Q1 2022 Williams-Sonoma Inc Earnings Call
Okay.
Please standby.
Williams Sonoma, Inc. Q1, 2022 earnings conference call at this time, all participants are in a listen only mode.
<unk> and answer session will follow the conclusion of the 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.
Afternoon, and thank you for joining our first quarter earnings call.
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.
We will refer to certain non-GAAP financial measures.
Measure 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 measures.
Along with an explanation of how and why we use these measures appears in exhibit one to the press release, we issued earlier today.
Cost 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, Thanks, Jeremy and good afternoon, everyone. We've been looking forward to this release.
The first quarter of fiscal 'twenty, two represented another quarter of outperformance with a nine 5% comp on the top line.
Both demand and net sales in line with each other and 19, 5% growth on the bottom line to $3.50 per share.
These results continue to demonstrate the strength of our multi brand portfolio and our team's ability to navigate challenges and outperform these.
These results are even more impressive when considering that we were up against last year's strong performance with a comp of more than 40%.
We are confident in our annual guidance and longer term goal of $10 billion in revenues by 2024 with growth across our core businesses and within our BTB marketplace and global initiatives.
Understanding our industry is key to putting our outstanding results in perspective.
We operate in a large and fragmented industry that generates more than half of its sales from smaller brick and mortar retailers that do not have sophisticated e-commerce capability.
We are one of the strongest market players and we believe we have an opportunity to capture more of this $830 billion total addressable market.
Our revenues in FY 'twenty, one of $8 2 billion represent just about 1% of the opportunity and we continue to prove our ability to incrementally capture share.
The current economic environment is challenging but the housing market remains strong.
<unk> work means people will continue to spend more time in their homes and the rising costs related to gas and travel have historically led people to stay at home to Cook and entertain.
We believe that these three trends will result in continued momentum to outfit and improve the home.
And as a company we are prepared to manage through economic uncertainty.
Our multichannel portfolio of brands with a management team that has expertise and experience in managing through historical times of economic challenge.
Another large point of change in our industry is the movement of the consumer to purchase online.
Further compounding this trend is the arrival of the millennial generation to the household creation stage.
And in industry occupied by companies, who are behind in developing their digital experiences and capabilities and pure plays that don't have experience running stores.
We believe we are well positioned as a digital first but not digital only company.
These macro trends are perfectly aligned with our key differentiators.
Our customers continue to look for us turning to us for our exclusive inspirational and high quality products that we are able to value engineer because of our in house design capabilities.
The benefits of our in house design capabilities extend far beyond physical product design.
We've also been able to design our own supply chain efficiencies and proprietary technology that allowed us has allowed our business to be resilient.
Our channel strategy provides a competitive edge and scaling the business into the future compared to both retail and marketplace only players.
And of course, our values, which are deeply rooted in sustainability diversity equity and inclusion are embedded in our products and central in our actions.
These principles will continue to be fundamental to our customers who have shown us they will use their disposable income and purchasing power to support what is important to them.
In fact in a recent survey released in April more than half of consumers said they are willing to pay a premium for.
For sustainable products.
All of this combined with our growth strategies, not only provide for sizable opportunities to grow our core business, but also to drive momentum in reaching new customers geographies and industries.
This expansion and diversification of our customer base presents many exciting opportunities to deliver solutions for underserved market.
Our <unk> business had its largest quarter ever.
Arriving almost $250 million in demand and increasing 53% over last year.
We are winning in this space by leaning into our best in class in house product design capabilities to develop products specifically for large contract projects.
This along with the continued expansion of our client base is not only growing our book of business, but also allowing us to focus on a wide breadth of client types and industry verticals.
For instance, in the hospitality industry, we continue to establish ourselves as a trusted partner in the large project space, including recent installs at Marriott New headquarter hotel.
In terms of BW recognition in April we won an award for the best Booth at the Hospitality design Expo, which is north America's largest hospitality focused tradeshow.
Heading into Q2, this business has strong momentum and energy.
Turning to marketing we are pleased with the performance of our investments.
This quarter, we delivered strong top line growth, while leveraging our advertising spend.
Key drivers of this efficiency include our proprietary in house platform, which gives us the ability to identify customers who are in the market for home furnishings and ensures we are optimizing the spend per customer through our loyalty program and our cross brand marketing.
On the digital front during the quarter, we focused our efforts on two main areas.
Improving the conversion funnel throughout the customer journey and driving our AUR with enhanced product recommendation functionality and an improved furniture shopping experience.
On the sustainability front our.
Our ESG leadership continues to distinguish our brands individually and our company as a whole.
We are well on our way and our expanded cross brand commitment to <unk>.
