Q3 2019 Earnings Call
Good day, ladies and gentlemen, and take your standing by welcome to today's Williams, Sonoma Inc. third quarter 2019 earnings call.
All participants artificially mode. We will conduct a question answer session. After the presentation I'd like to remind everyone. This call is being recorded and I'd now like to turn the floor over to Brian <unk> Senior Vice President Corporate Finance and Treasurer. Please go ahead Sir.
Thank you good afternoon.
Center in conjunction with the press release that we issued earlier today.
Okay, and otherwise our discussion correlate to result in guidance based on certain non-GAAP numbers.
A reconciliation of non-GAAP financial matters, the most directly comparable GAAP financial measures.
Well, it's not widely non-GAAP financial measures may be useful are discussed one of our press release.
This call also contains forward looking statements within the meaning of the private Securities Litigation Reform Act 1995, which dropped the financial condition results of operation business initiatives trends guidance growth plans and prospects of the company had 2019 out of yeah Andrew.
Subject to risks and uncertainties that could cause actual results to differ materially from such forward looking statements.
Please refer to the coffee is her absolutely an FCC box, including the most recent takeaway for more information on these risks and uncertainties.
The company undertakes no obligation to update or revise any forward looking statements, reflecting back or circumstances.
All right after the date does call.
I will now turn the conference calls over the Laura Alber, our President and Chief Executive Officer.
Thank you, Brian and good afternoon, everyone.
On the called me today are Julie Whalen, our Chief Financial Officer, Scott Billeadeau, Our Chief Marketing Officer, and Yasir Anwar Chief Technology Officer.
Q3 marks another quarter of strong performance.
Comparable revenues accelerates a 545%.
Getting margin held flat to last year, despite increased Karen headwind and he asks grew 7.4%.
Our results and continued success relative to the industry.
After a strong value proposition of high quality, because I'm glad to sustainable products is resonating with our customers.
Pragmatic home furnishings industry, it's hard to overstate, how important is that trust to continually evolve to stay ahead of the pack remain at the forefront driving profitable growth.
Importantly, our digital first model is a key component of our success.
While we continue to innovate experience in our store our revenue growth was led by e-commerce at 9%, reaching almost 57% revenue.
Highlights in the brands include Westell, which let outperformance with a 14.1% huh.
So the 8.3% comp last year.
We've also had a continued the resurgence of growth across our pottery barn brands.
We also had double digit increases in our emerging brands rejuvenation and Mark and Graham.
I, despite a negative comp we improved profitability in the Williams Sonoma, perhaps.
She did drive results across all our businesses. It's our increased focus on leveraging the strength of our portfolio through cross brand initiatives like our growing business to business Division, our loyalty program and our in home design services.
We are optimistic about the future and excited to serve inspire our customers would outstanding service and product.
Deeper connection to our brands.
Before I discuss our third quarter performance Fibria I'd like to talk about the effectiveness of our efforts to mitigate tariff intact. Despite.
Despite the impact nearly doubling quarter to quarter, we saw sequential improvement in gross margin de leverage from Q2.
This is a result for the hard work of all of our team we've been moving production out of China Renegotiating protocol with our Chinese vendor and we have successfully taken selective price increases.
In addition, we've been reducing the level of promotion and as a result, we feel confident our strategies implemented to offset cost pressure to deliver profitable growth.
I'm now going to talk about our brands.
West Elm stand out results again, this quarter were powered far strong growth strategies and effective execution with comp growth accelerating to 14.1%. This quarter, we talk broad strength across all product categories and channels.
This growth was led by furniture with particular success in new product introductions and meet the yeah, including made to order upholstery complemented by category Cheetah customer acquisition, which includes decorative accessories and textiles.
Ecommerce growth accelerate for another quarter as our ongoing digital innovation drove customer acquisition and improved traffic and conversion.
Retail also accelerated due to our differentiated design services and our new western stores continue to perform above expectations.
At West Elm, our ongoing commitment to sustainability is embedded in our products and business fulfilling our mission to design with impact.
We've continued our commitments artisans as 20% of our Assortments handcrafted, we're excited to lead our brands and Fairtrade Dr. recertification exceeding our company gold people over $3 million unfair trade premiums to workers by 2020, a year ahead of schedule.
We're on track to surpass our commitments response resorts sourced went through a wide assortment of FSC certified furniture, and we are meeting customer demand for organic good fully converting our betting a bath assortment to beach Giotti after OTN certified.
Looking to Q4, our holiday Assortments in West Elm, where after a strong start and increased seasonal assortment, that's driving incremental growth.
Looking further ahead, we are hyper focused on executing our key growth strategies, including highlighting our design and values leadership expanding at a product white space driving brand awareness and new customer acquisition and growing across all channels to reach our goal of 3 billion a revenues for this brand.
The part of our brand also maintain their strong momentum from last quarter delivered comp growth of 3.4% and pottery barn, and 4% and pottery barn kids and team.
There's much to celebrate and the pottery barn, Brad as we gain traction in our digital transformation and brand refresh with accelerating demand growth and improved service metrics.
