014
Retail Sales		$	1,847,420			$	1,755,077
Other(1)			18,362				16,666
Net sales		$	1,865,782			$	1,771,743

(1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a “store within a store” format. Other sales consisted primarily of these wholesale sales and royalties received from Grupo Sanborns and gift card breakage. Other sales in fiscal 2015 also included a reduction of credit card fees based upon a settlement agreement ($2.2 million net of related expenses).

Net sales during fiscal 2015 were $1.866 billion, an increase of 5.3%, from $1.772 billion for the prior fiscal year. Company comparable sales increased 4.7% for the year which was the result of an increase in total brand traffic, store and online conversion, and average ticket compared to the prior year. The Company’s e-Commerce sales accounted for 11.0% of net sales for fiscal 2015 compared to 4.0% for fiscal 2014. E-Commerce sales are comprised of both customer orders placed online which were shipped directly to the customer (“direct-to-customer”) and those picked up by the customer at a store location (“store pick-up”).

The Company’s sales from Canadian stores are subject to fluctuations in currency conversion rates. These fluctuations offset the increase in company comparable sales by approximately 50 basis points in fiscal 2015. Sales on the Pier 1 rewards credit card comprised 32.4% of U.S. sales compared to 30.4% last year. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.

The increase in net sales for the fiscal year was comprised of the following components (in thousands):

		Net Sales
Net sales for fiscal 2014		$	1,771,743
Incremental sales growth (decline) from:
New stores opened during fiscal 2015			25,891
Stores opened during fiscal 2014			18,179
Company comparable sales			79,874
Other, including closed stores			(29,905	)
Net sales for fiscal 2015		$	1,865,782

A summary reconciliation of the Company’s stores open at the beginning of fiscal 2015 and 2014 to the number open at the end of each period is as follows (openings and closings include relocated stores):

		United States				Canada				Total
Open at March 2, 2013			982				80				1,062
Openings			26				1				27
Closings			(17	)			—				(17	)
Open at March 1, 2014			991				81				1,072
Openings			29				1				30
Closings			(36	)			(1	)			(37	)
Open at February 28, 2015(1)			984				81				1,065

(1)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, which sells Pier 1 Imports merchandise primarily in a “store within a store” format. At the end of fiscal 2015, there were 68 of these locations in Mexico and one in El Salvador. These locations are excluded from the table above.

Merchandise Margin and Gross Profit

Gross profit for fiscal 2015 was $749.7 million, or 40.2% of sales compared to $745.6 million, or 42.1% of sales, in the same period last year, a decline of 190 basis points. Merchandise margin (the result of adding back delivery, fulfillment and store occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $1.081 billion for fiscal 2015, or

22    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

58.0% of sales, compared to $1.048 billion, or 59.2%, for fiscal 2014. The decline in merchandise margin as a percentage of sales was primarily attributable to increased promotional activity in the first half of fiscal 2015 and incremental unplanned supply chain expenses during the fourth quarter of fiscal 2015 primarily related to the distribution centers, which resulted from higher than normal inventory levels. Beginning in the third quarter of fiscal 2015 the Company refined its promotional strategy, utilizing a more targeted approach to promotions, with reduced frequency and depth of all-Company coupons and a more balanced mix between full price and promotional selling. Store occupancy costs during fiscal 2015 were leveraged at 16.0% of sales, compared to 16.3% during fiscal 2014.

Operating Expenses and Depreciation

Selling, general and administrative expenses were $576.1 million in fiscal 2015, compared to $531.2 million in fiscal 2014, an increase of $44.9 million. As a percentage of sales, selling, general and administrative expenses were 30.9% of sales in fiscal 2015, compared to 30.0% in fiscal 2014.

Selling, general and administrative expenses for fiscal years 2015 and 2014 included charges summarized in the table below (in millions):

		52 Weeks Ended
		February 28, 2015								March 1, 2014
		Expense				% Sales				Expense				% Sales
Compensation for operations		$	270.4				14.5	%		$	256.4				14.5	%
Operational expenses			66.8				3.6	%			58.5				3.3	%
Marketing			101.0				5.4	%			90.2				5.1	%
Other selling, general and administrative			137.9				7.4	%			126.2				7.1	%
Total selling, general and administrative		$	576.1				30.9	%		$	531.2				30.0	%

The year-over-year increase both in dollars and as a percentage of sales was primarily attributable to planned increases in marketing expenses and planned growth in headcount and associated costs to expand the Company’s organizational capabilities in support of its ‘1 Pier 1’ strategy.

Depreciation and amortization for fiscal 2015 was $46.3 million compared to $38.9 million in fiscal 2014. This increase was primarily the result of additional capital expenditures in recent fiscal years coupled with incremental expenditures deployed towards technology, which typically depreciate over a shorter time period compared to other depreciable assets, and store closures.

In fiscal 2015, the Company recorded operating income of $127.3 million, or 6.8% of sales, compared to $175.5 million, or 9.9% of sales, for fiscal 2014.

Nonoperating Income and Expense

Nonoperating expense for fiscal 2015 was $6.9 million, compared to $0.9 million in fiscal 2014. This increase was primarily the result of interest on borrowings under the Term Loan Facility (entered into in April 2014) and related expenses of approximately $8.4 million, partially offset by gains on the settlement of life insurance policies.

Income Taxes

The Company had an effective tax rate of 37.6% and recorded income tax expense of $45.2 million in fiscal 2015 compared to an effective tax rate of 38.4% and income tax expense of $67.1 million in fiscal 2014. The decrease in the effective tax rate was primarily due to certain non-recurring favorable permanent differences and other discrete items occurring during the fiscal year. The decrease in income tax expense compared to the prior year was primarily due to the Company’s lower income before income taxes in fiscal 2015.

Net Income and EBITDA

Net income in fiscal 2015 was $75.2 million, or $0.82 per diluted share, compared to $107.5 million, or $1.01 per diluted share for fiscal 2014. In fiscal 2015, non-GAAP adjusted net income excluding the after-tax effect of retirement related expenses for the Company’s former chief financial officer was $77.2 million, or $0.84 per diluted share. Fiscal year 2015 EBITDA (earnings before interest, taxes, depreciation, and amortization) was $176.3 million compared to $215.4 million in fiscal 2014. See “Reconciliation of Non-GAAP Financial Measures” below.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K23

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

FISCAL YEARS ENDED MARCH 1, 2014 AND MARCH 2, 2013

Net Sales

Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Sales by retail concept during fiscal years 20122014 and 20112013 were as follows (in thousands):

 

		2012						2011
Stores		$	1,518,200					$	1,381,944
Other(1)			15,411						14,526
Net sales		$	1,533,611					$	1,396,470

		2014				2013
Stores		$	1,703,572			$	1,676,293
Other(1)			68,171				28,592
Net sales		$	1,771,743			$	1,704,885

(1)

Other sales consisted primarily of direct-to-customer sales, wholesale sales and royalties received from subsidiaries of Grupo Sanborns S.A. de C.V. and gift card breakage.

