Q2 2021 Williams-Sonoma Inc Earnings Call

August 25, 2021

[music].

Welcome to the Williams Sonoma, Inc. Second quarter 2021 earnings Conference call at this point at this time all participants are in a listen only mode. We will conduct a question and answer session. After the presentation.

Looking statements. Please go ahead Sir.

Thank you good.

Good afternoon.

Cost should be considered in conjunction with the press release.

Earlier today.

<unk> indicated otherwise our discussion today will relate to results and guidance based on certain non-GAAP measures.

Reconciliation.

Of the non-GAAP financial measures the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in exhibit one of our press release.

This call also contains forward looking statements within the meaning of the.

Private securities.

<unk> Litigation Reform Act of $19.95.

Which address the financial condition results of operation.

<unk> initiatives trends growth plans and prospects of the company in 2021 and beyond and are subject to risks and uncertainties that could cause.

Cause actual results to differ materially from such forward looking statements.

Please refer to the company's current press release, and SEC filings, including the most recent 10-K for more information on these risks and uncertainties.

The company undertakes no obligation to update or revise any forward looking statements.

To reflect the events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Laura Alber, Our President and Chief Executive Officer. Thank you Brian. Good afternoon, everyone. Thank you all for joining US we are proud to report another quarter of outperformance with a 30% comp strong.

Its breadth across all brands and channels and 360 basis points of operating margin expansion.

These second quarter results demonstrate the success of our growth strategy and the earnings power of our company.

We have an advantage in our industry due to our exclusive in house design capability our channel strategy.

Which is digital first but not digital only and our values with sustainability and equity underlying all that we do.

Our teams have proven their ability to move with agility and execute against macro complexities, while building for the future and improve the environment for our customers our communities and our associates.

But as I mentioned, we are seeing in our business and are winning positioning set us up to continue to take share in a fractured market.

We do not see any evidence the growth trends are waning and in fact, we see favorability in the macro environment as more people prioritize their homes and home decor.

We believe we are at the intersection of a transformative change.

Accelerate the growth of our industry and our market share within the industry.

Home sales in 2021 are expected to grow more than 20%. The most sales recorded since 2005, the acceptance of remote work is gaining traction with a number of remote hybrid workers expected to nearly double in five years from pre COVID-19.

Covid metrics.

In addition, our growth strategies are gaining traction faster than we predicted and our key differentiators are further distancing us from our competition.

Therefore, we see a clear path to beating our previous revenue and profitability targets and we are raising our full year revenue outlook again with revenue.

Growth now expected to be in the high teens to low <unk> and operating margins now expected to be in the range of 16% to 17%.

Given our increased optimism, we now expect to achieve our long term goal of $10 billion in revenues in 2020 for one year faster than previously expected and with.

Higher profitability, which will now be at or above our increased FY 'twenty one operating margins.

Now I'd like to talk in more detail about why our model stands out from the competition.

First our positioning.

Our customers shop with us because we design high quality and sustainable products, they're engineered.

Engineered for value.

Our platform of loved brands allows us to serve customers, who are looking for quality and sustainable products at a great value across a wide range of aesthetics and scale.

The home furnishings market is extremely fragmented.

Our addressable market is $780 billion.

And we currently only own approximately 1%.

As the disruption from brick and mortar to online continues our digital first advantage built from decades of investments into our technology supply chain and digital marketing infrastructure will only further distinguish us from competition from competition.

Competition.

The competitors that are retail dominant.

And relative to the other strong online players in the market. Our model is the only one with an exclusive product line and a high service model.

Second our growth strategies are working and the new opportunities generated from these initiatives are.

Are incremental to our business today.

From our existing brands, we have a long runway to expand our reach with existing and new customers and.

And west down we are expanding into product white space and accelerating our presence both online and through new stores to drive our brand awareness from 20% to 60%.

These growth initiatives will fuel our goal of growing this brand of $3 billion in revenues by 2024.

In the pottery barn brands, we expect to reach nearly $5 billion by 2024 by driving incremental growth in categories, such as upholstery bass baby and dorm.

And our new updated aesthetic is resonate.

<unk> with both existing customers and a younger demographic of customers that are in the household formation mode.

Williams Sonoma is transforming their model to reach new customers with a higher penetration of E Commerce, and a winning new store model supported with more product exclusive products.

And.

And we have a substantial growth opportunity to take share in the high end market with Williams Sonoma home.

Rejuvenation and Mark and Graham.

With both having aggressive and profitable e-commerce growth in underserved categories will further drive market share gains as they scale.

Additionally.

<unk>, we are accelerators to our core business, such as <unk>, which is positioned to disrupt an underserved industry and further diversify our customer profile.

<unk> is now on track to reach almost 700 million by this year's end, which is well ahead of our growth goals.

<unk>.

To grow this business to at least $2 billion.

Our global business, which is led by our capital light franchise model allows us to move into markets faster and more profitably and is targeted to become at least a $700 million business by 2024.

Our cross brand initiatives, which are supported by our best in class marketing effectiveness team.

And loyalty programs like our new Cross brand credit card and growing key program are driving incremental growth within our brands.

And finally, our design services, both online and in stores, we have built an ecosystem of design tools, which allow us to help furnish our customer spaces with three D.

<unk> brings creative with our talented design staff or in a self serve model online with virtual health.

We already see the investments we have made in this technology paying off as large ticket orders and cross brand orders continue to grow and as return rates continue to come down.

The competitive.

<unk> advantage, we are creating with our service model and tools will continue to grow into the future led by our technology talent and digital first and service mindset.

In summary, the amplified power of all these factors I E. The macro are winning positioning and our growth drivers provide overwhelming.

<unk> case for outsized returns into the future.

Now as it relates to Q2 I would like to give you a few highlights which foretell the opportunity I outlined above.

Our growth this quarter was driven across all brands and channels E. Commerce grew at 12% and retail drove a 98 comp with both channels.

It's growing at a two year comp of over 50.

And we deliver these sales more profitably with operating margins expanding another 360 basis points to 16, 7% versus last year at 13, 1%.

In pottery barn, we drove an almost 30 comp in the second quarter.

All categories are outperforming.

With notable strength in our indoor rustic modern casual point of view and in our outdoor business.

We're also building momentum in our brand partnerships and our new business initiatives, including marketplace.

Apartment, and Bath renovation, which are all growing above 30%.

Our early fall.

<unk> results are strong with inspiring collections across category.

In pottery barn kids and teen we drove another quarter of double digit comps of 18% with strength across our proprietary 100% Greenguard gold furniture record setting results in our back to school business.

And over 30% growth in our baby business.

We saw exceptional customer response to our expansion of personalized backpacks, new recycled fabrications and reusable eco friendly food storage and water bottles as well as our new baby registry App.

We're also seeing a very strong response to.

<unk> lien launch, which should indicate a strong back half of the year with all of the seasonal celebrations and gifting to come.

And west Elm, our momentum continues to build with a 51 comp for the second quarter.

We saw strength across all categories with triple digit growth in our upholstery and.

Our house furniture businesses.

We've expanded our year round outdoor assortment and our new product collections and line extensions.

New categories, such as Bath kitchen, and West Elm Kids are also fueling incremental growth for the brand.

Our fall season is off to a strong start with continued strength across all.

<unk>, an exceptional response to our new opening price point line extensions and new introductions.

And the Williams Sonoma brand, we drove another strong quarter with a six four comp on top of last year's 29, four comp powered by our content led marketing and a higher percentage.

Percentage of exclusive and Williams Sonoma branded products, while at the same time substantially reducing promotional activity.

We see strength across key categories and fall is off to a strong start.

We're also very excited to share that our new store model is working in Q2, we opened three.

Categories with our newly designed inspiring store design. These.

These stores are lighter and brighter with clear destinations improving the shopping experience.

These stores are exceeding our forecast and they represent a material opportunity for us to strengthen the brand and drive more profitable.

New store results.

As a reminder, we have nearly 50 of our Williams Sonoma stores up for renewal this year, which provides us the opportunity to materially improve profitability or close.

Our Williams Sonoma home business continues to scale with our strategic reposition of the brand.

Written premium online furniture destination.

Our high end sustainable casual aesthetic is resonating with our high end customers in an underserved market.

We saw triple digit demand comp in outdoor furniture further validating our belief with the right assortment and digital presentation. The Ws home.

As it will be one of our biggest growth opportunity.

Cross banner brand, our <unk> Division continues to accelerate with another record breaking quarter up nearly 125% to over $100 million in revenue.

We continue to expand our portfolio of customers, which range from.

Graham 500 companies to small businesses.

Year to date, 71% of our sales have come from repeat customers and 50% of the BTB customers has shopped from more than one brands in our portfolio.

We are a go to resource for our clients across a range of their purchasing needs from furniture.

Sure to corporate gifting.

In addition to the sales growth we are continuing to make notable progress.

On our strategic initiatives to further accelerate the growth of this business.

We continue to believe that our differentiators and our ability to tailor to our customers' unique needs will allow us to further.

Disrupt this industry and.

And gain market share.

In addition to <unk>, we are making progress migrating our customers across our brands.