We drove strong digital growth NKTR, including double digit increases in traffic and product engagement.
We're seeing the benefits of improved product discovery with higher engagement in revenues per visit.
And we are effectively marketing, our differentiated quality and original design.
Demand in our stores is being driven by our trusted service culture and the talented team of designers, who facilitate putting a whole room together for our guests.
Stores to our multichannel advantage and customers embracing Omnichannel services like free DTC returns and the convenience of buy online pickup in store.
Designed to also continues to drive increased sales in store and an offsetting the traffic declines that are happening in some mall.
Growth in pottery barn is being driven by our successful initiatives.
Our curated pottery barn marketplace assortment is providing our guests with more choice while driving growth.
Our apartment assortment a floor space solutions is adding volume and converting new and younger customers.
And we are laying the foundation with increased assortment of contract grade furniture contributing towards that Williams, Sonoma Inc. business to business growth initiatives.
Another key success has been our monthly made campaign.
Which better communicate our commitment to sustainability and responsibly source material.
We're on track to meet our 2021 goal with 85% of our cotton Geo Ts certified organic and 33% of hardwood FSC certified and we've extended our leadership in mindful offerings with 50% of our closer departure Greengart gold certified.
These achievements have earned our company recognition by the nonprofit textile exchange as a top 10 company using organic cotton and preferred fibers and sustainable furnishings Council as a top scoring what furniture retailer.
We believe we're set up extremely well for the holiday season, and pottery barn, we've launched highly curated gift shops on mine that are inspiring and easy to shop and early reads to our customers are responding well to our assortments of cozy betting Velvet implants.
We're also seeing momentum in our pottery barn kids and gene brands.
We continue seat growth in our baby business as we expand its Fedex and price points.
We are using the lens of offerings safe healthiest product, thanks to our record safety standards and market, leading approached offerings Greenguard gold certified furniture and over 90% of our Assortments.
Our range stands from David Toddler kids routines and off to college, where we saw double digit growth in the quarter from offering of high quality to armor bedding furniture, and nobody else decorating solutions.
We're also focused on growing our customer reach through new et cetera.
Based on the success of our modern baby offering we recently announced the launch of pottery barn, modern kids and team.
A new range of furniture crafted with eco friendly material clean mines and kid oriented functionality.
Additionally, we are encouraged by the strong early reads on our children's Health Holiday collection, which include expanded holiday decor.
Gifting and seasonal betting.
And the Williams Sonoma brand, our priority remains balancing the brands long term growth with improved profitability and while we did run a negative 2.1% comp. We are encouraged execution against our transformation plan has already generated improved profitability.
Much of the sales shortfall in the quarter came from electric electrics, Bakeware, housewares and our Halloween Assortments.
Wf branded products continue to gain momentum remains the key growth initiatives in the future.
Consistent with our transformation strategies, we've improved our inventory levels and we've reduced a significant amount of low volumes skews across the brands.
We also continue to drive additional opportunities to improve overall profitability, including reduced promotional activity margin improvement and overall expense structure.
We made progress against our retail initiatives to eliminate waste and leverage our high impact remodels close underperforming stores and improve the in store experience.
In regard Ws home, we've made a strategic decision to reduced levels of promotion.
Focused unclear product stories and continue to improve our retail strategy.
Another point of differentiation in Williams, Sonoma is our dedication to making a positive impact.
In February we launched the Williams Sonoma cares campaign to increase the transparency of our ongoing commitment the wellbeing of our communities and our planet.
As of this year, 100% of our cookware SPF away free.
Underpinning of our food products are free of out ingredients, such as trans fat high fructose corn syrup, artificial colors and flavors and non traceable Commonwealth.
And we're making significant progress towards our goal for 2020 of the occupancy by 2020, we pledged to have 100% of claims Nonbranded coffee fair trade certified and 100% of our bed and Bath product Geo Ts certified organic and stood at 100 by Oak attacks.
In addition, we are transitioning all would kitchen tools to be FSC certified.
Looking forward to the fourth quarter, we're confident we'll deliver improved results from Q3 in the Williams Sonoma Brad.
We've increased our digital spend optimized catalog circulation and have a higher level of new innovative products that you will only find at Williams Sonoma.
As we deliver more relevant products and ideas to our customers, we will emphasize the Williams Sonoma different.
We are introducing new content rich experience is online and in our stores that reinforce Williams Sonoma as a destination for the holidays.
Initial reads on Thanksgiving hop in holiday products have been positive.
Our emerging brands rejuvenation, and Mark and Graham drove another quarter of double digit profitable growth as they continue to scale and attract new customers.
And in our global business, we saw continued profitable growth across both our company owned and franchise operations.
During the quarter, we expanded our wholesale network New Zealand in Ireland, which are off to a strong start and we're really looking forward to expanding our franchise operations with our entry into India early next year.
In addition to all of our brand initiatives, our cross brand programs have been increasingly impactful drivers of revenues and customer acquisition all year and during the third quarter. We added another 800000 members to our cross brand loyalty program. The key bringing total membership to 7.2 million.
