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Edited Transcript of WSM earnings conference call or presentation 15-Nov-18 10:00pm GMT

Q3 2018 Williams-Sonoma Inc Earnings Call

SAN FRANCISCO Jan 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Williams-Sonoma Inc earnings conference call or presentation Thursday, November 15, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elise Wang

Williams-Sonoma, Inc. - VP of IR

* Felix Carbullido

Williams-Sonoma, Inc. - Executive VP & CMO

* Julie P. Whalen

Williams-Sonoma, Inc. - Executive VP & CFO

* Laura J. Alber

Williams-Sonoma, Inc. - CEO, President & Director

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Conference Call Participants

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* Andrew James Minora

Gordon Haskett Research Advisors - Research Associate of Retail

* Christopher Michael Horvers

JP Morgan Chase & Co, Research Division - Senior Analyst

* Cristina Fernández

Telsey Advisory Group LLC - Director & Senior Research Analyst

* Jonathan Richard Matuszewski

Jefferies LLC, Research Division - Equity Analyst

* Marni Shapiro

The Retail Tracker - Co-Founder

* Michael Allen Baker

Deutsche Bank AG, Research Division - Research Analyst

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Peter Sloan Benedict

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Welcome to the Williams-Sonoma, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) This call is being recorded.

I would now like to turn the call over to Ms. Elise Wang, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

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Elise Wang, Williams-Sonoma, Inc. - VP of IR [2]

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Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our discussion today will relate to results and guidance based on certain non-GAAP measures. A reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release.

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial conditions, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2018 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press release and SEC filings, including the most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [3]

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Thank you, and good afternoon, everyone. On the call with me today are Julie Whalen, our Chief Financial Officer; Felix Carbullido, our Chief Marketing Officer; and Yasir Anwar, our Chief Technology Officer.

We delivered third quarter with EPS at the high end of guidance and continued strength in demand and customer growth. This performance demonstrates our team's strong execution, the ongoing benefits of our strategic initiative and the power of our multichannel, multibrand model. Given the substantial progress we've made in our business this year and our compelling pipeline of innovative products and inspiring content, we believe we are well prepared to deliver this holiday season and remain on track to meet or beat our full year guidance.

Now let me provide a summary of our third quarter financial results. Net revenues grew 4.4% with comparable revenue growth at 3.1%. Demand comp, which accounts for total customers -- total customer orders placed in the quarter was higher, accelerating sequentially to 4.6%. The difference between demand and net resulted from unexpected delay in product receipts this quarter caused by congestion out of China as many U.S. importers accelerated their shipments before the tariffs went into effect as well as a higher-than-expected amount of dropship sales that take longer to fulfill. Despite this disruption, earnings per share for the quarter grew 13.1% to $0.95 per share, at the high end of our guidance range.

Our financial results this quarter were once again driven by our team's strong execution of our 4 strategic priorities: digital leadership, product innovation, retail transformation and operational excellence.

Let me start with some highlights in digital leadership. Our innovation efforts are driving customer acquisition and e-commerce growth to an all-time high of 55% of total revenues. We continue to leverage the power of our multibrand portfolio, launching 2 new cross-brand initiatives this quarter. First, we released the customer-facing version of our Outward-powered professional design tool called Design Crew Room Planner or Ensemble as it was named during the initial phase. This launch was met with overwhelmingly positive feedback from our in-store cross-brand Design Crew associates, who've been actively using the application in our Pottery Barn, West Elm and Williams-Sonoma stores.

Since its initial launch in August, over 15,000 rooms have been created by the room planner with thousands of users engaging in design activities weekly. We believe this application will become an integral part of the home design and shopping experience, and we'll continue to add more features and functionalities to enhance this experience for our customers.

In October, we also launched our cross-brand registry program called The One Registry Collective. Our customers can now create a registry that includes items from Williams-Sonoma, West Elm, Pottery Barn and Pottery Barn Kids all in one place. For added convenience, the selected items are grouped together by brands and sorted by categories, allowing gift-givers to easily shop for their recipients' whole home. This is a strategic unlock for our registry program as it addresses the increasing demand for convenience and personalization for a millennial-driven audience. Early reads on customer response are strong.

In addition to these initiatives, we saw a sizable pickup in momentum in our cross-brand loyalty program, The Key. During the quarter, we improved the overall branding and design of the program and made enrollment online easier than ever. Total membership is now up 3x compared to the same time last year. The Key is a strategic loyalty program and will continue to grow as a revenue driver for our business.

Also in Q3, we expanded our cross-channel shopping capabilities to offer customers more choice and convenience in time for the holidays. We introduced buy online, pickup in store for Pottery Barn and West Elm brands, and we are seeing strong engagement and sales through this channel, particularly with items that are out of stock in e-commerce and seasonal and gift items that customers shop for at the last minute. We are taking advantage of our multichannel platform and testing more shipping options to meet our customers' growing expectations for more choice in the way they shop.

