UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended NovemberAugust 26, 20162017

OR

For the transition period from                    to                    

Commission file number 001-07832

PIER 1 IMPORTS, INC.

(Exact name of registrant as specified in its charter)

100 Pier 1 Place, Fort Worth, Texas 76102

(Address of principal executive offices, including zip code)

(817) 252-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of December 29, 2016,September 28, 2017, there were outstanding 83,034,24183,789,601 shares of the registrant’s common stock, all of one class.

PIER 1 IMPORTS, INC.

INDEX TO QUARTERLY FORM 10-Q

Forward-Looking Statements

Certain statements contained in Items 1, 2 and 3 of Part I, and Item 1 of Part II 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. Pier 1 Imports, Inc. and its consolidated subsidiaries (the “Company”) may also make forward-looking statements in other reports filed with the United States Securities and Exchange Commission (“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 regardingregarding: the effectiveness of the Company’s marketing campaigns, merchandising and promotional strategies and customer databases,databases; consumer spending patterns,patterns; inventory levels and values,values; the Company’s ability to implement planned cost control measures,measures; expected benefits from the real estate optimization initiative, including cost savings and increases in efficiency,efficiency; risks related to U.S. import policy; changes in foreign currency values relative to the U.S. Dollar the Company’s ability to retain a new Chief Executive Officer 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. Additional 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 and recalls; 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; litigation risks; risks related to imported merchandise including the health of global, national, regional and local economies 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. Additional information concerning these risks and uncertainties is contained in the Company’s Annual Report on Form 10-K for the year ended February 27, 2016,25, 2017, as filed with the SEC.

PART I

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS

(in thousands)

(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINESIX MONTHS ENDED NOVEMBERAUGUST 26, 20162017

(in thousands)

(unaudited)

The accompanying notes are an integral part of these financial statements.

PIER 1 IMPORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINESIX MONTHS ENDED NOVEMBERAUGUST 26, 20162017

AND NOVEMBER 28, 2015AUGUST 27, 2016

(unaudited)

Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and its consolidated subsidiaries. The accompanying unaudited financial statements should be read in conjunction with the Company’s Form 10-K for the year ended February 27, 2016.25, 2017. All adjustments that are, in the opinion of management, necessary for a fair presentation of the Consolidated Financial Statements contained in this report have been made and consist only of normal recurring adjustments, except as otherwise described herein, if any. Certain items in these Consolidated Financial Statements have been reclassified to conform to the current period presentation.Fiscal 2018 consists of a 53-week year ending on March 3, 2018. Fiscal 2017 consisted of a 52-week year which ended on February 25, 2017. The results of operations for the three and ninesix months ended NovemberAugust 26, 20162017 and November 28, 2015,August 27, 2016, are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment under the name Pier 1 Imports. As of NovemberAugust 26, 2016,2017, the Company had no financial instruments with fair market values that were materially different from their carrying values, unless otherwise disclosed.

NOTE 1 – EARNINGSLOSS PER SHARE

Basic earningsloss per share amounts were determined by dividing net incomeloss by the weighted average number of common shares outstanding for the period. Diluted earnings per share amounts were similarly computed, and include the effect, if dilutive, of the Company’s weighted average number ofOutstanding stock options outstanding and shares of unvested restricted stock. Outstanding stock options totaling 1,129,0001,781,000 and 1,885,0001,782,000 were excluded from the computation of diluted earningsloss per share for the three and ninesix months ended NovemberAugust 26, 2016, respectively,2017, as the effect would be antidilutive. Outstanding stock options and shares of unvested restricted stock totaling 67,0002,214,000 and 135,0002,263,000 were excluded from the computation of diluted earningsloss per share for the three and ninesix months ended November 28, 2015, respectively,August 27, 2016, as the effect would be antidilutive. EarningsLoss per share amounts were calculated as follows (in thousands except per share amounts):

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 – MATTERS CONCERNING SHAREHOLDERS’ EQUITY

Restricted stock compensation -For the three and ninesix months ended NovemberAugust 26, 2017, the Company recorded compensation expense related to restricted stock of $1,390,000 and $2,460,000, respectively. For the three and six months ended August 27, 2016, the Company recorded compensation expense related to restricted stock of $4,664,000$1,079,000 and $7,392,000, respectively. For the three and nine months ended November 28, 2015, the Company recorded compensation expense related to restricted stock of $1,135,000 and $4,494,000,$2,729,000, respectively. As of NovemberAugust 26, 2016,2017, there was approximately $20,992,000$31,164,000 of total unrecognized compensation expense related to unvested restricted stock that may be recognized over a weighted average period of approximately 1.7two years if certain performance targets are achieved. For discussion of additional expense in fiscal 2017 related to the departure of the Chief Executive Officer, seeNote 5 – Departure and Transition of Chief Executive Officer.

Share repurchase program -During the first ninesix months of fiscal 2017,2018, the Company repurchased 1,794,0531,925,300 shares of the Company’s common stock at a weighted average cost of $5.89$5.19 per share for a total cost of $10,566,000,$9,994,000, and $36,610,000$26,616,000 remained available for further share repurchases under the $200 million board-approved common stock share repurchase program announced on April 10, 2014 (“April 2014 program”). AsOf the $9,994,000 repurchased in the first six months of December 29, 2016, $36,610,000 remained available for further share repurchases of common stock under the April 2014 program.