As a reminder, cross brand customers spend over two times more than those who shop only one brand.

And only 30% of our cuts.

<unk> shop Cross brand today.

We believe our brands offer an assortment that fulfills all rooms of the home with a product offering that is designed in house made from sustainable materials and of the highest quality.

At the core of the cross brand loyalty program is the key our free.

The loyalty program the incense.

And reward customers for shopping across our portfolio.

We also recently announced our partnership with capital one with a new cross brand credit card, which just launched and should further incentivize this cross shopping behavior.

Now I'd like to discuss the power of our digital first advantage.

E Commerce continues to drive our growth and profitability.

Our in House Tech platform and rapid experimentation program continue to differentiate our customer shopping experience by improving speed visibility to orders.

Site personalization and selling capabilities.

For example, as we mentioned last quarter more customers are using our <unk> design tool. The design crew room planner, where we typically see two times as many sales as we do with our average customer.

And the second quarter, we saw even more usage.

Plans created grew 35% over last year.

This engagement with our customers extend with great service and presentation in our stores and omni services, which complement our digital platform.

This operating model allowed us to generate strong e-commerce growth maintaining a 65%.

Percent of our revenue mix, while delivering some of the highest retail growth we've seen on both a one year and two year basis.

The cohesiveness of our web site stores and storytelling brings our products to life, improving our customers' ability to visualize and imagine our products in their homes.

And with the evolving nature of.

Shopping behaviors the synergy from our digital first omni model have never felt more relevant.

We're also proud to see quantifiable progress and our commitment to values, which is our third key differentiator.

This quarter, we released our 2020 impact report detailing progress on our ESG goals.

We are proud to have already exceeded many of our goals, including our use of responsibly sourced wood, our commitment to pay fair trade premiums to our workers and our goal to invest in education and empowerment for workers.

By the end of 2021, we intend to keep 75% of our waste from stores.

Distribution centers and offices out of landfill.

This year, we have also set new long term commitments, which includes selling 75% of our product with labels aligning with our social or environmental initiatives.

Significantly, reducing our carbon footprint and sourcing 75%.

<unk> of our product purchases from suppliers with worker well being programs.

We believe our values are prioritizing the health of our planet the wellbeing of our people and a shared sense of purpose.

Foster long term sustainability resonate with our customers and will drive positive change.

In our industry.

As we look towards the second half of the year, we remain confident in our ability to continue taking market share.

Our upcoming product pipeline is strong and we anticipate continued momentum across our entertaining and gifting related categories as we move into the holiday season.

Quarter to date, we continue to see strong topline growth and strong margins.

As we look beyond this year, we have a clear path to drive topline and Bottomline growth.

Our operating model and our pricing power, resulting from our key differentiators.

Our in House design, our digital first channel and.

And our values will set us apart from our competition and allow us to drive long term growth and profitability.

And this is why we have raised our full year and long term outlook and have announced another quarterly dividend increase and a new increased share buyback program.

Before.

I pass the call to Julie I want to thank our team for their incredible commitment and hard work.

Their energy creativity and integrity are the pillars for the outstanding performance, we continued to achieve.

And with that I would now like to pass the call over to Julie to discuss our financial results in more.

Dale Thank you Laura and good afternoon, everyone to.

The continuation of our strong topline growth and record profitability levels was validated again with another quarter of outperformance on top of elevated growth last year or.

Our second quarter results reflect the power of our operating model and our three key Differentiators we have.

One of the only companies with an exclusive in house design capabilities combined with a channel strategy that is digital first but not digital only and that leads with sustainability and values across our business and in the communities where we work.

All of this is becoming increasingly more important to the consumer as evidenced by our strong second quarter.

<unk>.

Turning to our second quarter results in more detail.

Net revenues grew over 30% to approximately 195 billion with comparable brand revenue growth of 29, 8% and 43% on a two year stack.

Growth was broad based starting with west Elm with a record comp.

A 51, 1%, which was an acceleration from the first quarter and an over 58% comp on a two year basis.

<unk>, our largest brands delivered almost $750 million of revenue with a 29, 6% comp and an almost 38% two year comp.

Pottery barn kids and teens.

<unk> drove another quarter of double digit comps at 18% and almost 23% comp on a two year basis.

And the Williams Sonoma brand comps were six 4% on top of the highest prior year compare of a 29, 4% comp, resulting in an almost 36% two year comp or.

Our emerging brands rejuvenation, and Mark and Graham combined accelerated to a 42, 3% comp and an almost 58% comp on a two year basis, and our global business grew almost 50% to approximately $116 million.

Moving down the income statement, we saw another quarter of substantial gross margin expansion.

<unk> of 710 basis points to 44%.

Our selling margins drove 500 basis points of this expansion, which was an acceleration from the first quarter. It is evident our strategic decision to materially pullback on promotions is proving to be viable even with tougher compares the.

The fact that the products we sell are proprietary.

<unk> high quality and sustainable and are engineered for value enables us the pricing power to provide product at an initial great price in lieu of site wide promotions.

Occupancy costs also leveraged approximately 210 basis points, resulting from higher sales and low occupancy dollar growth.

Occupancy costs were.

Approximately $176 million were flat to the first quarter.

Year over year occupancy costs grew five 9% primarily due to several rent abatements that we recorded last year during the second quarter.

The occupancy benefits, we're seeing from our rent renegotiations and a net closure of 33 stores at the end of 2020.

<unk> has enabled us to minimize occupancy dollar growth and deliver this leverage and we expect this benefit to continue based on our plan to close approximately 25% of our fleet over the next five years.

SG&A in the second quarter was 27, 3% of net revenues compared to 23, 9% last year deleveraging.

<unk> 340 basis points year over year.

This rate held relatively in line with the first quarter and reflects the lowest second quarter SG&A rate, we've had outside of last year, where we had substantially reduced our spend across the business in response to COVID-19 and particularly in advertising.

As a result, the year over year deleverage is primarily.

Merely an advertising, where we have made incremental investments to drive our profitable top line growth and market share gains.

Given the strength in our business, we have made a strategic decision to incrementally invest in high ROI advertising to drive new customer acquisition and to drive our growth in the back half and beyond we see this as a competitive advantage as.

To make these investments and still drive record profitability levels at a time when this may not be possible for others.

And it is paying off with record new customer counts, including ecommerce customers growing almost 30% on a two year basis, the highest growth we have seen.

We were pleased to see that despite these incremental costs are overall.

We are a disciplined throughout SG&A allowed us to hold our rates at a pre COVID-19 historically low level, helping to deliver another quarter of record profitability.

Operating income grew to a record $326 million, resulting in an operating margin of 16, 7% expanding 360 basis points over last year.

This resulted in diluted earnings per share of $3.24 up 80% from last year's record second quarter earnings per share of $1.80.

On the balance sheet liquidity levels remained strong with $476 million year to date in operating cash flow or more than double last year, we ended the quarter with $655 million in cash after.

After funding the operations of the business paying off our term loan of $300 million earlier, this year and maximizing shareholder returns.

During the second quarter, we invested another $36 million in capital expenditures and returned over $180 million to shareholders in the form of $45 million in dividends and $135 million in share repurchases.

To date, we have repurchased over $450 million of our shares or approximately three times, our full year typical share buyback level, which reflects our confidence in the sustainability of our strong growth and profitability and our commitment to maximizing returns for our shareholders.

Moving down the balance sheet merchandise inventories, including inventory and.

Transit, where $1.171 billion for an increase of 12% over last year.

Our inventory on hand and available for sale is still down to last year with a two 5% decline.

Our inventory levels have sequentially improved however, they are not the levels. We had expected at this time, we continued to be impacted.

You're a stronger than expected demand across all brands as well as various supply chain disruptions, including industry wide container shortages coming out of Asia delays due to Covid surges in Vietnam, and Indonesia, and our recent port closure in China and it is hard to predict with certainty. When these supply chain challenges will be fully resolved as a result at this point.

Good bye and expect Backorder levels to remain elevated with moderate improvements in our inventory levels through the balance of the year.

Now, let me turn to our expectations for the rest of the year and longer term as.

As Laura said, we are raising our 2021 outlook from low double digit to mid teen revenue growth to high teens to low twenties revenue growth with opera.

Margins now projected to be in the range of 16% to 17%.

We are confident in our ability to deliver this higher outlook given the strength of our business year to date, the accelerating momentum in our growth initiatives and the macro trends that will fuel our business for years to come.

As a result of our strong expectations for 2021 and beyond we see an accelerated.

<unk> map to growth and profitability longer term.

We now believe we will hit our long term target of $10 billion in revenues by 2024, or one year earlier and with higher profitability holding at least at our further raised fiscal year 'twenty one operating margin.

I would now like to tell you why we are so confident in maintaining these operating.

<unk> <unk> levels. We believe we are best positioned to continue to deliver record level operating margins. Despite increased raw materials freight costs and distribution center labor for the following reasons.

Ongoing overall sales leverage including the additional accretion from our growth initiatives that have a higher operating margin and.

An accelerating shift online.

Margin or the operating margin profile is higher continue.