6 million trees through 2023 and partnership with the Arbor Day Foundation.
Also we launched an internal award for sustainable innovation it's.
It's called the Williams Sonoma, Inc. Goodbye design change maker.
This award celebrates associates doing great things across the company.
And sustainability.
And we were recognized for the fifth year as Repreve champion of sustainability for the use of recycled materials.
Now I'd like to talk about our global business.
We continue our franchise first strategy focusing on both retail and digital execution.
We are building, our France franchise presence in markets like the middle East with three new stores opening in Dubai during the quarter and with more global stores coming in 2022.
Before we get into the brands I want to take a minute to talk about the supply chain, where we continue to experience delays challenges and additional costs across our network we.
We continue to navigate through a challenging starts and stops from COVID-19 related pressures and shortages of raw materials and labor.
Nonetheless, we are focused on meeting the expectations of our customers and we are pleased that our customer satisfaction scores remain high and that we are beginning to see some improvement with in stock inventory across our brands.
And now, let's turn to the performance of our brands that comprise our portfolio.
Pottery barn delivered another high performance quarter with comp of $14 six on top of 41, 3% last year or $55 nine on a two year basis.
All channels and product categories contributed to driving incremental demand.
Our high quality proprietary furniture business continues to lead the growth.
We see strength across the business and core product new offerings and our seasonal inventories.
And our storage, we see particular strength in our design services.
As we move to Q2 in the summer season, we have further extended these services into outdoor spaces.
And our newly remodeled stores continue to outperform expectations with a re imagined store design that has expanded the footprint for displaying lifestyle furniture in store.
Moving to West Elm.
West Elm delivered a 12, 8% comp in the first quarter on top of $50 nine last year or $63 seven on a two year basis.
Growth in the quarter was driven by strong performance in furniture.
<unk> responded to new collections and line extensions and incremental sizes anesthetics.
Additionally, new categories, such as kids and Bath are also fueling incremental growth.
Looking forward to Q2, we are particularly excited to launch our expanded <unk> west Elm assortment and customer experience, specifically servicing the many small and medium sized businesses in the U S.
We are uniquely positioned to offer a broad assortment of full space performance led design fluid solutions directly to these customers.
This is an important initiative and our long term strategy to capture additional growth.
Become a $3 billion brand.
Now I'd like to update you on our pottery barn kids and teen business.
And our Q4 call we talked about the challenges in our children's business driven by supply chain pressure out of Vietnam.
This continued into Q1 and the brand's ran a negative $3 one comp we have seen recovery in inventory in the business. However, our back orders remain at significant levels and our back order rates, our creation rates are still higher than last year.
As we look to the balance of the year, we expect to see recovery in inventory levels in the back half.
Also impacted by out of stocks as our Williams Sonoma brand with a fourth quarter comp of negative $2. Two following a 35 three comp last year.
Unfortunately, these out of stocks on some key programs that had an outsized impact on our exclusive products.
On a three year basis on hand inventories are down almost 40% in Williams Sonoma on sales growth of 30%.
We are focused on getting more in stock and we believe we will see the recovery before Q4.
As part of the Williams Sonoma brand, our Williams Sonoma home business ran a high double digit comp this quarter and continues to be an opportunity.
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 destined to be a product leader of distinctive design led high quality furnishing.
And finally, let's not forget about our emerging brands, which include rejuvenation and Mark and Graham.
Gather these businesses ran a 31 comp this quarter and they continued to outperform we are confident in these brands and their ability to contribute to the long term growth of our company.
We believe rejuvenation, which is on track to generate more than $200 million of revenue. This year has the potential to be our next billion dollar brands.
In summary, we are proud of our continued outperformance.
As we look to the balance of the year, we remain confident and committed to our guidance of mid to high single digit comps.
With operating margins relatively aligned to fiscal 'twenty one we.
We have a solid lineup of growth initiatives and operational improvements planned for the balance of the year.
And as we look further we are confident in our path to be a $10 billion company by 2024.
Before I pass the call to Julie to go through the financials in more detail I want to thank our customers our employees and our shareholders. We are committed to delivering for all of our stakeholders.
And with that I'd like to turn the call to Julie.
Thank you Laura and Hello, everyone.
We are pleased to report another quarter of outstanding financial results with strong topline growth at record profitability levels, including revenue comps of nine 5% operating margins expanding 120 basis points to 17, 1% with gross margin expanding 80 basis points and EPS growing nine.
75% to $3 50.
Our results are even more impressive considering we were up against our strongest year over year compare.