Rights Agreement -The Company’s Board of Directors adopted a Shareholder Rights Protection Agreement (“Rights Agreement”) effective September 27, 2016, and declared a dividend of one right (a “Right”) on each outstanding sharefiscal 2018, $315,000 of the Company’s common stock, payablepurchases settled subsequent to holdersthe second quarter of record as offiscal 2018. Shares repurchased during the close of business on October 7, 2016.

In general terms,period but settled subsequent to the Rights restrict any person or group from acquiring beneficial ownership of 10% or more of the Company’s outstanding common stock (including certain derivative securities whose value is based on the common stock) after the date of the announcement of the adoption of the Rights Agreement. The Rights will not prevent a takeover of the Company, but may cause substantial dilution to acquirers of 10% or more of the Company’s common stock, which may block or render more difficult a merger, tender offer or other business combination involving the Company that is not supported by the Board of Directors.

Each Right entitles the holder to purchase a fraction of a share of the Company’s participating junior preferred stock having economicperiod end are considered non-cash financing activities and voting terms similar to one share of the Company’s common stock at an exercise price of $17.50 per Right after the Rights become exercisable or, in the alternative, to purchase a number of shares of common stockare excluded from the Company having an aggregate market value (as defined in the Rights Agreement) equal to twice the exercise price for an amount in cash equal to the exercise price. The Rights become exercisable if any person or group acquires 10% or moreConsolidated Statements of the Company’s common stock (in which case, they would become an “acquiring person”) or announces a tender offer for the Company, subject to certain exceptions set forth in the Rights Agreement. Shareholders who beneficially owned 10% or more of the Company’s common stock immediately prior to the announcement of the Rights Agreement will not be an “acquiring person” unless they acquire beneficial ownership of an additional 1% of the Company’s outstanding common stock.Cash Flows.

The Rights will expire on the close of business following the Company’s 2017 annual meeting of shareholders, unless earlier redeemed or exchanged, and unless the Rights Agreement is approved for extension by the shareholders, in which case the Rights would expire on a later date approved by the shareholders.

NOTE 3 – LONG-TERM DEBT AND AVAILABLE CREDIT

Revolving Credit Facility -TheAt the end of the first quarter of fiscal 2018, the Company hashad a $350,000,000 secured revolving credit facility with a $100,000,000 accordion feature (“Revolving Credit Facility”). On June 2, 2017, during the second quarter of fiscal 2018, the Company entered into a Second Amended and Restated Credit Agreement which amended certain terms of the Revolving Credit Facility. The amended Revolving Credit Facility extended the maturity date from June 18, 2018 to June 2, 2022, and increased the amount of the accordion feature to $150,000,000. The amended Revolving Credit Facility continues to be secured primarily by the Company’s eligible merchandise inventory and third-party credit card receivables and certain related assets on a first priority basis and by a second lien on substantially all other assets of certain of the Company’s subsidiaries, subject to certain exceptions.

Credit extensions under the amended Revolving Credit Facility are limited to the lesser of $350,000,000 or the amount of the calculated borrowing base. At the Company’s option, borrowings will bear interest at either (a) the adjusted LIBOR rate plus a spread varying from 125 to 150 basis points per annum, depending on the amount then borrowed under the amended Revolving Credit Facility, or (b) the prime rate plus a spread varying from 25 to 50 basis points per annum, depending on the amount then borrowed under the amended Revolving Credit Facility. Provided that there is no default and no default would occur as a result thereof, the Company may request that the amended Revolving Credit Facility be increased to an amount not to exceed $500,000,000. The amendment did not result in any other material changes to the Revolving Credit Facility.

At the end of the second quarter of fiscal 2018, credit extensions under the amended Revolving Credit Facility were limited to the lesser of $350,000,000 or the amount of the calculated borrowing base, which was $447,475,000$366,436,000 as of NovemberAugust 26, 2016.2017. The Company had $25,000,000 in netno cash borrowings and $39,051,000$41,831,000 in letters of credit and bankers’ acceptances outstanding under the amended Revolving Credit Facility, with $285,949,000$308,169,000 remaining available for cash borrowings, all as of NovemberAugust 26, 2016. At the end of the third quarter of fiscal 2017, the $25,000,000 in net cash borrowings bore interest at a weighted average cost of 1.8%. The Company repaid all cash borrowings under the Revolving Credit Facility subsequent to the end of the third quarter of fiscal 2017.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At the Company’s option, borrowings bear interest, payable quarterly or, if earlier, at the end of each interest period, at either (a) the LIBOR rate plus a spread varying from 125 to 175 basis points per year, depending on the amount then borrowed under the Revolving Credit Facility, or (b) the prime rate (as defined in the Revolving Credit Facility) plus a spread varying from 25 to 75 basis points per year, depending on the amount then borrowed under the Revolving Credit Facility.

Term Loan Facility -The Company has a senior secured term loan facility that matures on April 30, 2021 (“Term Loan Facility”). As of NovemberAugust 26, 2016,2017, February 25, 2017 and August 27, 2016, and November 28, 2015, the Company had $195,500,000, $197,000,000$194,000,000, $195,000,000 and $197,500,000$196,000,000 outstanding, respectively, under the Term Loan Facility with carrying values of $191,974,000, $192,865,000$191,079,000, $191,676,000 and $193,160,000,$192,271,000, respectively, net of unamortized discounts and debt issuance costs.

