Q3 2020 Williams-Sonoma Inc Earnings Call

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Ladies and gentlemen, welcome to the Williams Sonoma, Inc. Third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. We will conduct a question and answer session. After the presentation. This call is being recorded I would now like to turn the call over to at least Wang Vice President of Investor Relations to discuss not discuss non-GAAP financial measures.

Forward looking statements. Please go ahead.

Thank you good off of it.

This call should be considered in conjunction with the press release that lease yourself here today.

Wes indicated otherwise 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 directly comparable GAAP financial measures and Alex Foundation of why the non-GAAP financial measures may be useful are discussed at exists at was all got press release.

This call will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of $1.95, which address the financial condition results of operations business initiatives trend growth plans and prospects of the company in 2020 and beyond and are subject to risks out of.

At the piece that could cause actual results to differ materially from such forward looking statements.

Please refer to the company's current press releases 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 off of a day of this call.

I will now turn the conference call or a bunch of Laura Alber, our president and Chief Executive Officer Thankfully.

Good afternoon, everyone. Thank you all for joining us on the call with me today are Julie Whalen, our Chief Financial Officer at feel it's kind of really don't Chief marketing Officer, then yasir onto our Chief Technology Officer.

On today's call I will talk to you about our outstanding third quarter results and more importantly are company distinctive positioning and long term growth process.

In the third quarter sales again outperformed expectations with demand comp up nearly 31 per cent compared to a net comp 24% driven by strength across all of our brands.

He commerce accelerated sequentially to a record net comp of over 49% and we were pleased to see our store performance improved throughout the quarter two of net negative 11% comp even.

Even more encouraging is the retail the man camp at negative four yeah.

And we deliver lease sales more profitably with operating margins, leading record of reaching record levels experienced at 15.7% versus last year of 7.6%.

Although grants outperformed pottery barn delivered a net comp of 24.1% driven by double digit comps in all divisions.

EPS initiatives, including TV apartment and marketplace continued to build momentum growing more than 100% again this quarter to reach nearly 200 million in sales year to date.

Our pottery barn kids and teen business grew at a net cash of 23.8% with accelerated growth in all areas.

We also saw a longer tail end, our back to school of business with our gear and study at home solutions delivering a strong finish to the season.

The Williams Sonoma brand delivered another record quarter of the net cost of 30.4%.

This is a business that has always had of smaller online percentage compared to our other brands and this represents a big opportunity.

Our initiatives in E Commerce, and our real estate optimization strategies are driving our channel mix shift.

We're also pleased to see our stores performing better than expected in the Williams Sonoma brand.

And finally in our West Elm brand, we saw significant pick up in net comp in Q3 to 21.8% driven by strong growth at all night major categories as well as the traditional retail of dominant category of textiles and decorative accessories.

As we enter the fourth quarter holiday is off to a strong start across all of our brands we.

We are seeing earlier sales at holiday products than in years prior and our teams are prepared and ready to meet this demand by moving of launch day and marketing from holiday merchandise.

And we continue to see DTC strength at retail improving despite reductions in store occupancy.

Our supply chain team is also working diligently to meet this elevated demand.

Despite industry wide capacity in shifting from straight due to cope at 19, our teams are leveraging our scale and unique business model to do everything we can to ensure the best customer experience at holiday.

Our global sourcing team had been partnering with our vendors to expand capacity leveraging our in country presence and long standing vendor relationships.

Our transportation team worked quickly and aggressively early this year to further diversify our carrier network and we believe we have successfully secure at parcel shipping capacity for the elevated volumes, we expect to drive this holiday.

We will also be maximizing our omni channel capabilities, such as ship from store and buy online pickup in store to supplement our supply chain. So it's all at capacity.

We expect our omni services to fulfill up to 20% of our expected total GTT volume this holiday.

These results demonstrate our company's ability to deliver long term profitable growth post pandemic.

Our company's mission is to enhance the quality of People's lives at home.

We have built our business with this mission at the forefront of investing in areas that matter most to our customers.

These include high quality, well design sustainable of product at a great value because of our scale and vertical supply chain.

[noise] inspiring marketing.

And at the convenience of our high touch digital first omni channel experience.

And this combined with our loved brands that sort of a wide range of customers across of Fedex and price point is our distinctive positioning and is our competitive advantage.

No one else in end markets is doing what we are doing.

Our mission also extends to how we take care of our employees, our vendor partners, our customers and our shareholders at Williams Sonoma Inc. at across our brands. We are good by design from managing resources responsibility responsibly.

Caring for our people and leading with our value.

End of year marked by social environmental and health crises on a scale not previously seen in our lifetime these values from more important than ever.

We are proud to be leaders in our industry through our financial performance.

ER tackle E F G program and how he's taking care of our people, while increasing returns to our shareholders.

As we look at our business today, there are three key accomplishments that we believe will deliver significant growth for the future.

First we've been acquiring new customers and our digital channel at a rate of over 30% year end say, a significant acceleration compared to previous years.

Well, we have seen this in the past at generally foreshadow a strong business in the future. This is particularly notable UBS at a particularly notable increase at stores have historically been the key driver of new cost of customer growth.

Overall increase despite less store traffic shows the effectiveness of our current digital marketing strategy in acquiring new customers.