Net sales during fiscal 20122014 were $1.534$1.772 billion for the 52-week period, an increase of $137.1 million or 9.8%3.9%, from $1.396$1.705 billion for the priorin fiscal year.2013 (53-week period). The increase in sales for the fiscal year2014 was comprised of the following components (in thousands):

 

		Net Sales
Net sales for fiscal 2011		$	1,396,470
Incremental sales growth (decline) from:
New stores			9,329
Comparable stores			131,008
Closed stores and other			(3,196	)
Net sales for fiscal 2012		$	1,533,611

		Net Sales
Net sales for fiscal 2013		$	1,704,885
Incremental sales growth (decline) from:
New stores opened during fiscal 2014			25,520
Stores opened during fiscal 2013(1)			54,239
Comparable stores (2)			38,360
Comparable stores for the 53rd week of fiscal 2013			(27,360	)
Other, including closed stores			(23,901	)
Net sales for fiscal 2014		$	1,771,743

(1)	Includes incremental sales of $39,611 from direct-to-customer sales.

(2)	Includes incremental orders placed online for store pick-up of $14,607, and excludes sales at comparable stores during the 53rd week of fiscal 2013.

The total net sales growth for fiscal 20122014 was primarily the result of an increase in trafficcomparable store sales, direct-to-customer sales and the net increase in the number of stores, partially offset by the 53^rd week of sales in fiscal 2013. Comparable store sales increased 2.4% for the year and were driven by an increase in average ticket and conversion, offset by a decrease in traffic compared to prior year. As of February 25, 2012, the Company operated 1,052 stores in the United States and Canada, compared to 1,046 stores at the end of fiscal 2011.2013. The Company’s net sales from Canadian stores were subject to fluctuation in currency conversion rates. These fluctuations contributed to a 3040 basis point increasedecrease in both the net sales and comparable store calculationssales calculation in fiscal 20122014 compared to fiscal 2011. Net2013. The Company’s e-Commerce sales duringaccounted for 4.0% of net sales for fiscal 20122014 compared to approximately 1.0% for fiscal 2013. E-Commerce sales are comprised of both customer orders placed online which were shipped directly to the customer from a fulfillment center and those picked up by the fourth quartercustomer at a store location.

The Company’s proprietary credit card program provides both economic and strategic benefits. Sales on the Pier 1 rewards credit card comprised 30.4% of U.S. store sales compared to 25.7% in fiscal 2013. As of March 1, 2014, the Company operated 1,072 stores in the United States and Canada, compared to 1,062 stores at the end of fiscal 2011 included amortization of the deferred gain related to the renegotiation of the Company’s propriety credit card agreement with Chase Bank USA, N.A. (“Chase”) during the fourth quarter of fiscal 2011. The gain amortization in fiscal 2012 was consistent with the treatment of amounts received from Chase during the same period of fiscal 2011 for transaction level incentives. During both periods, the amounts were mostly offset by costs associated with the credit card program. As a result of its new agreement with a subsidiary of Alliance Data Systems Corporation (“ADS”) during the third quarter of fiscal 2012, the Company revised the amortization period for any remaining deferred gains related to prior transactions with Chase as appropriate.2013.

A summary reconciliation of the Company’s stores open at the beginning of fiscal 2012, 20112014 and 20102013 to the number open at the end of each period is as follows (openings and closings include relocated stores):

 

		United States						Canada						Total
Open at February 28, 2009			1,011						81						1,092
Openings			-						-						-
Closings			(38	)					-						(38	)
Open at February 27, 2010(1)			973						81						1,054
Openings			3						-						3
Closings			(9	)					(2	)					(11	)
Open at February 26, 2011			967						79						1,046
Openings			13						2						15
Closings			(9	)					-						(9	)
Open at February 25, 2012(2)			971						81						1,052

		United States				Canada				Total
Open at February 25, 2012			971				81				1,052
Openings			22				—				22
Closings			(11	)			(1	)			(12	)
Open at March 2, 2013			982				80				1,062
Openings			26				1				27
Closings			(17	)			—				(17	)
Open at March 1, 2014(1)			991				81				1,072

(1)

During the third quarter of fiscal 2010, the Company ended its relationship with Sears Roebuck de Puerto Rico, Inc. and closed all seven “store within a store” locations in Puerto Rico. These locations are excluded from the table above.

(2)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, S.A. de C.V. which sells Pier 1 Imports merchandise primarily in a “store within a store” format. At the end of fiscal 2012,2014, there were 4756 of these locations in Mexico and one in El Salvador. These locations are excluded from the table above.

24    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

Merchandise Margin and Gross Profit

Gross profit which is calculated by deductingfor fiscal 2014 was $745.6 million, or 42.1% of sales, compared to $743.1 million, or 43.6% of sales, in fiscal 2013. Merchandise margin (the result of adding back delivery, fulfillment and store occupancy costs fromto gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $1.048 billion for fiscal 2014, or 59.2% of sales, compared to $1.022 billion, or 60.0%, for fiscal 2013. The decline in merchandise margin dollars, was 42.5% expressed as a percentage of sales inwas primarily due to higher promotional and clearance activity versus fiscal 2012, compared to 39.8% a year ago. Merchandise margins were 59.8% as a percentage of sales, an increase of 120 basis points over 58.6% in fiscal 2011. This improvement was the result of strong input margins, the right balance of regular and promotional pricing, and well-managed inventory levels.2013.

Store occupancy costs during fiscal 20122014 were $265.9$288.4 million, or 17.3%16.3% of sales, compared to $262.4$276.5 million, or 18.8%16.2% of sales, during fiscal 2011. Rent, property taxes, utilities2013. Most occupancy costs for fiscal 2014 as compared to fiscal 2013 remained relatively constant as a percent of sales while rent, and repair and maintenance expenses were all lower as a percentage of sales.increased slightly. Overall, for fiscal 2014, occupancy costs increased in dollars when compared to the same period in fiscal 2013 primarily due to the increase in new store openings.

Operating Expenses and Depreciation

Selling, general and administrative expenses were $475.2$531.2 million or 31.0%in fiscal 2014, compared to $513.1 million in fiscal 2013, an increase of $18.1 million. As a percentage of sales, selling, general and administrative expenses were 30.0% in fiscal 2012,2014, compared to $431.9 million, or 30.9% of sales30.1% in fiscal 2011. 2013.

