Q4 2021 Williams-Sonoma Inc Earnings Call
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Welcome to the Williams to the Williams Sonoma, Inc, fourth quarter and fiscal year 2021 earnings Conference call.
Today's conference is being recorded.
At this time all participants are in a listen only mode. A question and answer session will follow the conclusion of their prepared remarks, I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer, and head of Investor Relations. Please go ahead.
Good afternoon.
And thank you for joining our fourth quarter and fiscal 'twenty one earnings call.
I'd like to remind you that during this call we will make forward looking statements with respect to future events and financial performance, including guidance for fiscal 'twenty, two and our long term outlook.
Although we believe these statements reflect our best estimates and all available information, we cannot make any assurances that these statements will materialize.
And actual results may differ significantly from our expectations.
The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after todays call.
Additionally, we will refer to certain non-GAAP financial measures.
These measures should not be considered replacements for and should be read together with our GAAP results.
A reconciliation of non-GAAP measures to the most directly comparable GAAP measure.
Along with an explanation of how and why we use these measures appears in exhibit one to the press release, we issued earlier today.
This call should also be considered in conjunction with our periodic and annual filings with the SEC.
Finally, the call is being recorded and a replay will be available on our Investor Relations website.
Now I'd like to turn the call over to Laura Alber, Our President and Chief Executive Officer. Thank you Jeremy.
Good afternoon, everyone and thank you all for joining us we're thrilled to deliver a strong finish to fiscal 2021 driving record results with Q4 comp of 10, 8% and operating margin expansion of 310 basis points.
These results reflect the resilience in our business model as we successfully navigated unprecedented challenges within the supply chain material and labor shortages and capacity limitations from our incredible consumer demands.
This resilience coupled with continued execution in our growth initiatives.
Annual comp of 22% operating margin expansion of 350 basis points and EPS growth of 64% to <unk> 85 per share.
Our three key Differentiators, our in house design, our digital first channel strategy and our values continue to provide the framework for execution, both in our core business and in our growth areas like BTB marketplace Cross brands, and our global business, which excitingly have all gained traction faster than predicted and demonstrates.
To us that we are well positioned to continue to take share in this industry.
First let's spend some time on a top line performance in the fourth quarter.
Throughout fiscal 2021, we continued a deliberate reduction in our site wide promotional cadence and all of our brands.
Instead, we shifted our focus on delivering aspirational and inspirational content and our customers clearly respond at.
This pricing power is entirely a function of our differentiated and sustainable product offerings that our customers know and love.
And further despite the highly promotional environment in the fourth quarter, we made a conscious decision to maintain this pricing integrity and not pursue incremental top line and the cost of our merchandize margin.
In fact, we delivered gross margin expansion of 290 basis points in the quarter.
Further this pricing power has allowed us the flexibility to absorb supply chain costs and aggressively fund marketing efforts.
Our bottom line performance in the fourth quarter speaks for itself.
We drove operating margin of 21% and a 37% increase in EPS.
Both of which demonstrate durability of our earnings power to execution in our core and growth initiatives, which I'm excited to update you on now.
Our <unk> business continues to outperform building its book of business to $753 million in 2021.
<unk> is an underserved and fractured industry.
As we continue to take share in this white space servicing businesses that need high quality sustainable furnishings at good price points.
Furthermore, our in house design capabilities offering a wide breadth of aesthetic across our brands, coupled with our industry, leading global sourcing and supply chain operations allows us to take this service to the next level.
Our <unk> business has tremendous potential to contribute to our results.
Our growth targets continue to climb as we unlock new opportunities and not only is our <unk> business model accretive to our gross margin, but even more accretive to op margin as a result of its fixed operating costs.
We continue to exceed our own expectations for this business and longer term. We believe this is one of our biggest opportunities.
Another contributor to our SaaS success has been our global strategy, where franchise first with strong retail and digital execution.
During 2021 global achieve record revenue up 23% over last year with strong earnings growth.
Core company owned markets of Canada, and U K achieved record results for the year and the quarter.
Franchise continues to be a growth vehicle with the critical markets of the Middle East, Mexico, and India, providing a large diverse growth base.
With our systems investments and our new digital platform and.
And large cost reductions and warehousing transportation and delivery, we expect to exceed our record results in 2022.
Marketing is another component.
This apart and drove results in FY 'twenty one.
Customers, who shop across our brands generate three to four times more revenue than our single brand customer and.
And we've seen incredible results this past year due to our continued marketing efforts.
In fiscal 'twenty, one approximately 60% of our sales came from cross brand customers a record high in terms of percent to total.
And our cross brand customer count grew faster than those of the single brand customer.
While new customer acquisition is always a priority and continues to grow we believe we have even more upside by increasing our share of wallet with our existing customer base.
Part of this strategy are three things.
First our cross brand loyalty program the key.
We continue to see record levels of customer engagement and an all time high membership.
Second our recently launched cross brand credit card.
This card reached its six month anniversary producing cardholder spend in cross brand activity that has exceeded our expectations.
And third we are focused on personalization efforts and our digital marketing.