Second and even more encouraging is that we are tracking these customers well deliberately shifting away from from motion.

Towards marketing that has inspiring content and its brand building.

This should mean that we have higher retention of these customers post pandemic.

And finally, all of our brands are resonating with younger generations.

Over the last three years. This cohort has driven the majority of our new customer growth and year to date millennials represent nearly 50% of our sales from your customers.

This of course is not going of coincidence as our value proposition and competitive strength are highly appealing to the younger generation of a strong affinity for design engaging content and accessible sustainably me proud of products.

In addition to these three internal positive indicators.

Industry trends also support our longer term growth.

These industry trends include the rapid shift to E commerce.

Further industry consolidation.

The generational shift to a younger customer.

The importance of sustainability and consumer purchasing decisions and the increase in the remote work and population mobility.

We believe that we are one of the few retailers best position take market share in the years to come.

Not only is our value proposition relevant and compelling.

Multiyear growth strategies at investments are working.

We will continue to prioritize E commerce growth and push the natural shifts in our channel mix.

We also expanded the product white space and aggressively support at the growth of new businesses and opportunities within our brands and cross brand.

For example, our business of business opportunity.

We believe at Williams, Sonoma, Inc business to business well beyond next billion dollar business within the next five years.

The speed of the market is large and highly fragmented with a market size of 80 billion in the U.S. alone.

Our competitive advantage is that we have eight unique brands.

In house product development capabilities on a sustainable supply chain, which allows us to simplify the customer experience for our b to b customers.

Since the launch of this business in 2019, we have gained traction in all areas with average order size and repeat purchases, both growing double digits and major project wins and residential commercial education healthcare and hospitality verticals.

Number of contract accounts are up 60% versus last year.

We are aggressively pursuing this growth opportunity and are on track to drive over $300 million in sales this year, which represents strong double digit growth compared to last year.

Another key growth driver that we believe is underappreciated is our global opportunity.

Our expansion to day has proven that we can grow profitably and with low capital investment further.

Further supporting the viability of profitable growth in this business for us and the estimated 450 billion dollar global home furnishings market.

To reiterate our strategy for expansion is through a franchise model and we look forward to growing our presence in our current markets and our launch in India next year.

In summary, our vision is to own at home.

And with our distinctive positioning we will only become more relevant.

We have brands that sort of a wide range of customers across static at.

End price point.

And unlike our competitors with undifferentiated marketplace models, we have always been different.

We designed the vast majority of our products and for those that we carry from third party vendors, we ensure that they are high quality sustainable and the best value in the market.

We are per service at its high touch both in person and virtually because of our impactful stores and associates and our sophisticated E commerce platform.

And most importantly, the shift to E commerce favors our business and provide a long runway to gain market share.

We have a strategy the team and the world class platform to successfully execute on our growth opportunity.

And we are confident they will continue to drive accelerating sales growth was inc, with increasing profitability and evolved into an even more attractive business from stakeholders during and post spin done it.

Before I turn the call over to Julie I want to thank our team we.

We have been operating in this challenging environment from more than eight months now and our team has been unwavering source of energy creativity and determination. We are deeply appreciative of their remarkable performance and with that I'd like to pass the call over to Julie to discuss our financial results for Q3 of <unk>.

Outlook for Q4 and be of thank.

Thank you Laura and good afternoon, everyone. We.

We are pleased to report another quarter of record growth and profitability. It is clear our mission and value proposition are increasingly more relevant and our growth strategies are continuing to gain traction and this combined with our world class platform that we have been investing at overtime. The agility of strong execution from our team and a culture of strong financial discipline.

At enabled us to capture market share and expand profitably.

We are so proud that our ongoing financial strength has allowed us to continue to take care of our stakeholders our associates, our customers our communities and our shareholders. During this unprecedented hot.

Turning to the third quarter financial results net revenues grew 22.4% year over year to 1 billion of 765 million with net comp growth accelerating to 24.4%.

This strong performance was driven by all of our brands and at a higher margin than we have seen as we have a materially shifting away from promotions.

Our demand top which includes orders placed but not yet filled in the quarter was again higher at almost 31% of sales continue to outpace our expectations.

Our accelerated growth was driven by at 49.3% comps and E commerce and of material improvement in our retail revenues.

All bran sequentially improved strong double digits. This quarter Williams Sonoma delivered another record net cash of 30.4% pottery barn accelerated to at net top of 24.1% the part of our kids and teen business grew at a net income of 23.8% West Elm delivered accounts of 21.8% on top of 14 point.

1% last year, and our emerging brands rejuvenation, and Mark and Graham delivered another quarter of strong double digit growth.

Moving down the income statement gross margin expanded 400 basis points at 40% in the third quarter. This was driven by higher merchandise margin and occupancy leverage higher merchandise margins resulted from reduced promotional activity as we continue to shift to a content led marketing strategy that focuses on the overall value equation of our high quality.

Sustainable products.

Occupancy leverage was driven by higher sales and an almost 3% or $5 million reduction in Europe at your occupancy costs, which includes the impact of reduced rent and operating cost from fewer stores and.

