Q3 2022 Williams-Sonoma Inc Earnings Call
Brooks, Chief Accounting Officer, and head of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining our third quarter earnings call I'd like to remind you that during the call. We will make forward looking statements with respect to future events and financial performance, including guidance for fiscal 'twenty two.
We believe these statements reflect our best estimates however, we cannot make any assurances that these statements will materialize.
And actual results may differ significantly from our expectations the.
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 for the most directly comparable GAAP measure appears in exhibit one to the press release, we issued earlier today.
The call should also be considered in conjunction with our filings with the SEC.
Finally, 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 and good afternoon, everyone.
We are proud of another strong quarter generating an eight 1% comp by 25% on a two year basis, and 50% comp growth on a three year basis.
With record EPS growth of 12% over last year to $3 72 per share.
These results reflect the continuation of backlog order fulfillment strong product margins and disciplined cost control.
The man comps for the quarter were slightly negative.
This continued outperformance reflects the unique strength of our multi brand portfolio.
Both initiatives and ongoing execution of our talented team.
Since we last spoke the macro backdrop has become more uncertain. However, what has not changed is the large and fragmented space in which we operate when no one player on significant market share.
We believe we have an ability to capture more of this market in any environment.
We have and will continue to deliver results leveraging our key differentiator our in house design, our digital first but not digital only capabilities and our values.
These competitive advantages in combination with our growth strategy gives us many opportunities for the future.
As we've talked about before one of our largest is BBB, which had another excellent quarter driving over $30 million and demands a 17% increase to last year.
We continue to believe our <unk> business presents a sizeable growth driver for us as it disrupts an underserved estimated 80 billion dollar total addressable market.
<unk> is building velocity with large and repeat projects from commercial and hospitality partners like Marriott and Hilton.
We are also focused on diversifying into new industry verticals, including health care space through multi property partnerships with national accounts.
In September we successfully launched our improved corporate gifting and custom merchandize services and we are encouraged by the early success leading into the holiday season.
A key <unk> customer of ours for over three years now and Starbucks.
We're thrilled to publicly announced that our team was able to assist Starbucks for the Buildout of the cordless <unk> flagship reserve store in the Empire State building.
In addition to incorporating furniture from Brooklyn based West Elm.
<unk>.
Had the opportunity to work with Starbucks to create custom furniture solutions to meet their unique needs.
We look forward to growing our existing relationship with Starbucks.
And now I'd like to talk about our global business, where we continue to expand in key markets and grow our multichannel presence.
In Q3, we saw strength in both franchise and company owned in.
And the franchise business, we believe that one of our biggest opportunity is in India.
And after launching our website earlier this year, we opened our first pottery barn store in new Delhi, joining our west Elm stores in New Delhi and Mumbai.
We plan to continue to focus on India and in early 2023, we'll be adding stores across our brands and continuing to improve our online experience with our great partner the reliance group.
And our company owned business I want to highlight Canada, where we successfully relaunched our web sites. This year across all the brands driving order fulfillment and improved omni experience.
Another important initiative is sustainability.
For which we continue to be recognized for impact initiatives and ESG leadership across the home furnishing industry and.
In Q3, we were named the top score on a sustainable furnishings counsel wood furniture scorecard for the fifth consecutive year and West Elm received a forest Stewardship Council leadership award for its use of FSC certified wood.
We recognize there is much more work to do in this space and we are committed to continuing to be a leader in planet people and purpose.
One of our sustainability initiatives is our goal to <unk> 6 million trees across our family of brands in partnership with the Arbor Day Foundation.
We are excited to report that we have planted over 2 million trees to date.
Now, let's turn to the performance of our brands.
Pottery barn delivered yet another very strong quarter with a 19, 6% comp or 35, 5% on a two year stack and almost 60% on a three year stacks.
<unk> continues to perform offering exclusive high quality inspirational products and strategic growth areas like apartment marketplace and Bath Reno are driving results.
We're particularly proud of our accessible home collection, which launched in late July and has quickly scaled.
West Elm delivered a four 2% comp in the third quarter or 26, 6% on a two year stack and 48, 4% on a three year basis.
During the quarter, we improved our in stock inventory position and we expect to continue to make improvements in our service levels into Q4 and next year.
We're also very focused on improving our e-commerce experience and customer facing conversion driving initiatives.
I've had the opportunity to spend a lot of time with west Elm quarter, and I'm very impressed with the talented and passionate team running the brand.
Our greatest opportunity at West Elm is doubling down on what has made this brand great our commitment to design innovation and value price points.
Now I'd like to update you on the pottery barn children's home furnishings business.
Which ran a negative four 8% comp in Q3, but a positive $12 one on a two year basis and a positive $35 nine on a three year basis.
We continue to see ongoing recovery and our in stocks.
And looking to the future we have a strong pipeline of products at compelling values.
The Williams Sonoma brand, we had a negative one 5% comp in Q3, but a positive $6 one on a two year and a positive $36 five on a three year basis.
We continue to see that people are hosting and entertaining at home and as such we saw strength in entertaining areas.
In Q3, we successfully kicked off the holiday season with our exclusive collaboration with.
With celebrity chef and author Ina Garten.
As part of this collaboration <unk> share Thanksgiving chips for cooking and hosting the ultimate Thanksgiving dinner Party.
We also announced the exciting launch of our collaboration with renowned British Heritage textile brand William Morris <unk> Company.
Williams Sonoma home delivered another double digit comp in Q3.
We continue to see this business as an opportunity to deliver outsized growth by picking up market share from the limited luxury high end home market.
We're excited to launch an expanded furnishing blind for the kitchen in Q4.
As we look to the holiday season, we are prepared to meet the needs of our gift, giving customers with compelling product offerings are.