We continue to leverage our in house managed first party data across our brands, which positions us for the cookie those future that is rapidly approaching.
Remember, our multifaceted loyalty program generates benefits across our portfolio and is a clear competitive advantage few of our peers offer.
As a digital first company, we are constant pursuit of incremental improvement to our customers' shopping journey online.
We've improved several product finding and purchasing experiences on our website.
From improved room styling native registry applications and the removal of friction in the checkout process.
Additionally, we relentlessly focus on continued optimization and automation in our Dcs and logistics networks to improve our service time.
On the sustainability front, we take great pride in the progress we are making with our impact initiatives and ESG leadership across the home furnishings industry.
Notable accomplishments in this quarter included our second annual inclusion in Bloomberg's gender equality index.
Being recognized as number 21 on Barron's 100, most sustainable companies.
And receiving an a rating from CDP for leadership in supplier engagement and our work with suppliers on tackling climate change.
These commitments are reflected in the high quality.
Sustainable products that we offer our customers and continue to distinguish our company and our brands.
Our values are both central and our actions and embedded in our products.
We always want to provide our customers with transparency and each day, we commit ourselves to maintaining the highest level of integrity and ethical standards.
We are deeply saddened by the war on Ukraine, and we stand with Ukrainians and all people, who oppose war and its atrocities on family and the home.
Related to product and business with Russia, we have no operations in Russia.
And as the situation between Russia, and Ukraine escalated our team identified a handful of products of Russian origin, which we are no longer selling.
And now, let's turn to the performance of our brands.
West Elm delivered 18, three comp in the fourth quarter with all categories driving strong growth.
Customers responded well to new products, including best sellers in bedroom dining storage and occasional categories.
Additionally, new categories, such as Bath Kids and kitchen.
Also contributed to incremental growth.
On a full year west Elm delivered a comp of 33, 1% building to a 48, 3% on a two year basis, and continuing to build velocity and its mission to become a $3 billion brand.
Pottery barn delivered another high performance quarter with a 16, 2% comp driven by strong core franchises in key categories.
Q4 results were enhanced by a strong seasonal decorating business and inspiring seasonal bedding and entertaining.
On a full year pottery barn celebrated a record year with a comp of 23, 9% building to a 39, 1% on a two year basis.
Also we are delighted to report that pottery barn has surpassed the halfway mark and its commitment to plant 3 million trees and three years to restore vulnerable for us.
Our partner Arbor Foundation felt the best practices and the latest science to ensure maximum impact and promote biodiversity.
And even better based on the tremendous success of this program. Our other brands have joined the effort doubling our commitment to planting 6 million trees by 2023.
We coupled this with commitments to responsibly harvest wood and a robust sustainability story.
Now I would like to talk about pottery barn kids and teen.
As we indicated during our third quarter call, we were not entirely immune to the ripple effect from delays, resulting from the supply chain disruption around the world in.
In particular, the shutdown and related backlog from Vietnam had a larger impact on our children's home furnishings business.
<unk> ran a negative $6 one comp for the quarter.
Unfortunately, we expect to feel this impact at least through the second quarter. This year.
Despite the supply chain pressure strengthen the business includes our baby business, which is delivering growth through our offering of Green guard gold furniture, along with additional volume from our in store and online Davis Baby registry.
Also we delivered record results in our seasonal trend business as customers enjoyed the holidays.
Pottery barn kids and teen delivered a full year comp of 11, 6% building to a 28, 2% on a two year basis.
Our Williams Sonoma business drove a fourth quarter comp of four 5% on top of a 26, 2% comp last year with growth driven by demand for entertaining at home and gift giving.
We continue to focus our strategy on expanding our exclusive product and Williams Sonoma branded products to drive growth.
We are pleased with improvements in the digital experience on the web site that are driving conversion and our store optimization strategy is working.
Our high impact store Remodels and our market consolidation efforts are driving improved operating margins.
On a full year Williams Sonoma delivered a comp of 10, 5% building to a 34, 3% on a two year basis.
One of our key components of growth is our Williams Sonoma home business.
Given the strength of the Williams Sonoma brand name our expertise in the furniture category and the clear opportunity in the high end home market. We believe that Williams Sonoma home is one of our biggest growth opportunities.
In summary, we're immensely proud of our accomplishments and record results this fiscal year.
I am confident that we will continue to raise the bar and extend this momentum in fiscal 2022.
So far in the first quarter, we continue to see strong sales and margins.
We have a robust lineup of growth initiatives and operational improvements planned for this year.
And as we look further we are confident in our long term outlook driving mid to high single digit comps with topline growth to 10 billion by 2024 and operating margins relatively in line with fiscal 2021.
Before I pass the call to Julie to go through the financials in more detail I want to thank our entire team for never slowing down.
Endlessly grateful for their outstanding work their creative energy and their relentless focus I am privileged.
To work alongside the talented group of people and with that I'd like to turn the call to Julie.
Thank you Laura and good afternoon, everyone. We.
We are pleased to report another quarter and fiscal year of outstanding financial results with revenues and profits at the highest levels we have seen.
