Pier 1 Imports Q4 2010 Earnings Call Transcript

123jump.com Staff
16 Apr, 2010
New York City

Sales rose 1.7% to $396.0 million & net income was $34.5 million or 30 cents a share. The increase in sales improved merchandise margins & controlled expenses resulted in operating income for the quarter of $36 million a $63 million improvement over the $27 million operating loss reported last year.

Pier 1 Imports Inc. ((PIR))
Q4 2010 Earnings Call Transcript
April 18, 2010 11:00 a.m. ET

Executives

Nancy Benson - Assistant Treasurer and Director, Investor Relations
Alexander W. Smith - President and Chief Executive Officer
Charles H. Turner - Executive Vice President and Chief Financial Officer

Analysts

Budd Bugatch - Raymond James
Brian Nagel - Oppenheimer & Co.
Unidentified Analyst - Banc of America/Merrill Lynch
David Berman - Berman Capital
Bradley Thomas - KeyBanc Capital Markets
Anthony C. Chukumba - BB&T Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen. This is Pier 1 Imports Quarterly Conference Call. At the request of Pier 1 Imports today’s conference call is being recorded. All lines will be in a listen-only mode.

I would now like to introduce Mrs. Nancy Benson, Assistant Treasurer and Director of Investor Relations for Pier 1 Imports. Mrs. Benson, you may begin.

Nancy Benson

Good morning, everyone. And thank you for joining us this morning. Earlier today we issued a press release, which included the detailed financial results for the fourth quarter and fiscal year ended February 27, 2010.

In just a few moments, we’ll hear comments from our President and Chief Executive Officer, Alex Smith; and Executive Vice President and Chief Financial Officer, Cary Turner about those results followed by a brief question-and-answer period.

Before we begin, I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and can be identified by the use of words such as may, will, expect, anticipate, believe and other similar words and phrases.

Our actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that maybe outside of our control. Please refer to our SEC filings, including our annual report filed on Form 10-K, for a complete discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

The press release issued earlier today also includes a reconciliation of any non-GAAP measures that are being discussed today. If you do not have a copy of today’s press release you may obtain on, along with copies of prior press releases and all SEC filings, by linking through to the investor relations page of our website, pier1.com.

I would now like to turn the call over to Alex.

Alexander W. Smith

Thank you, Nancy. And thank you, everyone, for joining us this morning. Amazingly to me it was three years ago today that I spoke to you on my first earnings call. It seems like yesterday. At that time I talked about how we were going to return our company to profitability. I didn’t know then what the economy was going to throw at us, so the recession has, obviously, extended our turnaround timeline. It has cost us a year. But we stayed with our strategy, took advantage where we could and focused not only on the execution of our business priorities but on building the culture we all want for ourselves here at Pier 1 Imports. Consequently we arrive here today stronger, leaner, more effective and more determined to take market share than every before.

Now Cary’s going to talk about our fourth quarter and year-end results. You’ll hear how our business has dramatically improved and will grasp just how much potential lies ahead of us. Cary?

Charles H. Turner

Thank you, Alex. Earlier today for the fourth quarter we reported net income of $35 million or $0.30 per share, a $64 million improvement over the net loss of $29 million or $0.33 per share reported for the same period last year.

Results for the fourth quarter of fiscal 2010 included special charges of $1 million, which are discussed later. Excluding these charges, the company’s net income on a non-GAAP basis for the quarter would have been $36 million or $0.31 per share.

Despite having started the quarter with 49 fewer stores than the year-ago quarter, total sales for the fourth fiscal quarter increased to $396 million from $389 million. The increase in total sales during the quarter was primarily due to a comparable-store sales gain during the period of 6.5%. Comparable-store sales increased as a result of traffic improvements in December and higher average ticket, averaging at retail and conversion rate for the quarter.

Merchandise margins for the quarter were $221 million or 55.8% of sales, a 1150-basis point improvement over $173 million or 44.3% reported for the same period last year. A fourth quarter merchandise margin rate at this level has not been achieved since fiscal 1999.

Store occupancy costs of $67 million declined from $71 million last year due to the reduced store count and rental rate reductions achieved in existing stores. Gross profit for the quarter, calculated by deducting store occupancy costs for merchandise margin dollars improved to $154 million or 38.9% of sales from $102 million or 26.2% of sales in the fourth quarter last year.