Now I'd like to talk about product innovation. Following the tremendous success of our Harry Potter collaboration in PBteen, we've expanded our partnership with the Harry Potter franchise to all 3 Pottery Barn brands. In the second of our One Home coordinated releases across the Pottery Barn brands, the expanded collection includes new product categories such as furniture, decorative accessories and holiday decor and gifting.

We also introduced Design Crew Basics, a proprietary collection of low-priced, high-quality essentials for the home available across our portfolio of brands. This cross-brand collection allows us to combine the purchasing power of our multiple brands and offer our customers a greater value wherever they choose to shop with us.

In the Pottery Barn brand, the holiday plaid fashion story is off to a strong start as is our seasonal assortment. We also continue to see Pottery Barn Apartment accelerate and attract new customers to the brand. In addition, we continue to build out our marketplace strategy, which is a broader assortment of high-quality curated products that augment our core collection. Marketplace gives us the ability to test new products, new aesthetics and price points, and accelerate growth without inventory cost. We'll be replicating this strategy in other brands and expect the total revenue opportunity to be close to 5% of our company revenues over time.

In our Pottery Barn children's businesses, our baby segment continues to gain momentum and attract new customers as an early entry point to the brand. As a highlight, the modern baby collection launched in Q2 is already performing ahead of plan with its unique contemporary design and strong commitment to safety and quality. We are headed into the holiday with an exciting assortment of innovative product and newness across many seasonal and gifting categories, and early holiday reads are off to a strong start. In the Williams-Sonoma brand, our customers continue to respond to unique products only available at Williams-Sonoma. We introduced 2 vendor exclusives with long-term partners, All-Clad and Scanpan, which drove a very strong performance in our cookware business. We also launched our first ever television ad campaign featuring our exclusive Thermo-Clad cookware, timed for the lead up to the holiday.

Looking ahead to Q4, our Williams-Sonoma holiday lineup is very compelling with many new offerings as well as returning favorites. The Williams-Sonoma team is prepared and ready to deliver on all of our customers' cooking, entertaining and gifting needs this holiday.

West Elm also continued to deliver strong growth as customers continue to respond to the brand's aesthetic, scale and price point. Growth is accelerating across all regions and product categories and particularly in the e-commerce channel as strong traffic and ongoing digital innovation are driving customer acquisition and improved conversion. We are balancing our assortment between furniture and non-furniture with a focus on expanding our seasonal decorating and entertaining businesses this holiday to drive traffic and conversion with these less considered purchases. As the leader in modern high quality and affordable home products, we are confident in West Elm's potential to continue to capture market share and to continue to drive double-digit profitable growth, becoming our biggest brand over time.

Our third strategic priority is retail transformation. We continue to execute on our successful remodel strategy while selectively investing in new stores. We remodeled 5 stores and opened 3 new stores in the quarter. Our fleet of remodeled and relocated stores is averaging double-digit growth in annualized sales over the prior store. Our new stores continue to perform better than the fleet with West Elm stores outperforming their first year of performance sales by 25% on average.

In the Williams-Sonoma Home brand, we've intensified our focus on the retail store of the future and are in the process of running tests in several of our stores to optimize the strategic growing brand. To further transform our retail fleet and expand profitability, we impaired 1 underperforming store this quarter and plan to close another 21 stores upon lease expiration in Q4 as part of our planned closures for the year. This will bring our total closures for the year to 33 stores in total.

In our global operations, we continue to expand our presence with the introduction of Pottery Barn Kids in the U.K. via e-commerce and 3 new John Lewis locations. And as we announced earlier today, we have successfully entered into a partnership with a franchise partner in India, Reliance Brands, where we plan to enter in early 2020. We look forward to partnering with Reliance and introducing our distinctive brands and excellent service to our customers in India. In addition to this exciting new development, we are also actively pursuing other opportunities to further expand our global business. And finally, I'd like to give you an update on our strategic focus on operational excellence and improving the customer experience.

We continue to drive efficiency improvements and cost reductions throughout the supply chain. Production shipments from our domestic manufacturing facility were up 17% during the quarter, while company-wide damages improved 18% year-to-date. Performance measurement at every customer touch point has also been a key focus. And we are encouraged that our average star rating is at a high of 4.8 out of 5 stars for both in-store customer service and in-home delivery. Regarding our transition to one inventory, we are executing ahead of plan, crossing the threshold of $1 billion in annualized sales volume through the one inventory program in September.

Our multiyear transition to one inventory will allow us to completely reengineer inventory flow processes, better allocating inventory cross-channel, optimizing inventory levels, improving DCF efficiency and significantly bringing down costs in the supply chain. With 3 quarters of operational improvements behind us, we believe our teams are better prepared than ever headed into the peak season. Despite tightness in the labor market, we are ahead in our seasonal hiring versus last year, helped by the recent increase in hourly wage and incentive pay in our DCs. Our teams are focused on executing the fundamentals flawlessly and delivering outstanding service at every touch point to give our customers the great holiday experience that they expect from our company.