The demand for our proprietary products remains strong our.
Our growth strategies continue to thrive our operating model, which is difficult to replicate continues to set us apart from the competition.
And all of this plus our proven ability to dynamically operate in a complex macro environment continues to demonstrate that we are well positioned to succeed long term in this industry.
Moving to our fourth quarter results in more detail.
Net revenues surpassed $2 5 billion with another quarter of double digit comparable brand revenue growth of 10, 8%.
These strong top line results were across both channels, including retail at a 20% comp in e-commerce at a seven 2% comp on top of last year's 47, 9% for a 55, 1% two year stack.
By brand West Elm delivered 18, 3% comp on top of 25, 2% last year.
Pottery barn accelerated from the third quarter to 16, 2% comp.
Williams Sonoma drove a four 5% comp on top of last year's 26, 2%.
And our emerging brands accelerated to a 33% comp.
In the children's home furnishings businesses pottery barn kids and teen comps were a negative six 1%.
This is below the third quarter year to date trend of approximately 20% as these brands were the most impacted during the fourth quarter by the supply chain issues from the Covid related closure of Vietnam.
Moving down the income statement.
Gross margin came in at a record 45, 8%, a 290 basis point expansion over last year.
The strength of our merchandize margins drove almost all or 270 basis points of this expansion.
Our strategic decision to preserve our pricing integrity by eliminating site wide promotions was once again a clear success.
This pricing power enabled us to absorb increased freight and product cost, while still delivering strong profitable merchandize sales.
Occupancy costs at seven 7% of net revenues.
Averaged approximately 20 basis points, resulting from another quarter of higher sales and lower occupancy dollar growth.
Occupancy dollars increased six 7% to approximately $193 million, which includes a full quarter of incremental costs from our new East Coast distribution center to further support our customer demand, partially offset by our ongoing retail optimization efforts from additional store closures and reduced rent.
In fiscal year 'twenty, one we closed an additional 37 stores and are on track to close approximately 25% of our total retail fleet.
SG&A also leveraged 20 basis points to a historical low of 24% despite absorbing higher year over year advertising costs from our reduced spend last year.
Leverage was driven by employment and general expenses, which includes lower incentive compensation during the quarter due to timing and the year over year benefit from our ongoing retail recovery various operational efficiencies during the holiday season, and overall strong financial discipline throughout.
As a result, we delivered another quarter of record profitability with operating income growth of 28% to $525 million and our highest ever operating margin at 21% expanding 310 basis points over last year, and approximately 500 basis points higher than our last three.
Quarters this year.
This resulted in diluted earnings per share of $5 42.
Up 37% from last year's record fourth quarter earnings per share of $3 95.
These fourth quarter results combined with our outperformance we have seen throughout 2021 allowed us to deliver another year of substantial growth and outperformance.
On the topline. These full year highlights include an additional $1 5 billion in net revenues growing to over $8 2 billion, including comparable brand revenue growth of 22% on top of last year's 17% or 39% two year stack.
E Commerce growing to a 14, 3% comp and a 58, 8% two year comp with our e-commerce mix at 66% of total revenue.
Retail growing at a 43, 2% comp despite traffic levels at negative 16% to 2019.
A second consecutive year of double digit growth across all brands with significant acceleration across our two largest brands with west down at a 33, 1% comp.
Audrey barn at a 23, 9% comp.
Williams Sonoma at a 10, 5% comp on top of last year's 23, 8%.
Our emerging brands rejuvenation, and Mark and Graham combined delivering another year of accelerating double digit growth.
Our global business growing 23% over $425 million and our cross brand initiatives outperforming with our business to business division growing 109% to over $750 million in demand and contributing approximately 500 basis points to our total company comp.
On the bottom line this top line strength and strong financial discipline throughout enabled us to grow 2021 operating income to $1 5 billion over half a billion or 52% higher than last year.
Operating margin at 17, 7% on the year expanded 350 basis points over last year and with more than two times higher than our 2019 and prior operating margin levels.
This was driven by gross margins expanding to record levels or 500 basis points above last year to 44% despite increased costs associated with supply chain disruptions throughout the year.
This operating income strength resulted in EPS of $14 85.
Which was $5 81, or <unk>, 64% above last year and drove our return on invested capital to an all time high at 57, 9%.
On the balance sheet, we ended the year with strong liquidity levels with a cash balance of $850 million and no debt or amounts outstanding on our line of credit the.
The strength of our business generated operating cash flow of almost $1 4 billion during fiscal year 2021, which has allowed us to fund the operations of the business to invest over $225 million in capital expenditures, primarily in technology and supply chain and to return nearly $1 1 billion to shareholders in the form of 180.
$8 million in dividends and $900 million in share repurchases.
These decisions reflect our confidence in the sustainability of our growth and our commitment to maximizing returns for our shareholders.
Moving down the balance sheet merchandise inventories were $1 $246 million, increasing 24% over last year, which includes inventory in transit inventory.
Inventory on hand increased 14, 8%, but was still negative 13% on a two year basis given.