Continued occupancy leverage from the renegotiation of our lease agreements and further store closures.

The pricing power in our merchandise margins due to our differentiated product positioning with design led value engineered and sustainable products.

<unk> supply chain efficiencies, including automation and in stock.

Inventory levels and from our continued emphasis on overall strong financial discipline.

As far as our capital allocation in 2021, we are maintaining our balanced approach of first investing in the business and then returning excess cash to shareholders. We are on track to invest towards the higher end of our range at approximately $250 million in the business. This.

Year was spend prioritize on technology and supply chain initiatives that primarily support our ecommerce growth.

Given the strength of our business and liquidity, we are taking this opportunity to aggressively pursue incremental investments in the business to support our long term elevated growth.

We also plan to return excess cash to our shareholders in the form of further.

Quarterly dividend payouts and an increased level of share repurchases year to date, we have paid $91 million in dividends by 15% increase and over $450 million of share repurchases compared to no repurchases last year.

Today, given the strength in our business and our liquidity, we announced an additional quarterly dividend increase of 20%.

And a new share repurchase authorization to 1.025 billion a $700 million increase what is remaining on our existing share repurchase authorization.

We are committed to maximizing shareholder returns and given our long term growth and profitability outlook. We continue to believe that our stock is undervalued as a result, we believe investing even more in our own.

Stock will drive long term financial returns for our shareholders.

In summary, our results in the second quarter further validate our ability to deliver sustainable strong growth and profitability. We believe we are uniquely positioned with a favorable long term macro trends, including a strong housing market driving ongoing investment in the home the disruption of brick and mortar.

Water in an accelerating shift to e-commerce, the increasing importance of sustainability and being a values driven company combined with our key differentiators are accelerating growth initiatives, our strong operating cash flow liquidity and our proven track record of strong financial discipline. All of this will enable us to drive long term growth and profitability and strong financials.

Turns for our shareholders for years to come I would now like to open the call for questions. Thank you.

Thank you if you'd like to ask a question. Please Sigma pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you would like to ask.

A question.

And we'll take our first question from Adrian <unk> from Barclays. Please go ahead.

Yes, good afternoon, another stunning quarter, so congratulations to the entire team.

Thank you.

Youre welcome.

I guess, Julie I'll start with you about the second quarter of <unk> 40.

Financial <unk> gross margin last quarter, 44% gross margin externally reported this quarter. If you can can you help us.

That kind of roll back up into merchandize margins relative to history and how much more room is there to the upside on pure merch margin.

And then.

Secondarily.

3% wanted to do.

See right. So the average unit cost any color on what that maybe this quarter and did that get worse in the third and fourth quarters as we've heard from many people. Thank you very much. Thanks.

Thanks, Adrian as far as merchandise margins I think first of all I want to remind everybody.

We saw merch margin expansion back even in 2018. So this is something we've been working on obviously not to this degree we've had a fundamental shift in the company to substantially pullback on site wide promotions and the reason we can do that is because of our pricing power because of what we sell that its in house designed.

Body dietary and it's designed for value engineered for value and so we can then come out with an initial price that is relevant to the customer and a good value and allow us to not do as many site wide promotions and so that's a fundamental shift that we have now been pursuing pretty aggressively for a while now and so we think this can continue will it continue with the same degree.

It's <unk>.

Probably not I wouldnt model that to the same degree we're very pleased to see continuing strong selling margin expansion from I think it was 400 last quarter to 500. This quarter. Obviously, we also are going to have some raw material price increases and freight cost increases. So that's going to put pressure on that line, but I think the team has done an incredible job of managing.

Great through that and mitigating those costs and because we're vertically integrated we're better positioned than most to be able to do that so we do think this is sustainable but maybe not at the same level.

Okay.

Thank you, we'll now take our next question from Cristina.

Managing.

That's right.

Good afternoon and congrats.

Also on a strong quarter can you talk about how demand progressed through the quarter any additional color that you can give us about.

Third quarter so far.

The demand was incredibly strong for pretty much all quarter long.

Obviously with these kinds of results.

We've just had phenomenal topline performance and as we said in our prepared remarks, we have not seen that Wayne. So we are very optimistic clearly and confident about the future of our business and it's just you know even on top of these elevated compares we're seeing strong growth with 40 costs both demand.

I mean that in Q1, and Q2 holdings and.

<unk> strong growth as we've entered the third quarter.

Thank you and if I could ask a second question.

Thinking about 16% to 17% operating margin longer term.

What is that imply for.

The mix of the business between E Commerce and retail.

We need to see.

Level.

Well, we have assumed that E. Commerce will continue to grow obviously, we're pleased we're able to hold it to 65% despite the.

The fact that we have the retail recovery this year and so that makes it a little bit.

Volatile so to speak but we're still holding at 65%. We've said before we plan to at least grow at 70% and so thats assumed within our numbers.

But we have many opportunities to drive operating margin expansion and to be able to at least hold where we plan to come out in 2021 first will have the ongoing sales.

Coverage.

With additional accretion by the way from our growth initiatives, which I think is really important to understand that and b to b and marketplace and in franchise. For example, they may have some pressure on the gross margin line, but they are incredibly accretive to the total company operating margin. So as those have an outsized growth potential as we've seen.

Our label by themselves helped with the operating margin expansion going forward and then you have an accelerating shift to online which has always been more profitable as you may recall back for years, we used to report that it was above a 20% operating margin.

And it's even higher today, obviously with the top line sales flow through so as that shifts.

More and more online we expect that to drive operating margin expansion continued occupancy leverage will drive that you know given the fact that we're still optimizing our retail fleet and we're renegotiating leases and we're closing less profitable stores I think we've demonstrated that we've been able to do that and hold our operating costs down while we're driving top line.

<unk> minutes back to a pricing power. The fact that we design our own product and engineered for value that gives us a lot of leverage on the on the operating margin line plus everything else from supply chain efficiencies and all kinds of things, but all of that gives us the confidence to believe that we at least can hold the 16% to 17% for this year and then going.

And that has accelerated pace on the top line.

Yeah.

Thank you we'll take our next question from Curtis Nagle with Bank of America.

Good afternoon, or good evening, thanks, very much so two quick ones.

One.

Forward Ross you're thinking about.

I'm not asking the question is I'm trying to absorb growth.

Thank you Buck.

No.

You guys are working on our registry rights for.

Baby and wedding those businesses.

Probably we're in great shape.

Last year.

A lot of things are kind of opening up.

How much is I guess what are your particular, you know started to help I guess is it helping.

Just given.

And finally are starting to see people getting.

Got it.

Actually celebrate all that's the first one and then just secondly.

Second just could you give any clarity in terms of.

We're going to do I think you'd mentioned Beth.

<unk> reward investments will be made in <unk>.

Marketing or advertising dollars.

How should we think about that relative to <unk>.

This quarter year over year.

Okay.

Yeah. Thanks, Let me start it's Laura for the <unk>.

I'm, So glad you brought up wedding registry.

Bob and I said it in my prepared prepared remarks, it is phenomenal.

As you can imagine I mean, they weren't cutting weddings other weddings and.

<unk>.

I'd just ask Julia if I can tell you, we're up 19% and wedding registry I mean, that's.

And the sales that's a big number.

And maybe it's been.

Probably should hold time, new baby App, which is very successful.

We're learning that across all of our brands the more time, we spend on mobile the better because it drives conversion and it's really the.

Choice for our customers, so you're going to see us do even more things with mobile and make it.

Really help the selling proposition, but in those two very.

And life stage.

Buying opportunities were seeing tremendous growth and we're continuing to support it with technology.

Likewise these trends as I said hybrid work.

And then the reality of.

People learn how to Cook and there's still cooking and they love cooking and so we're.

Important to see those businesses and Williams Sonoma that support those whether it be coffee or.

Food at home those businesses are quite strong for us today, even though we had the big surge last year and then.

The back to school I mentioned kids going back to school and.

Backpacks are a big.

Continued that tradition, so of course, that's a business that we've.

We've seen really strong growth in and that's why we crept into the season of holidays.

Halloween is tremendous if anybody on the call needs to buy anything you should buy it now because were seeing a very strong SaaS curve.

And I imagine.

Big part of the same with Thanksgiving and Christmas, which was a tough time for everybody last year and should be hopefully one where you can at least test small gatherings, if not more so I think there's a lot of natural upside and life stage trends that we are going to be right. There.

With our customers on appropriately to help them.

That will make.

Make the most of those so thanks for that question.

And then I'll pass it over to Julie to answer the marketing advertising question, Yeah, So as far as the advertising them and we have said before that you know certainly we're gonna be incrementally investing in advertising year over year last year, certainly that was a big lever for us to pull back on Q2 was.

On the lowest spend in SG&A period, which advertising was a big piece of it.

Until we could read the business to make sure that we were okay going forward and so youre going to see year over year pressure on that line on SG&A because of it but I think the key takeaway for you guys that you realize that it's a competitive advantage right now I mean, most companies don't have.

Same kind of.