Selling, general and administrative expenses for fiscal years 20122014 and 20112013 included charges summarized in the table below (in thousands)millions):

 

		February 25, 2012												February 26, 2011												Increase /
		Expense						% Sales						Expense						% Sales						(Decrease)
Store payroll		$	233,433						15.2	%				$	218,924						15.7	%				$	14,509
Marketing			74,251						4.8	%					65,840						4.7	%					8,411
Store supplies, services and other			24,620						1.7	%					24,669						1.8	%					(49	)
Variable costs			332,304						21.7	%					309,433						22.2	%					22,871
Administrative payroll			99,766						6.5	%					84,900						6.1	%					14,866
Other relatively fixed expenses			43,092						2.8	%					37,567						2.6	%					5,525
Relatively fixed costs			142,858						9.3	%					122,467						8.7	%					20,391
		$	475,162						31.0	%				$	431,900						30.9	%				$	43,262

		52 Weeks Ended March 1, 2014								53 Weeks Ended March 2, 2013
		Expense				% Sales				Expense				% Sales
Compensation for operations		$	256.4				14.5	%		$	252.7				14.8	%
Operational expenses			58.5				3.3	%			55.1				3.2	%
Marketing			90.2				5.1	%			85.2				5.0	%
Other selling, general and administrative			126.2				7.1	%			120.1				7.0	%
Total selling, general and administrative		$	531.2				30.0	%		$	513.1				30.1	%

Expenses that tendThe year-over-year increase in dollars was primarily attributable to fluctuate proportionately with sales and number of stores, such asincreases in store payroll, continued investments in marketing store supplies, and equipment rental, increased $22.9 million, but decreased 50 basis points as a percentage of sales from last year. Store payroll increased $14.5 million primarily as a result of additional associate hours atplanned growth in headcount and associated costs to expand the stores and increased store bonuses, both the result of higher sales volume. The increase also related to the opening of a net six stores in fiscal 2012. Marketing expenditures increased $8.4 million compared to the same period a year ago as a result of planned increases in spending.

Relatively fixed selling, general and administrative expenses increased $20.4 million. Administrative payroll increased $14.9 million, primarily as a result of the planned hiring of incremental headcountCompany’s organizational capabilities in support of e-Commerce and other growth initiatives and additional expense for performance related pay and other items. All other relatively fixed expenses increased $5.5 million. These increases primarily resulted from other administrative expenses related to the Company’s strategic initiatives, a decrease in deferred gain amortization related to the sale of the home office building, and $1.6 million gain in the prior year related to the sale of a distribution center near Chicago, with no similar gain in the current year.its ‘1 Pier 1’ strategy. These increases were partiallypartly offset by a decrease in general insurance.short-term incentives due to the Company not achieving its profit goals under its short-term incentive plan in fiscal 2014.

Depreciation and amortization for fiscal 20122014 was $21.2$38.9 million representing an increase of approximately $1.5compared to $31.0 million from last year’s depreciation and amortization expense of $19.7 million.in fiscal 2013. This increase was primarily the result of capital expenditures in fiscal 2012,2014, partially offset by certain assets becoming fully depreciated and store closures.

In fiscal 2012,2014, the Company recorded operating income of $154.8$175.5 million, or 10.1%9.9% of sales, compared to $103.7$199.0 million, or 7.4%11.7% of sales, for fiscal 2011.2013.

Nonoperating Income and Expense

Nonoperating income for fiscal 2012 was $9.3 million, compared to expense of $0.2 million in fiscal 2011. The increase in net interest income was primarily the result of an increase in deferred gain recognition related to the renegotiation of the Company’s proprietary credit card agreement with Chase during the fourth quarter of fiscal 2011. As a result of its agreement with ADS during the third quarter of fiscal 2012, the Company also revised the amortization period for any remaining deferred gains related to prior transactions with Chase as appropriate.See Note 8 to the Notes to Consolidated Financial Statements for further discussion. In addition, interest expense decreased primarily as a result of a lower debt balance in fiscal 2012.

Income Taxes

The Company recorded an income tax benefit of $4.8 million in fiscal 2012 compared to a provision of $3.4 million in the prior year. During the fourth quarter of fiscal 2012, the Company was able to conclude that given its improved performance, the realization of its deferred tax assets was more likely than not and accordingly reversed its valuation allowance and recorded a tax benefit during the period. This benefit was partially offset by tax expense. During fiscal 2012, the Company recognized federal income tax expense compared to only minimal amounts of state and foreign tax during fiscal 2011 due to the full valuation allowance.

Net Income

Net income in fiscal 2012 was $168.9 million, or $1.48 per share, which included the tax benefit resulting from the change in the Company’s tax valuation allowance during the fourth quarter of fiscal 2012. Before non-recurring tax benefits of $61.5 million, primarily resulting from the change in the Company’s tax valuation allowance, earnings per share were $0.94 for fiscal 2012. Net income for fiscal 2011 was $100.1 million, or $0.85 per share.

Net income for the fourth quarter of fiscal 2012 was $115.2 million, or $1.04 per share. Before non-recurring tax benefits of $61.5 million, primarily resulting from the change in the Company’s tax valuation allowance, earnings per share were $0.48 for the fourth quarter of fiscal 2012. Net income for the fourth quarter of fiscal 2011 was $57.1 million, or $0.48 per share.

FISCAL YEARS ENDED FEBRUARY 26, 2011 AND FEBRUARY 27, 2010

Net Sales

Net sales consisted primarily of sales to retail customers, net of discounts and returns, but also included delivery revenues and wholesale sales and royalties. Sales by retail concept during fiscal years 2011 and 2010 were as follows (in thousands):

		2011						2010
Stores		$	1,381,944					$	1,279,742
Other(1)			14,526						11,110
Net sales		$	1,396,470					$	1,290,852

(1)

Other sales consisted primarily of wholesale sales and royalties received from subsidiaries of Grupo Sanborns, S.A. de C.V. and gift card breakage.

Net sales during fiscal 2011 were $1,396.5 million, an increase of $105.6 million or 8.2%, from $1,290.9 million for the prior fiscal year. The increase in sales for the fiscal year was comprised of the following components (in thousands):

		Net Sales
Net sales for fiscal 2010		$	1,290,852
Incremental sales growth (decline) from:
New stores			2,969
Comparable stores			136,420
Closed stores and other			(33,771	)
Net sales for fiscal 2011		$	1,396,470

The total sales growth for fiscal 2011 was primarily the result of an increase in traffic, conversion rate, and average ticket compared to prior year. As of February 26, 2011, the Company operated 1,046 stores in the United States and Canada, compared to 1,054 stores at the end of fiscal 2010. The Company’s net sales from Canadian stores were subject to fluctuation in currency conversion rates. These fluctuations contributed to a 70 basis points increase in both the net sales and comparable store calculations in fiscal 2011 compared to fiscal 2010.

A summary reconciliation of the Company’s stores open at the beginning of fiscal 2011, 2010 and 2009 to the number open at the end of each period follows (openings and closings include relocated stores):

		United States						Canada						Total
Open at March 1, 2008			1,034						83						1,117
Openings			1						-						1
Closings			(24	)					(2	)					(26	)
Open at February 28, 2009			1,011						81						1,092
Openings			-						-						-
Closings			(38	)					-						(38	)
Open at February 27, 2010(1)			973						81						1,054
Openings			3						-						3
Closings			(9	)					(2	)					(11	)
Open at February 26, 2011(2)			967						79						1,046

(1)

During the third quarter of fiscal 2010, the Company ended its relationship with Sears Roebuck de Puerto Rico, Inc. and closed all seven “store within a store” locations in Puerto Rico. These locations are excluded from the table above.