Given the significant macro supply chain disruptions throughout the year and the ongoing strong customer demand we are still below optimal levels.
As a result, we expect to see elevated back order levels continue until the back half of 2022.
Now, let me turn to our expectations for the future.
As Laura said, we remain very optimistic in the long term outlook of the business. Our business remains strong as we enter Q1 with momentum in our core businesses and our growth initiatives continuing.
As a result for both fiscal year 2022, and beyond we are reiterating our previously provided financial outlook of mid to high single digit comp growth with operating margins relatively in line with fiscal year 2021.
We estimate revenues will reach 10 billion by fiscal year, 2024, with our brands accelerating or reaching our prior committed targets faster.
Including pottery barn, expanding to $3 5 billion in revenues West.
West Elm, adding $1 billion in revenues to over $3 3 billion.
Williams Sonoma will reach almost $1 6 billion in revenues in our pottery barn kids and teen businesses will grow to $1 4 billion.
This expected topline growth will also be fueled by growth across our strategic initiatives, such as our <unk> business doubling to $1 5 billion in revenues.
Our marketplace business growing 20% annually to nearly $700 million.
Our emerging brands expanding to a combined revenue of over $600 million and our global operations continuing to expand in size to $700 million.
And we are confident we can drive this top line growth profitably due to leverage across the P&L from ongoing higher sales growth additional accretion from our accelerating growth initiatives that have a higher operating margin profile.
An accelerating shift online where the operating margin is higher.
Strong merchandise margins from the pricing power, our proprietary and vertically integrated products provide continued.
Continued occupancy leverage from further store closures and reduced rents.
Various long term supply chain efficiencies, such as automation and better in stock inventory levels and leverage from overall strong financial discipline throughout keeping expense growth below sales growth.
Our capital allocation plans for 2022, we will continue to first prioritize investments into the business and then return excess cash to our shareholders. We.
We expect to invest approximately $350 million in the business with over 80% of the spend prioritize on technology and supply chain initiatives, primarily to support E Commerce, including the addition of a new automated distribution center in Arizona.
We also expect to return excess cash to our shareholders in the form of increased quarterly dividend payout and elevated share repurchases.
For dividends, we announced earlier today, another double digit increase in our quarterly dividend up 10% or <unk> <unk> to <unk> 78 per share.
We also announced our board has approved a new share repurchase authorization to $1 5 billion, which will replace the remaining amount outstanding under our prior authorization.
We continue to believe that our stock price remains undervalued, given our projections for growth and profitability. This new authorization will allow us the flexibility to opportunistically invest in our own stock and drive long term financial returns.
As we begin our next fiscal year, our focus remains on executing against our opportunities to drive long term elevated top and bottom line growth.
We believe we are uniquely positioned to continue to take market share and profitably.
Long term macro trends should continue to favor our business, including a strong housing market driving ongoing investment in the home and accelerating shift to e-commerce , and the increasing importance to the consumer of sustainability and being a values driven company.
And this combined with our accelerating growth initiatives, our strong operating cash flow and liquidity and a proven track record of strong financial discipline give us the confidence to reiterate our accelerated long term growth and profitability outlook and to drive strong financial returns for our shareholders.
I would now like to also thank all of our associates and business partners for all that they do for our company. It is their ongoing commitment that has enabled us to deliver another year of financial outperformance and to reward all of our stakeholders.
I would now like to open the call for questions. Thank you.
Ladies and gentlemen, if you would like to ask a question maybe sticking with my question Star one on your telephone keypad. Please ensure that your function of your telephone is switched off to allow your signal to reach our equipment.
Again please.
I wanted to ask a question.
Our first question comes from Max <unk> of Cowen <unk> co.
Great. Thanks, a lot and thank you for all the color just curious on the new businesses. What can you share about how much higher margins. Those businesses are and then as we continue to grow over time, how much do you think the adult contribute to the business longer term and offset.
Normalization that we will see otherwise thanks a lot.
These businesses are incredibly accretive to op margin, we havent disclosed the amount, but it's something that we're super excited about because as you can see for example would be to be in the volume of that is driving in the bigger piece that is becoming of our comp. It has a significant benefit to the operating margin at the same time into our earnings and so we're very.
Cited about that growth trajectory.
And I thought Max that you asking the question about some of our smaller brands.
And in the case of those brands.
There is still so small that there's actually runway for improvement in their profit profiles, because we still aren't big enough to get the the great sourcing leverage that we do on our larger brands. So they are very profitable as you would imagine they are today, but they can be.
A really strong.
Opportunity to improve these margins further.
Growth.
Okay.
Okay.
Our next question comes from Anthony <unk> of loop capital markets.
Thank you so much for taking my question and congrats to a strong finish to an incredibly strong year.
My first question.
You talked about.
Cross brand.
Key Cross brand loyalty program can you just give us an update in terms of the number of members that you have if I recall correctly last time last number.
I know, it's about 12 million members.
Yes, hi, there Anthony its Felix.
I can tell you I don't believe we're sharing the numbers, but I can tell you that is significantly up.
As Lawrence said.
Program to date life to date.
