Town of Davie Police Pension Plan v. Pier 1 Imports, Inc.

• Citation: 273 F.Supp.3d 650
• Decision Date: 10 August 2017
• Docket Number: Civil Action No. 3:15–CV–3415–D
• Parties: TOWN OF DAVIE POLICE PENSION PLAN, individually and on behalf of all others similarly situated, Plaintiff, v. PIER 1 IMPORTS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

273 F.Supp.3d 650

TOWN OF DAVIE POLICE PENSION PLAN, individually and on behalf of all others similarly situated, Plaintiff,

v.PIER 1 IMPORTS, INC., et al., Defendants.

Civil Action No. 3:15–CV–3415–D

United States District Court, N.D. Texas, Dallas Division.

Signed August 10, 2017

James M. McCown, Nesbitt Vassar & McCown LLP, Addison, TX, David Folsom, Jackson Walker LLP, Texarkana, TX, David T. Moran, Jackson Walker LLP, Dallas, TX, Gerald H. Silk, Pro Hac Vice, Michael D. Blatchley, Pro Hac Vice, Salvatore J. Graziano, Pro Hac Vice, Adam H. Wierzbowski, Pro Hac Vice, Angus Ni, Pro Hac Vice, Avi Josefson, Pro Hac Vice, Bernstein Litowitz Berger & Grossman LLP, New York, NY, for Plaintiff.

Stephen B. Crain, Bradley J. Benoit, Joseph M. Cox, Bracewell & Giuliani LLP, Dallas, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

SIDNEY A. FITZWATER, UNITED STATES DISTRICT JUDGE

In this putative class action alleging claims for securities fraud, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Securities and Exchange Commission ("SEC") Rule 10b–5 ("Rule 10b–5"), 17 C.F.R. § 240.10b–5, promulgated thereunder, the court must decide whether plaintiff has adequately pleaded its claims under the heightened pleading standards of Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u–4. Concluding that it has not, the court grants defendants' motion to dismiss under Rules 12(b)(6) and 9(b), but it also permits plaintiff to replead.

I

Lead plaintiff the Municipal Employees' Retirement System of Michigan ("MERS") brings this putative class action against defendants Pier 1 Imports, Inc. ("Pier 1"), Pier 1's former chief executive officer, Alexander W. Smith ("Smith"), and Pier 1's former chief financial officer, Charles H. Turner ("Turner").¹ MERS alleges in its consolidated class action complaint ("complaint") that defendants committed securities fraud, in violation of the Exchange Act and Rule 10b–5, by, inter alia , misrepresenting and concealing from the market that Pier 1 had acquired excess inventory that far exceeded consumer demand, thereby creating a substantial risk that it would be necessary for Pier 1 to engage in costly price markdowns and incur other significant expenses associated with storing, tracking, and transporting the excess inventory. MERS sues "on behalf of itself and all other persons or entities who purchased or otherwise acquired the publicly-traded common stock of [Pier 1] during the period from December 19, 2013 through December 17, 2015, inclusive (the 'Class Period') and were damaged thereby (the 'Class')." Compl. 1.

Pier 1 is a specialty retailer that sells decorative home furnishings at more than 1,000 stores nationwide and through its website, Pier1.com.² In 2007, when Smith became Pier 1's CEO, Pier 1 was in the midst of a financial crisis. According to the complaint, Pier 1 embarked on a series of expansion campaigns in the early 2000s, after its sales had reached $1 billion. But by 2007 it had become clear that Pier 1 had grown too quickly: sales plummeted, and the company reported a $227 million loss for that fiscal year. After Smith was appointed Pier 1's CEO, he adopted a cost-cutting strategy that centered around aggressive inventory management, including obtaining and maintaining a level of inventory in line with actual consumer demand.³ The complaint alleges that Smith referred to this level of inventory as "clean inventory."⁴ Id. ¶ 25. By 2009 Pier 1's financial condition had improved. But a shift in the industry toward online retail put new pressure on Pier 1 to enter the online market. In response, Smith and Turner developed an "omni-channel" initiative to integrate online and in-store sales. Referred to as "1 Pier 1," the initiative allowed customers to shop online and have their purchases shipped to their homes, or to pick them up at Pier 1's U.S. stores without incurring shipping charges. 1 Pier 1 launched in August 2012.