And now I want to take a few minutes to discuss the China tariffs. While the situation remains volatile, our teams are aggressively resourcing and renegotiating costs with our vendor partners. And given our vertically integrated multi-country supply chain and our trusted long-standing relationships with our vendors, we're making good progress. We're also looking to mitigate the impact due to the tariffs through cost reductions in other parts of the business. For example, we've recently undergone an exhaustive exercise on non-merchandise vendor expense where we have identified sizable opportunities to consolidate work with our vendors and reduce costs in areas such as janitorial, data processing, contingent labor and utilities, to name a few.

As we look forward to the fourth quarter, we are in a strong position with our compelling pipeline of exclusive innovative products, engaging content and commitment to customer service. Our high-touch multichannel, multibrand platform, differentiated product offer and lifestyle merchandising are what truly sets us apart. Our team has worked all year to strengthen our business with a goal of creating a better experience for the customer. And now with the most exciting time of the year just ahead of us, we are prepared and ready to pursue every opportunity to serve our customers, gain market share and drive accelerated profitable growth.

I look forward to updating you all next year, and now I'd like to turn the call over to Julie Whalen, our Chief Financial Officer, to discuss our financial results.

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [4]

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Thank you, Laura, and good afternoon, everyone. Our third quarter results reflect the momentum we are gaining in all of our strategic initiatives and our continued commitment to operational discipline. We are pleased that despite a delay in product receipts we experienced in the quarter, we delivered top line results within our guidance range; demand comps outpacing the second quarter and last year; e-commerce revenues growing over 8% to an all-time high of 55% of total revenues; continued strength across our gross and operating margins, including e-commerce and retail operating margin expansion; earnings per share at the high end of our guidance range with double-digit growth; and a strong balance sheet with inventory growth again substantially below revenue growth.

Before I discuss our results in more detail, a reminder that our third quarter 2018 results include the financial impact from the implementation of a new accounting standard associated with revenue recognition. Similar to last quarter, the impact associated with the re-class of other income from SG&A into net revenues resulted in an approximate 100 basis point improvement to revenue and a 60 basis point swing in margin improvement from SG&A into gross margin. The remaining impact is primarily associated with the timing of our revenue recognition for certain merchandise shipped to our customers, which is dependent upon our performance during the last week of the quarter.

Now let's review our third quarter financial results. Net revenues in the third quarter were $1.356 billion for a year-over-year growth of 4.4%, and comparable brand revenue growth was 3.1% on top of 3.3% last year.

Demand comps, which include orders placed by customers that are not yet fulfilled, were higher at 4.6%, accelerating sequentially and versus last year. We are pleased to see this continued strength in customer demand. By brand, comp growth for the Pottery Barn brand was up 170 basis points year-over-year to 1.4%, and their demand comp was even higher at 2.7%, which includes one of the highest e-commerce comps Pottery Barn has seen in several years.

In our Pottery Barn Kids and Teen business, though they had a softer quarter with a flat comp, this was largely driven by our decision not to anniversary some unproductive promotions from last year.

Year-to-date, however, we are pleased to see that they are driving strong year-over-year results with a combined comp of 3.4%, which is 640 basis points over last year. West Elm delivered another quarter of double-digit revenue growth. Comp growth was at a strong 8.3% on top of an impressive 11.5% last year, resulting in the highest 2-year comp they have seen in the past 4 quarters. We also saw solid growth in our Williams-Sonoma brand, which delivered a comp of 2.1%. This was a sequential acceleration from the second quarter and represents another quarter of the highest 2-year comps we have seen in over 3 years.

And finally, our newer businesses, Rejuvenation and Mark and Graham, as well as our global company-owned operations continued to scale and deliver another quarter of double-digit growth. By channel, retail net revenues grew 0.2% year-over-year, and e-commerce net revenues reached an all-time high of 55% of total company revenues this quarter. E-commerce growth was strong at 8.1%, outpacing last year's 6.4% by 170 basis points. We also drove the highest third quarter e-commerce comps we have seen in several years. These results reflect the success of our efforts to enhance the digital shopping experience and our shift in marketing mix to high-impact digital advertising.

Moving down the income statement. Gross margin for the third quarter was 36.5%, which was in line with last quarter and 60 basis points above last year's gross margin at 35.9%. The 60 basis point increase was a result of higher selling margins and occupancy leverage and includes the overall margin benefit from the re-class of other income into revenues from the implementation of the new revenue recognition standard.

Occupancy costs grew 3.5% in the quarter to $177 million or 13.1% of net revenues compared to last year's $171 million or 13.2% of net revenues. Higher shipping costs from higher UPS rates and a higher mix of furniture, which is more expensive to ship, was completely offset by further supply chain efficiencies. We were also pleased to see continued strength in our selling margins, which reflects the success of our strategic initiatives to reduce inventory levels, drive supply chain efficiencies, streamline promotions and develop content that communicates the value of our products more effectively.