Fourth quarter selling, general and administrative expenses were well controlled and declined to $113 million, a $9 million decrease when compared to $122 million reported for the year ago quarter.

During the period, SG&A consisted primarily of $18 million in marketing costs, $77 million in payroll and $17 million in other G&A costs. Also, these expenses included approximately $1 million in special charges resulting from store closings and severance charges.

Reductions in store payroll, special charges and other relatively fixed expenses were partially offset by an increase in administrative payroll related to annual incentive compensation costs. As a percentage of sales ongoing SG&A costs showed an 80-basis point improvement, as they declined to 28.2% of sales from 29.0% of sales in the prior period.

Overall the increase in sales, improved merchandise margins and controlled expenses resulted in operating income for the quarter of $36 million, a $63 million improvement over the $27 million operating loss reported last year.

For the full-year fiscal 2010, we reported net income of $87 million or $0.86 per share, compared to a net loss of $129 million or $1.45 per share last year. Total sales were $1.291 billion, compared to $1.321 billion last year. The decline in sales during the year was primarily attributable to a net store reduction of 38 stores.

The decrease from store count was offset by an increase in comparable store sales of 1.5% for the fiscal year. Excluding the January clearance event, traffic increased over the second half of the year, positively affecting comparable store sales. In addition, we experienced increases in average ticket, conversion rate and average unit retail. The comp-store sales gain for the last six months of the year was 9.7%.

We are very pleased with the performance of our Pier 1 Rewards program in fiscal 2010. For the year, the penetration rate improved to 24% of sales, up from 22% a year ago. Total sales on the Pier 1 Rewards card increased 9% over last year.

We will continue to work closely with our partner Chase and are pleased with what we’ve been able to accomplish. We will work together in fiscal 2011 developing dynamic marketing promotions aimed at growing our rewards card business. Our penetration rate target for this coming fiscal year is 26.5%. Chase has been a great partner and we look forward to continued success.

Merchandise margins for the year were $707 million or 54.8% of sales, compared to $647 million or 49% of sales last year. The 580-basis point improvement is the result of reduced markdowns, lower supply chain costs, reduced freight costs and more advantageous vendor costs.

Store occupancy costs of $267 million declined $17 million from $284 million in fiscal 2009. The decline was achieved primarily through 38 store closings and the reduction of rents in approximately 350 locations throughout the year.

Gross profit for the year improved to $440 million or 34.1% of sales, from $363 million or 27.5% of sales last year.

For the year our attention to cost control resulted in a decline in SG&A expenses to $421 million, down from $453 million in fiscal 2009. The expenses consisted primarily of $285 million in payroll, $61 million in marketing and $62 million in other G&A costs. Additionally, these expenses included approximately 13 million in special charges, resulting from the store closing costs, severance and other charges.

Ongoing SG&A expenses showed a 90-basis point improvement as a percentage of sales, as they improved to 31.7% of sales from 32.6% last year. Inventory at the end of the year was $313 million, or $38 per retail square foot, compared to $316 million or $37 per retail square foot at the end of last year and included a much smaller percentage of clearance inventory as at the end of this year when compared to last year.

At the end of year cash and cash equivalents were $188 million, a $32 million increase over last year. For the year, operations generated cash of $71 million, which included the receipt of a $56 million tax refund relating to changes in tax laws that occurred during the third quarter.

Cash flow from operations we used primarily to fund the associated costs and repurchase of the convertible debt, as well as, capital expenditures. Capital expenditures totaled approximately $5 million for the year and were primarily spent on existing stores and technology.

In addition to cash, our secured credit facility had a calculated borrowing base of $229 million as of the end of the year. After taking into account all reserve amounts and outstanding letters of credit of $86 million, $113 million remained available for cash borrowings. We did not utilize the secured credit facility during fiscal 2010 for any purpose other than letters of credit. Taking into account both the cash and cash equivalents and the availability under the line of credit for cash borrowings, our total liquidity as at the end of the year was $301 million.

Total debt as of the end of the year, including the current portion was $35 million, compared to $184 million a year ago. The reduction in debt was primarily accomplished through the repurchase of $79 million of our outstanding 6.375% convertible senior notes during the first quarter of the fiscal year.

The notes were acquired in privately-negotiated transactions at a purchase price of $27 million, including accrued interest and as a result, a gain was recorded on this transaction of approximately $50 million than in the first quarter.