This ongoing accelerate aggressive member is an important contributor to our future growth as a key members currently spend on average three times more the non team members with two times higher purchase frequency and they are three times more likely to shop across multiple brands.
They also driving significant lift in sales at key members typically spend over five times the value of their rewards.
To drive greater redemption, we optimize our redemption email campaigns and enhance rewards visibility across our brands sites.
We've also been expanding our member events and experiences to engage our best customer.
We'll be leveraging this valuable platform with the launch of more marketing initiatives and membership events throughout the holiday keep our brands top of mind and drive more cross brand shopping.
Our Williams Sonoma Inc. business to business Division also delivered another quarter of accelerating double digit growth and dropped nearly 100 basis points of comp growth for the total company.
Three also marked a successful relaunch of our business to business membership program, which now encompasses seven membership type.
Providing a much broader platform to attract and acquiring new customers.
This expanded program also allows us to unlock the full industry range and market share potential for this new division through the delivery of more targeted and relevant content for specific businesses or project type.
It will be key for driving brand awareness as well for accelerating our speed to market.
In addition, we've introduced regionally focused service teams and launched a complete rebranding of the program, which is included on all of our brand website.
We're also recently honored at the peak design, New York as the best of boutique designed winner of the best exhibit competition out of over 800 Biz.
Fundamentals to all our initiatives.
Focus on the delivery of a best in class experience for our customers during the holiday season.
Customer experience oxygen for growth and there's no time in the or more critical for us to ensure that we need to high standards that our customers have come to expect from us.
We've improved our campsites speed enhance the search experience of the new iteration of our machine learning algorithms and adding new capabilities to display lifestyle room imagery and product information as well as add the car functionality and our Shoppable room.
And it's a part of our evolution to build an agile technology technology rich retail operation, we continue to test new technologies to enhance the shopping experience.
Including additional design capabilities projects product recommendations.
Financing solutions and improvements to our outward room planner.
In our distribution centers technology is facilitating faster and more streamlined order processing through a number of enhancements, including paperless order processing and automated packing for high volume products.
To further improve order visibility we are continually building on our machine learning optimization framework to provide more accurate data driven delivery estimates to customers.
Within our in home furniture delivery network, we've expanded the rollout of Glenn.
A same day delivery what are tracking program, which enables flight tracking of home delivery trucks on the day of delivery and real time customer updates on order delivery progress.
Our transportation team is also completed extensive planning sessions with our ocean carriers freight vendors and EPS to ensure that we deliver great customer experience over the holidays.
Additionally, our west Elm West Coast DC in Fontana, California is not fully operational facilitating growth for our west Elm brand on the West coast.
After a highly successful peak last year and with three quarters of operational improvements behind US we are in a strong position heading into this holiday season. Our teams are focused on flawlessly executing the fundamentals and delivering outstanding service at every customer touch points.
Before I conclude I want to provide you with an update on our sustainability efforts.
Across our company, we strive to make a positive impact in the world in corporate responsibility is central to who we are and the way we run our business.
The conscious changes we continue to make in our global supply chain leads to shift towards greater responsibility in the way our industry operates and in our customers choices.
In October we released our annual corporate responsibility report, which outlined the meaningful companywide progress, we've achieved towards environmental social and governance leadership.
We are committed to improving transparency and strengthening our long term commitment to SG values, including efforts for responsible sourcing landfill diversion and improvements in worker wellbeing.
We also recently celebrated fibers, a partnership with fair trade USA.
As the first global home retail to make a broad commitments. This organization, we're pleased to take part in improving the well being of our workers through community development, such as health clinic water filtration and other community projects.
We believe all of these efforts are becoming increasingly important to our customer our associates the communities that we operate in and our shareholders.
In conclusion, while we are pleased with our year to date performance. We are even more excited about seeing the continued evolution and innovations come to life in our business.
Our strength strong value proposition of high quality design led sustainable products.
Combined with our multi brand digital first operating model is a winning combination we're confident that we will deliver great service to our customers. This holiday season and lead is an example of sustainability in our industry.
We believe we are well equipped for an exceptional 2019, and we are ready for what's to come in 2020.
And now I'd like to turn the call over to Julie to review our financial results.
Thank you Laura and good afternoon, everyone.
We're pleased to report another quarter of strong results with profitable revenue growth exceeding expectations, including ecommerce revenues growing to an all time high.
We delivered sequentially improving gross margins another quarter of operating income growth and operating margin stabilization as well as inventory growth below sales growth all despite incremental China tariffs during the quarter.
These results reflect the ongoing success of our growth and operational initiatives that we have seen all year and further demonstrate our ability to deliver upon our long term commitments.
During the third quarter, we generated net revenues of 1.442 billion for a year over year increase of 6.3%.
Comparable brand revenues grew 5.5% on top of 3.1% last year.
Growth was led by ecommerce rowing, 9.3% to a record high of almost 57% of total revenues.