The fair value of the amount outstanding under the Term Loan Facility was approximately $178,394,000$186,968,000 as of NovemberAugust 26, 2016,2017, which was measured at fair value using the quoted market price. The fair value measurement is classified as Level 2 in the fair value hierarchy based on the frequency and volume of trading for which the price iswas 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 – DEFINED BENEFIT PLANS

The Company maintains supplemental retirement plans for certain of its current and former executive officers. These plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will receive benefits based on highest compensation, years of service and years of plan participation. The plans are not funded and thus have no plan assets.

Benefit costs are determined using actuarial cost methods to estimate the total benefits ultimately payable to executive officers, and this cost is allocated to the respective service periods. The actuarial assumptions used to calculate benefit costs are reviewed annually or in the event of a material change in the plans or participation in the plans. For discussion of the curtailment charge recorded in fiscal 2017 related to the departure of the Chief Executive Officer, seeNote 5 – Departure and Transition of Chief Executive Officer.

The components of net periodic benefit cost are shown in the table below (in thousands). The amortization of amounts related to unrecognized prior service cost and net actuarial loss was reclassified out of other comprehensive income (loss) as a component of net periodic benefit cost.

NOTE 5 – DEPARTURE AND TRANSITION OF CHIEF EXECUTIVE OFFICER

The Company and Alexander W. Smith, the Company’s President and Chief Executive Officer, reached a mutual agreement that Mr. Smith’s employment with the Company would terminate on December 31, 2016. The parties entered into a Mutual Termination Agreement and General Release dated September 2, 2016 (the “Termination Agreement”) setting forth various agreements and understandings between the parties regarding the termination of Mr. Smith’s employment. As a result of

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

these events, the Company recorded additional expense in the third quarter of fiscal 2017 related to the accelerated vesting of certain restricted stock awards of approximately $3,900,000 and cash severance of $2,500,000 payable to Mr. Smith in accordance with the Termination Agreement. In addition, the Company recorded a curtailment charge related to revised defined benefit plan assumptions of $1,562,000 during the third quarter of fiscal 2017. The Company anticipates recording a settlement expense of approximately $2,000,000 during the fourth quarter of fiscal 2017. Mr. Smith will receive his defined benefit plan payout under the Pier 1 Imports, Inc. Supplemental Retirement Plan of approximately $24,000,000 as a lump sum distribution during fiscal 2018. The majority of this benefit was accrued prior to the third quarter of fiscal 2017.

Subsequent to quarter end on December 14, 2016, the Company announced that its Board of Directors appointed Terry E. London, Chairman, to the position of Interim President and Chief Executive Officer effective as of January 1, 2017.

NOTE 6 – INCOME TAX

The income tax provisionbenefit for the thirdsecond quarter of fiscal 20172018 was $6,001,000,$6,092,000 compared to $5,921,000$2,829,000 during the same period in the prior fiscal year. The effective tax rate for the thirdsecond quarter of fiscal 20172018 was 30.7%43.8%, compared to 35.2%41.0% in the same period during fiscal 2016. The lower effective tax rate for the third quarter of fiscal 2017 primarily relates to certain favorable discrete items occurring in the third quarter, mostly related to state income tax benefits and other one-time discrete items for previously expensed share-based compensation no longer subject to deduction limitations.2017. The income tax benefit for the first nine monthshalf of fiscal 20172018 was $882,000,$7,905,000, compared to the income tax provision of $11,898,000$6,883,000 during the same period in the prior fiscal year. The effective tax rate for the first nine monthshalf of fiscal 20172018 was (33.8%)42.2%, compared to 36.2% for40.6% in the same period during fiscal 2016.2017. The increase in the income tax benefit is primarily due to the Company’s higher pre-tax losses generated in the second quarter and first half of fiscal 2018 as compared to the negativesame periods last year. The higher effective tax rate for the second quarter and first nine monthshalf of fiscal 20172018 primarily relates to lower pre-tax earnings during the period andimpact of certain favorable discretenon-deductible items occurringrecognized in the thirdsecond quarter of fiscal 2017 as described above.2018, including the Consumer Product Safety Commission (“CPSC”) matter referenced inNote 6 – Commitments and Contingencies.

As of NovemberAugust 26, 2016,2017, the Company had total unrecognized tax benefits of $6,327,000,$5,808,000, the majority of which, would, if recognized, would affect the Company’s effective tax rate. It is reasonably possible a significant portion of the Company’s gross unrecognized tax benefits could decrease within the next twelve months primarily due to audit settlements.settlements with certain taxing jurisdictions.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Putative class action complaints were filed in the United States District Court for the Northern District of Texas – Dallas Division against Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner in August and October 2015 alleging violations under the Securities Exchange Act of 1934, as amended. The lawsuits, which have been consolidated into a single action captioned Town of Davie Police Pension Plan, Plaintiff, v. Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner, Defendants, were filed on behalf of a purported putative class of investors who purchased or otherwise acquired stock of Pier 1 Imports, Inc. between December 19, 2013 and December 17, 2015. The plaintiffs seek to recover damages purportedly caused by the Defendants’ alleged violations of the federal securities laws and to pursue remedies under Sections

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys’ fees. On August 10, 2017, the court granted the Company’s motion to dismiss the complaint, while providing the plaintiffs an opportunity to replead their complaint. An amended complaint was filed with the court on September 25, 2017. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend against it vigorously.