We're at an all time high.
And with the introduction of the credit card. This year. This past August we are starting to see our dividends pay off in a big way in terms of cross shopping.
We believe this is one of our biggest opportunities as a company is increasing our share of wallet and.
The key both from our multi tender loyalty perspective, and the credit card are key drivers for that initiative.
Got it and then just if I could get one quick follow up.
As you kind of Dimensionalize.
I guess lost sales in kids and teen.
The global supply chain issues I mean, it's just such a stark slowdown.
As you pointed out.
Yes.
Yes, I mean, I think if you did the math what I said on my script that there year to date run rate was about 20% and but for sort of these supply chain issues. We had no reason to believe their business will remain as strong. So if you can do the math on that and come up with how much you mentioned the fourth quarter and certainly had bay delivered where they had come in.
Would have been at the higher end of our implied guidance. So it was a decent impact to the to the fourth quarter. Unfortunately.
Got it thank you and keep up the good work.
Okay.
Our next question comes from Cristina Fernandez of Telsey Advisory group.
Yes.
Good afternoon, and thank you for taking my question I wanted to ask.
You think about.
Mid to high single digit growth in 2022, how are you thinking about.
Industry growth, if they need the mens furnishings industry versus market share gains.
Sure.
As we all acknowledge is a great deal of uncertainty in the world. We live in today from rising interest rates to global conflicts.
But what gives me confidence is that we operate in an industry that is really large and fragmented and still more than half of our sales are generated from smaller brick and mortar retailers and this provides us a huge opportunity and as we enter the endemic two things are clear to us people have re priced re prioritized.
What's important to them.
People love their homes and there is no doubt theyre going to continue to entertain cook and work more in their homes and in talking to a lot of Ceos I believe hybrid work is really here to say so.
Weather.
The total industry grows or not.
The macro shifts and changes in the way we live.
Combined with our key differentiators in our long term growth prospects.
Leads us to believe that we're going to have the ability to continue to take market share and grow and honestly I believe there is no one in a stronger position to disrupt the home furnishings industry than us.
Thank you for that and then as a follow up.
Perhaps for Julie.
The ability to maintain the operating margin this year should we think about.
The gross margin in expenses, both being in line with 2021 or will one be.
Better improvement year over year versus versus 2021.
Yes, I mean, obviously, we're not providing guidance on the line items.
We're focused on maintaining our operating margin at these incredibly elevated levels that as I think I said there are more than two times will recur in 2019, and so our commitment is to is to be able to maintain these levels and so through all the different line items that I went through we have that opportunity to do it. Some may go up some may go down.
But at the end of the day, because we have the ability to leverage the P&L with the higher sales. We've got the accelerating growth initiatives that I just answered a question about but as those continue to move forward like with B to B.
We have the opportunity to drive that operating margin to be maintained at the same levels. We've got our merchandize margins that are incredibly strong and given our proprietary products and vertical integration, we can maintain those despite.
Higher prices on <unk>.
Product and freight.
And supply chain efficiencies and on and on there's many things many levers that we're using to continue to maintain these elevated.
Op margins, and so it'll depend which line, which line lands on but I would I would say for modeling purposes, I would say I would hold them flat at this point.
And our next question comes from Chuck Grom of Gordon Haskett.
Hi, This is Greg summer on for Chuck.
Thanks for taking my question. My first question is just if you could maybe give us some color on the cadence.
Demand throughout the quarter and along those lines, if you've seen any indicators of trade down or received by the customer and then a quick follow up.
Yes, I mean, we did see a really strong start to the fourth quarter, we saw a little bit of a dip during the holiday selling weekend, where I think that was pretty common amongst most retailers and then we came out of that.
Even stronger in January and as we've entered into.
The first quarter.
Made a strategic decision to not chase the sales and Thats. The reality, we could have been much more promotional and we didn't do any sitewide promos and so at the end of the day, we still delivered whatever 10, eight double digit comps with incredible operating margins and earnings and so that is what we.
We remain committed to continue to do.
And we're just excited to see that that that strength continuing.
Okay. Thanks, and then.
Just a quick follow up did you guys provide a demand comp for Q.
We didn't but it's relatively in line.
And again on that that doesn't mean that we don't have elevated back orders, we still have elevated back orders were still encouraging occurring supply chain challenges.
As Laura alluded to but.
The reality is that we haven't been able to bring down.
Those backwards to the level that we'd like and.
And so therefore, we're continuing to hold those in continuing to hold demand in line with with net which obviously, we're always paying attention to we want the most important thing is our customer and making sure they get the product in a timely fashion, but from a financial perspective certainly it's.
Opportunity as those products come in for delivery.
Okay. Thank you.
Our next question comes from Simeon Gutman of Morgan Stanley .
Okay.
Hi, everybody. This is Michael Kessler on for Simeon.
First question for many retailers.
The expectation for 2022 is it transactions or units, probably not growing but you have prices and offset in a driver. We're hearing anywhere 510, 15, 20% year over year price growth. So your sales guys quite good guiding to growth.