By brand, we saw another quarter of outperformance in the West Elm brand with a 14.1% comp continued strength across the pottery barn brands, including pottery barn at a 3.4% comp and the kids and team businesses accelerating to a 4.0% comp another quarter of double digit growth for rejuvenation, and Mark and Graham combine.
And as well as another solid quarter of growth in our international operations of 9.2%.
Gross margin for the third quarter was 36% compared to 36.5% last year. The gross margin de leverage up 50 basis points was driven by the incremental impact from the China tariffs as well as higher shipping cost primarily from a higher mix of furniture sales, which is more expensive to shift partially offset by occupancy leverage despite.
The terror impact almost doubling from the second quarter, our margin sequentially improve because of the continued success. We are seeing from all of our mitigation efforts and the overall strength of our business, allowing us to further reduce the amount and depth of our promotional discounting this quarter, resulting in offsetting merchandise margin gains within gross margin.
We also generated incremental occupancy leverage during the quarter, which helped to further offset the tariff impact within the gross margin.
Occupancy costs were 179 million or 12.4% of revenues compared to 177 million or 13.1% of revenues last year.
Our ongoing retail optimization efforts and the corresponding benefits, we see from reduced rent and other occupancy cost allowed us to minimize occupancy cost growth to only 1.1% driving 70 basis points of leverage.
Additionally, we delivered on our commitment for cost reductions throughout the company to further mitigate the tariff impact on the bottom line.
As a result, we saw SGN, a leverage 50 basis points to 28.4% of net revenues this year compared to 28.9% of revenues last year, primarily driven by leverage across employment and advertising from higher sales and our continued cost containment initiatives, we have reduced employment costs, primarily resulting from the reduction.
In force earlier, this year as well as some other employment related costs.
We have further optimize our advertising spend by shifting more of our spend away from catalogs to more efficient digital advertising. We have also been aggressively reducing non merchandise related costs. As a result of our comprehensive companywide initiative to consolidate vendors and leverage economies of scale that we started at the beginning of the year.
As a result operating income grew in line with sales growth to 109.9 million and we held operating margins flat to last year at 7.6%.
The effective income tax rate was 24.7% compared to 23% last year.
And diluted earnings per share of a dollar to grew 7.4% compared to 95 cents last year.
Year to date. This has helped delivering revenue growth of 5.7% operating income growth of 9.8% operating margin expansion of 30 basis points and double digit diluted earnings per share growth of 13%.
We're pleased to see that all of the mitigation strategies, we implemented have allowed us despite the ongoing cost pressure from the China tariffs to deliver strong profitable growth.
Of course without these tariffs are performance would have been even stronger.
Moving to the balance sheet, we ended the quarter, where the cash balance of $155 million versus $164 million last year.
Year to date, we have invested 121 million in the business and have returned 226 million to stockholders split evenly between share repurchases and dividends at approximately 113 million each.
Merchandise inventories ended the third quarter at 1.259 billion, increasing 5.1% over last year or 120 basis points below our sales growth of 6.3%.
This speaks to the success of our inventory initiatives, including the continued expansion of our omni channel inventory fulfillment capabilities.
Sure in time frequent flow of inventory from our overseas vendors as well as the continued shift of our business to more drop ship and made to order inventory.
These initiatives not only enabled us to drive inventory growth below sales growth. Despite the incremental inventory cost impact from the China tariffs, but also enabled us to reduce back orders and backwater create rates.
Now I'd like to discuss our fiscal year 2019 guidance, but before I do I want to remind you that fiscal year 2019 at the 52 week year versus a 53 week year in fiscal year 2018.
We had estimated last year that the extra week in fiscal year 2018 was worth approximately 85 million in revenues and 10 cents EPS and this has been reflected within our fiscal year 2019 guidance all year.
Given the strength, we are seeing in our year to date results with strong topline growth and operating margin stability. We are raising the low end of our fiscal year guidance. This guidance includes the financial impact from all China tariffs through the end of year and we have not assume the any China tariffs will be repealed.
As a result, our fiscal year 2019 guidance includes net revenues in the range of 5.770 billion to 5.900 billion.
Growth in the range of 3.5% to 6%.
Diluted earnings per share growing 7% to 10% excluding the impact from the 50 Threerd week last year to arrange a $4.65 to $4 an 80 cents.
All other guidance within our press release remained unchanged.
Additionally, we are reiterating our commitment to maintain a balanced capital allocation strategy. We will continue to 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 we remain committed to returning excess cash to our stockholders in the form of share repurchases and dividend pay.
Payments.
In closing our strong third quarter and year to date results reflect the continued momentum we are seeing from our growth and operational initiatives along with the unique positioning we have in the marketplace.
As customers increasingly want to shop with brands, they know and trust that sell proprietary products that exhibit quality value and sustainability and that can provide exceptional customer service online and in store. We believe we are one of the best positioned in the industry support this customer demand and this combined with a culture of strong financial discipline will allow us to gen.
Great long term profitable growth and returns for our shareholders.