The Company announced in January 2016 a voluntary recall of its Swingasan Chair and Stand in cooperation with the CPSC. In September 2016, the Company received a staff investigatory letter from the CPSC indicating that the CPSC would investigate whether the Company complied with certain reporting requirements of the Consumer Product Safety Act with respect to the recall. The Company responded to the inquiry and cooperated with the CPSC. On September 20, 2017, the Company received a letter from the CPSC proposing to resolve certain alleged violations of the Consumer Product Safety Act relating to the Swingasan recall on terms which would require, among other things, the payment of a civil money penalty. The Company is evaluating the assertions made by the CPSC and is preparing a response. The Company disagrees with a number of the allegations and legal conclusions asserted by the CPSC and believes the requested civil money penalty is excessive in view of the circumstances. Given the nature of this matter and the uncertainty as to how and when it will be resolved, the Company believes that a reasonable estimate of the potential range of loss in connection with this matter is $2,000,000 to $6,200,000. While we anticipate that the final settlement will fall within the estimated range of outcomes, the final terms of the resolution of this matter cannot be predicted with certainty and no assurances can be given as to the specific amount that the Company may be required to pay.

The Company is a defendant in lawsuits pending in federal courts in California containing various class action allegations under California state wage-and-hour laws. These lawsuits seek unspecified monetary damages, injunctive relief and attorneys’ fees. The Company has sought to settle these cases on terms favorable to the Company in view of the claims made, the continuing cost of litigation and an assessment of the risk of an adverse trial court or appellate decision. The Company has settled or agreed to settle the pending cases, subject to completion of associated procedural requirements. The Company does not believe any reasonably foreseeable resolution of these matters will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The Company recognized expense of $6,600,000 in the second quarter of fiscal 2018 attributable to the legal and regulatory proceedings described in the two preceding paragraphs as a component of selling, general and administrative expenses.

There are various other claims, lawsuits, inquiries, investigations and pending actions against the Company incident to the operations of its business. The Company considers these other matters to be ordinary and routine in nature. The Company maintains insurance against the consolidated class action described in the first paragraph in this Note and liability insurance against most of the other matters noted in this paragraph. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such matters will not have a material adverse effect, either individually or in the aggregate, on the Company’s financial condition, results of operations or liquidity.

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTSSTANDARDS

In May 2014, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with Customers (Topic 606).” In August 2015, the FASB issued ASU 2015-14,“Revenue from Contracts with Customers (Topic 606).: Deferral of the Effective Date.” ASU 2015-14 defers the effective date of revenue standard ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. During fiscal 2017, additional ASUs were issued related to this revenue guidance. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations.” This amendmentASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,“Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations. In December 2016, the FASB issued ASU 2016-20,“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” ASU 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. ASU 2016-20 also makes additional technical corrections and improvements to the new revenue standard. The amendments have the same effective date and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

transition requirements as the revenue standard. The above ASUs are effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018. The Company anticipates the adoption of this guidance will result in a change in the timing of revenue recognition for income related to gift card breakage. The Company plans to adopt this standard in fiscal 2019, using the modified retrospective method. Under this method, the Company expects to record a cumulative adjustment to retained earnings related to the change in gift card breakage income. Based on the Company’s preliminary assessment, we anticipate the adoption of this guidance will not have a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02,“Leases (Topic 842),” which provides new guidance on accounting for leases. The Company leases its corporate headquarters, retail stores and the majority of its distribution and fulfillment centers. Under ASU 2016-02, lessees will be required to recognize most leases on the balance sheet; therefore, ASU 2016-02 is continuingexpected to have a material impact on the Company’s balance sheet. ASU 2016-02 is effective for the Company beginning in fiscal 2020. Early adoption is permitted. The Company plans to adopt this standard in fiscal 2020. ASU 2016-02 must be adopted using a modified retrospective transition, with the new guidance applied to the beginning of the earliest comparative period presented. The Company will continue to evaluate the impact of the adoption of this guidanceASU 2016-02 on its financial statements.

In April 2015, the FASB issued ASU 2015-05, ““CustomersCustomer’s Accounting for Fees Paid in a Cloud Computing Costs.Arrangement.” The standard ASU 2015-05 provides more specific guidance related to how companies account for cloud computing costs. The Company adopted this guidanceASU 2015-05 on a prospective basis in the first quarter of fiscal 2017. The adoption of this standard doesASU 2015-05 did not currently have a material impact on the Company’s financial statements.

In AugustDecember 2016, the FASB issued ASU 2016-15,2016-19, “Technical Corrections and Improvements” to clarify guidance, correct errors and make minor improvements to the Accounting Standards Codification (“ASC”). ASU 2016-19 amends ASC 350-40 to clarify that after ASU 2015-05 is adopted, companies are required to record an intangible asset for the license acquired in a software licensing arrangement. The asset for the software license is required to be recognized and measured at cost, which includes the present value of the license obligation if the license is to be paid for over time. Companies are required to record a liability for any of the software licensing fees that are not paid on or before the acquisition date of the license. The Company adopted the provisions of ASU 2016-19 on a prospective basis in the first quarter of fiscal 2018. ASU 2016-19 did not have a material impact on the Company’s financial statements upon adoption.