SG&A for the third quarter was 28.9% this year versus 27.4% last year. This 150 basis point deleverage was primarily associated with higher employment-related costs. Last year we had lower incentive compensation costs due to a reduction in performance-based compensation that was not earned. The deleverage also reflects our reinvestment of tax savings into increased hourly wages. Given the increasingly competitive labor market, we are pleased to be able to accelerate this investment in our people this year so that we are much better positioned to attract and retain talent for our future.

The third quarter SG&A rate also reflects general expense deleverage predominantly driven by the re-class of other income into revenues from the implementation of the new revenue recognition standard. Operating margin for the third quarter deleveraged 90 basis points to 7.6% as a result of corporate unallocated expenses, which as a percentage of net revenues, was 7.3% in the third quarter compared to 5.8% last year. This deleverage was primarily driven by employment-related costs resulting from the lower incentive compensation costs last year. Excluding this deleverage, our operating margin would have expanded as operating margins leveraged across both the e-commerce and retail channels.

In the e-commerce channel, operating margin was 21% versus 20.7% last year. This 30 basis point leverage was primarily driven by higher selling margins and catalog advertising optimization, partially offset by general expense deleverage predominantly driven by the re-class of other income into revenues from the implementation of the new revenue recognition standard. The operating margin in the retail channel also improved, expanding 60 basis points to 7.6%, primarily driven by overall SG&A favorability from strong financial discipline, partially offset by occupancy deleverage within gross margin due to lower retail sales.

The effective income tax rate in the third quarter was 23% compared to 35.3% last year. The lower year-over-year tax rate primarily reflects a reduced federal tax rate from 35% to 21% associated with the 2017 Tax Cuts and Jobs Act.

Third quarter 2018 diluted earnings per share were $0.95 compared to $0.84 last year, representing growth of 13.1% year-over-year. Despite the delay in product receipts in the quarter, we were pleased to be able to deliver double-digit EPS growth and to reach the high end of our guidance range in EPS, driven by continued healthy selling margins, further supply chain efficiencies and overall strong financial discipline. Our financial results year-to-date of 6.1% revenue growth, including 9.3% e-commerce revenue growth and 23% EPS growth, demonstrate the overall success of our strategic initiatives and give us the confidence in our ability to deliver long-term profitable growth for our shareholders.

Moving to the balance sheet. Cash at the end of the quarter was $164 million versus $91 million last year. In the third quarter, we invested $48 million in the business and returned $80 million to stockholders through share repurchases and dividends, which is comprised of $45 million in share repurchases and $35 million in dividends. This results in a year-to-date return to shareholders of $325 million, an almost 30% increase over last year. Our merchandise inventory level at the end of the third quarter was approximately $1.2 billion and only 1.8% higher than last year, which was significantly lower than our revenue growth. We continue to build on the progress we've made all year across all of our inventory initiatives with a focus on driving efficiencies across our supply chain network and improving customer service.

Now I would like to discuss our fourth quarter and fiscal year 2018 guidance. We are reiterating our previously raised fiscal year 2018 guidance, which reflects our strong year-to-date performance. We expect net revenues to grow to a range of $5.565 billion to $5.665 billion with comp growth in the range of 3% to 5%. We anticipate operating margins to be in the range of 8.4% to 9% with diluted earnings per share in the range of $4.26 to $4.36. All other financial guidance within the press release remains unchanged from our previous guidance.

For the fourth quarter of 2018, we expect to grow net revenues to a range of $1.733 billion to $1.833 billion with comparable brand revenue growth in the range of 0% to 5%. And we expect diluted earnings per share to be in the range of $1.89 to $1.99.

As we head into the holiday season, given our strong product assortment and our proven ability to execute, we are confident in our fiscal year guidance, which at the high end of the ranges represents comp growth of 5% and EPS growth of 21%. With regard to capital allocation, our balanced approach remains unchanged. We will utilize our strong operating cash flow to first invest in the business in those areas that will fuel our growth and provide the highest returns and to return excess cash to our shareholders in the form of share repurchases and dividends. We will continue to monitor our level of share buybacks and with our strong balance sheet and financial liquidity, we are prepared to opportunistically increase our rate of buybacks as we did earlier this year.

Before we open the call for questions, we want to say thank you to our team for the work they have done to prepare us for the holiday season and throughout the year. With their commitment and hard work as well as our unique competitive strengths, including a portfolio of the most loved brands in home, serve a range of demographics and aesthetics, a vertically integrated supply chain that gives us flexibility on sourcing and control over quality and cost, a multichannel platform with industry-leading 55% e-commerce penetration, a world-class customer service heritage, a strong balance sheet and cash flow, along with a proven track record of strong financial and operational discipline, we are confident that we will be able to deliver a superior customer experience this holiday and beyond. We continue to see many opportunities to drive profitable growth and to deliver long-term sustainable value for our shareholders.

