WSM Williams Sonoma

Net revenue growth of 8.2%, with comparable brand revenue growth of 5.5%GAAP diluted EPS of $0.54; non-GAAP diluted EPS of $0.67Raises 2018 full-year guidance

Williams-Sonoma, Inc. (NYSE: WSM) today announced operating results for the first fiscal quarter (“Q1 18”) ended April 29, 2018 versus the first fiscal quarter (“Q1 17”) ended April 30, 2017.

KEY HIGHLIGHTS

1st Quarter 2018

• Net revenue growth of 8.2%
• Comparable brand revenue growth of 5.5%
• E-commerce net revenue growth accelerates double-digits, to 53.7% of total company net revenues
• GAAP operating margin of 5.5%; non-GAAP operating margin of 6.3%
• GAAP diluted EPS of $0.54; non-GAAP diluted EPS of $0.67 outperforms guidance
• Merchandise inventories growth of 1.5%, significantly below net revenue growth

These results include the adoption of ASU No. 2014-09, which pertains to revenue recognition, in the first quarter of 2018. The year-over-year impact of this change in accounting is a financial benefit of $13.6 million in net revenues, $1.6 million in operating income and $0.01 in EPS. From a rate perspective, this amounts to a benefit of approximately 130bps of revenue growth, 30bps of comparable brand revenue growth, 70bps of gross margin improvement, 60bps of selling, general and administrative expense deleverage and 10bps of operating margin improvement. See Exhibit 2 for more details on the financial impact of adoption.

Fiscal Year 2018 Guidance

• Net revenue guidance raised to $5,495 billion – $5,655 billion
• Non-GAAP diluted EPS raised to $4.15 – $4.25

Laura Alber, President and Chief Executive Officer, commented, “Following a robust fourth quarter, we saw continued strength in the first quarter. We achieved strong results against our guidance range across all metrics, with our e-commerce revenues outpacing to almost 54% of our total revenues. Our customer growth continued to trend positively for both new and existing customers, demonstrating the success of our balanced customer acquisition strategy.”

Alber continued, “These results speak to the power of our established multi-channel model, distinctive brand portfolio and world-class customer service heritage – all of which are our company’s competitive strengths. Based on this strong start to the year, we are raising our full year guidance for net revenues by $20 million and for EPS by $0.03.”

1st QUARTER 2018 RESULTS

Net revenues increased 8.2% to $1.203 billion in Q1 18 from $1.112 billion in Q1 17. Excluding certain discrete items, non-GAAP net revenues were $1.202 billion in Q1 18 or an 8.2% increase on Q1 17. See Exhibit 1.

Comparable brand revenue in Q1 18 increased 5.5% compared to an increase of 0.1% in Q1 17 as shown in the table below:

1st Quarter Comparable Brand Revenue Growth (Decline) by Concept*

         

Q1 18 

 

Q1 17 

Pottery Barn 2.7%   (1.4%) West Elm 9.0% 6.0% Williams Sonoma 5.6% 3.2% Pottery Barn Kids and Teen1 5.3%   (8.0%) Total 5.5%   0.1%

*See the Company’s 10-K and 10-Q filings for the definition of comparable brand revenue.

1Starting in Q1 18, the performance of the Pottery Barn Kids and PBteen brands are beingreported on a combined basis as Pottery Barn Kids and Teen. For reference, thecomparable brand revenue growth for Pottery Barn Kids and PBteen were 4.3% and 8.2%,respectively, for Q1 18, and (5.7%) and (14.3%), respectively, for Q1 17.

 

E-commerce net revenues in Q1 18 increased 11.3% to $646 million from $581 million in Q1 17. Excluding certain discrete items, non-GAAP e-commerce net revenues were $645 million in Q1 18 or an 11.2% increase on Q1 17. See Exhibit 1.

Retail net revenues in Q1 18 increased 4.9% to $557 million from $531 million in Q1 17.

Operating margin in Q1 18 was 5.5% compared to 5.6% in Q1 17. Excluding certain discrete items, non-GAAP operating margin was 6.3% in Q1 18 versus 6.1% in Q1 17. See Exhibit 1.

     

–

Gross margin was 35.9% in Q1 18 versus 35.6% in Q1 17. Excluding certain discrete items, non-GAAP gross margin was 36.0% in Q1 18. See Exhibit 1.