Subsequently, during the second quarter we entered into a separate set of privately negotiated transactions under which we repurchased an additional $5 million in notes and exchanged $64 million of the remaining notes for newly-issued 9% convertible senior notes. As at the end of fiscal 2010, $17 million of the 6.375% convertible notes remained outstanding and is reflected on the balance sheet as a current liability net of discounts.

During the third quarter of fiscal 2010, all of the newly-issued 9% convertible notes were converted into common stock and as a result, we issued approximately 24 million additional shares of common stock. In connection with this conversion the holders also received an additional interest payment of approximately $14 million. As at the end of the fiscal year outstanding shares of our common stock totaled approximately 116 million shares.

During the fourth quarter, we closed five Pier 1 Imports stores. We ended the year with 1,054 Pier 1 Imports stores with 973 stores in the U.S. and 81 stores in Canada with approximately an 8.3 million retail square feet. Over the year we closed 38 stores.

Throughout the fiscal year we have engaged our landlord community in rental reduction negotiations to achieve better store contributions across our entire portfolio. As a result of these efforts we have negotiated approximately 350 rental-rate reduction agreements with an average reduction of 23% over a two-year period.

During fiscal 2010 these agreements resulted in expense savings of $6 million and cash savings of approximately $10 million. We will continue to partner with the landlord community to achieve rental rates that ensure the long-term success of each Pier 1 Imports store.

Looking ahead to fiscal 2011, we are not giving comparable store sales guidance, but we will give a framework from which you can build an earnings model. Comparable store sales are expected to outpace total sales gains by 500-basis points in the first quarter and 400-basis points in the first half of the year due to the significant store count reduction that occurred in the first half of fiscal 2010.

For the year comparable store sales will outpace total sales by approximately 200-basis points. Comparable-store sales face a tougher comparison in the second half of the year, as we’ve cycled back around to the 9.7% comp-store gain achieved over the last six months of last year that I mentioned earlier.

Merchandise margins will further increase and should be at least 55% of sales for the year. It is anticipated that ten to 15 stores will be closed in fiscal 2011 and we will open three to five stores. Taking into account the lower store base and average rental rate reductions, store rental expense is expected to be approximately $6 to $7 million less in 2011, as compared to 2010.

We also expect that SG&A expenses will be leveraged as total sales increase. Fixed expenses will remain relatively flat, while variable expenses will increase at a rate equal to approximately one half of the comparable store sales gain.

Operations are expected to generate positive cash flow, which will be used to reinvest in the business infrastructure. As of year end we had a net operating lose tax carry forward of approximately $100 million. We will continue to utilize this carry forward to offset future taxable income. Once the NOL tax carry forward has been used up, the effective tax rate will be approximately 37% to 38%.

Capital expenditures are expected to increase to $25 million, as we update and expand our store portfolio and invest in additional systems improvement to further enhance the store experience for customers and to improve operating efficiencies wherever possible.

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

Alexander W. Smith

Thanks, Cary. Over the past three years we’ve improved and strengthened every aspect of our business and as a result, our relationship with our customers, our vendor network, our organization and our balance sheet are all overwhelmingly stronger than when we began this journey to return our company to profitability.

For some time we have demonstrated that we can run a lean and efficient infrastructure and that we can improve our merchandise margin by being better merchants and better importers. What has been harder to demonstrate was that we could grow the topline and we have the recession to thank for this.

However, it now seems as though the economy is getting a little stronger and giving us some tailwind. Consequently, we are finally beginning to reap the rewards of our efforts and the comp-store sales growth that we always knew would come in time.

We are now focused on unlocking the considerable opportunities we have at Pier 1 Imports for organic growth. Not that long ago our sales per square foot peaked at $235. Today our sales per square foot are $152. What a huge opportunity. We know that our square footage can work much harder than it does today. There is no change of direction needed to accomplish this. We just need to keep getting better at being who we are.

As I’ve already said, we are now positioned with stronger vender relationships, stronger customer relationships and a stronger balance sheet, all of which make us able to meet any future economic challenges. Internally, we have shifted our mind-set from a defensive to an offensive position. Externally we must capitalize on the strength of our brand, starting with our unique market position.

Even though the economy has improved a little, our customers are still not spending as freely as they did before the recession and so the quality design and price relationship in our merchandise is critical.