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. ASU 2016-09 requires entities to record excess tax benefits and deficiencies as income tax benefit or expense in the income statement. In addition, excess tax benefits are required to be presented as an operating activity in the Statement of Cash Flows (Topic 230).”Flows. The standard is intendedCompany adopted these provisions of ASU 2016-09 on a prospective basis in the first quarter of fiscal 2018. ASU 2016-09 also allows an entity to make an accounting policy election to either recognize forfeitures of share-based payment awards as they occur or estimate the number of awards expected to forfeit. The Company adopted this provision of ASU 2016-09 on a modified retrospective basis in the first quarter of fiscal 2018. The Company will recognize forfeitures of share-based payment awards as they occur and recorded a cumulative adjustment to retained earnings for this change. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial statements. Subsequent to the adoption of ASU 2016-09, the Company expects increased volatility of income tax expense or benefit.

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce the diversity in practice around how certain transactionsand result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are classifiedthe same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within the statement of cash flows. Thethose annual periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 is effective for the Company beginning in fiscal 2019. Early adoption is permitted with retrospective application. The Company is continuing to evaluateevaluating the impact of the adoption of this guidance on its financial statements.statements but does not expect it to have a material impact.

In October 2016, the FASB issued ASU 2016-16,“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018 with modified retrospective application. The Company is continuing to evaluate the impact of the adoption of this guidance on its financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In November 2016, the FASB issued ASU 2016-18,“Statement of Cash Flows (Topic 230) — Restricted Cash.” The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for the Company beginning in fiscal 2019. Early adoption is permitted with retrospective application. The Company is continuing to evaluate the impact of the adoption of this guidance on its financial statements.

PART I

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with the Company’s Consolidated Financial Statements as of February 27, 2016,25, 2017, and for the fiscal year then ended, the related Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, all contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 27, 2016.25, 2017.

Management Overview

Pier 1 Imports, Inc. (together with its consolidated subsidiaries, the “Company”) is dedicated to offering customers exclusive, one-of-a-kind products that reflect high quality at a great value. Starting with a single store in 1962, Pier 1 Imports’ product is now available in retail stores throughout the original global importer of home décorU.S. and furniture.Canada and online at pier1.com. 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 and through the Company’s website, Pier1.com.products. Fiscal 2018 consists of a 53-week year ending on March 3, 2018. Fiscal 2017 consisted of a 52-week year which ended on February 25, 2017. The results of operations for the three and ninesix months ended NovemberAugust 26, 20162017 and November 28, 2015,August 27, 2016, are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business. Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December. The Company conducts business as one operating segment. As of NovemberAugust 26, 2016,2017, the Company operated 1,0221,012 stores in the United StatesU.S. and Canada.

Over the past several years, the Company has transformed from a brick-and-mortar retailer to an omni-channel retailer, with the objective of seamless integration across stores, desktop and mobile devices. As part of its transformation to an omni-channel retailer, the Company re-launched its e-Commerce capabilities including its website, Pier1.com, during fiscal 2013. The Company’s focus through the ‘1 Pier 1’ omni-channel strategy is to ensure that customers have an extraordinary experience, regardless of how they shop. By enabling the customer to interact with the brand both in-store and online, the Company expects to maximize selling opportunities, extend brand reach and capture greater market share. The ‘1 Pier 1’Company’s strategy has required, and is expected to continue to require, investment in systems, distribution and fulfillment centers, call centers,and distribution network and store development, including new in-store selling tools such as swatch stations, computers and tablets. This strategy also includes a continuing commitment to return excess capital to shareholders through share repurchases and cash dividends.

During the thirdsecond quarter of fiscal 2017,2018, net sales decreasedincreased 0.4% from the prior year second quarter, and company comparable sales increased 1.8%. At the end of the third quarter of fiscal 2017, the Company operated 33 fewer stores than at the end of the third quarter of fiscal 2016. The company comparable sales increase for the thirdsecond quarter of fiscal 20172018 resulted primarily from increased online direct-to-customer sales,brand traffic and average ticket, partially offset by decreased in-store activity.lower conversion. During the thirdsecond quarter of fiscal 2017,2018, e-Commerce sales accounted for approximately 20%27% of net sales compared to 16%20% in the same period of the previous fiscal year. A significant portion of e-Commerce sales touch the retail stores, either by originating on in-store PCs and tablets, or through in-store pick-up.