And we outperformed against the backdrop of ongoing macro volatility, including continued global supply chain pressures rising inflation, increasing interest rates and the continued evolution of consumer spending in a post pandemic world.
Our results further validate the demand for our proprietary and sustainable products to success of our growth strategies and the efficiencies of our operating model highlighting why we believe we are best positioned to succeed in the short and long term was strong profitable growth.
Moving to our first quarter results in more detail.
Net revenues grew to nearly $1 9 billion with comparable brand revenue growth at nine 5%, which was in line with our demand comp in.
And this growth was on top of a 44% comp last year for a two year stack of 50%.
These strong topline results actualized in both channels, including retail at 14, 4% comp, which was an 82, 1% two year stack, despite retail traffic still negative 20% to pre pandemic levels in 2019.
And then ecommerce we delivered a seven 3% comp on top of a 36% comp last year, maintaining our ecommerce mix as a percent of total revenues of 65%.
Moving down the income statement gross margin came in at a record 43, 8% an 80 basis point expansion over last year, driven primarily by the strength of our merchandize margins, where we're able to continue to preserve our pricing integrity without utilizing sitewide promotion.
The demand for our full priced products once again allowed us to more than offset higher product and freight costs, while still delivering record margins and strong top line sales.
Occupancy costs came in at nine 9% of net revenues and leveraged 20 basis points, resulting from another quarter of higher sales and lower occupancy dollar growth.
Occupancy dollars increased six 1% to approximately $186 million, which includes the incremental costs from our new East Coast distribution center to support our strong customer demand as well as higher depreciation costs, primarily from our capital expenditures to support our E Commerce business.
All of this was partially offset by our ongoing retail optimization actions.
The occupancy benefits, we're seeing from our rent renegotiations and the incremental net closure of 37 stores at the end of 2021 is.
Has enabled us to minimize occupancy dollar growth and deliver this leverage.
Our SG&A rate was a first quarter low of 26, 7% leveraging 40 basis points over last year, driven primarily by employment and advertising.
This leverage was a function of our strong topline performance and operational efficiencies holding our payroll costs advertising and general expense growth below sales growth.
We are proud of the disciplined culture, we have built which demands efficiency and returns from our spend.
These results led to our most profitable Q1 ever with operating income growth of 16% to $323 million and an operating margin at 17, 1%, our highest non holiday quarter ever expanding 120 basis points over last year.
This resulted in diluted earnings per share of $3 50 up 19, 5% from last year's record first quarter earnings per share of $2 93.
On the balance sheet, we ended the quarter with strong liquidity levels with a cash balance of $325 million and no debt outstanding our strong.
Liquidity and operating cash flow of almost a $185 million during the quarter allowed us to not only fund the operations of the business, but to also invest in the business at higher year over year levels in the form of $71 million in capital expenditures to pay incremental dividends increasing to over 58 million in the quarter and to repurchase a record 500.
And shares a 60% year over year first quarter increase off of a prior year high.
These decisions reflect our commitment to maximizing returns for our shareholders and with our strong and disciplined balance sheet combined with our expected cash flow strength and our remaining over $1 billion share repurchase authorization. This allows us the flexibility to continue to opportunistically invest in our own stock and drive long term shareholder return.
Yeah.
Moving down the balance sheet merchandise inventories, which include in transit inventory were $1 $396 million, increasing 28, 4% over depressed levels last year.
Inventory on hand increased 17, 7% over last year and our units were only up 1% year over year, which primarily reflects the mix shift to higher AUR furniture inventory.
And on a three year basis, our on hand inventory was down nearly 7% to 2019 pre pandemic levels as compared to sales that have grown over 50% over the same timeframe.
As a result, given our ongoing higher sales volumes, our continued elevated backorder levels and a significant macro supply chain disruptions. We are still experiencing we are still below optimal levels, particularly in our best selling back ordered items and we expect this to continue into the back half of 2022.
Now, let me turn to our expectations for the rest of the year and beyond.
We remain optimistic in the long term outlook at the business as a result, we are reiterating our financial outlook of mid to high single digit revenue growth with.
With operating margins relatively in line with 2021.
We are confident in our ability to deliver our revenue outlook given the strength of our business year to date the momentum in our growth initiatives, such as <unk> and our expected sequential improvement in our in stock inventory levels, enabling us to fill our significant back orders and recognized net revenue and potentially at a higher comp in demand even if demand <unk>.
<unk> as we move throughout the year.
From a profitability perspective, we remain confident in our ability to hold our operating margins relatively in line with 2021, despite expected ongoing cost pressures.
Like everyone else, we are experiencing higher product costs and supply chain related cost, including higher freight and incremental distribution center cost for additional space to support our overall growth and our ongoing mix shift of furniture that is a larger cube.