Over the past three years our expanded buying team has been traveling extensively, working very closely with new and existing vendors to develop assortments that give our customers unique and special merchandise that remains affordable.

We have further improved the good, better, best differentiation in all categories to provide our customers with a broad range of options. All of these ongoing activities are helping us to create very compelling merchandise assortments that meet the current and changing needs of consumers and will help us to gain market share.

Comp-store sales gains, growing conversion rates, more traffic and expanded merchandise margins are all evidence of this.

We are extremely pleased that over the past six months we have seen improved sales throughout the store. Every product category has shown gains over the last year. Of course, we still have significant room for further improvements. Opportunities exist to grow sales in all major categories, including furniture. I have every confidence that our buyers and their leadership will continue to raise the bar as they struggle to reach our (inaudible) the perfect assortment.

Our merchants are not alone in that quest. They have strong P&A partners. Improved systems, improved planning routines and more sophisticated analysis are helping to optimize the effectiveness of every SKU we buy. Consequently, improvements in sales will be achieved without corresponding increases in inventory.

Our second opportunity for organic growth is to capitalize on our strong brand name on our loyal and broad customer base. Our market research tells us that for an overwhelming majority of our customers Pier 1 Imports is one of their favorite stores. This is no surprise to us, as 24% of our sales are on our loyalty card.

Over the past two years we have spent more of our marketing dollars on communicating to our cardholders rather than acquiring new customers. This makes sense in a recessionary environment. However, we are now ready to cast our net a little wider. There are still former Pier 1 Imports customers out there who we need to reconnect with and then of course, there are brand new customers.

Our medium mix for fiscal 2011 is not dramatically different from fiscal 2010 but it is skewed more heavily to acquisitions. Our FY ‘11 budget has us holding marketing costs of around 4.5% of planned sales.

Having said that, we’ve constructed our plans so that we can increase our spend if we feel certain that the economy is improving and our customers have a propensity to spend. We call this our pushing on an open door strategy.

Pier1.com, our website, is looking much, much better we are very pleased with it. Over the past year the number of visits to the site has increased 19% and amazingly, our dwell times are longer than when we were selling on the website.

For a great many of our customers the website serves as our first sales associate. Therefore, we plan to invest additional capital dollars into further improvements. For the time being, www.pier1.com will continue to be utilized for marketing and pre-shopping purposes, but at some time in the near future we will make a return to online selling. At this stage our plans are embryonic but they are plans nevertheless.

Pier 1 Imports is something that no other specialty or retailer has, a store portfolio that puts over 80% of all target customers within a comfortable drive of a Pier 1 Imports store. This is a huge strength that is not always fully appreciated, high-quality customer service and the treasure hunt atmosphere that customers enjoy so much is something that no catalog or website can provide. Our store managers and their leaders, assisted by a very strong visual merchandising team, deliver a store experience that is vastly improved, but it can be even better.

Going forward we will continue to work towards a superior in-store experience for our customers and this year we can start to reinvest in our stores, as Cary as indicated. We will be modest initially, testing new fixtures and floor sets to see how best to help drive up those sales per square foot.

Our stores will be the engine room of our company for the foreseeable future, which is why we worked so diligently to partner with our landlords over the past year to retain our coast-to-coast network of stores. I don’t like to close stores, in fact I hate it, but sometimes we have to and we’ll continue to do that when and where it is necessary.

In FY ‘11 we will open a few new stores, which is great news and expect net closings of 10 to 15. The strong relationships we have built with our landlords is helping us to develop a pipeline of new locations and we anticipate that in fiscal 2012 we will be opening more stores than we are closing.

Over the past three years we have demonstrated our ability to dramatically cut costs in a smart way. Our leaner and more efficient infrastructure has made us better equipped to meet the challenges presented by the recession over the past 18 months. These reductions are permanent. While some variable costs will increase with sales, we remain committed to controlling costs and keeping our company lean and efficient.

We’ve also been able to reduce our merchandise cost by working with our vendors to reduce vendor product costs and by working with our transportation and shipping partners to lock in reduced transportation costs. We have significantly reduced the markdown list income our inventory by refining our buying processes and making smaller initial purchases.

And although we have gained -- generated significant improvements to our initial margin there is still further room for improvement. Our stronger merchandise margins are a consequence of this and of course, more of what we buy hits the bull’s-eye.