Gross profit for the thirdsecond quarter of fiscal 20172018 was $196.4$140.2 million, or 41.3%34.4% of sales, compared to $184.0$145.0 million, or 38.5%35.7% of sales, in the same period last year, an increasea decrease of 280130 basis points. For the thirdsecond quarter of fiscal 2017,2018, merchandise margin (the result of adding back delivery and fulfillment net costs and store occupancy costs to gross profit — see “Reconciliation of Non-GAAP Financial Measures”) was $286.4$232.2 million, or 60.2%57.0% of sales, compared to $268.6$229.8 million, or 56.2%56.6% of sales, for the same period last year. The year-over-year increaseimprovement in merchandise margin as a percentage of sales is primarily attributable to a more balanced promotional strategy and improved operations within the Company’s distribution centers.lower supply chain costs. Delivery and fulfillment net costs for the thirdsecond quarter of fiscal 20172018 were $17.3$18.7 million, or 3.6%4.6% of sales, compared to $10.3$10.6 million, or 2.2%2.6% of sales, in the same period last year. The increases areincrease is primarily attributabledue to additional free shipping promotions in the third quarter of fiscal 2017.promotions. The increase also reflects the increase in direct-to-customer sales as compared to prior year. To the extent these sales have grown and continue to grow, delivery and fulfillment net costs have also increased and are expected to continue to increase. Store occupancy costs decreased duringFor the thirdsecond quarter of fiscal 2017 to 15.3%2018, store occupancy costs were $73.3 million, or 18.0% of sales, compared to 15.5%$74.2 million, or 18.3% of sales, during the same period last year. For the three months ended August 26, 2017, contribution from operations (gross profit less compensation from operations and operational expenses — see “Reconciliation of Non-GAAP Financial Measures”) totaled $61.1 million, compared to $61.5 million during the same period last year.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. (continued)

Operating incomeloss for the thirdsecond quarter of fiscal 20172018 was $22.3$11.3 million, or 4.7%(2.8%) of sales, compared to $19.7an operating loss of $4.3 million, or 4.1%(1.1%) of sales, for the same period in the prior year. Net incomeloss for the thirdsecond quarter of fiscal 20172018 was $13.6$7.8 million, or $0.17($0.10) per share, compared to $10.9a net loss of $4.1 million, or $0.13($0.05) per share, for the thirdsecond quarter of fiscal 2016.2017. Adjusted net incomeloss (non-GAAP) for the thirdsecond quarter of fiscal 2017, which excludes the costs related to the departure of the Company’s Chief Executive Officer and the related tax benefit, totaled $17.62018 was $4.2 million, or $0.22($0.05) per share, onand excludes $6.6 million ($3.6 million, or $0.05 per share, net of tax) of expense for legal and regulatory costs relating to a California wage-and-hour matter and an adjusted basis.ongoing Consumer Product Safety Commission (“CPSC”) inquiry. EBITDA (earnings before interest, taxes, depreciation and amortization) for the thirdsecond quarter of fiscal 20172018 was $35.9$2.8 million, and after excluding the legal and regulatory costs referred to above, adjusted EBITDA was $9.4 million, compared to $32.6EBITDA of $9.5 million in the thirdsecond quarter of fiscal 2016.2017. See “Reconciliation of Non-GAAP Financial Measures”Measures below.” below.

As an omni-channel retailer, the Company’s strategies and plans are being enhanced to address sales trends, restore merchandise margin and reduce costs across the organization. These enhancements include, but are not limited to: improving merchandise assortments; enhancing marketing programs; optimizing the real estate portfolio; reducing store and administrative expenses; improving supply chain efficiencies; managing inventory levels; improving promotional effectiveness; and managing capital expenditures. Profitability in fiscal 2017 has been and2018 may continue to be challenged by store traffic declines, increases in media spending, additional delivery and fulfillment net costs and expected promotional and clearance activity. Increased costs attributable to prior distribution center network inefficiencies, reflected in fiscal 2017 first-half results, did not affectIn addition, sales and merchandise margin for the third quarter andof fiscal 2018 are not expected to impact the fourth quarter of fiscal 2017.

The Company has set out several key guidepostsbe impacted by which to measure the Company’s performance in achieving its objectives, which are:recent weather-related events.

The Company is on track to close approximately 1520 to 25 net stores by the end of fiscal 2017.2018. These closures are consistent with, and a part of, the real estate optimization plan previously announced by the Company. The real estate optimization plan includes three parts: (1) closure of approximately 100 stores over a three to four fiscal-year period commencingwhich commenced in fiscal 2016, primarily through natural lease expirations and relocations; (2) a more modest new store opening and relocation program; and (3) ongoing renegotiations of rent commitments.

During the first ninesix months of fiscal 2017,2018, the Company utilized $32.0$25.2 million for capital expenditures, which was deployed toward the opening of new stores, other leasehold improvements and technology and infrastructure initiatives. The Company expects total capital expendituresinitiatives, new and existing stores and distribution centers. Capital spend in fiscal 2018 is expected to be approximately $48$55 million in fiscal 2017 to support ongoing investments in technology, stores and distribution centers.

On April 10, 2014, the Company announced a $200 million board-approved common stock share repurchase program (“April 2014 program”). During the first ninesix months of fiscal 2017,2018, the Company repurchased 1,794,0531,925,300 shares of its common stock under the April 2014 program at a weighted average cost of $5.89$5.19 per share for a total cost of $10.6 million. During the third quarter of fiscal 2017$10.0 million, and through December 29, 2016, there were no share repurchases, and $36.6$26.6 million remained available for further repurchases under the program. During the first ninesix months of fiscal 2017,2018, the Company paid quarterly cash dividends totaling approximately $16.9$11.2 million. On December 14, 2016,September 27, 2017, subsequent to quarter end, the Company announced a $0.07 per share quarterly cash dividend payable on FebruaryNovember 1, 2017, to shareholders of record on JanuaryOctober 18, 2017.