Margin expansion, whether it's merch margin gross margin or operating margin expansion that we have that where we can take that and reinvest back into advertising when others may not be able to do so right now they may have to pull back because they are trying to pay for freight or theyre trying to pay for raw material increases or whatever it may be and we don't have to do that.

So, we're taking that opportunity and investing to drive new customer acquisition and to fuel future growth and we think that's a real big competitive advantage.

Okay fair enough thanks very much.

Thank you.

Thank you, we'll hear next from Sean with Wedbush Securities.

Thanks, a lot and good afternoon. Congrats on the strong results I have one bigger picture question and one specific question bigger picture.

I am very intrigued by your thoughts on this.

Transformational.

And you asked me in the home and the drivers behind that.

When you think about the.

Right now trend towards hybrid work environment is that the primary thing that you're considering.

Considering if you think about higher investment levels in the home furnishings home furniture et cetera, going forward or are there bigger things how youre thinking about.

Yeah, I think it's you know the time, we've all spent more at home has made us realize the importance of home it was.

Jen peoples primary investment.

And so.

So that hasn't that's on a new piece, but the amount of time the ability for you to improve that space.

Is so real and the happiness that that gives you and the productivity and so it's not just hybrid work it's everything.

Always learning how to Cook it.

You see trends.

Our families having their kids come back and live with them are bringing in.

Their parents to live with them and all of those moves at the same time.

Apply of houses is still too low and there's a lot of people who are out looking for a second homes and even if they can't afford it themselves.

And the resources together with friends to complete that fantasy of buying getaway home and those are the things that when you talk to people about what they're thinking about now and what's important to them. This is what you hear you hear about the kitchen remodel you hear about the second home they wish they could buy I mean, I'm sure you're hearing it with your friends and family.

Paul and this is a really really important.

Trend that I don't think it's going to be transient.

It's one that will continue to last for a long time and one that puts us in a very good position.

To not only take advantage of the trend, but also gain share because as I said earlier, there's just nobody.

<unk> has much chair.

In this world and nobody is doing what we're doing.

Got it that's helpful perspective, and then secondly, thinking about the outlook for the balance of year, obviously your guidance create impressive but it does imply a material deceleration in comparable store sales on two year basis from the first half of the year. Despite.

Really the fact that you guys mentioned that you see a very strong start and expect strong holiday outlook is that just due to conservatism or is there something else, we should be thinking about.

Yeah, I wouldn't read anything more into that as we've said we've had very strong success.

Success year to date, we've had for quite a few quarters now and we've seen a strong going into the third corner.

Despite and we're guiding to low twenty's.

Which is still very high on a two year basis, certainly we are taking into consideration like everybody else the impacts from supply chain challenges that are out there, but I think with our incredible supply chain team, where we're best positioned to maneuver through that better than anybody but.

Hi, thoughtful of that and that's why we have the range that we have but with that said, there's absolutely no fundamental difference in our outlook for our business.

Thank you very much.

Thank you we'll take our next question from Chuck Grom with Gordon Haskett.

We're being great. Thanks, Congrats on an awesome quarter.

Laura you talked about not seeing any signs of a slowdown, but I'm actually curious if you're seeing an acceleration in your business what back to school here somewhere ending et cetera.

So at what banner and then.

Can you size up <unk> I.

I think it's $700 million long term opportunity.

Can you just remind us what you think.

Sonoma home could be long term.

Yes, sure many Julia to up on this.

First of all the obvious business that gets the most bang from that school is that kids and teen businesses.

Because that is what we believe.

We really address that if you go to a home.

But right now and Youll see that and so of course that would imply that those have the most upside relative to back to school.

And so it would be to be first of all let me make sure that I didn't misspeak earlier as Julie wrote me a note and such a thought I said $100 million when I meant to say $180 million for the quarter [laughter].

John I'm going to take this opportunity with your question to correct myself, if I misspoke I apologize.

So b to B.

You know it is a really good question on how big this can be.

When.

It's certainly faster than we ever expected and we keep making jokes.

So.

How much bigger could it be but we're certainly on track to.

We said $1 billion and what Julien originally five years and if I could.

100 million this year, which is seven.

700 million this year.

So you know the reason I didn't put a number out there is because.

I don't want to be too.

Folks have been all minded about it [laughter].

You know what I can say a number and then that is not even close to what opportunity is it's it's a monster opportunity.

Got it and what about Williamson of them.

Williams Sonoma home, hopefully I don't think we put that number out there we we just we've.

We've really changed our strategy from doing parts of the stores being online focus, which we think is a huge advantage in the market.

And we just brought a new leader in and it's too early for us to put a number around it but so far so good and.

I do see it as a big growth driver and a large underserved market.

Got it and then one for Julie just in order to get to that 16% to 17% EBIT margin here in 'twenty one.

Let's say, a 20% revenue growth implies less flow through in the second half of the year. It sounds like there's going to be some incremental AD spend but can you just help us think about the puts and takes in any variability between.

The third and the fourth quarter that you want us to think about.

Yes, I mean, certainly AD spend will come into play on the SG&A line, but also we still believe we're going to have gross margin expansion both for merch margin expansion and from occupancy leverage I wouldn't focus too much on that I mean, the reality is if you look at the 16% to 17%. It's almost two <unk>, where we were in 2019.

So we're just being thoughtful of that and certainly we're also keeping in mind the increase in raw material costs and freight costs that everyone is maneuvering through.

But could it be higher sure, but right now we think this is the right target given we got a big back half to go and we'll update you as we move through the year.

Great. Thank you.

Yeah.

Thank you we'll take our next question from Simeon Gutman with Morgan Stanley.

Everyone, a nice quarter two quick questions I missed prepared remarks, I didn't know what you talked about regarding freight how you're navigating the environment. How your inventory position looks and then even into next year and then the second part is on the advertising spend I did catch some of that can.

About the timeframe in terms of return are you spending because you're seeing the immediate return or is this.

Medium longer term branding.

From an inventory perspective, what we said is you'll see sequential improvement I think last quarter. It was one seven or something like that and we moved to a 12% increase but if you look at our inventory that's on hand and available for sale.

It's still a decline of two 5%. So we're not where we expected to be and that's just quite frankly, because one where our demand just hasn't stopped so it's constantly really high demand so to get back in stock is really challenging and then you combine that with the supply chain challenges.

That all are facing.

We are better.

Your position than most I guarantee that given our scale and long term relationships and our incredible supply chain team.

And two always jumps ahead of this way ahead of anybody can think about the tariffs and everything else that we did.

And so.

Certainly that is impacting us we're not immune to it.

So that will cause us to have higher back back order levels and.

Throughout the balance of the year, but we do expect inventory to improve moderately as we move throughout the year and there's things that I'm really proud of and want to make sure we mentioned that.

A very competitive so for example, right now in our upholstery business, where we make our own a large percent of our own upholstery.

We were previously clothing.

100 days, which is when you look at a lot of people sites, you know still better than most but we are now down to 80 days and looking at dropping that further as our incredible upholstered teams are really producing more than anyone else and so we're thrilled about that and that's the kind of thing you know would you give us a good challenge.

Goodbye.

Most times, you're going to see we're going to outperform.

And take that challenge and make it into an opportunity for us because it's all about visa the custom furniture from anyone else.

So <unk> would you like to answer the question about advertising without.

Being too competitive about telling everybody how we do.

Sure.

Yeah, you got it.

And so short term or long term I guess, what we focus mostly on is return on investment.

And you really focus on customers who are in market.

So end market for furniture, we're very focused on.

Yes.

People looking to who are either moving as Laura mentioned wedding, having a baby those are high high value customers and so our acquisition strategies around there.

Our very strong and are prevalent throughout all of our banners from a long term perspective.

Well when we see this uptick in furniture, that's always a good signal for us in terms of what it means from la lifetime value.

I would say without percentage I mean, it out we're focused on in market in the short term and then high value customers in the long term.

Okay. Thanks, that's helpful.

Thank you we'll take our next question from Zack <unk> with Wells Fargo.

Hi, This is David Lance on for Zach Thanks for taking our questions.

To start within merchant those margin. We were wondering if you could unpack that a little bit in terms of price increases mix and the absence of promotions and clearance.

And then a follow up would be.

How did traffic and ticket trend in the quarter and what was the impact of inflation.

Oh boy.

[laughter] impact of inflation I mean, you know.

That's that's a hard one to tease out but in terms of promos.

Our strategy.

So the customer great value in our products, but not to run a promotional business and this quarter reflects that strategy. You know it's interesting the broader competitive set I think is actually getting more promotional based on our research and yet we were able to outperform topline and bottomline without running promotions, we are aggressive about our inventory turn.

And about slow movers and.

Interesting fact.

Is that our clearance inventory is down 34% year over year because of our aggressiveness in clearing some of the slow movers, which is really really important.

For us to continue to do with our large cube furniture traffics another really interesting story.

Because in our retail stores believe it or not as much as traffic has improved its still down to 2019 and were running these crazy good comps, they're doing such a good job in our stores selling and our product is so appealing to our customers, but imagine when the traffic comps how much better it could even.

So.