At this resulted in occupancy leverage of approximately 250 basis points at 174 million or 9.9% of revenues this year as compared to 179 million or 12.4% last year.

Occupancy leverage combined with our merchandise margin expansion was partially offset by higher shipping costs year over year, driven by the substantial shift to E commerce sales in the quarter as well as shipping surcharges from our third party shippers.

We were pleased to see that even with these higher shipping costs are selling margin, which include our merchandise margins at shipping expanded 150 basis points.

And this plus our occupancy leverage allowed us to deliver our highest ever third quarter gross margin rate.

SGN, a leverage 400 of 10 basis points to 24.3% of net revenues compared to 28.4% of net revenues last year. This was primarily driven by significant advertising leverage as we further optimized our digital spend on those initiatives that drove high returns in traffic and conversion.

Employment leverage and other leverage throughout SGN AG from higher topline performance lower variable store payroll and ongoing strong financial discipline.

These results led to another quarter of record profitability with operating income growth of 152% to 277 million and operating margin expansion of 810 basis points to 15.7%.

This resulted in diluted earnings per share of $2 at 56 cents, which grew 151% from more than double of out of last year at of dollar true.

We are proud to achieve these levels of profitability, while continuing to take care of our associates with heightened safety protocols, such as personal protective equipment frequent cleaning and covert testing as well of higher employment cost from providing pandemic bonuses for our store associates and increased hourly wages for our distribution Center associates.

On the balance sheet, we ended the quarter with a strong cash balance of 773 million compared to 155 million last year. This reflects the strength of our cash balance as we enter 2020 as well as the resilience of our business. During this pandemic generating positive operating cash flow of almost $727 million year to date, our strong liquidity.

Position allowed us to fund the operations of the business to invest nearly 125 million in capital expenditures in support of our future growth and to return nearly $117 million in form of continued quarterly dividend payments to our shareholders. Additionally, this quarter as previously announced we also repaid in full our short term borrowings under our 500 million dollar.

The revolver reinstated our share repurchase program repurchasing 109 million this quarter alone at.

We also committed to a quarterly dividend increase of 10% of effective with our next dividend payment in the fourth quarter.

These decisions reflect our confidence in the long term growth and profitability trajectory of our business and our commitment to maximizing returns for our shareholders.

Moving down the balance sheet merchandise inventories were 1 billion of 125 million for a decrease of 10.6% year over year versus at 12.2% decline in the second quarter.

As Laura said, we have been working closely with our vendor partners to manage through the cobot disruption and to expand capacity.

But given the ongoing elevated demand at our high back orders, we do not expect to be fully back in stock until the second quarter of next year. What this means is that we have 700 basis points of demand sales from Q3 that we expect to fill in future quarters, when the inventory of available and deliver to the customer.

We are pleased with our customers have continued to walker of orders of liver, even if they have flight delays.

Turning to our outlook for the rest of the fiscal year. It is clear from the latest search and co infection rates across the country and globally, but there are still unfortunately significant uncertainty related to the pandemic.

As a result, we will not be providing specific sales and earnings guidance for fiscal 2020.

But directionally I can tell you our business continues to be strong across all brands three weeks into the fourth quarter of the momentum in our business is continuing.

From a gross margin perspective with lower levels of planned promotions, we expect merchandise margins to continue to expand year over year.

We also expect occupancy leverage to continue driven by the cost savings from the leases that we have already renegotiate at year to date as well as the closure of unprofitable stores and final read the basement negotiations. This.

This will be partially offset by higher shipping costs that will continue to be a headwind in Q4, given the anticipated elevated levels of E Commerce sales and peak surcharges that will come into effect during the holiday peak selling season.

In terms of EPS, you know, we expect to incur incremental costs associated with keeping our people end customer sales during the pandemic as well at additional supply chain employment costs at the same time, we will continue to exercise strong cost discipline in all areas of non essential spend to ensure that we can remain resilient during this period of uncertainty.

As a result from here, we remain confident in our ability to drive substantial operating margin expansion versus last year due to our strong performance to date and the likely continuation of robust E commerce trends through the balance of the year.

With regard to capital allocation. In addition to the increased quarterly dividend and reinstate a share buyback program. We have increased our capital investments at high return of initiatives that focus on digital to drive our long term growth. We expect our total capex this year to be back relatively in line with historical levels.

As far as our longer term outlook, we remain confident in our ability to drive strong topline results, while continuing to deliver operating margin expansion.

It was clear pre pandemic at our strategies for growth, we're working with accelerated cost or 2019 internal of 10% comp heading into March before at the pandemic accelerated and be successful growth strategies combined with our strong new customer accounts and growing at loyalty customer base, the fundamental shift of business online as well.

All of our leadership of sustainability, which has become increasingly more important to the consumer reinforces our ability to continue to drive strong topline growth post pandemic.

And we expect to deliver this growth with further operating margin expansion.

As you know we have a highly profitable E commerce business with an operating margin that over the last 10 years alone at average over 21%.

Unlike many retailers who are still in the process of scaling their online business. We have already made at the significant investments in our E commerce platform over many years, which enables us to drive significant leverage throughout as we further scale. Our E. Commerce business. This is a significant competitive advantage of speaks to the earnings power of our digital first model.