We were assuming as maybe potential for some real price inflation within that which means units could be down I guess is that's a bright framework and if it is how should we feel about that doesn't mean, there's more risk or more upside to the guide and it doesn't mean, if thats true that growth could slow in 'twenty three if pricing normalizes. So I guess, how does that how does what does that tell you how does that how do you frame that.
<unk>.
Sure Good question so as.
As you know, it's really important to us that we provide our customers a product that is.
Well designed sustainable and the best value in the market and that's where we've won.
Of course.
Costs have gone up.
And so we not only did we stop site wide promotions, but we have strategically taken price increases carefully.
Where we could.
And if prices to us come down.
We would give our customers a bra.
<unk> some products, because we always want to offer them.
Best value.
Now.
I will tell you that I believe that we are doing that and that's why our sales growth is higher than our industry and versus our peers, but it's something we're going to stay very humble about and we check it all the time, we're constantly checking our product and our prices versus our competition and innovating.
To ensure that we have products that our customers can't buy at the at the competitors and this is a really key part of our strategy as it relates to units versus AUR growth.
I expect even though we saw increase in units last year to see it to be.
To be more flat this year.
On the unit growth.
That's my expectation that's what's implied in this guidance, but we are very confident in this guidance for all the factors that we've gone through already both our differentiator.
Our growth initiatives and the reality that we have a big backwater log that needs to come in sometime.
It hasn't come in yet, but it should come in and we're thinking now Unfortunately, and I hate to move the state out constantly but the supply chain issues continue to be.
Many.
Buried.
It's going to be in the back half of this year now because.
Everyone I know is reading the same news.
There is also some things that continue to go on and so our focus continues to be so.
To really give our customer great service and to that point.
While I have the floor.
I'll just also make the comment that we are seeing.
Our customer calls.
<unk>.
And Les Escalations from our customers. So I think despite these disruptions that we all know are occurring.
We are still competitively offering faster lead times and we are doing a good job communicating with our customers are better job I should say.
Communicating with our customers about the push outs.
Okay, Great that was really helpful. Thank you if I could just ask one quick follow up this is maybe more of a technicality type of question I think your prior language had been talking about the long term operating margin guidance would be at least levels of 2021, I think now we're saying we're relatively in line at least for 2022, obviously.
<unk> is now higher than where it was a quarter ago or guided a quarter ago.
Is there anything to read into that or just kind of basic language.
You got it yes, you got it.
Okay. Thank you.
Thank you.
We can go to Jason Haas of Bank of America.
Great. Good afternoon, Thanks for taking my question.
The first one is just on the <unk> business I'm curious just what trends youre seeing there and how you are thinking about that in 2022.
Awesome.
So as we said <unk> grew over 100%.
And it just continues to go.
I think I've revised my estimates every time I've gotten on this call I decided not to give estimates anymore.
<unk> I keep under shooting at.
Embarrassing as well.
The market for <unk> is enormous and as I said earlier, no one's really doing a very good job.
So because we have in house designed products, which allow us to do specific product development for our clients and also our supply chain, we can deliver it together and giving them a great experience and they are just a couple of fun.
On different projects.
Pipeline book of business. So our stadium and arena work continues to build momentum we had big projects for the San Diego Padre as in the New York Mets.
In hospitality, we're seeing a promising and encouraging return of our large Marriott brand standard business.
In healthcare, we are building a strong relationship with a big account I don't think we can say the name yet, but we're excited about that.
We are doing large residential working with large residential developers like related companies and a fun one.
Really think its greatest Churchill downs.
And we're working with Woodford reserve on that and then the last which is also awesome and really relevant to us.
<unk> canvas, which is a premier luxury Glamping company and we're furnishing their camps across the country adjacent to the leading national parks such as gives you a sense.
Of what we're doing this new book of business and then those are businesses that just continue to go because we have more units and Theres also replacement.
Thanks, that's great color and then just as a follow up I wanted to ask about the inventory on the balance sheet being up I know I think Julien touched on it in the prepared remarks, but just curious if you could give any color in terms of how much of that is just.
Inventory being stuck out in the ports versus what you have on hand, and just sort of overall, how you feel about your inventory position.
Yeah, I said in my prepared remarks that about 14, 8% of the 24% increase is on hand inventory. So the delta is what's in transit of that 24%.
So a sizable portion of it is still on the water.
And obviously there has been some delays in bringing that that <unk>.
Inventory anaphor, a myriad of reasons that certainly with our scale and sophistication, we're much better at new breakthrough that and getting it in a lot quicker and more effectively than others, but we're not immune to it and so we're definitely working through those those factors, but certainly we're nowhere near where we want to be were not at optimal levels with a negative <unk>.
<unk>.
On hand inventory on a two year basis, and you look at our sales growth at a 39 comp on a two year basis, we have a lot of room to go and so it's a huge opportunity for the company.
And hopefully by the back half of the year will be in a much better position.
Thanks, that's helpful.
The next question comes from Brian <unk> of Barclays.
Great. Thank you very much and congratulations to the entire team.
Year with fantastic quarter was fantastic.