Yes, we are we are not back to 2019 level traffic in our stores, but it is an opportunity we're seeing customers buy more from us.

They're buying more furniture, and theyre buying more pieces as they look at decorating their whole homes with us and also as I said earlier online there.

They're shopping cross brand and we're pushing that it's not just <unk> that we are pushing cross brand sales and we just launched this week the new credit card.

I think it might be before I run out of time.

<unk> handed over Felix talk about what makes this credit cards different from our plc and Williams Sonoma card before Felix.

Yes.

This week Monday and in fact, we launched our New Cross brand Cross brand credit card in.

In partnership with capital one as.

As part of our ever expanding loyalty program and so when you shop with any of our brands online or in store you get 5% back in rewards you get 10% back.

And your first 30 days.

When you shop at which.

Which incremental to our pass programs is when you shop at grocery stores and restaurants, you'll receive 4% back and when you shop anywhere else you get 1% back in rewards.

All cardholders, regardless of which brand they sign up for.

Get free shipping at Williams, Sonoma as well so.

The card is designed to drive and increase retention in each individual brand, but it's also to incent and reward customer shopping across our brands. So as Laura said that average sale per customer is.

Is one of our.

Our key weapons in terms of growth and we continue to believe that we can increase our share of wallet.

By introducing our sister brands.

Across our portfolios to our customer.

Yes.

Great. Thanks.

Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for any additional or closing remarks.

Just wanted to say thank you to you all for joining us and for your support and I look forward to hopefully seeing you in person if not talking to you again at the next quarter happy shopping.

Okay.

Thank you that does conclude today's conference. We do thank you all for your participation and you may now disconnect.

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Please standby were about to begin.

Welcome to the Williams Sonoma, Inc. Second.

2021 earnings conference call at this point 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 Mr. Brian <unk> Senior Vice President of corporate finance and treasurer to discuss non-GAAP financial measures and forward looking statements. Please go ahead Sir.

Quarter. Thank you.

Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today.

Unless 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.

The directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in exhibit one of our press release.

This call also contains forward looking statements within the meaning.

Private Securities Litigation Reform Act of $19.90.

The most which.

Which address the financial condition results of operations business initiatives trends growth plans and prospects of the company in 2021 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such.

Five looking statements.

Please refer to the company's current press release, and SEC filings, including the most recent 10-K for more information on these risks and uncertainties.

The company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances.

Forward may arise after the date of this call.

I will now turn the conference call over to Laura Alber, Our President and Chief Executive Officer. Thank you, Brian Good afternoon, everyone and thank you all for joining US we are proud to report another quarter of outperformance with a 30% comp strong growth across all brands and channels and three.

60 basis points of operating margin expansion.

These second quarter results demonstrate the success of our growth strategy and the earnings power of our company.

We have an advantage in our industry due to our exclusive in house design capability, our channel strategy, which is digital first but not digital only and.

Ranjan views with sustainability and equity underlying all that we do.

As I mentioned, we are seeing in our business and are.

Our valve positioning set us up to continue to take share in a fractured market.

Do not see any evidence the growth trends are waning and in fact, we see favorability in the macro environment as more people prioritize their homes and home decor we.

We believe we are at the intersection of a transformative change that will accelerate the growth of our industry and our mark.

We're winning within the industry.

Home sales in 2021 are expected to grow more than 20%. The most sales recorded since 2005, the acceptance of remote work is gaining traction.

The number of remote hybrid workers expected to nearly double in five years from pre COVID-19 metrics.

In addition, RV.

Sure what strategies are gaining traction faster than we predicted and our key differentiators are further distancing us from our competition.

Therefore, we see a clear path to beating our previous revenue and profitability targets and we are raising our full year revenue outlook again with revenue growth now expected to be in the high teens.

<unk> and operating margins now expected to be in the range of 16% to 17%.

Given our increased optimism, we now expect to achieve our long term goal of 10 billion in revenues in 2020 for one year faster than previously expected and with higher profitability, which will now be at.

So lots above our increased FY 'twenty, one operating margins.

Now I'd like to talk in more detail about why our model stands out from the competition.

First our positioning.

Our customers shop with us because we design high quality and sustainable products. They are engineered for value.

Our platform of.

At our other brands allows us to serve customers, who are looking for quality and sustainable products at a great value across a wide range of aesthetics and scale the.

The home furnishings market is extremely fragmented.

Our addressable market is $780 billion and we currently only one approximately one.

Loved that.

And competitors that are retail.

One for some of that.

And relative to the other strong online players in the market. Our model is the only one with an exclusive product line and a high service model.

Second our growth strategies are working and the new opportunities generated from these initiatives are incremental to our business today.

<unk> dot existing brands, we have a long runway to expand our reach with existing and new customers.

And west Elm, we're expanding into product white space and accelerating our presence both online and through new stores to drive our brand awareness from 20% to 60%. These growth initiatives will fuel our goal of growing.

From our end of $3 billion in revenues by 2024.

In the pottery barn brands, we expect to reach nearly $5 billion by 2024 by driving incremental growth in categories, such as upholstery bass baby and dorm.

And our new updated aesthetic is resonating with both existing customers and a young.

Longer demographic of customers that are in the household formation mode.

Williams Sonoma is transforming their model to reach new customers with a higher penetration of E Commerce, and a winning new store model supported with more product exclusive products.

And we have a substantial growth opportunity to.

This share in the high end market with Williams Sonoma home.

Rejuvenation and Mark and Graham.

With both having aggressive and profitable e-commerce growth in underserved categories will further drive market share gains as they scale.

Additionally, we are accelerators to our core business such as.

<unk>, which is positioned to disrupt an underserved industry and further diversify our customer profile.

<unk> is now on track to reach almost $700 million by this year's end, which is well ahead of our growth.

<unk>.

To grow this business to at least $2 billion.

Our global business, which is led by.

Our capital light franchise model allows us to move into markets faster and more profitably and is targeted to become at least a $700 million business by 2024.

Our cross brand initiatives, which are supported by our best in class marketing effectiveness teams and loyalty programs like our new.

New Cross brand credit card and growing key program are driving incremental growth within our brands.

And finally, our design services, both online and in stores, we have built an ecosystem of design tools, which allow us to help furnish our customer spaces with three D renderings created with our talented design.

<unk> staff or in a self serve model online with virtual health.

We already see the investments we've made in this technology paying off as large ticket orders and cross brand orders continue to grow and as return rates continue to come down.

The competitive advantage, we are creating with our service model.

<unk> and tools will continue to grow into the future led by our technology talent and digital first in service mindset.

In summary, the amplified power of all these factors I E. The macro are winning positioning and our growth drivers provides an overwhelming case for outsized returns.

Into the future.

Now as it relates to Q2 I would like to give you a few highlights which foretell the opportunity I outlined above.

Our growth this quarter was driven across all brands and channels E. Commerce grew at 12% and retail drove a 98 comp with both channels growing at a two year comp of over 50.

And we deliver these sales more profitably with operating margins expanding another 360 basis points to 16, 7% versus last year at 13, 1%.

In pottery barn, we drove an almost 30 comp in the second quarter.

All categories are outperforming with notable strength in our indoor rustic.

Modern casual point of view and in our outdoor business.

We're also building momentum in our brand partnerships and our new business initiatives, including marketplace apartment, and Bath renovation, which are all growing above 30%.

Our early fall results are strong with inspiring.

Bring collections across categories.

Over 30% growth in our baby.

The business we.

We're also seeing a very strong response to our Halloween launch, which should indicate a strong.

The back half of the year with all the seasonal celebrations and gifting to come.

And west Elm, our momentum continues to build with a 51 comp for the second quarter.

We saw strength across all categories with triple digit growth in our upholstery in outdoor furniture businesses.

We've.

We've expanded our year round outdoor assortment and our new product collections and line extensions.

New categories, such as back kitchen, and West Elm Kids are also fueling incremental growth for the brand.

Our fall season is off to a strong start with continued strength across all categories and an exceptional response.

To our new opening price points line extensions and new introductions.

And the Williams Sonoma brand, we drove another strong quarter with a six four comp on top of last year's 29, four comp powered by our content led marketing and a higher percentage of exclusive and Williams Sonoma.

<unk> branded products, while at the same time substantially reducing promotional activity.

We see strength across key categories and falls off to a strong start.

We're also very excited to share that our new store model is working in Q2, we opened three new stores with our newly designed inspire.

Inspiring store design.

These stores are lighter and brighter with clear destinations improving the shopping experience.

These stores are exceeding our forecast and they represent a material opportunity for us to strengthen the brand and drive more profitable retail results.

As a reminder.

<unk>, we have nearly 50 of our Williams Sonoma stores up for renewal this year, which provides us the opportunity to materially improve profitability or close.

Our Williams Sonoma home business continues to scale with our strategic reposition of the brand as a premium online furniture destination.

<unk>, our high end sustainable casual aesthetic is resonating with our high end customers in an underserved market.

We saw triple digit demand comp in outdoor furniture further validating our belief with the right assortment and digital presentation. The Ws home Graham will be one of our biggest growth opportunities.