And with that I would like to wish you all happy holiday and I would now like to open up the call for questions. Thank you.
Okay and then.
And gentlemen, if you do have any questions. Please join the queue by pressing star 100 telephone keypad and if you would just make sure that your mute function as turned off so that we can receive that signal once again Thats star one for any questions. At this time robots for just a quick.
Okay first from Barclays, we have Adrian yet.
Yes, good afternoon, and congratulations Laura My first question is about.
Of your per pure play competitors Wayfair.
They spoke on their call about when the tariffs came in and since they don't carry inventory they had a pricing disruption the delayed the consumer behavior. The purchasing behavior I'm wondering if you've seen any of that seems like not but if you could talk about that and then secondarily kind of on a longer term basis, now that mark and Graham and rejuvenation or double digit.
Kind of growth what did the long term plans for that and then two Lee really quickly in terms of kind of helping us with some tariff impact as we roll into 2020.
Can you help us kind of think about what percentage it will be sourced from China and any impact how long do your current stock of inventory the pre tariff inventory can carry into 2020 . Thank you very much.
Sure. Thanks Adrian.
We have not seen any delayed purchasing from.
Our customers, we've had very strong demand and it was very consistent through the quarter and its continuing so.
I haven't noticed that in terms of Mark and Graham and rejuvenation.
All of our brands work together.
In a symbiotic way too.
Serve customers and life stages, and lifestyle and rejuvenation is a very specific focus on how parts and hardwired lighting, and we know that remodeling homes and the people love for their homes is not waiting and we're seeing great growth because we sit in a very unique place with this high quality custom covers.
Figures lighting.
And it's very difficult.
Many of you've probably done remodels of rooms and to match all the finishes in a room, even from a single retailer can be tricky and we make it all we finished at all I should say in port.
And Portland, So all the finishes match perfectly and work. So we'll continue to see the growth we're seeing it both in the stores, which are comping nicely and online were debating a couple more stores and key locations, but we don't we don't think that we also we don't have to open source to continue this growth has a lot of natural growth and natural category growth and rejuvenation.
Mark and Graham really Leverages, our strong personalization techniques that we have in the company and is again differentiated way for a customer shot for against I mean, nothing like giving someone something for the holidays that.
Has their name on it really shows that you thought of them and so yes, we see both continuing to grow and be sizable nibble, producing very profitable bottom line. So they're they're helping us with our EPS and they will continue to expand and leverage the base that we still on the foundation of the company.
Great. Thank you Andrew this is truly regarding the tariff impact I mean, obviously, our next call. We'll go through a lot more detailed the of the puts and takes with 2020 in our guidance, but certainly at a high level, we remain committed regardless of tariffs to our long term commitment.
Hold on margins and operating income relatively in line with revenue growth of therefore operating margin stability, regardless of the the tariffs but.
From as we roll into 2020 to give you directionally. Some some information I mean, obviously the first half will have more pressured in the back half because lot of the tariffs came in towards the back half of the year. However on the flip side. We're also going to be Resourcing more next year. So we've said externally that we plan to get out of about half of our exposure.
In China by the end of next year. So we're halfway there too that commitment and so it will be more that resource next year, but what I would say is that I think you can see that we've done an incredible job of offsetting this tariff exposure on this quarter in particular that is a great example of that when you look at sequentially improving gross margins with almost double the tariff impact.
And we've done that with strong health of our business and our ability to pull back on promotions and all of this resourcing.
Cost negotiations cost reductions throughout PNM, we've been working on this for a long time and so I would say that's going to be helpful. For us for next year as far as the inventory side of things and maybe I understand your question, but ultimately just about all of the chair for the come into play at this point for us except for Okay. The list for the tariffs, which.
Our currently scheduled we'll see but for December 15th and so thats really the incremental.
Inventory impact if you will everything else is already gotten a tariff in it. So there's nothing that we can really pull ahead from that perspective.
Very helpful Best of luck for holiday.
Thank you.
And once again, ladies gentlemen that is star one for any questions. Then we would just ask that you limit yourselves to one question to allow everyone the opportunity.
Moving on we will hear from Kate Mcshane.
With Goldman Sachs.
Thank you for taking my question.
Question could you go around gross margin.
Welcome.
The us qualified lead some of the headwinds during the quarter I noticed that you did call out due to be as one of the headwind gross margins I wondered if you could address that.
We should be thinking about cost for Q4.
Sure. So from a gross margin perspective, the kind of walk you through it.
They basically came down 50 basis points, which is 60 basis point improvement from the second quarter despite having.
Double the impact from the China tariffs and so we're pleased to see that with the fact that we had accelerating operating margin leverage to 70 basis points that helped offset it. In addition to the fact that we were able to given the strength of our business as I said earlier pull off of promotions that basically offset entirely the tariffs.
So if you back out to your point there is some b to b exposure it wasn't as significant.
Relative to the total but there was some b to b exposure in our gross margin of course, that's accretive to our op margin, but if you back sort of those things out in some onetime things you get to a pure merch margin that is basically flat despite the incremental tariffs.