 

–

Selling, general and administrative (“SG&A”) expenses were $366 million, or 30.4% of net revenues in Q1 18, versus $333 million, or 30.0% of net revenues in Q1 17. Excluding certain discrete items, non-GAAP SG&A expenses were $358 million, or 29.7% of net revenues in Q1 18 versus $328 million, or 29.5% of net revenues in Q1 17. See Exhibit 1.

The effective income tax rate in Q1 18 was 30.9% versus 36.8% in Q1 17. Excluding certain discrete items, the non-GAAP effective income tax rate was 23.8% in Q1 18 versus 34.5% in Q1 17. See Exhibit 1.

EPS in Q1 18 was $0.54 versus $0.45 in Q1 17. Excluding certain discrete items, non-GAAP EPS was $0.67 in Q1 18 versus $0.51 in Q1 17. See Exhibit 1.

Merchandise inventories at the end of Q1 18 increased 1.5% to $1.053 billion from $1.037 billion at the end of Q1 17.

STOCK REPURCHASE PROGRAM

During Q1 18, we repurchased 732,000 shares of common stock at an average cost of $51.53 per share and a total cost of approximately $38 million. As of April 29, 2018, there was approximately $481 million remaining under our current stock repurchase program.

 

FISCAL YEAR 2018 FINANCIAL GUIDANCE

 

2nd Quarter 2018 Financial Guidance*

  Total Net Revenues (millions) $1,250 – $1,275 Comparable Brand Revenue Growth 3% – 5% Non-GAAP Diluted EPS $0.65 – $0.70    

Fiscal Year 2018 Financial Guidance*

  Total Net Revenues (millions) $5,495 – $5,655 Comparable Brand Revenue Growth 2% – 5% Non-GAAP Operating Margin 8.2% – 9.0% Non-GAAP Diluted EPS $4.15 – $4.25 Non-GAAP Income Tax Rate 24.0% – 26.0% Capital Spending (millions) $200 – $220 Depreciation and Amortization (millions) $185 – $195

* We have not provided a reconciliation of non-GAAP guidance measures to the corresponding GAAP  measures on a forward-looking basis due to the potential variability of discrete items.

 

Store Opening and Closing Guidance by Retail Concept**

  FY 2017 ACTUAL FY 2018 GUIDANCE   Total New

Close 

End Williams Sonoma 228 5 (15) 218 Pottery Barn 203 4 (3) 204 West Elm 106 9 (3) 112 Pottery Barn Kids 86 - (9) 77 Rejuvenation 8 2

- 

10 Total 631 20 (30) 621

** Included in the FY 17 store count are 19 stores in Australia and two stores in the UK.   FY 18 guidance includes one additional UK store.

 

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, May 23, 2018, at 2:00 P.M. (PT). The call, hosted by Laura Alber, President and Chief Executive Officer, will be open to the general public via live webcast and can be accessed at http://ir.williams-sonomainc.com/events. A replay of the webcast will be available at http://ir.williams-sonomainc.com/events.

SEC REGULATION G — NON-GAAP INFORMATION

This press release includes non-GAAP financial measures. Exhibit 1 provides reconciliations of these non-GAAP financial measures to the most comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for or superior to the GAAP financial measures presented in this press release and our financial statements and other publicly filed reports. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements relating to: our ability to continue to improve performance and increase our competitive advantage; our focus on operational excellence; our ability to improve customers’ experience; our optimism about the future; our ability to drive long-term profitable growth; our future financial guidance, including Q2 18 and FY 2018 guidance; our stock repurchase program; and our proposed store openings and closures.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include: continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending; new interpretations of or changes to current accounting rules or tax regulations; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; changes in consumer spending based on weather, political, competitive and other conditions beyond our control; delays in store openings; competition from companies with concepts or products similar to ours; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; effective inventory management; our ability to manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in e-marketing, infrastructure and regulation; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; challenges associated with our increasing global presence; dependence on external funding sources for operating capital; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; and other risks and uncertainties described more fully in our public announcements, reports to stockholders and other documents filed with or furnished to the SEC, including our Annual Report on Form 10-K for the fiscal year ended January 28, 2018 and all subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

ABOUT WILLIAMS-SONOMA, INC.

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed through e-commerce websites, direct-mail catalogs and retail stores. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry.

 

Williams-Sonoma, Inc.