We are also experiencing higher costs to best serve our customers to get product to them as timely as possible by shipping product from out of market distribution centers and for multi unit orders were shipping multiple times to the same customer, which typically would have all been done in one shipment and an incremental cost to us. However.
However, because of the power of our operating model. We believe we are best positioned to mitigate these costs in both the short and long term.
Whether it is the leverage from our higher sales on our path to $10 billion.
Accelerating expansion of our highly accretive growth initiatives such as <unk>.
The growth of our ecommerce business, which operates at a higher margin profile.
Our strong merchandise margins from the pricing power, our proprietary and vertically integrated products provide.
Our retail optimization efforts, reducing rents and other efficiencies to drive margins more in line with ecommerce.
Various supply chain efficiencies, including automation and in stock inventory levels over time, and our continued emphasis on strong financial discipline. We continue to believe the combination of all of these opportunities to provide several levers we can utilize to drive incremental earnings to offset higher costs.
And this is what gives us the confidence to hold our operating margins relatively in line with last year.
In summary, we are pleased with our outperformance. This quarter. These results further validate that our key differentiators are incremental growth strategies and our proven operational execution combined with an environment, where consumers are investing more in their homes are shifting increasingly online and are prioritizing value and sustainability.
Their purchases now more than ever before leave us uniquely positioned to continue to take market share and profitably in this evolving macro environment.
And this combined with our strong operating cash flow and liquidity are operational levers that enable us to help mitigate incremental costs along with a proven track record of strong financial discipline and a tenured management team with a winning culture give us the confidence to reiterate our accelerated long term growth and profitability outlook of $10 billion in revenues.
2024, with operating margins relatively in line with last year.
To drive strong financial returns for our shareholders.
Finally, I would like to thank our associates for all they do to make our company great.
The commitment creativity and integrity of our talent is the backbone for the results we continue to deliver.
And now I'd like to open the call for questions.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.
If you are joining us today using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Also please.
Limit yourself to one question.
Once again, if you would like to ask questions. Please press star one on your Touchtone telephone.
And our first question will come from Seth Basham with Wedbush Securities.
Thanks, a lot good afternoon, and congrats on great results.
Good question Ron on the demand outlook are you seeing any slowdown in demand as you look into the second quarter here and how are you considering the demand comps relative to sales comp and balance of the year.
Hi, there it's Julie.
Far as though I mean first of all the first quarter, we certainly haven't seen it you can see by our results with a nine five comp on top of a 40 last year with a 52 year stack and we said the demand is in line with Matt when we're talking about the second quarter. I mean, we are really only three weeks three weeks into the quarter. It's super early.
But we have seen some.
Short term moderation in demand sales within our portfolio of brands, but nothing to the degree that we're hearing others reporting out there at all.
I remember from a net perspective or our actual reported results we have seen and expect to continue to see sequential improvement in our in stock inventory levels, enabling us to fill significant back orders and recognized net revenue even if demand were to wane as we move throughout the year. So this of course combined with as we said our key to.
<unk>, our incremental growth strategies, and our operational execution make.
<unk> is best positioned to outperform even in an evolving macro environment.
Okay. Thank you very much and just to reframe. The question thinking about that delta between demand and sales comps how much of a demand slow for you to come in at the low end of your guidance.
We haven't disclosed that but I think obviously, we have said many times that we have significant amount of backlog that gives us the confidence to move throughout the year to be able to hit our guidance on the year.
Fair enough. Thank you and good luck.
And our next question will come from Adrienne <unk> with Barclays.
Good afternoon, and I can truly congratulations.
Really remarkable result.
Laura So we sit here I guess here, where the macro and kind of your results don't kind of Nash.
A couple of days ago, we sales of new homes are down about 17% in April raising prices higher mortgage rates et cetera, how do you foot what's happening with the overall kind of like the big macro backdrop with your results and I know that you did you went over several thing but.
Is it the millennials that are continuing that that home buying where you have really that touch point and what do you look for.
In order to see whether the macro might ultimately impact you. Thank you.
That's a good question because on my desk today I got a report from Google.
With some I think pretty fresh data.
Here's some interesting stats nearly 40% of Americans are pondering a move in 2022 and most hoped to by the desire for more space as the number one reason Americans plan to move while others have certain features in line. Those features include outdoor space and a large kitchen.
Also pet friendly.
Which is really consistent with what we do in all of our brands with the casual lifestyle that we show.
And so.
There's all sorts of different pieces about the macro you can read negatively and then there's things like this and the reality that Ive said in the prepared remarks about people working from home people learn how to Cook.