During a May 2013 conference call with analysts and investors, Pier 1 stated that it had upgraded its planning and allocation systems to accurately monitor and maintain inventory in line with sales. According to Pier 1, the system improved its "forecast accuracy" and "inventory control" and allowed it to "keep all distribution centers in optimal stock." Id. ¶ 171. During the Class Period, defendants represented to investors on various occasions that Pier 1 was operating with a "clean" inventory; that Pier 1's inventory was "well-controlled"; that there was not a "significant markdown risk"; and that Pier 1's inventory growth was the result of increasing sales.

The complaint alleges that, despite the reassurances and optimistic forecasts from Pier 1 and its top executives, inventories at Pier 1's distribution centers⁵ and stores were at unprecedented levels during the Class Period. The complaint asserts that, during fiscal years ("FYs") 2014 and 2015, "[Pier 1's] distribution centers were overflowing with excess inventory, its stores were 'busting at the seams' with merchandise, and [Pier 1] incurred undisclosed costs in order to store containers full of inventory at ports and rail yards and in temporary storage facilities." Id. ¶ 7.

MERS alleges that Smith and Turner knew about—or were severely reckless in disregarding—Pier 1's excess inventory and markdown risk. During a March 2014 internal Pier 1 "town hall" meeting, Smith admitted that he was responsible for pushing overly high sales goals on Pier 1 employees and for underestimating what it would take to achieve these goals, and he acknowledged, among other things, that "[w]e became victims of our own ambition." Id. ¶ 8. MERS asserts that Pier 1 did not fully disclose to investors the true state of its inventory and markdown risk until late 2015.

According to the complaint, Pier 1 did not disclose to investors the existence and magnitude of its excess inventory and markdown risk until it made a series of "partial corrective disclosures" in 2015. Id. ¶ 9. On February 10, 2015 Pier 1 announced that there had been a "failure to adequately forecast the revenue and expenses in our business," id. ¶ 114; that the company had "unplanned supply chain expenses" that included "incremental distribution center costs that affect our gross profit," id. ¶ 115; and that its CFO, Turner, a 22–year veteran of the company, was resigning effective immediately, at the age of 58. In response to these revelations, the price of Pier 1's stock fell 25% (from $16.97 per share on February 10, 2015 to $12.84 per share on February 11, 2015).

MERS alleges that, during the months that followed, Pier 1 made a series of misrepresentations that were intended to reassure investors, including that Pier 1's inventory complexion was "healthy" and that it did "not pose a significant immediate markdown risk." Id. ¶ 110. On September 24, 2015, however, Smith disclosed, inter alia , that Pier 1's margins had been negatively impacted by "increased promotional and clearance activity," id. ¶ 121, and he admitted to "heavier than expected promotional and clearance markdowns, and excess costs in our distribution network," id. ¶ 123. The complaint alleges that, in response to these announcements, Pier 1's stock price fell by 12.2%.

Although over the next two months Pier 1 continued to minimize its inventory issues, Smith finally disclosed in December 2015 that Pier 1 had "encountered supply chain difficulties, stemming from an aggressive sales forecast that resulted in excess inventory and added costs," and that Pier 1's distribution centers had been disrupted by its "extremely high inventory levels." Id. ¶ 128 (emphasis omitted). Smith also admitted that "over [the] last 18 months or [so] we got out of whack," and failed to "keep inventory and sales growing at approximately the same rate," id. ¶ 129 (alterations in original). He then explained that it would take 18 more months to get "[b]ack to our normal trajectory where sales and inventory are in sync." Id. Pier 1's stock price fell by another 20%, dropping from $16.97 per share on February 10, 2015 to $4.75 per share on December 17, 2015. MERS contends that post-Class Period events confirm that the "fraud" put Pier 1 in a catastrophic financial position, and, in September 2016, Pier 1 announced that Smith was departing as CEO at the end of the year.

On October 21, 2015 the Town of Davie Police Pension Plan filed suit against Pier 1, alleging violations of §§ 10(b) and 20(a) of the Exchange Act and of Rule 10b–5. Following proceedings required by the PSLRA, the court appointed MERS as lead plaintiff. MERS then filed the complaint that defendants now move to dismiss under Rules 12(b)(6) and 9(b) and the PSLRA. The court has heard oral argument on defendants' motion.

II

A

"In deciding a Rule 12(b)(6) motion to dismiss, the court evaluates the sufficiency of [the] complaint by accepting all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff." Bramlett v. Med. Protective Co. of Fort Wayne, Ind. , 855 F.Supp.2d 615, 618 (N.D. Tex. 2012) (Fitzwater, C.J.) (internal quotation marks and brackets omitted) (quoting In re Katrina Canal Breaches Litig. , 495 F.3d 191, 205 (5th Cir. 2007) ). To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly , 550 U.S....