TheOn May 1, 2017, Alasdair James joined the Company as President and Alexander W. Smith,Chief Executive Officer. Mr. James was also elected to the Company’s Board of Directors effective May 1, 2017. Upon Mr. James assuming his role as President and Chief Executive Officer, reached a mutual agreement thatTerry London was appointed to serve as Executive Chairman and served in this role through July 31, 2017. On August 1, 2017, Mr. Smith’s employment withLondon reassumed the Company would terminate on December 31, 2016. The parties entered into a Mutual Termination Agreement and General Release dated September 2, 2016 (the “Termination Agreement”) setting forth various agreements and understandings between the parties regarding the terminationrole of Mr. Smith’s employment. As a result of these events, the Company is recording additional expense in fiscal 2017 related to the accelerated vesting of certain restricted stock awards, revised defined benefit plan assumptions and cash severance payable to Mr. Smith in accordance with the Termination Agreement. SeeNote 5Non-Executive Chairman of the Notes to Consolidated Financial Statementsfor additional discussion of these expenses.Board.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. (continued)

Subsequent to quarter end on December 14, 2016, the Company announced that its Board of Directors appointed Terry E. London, Chairman, to the position of Interim President and Chief Executive Officer effective as of January 1, 2017.

The Company’s Board of Directors adopted a Shareholder Rights Protection Agreement (“Rights Agreement”) effective September 27, 2016, and declared a dividend of one right on each outstanding share of the Company’s common stock, payable to holders of record as of the close of business on October 7, 2016. SeeNote 2 of the Notes to Consolidated Financial Statements for more information regarding the Rights Agreement.

Results of Operations

Management reviews a number of key performance indicators to evaluate the Company’s financial performance. The following table summarizes those key performance indicators:

Company Comparable Sales Calculation -—The company comparable sales calculation includes all in-store sales, including direct-to-customer (as defined below), provided that the store was open prior to the beginning of the preceding fiscal year and was still open at period end. In addition, company comparable sales include all orders placed online outside of a store as direct-to-customer sales. Remodeled or relocated stores are included if they meet specific criteria. Those criteria include the following: the new store is within a specified distance serving the same market, no significant change in store size, and no significant overlap or gap between the store closing and reopening. Such stores are included in the company comparable sales calculation in the first full month after the reopening. If a relocated or remodeled store does not meet the above criteria, it is excluded from the calculation until it meets the Company’s established definition as described above.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. (continued)

Net Sales -— Net sales consisted almost entirely of sales to retail customers, net of discounts and returns, but also included delivery revenues, wholesale sales and royalties, and gift card breakage. Net sales during the period were as follows (in thousands):

Net sales for the thirdsecond quarter of fiscal 20172018 were $475.9$407.6 million, a decreasean increase of 0.4%, compared to $478.0$405.8 million for the thirdsecond quarter of fiscal 2016.2017. At the end of the thirdsecond quarter of fiscal 2017,2018, the Company operated 3311 fewer stores than at the end of the thirdsecond quarter of fiscal 2016.2017. Company comparable sales for the thirdsecond quarter of fiscal 20172018 increased 1.8%, compared to the same period last year primarily resulting from an increase in online direct-to-customer sales (as defined below),increased brand traffic and average ticket, partially offset by decreased in-store activity.lower conversion and a decrease in delivery revenues due to additional free shipping promotions. Net sales for the year-to-date period of fiscal 20172018 were $1.300 billion,$817.1 million, a decrease of 3.7%0.9%, compared to $1.350 billion$824.2 million for the first ninesix months of fiscal 2016.2017. Company comparable sales for the year-to-date period of fiscal 2017 decreased 1.5%2018 increased 0.7%, compared to the same period last year primarily resulting from decreased in-store activity,increased brand traffic and average ticket, partially offset by an increasea decrease in online direct-to-customer sales.delivery revenues due to additional free shipping promotions.

The Company’s e-Commerce sales accounted for approximately 20%27% and 16%20% of net sales for the three months ended NovemberAugust 26, 20162017 and November 28, 2015,August 27, 2016, respectively. The Company’s e-Commerce year-to-date sales accounted for approximately 20%26% and 17%20% of net sales for the periodsix month periods ended NovemberAugust 26, 20162017 and November 28, 2015,August 27, 2016, respectively. E-Commerce sales are comprised of customer orders placed online which were shippeddelivered directly to the customer (“direct-to-customer”) or werethose picked up by the customer at a store location.

Sales at the Company’s Canadian stores are subject to fluctuations in currency conversion rates. For the thirdsecond quarter of fiscal 2017, currency fluctuations2018, the year-over-year increase in the value of the Canadian storesDollar, relative to the U.S. Dollar, had no impact on net sales orand positively impacted company comparable sales. However,sales by approximately 10 basis points. For the first six months of fiscal 2018, the year-over-year decline in the value of the Canadian Dollar, relative to the U.S. Dollar, negatively impacted net sales and company comparable sales by approximately 20 basis points and 10 basis points, respectively, for the year-to-date period.points. Sales on the Pier 1 credit card comprised 35.6%37.3% of U.S. sales for the trailing twelve months ended NovemberAugust 26, 2016,2017, compared to 33.7%34.5% for the comparable period in fiscal 2016.2017. The Company’s proprietary credit card program provides both economic and strategic benefits to the Company.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. (continued)