They care more about their homes, they've invested and now theyre moving they want to move and when you talked to we talked in New York about this to talk to many people. Most people are planning a remodel of the planning to move and that drives our sales more than anything else.
And I also know the market is so fractured so let's say I'm wrong in the housing comes in a little there is still a lot of room to pick up share because we're so we are so small even though we're the leader was still so small relative to the total addressable market.
So I just.
I really believe that with our.
Differentiators, which make us really unique and.
That combined with our growth initiatives that are not just the plan, but youll see them actualize ucs prove it now many quarters in a row despite.
What others might think we keep proving that we have big runway on these initiatives.
Those are all things that are really in our favor right now and very real.
Okay, and then for Julie.
Yeah.
I always helping to shape the near end quarter. The quarter that were in Q2, I know you gave sort of long long long term LLP guidance and then for the year.
How should we think about kind of the trend.
The momentum continuing in today, how should we think about gross margin should we just think of Q2 as a continuum of what we're seeing here today in Q1. Thank you.
Yeah.
Yes, I mean, obviously, we're not providing quarterly guidance, but we would say as we've said before you need to kind of stick within our band range on the top line that we've said for the year I would say on the gross margin line certainly there could be pressure from supply chain cost that we've been experiencing like everybody else has but we're committed on the year to hitting.
Our operating margin relatively in line with 2021, which has a reminder is more than two X where it was two years ago. So we feel really good about that and obviously, we've proven that we can do that with this quarter's results being up 120 basis points.
Fantastic well then best of luck.
Thank you.
And our next question will come from Chuck Grom with Gordon Haskett.
Hey, Thank you very much.
Is that going to only come out this quarter.
I just wanted to follow up on Paul's question on the almost flowing into America.
Here's where multi again.
<unk> will go from a lot of retailers that clinical study was slow in the middle of March.
Already for you at that point.
And I guess.
You could have with across all four brands equally or if it was.
With the <unk>.
West Elm parts of the business will look like a debatable.
Yes.
I guess I wouldn't read too much into it as I said before it's been three weeks into the second quarter clearly with our performance in Q1 and the demands in line with net we don't really see it in Q1 and Q2, it's three weeks in.
And so I, specifically said that its within our portfolio brands. So it is not necessarily across all.
And we've seen things improve as well. So it's just it's very short term. This moderation we've seen and at the end of the day because of our net sale and <unk> and everything else that we are going from our growth initiatives perspective, we feel very confident in our outlook.
Outlook for the year.
Okay, great. Thanks, a lot and just a quick follow up would be we've had great success raising prices over the past 12 to 24 months.
With the recent land more peaking demand trends will pushback.
And if there is any demand destruction doesn't sound like you're hearing from.
<unk> received so far.
No we haven't seen it I mean furniture is our biggest growth vehicle furniture has been very very good for us and so you would think that if there was a problem with big ticket or our higher prices or things like that we'd see that coming down and we have not just been very strong for us.
Okay awesome conducted them.
And our next question will come from Cristina Fernandez with Telsey Advisory group.
Yes, good afternoon, and congratulations also on a really great result, I want.
Wanted to ask about.
Promotions in it definitely looks like a lot of retailers either are starting to get more promotional or expect to to be as the year progresses. What is your stance in case in the event the industry gets more promotional.
Thanks Kristina.
We've definitely seen more promotional environments, especially.
As you heard about the general softness out there and it really hasnt changed our stance at all as you can see by the results. We just put up we made a strategic decision not to do site wide promotions and that has not changed.
And you can see from pre pandemic to now we are much more profitable business and this is structural change for us and one that.
We continue to see opportunity and once we get out of the supply chain costly year that we're in.
There's a lot of things.
That we expect to have.
The improvements to our operations not this year, but into the future.
And so we are always looking at.
Turning our inventory being better inventory accuracy and getting rid of slow movers.
And youre going to constantly see us package, those things up and make them really appealing to our customers. So it's very different than wholesale price reductions across the board that you see many using right now.
Thank you and our next question will come from Jason Haas with Bank of America.
Hi, good afternoon. Thanks for taking my question. The first is just on.
Definition question when you see the demand.
Sales were in line with each other are you referring to the dollar amount or is that also the growth rates were in line with each other.
Relatively one and the same but yes, I mean, I would focus on the growth rate, but if the growth rate just staying on the demand of $3 out to the clubs as well.
Yes.
Got it that's helpful that makes sense, that's what I thought.
In terms of I wanted to dig into the advertising expense a little bit.
I think there was a point of deleverage.
Through last year and.