As a result of these margin and cost improvements we expect to see a good percentage of sales gains flowing through to the bottom line further improving our cash flow. Because we have taken significant costs out of our business, we believe we can achieve double-digit operating margins at a sales to square foot less than our previous peak.

Fiscal 2011 is off to a good start, as the sales and margin trends we saw in the second half of 2010 have continued into this year. As we told you earlier today, our comparable store sales for March creased 19.4%, driven by improvements in traffic, conversion rate and average ticket.

Early Easter helps, of course and our seasonal sell-through was very good, but it was more than this. We are seeing positive results in every merchandise category and our merchandise margins continue to be strong as well.

We started the new year with a strong balance sheet and a very strong leadership team. It has taken us three years to fully transform our leadership. But I feel very good that we have the right players in place. A great combination of skill and experience, our management team is fully able to realize the potential for organic growth that exists in our business.

Our team will work together to generate cash so we can strategically and judiciously invest in our business. We will make physical store improvements and enhance our technology and infrastructure.

Although we cannot predict what the economy will do, it is our plan and our expectation that by executing our updated business priorities we will be able to move even closer to reaching the historical highs for merchandise margin and make significant improvements in our sales per square foot in fiscal 2011.

Thanks for listening to us today. We’ll now take your questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone that if you would like to ask a question, please press star followed by the number one on your telephone keypad now. Once again to ask a question, please press star one at this time. We’ll pause for just a moment to compile the Q&A roster.

The first question will come from Budd Bugatch of Raymond James.

Budd Bugatch - Raymond James

Good morning, Alex. Good morning, Cary. Good morning, Nancy. Congratulations on…

Charles H. Turner

Hi, Budd.

Budd Bugatch - Raymond James

… performance in the quarter and the store transformation. I did have a couple of questions, if I might. One, you talked a little bit about updating the store portfolio and being a reason for the increased CapEx.

Can you give us a vision to the extent that you can of what you’re looking for in an updated store portfolio and what the penetration might be and kind of the timeframe?

Alexander W. Smith

Yeah. And we’re starting the first wave now, Budd and there’ll be a second wave during the quiet time over July and August. So we’re planning to touch around 50 stores this year for a fairly major overhaul. It’ll include the infrastructure pieces in the store, making sure that they’re painted and decorated and lightings up to scratch, there’s quite a bit of lighting upgrading we need to do.

And then we’ll be taking out some of the older fixturing and replacing it with new fixturing, which we think will better show off the assortments. We’re not at this stage going to touch the perimeters but we’re going to look at those as we move into the new store program.

Budd Bugatch - Raymond James

Any ability to disclose what might be the financial impact per store of that kind of updating?

Alexander W. Smith

Well, no -- well, not really and that’s, I said in the prepared remarks that we’re going to be judicious and so that’s really why we’re doing this sort of spending of relatively large amounts of money per store over a small number of stores so that we can really evaluate, is it cost effective or do we need to simplify it or can we do even more. So I think as we move through the year and we start to get some response to those early conversions we’ll update you as we go.

Budd Bugatch - Raymond James

Okay. On another topic and maybe Cary can help us with some math taking the penetration of reward cards from up 250-basis points over the year, what’s the impact of comps of that penetration, because I thought the reward cards have a higher average ticket, is that correct?

Charles H. Turner

Yeah. And, right now I’m not going to answer that, Budd, just because we’re trying to see exactly how that penetration works and see if those trends do continue.

Budd Bugatch - Raymond James

And is the average ticket on a reward card still about three times the…

Charles H. Turner

Yeah. It’s two to three times and Budd, the more rewarding piece of all of this is the fact that we’re capturing her name and she starts shopping with us more frequently.

Budd Bugatch - Raymond James

And can -- what’s the contract frequency of shopping differential between a rewards card customer and others?

Charles H. Turner

It’s almost up to double.

Budd Bugatch - Raymond James

Got you. And lastly, you talked about being able to control transportation costs going forward and we’re hearing that containers obviously are in shorter supply and more costly than they have been. Can you talk a little bit about how you’ve been able to do that and maybe what the impact of that container shortage might be?

Alexander W. Smith

Well, when we, so if we go back a year when the costs were at rock bottom, we talked to our -- the shipping lines and the guys here did a very smart thing. They said you cannot afford to ship goods at those prices you have quoted us and so we said we’re happy to pay a little more and we need to -- but we need to lock in a two-year deal. So we are in the second half of a two-year deal with our major shipping lines and they’ve, clearly that sort of spirit of collaboration goes a long way.