As far as Q4 going forward, obviously, we don't provide detailed necessarily at the gross margin in quarterly gross margin line, but directionally. It's another quarter that we have incremental tariffs to be honest so with a list for a tariffs came in towards the end of this quarter and then we have potentially lists for b shares that are coming in December 15th So it's another.
Quarter of absorbing incremental tariffs, but on the flip side given the success. We've had in this quarter, we feel really good about our ability to cover that.
And so were again committed to the bottom line with op margins stabilizing operating income growth in line with revenue growth and so if there's pressure on the gross margin like we've done all year, we will offset it with other cost reduction opportunities within SGN Act.
Thank you.
And next question comes from Steve Forbes with Guggenheim Securities.
Good evening.
I wanted to focus on expected. Thanks, sorry expense leverage given the sequential moderation right you thought you talked about the improvement there in gross.
Which is certainly a positive but if we look at expenses the leverage right. It looks like it moderated so I don't know if there were certain costs that hit during the quarter. Our work you could just remind us right as we model by model forward.
How much the corporate realignment helped yet.
On the Levered line item and or whether you are still leveraging store labor level payroll given the strong outperformance.
So we definitely saw considerable leverage again within the employment line. So on certainly the.
Fortunately or unfortunately, the reduction enforce the beginning of year is certainly helping us as we move through we're definitely seeing leverage from us.
Store perspective as well.
The difference on sequentially is simply of course by quarter by quarter. The elaborate the amount of leverage is going to fluctuate for many reasons, but relative to last quarter. The reason why it's a little bit less leverage is because just two things one we made some more investments on the advertising side, even though advertising leverage you didn't leverage as much as the second quarter.
And I'll, let Felix talked about in a second.
And then secondly, we had up.
State sales tax audit settlement that happened during the quarter that wasn't there last year in second quarter. So both of those sort of put pressure. If you will on a lower leverage within SSG and I, but we're really proud that we're been able to with our cost containment initiatives maintain this leverage as we've moved throughout the year, even though it's going to vary by quarter feel if you want to talk about our appetite.
Yes, absolutely as Charlie said for the third quarter in a row, we leveraged our marketing spend and our customer accounts, which from a longer term perspective, we recognize thats what fuels our growth for the long term, so introducing new customers retaining happy customers is still our number one priority and where we see.
Efficient ROI, we will spend.
That said as Joe said, given the ongoing challenge at the tariffs we will find efficiencies we've taken all of our.
Online media buying in house, it allows us to better leverage cost across the digital ecosystem, we have a cross brand learning agenda as learning to agenda with our seven brands, which allows us to test and learn quickly on one brand and then roll it to the others. When we see the return on investment and finally, we yes for 20.
Five plus years, we we've been focused on performance marketing.
Because of our catalog days, we've had a continuous improvement and investment in customer and marketing analytics that gives us.
Confidence to spend.
When we see the right return on investment.
Thank you.
The next from Telsey Advisory group, we have Cristina Fernandez.
Hi, good afternoon.
You know about brand can you talk about some of the new units that's coming in.
In the fourth quarter that gives you confidence that you can get a positive comp and also a couple department stores have talked about incremental promotions on houseworth did you feel like that happen that had an impact it that brand with the quarter.
Sure. Thank you for the question.
In terms of things that we're bringing in we have.
We've seen some strengthened some categories that flex up.
During the holidays and cookware continues to be quite strong.
Especially with our exclusive launches Lucozade hours collection, which is great.
That fills in the fourth quarter. We also see continued momentum in our Ws branded and that is going to be something that we continue to pick up as a percent of total.
We've also been working on.
That in marketing strategy. So that we can drive double digit traffic growth online, which is really key to the holiday time period, and we have tested it and are on track to execute that and we funded through catalog.
We also really realize an up now and in a market where there is a lot of competition. It is important for us to better.
Described and communicate why we are different and what products a different and so you're going to see us continues to pull back on promo.
And the promo marketing that we can tell better lifestyle stories, and you're going to know sent an email and also on our site.
And.
And in Furthermore, in terms of the whole model, we believe that as we continue to focus on bigger stores and tell them better we'll be able to improve our margins and improve sales because we're not so over assorted.
And then a follow up.
The tariff so lift three terrorists didn't go to 30 from 25 beds had been indicated on the last quarter and then lists for retirees are delayed how do you think about that benefit reinvesting it are flowing.
So the bottom line.
I, just I guess [laughter] would you like.
[laughter] list for B as you mentioned if it if it doesnt go through was supposed to go through December 15th and so by the time we received good.
Into our distribution centers and ultimately sell it it's a relatively small impact to the fourth quarter for us if it were to get lifted not depends on the facts and circumstances does it get repealed for for a and all these other ones that already in place who knows but based on for be alone. If that one didn't go into play it wouldnt be significant for us for the fourth quarter, but certainly it takes pressure off of next year.
All right and then moving on we'll take our next question from Chuck Grom with Gordon Haskett.