I would like to wish you all happy holidays. And with that, let's open the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Michael Lasser with UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [2]

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It's going to come in 2 parts to squeeze it in under the definition. So first part is should we consider the difference between the reported comp of 3.1% and the demand comp of 4.6% due to the issues with dropship and congestion in China? So is that 150 basis point spread all due to those delays? And should we just add that to our 4Q comp estimate? And then you said you're working to aggressively mitigate potential impact from tariffs. But can you help us understand the potential impact next year given that you previously said about 15% of your sales are currently subject to the tariffs?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [3]

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Okay. So on the first question -- Michael, this is Julie. Basically, yes, the complete spread of 4.6% to the 3.1%, 150 basis points, is due to fulfillment. And so there's 2 pieces to that. There's the fact that we had congestion in the China ports that caused a delay in product receipts, and we also have a shift to higher sales associated with dropship sales. So those take longer to fulfill. And so those should come in into the fourth quarter, and of course, those are assumed within our guidance. As far as tariffs, just to clarify, you said 15% of sales. We actually said it's 15% of total cost of goods is the impact to us. And as we said in our prepared remarks, we are aggressively going after offsetting that impact by lowering the cost from our vendors by resourcing where we source our products from out of China and then obviously looking for every way possible to find cost savings throughout the company.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [4]

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And just to clarify also for you, Michael, we're assuming that the tariffs go to 25% as they have been communicated. Of course, if that changes, that would be great. But right now, we're assuming the worst case scenario.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [5]

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And if they do go to 25%, is that going to have a meaningful impact on your margin in 2019?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [6]

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As I said in my prepared remarks, we have been executing against a very aggressive plan to mitigate the impact of the tariffs and stay ahead of future risks. And we're very lucky that we're vertically integrated. We have a multi-country supply chain, and we have really great relationships with our vendors. So we're moving a lot of goods out of China. We're renegotiating with our long-standing Chinese vendor partners. And then as I mentioned earlier, we're looking at every other part of our business to find other cost offsets. And we're really pleased with what we have targeted. So we are looking to mitigate every dollar next year of the possible tariff risks, that is our intention.

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Operator [7]

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We'll now take our next question from Peter Benedict from Baird.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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I guess just a question on the operating margin plan for the year, 8.4% to 9.0%. If we look at the midpoint of the revenue guidance maybe for the fourth quarter, it would seem to imply that the margins in 4Q would have to be up anywhere from 80 to maybe even a couple hundred basis points to kind of get into that 8.4% to 9% range for the year. Are we thinking about that correctly? And if so, just curious what would be the driver of that level of expansion in the fourth quarter?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [9]

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I think you're thinking of that correctly. I think obviously the op margin is a play on the revenue. If we come in at the higher end of the revenue, and we continue to have healthy selling margins, then obviously, that leverages the P&L and drops all the way down that we've seen in the beginning of the year. So it depends on your assumptions. But if you're at the high end of the revenue range, you should see that op margin expansion.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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And just as a follow-up to that, Julie, did I hear you say that the EBIT margin decline in the third quarter of 90 basis points, did you say all of that was the incentive comp change or did I mishear that?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [11]

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No, you heard that. So if you look at the corporate unallocated deleverage of 150 basis points, almost all of that is due to this higher compensation that we have this year from lower compensation last year. And so but for that, our operating margin total company would have expanded because if you look at the retail and e-commerce channels, they both expanded. So the health of the business is incredibly strong. We just have this one moment in time where we had a difference in incentive compensation because we didn't earn it last year.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Got it. And then the fourth quarter, it's expected to be more similar year-over-year, that's the point?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [13]

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Yes.

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Operator [14]

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We'll now take our next question from Chuck Grom with Gordon Haskett.

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Andrew James Minora, Gordon Haskett Research Advisors - Research Associate of Retail [15]

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This is Andrew on for Chuck. I had a question on full year sales outlook. So to get to the midpoint of the comp guidance, it implies a pretty material acceleration on the 2-year and 4Q across your biggest brands. Can you guys help us understand a little bit like what's going to drive that acceleration in the fourth quarter? And then I have a quick follow-up.

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [16]

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Well, I mean if you look at our year-to-date performance on a 1-year basis, we're essentially at the high end of our guidance. So I mean, yes, you can look at it at a 2-year and come to your own conclusions on that. But at the end of the day, we feel confident we have no reason to believe that we can't continue to drive that top line especially given all of the strong customer counts that we have, the strong traffic we have, the momentum we're seeing in the e-commerce business. And again, our demand just accelerated from second quarter, so the health of the customer and what they want from our business is still strong.

You also saw Williams-Sonoma accelerate from the second quarter, and they become a bigger piece of the pie next year. So given all of our product pipeline, the fact that our teams are ready more than ever with the increase in the hourly wages, we've been able to get them lined up, an incredible lineup of talent to be ready for this holiday season. We feel very strong that we can hit the high end.

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Andrew James Minora, Gordon Haskett Research Advisors - Research Associate of Retail [17]

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That's great. That's helpful. And then if I could just on the gross margin line, ex revenue, add rev rec impact, I know you guys talked about the components. But can you give us a sense of the magnitude of the different components of gross margins this quarter versus second quarter?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [18]

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Well, so we don't typically go through all the line items. We typically tell you, you know, selling margin was up 50 basis points. It was up 10 basis points from an occupancy perspective. For total gross margin, up 60. If you back out the accounting, it's essentially flat across the board. But I think what's important to realize is that we drove these healthy margins, and we had demand comp that was higher, and we had shipping costs that were higher because we were able to offset it again with another quarter of incredible supply chain efficiencies. So it really speaks to the fact that our initiatives to both streamline the promotions and to continue to drive efficiencies across our company enabled us to hold our selling margins and gross margin.