I think in <unk> as well and I know you called it out as a point of leverage now so I'm curious what are you changing there that's different there to drive that leverage.
Yes, I think if you recall last year, we were basically getting our advertising dollars back to the level. They were previously so in 2020. It was one of the big drivers too.
For cost cuts as we're moving throughout that year and so as we said all throughout 2021 that we are investing back into advertising for future long term health of business. So last year was more of a year of.
Deleverage and now that we've sort of lapped that we now are back to more normalized levels of advertising and we're very happy to see that we were able to generate leverage with the top line sales and our philosophy of ROI on advertising spend we don't spend advertising to go get.
Customer counts are traffic numbers or we do advertising to get our return because we think that's the right thing to do and so that's what we generated this quarter to say also as a portfolio of brands, we have a big advantage because we're bidding as one we're not bidding separately and also we're looking at what works in one brand and applying it to.
The other and that's.
A huge advantage as a multi brand company that we have Felix do you want to I know, we just still your thunder with some credit about marketing.
Do you want to add to what Julianna.
No I think julie's right.
Everything we do is ROI focus and so.
When we see the return on investment even if advertising costs go up.
If we see AUR increases in dollars per customer increase.
Feed that we will invest so we have that ability to throttle them given the business conditions, because we manage it in house and because we're all committed to that.
Margin growth.
Thank you that's helpful color.
Thank you thanks for the question.
And our next question will come from Max <unk> with Cowen and company.
Slide show first just if the industry were to slow what are some tools and strategies that you have to play offense and then what are some of those initiatives that you alluded to in your prepared remarks.
Yes, so I mean from a leverage perspective.
<unk> I think first of all.
Just went through this at the beginning of the pandemic, we've all been through it in a way no nine and thankfully we have a lot of the same management team. That's here. So we know how to do it hopefully we're not in that situation certainly we're not seeing anything close to that situation today, but but we know how to pull back on expenses, we know how to cut inventory capital advertising policies to all.
Discretionary spend on the flip side to your point about being on the offense.
We're seeing other folks not have the same result, as us and here. We are with these incredible results and we're seeing that momentum continue.
There's lots of opportunities there I mean advertising is one example, where people are pulling out from advertising that could be an interesting play for us to play, but it really depends obviously its confidential as to what we want what levers we can pull but certainly we can if we're generating the cash flow and the earnings that we are.
And then in terms of supply chain efficiencies I think you asked that question as well as your second piece.
There's a lot of things that were there.
We are getting better there is still not where they should be but I do want to bring up a couple.
So our Sutter Street upholstery operation has cut its lead time down in half from where it was last year, it's still too high frankly.
To the best custom Qualcomm's I believe in the market right now.
In stock improvement less out of market less duplicate shipping.
Reduction in damages return rates.
Utilization of hubs retail stores to drive efficiencies I think we've talked about this year, where we've told you we're putting together.
We're opening a new Arizona distribution center.
And we'll have more automation, there that should give us some efficiencies.
And eventual reduction of shipping costs in general and reduction of the cost brought up before a customer accommodation.
Because we've been late so late unfortunately in some cases with the Vietnam slowdown so embarrassingly having too.
Hello customer of one or two or three times, even that they are delivery is delayed because of all the problems that we've had due to COVID-19 and some of those countries. So it's just again the list of things I think about when you asked me about efficiencies into the future.
I am excited and want to hear about these opportunities because it means we can do better and that's our mantra is to just make it better.
Great. That's helpful and just very quickly I don't know if I missed it but did you call out how your cancel rates are trending and then I imagine that you Chuck.
Chuck a lot of your competitors, but how would you rate how your lead times are today versus some of your top peers. Thank you.
As far as cancer rates are really low I mean, we haven't seen much movement from week to week Thankfully I mean, the customers, obviously voting with their wallet and are willing to stay on and work with us to get the product that they want and so we haven't seen that change at all.
We're going to talk about the lead times, our lead times.
But I mentioned the upholstery it looks like were significantly lower than most people out of 100 days.
On the other things and we have so many different brands product lines.
I could answer on one but not on all of them saw I'll hesitate to say.
Specifically other than.
It seems based on what the customers are telling us that we're faster.
An exciting we have some new tools that allow us to see what's in stock across brands.
So do you want to comment about that.
We have been continuously looking on this opportunity on the challenges that we're seeing in inventory and we are building. The in house Cross brand a broader finding to allow us to serve the customers upfront, especially in the <unk>, but also then that is situations where they're not.
<unk> and delays, we can quickly find across the brands of bright product the customer needs for the design.
Turning out to be very very strong powerful tool for us.
Yeah.
And our next question will come from Oliver Winter mantle with Evercore ISI.