Good afternoon. This quarter can you maybe take a step back and how should we think about the the healthier business only because most of your banner so a little bit of a slowdown on the stock. So just wondering if you still feeling confident and then.
Full year comp range 3.5 to six is pretty implies a pretty big are wide range here for the fourth quarter. Just wonder if you could help us narrow that range a little bit and then on B to B is one of the maturity correctly that that was about 100 basis points of comp benefit to the to the third quarter and am I understanding that can be lumpy the times, but how should we think about that going forward. Thanks.
So from a b to B perspective.
Yes. It came in about the same high this quarter.
Almost 100 basis points of our comp growth, but that could be lumpy I mean again it depends on the size the deals and the timing of the deals and so we're just thrilled to see again that it was a significant contributor.
To our results from a comp perspective as far as how we're feeling so what I would say as we feel great about the strike that we're seeing our business, we're not seeing any signs of a slowdown.
We've entered the fourth quarter, we remain confident in our long term ability to outperform and take market share from our fiscal year guidance at the high end is aligned with our outperformance we have seen year to date was strong topline growth at the 5.7 as I mentioned, a double digit EPS growth as far as your questions on the implied fourth quarter guidance in a wider range I really wouldn't.
Read anything into that we have simply provided for your guidance, where given the strength of our business. We raised the low end of our guidance ranges for the third time this year, despite absorbing another quarter of incremental China tariffs, which again remind everybody we're going to have a full quarter now off the list for a tear ups.
And the addition of the plan implementation list for be tariff. So it's another quarter of incremental tariffs, but we believe this guidance reflects the range of outcomes that are possible and obviously the mixed retail results that were seeing out there. We think these guidance ranges our program at the time, but at the end of a day, we remain confident in the growth in operational initiatives that we've been executing again.
This year that has driven our outperformance all year.
And will allow us to deliver long term market share gains in Cape Yes.
Our very strong Chuck including customer counts customer attention.
The digital traffic to our websites as I said earlier is double digit which is.
Very good [laughter].
Retail store, we're well set up or set in the stores. We've been out we've seen them. They look great and were operationally ready for the compressed calendar.
So.
We know that there's some opportunity with the last year.
Compares in Q4 pottery barn was.
Flattish last year, and it's a big it's big upside for US this year, because we continue to see increasing momentum in pottery barn, and remember that as we grow furniture.
Our net comp which is the one that we publish.
Often lags demand comp so that makes us even more confident as we have seen demand comp continue to grow and pottery barn, and some of our other furniture base Fran.
So there is there's a lot of good news here, we also because.
Last Q4, Wasnt as robust as other quarters, we have the opportunity not just drive incremental sales, but also drive increased margin.
Because we we had a lot of clearance and promotional levels last year that we are hoping not to be not to comp and that could give us upside as well. So I'd say just echoing what what Julie said, we're set up extremely well KPN prove it macro backdrop is healthy and we have opportunity on the two year.
Great and just one more quick win Julie's a great job unpacking the gross margin for US just wondering if you could help us.
Modify the headwinds specifically in the third quarter, I guess relative to what that was and so.
I'm going to take that one since you didn't let me take the other just.
You know we've assumed the were okay. So we continue to assume the worst all the tariffs going to play, but we haven't assumed as they make the worst yet but the ones that have been mentioned every time, they mentioned them, we double down our plants offsets.
So that's what's in as we think about.
The end of this year next year.
Obviously, there would be some upside.
If that didn't happen if any of them go back.
But.
You be.
Who can who can just what's going to happen here, it's impossible and to over thinking I think is a waste of time, which is prepared for it.
We're not running all these models all the time because they change daily hourly as we all know.
But I think were better prepared for the most and were evidencing right now that we're covering yet despite.
Them increasing.
Okay. Thanks, good luck.
Thanks.
Next question will come from Chris Horvers with JP Morgan.
Thanks. Good evening. So two questions you mentioned December last year, obviously, the stock market dropped pretty sharply in and it seemed like some of your peers at the high end saw a pretty big impact on that so did you see that.
In your business.
Impact of the market in terms of trends.
Then the second question as you did mention demand comp last year, you talked about demand come.
Actual cobb lighting demand come by 150 basis points that seems like a easy compare there is that something that help comps overall and how would you look at that thank you.
On the demand comps, so our furniture businesses, our fastest growing business.
As you know part of attack mitigation list of bringing some of the upholstery back from China to.
America.
And as a result that that upholstery is made order is not stuff.
So that is actually at work right now is different from last year as part of our care from litigation, which means that when both of those things happen you're going to continue to see this lag.
And it's just the reality of growing furniture businesses may door.
Do you want to talk about the high on last year.
Yes, I don't think we saw as much as others have reported the correlation between the stock market impact, we certainly had an impact in our results, but it wasn't as significant as others have said, we could have done that in last years I mean last year you remember the comps.
They were they are pretty flattish except for west Elm.
Got it every holiday thank you.
Thank you.
The next from Evercore ISI, we have Oliver Wintermantel.
Yes, thanks, guys.