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Operator [19]

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(Operator Instructions) We'll hear our next question from Chris Horvers with JP Morgan.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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So if -- I'm just curious on the demand comp. Did Williams-Sonoma and West Elm have a demand comp versus actual comp this year? Was that mainly in Pottery Barn? And if not, for West Elm, I mean it's a pretty similar type of product mix. Why wouldn't West Elm would have that impact? And then as it relates to the fourth quarter guide, I mean you did widen out to 0% to 5% versus 3% to 5% in the first half of the year. So if you have this visibility to an incremental 150 basis points, it's already in the bag, so to speak, why widen the guide out so much? Is that -- do you expect further demand comp issues?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [21]

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So on the West Elm and the other brands -- all brands were impacted by the delays out of China. And so all brands except for one of the smaller brands had demand comps that were higher. So your question on West Elm, they would've been even higher. That's how on fire they were. So I wouldn't read anything into that.

As far as the guidance range, there's a couple of things going on there. I mean first of all, we just held the fiscal year. We raised twice this year already. So given we hit our guidance, we thought the prudent thing to do was to hold our fiscal year, and that's just sort of the math, which is equal to the implied guidance that we gave you guys last quarter. There's not a big story there. I mean the only thing I could -- other -- point to on that front is the fact that we do have this China delay, and we're obviously watching that closely. We do expect that to be cleared up in the next couple of weeks. But in the event that doesn't, that could cause us to be at the lower end of the range, which by the way as was mentioned earlier, on a 2-year basis, it's still in line with our trend.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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And then just a quick follow-up. So the selling margins up 50, that includes the accounting benefit?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [23]

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Yes.

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Operator [24]

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(Operator Instructions) We'll hear now from Simeon Gutman with Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [25]

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Sorry for the noise. I'll put it all in one. Julie, on the demand comp, one more on this. I guess the history on it, I think you said assuming all of that demand gets realized, is there anything different about this quarter? Will customers back out? Like why should it flow through at that rate? And then the second question, I think you also mentioned product delays, but it looks like customer balance sheets -- customer deposits are also down on the balance sheet. So how do those reconcile?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [26]

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Yes. There isn't anything unusual from a cancellation perspective or anything like that, that you're thinking about from a demand perspective. We do expect that all to come in. I mean when we look at the delta between the demand and net and we look at what is missing from a receipt perspective, it matches up. So we expect that all to come in. It's just a delay in the timing of the receipts. From a customer deposit perspective, the reason that it's down is -- from the beginning of the year, that's been down because of the accounting change. We had to run through a bunch of income through that balance sheet account. And so when you look at it now at Q3 relative to last year, it's just showing that it's down for that reason. I would not read anything into that at all. And remember, the biggest piece of that account is our gift cards.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [27]

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Right. And the inventory, would that have been up more had it flipped? Say the demand and the same-stores comp was the same, the inventory would have looked different at the end of the quarter or still would have looked better than sales?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [28]

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No, it should have still looked better than sales because remember, this inventory is to fulfill customer demand. So they're on back order. They're waiting for it, so we would have then flipped it around and shipped it out, so it would have been in our inventory.

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Operator [29]

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We'll take our next question from Jonathan Matuszewski with Jefferies.

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Jonathan Richard Matuszewski, Jefferies LLC, Research Division - Equity Analyst [30]

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Just first one, last quarter you mentioned some new opening price points at West Elm. I think you've been doing that across the Pottery Barn brands too. Could you just elaborate on your progress kind of with this pricing strategy? Maybe just share some more on this introduction of the Design Crew Basics line and kind of is the conversion for these opening price points coming from more existing customers or new customers? Any color there would be helpful.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [31]

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Sure. Thank you for the question. We're always testing and refining our pricing strategy. And we did some of our brand work last year in Williams-Sonoma and Pottery Barn. We had a lot of customers who said, "We love your brand, but we simply can't afford it." And so at that point, we looked to increasing our opening price point and also the scale of the products we're selling.

And in all of our brands, we never set out to be the most expensive. We set out to be the best, to have the best quality for the value. And so because of our buying power, we knew that we'd be able to bring in great quality basics at a great price. And that's what we've done across all of our brands, this Design Crew Basics program that we're talking about.

And then specific to each brand, they each have one of these strategies. So for example, in Williams-Sonoma, you see Open Kitchen. Fantastic growing business, and it's really attracting a younger clientele and new customers to the brand, which is awesome. In Pottery Barn, you've seen us introduce Pottery Barn Apartment, which is smaller scale, more value-oriented, a lot of knockdown furniture. And again that's driving increased incremental demand. And then West Elm continues to grow its business across not just furniture but in other categories, so that if you're not looking for a sofa yet but you want to go in and buy a vase, there's more offer. And so they're attracting younger customers and customers coming into the market with not only price point but mix.