What we’re now doing during the second of those two years is starting our renegotiations so that we can do a back-to-back contract and we expect to, we don’t expect any huge hikes. We are not, Pier 1 Imports is not suffering any disruption or disturbance to our shipping at all, so others may be short of containers, we’re not.

Charles H. Turner

But more importantly I think what we’re trying to do is to just lock those prices in for a longer period of time.

Budd Bugatch - Raymond James

Got you. And that’s very interesting. Thank you very much and good luck on the remainder of the quarter and for the year.

Alexander W. Smith

Thanks, Budd. Appreciate it.

Operator

The next question will come from Brian Nagel of Oppenheimer.

Brian Nagel - Oppenheimer & Co.

Hi. Good morning.

Alexander W. Smith

Hi, Brian.

Brian Nagel - Oppenheimer & Co.

Congratulations on a nice report again.

Alexander W. Smith

Thanks.

Brian Nagel - Oppenheimer & Co.

So a couple of questions, one short-term and one longer term, the short-term one first. As we look at the March sales performance, which you provided to us and you commented on not only the sales but also the margin performance. But could you help us understand maybe the cadence of comps through the month so that we can maybe better isolate if there was any benefit from the Easter shift?

Alexander W. Smith

Through the month you say?

Brian Nagel - Oppenheimer & Co.

Yeah. Through the month.

Alexander W. Smith

Well, actually the month was surprisingly consistent. It’s a five-week month, as you know and our comps were actually pretty similar every single week. Having said that, there obviously was an Easter impact in there and we think that could have been sort of, so 3% to 4% of our sales gain. But it was a really steady month. I do not want you to think that it was just sort of a great, big hiatus around Easter because it wasn’t.

Brian Nagel - Oppenheimer & Co.

Okay. It’s very helpful. And then the second question longer term in nature, with sales started to improve now you’ve obviously made a lot of very positive structural changes in the business over the last few years. As we look at these improving sales trends, how -- maybe do we have a better idea of now one of your -- how much of your cost controls and the structure improvements you made in the business will be able to stick as we layer in better sales?

Charles H. Turner

Well, I think I tried to give you that, Brian. I think if you take a look at our expense structure from our ongoing SG&A costs and if you want to model, keep the fixed costs relatively flat because, as Alex said, we’re going to be very prudent, trying to limit those. And the variable costs take them up, probably half of what you’re modeling the comp increase to be.

Brian Nagel - Oppenheimer & Co.

Okay. Thanks, Cary.

Charles H. Turner

Okay.

Operator

The next question will be from Alan Rifkin of Banc of America/Merrill Lynch.

Unidentified Analyst - Banc of America/Merrill Lynch

Hi. Thanks very much for taking the question. This is (inaudible) sitting in for Alan. Just have a question on the traffic. I want to delve into that a little bit more. If you folks can provide any directional breakdown between different traffic for the quarter and in particular, I know you had called in the press release traffic improvement in December and if you can give any color on post-December trends?

Charles H. Turner

Well, I think what we said for the last six months, if you take a look at the last six months of last year, if you take a look at that 9.7% comp it’s really a third, a third, a third. Being, a third is being driven by traffic, a third is being driven by conversion rate and a third is being driven by average ticket and those are the same trends that we saw for March.

Unidentified Analyst - Banc of America/Merrill Lynch

Okay. That’s very helpful. And one follow up, if I may. With getting a higher penetration of your cardholders, just any color that you can provide in terms of the customers that are coming in, the new versus prior and existing customers? I know, that is going to be a focused on broaden your marketing efforts, but of traffic increases that you’re seeing any breakdown of the contract customer demographics? Thank you.

Alexander W. Smith

Listen, I don’t think that we can give you that, not because it’s a secret as we really don’t really track it like that. We measure total traffic and we have good stats on that and we know what people are spending on the card, but of the balance it’s -- we really can’t tell you who are new customers and who are repeat customers.

Unidentified Analyst - Banc of America/Merrill Lynch

Okay. That’s fair enough. Thank you very much.

Charles H. Turner

Yeah. I would just add all we really know is anecdotally we are having people come into the store that haven’t been there for a while and in addition to the people who are coming in, they’re coming in more often, so?

Unidentified Analyst - Banc of America/Merrill Lynch

Okay. Thanks.