Condensed Consolidated Statements of Earnings

(unaudited)

  Thirteen Weeks Ended April 29, 2018   April 30, 2017 In thousands, except per share amounts   $   % ofRevenues   $   % ofRevenues E-commerce net revenues 646,180   53.7% 580,510   52.2% Retail net revenues   556,820   46.3%   530,997   47.8% Net revenues 1,203,000 100.0% 1,111,507 100.0% Cost of goods sold   770,836   64.1%   715,747   64.4% Gross profit 432,164 35.9% 395,760 35.6% Selling, general and administrative expenses   365,614   30.4%   333,286   30.0% Operating income 66,550 5.5% 62,474 5.6%

Interest (income) expense, net

  1,201   0.1%   (103)   - Earnings before income taxes 65,349 5.4% 62,577 5.6% Income taxes   20,181   1.7%   23,022   2.1% Net earnings   45,168   3.8%   39,555   3.6% Earnings per share (EPS): Basic $0.54 $0.45 Diluted   $0.54       $0.45     Shares used in calculation of EPS: Basic 83,392 86,962 Diluted   84,174       87,710    

 

     

Williams-Sonoma, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

  In thousands, except per share amounts   April 29,

2018

  January 28,

2018

  April 30,

2017

ASSETS Current assets Cash and cash equivalents $ 290,244 $ 390,136 $ 93,975 Accounts receivable, net 102,630 90,119 63,982 Merchandise inventories, net 1,052,892 1,061,593 1,037,107 Prepaid catalog expenses — 20,517 20,341 Prepaid expenses 56,333 62,204 64,739 Other current assets     21,118     11,876     10,901 Total current assets     1,523,217     1,636,445     1,291,045 Property and equipment, net 926,320 932,283 920,531 Deferred income taxes, net 58,842 67,306 124,977 Other long-term assets, net     148,526     149,715     54,624 Total assets   $ 2,656,905   $ 2,785,749   $ 2,391,177 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $

393,025

$

457,144

$

397,442

Accrued expenses 99,823 134,207 87,184 Gift card and other deferred revenue 256,534 300,607 298,113 Borrowings under revolving line of credit — — 45,000 Income taxes payable 72,036 56,783 37,792 Other current liabilities    

61,403

   

59,082

   

47,134

Total current liabilities     882,821     1,007,823     912,665 Deferred rent and lease incentives 204,599 202,134 195,201 Long-term debt 299,472 299,422 — Other long-term liabilities     72,779     72,804     73,160 Total liabilities     1,459,671     1,582,183     1,181,026 Stockholders’ equity Preferred stock: $.01 par value; 7,500 shares authorized; none issued — — —

Common stock: $.01 par value; 253,125 shares authorized; 83,222, 83,726 and   86,883 shares issued and outstanding at April 29, 2018,   January 28, 2018 and April 30, 2017, respectively

833

837 869 Additional paid-in capital 564,685 562,814 549,281 Retained earnings 638,774 647,422 671,758

Accumulated other comprehensive loss

(6,755)

(6,782)

(10,830)

Treasury stock, at cost     (303)     (725)    

(927)

Total stockholders’ equity     1,197,234     1,203,566     1,210,151 Total liabilities and stockholders’ equity   $ 2,656,905   $ 2,785,749   $ 2,391,177           Retail Store Data(unaudited)                       January 28, 2018   Openings   Closings   April 29, 2018   April 30, 2017 Williams Sonoma 228 — (4) 224 233 Pottery Barn 203 1 (1) 203 199 West Elm 106 2 — 108 99 Pottery Barn Kids 86 — (2) 84 89 Rejuvenation   8   —   —   8   8 Total   631   3   (7)   627   628  

Williams-Sonoma, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

    Thirteen Weeks Ended In thousands   April 29,2018   April 30,2017 Cash flows from operating activities:   Net earnings $ 45,168 $ 39,555 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 47,873 44,950 Loss on disposal/impairment of assets

414

519 Amortization of deferred lease incentives (6,724)

(6,477)

Deferred income taxes (3,241)

(3,848)

Tax benefit related to stock-based awards 6,126 13,742 Stock-based compensation expense 12,889 9,817 Other 64

 

(76)

Changes in: Accounts receivable

(9,556)

24,610 Merchandise inventories 2,388

(60,246)

Prepaid catalog expenses —

(844)

Prepaid expenses and other assets (4,399)

(11,069)

Accounts payable

(76,823)

 

(65,483)