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Jonathan Richard Matuszewski, Jefferies LLC, Research Division - Equity Analyst [32]

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Got it. And then just a quick follow-up on the loyalty program. It seems like the easier enrollment is probably helping expansion of the program. But what are you thinking in terms of driving that enrollment higher? Are you thinking about any new kind of member benefits there? Any color there would be helpful.

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Felix Carbullido, Williams-Sonoma, Inc. - Executive VP & CMO [33]

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As Laura mentioned, our enrollment rates throughout the quarter were up close to 4x last year's rate. Buried in some of those numbers is the latter half of October, where we implemented easy enrollment online, and we actually saw the numbers go close to 20x last year's rate. So we're headed into Q4 with a platform that will encourage enrollment across not just our retail stores, which was the key driver of enrollment, but now for our online customers, to make it basically a no click alternative to join our program. And as Julie mentioned, that's 55% of our business. So we anticipate this program growing dramatically.

This quarter, we're excited to introduce a number of different initiatives. I guess the most exciting one is a program in which we're encouraging customers to repeat across our brands, with an ultimate prize to win a home makeover sweeps by our Design Crew. So we have a number of programs in place that will encourage frequency across our brands for the holiday.

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Operator [34]

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(Operator Instructions) We'll hear now from Cristina Fernández with Telsey Advisory Group.

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Cristina Fernández, Telsey Advisory Group LLC - Director & Senior Research Analyst [35]

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I had a follow-up question on the inventory delays. Are there any categories that are more impacted? And are you seeing any meaningful change in the cost to bring product in? We've heard from other retailers that it's just more costly with the backlog, so wanted to see if that's something you're seeing as well.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [36]

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Sure. We actually had a little bit more of an impact on our kids business, where the demand comp was even more sizably greater than the net comp. But as Julie said, all brands were affected. In terms of price, we have a really favorable shipping contract out of Asia. So even if we're paying a spot rate on a few containers, it's not exorbitant. It doesn't add up to as much. Depends on, I think what people's rates were and where their contract began or ended, and we're in good shape.

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Cristina Fernández, Telsey Advisory Group LLC - Director & Senior Research Analyst [37]

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And a quick follow-up, if I may. On Pottery Barn Kids and Teens, are the unproductive promotions that affected this quarter just a onetime or -- and we should see revenues accelerate? Or is that something that could carry forward into the fourth quarter as well?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [38]

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I'm just -- I'm thrilled that the kids and teens have reduced the amount of clearance particularly in the stores, but also online, it's a really very healthy way to run the business. And we didn't buy into that inventory, we're running our inventories tight, and we didn't comp it. So we saw very sizable margin improvements in those businesses. And, of course, gave up little sales in the meantime, but we're looking to drive to more profitable sales and not carry overstocks.

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Operator [39]

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We'll now take our next question from Seth Basham with Wedbush.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [40]

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I was hoping you can provide some more color on category strength. Is furniture still disproportionately driving the account?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [41]

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We're seeing strength across a lot of categories. As I said earlier, some of these incremental businesses are very important to us and whether it's the baby business, Modern Baby, the apartment business, Open Kitchen, those are all excellent. And then we see strength where we have innovation in Williams-Sonoma and exclusives that I talked about earlier. And then we continue to see our upholstery and furniture business to be quite strong. We have an advantage because we make most of our own upholstery here in America. It's very high quality, and our customers really understand that quality difference. And it's able to get to them faster. It's all custom. And we're able to deliver it faster and at higher quality than our competition.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [42]

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And as a follow-up, I was hoping to get some color on how you would characterize the current promotional environment and how you fared in terms of changing your promotions around year-to-date and what you might do any differently going forward.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [43]

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Sure. I would say that we have more effective promotions this year versus last. And as I said earlier, we have less clearance. As you can tell out in the environment, we're in the midst of the holiday season, and people are getting ready for Black Friday as are we. And it's been competitive. It's been competitive in years past. I don't see a material change.

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Operator [44]

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We'll take our next question from Mike Baker with Deutsche Bank.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [45]

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I wanted to ask about the accounting change, and you said it has to do with the timing with the last week, the strength of the last week. But if I'm understanding your Exhibit 2 in your press release, it looks like it helped -- that helped the EBIT dollars by about $4.3 million. And I think it's been a help in each of the last 3 quarters. So is that just that you just had really strong last weeks of the quarters, the last 3 weeks? And I guess the sort of related question is when does that reverse or cycle itself? And not to make everyone's head explode, but how does the extra week impact that? Because the timing of all your quarters will be off next year.

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [46]

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Okay. So I think the first way to think about it, especially in this quarter, is the fact that if you were to not sort of accept or account for the accounting change in the third quarter, then basically you can't account for it in the second quarter, which means the second quarter change would come into the third quarter. And if you look at the second quarter and the third quarter, they're exactly the same. I mean they're very, very similar. So from that perspective, there's absolutely no impact on our quarter. But to answer your question, yes, we have seen strength in the last week or 2 of the quarter, this quarter as well, which we're very pleased to see, given that customers reacting to the promotions and our products.

