Second Quarter Highlights:

Operating loss improved 46% over last year

Comparable store sales declined 7.6%

Merchandise margin improved 270 basis points to 52% of sales

Inventories $43 million lower than last year

Cash balance of $109 million at the end of the quarter; total liquidity of $232 million

Retired $5 million and refinanced $64 million of 6.375% convertible debt

Returning to Profitability

Alex W. Smith, President and Chief Executive Officer, said, "At the end of the first quarter we indicated that, despite the pressure of the economic environment, our relentless focus on executing our business priorities, which speak to great merchandise, great stores, and a lean and efficient infrastructure, was yielding results. Using mixed metaphors, we talked about 'green shoots' and a light at the end of the tunnel. Today, as we head into the back half of the fiscal year, those green shoots are taller and the light is brighter. We are very pleased with what we were able to accomplish in the second quarter as our sales, merchandise margin and operating results continued to exceed our internal budgets.

"Looking ahead, we feel very well positioned for the third quarter. Our level of clearance inventory is very low and our initial markups are strong. Consequently, we expect to continue to see significant improvements in merchandise margin on a year over year basis. As previously indicated, our purchases for the fall and holiday selling season were less cautious than the first half as we anticipate a stronger sales trend in the third and fourth quarter. Customers are responding positively to our fall merchandise, and although it is early in the quarter, we are generating positive comparable store sales so far in September. Our stores look really good and we are looking forward to the holiday transition which will begin in October."

Second Quarter Results

The Company reported a net loss of $16 million, or $0.17 per share, for the second quarter, versus a net loss of $30 million, or $0.34 per share, for the same period last year. Operating results improved by $13 million to a loss of $15 million. Total sales for the second quarter declined to $287 million from $320 million in the year-ago quarter. Comparable store sales during the quarter declined 7.6% which can be attributed to reductions in traffic related to the declines in the overall economic environment. Without the effects of Canadian currency conversion rates, the decline in comparable store sales during the fiscal quarter was 6.9%.

Merchandise margins for the quarter were 52% of sales compared to 49% of sales in the same period last year. Merchandise margins were positively impacted by reduced markdown activity as well as strong initial mark ups. Store occupancy costs were $68 million compared to $72 million last year. The decline was primarily the result of negotiated rental reductions as well as a lower overall store count.

Second quarter selling, general and administrative expenses were $91 million compared to $107 million in the year ago quarter. SG&A expenses consisted primarily of $9 million in marketing, $65 million in payroll, and $17 million in other G&A costs. Selling, general and administrative expenses included approximately $3 million in special charges relating to lease terminations versus $5 million in special charges during the same period last year.

Year to Date Results

Year to date the Company reported net income of $14 million, or $0.15 per share versus a net loss of $63 million, or $0.71 per share, for the same period last year. Operating results improved by $17 million to a loss of $42 million. Total sales for the first six months declined to $568 million from $631 million in the year-ago period. Comparable store sales for the first six months declined 7.5%. Without the effects of Canadian currency conversion rates, the decline in comparable store sales during the period was 6.5%.

Merchandise margins for the first six months were 53% of sales compared to 50% of sales in the same period last year. Store occupancy costs were $135 million compared to $143 million last year.

Year to date selling, general and administrative expenses were $197 million compared to $216 million in the year-ago period. SG&A expenses consisted primarily of $22 million in marketing, $134 million in payroll, and $41 million in other G&A costs. Selling, general and administrative expenses included approximately $11 million in special charges versus $8 million during the same period last year.

Balance Sheet and Liquidity

During the second quarter, inventory levels remained in line with the Company's plan as the Company began its normal seasonal build in preparation for the fall and holiday selling season. At the end of the second quarter, inventory was $336 million, which included $55 million of in-transit inventory, compared to $379 million, which included $44 million of in-transit, at the end of the second quarter last year. Management expects that inventory levels will continue to build in the third quarter to approximately $350 million as the holiday selling season approaches.

Cash and cash equivalents at the end of the quarter were $109 million. In addition, as of the end of the quarter, the Company's calculated borrowing base on its secured credit facility was $267 million. After excluding the required availability of $30 million and the $114 million in outstanding letters of credit and bankers' acceptances, $123 million remained available for use by the Company for working capital purposes. The Company did not utilize its secured credit facility during the second quarter for any purpose other than its customary letter of credit needs. Including cash and available credit, the Company had total liquidity of $232 million as of the end of the second quarter. Management expects to continue the Company's current conservative approach to merchandise purchases, expense planning, and capital expenditures throughout this fiscal year.

As previously reported, during the second quarter the Company entered into separate privately negotiated exchange transactions under which it retired approximately $64 million of its outstanding 6.375% convertible senior notes due 2036 ("Original Notes"). Under the exchange agreements, the exchanging holders received $61 million in aggregate principal of new 9% convertible senior notes due 2036 ("New Notes"). The New Notes have an initial conversion price of $2.5050, or approximately 399 shares of the Company's common stock for each $1,000 note. The Company has the option in certain circumstances, upon at least 30 days notice, to terminate each holder's right to convert the New Notes if the closing price per share of the Company's common stock is above $3.1313 for at least 20 days in any 30 trading day period. In accordance with generally accepted accounting principles, the carrying value of the New Notes was reduced by approximately $12 million to account for the embedded derivative and the beneficial conversion feature of the notes. This discount will be accreted to interest expense through February 2013 or earlier conversion. In addition to this exchange, the Company purchased and retired $5 million of Original Notes. During the second quarter, the Company reported a gain on these transactions of approximately $2 million. Following these transactions, the Company's outstanding long term debt includes the remaining principal amount on the Original Notes of approximately $16 million, $19 million in industrial revenue bonds and the discounted amount of $49 million in New Notes.

Real Estate Update

The Company ended the quarter with 1,061 Pier 1 Imports stores in North America. In its continuing rental reduction efforts, the Company has now reached, in principal, rental reduction agreements on approximately 30% of its stores. These agreements will result in total rental savings of approximately $11 million on a cash basis in fiscal 2010. When adjusted using straight line accounting methods, these agreements will reduce the Company's reported rental expense by $6 million for this fiscal year. Cumulatively, these agreements are expected to reduce rental expense by $37 million, with over 75% of the cash savings being realized within the next three fiscal years. The Company will focus its on-going efforts on achieving rental reductions, rather than on lease terminations. However, management still expects to close approximately 50 locations in total this fiscal year, which is significantly less than the original estimate of 125 locations. Year to date, the Company has closed 31 locations and expects to close another 19 locations primarily during January and February. As a result of lease terminations, the Company anticipates recording related charges of approximately $13 million during fiscal 2010, of which $10 million have been recorded in the first six months of this fiscal year. The cash portion of these charges will be partially offset by the liquidation of inventory in the closing stores.

Conference Call Information

The Company will host a conference call concerning second quarter results at 10:00 a.m. Central Time today. Investors will be able to connect to the call through the Company's website at www.pier1.com.