Cross banner brand, our <unk> Division continues to accelerate with another record breaking quarter up nearly 125% to over $100 million in revenue.

We continue to expand our portfolio of customers, which range from fortune 500 companies to small businesses.

Year to date, 71% of our sales have come from repeat customers and 50% of the BTB customers has shopped from more than one brands in our portfolio.

We are a go to resource for our clients across a range of their purchasing needs from furniture to corporate gifting.

In addition to the sales.

<unk> growth, we are continuing to make notable progress on our strategic initiatives to further accelerate the growth of this business.

We continue to believe that our differentiators and our ability to tailor to our customers' unique needs will allow us to further disrupt this industry.

And gain market share.

In addition to beta B, we are making progress migrating our customers across our brands.

As a reminder, cross brand customers spend over two times more than those who shop only one brand.

Only 30% of our customers shop Cross brand today.

We believe our brand.

Brands offer an assortment that fulfills all rooms of the home with a product offering that is designed in house made from sustainable materials and of the highest quality.

At the core of the cross brand loyalty program is the key our free loyalty program, the incentives and rewards customers.

For shopping across our portfolio.

We also recently announced our partnership with capital one with a new cross brand credit card, which just launched and should further incentivize this cross shopping behavior.

Now I'd like to discuss the power of our digital first advantage.

E Commerce continues to drive our growth and profitability.

Our in House Tech platform and rapid experimentation program continue to differentiate our customer shopping experience by improving speed visibility to orders.

Personalization and selling capabilities.

And the second quarter, we saw even more usage plans created grew 35% over last year.

This engagement with our customers extend with great service and presentation in our stores and omni services, which complement our digital platform.

This operating model allowed us to generate strong ecommerce growth, maintaining a 65% of our revenue mix, while delivering some of the highest retail growth we.

We have seen on both a one year and two year basis.

The cohesiveness of our web site stores and storytelling brings our products to life, improving our customers' ability to visualize and imagine our products in their homes.

And with the evolving nature of shopping behaviors the synergy from our digital first omni model have not.

Never felt more relevant.

We're also proud to see quantifiable progress and our commitment to values, which is our third key differentiator.

This quarter, we released our 2020 impact report detailing progress on our ESG goals.

We are proud to have already exceeded many of our goals, including our.

Use of responsibly sourced wood, our commitment to pay fair trade premiums to our workers and our goal to invest in education and empowerment for workers.

By the end of 2021, we intend to keep 75% of our waste from stores distribution centers and offices out of landfill.

This year, we have also set new long term commitments, which includes selling 75% of our products with labels aligning with our social or environmental initiatives.

Significantly, reducing our carbon footprint and sourcing 75% of our product purchases from suppliers with worker well being.

Being program.

We believe our values are prioritizing the health of our planet the wellbeing of our people and a shared sense of purpose to foster long term sustainability resonate with our customers and will drive positive change in our industry.

As we look forward.

The second half of the year, we remain confident in our ability to continue taking market share.

Our upcoming product pipeline is strong and we anticipate continued momentum across our entertaining and gifting related categories as we move into the holiday season.

Quarter to date, we continue to see strong topline.

Line growth and strong margins.

As we look beyond this year, we have a clear path to drive topline and Bottomline growth, our operating model and our pricing power, resulting from our key differentiators.

Our in House design, our digital first channel and our values will set us apart.

From our competition and allow us to drive long term growth and profitability.

And this is why we have raised our full year and long term outlook and have announced another quarterly dividend increase and a new increased share buyback program.

Before I pass the call to Julie I want to thank.

Our team for their incredible commitment and hard work there.

<unk> energy creativity and integrity are the pillars for the outstanding performance, we continued to achieve.

And with that I would now like to pass the call over to Julie to discuss our financial results in more detail.

Thank you Laura and good afternoon, everyone.

The continuation of our strong topline growth and record profitability levels was validated again with another quarter of outperformance on top of elevated growth last year.

Our second quarter results reflect the power of our operating model and our three key Differentiators. We are one of the only companies with an exclusive in house.

House design capability combined with a channel strategy that is digital first but not digital only and that leads with sustainability and values across our business and in the communities where we work.

All of this is becoming increasingly more important to the consumer as evidenced by our strong second quarter results.

Turning to our second quarter.

Results in more detail.

Net revenues grew over 30% to approximately 195 billion with comparable brand revenue growth of 29, 8% and 43% on a two year stack.

Growth was broad based starting with west Elm with a record comp of 51, 1% which was an.

An acceleration from the first quarter and an over 58% comp on a two year basis.

Pottery barn, our largest brand delivered almost $750 million of revenue with a 29, 6% comp and an almost 38% two year comp.

Barn kids and teen drove another quarter of double digit comps.

Comps at 18% and almost 23% comp on a two year basis.

And the Williams Sonoma brand comps were six 4% on top of the highest prior year compare of a 29, 4% comp, resulting in an almost 36% two year comp or.

Our emerging brands rejuvenation, and Mark and Graham.

Combined accelerated to 42, 3% comp and an almost 58% comp on a two year basis, and our global business grew almost 50% to approximately $116 million.

Moving down the income statement, we saw another quarter of substantial gross margin expansion of 710 basis points to 40.

4%.

Our engineered for value enables us the pricing power to provide product at an initial great price in lieu of site wide promotions.

Occupancy costs also leveraged approximately 210 basis points, resulting from higher sales and low occupancy dollar growth Aki.

Occupancy costs were approximately $176 million or.

Flat to the first quarter.

Year over year occupancy costs grew five 9% primarily due to several rent abatements that we recorded last year during the second quarter.

The occupancy benefits, we are seeing from our rent renegotiations and the net closure of 33 stores at the end of 2020 has enabled us to minimize occupancy dollar.

Growth and deliver this leverage and we expect this benefit to continue based on our plan to close approximately 25% of our fleet over the next five years.

SG&A in the second quarter was 27, 3% of net revenues compared to 23, 9% last year deleveraging 340 basis points year over year.

As a result, the year over year deleverage is primarily in advertising, where we have made incremental.

Rental investments to drive our profitable top line growth and market share gains given.

Record profitability levels at a time with this may not be possible for others and it is paying off with record new customer counts, including e-commerce customers growing almost 30% on a two year basis, the highest growth we have seen.

We were pleased to see that despite these incremental costs, our overall cost discipline throughout SG&A allowed.

Allowed us to hold our rates at a pre COVID-19 historically low level, helping to deliver another quarter of record profitability.

Operating income grew to a record $326 million, resulting in an operating margin of 16, 7% expanding 360 basis points over last year. This resulted in diluted earnings per share.

Of $3.24 up 80% from last year's record second quarter earnings per share of $1.80.

On the balance sheet liquidity levels remained strong with $476 million year to date in operating cash flow or more than double last year. We ended the quarter with $655 million in cash after funding the operations of the business paying.

Paying off our term loan of $300 million earlier, this year and maximizing shareholder returns.

Year to date, we have repurchased over 400.

$50 million of our shares or approximately three times, our full year typical share buyback level, which reflects our confidence in the sustainability of our strong growth and profitability and our commitment to maximizing returns for our shareholders.

Moving down the balance sheet merchandise inventories, including inventory in transit, where 1 billion 100.

$71 million for an increase of 12% over last year. However, our inventory on hand and available for sale is still down to last year with a two 5% decline our.

Our inventory levels have sequentially improved however, they are not the levels. We had expected at this time, we continued to be impacted by our stronger than expected demand across all.

As well as various supply chain disruptions, including industry wide container shortages coming out of Asia delays due to Covid surges in Vietnam, and Indonesia, and our recent port closure in China and it is hard to predict with certainty. When these supply chain challenges will be fully resolved as a result at this point, we expect backorder levels to remain elevated.

All Bradford improvements in our inventory levels through the balance of the year.

Now, let me turn to our expectations for the rest of the year and longer term.

As Laura said, we are raising our 2021 outlook from low double digit to mid teen revenue growth to high teens to low twenties revenue growth with operating margin is now projected to be in the range of 16.

With 17%.

As a result of our strong expectations for 2021 and beyond we see an accelerated path to growth and profitability longer.

<unk> term.

I would now like to tell you why we are so confident in maintaining these operating margin levels. We believe we are best.

<unk> positioned to continue to deliver record level operating margins, despite increased raw materials freight costs and distribution center labor for the following reasons ongoing overall sales leverage including the additional accretion from our growth initiatives that have a higher operating margin.

An accelerating shift online where the operating margin profile is higher.

<unk>.

Continued occupancy leverage from the renegotiation of our lease agreements and further store closures.

The pricing power in our merchandise margins due to our differentiated product positioning with design led value engineered and sustainable products.

<unk> supply chain efficiencies, including automation in stock inventory levels and from our continued.

With an overall strong financial discipline.

Empathy and supply chain initiatives that primarily support our ecommerce growth.

Given the strength of our business and liquidity, we are taking this opportunity to aggressively pursue incremental investments in the business to support our long term elevated growth.

We also plan to return excess cash to our shareholders in the form of further increased quarterly dividend payouts and an income.

<unk> level of share repurchases.