Accrued expenses and other liabilities

(32,047)

(47,248)

Gift card and other deferred revenue

4,815

(4,648)

Deferred rent and lease incentives 10,004 5,806 Income taxes payable     13,818     14,564 Net cash provided by (used in) operating activities    

10,769

   

(46,376)

Cash flows from investing activities: Purchases of property and equipment (34,029)

(32,153)

Other    

120

    5 Net cash used in investing activities    

(33,909)

   

(32,148)

Cash flows from financing activities: Repurchases of common stock (37,713)

(38,350)

Payment of dividends (34,081)

(34,189)

Tax withholdings related to stock-based awards (7,438)

(13,780)

Borrowings under revolving line of credit     —     45,000 Net cash used in financing activities     (79,232)    

(41,319)

Effect of exchange rates on cash and cash equivalents 2,480 105 Net decrease in cash and cash equivalents (99,892)

(119,738)

Cash and cash equivalents at beginning of period     390,136     213,713 Cash and cash equivalents at end of period   $ 290,244   $ 93,975  

Exhibit 1

1st Quarter GAAP to Non-GAAP Reconciliation*

(unaudited)

(Dollars in thousands, except per share data)

  Thirteen Weeks Ended April 29, 2018       GAAP Basis

(as reported)

  Outward-Related1  

Employment-

Related Expense2

  Tax Reform3  

Impact of Equity

Accounting Rules4

  Non-GAAP Basis Net revenues $ 1,203,000 $ (694) $ 1,202,306 Gross profit 432,164

582

432,746

% of Revenues 35.9% 36.0% Selling, general and administrative expenses 365,614 (6,344) (1,702) - - 357,568 % of Revenues 30.4% 29.7% Operating income 66,550 6,926 1,702 - - 75,178 % of Revenues 5.5% 6.3% Earnings before income taxes 65,349 6,930 1,702 - - 73,981 Income taxes 20,181 1,467 402 $ (3,298) $ (1,146) 17,606 Tax rate     30.9%                     23.8% Net earnings   $ 45,168   $ 5,463   $

1,300

  $ 3,298   $ 1,146   $ 56,375 Diluted EPS $0.54 $0.06 $0.02 $0.04 $0.01 $0.67   Thirteen Weeks Ended April 30, 2017     GAAP Basis

(as reported)

Severance-Related

Expense5

Adoption of Equity

Accounting Rules4

Non-GAAP

Basis

Selling, general and administrative expenses $ 333,286 $ (5,705) - $ 327,581 % of Revenues 30.0% 29.5% Operating income 62,474 5,705 - 68,179 % of Revenues 5.6% 6.1% Earnings before income taxes 62,577 5,705 - 68,282 Income taxes 23,022 1,971 $ (1,429) 23,564 Tax rate     36.8%             34.5% Net earnings   $ 39,555   $ 3,734   $ 1,429   $ 44,718 Diluted EPS $0.45 $0.04 $0.02 $0.51

*Per share amounts may not sum across due to rounding to the nearest cent per diluted share.

 

Reconciliation of GAAP to Non-GAAP By Segment**

(unaudited)

                In thousands   E-commerce   Retail   Unallocated   Total     Q1 18   Q1 17 Q1 18   Q1 17 Q1 18   Q1 17 Q1 18   Q1 17 Net revenues $ 646,180 $ 580,510 $ 556,820 $ 530,997 - - $ 1,203,000 $ 1,111,507 Outward-related1     (694)                   (694)     Non-GAAP net revenues     645,486     580,510   556,820     530,997         1,202,306     1,111,507 Net revenue growth 11.3% 0.7% 4.9% 1.8% 8.2% 1.2% Non-GAAP net revenue growth     11.2%     0.7%   4.9%     1.8%         8.2%     1.2% GAAP operating income (expense)     142,805     132,004   22,061     21,714 (98,316)   (91,244)   66,550     62,474 GAAP operating margin     22.1%     22.7%   4.0%     4.1% (8.2)%   (8.2)%   5.5%     5.6% Outward-related1 5,551 - - - 1,375 - 6,926 - Employment-related expense2 - - - - 1,702 - 1,702 - Severance-related expenses5     -     -   -     - -   5,705   -     5,705 Non-GAAP operating income (expense)     148,356     132,004   22,061     21,714 (95,239)   (85,539)   75,178     68,179 Non-GAAP operating margin     23.0%     22.7%   4.0%     4.1% (7.9)%   (7.7)%   6.3%     6.1%  

**See the Company’s 10-K and 10-Q filings for additional information on segment reporting and the definition of operating income (expense) and operating margin.