The decrease in net sales for the period was comprised of the following incremental components (in thousands):

A summary reconciliation of the Company’s stores open at the beginning of fiscal 20172018 to the number open at the end of the thirdsecond quarter is as follows (openings and closings include relocated stores):

Merchandise Margin and Gross Profit -— In the thirdsecond quarter of fiscal 2017,2018, gross profit was 41.3%$140.2 million, or 34.4% of sales, compared to 38.5%$145.0 million, or 35.7% of sales, for the same period last year, an increasea decrease of 280130 basis points. In the first ninesix months of fiscal 2017,2018, gross profit was 37.7%remained flat at 35.7% of sales and was $291.8 million, compared to 37.6% of sales$294.0 million for the same period last year, an increase of 10 basis points.year. Merchandise margin (see “Reconciliation“Reconciliation of Non-GAAP Financial Measures”Measures”) in the thirdsecond quarter of fiscal 20172018 was $286.4$232.2 million, or 60.2%57.0% of sales, compared to $268.6$229.8 million, or 56.2%56.6% of sales, for the same period last year. The year-over-year increase in merchandise margin is primarily due to a more balanced promotional strategy and improved operations within the Company’s distribution centers. For the first ninesix months of fiscal 2017,2018, merchandise margin was $748.7$472.4 million, or 57.6%57.8% of sales, compared to $761.3$462.3 million, or 56.4%56.1% of sales, for the same period last year. The year-over-year improvement in merchandise margin as a percentage of sales is primarily attributable to improved operations within the Company’s distribution centers.lower supply chain costs. Delivery and fulfillment net costs for the thirdsecond quarter of fiscal 20172018 were $17.3$18.7 million, or 3.6%4.6% of sales, compared to $10.3$10.6 million, or 2.2%2.6% of sales, in the same period last year. Delivery and fulfillment net costs for the first ninesix months of fiscal 20172018 were $38.8$35.4 million, or 3.0%4.3% of sales, compared to $28.7$21.4 million, or 2.1%2.6% of sales, in the same period last year. The increases areincrease in delivery and fulfillment net costs is primarily attributabledue to additional free shipping promotionspromotions. The increase also reflects the increase in direct-to-customer sales as compared to the thirdprior year. For the second quarter of fiscal 2017 and continuing growth in direct-to-customer sales. Store2018, store occupancy costs decreased during the third quarter of fiscal 2017 to 15.3%were $73.3 million, or 18.0% of sales, compared to 15.5%$74.2 million, or 18.3% of sales, during the same period last year. Store occupancy costs decreased in dollars for the first ninesix months of fiscal 2017;2018; however, as a percentage of sales, these costs deleveraged to 16.9%, compared to 16.6% during the same period last year as a resultremained flat at 17.8% of lower sales.

Selling, General & Administrative Expenses, Depreciation and Operating Income -Loss — In the thirdsecond quarter of fiscal 2017,2018, selling, general and administrative (“SG&A”) expenses were $160.8$138.1 million, compared to $151.6$135.8 million for the same period in fiscal 2016.2017. As a percentage of sales, SG&A expenses were 33.8%33.9% in the thirdsecond quarter of fiscal 2017,2018, compared to 31.7%33.5% for the same period in fiscal 2016.2017. Year-to-date SG&A expenses were $439.3$278.3 million, compared to $428.6$278.5 million for the same period in fiscal 2016.2017. As a percentage of sales, SG&A expenses were 33.8%34.1% for the first ninesix months of fiscal 2017,2018, compared to 31.7%33.8% for the same period in fiscal 2016.2017.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations. (continued)

SG&A expenses are summarized in the tables below (in millions):

For the thirdsecond quarter of fiscal 2017,2018, cost reductions across the Company, including a $1.8 million decrease in store payroll,compensation and corporate expenses were offset by plannedlegal and regulatory costs relating to a California wage-and-hour matter and an ongoing CPSC inquiry, as well as investments in marketing, including television advertising. In addition, other selling, general and administrative expenses in the third quarter of fiscal 2017 includebrand consulting totaling approximately $8 million of costs associated with the departure of the Company’s Chief Executive Officer (“CEO”) and approximately $3.7 million for incremental legal and advisory fees, CEO transition costs, including CEO search fees and retention program awards to executives and certain costs for sub-leasing portions of the corporate headquarters.million. For the first ninesix months of fiscal 2017, the increase2018, reductions in total SG&A expenses was primarily attributable to a $19.2 million increase in marketing and other selling, general and administrative expenses, partiallystore compensation expense were offset by an $8.4 million decrease in store payroll and operational expenses. Other selling, general and administrative expenses for the nine months ended November 26, 2016, include approximately $8 million related to CEO departure expenses and approximately $5.3 million related to incremental legal and advisory fees and other expenses as describedregulatory costs referred to above.

Depreciation expense for the thirdsecond quarter of fiscal 20172018 was $13.3$13.4 million, compared to $12.8$13.6 million in the same period last year. Depreciation expense for the first ninesix months of fiscal 20172018 was $41.0$27.1 million, compared to $37.9$27.6 million in the same period last year. The increasedecrease was primarily the result of additionaldue to certain assets becoming fully depreciated and store closures, partially offset by capital expenditures in recent fiscal years.expenditure additions.