Year to date, we have paid $91 million in dividends by 15% increase in over $450 million of share repurchases compared to no repurchases last year and today given the strength in our business and our liquidity, we announced an additional quarterly dividend increase of 20% and a new share repurchase authorization to one.

<unk> $25 million by $700 million increase what is remaining on our existing share repurchase authorization we.

Bitter holders.

For us the increasing importance of sustainability and being a values driven company combined with our key differentiators are accelerating growth initiatives, our strong operating cash flow and liquidity and a proven track record of strong financial discipline. All of this will enable us to drive long term growth and profitability and strong financial returns for our shareholders for years to come.

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

Thank you.

That's a good question. Please signify pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute.

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And we'll take our first.

<unk> <unk> from Barclays. Please go ahead.

Yes, good afternoon.

Other spending quarter, so congratulations to the entire team.

No.

Youre welcome.

So I guess I'll start with you about the second quarter of 43% gross margin last quarter, 44%.

Question gross margin externally reported this quarter. If you can can you help us.

How did that kind of roll back up into merchandise margin relative to history and how much more room is there to the upside on pure merch margin.

And then.

Secondarily.

I wanted to see AUC.

So the average unit cost.

Any color on what that maybe this quarter and did that get worse in the third and fourth quarters that'd be heard for many people. Thank you very much. Thanks.

Thanks, Adrian as far as merchandise margins I think first of all I want to remind everybody that we saw merch margin expansion.

<unk> right even in 2018. So this is something we've been working on obviously not to this degree we've had a fundamental shift in the company to substantially pullback on site wide promotions and the reason we can do that is because of our pricing power because of what we sell that its in house designed its proprietary and it's designed for value.

Back to neared for value and so we can then come out with an initial price.

That is relevant to the customer and a good value and allow us to not do as many site wide promotions and so thats a fundamental shift that we have now been pursuing pretty aggressively for a while now and so we think this can continue will it continue with the same degree probably not I wouldnt model that.

<unk> any degree we're very pleased to see continuing strong.

Selling margin expansion from I think it was 400 last quarter to 500. This quarter. Obviously, we also are going to have some raw material price increases and freight cost increases without going to put pressure on that line, but I think the team has done an incredible job of managing through that and mitigating those costs.

At the same and because we're vertically integrated we're better positioned than most to be able to do that so we do think this is sustainable but maybe not at the same level.

Okay.

Okay. Thank you.

Our next question from Cristina Fernandez from Telsey Advisory group.

Uh huh.

Good afternoon, and congratulations on a strong quarter can you talk about how demand progressed through the quarter and any additional color that you can give us about.

Third quarter so far.

The demand was incredibly strong for pretty much all quarter long I mean, obviously with these kinds of results.

We've just had phenomenal topline performance and as we said in our prepared remarks, we have not seen that Wayne.

So we are very optimistic clearly and confident about the future of our business and it's just even on top of these elevated compares we're seeing strong growth with 40 costs, both demand and net in Q1 and Q2 holdings.

The strong growth as we've entered the third quarter.

Thank you and if I could ask a second question.

Well, you know thinking about 16% to 17% operating margin longer term, what does that imply for the mix of the business between E Commerce.

Retail does it.

Nice to see the current level.

While we have assumed that E. Commerce will continue to grow obviously, we're pleased we're able to hold it to 65% despite the.

The fact that we have the retail recovery this year and so that makes it a little bit.

It'll so to speak but we're still holding at 60.

And the percent, we've said before we plan to at least grow at 70% and so Thats you know assumed within our numbers but.

But we have many opportunities to drive operating margin expansion and to be able to at least hold where we plan to come out in 2021 first will have the ongoing sales leverage.

The additional.

65% by the way from our growth initiatives, which I think is really important to understand that and b to b and marketplace and in franchise. For example, they may have some pressure on the gross margin line, but they are incredibly accretive to the total company operating margin. So as those have an outsized growth potential as we've seen.

They will buy themselves help.

Increased creating margin expansion going forward and then you have an accelerating shift to online which has always been more profitable as you may recall back for years, we used to report that it was above a 20% operating margin.

And it's even higher today, obviously with the top line sales flow through so as that shifts more and more online we expect that to dry.

Operating margin expansion continued occupancy leverage will drive that you know given the fact that we're still optimizing our retail fleet and we're renegotiating leases and we're closing less profitable stores I think we've demonstrated that we've been able to do that and hold our operating costs down while we're driving top line.

And then it's back to our pricing power.

The fact that you know we design our own product and engineered for value that gives us a lot of leverage on the on the operating margin line plus everything else from supply chain efficiencies and all kinds of things, but all of that gives us the confidence to believe that we at least can hold a 16% to 17% for this year and then going forward as accelerated pace on the topline.

Thank you we'll take our next question from Curtis Nagle with Bank of America.

Great good afternoon. Thanks.

Thanks, very much so two quick ones.

What's kind of out of curiosity you thinking about.

I'm not asking the questions off to absorb growth.

Thank you Buck.

No.

You guys are working on a registry.

For baby and weddings those businesses.

Probably we're in great shape.

Last year.

Thinking about as things are kind of opening up.

How much is I guess, what in particular you know.

Starting to help.

I guess is it helping.

Just given the.

We are starting to see people getting.

Got it.

Actually celebrate all that's the first one and then just a second.

If I can just could you give any clarity in terms of Bob Julie I think you'd mentioned some investments were more investments were being made.

Marketing or advertising dollars.

How should we think about that relative to two <unk>.

This quarter year over year.

Sure.

Yeah. Thanks, Let me start it's Laura.

The question I'm. So glad you brought up wedding registry I, probably should have said it in my prepared prepared remarks it is phenomenal.

As you can imagine I mean, they weren't cutting weddings other weddings.

And.

We've.

I'll just ask Julia if I could tell you, we're up 19% and wedding registry I mean thats.

And the sales that's a big number.

And maybe it's been up the whole time, and we have a new baby App, which is very successful in.

We're learning that across all of our brands the more time, we spend.

On mobile the better because it drives conversion and it's really the the choice for our customers. So you're going to see us do even more things with mobile and make it really.

It really helped the selling proposition, but in those two.

Very important life stage.

Buying opportunities were seeing tremendous growth and we're continuing to support.

With technology.

Likewise these trends as I said hybrid work.

And then the reality of <unk>.

People learn how to Cook and Theres still cooking and they love cooking and so we're continuing to see.

Those businesses and Williams Sonoma that support those whether it be coffee or.

Food at home those businesses are quite strong for us today, even though we had the big surge last year and then the.

Back to school I mentioned kids going back to school.

Backpacks are a big part of that tradition. So of course, that's a business that we.

We've seen really strong growth and that's why we.

Crept into the season of holidays.

Following his tremendous if anybody on the call needs to buy anything you should buy it now because were seeing a very strong SaaS curve.

And I imagine that we'll see the same with Thanksgiving and Christmas, which was a tough time for everybody last year and should be hopefully.

One where you can at least test small gatherings, if not more so I think there's a lot of natural upside and life stage trends that we are going to be right. There.

With our customers on appropriately to help them.

You know make the most of those so thanks for that question.

And what I'll pass it over to Julie to answer the marketing.

Marketing advertising question, yeah, so as far as the advertising I mean, we have said before that you know certainly we're going to be incrementally investing in advertising year over year last year, certainly that was a big lever for us to pull back on Q2 was some of the lowest spend in SG&A period, which advertising was a big piece of it.

Till we could read the business.

And make sure that we were okay going forward and so youre going to see year over year.

Pressure on that line are on SG&A because of it but I think the key takeaway for you guys that you realize that it's a competitive advantage right now I mean, most companies don't have the same kind of.

Margin expansion, whether it's merch margin gross margin or operating margin expansion that we have.

Now, where we can take that and reinvest back into advertising when others may not be able to do so right now they may have to pull back because they are trying to pay for freight or they're trying to pay for raw material increases or whatever it may be and we don't have to do that right now and so we're taking that opportunity and investing to drive new customer acquisition and to fuel future growth and we think that's a real.

Real big competitive advantage.

Okay fair enough. Thanks, very much thank you.

Thank you, we'll hear next from Michelle with Wedbush Securities.

Okay.

Thanks, a lot and good afternoon. Congrats on the strong results I have one bigger picture.

In one specific question bigger picture.

I am very intrigued by your thoughts on this.

The transformational.

Our investment in the home and the drivers behind that.

When you think about the trend towards hybrid work environment is that the primary thing that you're.

Question around if you think about higher investment levels in the home furnishings home furniture et cetera, going forward or are there bigger things that you're thinking about.

It's the time, we have all that more at home has made us realize the importance of home. It was always been peoples primary investment.

And so.

So that.

Congrats on a new piece, but the amount of time and the ability for you to improve that space.

Is so real and the happiness that that gives you and the productivity and so it's not just hybrid work. It's it's everything it's learning how to cook it.

The trends of families having.

Hasn't come back and live with them or bringing in there.

Their parents to live with them and all of those moves at the same time.

Apply of houses is still too low and there's a lot of people who are out looking for second homes and even if they can't afford it themselves pulling the resources together with friends.