Yeah. Thanks, Thanks, guys.
I had a question regarding the divergence between the room Sonoma in pottery barn kids and teens versus pottery barn and west Elm.
Is that in your prepared remarks, you said it was out of stocks or you don't have enough inventory.
Where do you see only drivers for the divergence there.
When do you expect that to be getting better and then on top of that is that would.
Would you expect pottery barn, and west Elm slowdown into the second half or could we see then.
<unk> being at the upper end of the spectrum of your guidance.
If the room snowmen reported bone cement kits improves.
Oliver I wish I had the crystal ball.
We are confident in our guidance is I'll say again like Julie has said.
In terms of our portfolio of brands.
They serve sometimes similar markets, often different and life stages and product types.
The product types that kids and teen serves where allotment many more were from Vietnam, Unfortunately furniture and.
Big backbone to that business as the furniture and.
We all know what happened in Vietnam with full shutdown.
It's been the one that has had the most out of stocks the highest backwards.
It continues to have the highest backorder crate rates.
Versus part of our West Elm have seen more recovery in their inventory.
You can measure that by all the numbers, we look at and so thats been an advantage to them and then Lee and some was in a totally different business kitchen Ware housewares.
Furniture, so they don't have the benefit of the strong furniture trend that we have and as I said earlier. They had some out of stocks that were pretty unfortunate and unfortunately they.
Affected the amount of exclusives that we presented to the customers is a big part of our strategy you've heard us talk about that before.
I'm optimistic that we are going to get them in this year before holiday kids.
<unk> I think it's going to be sooner than that but I predicted this before and unfortunately I've been wrong. Because you think you get one thing fixed and you have another problem happened in the supply chain. So it's.
It's good to have a portfolio.
Brands.
To produce results and we are on top of the details but yes.
In terms of.
Scott.
Second half that'd be my best estimate.
Got it thanks, very much and good luck.
Thanks.
And our next question will come from Peter Benedict with Baird.
Alright, guys good afternoon.
I wanted to talk a little bit about the.
To ask you about the <unk> business.
It looks like it was probably over 60% of your growth in the first quarter, so incredibly robust.
Can you help us maybe break down the future opportunity.
You see I know you expect to double that.
In the next three years, so one other silver $50 million or so in revenue kind of where is that coming from and.
I guess the real question is.
Is that less exposed to let's say the macro concerns that people have in the market right now around consumer spending and housing and all of these types of things is that a is that a business that you think can kind of be I guess a bit a cyclical.
Over the next few years thanks.
That's great, it's a different customer and the slowdown of the building and the pandemic means there's a backlog of all of this number. They build then they furnish. So there is I think more opportunity even now than there was.
We write estimates we see our book of business is very strong we haven't seen slowdown big.
Big win for US clearly one of our Differentiators, even if it's a more challenging environment in the future and so it's across multiple verticals. We've told you that.
We're excited because we're designing for.
People products and are specific to their needs and then we're finding that those are just great wins or even.
Consumer so it's a really.
<unk> innovator also of new product wins and.
It's interesting also is becoming a real first this is just an idea now big business people are starting to take notice of it and it's a really a source of confidence for.
<unk> everywhere, it's not just in your home and we're going to continue to invest in this twice white space.
We're winning awards and we're building this business.
It's a competitive advantage.
No absolutely it sounds like you got to ask only one question.
Please ask you to do so I'll just throw in there can you give us a sense of the shares you bought back in the quarter.
With that $500 million.
I think that'll be in the Q when we released the Q. So we'll give it to you then but certainly it was as I said in my prepared remarks that it's up 60% off of last year's all time high.
So it is considerable.
Out of shares that we bought and we believe wholeheartedly, obviously and that strength of our business and believe certainly that we're at a level of our stock price that we shouldnt be at and so we're going to continue to opportunistically invest in our own company.
Yes.
Makes sense. Thanks, so much guys. Good luck.
And moving on to Simeon Gutman with Morgan Stanley .
Hi, everyone, Hi, Laura Hey, Julie My question is on ticket.
Is there anything that's surprising you or maybe the spread between ticket and units is it widening.
And then it sounds like given that there's higher costs coming into the system.
There may be even higher prices, maybe by the back half of the year. So how do you kind of weigh that trade off with <unk>.
Maybe maybe macro headwinds, maybe not but it feels like prices probably go even higher in the back half.
You're reiterating your guide, but curious how that how that fits into it.
A couple of things first of all it is.
Not just about ticket of one thing its about our mix of business right. So we are growing our furniture business, which has a higher ticket and that's where our growth is coming versus the small business. So that is going to continue to be an interesting dynamic as.