So Laura I wanted to go back to the competitive landscape and I would like to hear your thoughts on how much of the industry was in sort of small chains and independents.
The pandemic where had they gone.
And then other competitors not just name like RH has moved higher pricing.
And maybe create some white space. So it really I am curious when you say competitors can you help us understand like who is do national chain that you compete against for West Elm pottery barn kids.
About kind of where people would go it really comes down to those two names.
Not a lot of others. So that's my first one sorry, it's a long winded and then Julie.
Can you help us out with Q1 shaping it seems like if you look at normal seasonality, there's more opportunity in Q1 from an op margin standpoint, Thank you very much.
Thanks, Hey, Jay So we're still is better better market data frankly.
We try to piece it together.
The.
Before the pandemic we saw.
Even higher amount being done on the street with brick and mortar retailers and it was part of it I think investor deck like three years ago that we said, it's not going to be 80% done brick and mortar.
It's going to be moving online and so even before the pandemic happened we were talking about.
The opportunity as people move online to be one of the clear winners online.
And so.
That is about as much data as I have I mean, you can see it in your local towns where it's changed a lot.
Right now in terms of.
Head to head competition, it's really.
Hard to find somebody who does what we do.
Which is great, but there is a lot of people selling pieces and parts.
And the big ones that we.
People talk about the specialty people, but truly.
We're thinking about the really big ones, who tend to have.
Value priced products.
That are not anything like our products, nor do they put the whole house together.
Seeing the temptation to call them by name, but you know who they are and then the specialty retailers.
A lot of the specialty retailers.
First of all they don't have the same digital capabilities. They don't have multiple brands. They don't have multiple aesthetics.
And then also they don't design their own products, which it may appear that they do they do a lot of other things I think well, but they don't necessarily have products that you can't find elsewhere. If you try hard enough and so that's really one of the most important competitive differentiators and then add to it that there's nobody else, who makes up aarons lift Susan home furnishings.
Not a one where the only home furnishings retailer on the Barron's list of top sustainable companies and we know our customers.
Care about that and they'd rather buy from someone who is also sustainable and frankly, they're happy to spend a little bit more because it's important to them to know how their products are made and what what chemicals are used in all of those things.
You saw us I hope everybody saw the new impact to report that we put out in all the pieces and parts of improving our <unk>.
Footprint and we're certainly not done, but we're going to continue to step it up.
Announced even bigger.
<unk>, when we get up to Earth day, and I'm excited about those goals. So there's a lot of work to be done there but were ahead.
We're in a leadership position already and we intend to stay there on sustainability and high.
High quality durable products.
Alright, Adrian on the Q1 question I mean, obviously you know we don't provide guidance on a quarterly basis I'm sure you're asking from a directional standpoint, I don't think theres anything thats really noteworthy to call out that's different than sort of the normal run rate. So I don't think theres anything to highlight at that point, we're super excited obviously about the incredible guidance we gave.
On the year and the fact that we are committed to holding operating margins on a year. So I think that's our that's our focus.
And then Julie just one.
Follow up what is the criteria for closing stores can clearly you're closing four wall profitable stores, which is for a retailer very very difficult decision to make.
Laura I know you've talked about it before having a hurdle rate for profitability and that's how you keep driving the profits up so when you're looking at that 25% of square footage of stores.
How are you making that decision each year.
Yes, I mean, I think one of the first things that makes us different obviously is the size of our ecommerce business. When you look at other retailers they don't have that choice and.
So we're making decisions why the decisions were looking at is the profitability on our e-commerce business and comparing that to the retail store and so do we want that fail and retailers. We wanted on the ecommerce side, but that's one factor. We're also looking at the store and as a brand enhancing is there other reasons to have the store because certainly stores are incredibly important to us from a service aspect for our customers.
And so but we haven't given out the exact metric, but I would say that's one way to think about it you know what our operating margins have been historically in E Commerce, and I think thats sort of a an interesting spot to think about we definitely want to make sure that the sales profitable.
And.
We're really.
Happy to see that.
As I said.
Specifically in Soma, but really across the board.
Our retail optimization strategy is really really working we are seeing the new stores remodeled stores beat our expectations.
And we're seeing better transfer from the closed stores and then our fantastic real estate team has last year.
We negotiated 90% of our leases that came up for renewal.
So there's a lot of good stuff going on with the retail profitability and our teams at retail continued to innovate.
We've talked about how strong they were.
During the pandemic and helping US do design chat and design services, even though our stores were closed.
Kept them employed and they have paid us back in spades with loyalty and passion and creativity and they continue to be really the face of our brands and so much of our business is done with these design appointments and we're doing it now virtually too.
That's something that I mean, we're not to establish it.
It's a it's a.
Big piece of our business and it's supported by ever improve.
Improving tech capabilities, so that people can really imagine how things will look in their home when they're making the purchasing decisions and eliminate mistakes that so many of US me quickly when we do a whole room or a whole house.
Fantastic looking forward to seeing you in person by.
Thanks.
And our next question comes from Brian Nagel Oppenheimer.
Hi, good afternoon.