As we continue to prioritize E commerce growth and structurally ship the channel mix of our business, we will drive material occupancy leverage as we renegotiate more favorable leases and closed unprofitable stores, we have half of our leases coming up for renewal of the next three years and we will be looking at each lease and keep only those stores, where the economics of the deal makes sense.

And where they are brand enhancing.

Our plan is currently has to close approximately 40 stores this year.

Stores continued to be a competitive advantage has people like to see merchandising person. However, we are anticipating a future with fewer better more profitable stores.

We're also planning from merchandise margin expansion by not only continuing to deliver more relevant content led marketing, but by also building more value into our product line, which will enable us to be less promotional.

Our strong product line of love brands gives us pricing power that others don't have because their products are undifferentiated. This is very important as we expect cost globally to increase over the next several years.

Another important driver of long term operating margin expansion is EPS, you can a leverage and while there may be some increases in some lines our shift to digital gives us confidence that we will be able to leverage throughout SGN day and to deliver operating margin expansion post pandemic.

In summary, our third quarter results continue to demonstrate the power of our distinctive position and driving strong profitable growth customers come to us for our in house design products that are high quality sustainably made in of a best value in the market they come to us for our brands at sort of a wide range of Fedex and price points, they come to us from expiring.

Confidence that of engaging and speaks to their needs and they come to us of the convenience that we offer with our omni channel model.

These competitive advantages combined with our long term growth strategies and proven execution give us the confidence that they will continue to drive long term strong sales of earnings growth and further returns for our shareholders. Both this year and post pandemic.

And now I would also like to thank our associates without their unwavering commitment to all our stakeholders none of this would be possible.

I would now like to open the call for questions. Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute button is turned off to a lot of your signal to reach of our equipment also we ask that you limit yourself to one question. Once again that of star one to ask a question and first of all go to Oliver Wintermantel Evercore ISI.

Yeah, Thanks, guys and a great. Congratulations on this performances this quarter again.

I had a question truly you mentioned.

Shipping costs.

You know bursting high because of the shift to E Commerce, but then also for the rates of shippers.

Is it do you expect at two to actually increase from the fourth quarter versus the third quarter end and how do you plan to off at the thank you.

We do because there's a peak charges that come in surcharges of come in during the holiday selling season, but what I will say at but you know our supply chain was done at unbelievable job of coming up with alternative carriers that we can use to help you know it could take care of the capacity constraints, we have as well as these higher prices. So it won't be a full offset.

Certainly we're doing everything they can to help mitigate it and then of course, along with you know the merchandise margin expansion of the occupancy leverage we should still see gross margin expansion, regardless of the shipping costs.

Got it in relation to that.

If I may.

Your dope.

So shipments from from Asia, and I know you brought some of the production back in into the U.S.

Could you maybe update us how much of your sales are now coming from or for you for your Cogs are coming from Asia and how much is produced in the U.S.

I don't think we've of ever slows that I think what we've set of the passes that we've been moving goods out of China to other locations other southeast Asian locations and so our goal was to get the amount that we had produced in China down by about 50% by the end of this year.

And we're still on target to do that.

Got it thanks very much.

Next up is Kate Mcshane Goldman Sachs.

Hi, good afternoon, Thanks for taking my question.

A big question last quarter was the difference between the demand comp and the comp that you reported and just what the demand comp would look like over time or what it could contribute to comp over time. So now that we are a quarter in here I wondered if there was a way to quantify.

What the the GAAP, oh or what the demand comp.

Part of it was made up if you will during the third quarter was it at a big contributor to the acceleration in the comp that you saw from Q2 to Q3 and if not just what was the unlock for the meaningful acceleration of your comp.

In Q3 versus Q2.

Right. The the cop is driven by the strength across all brands I mean, the the products are selling for our performance of not far from that perspective. When you look back to the last quarter. We had about six of the 800 basis point differential between demand and net and this quarter 700, so as products come in as long as we're accelerating outperformance on the top line is going to be able to.

But at a leap frog as we go through by each day.

The teams have been working very aggressively on partnership with our vendors and we have great relationships with our vendors to get back in stock as quickly as possible, but obviously given the incredible demand that we're seeing from our customers is going to take a lot longer than we expected it mostly into Q2 of next.

But we haven't seen the customer has been.

We let them know of these delays and so that's the great news that we expect this delta between demand and net to effectively come into future quarters.

My follow up question to that is E is there a potential for furniture mix to be higher in Q4, just again with some of these delays in the order its things got pulled or pushed back you know could you see more furniture mix in Q4 and would that be any kind of headwind.

In addition to maybe the higher surcharges you would see in the fourth quarter.

No it's not of six is Laura.

Usually you know when we're talking demand comp in Q4, the non furniture as a percent of total comes up of that as we do more gift thing and we have more Williams Sonoma. However, you're right that we have a lot of net in French are coming in and hopefully will fill a bunch of that so it should not affect it shouldn't be a headwind, but it's you know furniture.

As a very profitable and great business for us.

And we are just thrilled to be able to serve our customers and get the product into them and it doesn't matter.

What quarter that is.

Okay. Thank you.

And once again, ladies and gentlemen, we ask that you limit yourself to one question well go next to Chuck Grom Gordon Haskett.