 

SEC Regulation G – Non-GAAP Information – These tables include non-GAAP net revenues, gross profit, gross margin, SG&A, operating income, operating margin, earnings before income taxes, income taxes, effective tax rate, net earnings and diluted EPS. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our quarterly actual results on a comparable basis with prior periods. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.

Notes to Exhibit 1:

1

During Q1 18, we incurred approximately $6.9 million of expense, primarily associated with acquisition-related compensation expense, amortization of intangible assets, as well as the operations of Outward, Inc.

2

During Q1 18, we incurred approximately $1.7 million of employment-related expense in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.

3

During Q1 18, we recorded income tax expense of approximately 3.3 million, primarily related to the measurement of the income tax effect of the Tax Cuts and Jobs Act enacted in Q4 17.

4 During Q1 18 and Q1 17, we recorded income tax expense of approximately $1.1 million and $1.4 million, respectively, associated with the adoption of accounting rules related to stock-based compensation. 5 During Q1 17, we incurred approximately $5.7 million for severance-related reorganization expenses primarily in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.        

Exhibit 2

ASU No. 2014-09 Impact of Adoption*

(unaudited)

(Dollars in thousands)

                  Q1 2018GAAPAs Reported   ASU 2014-09Adjustment   Q1 2018GAAPAs Adjusted Net revenues $ 1,203,000 $ (25,101) $ 1,177,899 Cost of goods sold 770,836 (6,144) 764,692 Gross profit 432,164 (18,957) 413,207 SG&A expenses 365,614 (12,262) 353,352 Operating income   $ 66,550   $ (6,695)   $ 59,855

*We adopted ASU No. 2014-09, which pertains to revenue recognition, in the first quarter of fiscal 2018. This table shows the impact of adopting ASU No. 2014-09 on our consolidated statement of earnings for the first quarter of fiscal 2018.

     

Pro Forma Effect of ASU No. 2014-09**

(unaudited)

(Dollars in thousands, except per share data)

  As Reported Pro Forma    

Q1 2018

Non-

GAAP1

 

Q1 2017

Non-

GAAP2

 

Q1

Year-

Over-

Year

Q1 2018

Non-

GAAP1

 

Q1 2017 Non-

GAAP Including

the Effect of

ASU 2014-093

 

Q1

Year-

Over-

Year

Year-Over-Year

Impact of

Accounting Change

Net revenues $1,202,306   $1,111,507 $90,799 $1,202,306   $1,125,131 $77,175 $13,624 Net revenue growth 8.2% 6.9% 1.3% Revenue comp       5.5%       5.2% 0.3% Gross margin % 36.0% 35.6% 0.4% 36.0% 36.3% -0.3% 0.7% SG&A expenses % 29.7%   29.5% -0.2% 29.7%   30.1% 0.4% -0.6% Operating income 75,178 68,179 $6,999 75,178 69,751 $5,427 $1,572 Operating margin % 6.3%   6.1% 0.2% 6.3%   6.2% 0.1% 0.1% Diluted EPS $0.67   $0.51 $0.16 $0.67   $0.52 $0.15 $0.01   ** We adopted ASU No. 2014-09 in the first quarter of fiscal 2018 using the modified retrospective method. Results for reporting periods beginning after January 29, 2018 are presented under ASU No. 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with the prior revenue recognition standard. This table presents the pro forma effect of ASU No. 2014-09 as if the recognition and presentation guidance in the accounting standard had been applied in fiscal 2017.      

 

1

 

These numbers represent Q1 2018 non-GAAP financial results as disclosed in Exhibit 1, and include the impact of adopting the new revenue standard (ASU 2014-09).

 

2

These numbers represent Q1 2017 non-GAAP financial results as disclosed in Exhibit 1, and exclude the impact of the new revenue standard.

 

3

In order to provide a meaningful year-over-year comparison of our Q1 financial results, we have adjusted our Q1 2017 results for informational purposes to reflect the impact as if the new revenue standard had been adopted in Q1 2017.

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WILLIAMS-SONOMA, INC.Julie Whalen, 415-616-8524EVP, Chief Financial Officer-or-Elise Wang, 415-616-8571Vice President, Investor Relations