Going forward, I -- you asked something about a 53rd week. I don't see that there should be any impact on the 53rd week as a result of the accounting.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [47]

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Okay. Well, just the timing of when the quarters end. But so is there any way to think about a year-to-date number? Again, on that Exhibit 2, it was -- in the third quarter, it helped by $4.2 million. But I mean, so is it incorrect just to add up that Exhibit 2 number for each of the last 3 quarters?

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Julie P. Whalen, Williams-Sonoma, Inc. - Executive VP & CFO [48]

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Yes, because you would reverse it out each quarter if you think about it, right. So I mean you either get it in 1 quarter and then it comes out the other quarter. So it's a reversal that comes in and out between the quarters, so you have to take -- if you look at Q3, you have to take the Q2 and assume that would've been in Q3, and then you would have pulled Q3 out. And so you can't look at it as a sum of the 3 quarters.

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Operator [49]

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And we'll take our final question from Marni Shapiro with Retail Tracker.

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Marni Shapiro, The Retail Tracker - Co-Founder [50]

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The stores look absolutely beautiful so best of luck with the holidays if I don't remember at the end. Can we just dig in a little bit to your registry business? Can you give us an idea about the scale of your registry businesses across the brands? I guess which brand is the biggest and what it looks like and how significant the one could be? And then also do you find that your registry customers have a much higher lifetime value across the span of years?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [51]

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Sure, I'll take that. Registry is a really important entry point to our brands. And they are often our best customers lifetime. We have never given the number of what it is. Of course, it's the largest in Williams-Sonoma. But we have also realized that we haven't been as competitive because we didn't offer the kitchen plus the linens and the whole house wasn't offered together. And so with this Registry One Collective that we've just launched across our brands, you can register in each of our brands and have the great experience that we offer across all of them. And that is a huge unlock. I actually, believe that it will double our registry business over time. And we just did this a couple weeks ago. So it's really too early to read for you. But I expect that we'll see both registry and total growth but also value creation over time.

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Marni Shapiro, The Retail Tracker - Co-Founder [52]

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Over time. And is it a significant enough part of the business to the level of one of your smaller businesses? Is it as significant as, say a Mark and Graham kind of thing?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [53]

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I don't -- is...

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Marni Shapiro, The Retail Tracker - Co-Founder [54]

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Meaning are your registry sales, because -- are your registry sales at the level of, say Mark and Graham as a stand-alone company?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [55]

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That's an interesting way to ask me how big it is.

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Marni Shapiro, The Retail Tracker - Co-Founder [56]

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Well, I guess without giving me the -- I mean, let me rephrase it. I guess is it as important, I guess? Without giving me exact numbers, is it very important, as important as one of the new businesses or birthing a new business?

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [57]

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It is very important. It's got a lot of upside because I don't think we've been as competitive as we could be because we didn't have it cross-brand, which is the obvious unlock. And so now that we have the platform, imagine taking the platform plus The Key and all the things that we know how to do with our house phone, using that against this One Registry Collective. So I think it's going to be an area where we've been strong but an area where we can be the clear leaders because we own these brands in house and we have the platform to serve our customers across them.

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Felix Carbullido, Williams-Sonoma, Inc. - Executive VP & CMO [58]

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And it is a key driver of new customer growth for every brand, including Pottery Barn Kids. So as Laura mentioned, the lifetime value there as we start to introduce more relevant customers in that market to our other brands, we see new customer growth as a major benefit of The One.

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Marni Shapiro, The Retail Tracker - Co-Founder [59]

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Can I ask a follow-up to the customer growth? Is dorm also an area for new customer growth? Do you see new customers coming into your brands because of PB Dorm as well?

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Felix Carbullido, Williams-Sonoma, Inc. - Executive VP & CMO [60]

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Yes, absolutely. And these incremental businesses that we talked about earlier are meant to focus on new customer acquisition. Yes, our existing customers participate, but they're also strategic after going -- in terms of going after white space in the market.

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Operator [61]

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And that concludes our question-and-answer session for today. I'll turn the conference back over to Ms. Alber for any additional or closing remarks.

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Laura J. Alber, Williams-Sonoma, Inc. - CEO, President & Director [62]

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Great. I want to thank all of you for joining us on the call today. I know our thoughts all go out to those affected by the devastating fires in California. And as a company that's based here in California, we're using our headquarters here as a base for donations for the relief efforts, just like we did last year. And I know we're all going off to celebrate a wonderful Thanksgiving, but it's an extremely difficult time for some of our neighboring communities. And we are all doing what we can to provide assistance to those in need. And with that, happy Thanksgiving to you and yours, and I'm looking forward to talking to you after the holidays.

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Operator [63]

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Thank you. That does conclude our conference call for today. We thank you for your participation, you may now disconnect.