Hey, great quarter here guys. My question is on on the margins and the outlook the opportunity and then you've got really three big buckets produce promotions from lower occupancy dollars and.

The more efficient and so what do you think of hadn't really been fourth quarter, but really more of the next couple of years, how would you rank those.

Those opportunities, but what else you're most excited of what would what kind of where do you think of the most visibility on.

Well I mean quite honestly I think it's across the board I mean of the most of the first thing at we're excited about is this fundamental shift in our business going online and I think that's a trend that's across the industry.

And so as that shift to E commerce, and you combine that with the fact that we have many new customers in E. Commerce. Those two combined is going allow our E commerce business to price.

And as that continues to happen you know again, if you go back and look at our op margins I'm from the last 10 years, they've averaged about 21%. So just that alone will drive significant op margin expansion I'm going forward. Then you layer in the fact that we are feeling very good about our merchant merchandise margins and our ability to pull back on promotions with our profit led marketing strategy.

And we expect that to continue when you layer on the occupancy.

Levers that we're gonna have from all of these leases that were renegotiating are coming up for renewal over the next three years and end the stores that we may close at their unprofitable or we're going to keep the great ones of and make sure that they have the profitability levels that we we want which we've set of higher bar and so occupancy leverage will continue and then again without shifted E. Commerce. The rest of the EPS you know just.

Leverages beautifully so we think of the huge opportunity I'm going forward to be able to drive this business profitably an inflection point of the fact that weve shifted significantly to E Commerce, and we don't think that's going to change.

That's right. That's helpful. And then sort of just do a quick follow up you know no one of the push back from a story is just the sustainability of some of the trends that you're seeing today. So I guess im curious how how would you rank them in order of staying power over the next couple of years of the trends that are driving the strong demand are saying.

Sure. This is Laura I want to remind everybody that pre pandemic, we're running close to a 10 comps and we saw great opportunity in our business and we're very bullish actually about what we have in front of us and you know so we've we've benefited clearly from the stay at home trend, but the big.

You're eating pretty pandemic trends that we are in our favor with you know industry consolidation I'm away from brick and mortar you know previous to the pans out of 80 per cent was done in retail stores and we knew that wasn't kind of stay the same and so as people shift to online and younger customers have a lot more you know.

Purchasing power, we knew that we would be one of the people who would pick up that big market share and then as I keep saying you know we have such a competitive at damage without distinct at positioning of a lot of people online, but we serve a wide variety of customers across of Fedex and price points in our brands as you know are loved by.

Our consumers and we design our own products and that's that's a big difference between us and a lot of other big players who will also by the way be successful, it's not an either or but people are going to come to us.

Because we have unique products that are accessible and that are sustainable and that are designed in house and you can't buy elsewhere and that is very powerful outdoor values, you know really resonate with the consumer.

Consumer isn't that the future consumer to be so we're very optimistic about consumer consumer shopping with US and then of course from a financial.

Profile, we've talked about.

The the pieces of our.

Business at our Leverageable net are real and substantial and we've been investing in E commerce for so long that our platform.

[noise] able to hold a lot more volume without these huge step up investment the other retailers, who had of like you know, 10% to 20%, but had to invest so we fully see you know ourselves of the digital first business with great stores more profitable stores than ever we see 70% upwards of 70%.

E. Commerce, then that's of that is big time for the financial profile of our company.

Just you know those are the things I'm excited about.

Thanks, Laura Congrats.

Thank you Chuck.

Next from Morgan Stanley, It's Simeon Gutman.

Hi, everyone nice quarter, Laura I don't at all if you.

You're welcome all EPS in two parts of at first can you talk about you know quite you know acquiring customers and that's it should help you going forward can you talk about what you're learning now from an operating perspective, whether it's inventory management.

Maybe more markdown management movement of product that makes you stronger of post pandemic and then Julie you mentioned I think the demand versus actual comp at narrowed by <unk> point should we look at that first of all at the end of just the non event or does this mean at the supply chain catching up with the demand flow to pick.

But what was the last thing you said the man of the flood of why don't you at that.

So with that with the the the spread between the actual comp and the demand comp.

If it narrowed by one point.

I could just be a non event, but let's say if we see that narrow by a few points going forward can you attribute at more to the supply chain catching up to the demand what does that mean the demand slows a little.

Okay I understand thank you. Okay. So you know it's always a you know the top of times that make it stronger but they didn't you have to really go back and look at what you're going to investing.

And what we've been doing is investing in the things that matter most of our customers and I'm. Realizing the power of the people you know they take care of people and they do amazing things for you.

And that's you know, it's an operating principle that we know, but well you know it's been really brought home through this and we made those decisions early on to keep pan or people not for a lot of them then.

We made that decision I've never seen anything that's parcels that decision from store associates and you go into our stores now and [laughter].

[laughter] there. So there's it's it's there's it's such a different experience and so many other places in the malls.

Because of that relationship with them how close we are with supporting each other in terms of you know inventory management you know we.

Book.

Who would have called you know what well what's going to happen when it first came down and you know I just im impressed with the flexibility of team and chasing products and getting us back in stock and also you know what we're doing now is just trying to close the customer the best day weekend. The first time.