To complete that fantasy of buying.

Okay home.

And those are the things that when you talk to people about what they're thinking about now and what's important to them. This is what you hear you hear about the kitchen remodel that you hear about the second home they wish they could buy I mean, I'm sure you're hearing it with your friends and family and this is a really really important trend.

Trend that I.

Got away, it's going to be transient I think it's one that will continue to last for a long time and one that puts us in a very good position.

And not only take advantage of the trend, but also gain share because as I said earlier, there's just nobody really has much share.

In this world and nobody is doing what we're doing.

Thank God that's helpful perspective, and then secondly, thinking about the outlook for the balance of year. Obviously your guidance creates impressive but it does imply a material deceleration in comparable store sales on a two year basis from the first half of the year.

Bite. The fact that you guys mentioned that you see a very strong start and we expect strong holiday outlook is that just.

So if it isn't or is there something else. So we should be thinking about yeah.

Yeah, I wouldn't read anything more into that as we've said we've had a very strong.

Year to date, we've been for for quite a few quarters now and we've seen a strong going into the third corner on the high end, we're guiding to low twenty's.

Which is still very high on a two year basis.

You can certainly were taking into consideration like everybody else the impacts from supply chain challenges that are out there, but I think you know with our incredible supply chain team, where we're best positioned to maneuver through that better than anybody, but we're being thoughtful of that and that's why we have the range that we have but with that said there's absolutely no fundamental.

The difference in our outlook for our business.

Thank you very much.

Thank you we'll take our next question from Chuck Grom with Gordon Haskett.

Hey, Thanks, Congrats on an awesome quarter.

Laura you talked about not seeing.

Fundamentals of a slowdown, but I'm actually curious if you're if you're seeing an acceleration in your business with back to school here somewhere ending et cetera, and I guess, if so at what better and then at the same time.

You've sized up to be.

I think it's 700 million longterm opportunity can you just remind us what you think.

Sonoma home could be long term.

Yes.

Again, it's all new Julien touched upon this.

First of all you know the obvious business that gets the most bang from that school is that kids and teen businesses.

Because of that as well.

We really address that if you go to the homepage is right now and Youll see that and so of course that would imply that those have the most upside.

Sure I mean relative to back to school.

And so it would be to be first of all let me make sure that I didn't misspeak earlier as Julie wrote me a note and said you thought I said $100 million when I meant to say $180 million for the quarter [laughter]. So I'm going to take this opportunity with your question to correct myself, if I misspoke I apologize.

B to B.

You know it is a really good question on how big this can be in.

When.

It's certainly faster than we ever expected.

And we keep making jokes about.

How much bigger could it be but we're certainly on track to.

We said 1 billion.

And what Julien originally five years five to 700 million this year, which is 700 million this year.

So you know the reason I didn't put a number out there is because.

I don't want to be too.

Small minded about it [laughter] you know what I can say a number and then that is not.

Close to what opportunity is it's it's a monster opportunity.

Got it and what about Williams Sonoma home.

Williams Sonoma home, hopefully I don't think we put that number out there.

We just leave.

Really changed our strategy from doing parts of the store thing.

Online focus, which we think is a huge advantage in the market.

And we just brought a new leader in and it's too early for us to put a number around it but so far so good and.

I do see it as a big growth driver and a large underserved market.

Got it and then one for Julie just in order to get to that 16 to 17.

EBIT margin here in 'twenty one.

I mean certainly.

Ben will come into play on the SG&A line, but also we still believe we're going to have gross margin expansion both for merch margin expansion and from occupancy leverage I wouldn't focus too much on that I mean, the reality is if you look at the 16% to 17%. It's almost two <unk>, where we were in 2019. So we're just being thoughtful of that and certainly we're also keeping in mind the.

After its raw material costs and freight costs that everyone is maneuvering through.

But could it be higher sure, but right now we think this is the right target given we got a big back half to go and we'll update you as we move through the year.

Great. Thank you.

Yeah.

Thank you we'll take our next question from Simeon Gutman with Morgan Stanley.

Everyone Nice quarter, two quick questions I missed the prepared remarks I didn't know what you talked about regarding freight how you're navigating the environment. How your inventory position looks and then even into next year and then the second part is on the advertising spend I did catch some of that can you talk about the timeframe in terms of return are you spending because youre seeing the immediate return or is.

Mhm medium longer term branding.

Just quite frankly, because one where our demand just hasn't stopped so it's constantly really high demand so to get back in stock is really challenging and then you combine that with the supply chain challenges.

That all are facing.

We are better positioned than most I guarantee that given our scale and long term relationships and our incredible supply chain.

And that's <unk>.

Who always jumps ahead of this way ahead of anybody to think about the tariffs and everything else that we did.

So.

Certainly that is impacting us we're not immune to it.

And so that will cause us to have higher box back order levels and throughout the balance of the year, but we do expect inventory to improve moderately as.

Jane team throughout the year, and there's things that I'm really proud of and want to make sure we mentioned that.

A very competitive for example, right now in our upholstery business, where we make our own a larger percent of our own upholstery.

We were previously closing about 100 days, which is when you look at a lot of people sites.

As we moved into us, but we are now down to 80 days and looking at dropping that further as our incredible.

Bolster teams are really producing more than anyone else and so we're thrilled about that and that's the kind of thing could you give us a good challenge and.

And I think most times, you're going to see we're going to outperform.

And take that challenge and make it into an opportunity for us because it's all about visa the custom furniture from anyone else.

So as helix would you like to answer the question about advertising without.

Being too competitive about telling everybody how we do it.

Sure.

Yeah, you got it.

So short term or long term I guess, what we focus mostly on is return on investment.

You really focus on customers who are in market.

So end market for furniture, we're very focused on.

People looking to who are either moving as Laura.

I think Shane wedding, having a baby those are high high value customers and so our acquisition strategies around there.

Our very strong and are prevalent throughout all of our banners.

From a long term perspective.

Again.

Well when we see this uptick in furniture, that's always a good.

Laura <unk> for us in terms of what it means from la lifetime value.

I would say without percentage I mean it out.

We're focused on in market in the short term and then high value customers in the long term.

Okay. Thanks, that's helpful.

Thank you we'll take our.

Good question from Zack <unk> with Wells Fargo.

Hi, This is David Lance on for Zach Thanks for taking our questions.

To start within those margins were wondering if you could unpack that a little bit in terms of price increases mix and the absence of promotions and clearance and then.

Next go up would be.

How did traffic and ticket trend in the quarter and what was the impact of inflation.

Oh boy.

[laughter] impact of inflation I mean, you know.

That's that's a hard one to tease out but in terms of promos.

Our strategy is to offer the customer great.

And our products, but not to run a promotional business and this quarter reflects that strategy. It's interesting the broader competitive set.

I think it's actually getting more promotional based on our research and yet we were able to outperform topline and bottomline without running promotions, we are aggressive about our inventory turns and about.

Valley, Hoover's and <unk>.

Interesting fact.

Is that our clearance inventory is down 34% year over year because of our aggressiveness in clearing some of the slow movers, which is really really important.

For us to continue to do with our large cube furniture traffics another really interesting story.

In our retail stores believe it or not as much as traffic has improved its still down to 2019 and we're running these crazy good comps, they're doing such a good job in our stores.

Selling and our product is so appealing to our customers, but imagine when the traffic comps how much better it could even be.

So.

Yes, we are we are.

Back to 2019 level traffic in our stores, but it is an opportunity we're seeing customers buying more from us.

They are buying more furniture, and theyre buying more pieces as they look at decorating their whole homes with us and also as I said earlier online there they're shopping.

Hopping Cross brand and we're pushing that it's not just rockets that were pushing cross brand sales.

And we just launched this week the new credit card.

It might be before we run out of time, absolutely handing over to Felix to talk about what makes us credit cards different from our plc and Williams Sonoma card before Felix.

Yes.

I mean, we.

This week Monday, So in fact, we launched our new Cross brand Cross brand credit card.

In partnership with capital one.

Our ever expanding loyalty program and so when you shop with any of our brands online or in store you get 5% back in rewards you get 10% back in your first.

30 days.

When you shop at.

Which incremental to our pass programs is when you shop at grocery stores and restaurants, you received 4% back and when you shop anywhere else you get 1% back in rewards.

All cardholders, regardless of which brand they sign up for.

Yes.

You get free shipping at Williams, Sonoma as well so.

The card is designed to drive and increase retention in each individual brand, but it's also to incent and reward customers shopping across our brands. So as Laura said that average sale per customer.

Is one of our key weapon.

Happens in terms of growth and we continue to believe that we can increase our share of wallet.

By introducing our sister brands.

Across our portfolio to our customer.

Okay.

Yeah.

Great. Thanks.

Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for any additional or closing remarks.

I just wanted to say thank you to you all for joining us and for your support and I look forward to hopefully seeing you in person if not talking to you again at the next quarter happy shopping.

Thank.

That does conclude today's conference we do thank you all for your participation and you may now disconnect.

Q2 2021 Williams-Sonoma Inc Earnings Call

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