(2)

The Company supplies merchandise and licenses the Pier 1 Imports name to Grupo Sanborns, S.A. de C.V. which sells Pier 1 Imports merchandise primarily in a “store within a store” format. At the end of fiscal 2011, there were 38 of these locations in Mexico and one in El Salvador. These locations are excluded from the table above.

Gross Profit

Gross profit, which is calculated by deducting store occupancy costs from merchandise margin dollars, was 39.8% expressed as a percentage of sales in fiscal 2011, compared to 34.1% in fiscal 2010. Merchandise margins were 58.6% as a percentage of sales, an increase of 380 basis points over 54.8% in fiscal 2010. Improvements in merchandise margin over the previous year were primarily the result of significantly lower markdowns resulting from strong input margins and well-managed inventory levels throughout fiscal 2011.

Store occupancy costs during fiscal 2011 were $262.4 million or 18.8% of sales, a decrease of $4.7 million and 190 basis points from store occupancy costs of $267.1 million, or 20.7% of sales during fiscal 2010. The decrease was primarily the result of favorable rental negotiations on a large number of stores in the fiscal 2010 and fewer open stores, coupled with decreases in property taxes and property insurance, partially offset by an increase in maintenance and utility costs.

Operating Expenses and Depreciation

Selling, general and administrative expenses were $431.9 million, or 30.9% of sales in fiscal 2011, compared to $421.2 million, or 32.6% of sales in fiscal 2010, an increase of $10.7 million, and a decrease of 170 basis points as a percentage of sales. Selling, general and administrative expenses for fiscal years 2011 and 2010 included charges summarized in the table below (in thousands):

		February 26, 2011												February 27, 2010												Increase /
		Expense						% Sales						Expense						% Sales						(Decrease)
Store payroll		$	218,924						15.7	%				$	209,815						16.3	%				$	9,109
Marketing			65,840						4.7	%					60,945						4.7	%					4,895
Store supplies, services and other			24,669						1.8	%					28,661						2.2	%					(3,992	)
Variable costs			309,433						22.2	%					299,421						23.2	%					10,012
Administrative payroll			84,900						6.1	%					74,734						5.8	%					10,166
Other relatively fixed expenses			35,768						2.6	%					34,449						2.7	%					1,319
Relatively fixed costs			120,668						8.6	%					109,183						8.5	%					11,485
Lease termination costs and other			1,799						0.1	%					12,575						1.0	%					(10,776	)
		$	431,900						30.9	%				$	421,179						32.6	%				$	10,721

Expenses that tend to fluctuate proportionately with sales and number of stores, such as store payroll, marketing, store supplies, and equipment rental, increased $10.0 million, but decreased 100 basis points as a percentage of sales from fiscal 2010. Store payroll, including bonus, increased $9.1 million and decreased 60 basis points as a percentage of sales. Marketing expense increased $4.9 million and remained flat as a percentage of sales as a result of an increase in television, radio, and internet advertising, partially offset by a reduction of retail event mailers and catalogs and advertising in newspapers. Other variable expenses, primarily store supplies, store services and equipment rental, decreased $4.0 million, or 40 basis points as a percentage of sales.

Relatively fixed selling, general and administrative expenses increased $11.5 million to 8.6% of sales, or 10 basis points, from 8.5% of sales during fiscal 2010, primarily as result of increases in accrued management bonuses and in salaries and benefits. In addition, general insurance costs and foreign currency revaluation increased as a result of favorable trends in fiscal 2010.

Lease termination and other costs decreased $10.8 million compared to the same period in fiscal 2010. Lease termination costs decreased by $9.1 million, or 80 basis points as a percentage of sales, which was primarily the result of decreased activity with lease terminations and buyout agreements along with the closing of fewer stores in fiscal 2011 compared to fiscal 2010. In addition, the Company had a gain of $1.6 million on the sale of its distribution center near Chicago during the first quarter of fiscal 2011.

Depreciation and amortization for fiscal 2011 was $19.7 million, representing a decrease of approximately $2.8 million from fiscal 2010’s depreciation and amortization expense of $22.5 million. This decrease was primarily the result of certain assets becoming fully depreciated and store closures.

In fiscal 2011, the Company recorded operating income of $103.7 million compared to an operating loss of $3.3 million for fiscal 2010.

Nonoperating Income and Expense

Nonoperating expense for fiscal 20112014 was $0.2$0.9 million, compared to nonoperating income of $35.3$2.0 million in fiscal 2010.2013. The increase in expense was primarily the result of the completion of deferred gain recognition during the first quarter of fiscal 2013 which related to transactions with the Company’s former proprietary credit card provider. Additionally, in conjunction with the adjustment for uncertain income tax positions discussed below, $2.8 million of accrued interest was reversed during the second quarter of fiscal 2013.

Income Taxes

The Company had an effective tax rate of 38.4% and recorded income tax expense of $67.1 million in fiscal 2014 compared to an effective tax rate of 35.6% and income tax expense of $71.6 million in fiscal 2013. The increase in the effective tax rate was primarily due to the favorable impact of the reversal of a portion of the Company’s reserve for uncertain income tax positions for which the statute of limitations expired during the second quarter of fiscal 2013. The decrease in income tax expense compared to fiscal 2013 was primarily attributable to a $49.7 million gain relateddue to the repurchase and exchange of the Company’s convertible debt and the recovery of $10.0 million as a result of a foreign litigation settlementlower income before income taxes in fiscal 2010. These gains were partially offset by $18.3 million in charges taken during fiscal 2010 related to the debt transactions. The remaining variance resulted from an increase in deferred gain recognition related to the renegotiation of the Company’s proprietary credit card agreement Chase during the fourth quarter of fiscal 2011, partially offset by lower interest expense during fiscal 2011.

Income Taxes

The Company recorded an income tax provision of $3.4 million, compared to a benefit of $54.8 million in fiscal 2010. During fiscal 2011, the Company continued to provide a valuation allowance against deferred tax assets. As a result, minimal federal tax benefit was recorded on the results of fiscal 2011 and only minimal state and foreign tax provisions were made during the year. The benefit in fiscal 2010 was the result of the Company recording a federal income tax refund of $55.9 million resulting from theWorker, Homeownership, and Business Assistance Act of 2009.As of February 26, 2011, the Company had utilized all federal tax loss carryforwards.2014.

Net Income

Net income in fiscal 20112014, which consisted of 52 weeks, was $100.1$107.5 million, or $0.85$1.01 per share. Net income for fiscal 2013, which consisted of 53 weeks, was $129.4 million, or $1.20 per share, comparedwhich included the impact of the Company reversing a portion of its reserve for uncertain income tax positions during the second quarter of fiscal 2013.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K25

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). This Annual Report on Form 10-K references non-GAAP financial measures including merchandise margin, contribution from operations, EBITDA, adjusted net income and adjusted diluted earnings per share.