So they see the delay in the beginning of it doesn't push out again that the big difference between if I know I'm waiting of certain lot of time for sale, but then if you push it out over and over so very different and you know how do you feel about that delivery, whether you as a customer considered on time. So we're building those delays as much as we can into our Coke times now.

Others since I'm talking take the last question from isn't that comp of always been something we look at it we have never seen this kind of big.

GAAP between them and that was because you know we had that slowed the stores close and then this huge spike in inventory low and of course, that's what happens. The first time you catch up you know as we continue to accelerate sales.

You could continue to see this longer because you have to build the inventory back to be in better stock. So you know demand could go you know demand so net coming in certainly may cut to.

The amount, but you know this will this is a bad thing that will you know on the piano be a benefit to the future as much as we hate at we'd rather have it in stock for the customer that's the way we're trying to operate the business and that's what we're going to go for of when we get the inventory back in stock, but it will give us you know.

More sales in the future of because then that will come in on the previously very high demand.

Thanks for the question. Thanks.

Thanks.

Next up is Brian Nagel Oppenheimer.

Hi, good afternoon.

First off congrats on a really nice quarter price work.

They think of.

So of course I want to ask.

You know you look with regard to the gross margin expansion you talked about at the shift in marketing to more of a more of a content strategy of way from promotions sort of just a couple of questions because that one of your winter kind of size benefit of that to more of these here in the quarter and then more strategically.

Clearly hear your your your while demand was accelerating <unk> and standard demand at current even better here from the wage number of family of companies and through the crisis.

You are you copy of the strategy of content driven strategy.

Well, you'll just see type of results as end demand trends potentially normalize back to what they may have been price prepaying debt.

Well I feel like I'm on the phone, let me start the <unk>.

Of clashes and then I'll pass it over to see like you know.

Yeah.

We were if anything was [laughter], we've learned that we have to be the most adaptable to our current situation I think you know when something like this kind of them. It takes you off your feet you try new things and we really decided that we you know people needed relevancy they needed content that was inspiring where all you know.

She staring at the screen.

That's that's much more exciting to hear about you know new things of Cook at home with your family that is to hear about the next 20% off her and so we're always testing new things. We may find something else. That's you know even better next year, but we're we're using our multiple brands of test different things in different brands at roll them out and so we don't you know take.

At a huge risk with any given strategy and so you know even growth at the same time as we've been pulling down our promotions.

We have been also really working on our value. So if you go back to scripts in the past you'll hear me talking about value you know every day value as a key part of our strategy opening price point in pottery barn, yeah that pottery barn apartment strategy is exactly that to make sure that we're getting the new customer then of course west Elm at the gross.

Brand. So we're going to continue to push value, it's not about price increases it's about less promotions less less markdown inventory at we've now clear.

Clear the you know the mark down substantially from where they were a year ago. Julie do you want to have we give them can you give us how much you want to go ahead of them, it's down 37% of our clearance inventory and inventory.

And you know feel of do you want to add anything so that's kind of.

Yeah sure I think it's a great question. So I don't know a couple of proof points.

When we look at the businesses.

In terms of is is that content led messaging cutting true you know I.

Look at that I look at the growth in our active 12 month customers.

I see growth end customers, who we haven't seen in over a year.

And that every turned to make a purchase and our continued double digit growth in new customers. So we like to see growth amongst all three cohorts.

And then in terms of what it means for the future growth you know I I knew the trends in new customers are incredibly encouraging number that you really haven't seen before.

Tim I'm talking about higher retention rates for new customers in a higher rate of cross brand purchasing so we believe those are strong indicators of their of value over time. So those are some of the proof points I look at when it is at the message of resonating.

Yeah.

Well. Thank you its very helpful. Appreciate it that's one of their holiday season and beyond.

Thank you.

Our next question is Brad Thomas Keybanc capital markets.

Hi, Good afternoon, and let me add my congratulations on some great results here I was hoping to follow up on the topic of margin I mean, it does seem that there are some structural changes that support this breakouts of new record highs for margins and a number of drivers for you.

Going forward.

I was hoping we could just talk me that some of the other side when you're here.

As we are you know to keep us from maybe getting too far ahead of ourselves could you help us think about some of the dynamics like the record low clearance activity, you're seeing some increases in raw materials and transportation of labor costs, and maybe how we might think about factory news industry pricing in our models for 2021.

[laughter], Yeah, I think I mean, what we've said before we still expect to have a strong gross margins regardless of some of those headwinds that you've laid out obviously the team has been very aggressive at working through that at thinking through what those costs could be like but obviously, because we designed and engineered product that gives us at price.

Point strength that we can then create the right price for for any of those you know of headwinds and the raw materials are practically from that you spoke to transportation. We do think we'll continue to be a headwind, but as I mentioned earlier of the supply chain team has done a phenomenal job.

Sort of navigating through this we they acted quickly aggressively it's come up with alternative carriers and so were you know manage it through that to see how we can mitigate a of the cost on that go forward. So even with those again the substantial tailwind we get by shifting to E commerce and at the flow through that that provides as you've seen.

Moving to your point you in this quarter, we think that's going to be very helpful. Along with the merchandise margins along with the occupancy leverage to be able to drive significant margin expansion going forward.