Julie you mentioned E com grew about 9% in the quarter could you remind us what could you tell us what would it grew into first half and.
If it accelerated with where the acceleration came from and then just a follow up to the B to B question quickly.
Which when you said it helps the comp by a 100 basis points.
What line item would that hit is that that western was at pottery barn, maybe a little bit more detail, where where would that actually is helping thank you.
Sure from an e-commerce perspective, it's been holding relatively around that spot all year long. So we're pleased to see that that are strong growth is continuing as we move throughout the year. It from a b to B perspective, It's definitely cross brand I would say, it's predominantly in west down and in pottery barn benefits across the brands.
Got it thanks very much good luck.
And moving on from me B.S., we have Michael Lasser.
Good good evening, Thanks for talking a lot for taking my question couple for questions I Hope you don't mind first.
As you look at <unk>.
The comp.
In and you factor in like for like price increases in more full price selling because of less discounting how much did those two factors contribute to the comp in the period.
That wasn't significant.
Certainly we saw higher AIU ours, but it wasn't the main driver of that a lot of the big driver about is the fact that we're selling more furniture period.
And more could be to be operations, obviously more finished furniture, driven as well and December all the strategy, we put into place.
Have the number one for our supply chain and also how people French their homes and make good decisions about what works together and then our in store design crew and outward plan are all those things are coming together to drive that far show, which is a much higher ticket then.
Betting on deck.
It is we think about the pottery barn comp should we.
Assume that between PB apartment, the expansion of the marketplace in the B to B those were the threeg contributors to the comp growth during the period men and women towards those were big contributors, but I'll say in this quarter in particular, we launched a lot of new furniture that is off to a very strong Saar and I've said.
Before I think you've all seen at that when we get something that's new and it works we have a long time to optimize that pieces to it. So for example, if you start with the coffee table you can add.
Table in the bedroom collection and so it's great to see those collections be so strong because that gives us a really strong foundation to build on and that's not just in these new businesses. That's in the foundation is what we're really excited.
My last question is as we calibrate our models for 2020, how should we think about the outward expenses that you'll be excluding from the TNL well. They will you include any of that or in will they get larger than they were this year.
No. So what we have said is that after this year the outward fee operations from outward will now be included within our piano for 2020.
The pieces that are associated with the acquisition of outward will continue until that's done which is about another two years and so you can square with them out I think if you look at our K Zohr accused there are some information in there for you to be able to determine how much is associated with the acquisition.
And then you can come up with your estimates as to how much of that will be absorbed on next year. What's also going to be great is that by the time. We reached next year all the keep building bricks are going to be in place because.
This quarter, we just put in pottery barn teen and we continue to improve our cross brand room planner and there's a lot more to come next year with how that's going to work.
We're also starting to really measure the impact and the lift from some of these tools, which is exciting it's early days there, but as much as we're going to be.
Incurring the cost of outward next year. We're also going at the next year really for the first time seeing the true benefits in the piano from using the cross brand room planner successfully.
Excellent have agreed holiday.
Yes, I guess Utica.
Next question will come from Simeon Gutman with Morgan Stanley .
Thanks, Laura Julie Mike Mike My question I'll put it into two parts. So the business seems to be growing well in both the consumer and the B to B channels can you talk about how your topline visibility is changing as a result, I think the b to B may have longer lead times and so do you have a better sense of the business.
Six months 12 months out and then the part two of it is what are the implications from the B to b growth for the margin profile of the company.
Sure so b to B.
I'm pleased to have a second consecutive quarter up double digit growth and we continue to believe thats a tremendous opportunity for long term as as we told you. We saw you. It's a very fragmented market. It's right for disruption, it's really hard for people to furnish their commercial spaces right now and we are in advanced discussions with a number of fortune 500 companies.
We can't talk about them, yet, but the progress, we're making really reinforces the competitive damages that truly sets part in this very fragmented market. So we've said 2 billion.
Thats number we believe in annual revenues are getting there faster than I would've thought and I don't want to underestimate how quickly they can do it.
But it's it's one of these things where if you get one deal done it can really if you're if you're doing something for a big chain and they take some of your product in a certain regions.
It can then expand rapidly as they then get used to working with you. So it's got a very fast multiplier that from the margin perspective, similar to what we talk about what franchise and things like that there is certainly some pressure that happens on the gross margin line, but from an op margin perspective, it's accretive in definitely what you want us to keep moving forward on.
If I could just sneak one follow up if you think about the long term target for margin stability anything change in how you think about it the mix between expense leverage your gross margin overtime.
No.
Thank you.
Thank you.
Okay, and ladies and gentlemen that does conclude the question to answer portion over call to quit today I'd like to turn the floor back over to management for any additional or closing remarks.
Yes. Thank you all for being with US today I Hope you have a wonderful Thanksgiving and a great holiday season, Please shopped with us and we'll be we'll be looking forward to talking you after the holidays Hopper.
And ladies and gentlemen that does conclude at all and once again, we thank you for joining US today you may now disconnect that.
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