The Company believes that the non-GAAP financial measures included in this Annual Report on Form 10-K allow management and investors to $86.8 million, or $0.86understand and compare results in a more consistent manner for the fiscal years ended February 28, 2015, March 1, 2014 and March 2, 2013. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented.

In fiscal 2015, net income included retirement related expenses for the Company’s former chief financial officer. A reconciliation of GAAP net income and diluted earnings per share to non-GAAP adjusted net income and adjusted diluted earnings per share is shown below for the fiscal 2010.year ended February 28, 2015 (in millions except per share amounts).

		February 28, 2015
Net income (GAAP)		$	75.2
Add back: Retirement related expenses, net of tax (non-GAAP)			2.0
Adjusted net income (non-GAAP)		$	77.2
Diluted earnings per share (GAAP)		$	0.82
Add back: Retirement related expenses, net of tax (non-GAAP)			0.02
Adjusted diluted earnings per share (non-GAAP)		$	0.84

As the Company continues its omni-channel transformation, some non-GAAP metrics are being utilized to evaluate profitability such as merchandise margin, contribution from operations and EBITDA. Merchandise margin represents the result of adding back delivery, fulfillment and store occupancy costs to gross profit. Contribution from operations represents gross profit, less compensation for operations (which includes store and customer service payroll) and operational expenses. EBITDA represents earnings before interest, taxes, depreciation and amortization. Management believes merchandise margin, contribution from operations and EBITDA are meaningful indicators of the Company’s performance which provide useful information to investors regarding its financial condition and results of operations. Management uses merchandise margin, contribution from operations and EBITDA, together with financial measures prepared in accordance with GAAP, to assess the Company’s operating performance, to enhance its understanding of core operating performance and to compare the Company’s operating performance to other retailers. These non-GAAP financial measures should not be considered in isolation or used as an alternative to GAAP financial measures and do not purport to be an alternative to net income or gross profit as a measure of operating performance. A reconciliation of net income to EBITDA to contribution from operations to merchandise margin is shown below for the fiscal years ended (in millions).

		52 Weeks Ended February 28, 2015								52 Weeks Ended March 1, 2014								53 Weeks Ended March 2, 2013
		$ Amount				% of Sales				$ Amount				% of Sales				$ Amount				% of Sales
Merchandise margin (non-GAAP)		$	1,081.2				58.0	%		$	1,048.1				59.2	%		$	1,022.4				60.0	%
Less: Delivery and fulfillment costs			32.9				1.8	%			14.0				0.8	%			2.8				0.2	%
Store occupancy			298.7				16.0	%			288.4				16.3	%			276.5				16.2	%
Gross profit (GAAP)			749.7				40.2	%			745.6				42.1	%			743.1				43.6	%
Less: Compensation for operations			270.4				14.5	%			256.4				14.5	%			252.7				14.8	%
Operational expenses			66.8				3.6	%			58.5				3.3	%			55.1				3.2	%
Contribution from operations (non-GAAP)			412.5				22.1	%			430.7				24.3	%			435.3				25.5	%
Less: Other nonoperating income/expense			(2.8	)			(0.1	%)			(1.0	)			(0.1	%)			(2.0	)			(0.1	%)
Marketing and other SG&A			238.9				12.8	%			216.4				12.2	%			205.3				12.0	%
EBITDA (non-GAAP)			176.3				9.5	%			215.4				12.2	%			232.0				13.6	%
Less: Income tax provision			45.2				2.4	%			67.1				3.8	%			71.6				4.2	%
Interest expense, net			9.6				0.5	%			1.8				0.1	%			—				0.0	%
Depreciation and amortization			46.3				2.5	%			38.9				2.2	%			31.0				1.8	%
Net income (GAAP)		$	75.2				4.0	%		$	107.5				6.1	%		$	129.4				7.6	%

26    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash and cash equivalents totaled $287.9$100.1 million at the end of fiscal 2012,2015, a decrease of $13.6$26.6 million from the fiscal 20112014 year-end balance of $301.5$126.7 million. The decrease iswas primarily the result of the utilization of cash to support the Company’s growth plan and return of excess capital to shareholders, including $81.9 million for capital expenditures, $185.5 million to repurchase shares of the Company’s common stock under approved share repurchase programs, and cash dividends of $21.6 million. These expenditures were partially offset by cash provided by operating activities of $65.7 million and net proceeds of $198.0 million from the closing of the Term Loan Facility.

The Company’s cash and cash equivalents totaled $126.7 million at the end of fiscal 2014, a decrease of $104.9 million from the fiscal 2013 year-end balance of $231.6 million. The decrease was primarily the result of the utilization of cash to support the Company’s three-year growth plan, including $80.3 million for capital expenditures, of $62.3 million and $100.0$192.3 million to repurchase shares of the Company’s common stock.stock, and cash dividends of $21.7 million. These expenditures were mostlypartially offset by cash provided by operating activities of $142.2$159.2 million.

Cash Flows from Operating Activities

Operating activities provided $142.2$65.7 million of cash in fiscal 2015, primarily as a result of $168.9$75.2 million of net income partiallyand a $26.3 million increase in accounts payable and other liabilities, primarily due to increased purchases of merchandise, offset by increasesa $101.2 million increase in inventory. Inventory levels atThe increase in inventory over fiscal 2014 was primarily due to increased purchases during the endfiscal year in anticipation of fiscal 2012 were $322.5 million, an increasehigher forecasted sales including increased inventory for Express Request, the Company’s special order program and additional purchases made due to the shift in the timing of $10.7 million, or 3.4%, from the end of fiscal 2011. Inventory per retail square foot at the end of fiscal 2012 was $39 compared to $38 at fiscal 2011 year end.Chinese New Year. The Company continues to focusis focused on strategically managing inventory levels and closely monitoring merchandise purchases.

Operating activities provided $159.2 million of cash in fiscal 2014, primarily as a result of $107.5 million of net income and a $14.0 million increase in accounts payable and other liabilities, primarily due to timing of rent payments, partially offset by a $21.6 million increase in inventory. Inventory increased 6.1%, as anticipated, from the end of fiscal 2013 due to increased purchases to keep inventory in line with consumer demand.anticipation of increased sales for the first half of fiscal 2015.

Cash Flows from Investing Activities

During fiscal 2012,2015, the Company’s investing activities used $62.1$83.3 million, compared to $13.7$70.2 million during fiscal 2011. Capital2014. Total capital expenditures were $62.3$81.9 million, which were deployed toward the opening of 30 new stores, new merchandise fixtures for existing stores, other leasehold improvements, and technology and infrastructure initiatives, including enhancements to the omni-channel platform. The Company also invested in its distribution network and completed its second fulfillment center in Columbus, Ohio.