Operator

The next question will be from David Berman of Berman Capital.

David Berman - Berman Capital

Hi, guys. Outstanding numbers. And just wondering if you could embellish on the internet, your internet business, which you say is at the embryonic stage, I’m curious, first of all, how much you’ve learned from it at the moment because you said that people dwell longer on it. So I’m wondering how much that’s helped you look at your products, what you should be selling?

And secondly, how do you speed it up because obviously there could be a nice potential for profit?

Alexander W. Smith

Well, what we’re finding at the moment with the dwell times, we’ve got a percentage of our total assortments on the site, but it isn’t all the assortment. So, the first thing we’re going to do is get a much higher percentage of what we sell on the site and we think that’s going to help significantly. And that’s one of the enhancements we’re actively working on, as well as giving customers more suggestions about uses of the merchandise and room settings and design ideas and all those good things.

In terms of when we actually start selling via the web, I mean, we’re looking at that, very actively and I think as soon as we’ve got some clear dates in mind, we will update you.

David Berman - Berman Capital

Yeah. Okay. And in terms of this month of March, you just mentioned the improvement in business came from a variety of areas but what surprised you the most in terms of the big improvement and your products that did much better than you would have thought?

Alexander W. Smith

Well and I think what was, I don’t know whether I’d call it a surprise or just sort of pleasing that go we got what we wanted was, is the fact that we did see across the board improvements. So our furniture businesses did well, we got a good start to the season in our outdoor businesses, our home decorating business, our home decor businesses did well and our table top businesses did well.

And I know that sounds like a very bland answer but actually it’s the truth and we haven’t seen this for a long time. What we’ve seen previously is one category would be doing quite well but then we’d be struggling a little bit in another. So what we are really pleased about is the evenness of the business throughout the store.

David Berman - Berman Capital

The weather helped you mentioned outdoor stuff, the weather must have helped somewhat. I’m curious a question earlier on asked you what the business was like during your every week and you said it’s very stable. And I guess what that analyst was trying to at is what was the run rate and you said it’s fairly stable and so what is the run rate roughly right now do you think at Pier 1. Are we looking at 15%? What is the run rate right now?

Charles H. Turner

I think maybe we just want to take a look at this and continue to monitor it. I think Alex did answer your question. The run rate for March, remember last year was a minus 9.7% comp and without the effect of Easter maybe the comp was right around 15% or 16%.

David Berman - Berman Capital

Okay. I must have, okay. Well, thank you very much and well done.

Charles H. Turner

Okay.

Alexander W. Smith

All right. Thanks.

Operator

The next question will come from Brad Thomas of KeyBanc Capital.

Bradley Thomas - KeyBanc Capital Markets

Thanks. And let me add my congratulations as well on a great quarter and really nice to see some improving results and the fruits of all of your hard labors over the last few years.

Alexander W. Smith

Thanks, Brad. I appreciate that.

Bradley Thomas - KeyBanc Capital Markets

Wanted to follow up a little bit more on merchandise margins, you’re not too far off of that prior peek that I believe is about 5t.3%. Cary, I know that you mentioned you thought merchandise margins would be at least 55% this year.

Can you talk just a little bit more about maybe structurally what kind of permanent costs you’ve pulled out of merchandise margins out of business and maybe where you think highs could go if you do plan your inventory appropriately?

Alexander W. Smith

So, Brad, here’s what we absolutely know. Our sort of initial mark on our buyer’s mark on is very strong and we think that will continue to strengthen a little bit throughout this year.

We are pretty confident that our markdown as a percent of sales is going to reduce throughout this year just because we’re doing everything a lot better. The piece that we’re not quite sure on is how much we’re going to have to spend on promotional markdowns, because that is a function a little bit of the economy so all the time we’re trying to balance that promotional markdown spend versus the revenues.

So that’s the piece that’s harder to pin down. The stronger the economy gets the lower the amount of promotional markdown we’ll have to spend, so therefore the merchandise margin will go up and so that’s kind of all the moving parts that we look at. But we’re pretty confident that there’s -- that there is upside in the merchandise margin.

Bradley Thomas - KeyBanc Capital Markets

Okay. Great. And then, Alex, to follow up on your comments about the marketing and potential investment to try to increase the acquisition of new customers. Could you just share with us a little bit more about the possible marketing avenues that you might take this year?