Very helpful. Thank you gentlemen.

Thank you.

Adrian Cighi from Barclays is up next.

Great. Thank you, but I will add my congratulations.

Laura I wanted to say, you're very welcome it very well done and the promotions or the content led marketing is actually really coming through it's very obvious.

So kudos on that of the Laura I wanted to ask you you know as we go into kind of the Big question of next year is how do you comp the comp you know a lot of a lot of it comes from sort of new customers you part of lines.

Or you know customers same customers buying more of UBS, you know products. So one of the ones that really interested me here with your B to B comment what what is the size of that now can you give us some of the metrics of I mean, you know it forgive me if I am ignorant on this but is it a wholesale transaction. It is it just kind of at retail price points.

It gave us some metrics on that and how we see that unfolding over time.

And then Julie on the long term, but E. All day long term targets.

At the mid to high single digit topline, how should we think about that E yet and.

If they day, one last 170% E Commerce stores will open again next year. So should we still think about that penetration is being 70% and the ROI aspect of it when you move to E Commerce truly is.

Improving the cash flow so I totally agree in that regard. Thanks.

Great. Thank you for the question on B to B. So we decided for the first time to give you guys the numbers I see price.

You might have missed at in the script. It was Oh, we're going to be over 300 million this year.

And so its been sizable ER and we really are continuing to see even stronger strength, we passed our first $200 million milestone at a single quarter for the first time.

And our growth was really driven by our you know some of them b to B, our internal program improvements and execution on our key strategies.

With a continued push to diversify our business pipeline across various industry verticals and weren't part of new customers average order size is improving at a double digit rate and we're also seeing consistent build in sales volume and in each month.

In terms of strategic initiatives, we're aggressively expanding our contract reported.

So really converting our products to be contract grade and to build brand awareness, we of transition to a virtual digital marketing and engagement platform.

And for example, the Sun we partnered with Interior design magazine this quarter to take part of a series of live interviews as wells at Instagram takeover of featuring all of our brands. We're also expanding RP to be operating with concept.

And virtual events, such as cooking classes, which of them sell out from we are charging for these virtual events is very interesting business opportunity net worth thinking about in a big way.

For the future.

So you know industry that the industry believe it or not continues to show positive signs of recovery and we're seeing the Marianne pipeline continue and you know there's a there's a lot of there's a lot of the hotel occupancy rates bleeding out of rebounding from the industry lows.

And you know the renovations were heavily impacted from cove. It in there they're not moving forward again, so we're seeing good internal indicators that the pipeline is only going to get stronger and we built the foundation. So that we can handle these big orders its up depending on what it is it's a discount on retail how big it is and that's.

That's how we run it.

So and you know as I as I mentioned earlier, you know usually people have to go to you know.

10 different suppliers to furnish. These hotels are these projects and they can just come to us and we can do the whole thing and we can do you know may decide made to order products for them as well, which a lot of people cant do so that's I think in addition to our great sales team.

I think that's why we're winning.

So I'll hand, it over to Julie on the comps for the future and what that means for EPS, although we're not giving [laughter], we're not giving you that some of the let her kind of [laughter]. Yeah. So we haven't disclosed that but I think obviously you can translate from a mathematical perspective, if you make your assumptions of to where it will force.

On the revenue side clearly, we're leaning towards the higher end of at and you know what kind of operating margin expansion could occur when you factor in the shift to E Commerce and you factor in the merge margin expansion and you also factor in the occupancy leverage of continuing and then clearly I mean, that's kind of a non answer here, but then you do the math and you come up with the P. at the bottom line is we expect.

Strong growth and if yes, there's no reason from a translation from the op margin down to EPS at this time that there would be any sort of reason that would cause it to be disconnected. If anything interest expense would probably be coming down next year. Since we would be in line and things like that so I, yeah, sorry to kind of non answer, but hopefully [laughter] no no. That's that's all helpful.

Helpful color.

Thank you very much Inc.

Once again, ladies and gentlemen, we ask that you limit yourself to one question well go next to Anthony Chukumba loop capital markets.

Hi, good afternoon. Thanks for taking my question I'm, just sort of quick question. So Joe you mentioned.

Fourth quarter surcharges for deliveries and I know of its seasonal thing, but I just want to make sure I understand is that are you seeing higher surcharges than you normally would in the fourth quarter or you're just sort of you know mentioning you know there are these sort of from you used to be aware of Oh from.

From a shipping cost perspective, thank you.

Yeah, no at <unk>.

Definitely will be higher I think you know I'm sure people solve U.P.S. relief of things last quarter, where they indicated that for all retailers, they're passing along the cost. So we're not alone what I think the difference is I say over and over our phenomenal supply chain team has really done a great job they've acted quickly and aggressively and as you know that's sort of our company culture from so we moved on it.

At least to be able to try to mitigate that as best we can both from a capacity standpoint of from a pricing standpoint, and they have done a phenomenal job coupled with a tech team to make it all possible and so it doesn't mean, we're not going to have these incremental cost of surcharges, but I'm certainly compared to others, we're going to be at a much better spot. So end you kept it was a great partner of ours from there there.

They've done a good partner, but the truth is there's a lot more cost with Cowen.

And watching.