During fiscal 2012, and consisted primarily of $33.82014, the Company’s investing activities used $70.2 million, compared to $82.4 million during fiscal 2013. Total capital expenditures were $80.3 million, which included approximately $50.0 million for the opening of 27 new stores, six major remodels, new merchandise fixtures and existing stores.lighting, and other leasehold improvements and equipment. The remaining capital expenditures were for technology and infrastructure initiatives, including e-Commerce and new point-of-sale systems. Dispositions of properties provided $12.6 million, primarily from the sale of all remaining company-owned store locations. These locations were subsequently leased back and the majority of the remaining capital spendrelated gains will be recognized over the primary lease terms.

Cash Flows from Financing Activities

Financing activities for fiscal 2015 used $9.0 million, primarily related to the Company utilizing $185.5 million to repurchase the Company’s common stock, which included $11.6 million for shares repurchased in fiscal 2014 that settled in fiscal 2015, and paying quarterly cash dividends of $0.06 per share per quarter for the four quarters of fiscal 2015, totaling $21.6 million. This utilization of cash was usedoffset by $198.0 million of net proceeds from issuance of long-term debt. See “Revolving Credit Facility”, “Term Loan Facility” and “Share Repurchase Program” below for information systems enhancements.more information.

Financing activities for fiscal 20122014 used $93.8$193.9 million, primarily related to the Company using $100.0$192.3 million to repurchase the Company’s common stock and paying quarterly cash dividends of $0.05 per share per quarter for the first three quarters and $0.06 per share for the fourth quarter of fiscal 2014, totaling $21.7 million. The Company repurchased $203.9 million shares of its common stock in fiscal 2014, of which $11.6 million was settled in March of fiscal 2015. Amounts repurchased but settled subsequent to fiscal 2014 year end were considered non-cash financing activities and were excluded from the Consolidated Statements of Cash Flows. These cash outflows were partially offset by the receipt of $21.2 million in proceeds related primarily to stock option exercises and the Company’s stock purchase plan.

PIER 1 IMPORTS, INC.ï  2015 Form 10-K27

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

Revolving Credit Facility and Term Loan Facility

Revolving Credit Facility — The Company completed a second amendment to its Revolving Credit Facility on April 30, 2014, in order to allow additional borrowings under the Term Loan Facility that closed on the same day. Substantially all other material terms and conditions applicable under the Revolving Credit Facility remain unchanged. The Revolving Credit Facility is secured primarily by merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and, following the incurrence of the Term Loan Facility indebtedness discussed below, is secured on a second lien basis by substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions. Credit extensions under the Revolving Credit Facility are limited to the lesser of $350.0 million or the amount of the calculated borrowing base, which was $393.2 million as of February 28, 2015. Under the Revolving Credit Facility, the Company had no cash borrowings and $38.1 million in letters of credit and bankers’ acceptances outstanding, with $311.9 million remaining available for cash borrowings, all as of February 28, 2015.

Term Loan Facility — The Company entered into the Term Loan Facility on April 30, 2014. The Term Loan Facility matures on April 30, 2021, and is secured by a second lien on all assets subject to a first lien under the Revolving Credit Facility and a first lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions. At the Company’s option, borrowings under the Term Loan Facility will bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the LIBOR rate (as defined in the Term Loan Facility) subject to a 1% floor plus 350 basis points per year or (b) the base rate (as defined in the Term Loan Facility) subject to a 2% floor plus 250 basis points per year. As of February 28, 2015, the Company had $199.0 million outstanding under the Term Loan Facility with a carrying value of $197.2 million net of unamortized discounts. The proceeds of the loan were used for general corporate purposes, including working capital needs, capital expenditures, and share repurchases and dividends permitted under the Term Loan Facility. The Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the loans, with the balance due at final maturity. The Company could be subject to an annual excess cash flow repayment requirement, as defined in the facility, beginning with the fiscal year ending February 28, 2015. At the Company’s option, and subject to the requirements and provisions of the Term Loan Facility, the Company can prepay borrowings under the Term Loan Facility at any time prior to twelve months after closing subject to a 1% penalty in certain cases, and without penalty thereafter. The fair value of the Term Loan Facility was approximately $199.0 million as of February 28, 2015, which was measured at fair value using the quoted market price. The Term Loan Facility was classified as Level 2 based on the frequency and volume of trading for which the price was readily available. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Term Loan Facility includes restrictions on the Company’s ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase shares of the Company’s capital stock, make certain acquisitions or investments, materially change the business of the Company, incur or permit to exist certain liens, enter into transactions with affiliates or sell the Company’s assets to, or merge or consolidate with or into, another company, in each case subject to certain exceptions. The Term Loan Facility does not require the Company to comply with any financial maintenance covenants, but contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default. The Term Loan Facility provides for incremental facilities, subject to certain conditions, including the meeting of certain leverage ratio requirements as defined therein, to the extent such facilities exceed an incremental $200.0 million.

Share Repurchase Program

During fiscal 2015, the Company repurchased approximately 10% of the Company’s common stock outstanding at the beginning of the year under the Company’s share repurchase programs announced in October 2013 and April 2014. The Company’s share repurchase program announced on October 18, 2013, was completed on April 10, 2014, with total repurchases during fiscal 2015 of 5,071,812 shares at a weighted average cost of $18.95 per share for a total cost of $96.1 million. On April 10, 2014, the Company announced a $200 million common stock share repurchase program. As of February 28, 2015, the Company had repurchased 5,208,500 shares of its common stock under the April 2014 program at a weighted average cost of $14.94 per share for a total cost of $77.8 million, and $122.2 million remained available for further repurchases. In fiscal 2015, the Company had cash outflows of $185.5 million related to share repurchases. These share repurchases included $173.9 million for shares of common stock repurchased in fiscal 2015 and $11.6 million for shares of common stock repurchased in fiscal 2014 that settled in fiscal 2015. Subsequent to year end, through April 24, 2015, under the April 2014 $200 million program, the Company utilized a total of $5.1 million to repurchase 383,000 shares of the Company’s common stock under the initial Board approvedat a weighted average price per share repurchase programof $13.26 and $3.1 million in debt issuance costs for an amendment to the Company’s secured credit facility. The cash outflows were offset by the receipt of $9.3 million in proceeds related primarily to employee stock option exercises and the Company’s employee stock purchase plan.

During the first quarter of fiscal 2012, the Company amended and restated its $300 million secured credit facility. The amended and restated facility effectively refinanced the Company’s existing facility, and has a five-year term which will expire in April 2016, an initial line of $300 million and includes a $100 million accordion feature. As of February 25, 2012, the Company had no outstanding borrowings and had approximately $43.4 million in letters of credit and bankers acceptances outstanding. The calculated borrowing base was $255.6 million, of which $212.2$117.1 million remained available for additional borrowings. At the end of fiscal 2012, the Company was in compliance with all required covenants stated in the agreement.further repurchases under that program.