Alexander W. Smith

Well, it’s not too dissimilar for last year and the sort of the backbone of our marketing is our in-store events, which are supported by either retail mailers, which go to targeted addresses, our customer base obviously and then some lists that we buy in.

And then on top of that we do a -- what shall I call it? It’s a slimmed down version of the books that we distribute through shared mail and newspapers and things like that and that is less specific in terms of its targeting. That’s kind of the backbone of our print.

We will do two flights of TV this year, one in the early fall and one in holiday. The holiday one is same as in previous years, the fall one is new and so that’s additional.

And then underneath that are specific activities, which go towards either our Pier 1 Rewards cardholders or we have programs for new movers and things like that. And then the final layer is all of the electronic marketing that we do on top. So it’s pretty kind of multilayered.

Bradley Thomas - KeyBanc Capital Markets

Okay. And then I know that a number of other people have asked questions about performance among different categories, but is there a great difference in terms of the magnitude of sales growth between furniture versus decorative accessories? Does the price point matter in terms of the rate of sales growth that we’re seeing?

Alexander W. Smith

And well, within each broad merchandise category there are obviously a number of departments and the departments within the categories there are fluctuations. I was talking to the broadcast categories and the broad categories are pretty similar in truth, although, as they say, there are fluctuations at the department level. And sorry, what was the second part of that?

Bradley Thomas - KeyBanc Capital Markets

Just, I guess, first of all, any difference between furniture versus decorative…

Alexander W. Smith

No. No, not really. I mean, furniture as you know is 40% of our business. It continues to be 40% of our business. I think the big news on furniture and I would make this point is that historically the merchandise margins of our furniture dragged the average down because they were quite significantly below the non-furniture.

We’ve worked very hard to even that out, so what you see now is a much closer fit between our merchandise margins on furniture and non-furniture. Now that’s good news because we don’t have to try and manipulate the mix, we can just follow customer and whatever she wants we’ll supply without it having a detriment on our margin.

Bradley Thomas - KeyBanc Capital Markets

Okay. And then just lastly, anything geographically that seems different or anything that you would call out?

Alexander W. Smith

Yes. Some of the parts of the country have come back from the dead, which is terrific. We’re -- we’ve seen an uptick in business in Florida, which we’re pleased with. We’ve seen an uptick in business in California and the West Coast generally, which we’re very pleased with. And so, again, a much more even performance across the country than you were seeing in the last fiscal year.

Bradley Thomas - KeyBanc Capital Markets

Great. Thanks so much and congratulations.

Alexander W. Smith

Thanks. Sara, I think we’ve time for just one more question.

Operator

Yes, sir. The last question will come from Anthony Chukumba of BB&T Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets

Good morning. And just a really quick question on capital expenditures. You mentioned that you’re planning to spend about $25 million on CapEx, which is significant increase from the $5 million you spent last year but you only plan to open three to five stores.

So I guess if you could just give us some color in terms of where you’re going to spend that CapEx. I know that you mentioned 50 store remodels, as well as making changes to the website, but just if you could just give us a little color on that?

Charles H. Turner

Well, Anthony, when I take a look at the CapEx I would say half of it is going to be for stores and the other half is going to be for IT projects. As I said, the IT protects are going to be to improve efficiency and to improve the customer experience.

Fixtures is just a subset of the CapEx for the stores, a smaller amount is for the new stores. But we are looking at wanting to touch a significant number of the stores over the next three years, just to, if nothing else, give them a fresh set of paint and to refresh them.

And when I take a look at the CapEx at $25 million and you take a look at the last couple of years, it’s really been de minimis and we’ve done a good job controlling that expense but we feel the $25 million is the right number.

Anthony C. Chukumba - BB&T Capital Markets

Okay. I mean, given the fact that you have cut back on your CapEx, some of the CapEx spending for the stores is going to be sort of almost like catching up for a given…

Charles H. Turner

No, no. It’s really primarily going to be the intent is to drive sales and sales per square foot and show the product off a little bit better.

Anthony C. Chukumba - BB&T Capital Markets

Okay. That’s helpful. Thank you.

Alexander W. Smith

Everybody, thanks for joining us today. Thanks for your questions. We’ll talk to you in three months. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference call. You may now disconnect.

Alexander W. Smith

Thanks, Sara.

Operator

You’re welcome, sir. Have a good day.

Alexander W. Smith

Thanks.