As we think about these things so I don't think.
Worrying about that as just an inflationary issue is.
The right way to think about it because I know that it's also because were very deliberately building the world's greatest furniture business.
But that's going to mean that ticket goes up.
So thats the first and then pottery barn is higher ticket, obviously than some of our other brands even higher than that is more expensive than a crib.
So if you don't the cribbs itself.
There's so many dynamics underneath ticket as a question. So it's not just as.
Easiest thing, it's inflationary issue in terms of pricing I mean, the first thing is.
Yes, we just beat the op margin substantially we're not guiding that be through the balance of this year. Okay. So that's because we know theres additional costs that are coming through the balance of this year.
So it's not that we're raising prices. It's that we don't expect to be by how much we would be by July 120 to 120 basis points. We said, we're going to be in line for the balance of the year.
Fair enough.
If I can sneak in my first follow up question is outdoor and seasonal as anything differ whether because it's coming in late or because the weather didnt break in.
Are you planning that category.
I mean, the specific weather pattern that I've ever seen frankly.
Packed but.
Versus last year of course coming out of Covid or.
Because we are still in Covid, we sold it early.
Earlier, and so we're back at a more normalized curve for outdoor this later in the season, which is actually a really.
Good thing.
A year round business. So it's not a business that we just have during the summertime and that also helps us with stability of inventory, but also our business is very strong business for us, but one where we continue to gain market share and push our assortments and have better products and better marketing and it's a real growth vehicle for us.
Okay, Thanks, nice quarter take care.
Thank you.
Our next question will come from Jonathan <unk> with Jefferies.
Hi, Laura Julie Great results. Thanks for taking my question.
Follow up question about a scenario in the economy slowing could you remind us how much of your Cogs and SG&A could flex.
Yes.
Fixed and variable split for both if you could share.
And we've never really disclose that and I guess, what I would say what we've learned is nothing's fixed if you are depending on the environment. We go after it all and we've been very successful at that so it's kind of irrelevant for us we've been very successful at going after.
If prices come down cost come down too.
From our vendors, Okay, and just a quick follow up on <unk> to be a lot of traction there.
How much of your business on B to B has been driven by repeat engagement.
Presumably if you've done a hotel or a satellite office for one hospitality or our corporate client how often does that translate into a future project trying to get a sense of how.
Much of this is relationship driven.
Or would be open to kind of.
Recurring competitive bidding thanks, so much.
Yeah, so that piece of the business is growing but we still have a lot of small projects to we love both so.
Teasing it out that way I don't think there's anything really to that yet other than to say that we're building this more consistent annuity business and that will.
Get more and more stable as we grow.
I appreciate the color best of luck.
And moving on to Steven Zaccone with Citi.
Great. Thanks for taking my question and good afternoon, everybody I wanted to follow up on <unk> question. So you referenced inventory on hand was up 17% and then I think units on hand are up about 1% is that spread a good proxy to think about how much AUR is up.
Not necessarily.
It's mix shift it's pricing, it's all sorts of things that are a combination that make up that delta.
But I think the point there is to really think about that we don't have excess inventory like the other companies that have been reporting.
We have been very thoughtful about that and we only have 1% up in units to make the point that the 28% is over overstated relative to what we've heard from others.
Got it perfect. Thank you.
The other question just to follow up I, just wanted to make sure I understand the message and correctly. So it sounds like theres some more costs coming online as we think about the balance of the year should we interpret that that gross margin expansion gets a bit more challenging as we go through the year I'm just trying to understand if that's.
New or is it just this is still a little bit of conservatism that you're factoring in on the gross margin line. Thanks very much.
It's possible I mean, certainly we do have higher cost coming throughout the year as we've said, we've got higher product costs higher freight costs. There's costs that we're incurring to have additional distribution space to house. The fact that we've got this mix shift to furniture, which is a larger cube and we're also doing the right thing by our customers as I said before we are ship.
<unk> things to them that are out of market.
It's from out of market distribution centers, because we want to get it to them faster and customer service is critical for us.
And we might ship multiple times during our same customer if they've got a multi unit order and we want to do the right thing by the customer and so yes, there could be pressures moving through but at the end of the day, we're committed to obviously doing everything we can to mitigate it as we've done in the past and we are committed to holding our op margin on the year relatively.
In line, which again is more than two X where it's been.
Okay. That's very helpful. Thanks for that.
Thank you and that does conclude the question and answer session. I will now turn the conference back over to you for any additional or closing remarks.
Yes, I just want to thank all of you for your support and interest in our company and we look forward to talking to you next quarter.
Well. Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Goodbye.