The Company’s secured credit facility may limit certain investments and, in some instances, limit payment of cash dividends and repurchases of the Company’s common stock. The Company will not be restricted from paying certain dividends unless credit extensions on the line result in availability over a specified period of time that is projected to be less than 20% of the lesser of either $300 million or the calculated borrowing base, subject to the Company meeting a fixed charge coverage requirement when availability over the same specified period of time is projected to be less than 50% of the lesser of either $300 million or the calculated borrowing base.28    PIER 1 IMPORTS, INC.See Note 5 to the Notes to Consolidated Financial Statements for further discussion of the Company’s secured credit facility.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

During fiscal 2012,2014, the Company repurchased approximately 8%9% of the Company’s common stock outstanding at the beginning of the year under the Board approved initialCompany’s share repurchase program. Aprograms announced in December 2012 and October 2013. The Company’s share repurchase program announced in December 2012 was completed on September 30, 2013, with total repurchases during fiscal 2014 of 9,498,6504,525,805 shares of its common stock were repurchased at a weighted average cost of $10.53$22.10 per share for a total cost of $100.0 million. On October 13, 2011,18, 2013, the Company’s Board of Directors authorizedCompany announced a new $100$200 million share repurchase program. As of February 25, 2012, noMarch 1, 2014, the Company had repurchased 5,262,452 shares had been repurchasedof its common stock under the newOctober 2013 program at a weighted average cost of $19.74 per share for a total cost of $103.9 million. In fiscal 2014, the Company had cash outflows of $192.3 million related to share repurchases. These share repurchases included $203.9 million for shares of common stock repurchased in fiscal 2014 and $100excluded $11.6 million remained available for share repurchase. The timingshares of common stock repurchased in fiscal 2014 that settled in fiscal 2015. Shares repurchased during the repurchases will depend on several factors including, among others, prevailing market conditionsperiod but settled subsequent to the period end are considered non-cash financing activities and prices.are excluded from the Consolidated Statements of Cash Flows.

Dividends Payable

On April 5, 2012,8, 2015, subsequent to year end, the Company’s Board of Directors declaredCompany announced a $0.04$0.07 per share quarterly cash dividend on the Company’s outstanding shares of common stock. The $0.04$0.07 per share quarterly cash dividend will be paid on May 2, 20126, 2015, to shareholders of record on April 18, 2012.

22, 2015.

Contractual Obligations

A summary of the Company’s contractual obligations and other commercial commitments as of February 25, 201228, 2015, is listed below (in thousands):

 

								Amount of Commitment per Period
								Less Than						1 to 3						3 to 5						More Than
		Total						1 Year						Years						Years						5 Years
Operating leases		$	814,305					$	216,295					$	321,657					$	163,395					$	112,958
Assets retirement obligation			3,135						363						1,404						966						402
Purchase obligations(1)			142,560						142,560						-						-						-
Standby letters of credit(2)			33,263						33,263						-						-						-
Industrial revenue bonds(2)			9,500						-						-						-						9,500
Interest on industrial revenue bonds(3)			280						19						38						38						185
Interest and related fees on secured credit facility(4)			7,477						1,826						3,651						2,000						-
Other obligations(5) (6)			42,504						1,442						15,739						3,879						21,444
Total		$	1,053,024					$	395,768					$	342,489					$	170,278					$	144,489

						Amount of Commitment per Period
		Total				Less Than 1 Year				1 to 3 Years				3 to 5 Years				More Than 5 Years
Operating leases		$	1,272,768			$	239,508			$	400,619			$	260,550			$	372,091
Purchase obligations(1)			210,038				210,038				—				—				—
Standby letters of credit(2)			26,710				26,710				—				—				—
Industrial revenue bonds(2)			9,500				—				—				—				9,500
Interest on industrial revenue bonds(3)			45				4				8				8				25
Interest and related fees on revolving credit facility(4)			2,866				1,245				1,621				—				—
Term loan facility			199,000				2,000				4,000				4,000				189,000
Interest and related fees on term loan facility(5)			53,269				8,865				17,460				17,100				9,844
Other obligations(6) (7)			63,184				9,634				2,525				29,479				21,546
Total		$	1,837,380			$	498,004			$	426,233			$	311,137			$	602,006

(1)

As of February 25, 2012,28, 2015, the Company had approximately 142.6$210.0 million of outstanding purchase orders, which were primarily related to merchandise inventory, and included $0.4$1.6 million in merchandise letters of credit and bankers’ acceptances.acceptances for such orders. Such orders are generally cancelable at the discretion of the Company until the order has been shipped. The table above excludes certain executory contracts for goods and services that tend to be recurring in nature and similar in amount year over year.

(2)	The Company also has an outstanding standby lettersletter of credit totaling $9.7 million related to the Company’s industrial revenue bonds. This amount is excluded from the table above as it is not incremental to the Company’s total outstanding commitments.

(3)

The interest rates on the Company’s industrial revenue bonds are variable and reset weekly. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 20122015 year end and exclude fees for the related standby letter of credit, whichas these fees are included elsewhere in this table.interest and related fees on revolving credit facility.

(4)

Represents estimated commitment fees for trade and standby letters of credit, and unused balance fees on the Company’s $300 million secured credit facility.Revolving Credit Facility. Fees are calculated based upon balances at fiscal 20122015 year end and the applicable rates in effect under the terms of the Company’s $300 million secured credit facility.Revolving Credit Facility.

(5)

The interest rates on the Company’s Term Loan Facility are variable. The estimated interest payments included in the table were calculated based upon the rate in effect at fiscal 2015 year end. Currently a principal reduction in the amount of $0.5 million is made on the last day of each calendar quarter, therefore the principal is reduced by $2.0 million annually.

(6)	Other obligations include various commitments including the Company’s liability under variousits unfunded retirement plans.See Note 65 of the Notes to Consolidated Financial Statements for further discussion of the Company’s employee benefit plans.

(6)(7)

Excluded from this table, but recorded on the Company’s balance sheet, is the portion of reserves for uncertain tax positions of $14.3$0.5 million for which the Company is not reasonably able to estimate when or if cash settlement with the respective taxing authority will occur.

The present value of the Company’s minimum future operating lease commitments discounted at 10% was $638.6 million at fiscal 2012 year end, compared to $592.8 million at fiscal 2011 year end. As part of the sale of the Company’s home office building and accompanying land during fiscal 2009, the Company entered into a lease agreement to rent office space in the building. The lease was amended on July 1, 2011 to extend the term of the lease to expire on June 30, 2020. No renewal options are included in the lease. The Company plans to fund its lease commitments from cash generated from the operations of the Company and, if needed, from borrowings on its secured credit facility.