Congrats on another nice quarter.
Thank you.
My question.
Talked about supply chain, a bunch already but I wanted to just talk about more.
As you look at the supply chain dynamics.
Packaging.
Williams Sonoma is it.
Recognizing how fluid the situations out there.
Our dynamics getting worse.
Staying the same.
And then as you think about the duration of this and we've talked to your Melbourne, it issues persisting, you're pretty far into 'twenty two.
Are there levers that Williams Sonoma could coal.
Perhaps you guys are not pulled yet.
From a mutual standpoint could help to mitigate some of these pressures.
So I mean so.
Dynamics worth.
We are talking about this the other day in our.
Our.
Our.
Perspective is that this year is going to be about the same as last year and we thought nothing could be worse than last year.
So I would say, it's as bad as last year.
Does that <unk>.
We'll comment but.
We're realists about this we're expecting it to be.
Stops and starts we see all sorts of things Covid stop in starts we see material labor shortages.
Now the terrible war.
We will have some impact.
So these are all things that are happening to everyone.
And the industry and.
All consumer businesses.
But the reason we are so confident is the.
We have an incredible team.
And scale with the 13 largest container importer.
We have great relationships with our vendors and our shippers that allows us to expedite production and inventory flow.
And.
We're going to we tend to be.
Very worried about what could happen and create contingency plans for these things as much as we can.
<unk>.
And so we're also at the same time looking at how do we <unk>.
Joel what we can control better I E time to process in order.
To get it to our customer and that is why we're continuing to regionalize our distribution.
Distribution network, so we're closer to our customers and we give them incredible service with even fewer damages.
There's a lot I think Julie.
Gave a great summary of all the operating margin levers that we have in our company and as well as we've done we believe there is still a lot of room to improve.
And the supply chain and I don't think that we have to.
We can do this many of them that I expect to happen this year.
But we also know that there's some things that we haven't predicted yet that are likely to come our way as well.
Okay. Thanks, a lot.
Thats helpful.
Quick follow up and I guess somewhat related to that you talked about.
I would say lack of promotion of lack of widespread promotions.
Driver.
Upside to the margin in the quarter.
And I think we've discussed this before but how do you think about the sustainability.
If you are building your <unk>.
Nobody else drive better full price sell through more function of internal initiatives such as the merchandising or are you still really benefiting from the <unk> supply chain constraints and widens lack of product within the channel.
No it was really it.
More than even either one of those things as a mindset shift.
Net.
It wasn't a good idea to have a price go up and down.
On a product that you are selling on a regular basis, you will see us take markdowns.
We will miss on fashion, we will have things that are overstocked.
I know that you've seen us take markdowns those are not what I'm talking about.
We've been talking about not running site wide promotions that you see others Romney saw many people run during the holiday season, you can still pull them up and look at them now and really it's a measure or pricing power as a measure of our merchandise and product initiatives.
Internally and the strength of our brands.
Alright, I appreciate it congrats again thank you.
Thank you. Thank you.
And we can go to Seth Basham of Wedbush Securities.
Hi, This is Matt Mccartney on for Seth.
Thanks for taking my question just real quick just want to revisit the price volume sort of equation for for this year is it fair to kind of think about volumes being down in the first half given the supply chain issues, and then sort of picking up in the back half maybe even growing.
And then kind of coming out of that flattish balance for the full year.
Sorry are you talking about units are you talking about what are you. What are you talking I'm talking about your understanding how much is pricing aside just yeah just units first half versus second half given the supply chain issues.
No I wouldn't assume that at all.
I think it's just a function of we have incredibly strong sales that we've been chasing inventory on for a long period of time and so we're continuing to chase that inventory, which is maintaining elevated back order levels, but we're still having strong sales going forward. It will still be unit sales that occur.
As we move throughout the year I don't think theres anything to tie the number of units to relative to inventory receipts with supply chain in the first half.
Okay. Thank you that's helpful and then just.
One last question here just wondering about.
Your ability to pass on price on you mentioned in your pricing power is there.
Any sort of a differentiation on a brand level were seeing perhaps more pricing power or maybe even less pricing power.
I wouldn't know.
We've been very careful and there's a fine line, we want to make sure as I said that we are giving our customers great value. So it's a judgment.
<unk> product category, and we're doing a lot of testing.
And every single brand and we are seeing.
Success in the pricing increases that we've had to take because cost increases have gone up as well.
But we also at the same time remember because we care so much about keeping a range of customers.
We continue to increase the amount of.
Opening price point products, so even though something might have to go up in price. We also are bringing in.
A bunch of opening price point products. So we can really keep pushing our customer acquisition and we have worked with our vendors to really value engineer and still build our same quality and sustainability profiles into these products. So that we don't just become a very expensive set of brands.
Ladies and gentlemen, that's all the time, we have for questions today I'd like to hand, the call back to the management team for any additional or closing remarks.
Well. Thank you all really appreciate your questions and your enthusiasm and your engagement and can't wait to see you all in person.
Ladies and gentlemen that concludes today's conference call. We thank you for your participation you may now disconnect.