Got it that's that's it that's helpful. Good luck with the holiday selling season. Thanks.

Thank you.

Our next question is Stephen for Kids in home security.

Good evening.

I wanted to follow up on me customer cohorts, writing and maybe specifically focused on the active 12 month of customer base I'm really just curious if you can expand on how how that cohort has engaged with the portfolio of brands doing.

2020, right, maybe relative to a 19 at any contacts Baron.

And whether you've seen any change in behavior, or whatever youre opting out or or any sort of behavioral change right at the business has migrated write more towards this content less and less promotional activity right. As we think about your conviction, they're behind a lot of ongoing growth in market share gains.

On a lot of deals to take that.

Yeah sure. Thank you for the question of.

Yes, I guess I guess I'll start with it's a record high number that of customers. So you know in index. That's driven both by you know the existing customer base and new customers coming in especially of the DTC channel. So you know I look at that number of they say, okay, well the message that were giving this cash.

Really resonating I think about E mail metrics, including engagement.

Open rates I look at our social engagement those are a record high numbers that we've seen so at the message is clearly cutting true.

In terms of the makeup of the customers I mean, you know at Laura mentioned, we're starting to see more millennials you know into our customer base at a greater rate than we ever have before at does that you know as we all know that's a huge generation at the biggest generation, we've seen or lifetime so that.

Gives us promise for all of 2021 and further on getting those customers now as they move into household formation.

And then I think lastly.

The majority of our customers are new customers are now members of the key our cross brand loyalty program. So we've seen team members have higher repeat rates and higher retention rates then non team members. So all of that means our active customer base as well.

He did for growth for for next year.

Does that answer your question.

Yes, the day I don't know Oh, I think we got an update on the key members a in some time and given that you mentioned is that is that something you can provide today as well.

Sure Yes.

Yeah, we had over 11 million members on average.

I mentioned most of our new customers are now in the world.

And you know the key which is our loyalty program as you know its very cost efficient way for us to drive incremental sales and yeah I'm proud to say that you're at a day. We now have more cross brand customers than we ever had here at company. So that we know is an incremental opportunity for all of us and clear.

Really much more efficient way to drive sales with existing customers and acquiring new ones.

So again gives us confidence in advertising efficiency going forward.

Thank you.

Yeah.

Our next question is Marni Shapiro retail tracker.

Hey, guys congratulations.

So I'm going to move on past calls at I'm tired of talking about it to the post closing of World Laura you've talked a lot about your point of differentiation and your friends and everything that you guys do internally you've also for quite some time now focus your company on sustainability at organic products and things at.

I think millennials intensity of very interesting. So can you you know think in 2021 as at.

Everybody has discovered at home is of Great business, how do you think about marketing sustainability and this part of the business at two to keep your positioning and kind of.

Better position you guys first feature.

Thank you so much for the question. It's so important to us and we will continue to pursue sustainability program sort of strategic immaterial to our business and important to our customers.

Word of lead here really at an ethical production, we're going to lead and worker wellbeing and will build out our environmental commitments, we put out our reported in October but.

For next year, we're going to from climate and energy were going to build on this years scope three footprint in CDP disclosure to develop and sacrifice base target production.

And responsibly materials and finishes we're going to continue to our leadership in Cottonwood end, Greenguard and we're going to expand our commitments around lower impact alternatives like recycled polyester.

End of waste of circularity rid of build off of our scale and our successful circular pilots.

At across all these U.S.G. areas, we will continue to disclose and measure and track our progress.

For example, this year at in our corporate responsibility report, we made public auction of its a diversity inclusion with our equity action plan and our first ever data on gender and ethnicity representations.

HM we are committed to to our launch of goods by design and our pillars are people planet and purpose.

Thank you so much of things can be very important over the next couple of years, it's great.

Thank you Marty thank you.

Next up is set especially from Wedbush.

[laughter]. Thanks, a lot of good afternoon, Congrats as well on my question is really a clarifying one day.

Really I think you mentioned that you expect operating margin expansion post pandemic. So we take that to mean after we get a virus you still expect operating margin to rise from whatever trailing 12 month level, they're at for the next 12 months.

I forget at vaccine actually day.

Yes, yes, we do expect ongoing operating margin expansion because our expectation at the top line is going to continue to thrive in especially the E Commerce as I mentioned at all the things that we're doing from a merch margin expansion perspective at occupancy leverage all of that will continue and so we do expect it to expand above where we're landing on the share.

Fantastic. Thank you and then secondly, as we just think about at some of the shipping dynamics. One more time, what are you doing in terms of shipping fees that you're charging customers or to mitigate some of the higher costs at year end occurring.

We haven't changed our model. It's the same shipping model that we have.

All right. Thank you very much.

Thank you. Thank you ladies and gentlemen that is all the time, we have for questions today I'd like to hand, the conference back to Laura for any additional or closing remarks.

Sure. Thank you all four of 'em, joining us today, and I really sincerely wish you, a wonderful and safe Thanksgiving with your friends and.

Probably just your family, but maybe your friends five of them. So we'll be talking to you soon and look forward to it.

[noise] once again, everyone that does conclude today's conference. Thank you all for your participation you may now disconnect.

Mhm.

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HM.

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