The Company has an umbrella trust, currently consisting of five sub-trusts, which was established for the purpose of setting aside funds to be used to settle certain benefit plan obligations. Two of the sub-trusts are restricted to satisfy obligations to certain participants in the Company’s supplemental retirement plans. These trustsThe trusts’ assets consisted of interest bearing investments of less than $0.1 million at both February 25, 201228, 2015 and February 26, 2011,March 1, 2014, and were included in other noncurrent assets. The remaining three sub-trusts are restricted to meet the funding requirements of the Company’s non-qualified deferred compensation plans. TheseThe trusts’ assets consisted of investments totaling $1.2 million and less than $0.1 million at February 25, 2012 and February 26, 2011, respectively, and wereare included in other noncurrent assets. These trustsassets and are comprised of investments and life

PIER 1 IMPORTS, INC.ï  2015 Form 10-K29

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

insurance policies. The investments totaled $10.6 million and $6.7 million at February 28, 2015 and March 1, 2014, respectively. The investments were held primarily in mutual funds and are stated at fair value. Some of the sub-trusts also own and are the beneficiaries

of life insurance policies withon the lives of former key executives. These polices are stated at fair value. The cash surrender valuesvalue of the policies was approximately $6.3$5.7 million atand $6.7 million as of February 25, 201228, 2015 and March 1, 2014, respectively, and the death benefits ofbenefit was approximately $11.3 million and $13.1 million. million, respectively.

In addition, the Company owns and is the beneficiary of a number of insurance policies on the lives of current and former key executives that arewere unrestricted as to use.use at the end of fiscal 2015. The cash surrender value of thesethe unrestricted policies was approximately $17.1$13.1 million and $18.1 million at February 25, 2012,28, 2015 and March 1, 2014, respectively, and was included in other noncurrent assets. These policies had a death benefit of approximately $26.0$19.9 million atand $26.4 million as of February 25, 2012.28, 2015 and March 1, 2014, respectively. At the discretion of the Board of Directors, contributions of cash or unrestricted life insurance policies couldmay be made to one or more of the trusts.sub-trusts.

Sources of Working Capital

The Company’s sources of working capital for fiscal 20122015 were primarily from operations.operations and the Term Loan Facility. The Company has a variety of sources for liquidity, which include available cash balances and available lines of credit.borrowings against the Company’s Revolving Credit Facility and Term Loan Facility. The Company’s current plans for fiscal 20132016 include a capital expenditure budgetplan lower than fiscal 2015, decreasing purchases of approximately $70-75 million,inventory and continuation of cash dividends and share repurchases as discussed above.repurchases. The Company does not presently anticipate any other significant cash outflows in fiscal 20132016 other than those discussed herein or those occurring in the normal course of business.

The Company’s key drivers of cash flows are sales, management of inventory levels, vendor payment terms, management of expenses and capital expenditures. The Company’s focus remains on making conservative inventory purchases, managing those inventories, and continuing to evolve the Company’s merchandise offering. In addition, the Company’s ongoing mission is to maximizeofferings while also maximizing its revenues, while seeking out ways to make its cost base more efficient and effective and still preservepreserving liquidity. While there can be no assurance that the Company will sustain positive cash flows or profitability over the long-term, given the Company’s cash position and the various liquidity options available, the Company believes it has sufficient liquidity to fund its obligations, including debt related payments, capital expenditure requirements, cash dividends and share repurchases through fiscal 2013.2016.

OFF-BALANCE SHEET ARRANGEMENTS

Other than the operating leases, letters of credit and purchase obligations discussed above, the Company has no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Historically, actual results have not varied materially from the Company’s estimates, with the exception of the early retirement of participants in its defined benefit plans, and income taxes as discussed below.estimates. The Company does not currently anticipate a significant change in its assumptions related to these estimates. Actual results may differ from these estimates under different assumptions or conditions. The Company’s significant accounting policies can be found inNote 1 of the Notes to Consolidated Financial Statements. The policies and estimates discussed below include the financial statement elements that are either judgmental or involve the selection or application of alternative accounting policies and are material to the Company’s financial statements. Unless specifically addressed below, the Company does not believe that its critical accounting policies are subject to market risk exposure that would be considered material, and, as a result, has not provided a sensitivity analysis. The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered most critical are as follows:

Revenue recognition – The Company recognizes revenue from retail sales, net of sales tax and third-party credit card fees,— Revenue is recognized upon customer receipt or delivery of merchandise. The Company records an allowance for

retail sales. A reserve has been established for estimated merchandise returns based upon historical experience and other known factors. Should actual returns differ from the Company’s estimates and current provisionestimated reserve for merchandise returns, revisions to the estimated merchandise returnsestimate may be required. The Company’s revenues are reported net of discounts and returns, net of sales tax and third-party credit card fees, and include wholesale sales and royalties. Amounts billed to customers for shipping and handling are included in net sales.

30    PIER 1 IMPORTS, INC.ï  2015 Form 10-K

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								ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS.

Gift cards –— Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as payment. Gift card breakage is estimated and recorded as income based upon an analysis of the Company’s historical data and expected trends in redemption patterns and represents the remaining unused portion of the gift card liability for which the likelihood of redemption is remote. If actual redemption patterns vary from the Company’s estimates or if regulations change, actual gift card breakage may differ from the amounts recorded. For all periods presented, estimated gift card breakage was recognized 30 months after the original issuance and was $3.8 million, $4.2 million, and $4.6 million in fiscal 2012, 2011, and 2010, respectively.issuance.

Inventories –— The Company’s inventory is comprised of finished merchandise and is stated at the lower of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at the time it is received in the Company’s warehousedistribution center using vendor invoices, the cost of warehousing and transporting product to the stores and other direct costs associated with purchasing products.merchandise. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying amount of the inventory. The Company reviews its inventory levels in order to identify slow-moving merchandise and uses merchandise markdowns to sell such merchandise. Markdowns are recorded to reduce the retail price of such slow-moving merchandise as needed. Since the determination of carrying values of inventory involves both estimation and judgment with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.

The Company recognizes known inventory losses, shortages and damages when incurred and makesmaintains a provisionreserve for estimated shrinkage.shrinkage since the last physical count, when actual shrinkage was recorded. The amount of the provisionreserve is estimated based on historical experience from the results of its physical inventories. Inventory is physically counted at substantially all locations at least once in each 12-month period, at which time actual results are reflected in the financial statements. Physical counts were taken at substantially all stores and distribution centers during each period presented in the financial statements. Although inventory shrinkage rates have not fluctuated significantly in recent years, should actual rates differ from the Company’s estimates, revisions to the inventory shrinkage expense may be required.

Insurance provision –— The Company maintains insurance for workers’ compensation and general liability claims with deductibles of $1,000,000$1.0 million per occurrence. The liability recorded for such claims is determined by estimating the total future claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims loss development factors as well as information obtained from and projections made by the Company’s broker, actuary, insurance carriercarriers and third party claims administrators. The recorded liabilities for workers’ compensation and general liability insurance, including thoseclaims include claims occurring in prior years but not yet settled and reserves for fees, at February 25, 2012 were $17.4 million and $6.0 million, respectively, compared to $17.7 million and $5.8 million, respectively, as of February 26, 2011.fees.

The assumptions made in determining the above estimates are reviewed monthly and the liability adjusted accordingly as new facts are developed. Changes in circumstances and conditions affecting the assumptions used in determining the liabilities could cause actual results to differ from the Company’s recorded amounts.

Defined benefit plans –— The Company maintains supplemental retirement plans (the “Plans”) for certain of its current and former executive officers. The PlansThese plans provide that upon death, disability, reaching retirement