Pier 1 Imports Inc

posted a narrower-than-expected quarterly loss, helped by improved merchandise margins due to reduced supply chain costs and decreased clearance activity, sending the home furnishings retailer's shares soaring 25 percent.

The company reported net income of $29.3 million, or 32 cents a share, for the first quarter ended May 30, compared with a net loss of $32.8 million, or 37 cents a share, a year earlier.

Pier 1, whose rivals include Williams-Sonoma Inc and Bed Bath & Beyond Inc , said it recorded a gain of $48 million in the first quarter on the repurchase of debt.

Excluding the gain, the company lost 20 cents a share, while analysts were expecting a loss of 36 cents a share, according to Reuters Estimates.

Merchandise margin were 54 percent of sales in the quarter compared with 51 percent a year earlier, while inventories declined $91 million from prior year levels.

Net sales for the quarter fell 9 percent to $281.1 million due to fewer stores and a 7.5 percent decline in comparable-store sales, but came in above analysts' estimates of $276.2 million.

Pier 1 has been axing jobs, closing stores and negotiating with landlords to slash rents as part of its efforts to cut costs as the recession curbs consumer appetite for its home decor and furniture.

The company also said it would terminate leases on 22 stores and close five additional stores. It estimates total charges of about $8 million in cash and non-cash termination charges related to these closures, of which $5 million were incurred in the first quarter.

Pier 1, which also expects to close about 50 locations, said it reduced its long-term debt by $79 million and had cash and cash equivalents of $136 million at the end of the first quarter.

Shares of the Fort Worth, Texas-based company were trading at $2.41 before the bell. They closed at $1.94 Wednesday on the New York Stock Exchange.

(Reporting by Amitha Rajan in Bangalore, Editing by Saumyadeb Chakrabarty, Aradhana Aravindan)