Our stores are competitive advantage and they are stock and our associates are ready to serve our customers.
And finally, our emerging brands, including <unk> and Mark and Graham.
Together, they ran a seven 8% comp this quarter that rejuvenation, we saw success and remodel categories related to kitchen, and bathroom, including vanities cabinet hardware and <unk>.
And Mark and Graham wins are from the travel category, including luggage and travel accessories.
We are proud of our third quarter results, but we are also aware that economic uncertainty is on the minds of consumers and investors alike.
During the third quarter, we experienced deceleration and choppiness in our demand and it is hard to know where the economy is going or how long the uncertainty will last.
Nonetheless, we are controlling what we can control and looking opportunities to reduce costs without an impact to the customer experience. In fact, we believe that protecting service and innovation is key to outperforming our peers.
As it relates to pricing, we continue to be committed to not running site wide promotions as we did before the pandemic, but we will continue to markdown and clear overstocked.
We are working with our vendors to reduce cost and pass on that value strategically to our customers.
As for additional expenses out of market and redundant shifting expenses and transportation costs have negatively impacted our gross margin.
We continue to focus on these pressures and mitigation of these costs will be a significant benefit for us in the future.
Particularly in the second half of next year.
In summary, we.
We are conscious that the home furnishings market may contract due to macro factors.
This happens we believe we are uniquely positioned to take market share even if there is a downturn and here's why.
We built a company of love brands with a shared platform of competitive Differentiators that leads the industry in house design digital first but not digital only platform and our value.
We have identified opportunities for growth through strategic initiatives like <unk> to be global and marketplace, where we have the opportunity to disrupt.
And finally.
We have a culture of innovation and an experienced team who knows how to increase operational efficiencies and control costs, while protecting service and driving new growth opportunities.
Now I will turn it over to Jeff to walk you through the results in more detail in his first earnings call as CFO .
Thank you Laura and Hello, everyone.
So pleased to join you today for my first earnings call in my new role as Chief Financial Officer.
While I am relatively new to this particular role I'm, a 20 year member of the Williams Sonoma leadership team.
I come into this role with deep knowledge and experience across our brands operations and financials.
Look forward to applying my breadth and depth of experience to drive continued strong results.
Diving into our third quarter results we.
We delivered another quarter of record revenues and earnings in a challenging environment. Our top line results illustrate our ability to gain market share.
Bottomline results demonstrate the power of our operating model to sustained merchandize margin and control SG&A expenses.
Net revenues grew to $2 2 billion with comparable brand revenue growth at eight 1% for two year comp of 25% and a three year comp of almost 50%.
Our revenue growth was driven by strong order fulfillment.
Ongoing momentum in our growth initiatives and our continued ability to take market share even as we experienced inconsistent demand within our portfolio of brands and across the quarter.
Growth channel continued to experience strong growth with retail at a 16, 9% comp and e-commerce at a four 4% comp.
Moving down the income statement.
Gross margin was 41, 5%.
220 basis points below last year and in line with our expectations.
We sustained strong merchandise margins that were flat year over year.
We remain committed to our decision to no longer offer sitewide promotion and.
And preserved the pricing integrity, our proprietary differentiated product commands.
The strength of these merchandise margins is particularly impressive given we absorbed significant cost increases from our vendors and ocean carriers, including higher demurrage and detention charges.
As expected the gross margin decline was driven by higher outbound shipping costs.
This is due to our increased furniture mix.
Higher back order fulfillment and incremental freight costs.
We also incurred higher cost to best serve our customers by shipping from out of market distribution centers and in some cases shipping multiple times for multi unit orders, which typically would have been fulfilled in a single shipment.
Occupancy cost at nine 2% of net revenues with 30 basis points above last year with.
With occupancy dollars, increasing 10, 5% to approximately $202 million.
Our ongoing retail store optimization initiatives, partially offset incremental costs from our new distribution centers on both the east and West Coast.
These new distribution centers will support our long term growth improved service time for our customers and drive cost efficiencies over time.
Our SG&A rate continues to be at historic lows at 26%.
Leveraging our 150 basis points over last year, driven by advertising and employment leverage.
Our advertising leverage reflects the agile performance driven proficiency of our marketing teams.
Our in house capabilities.
First party data and.
In multi brand platform allow us to test.
<unk> and scale.
Which is a unique competitive advantage.
Our SG&A leverage also reflects our culture of financial discipline, where we consistently challenge all expenses.
Our return on investment and drive operational efficiency throughout the company.
On the bottom line, we delivered another record quarter of earnings.
Q3, operating income grew 2% to $340 million.
We delivered strong operating margin at 15, 5% only 80 basis points below last year, despite significant headwinds and cost pressures.
Our diluted earnings per share of $3 72.
<unk> was up 12% from last year's record third quarter earnings per share of $3 32.
On the balance sheet, we ended the quarter with a cash balance of $113 million with no debt outstanding and year to date operating cash flow of $588 million.
That enabled us to fund the operations of the business and expand our capital investments to support our long term growth.
In addition year to date, we have returned excess cash of over $1 billion to shareholders through $165 million in dividends and $840 million and share repurchases.
These decisions reflect our commitment to maximizing returns for our shareholders.
And with our strong and disciplined balance sheet combined with our expected free cash flow, we have flexibility to continue to invest in the growth of the business and opportunistically invest in our own stock and drive long term shareholder returns.
Moving down the balance sheet merchandise inventories, which include in transit, where $1.688 billion, increasing 33% over a reduced level of last year.
Inventory on hand increased 34% over last year, but was up only 11% to 2019 versus sales up 52% over the same time.
In the quarter back order levels decreased but remain well above historical levels.
We are working hard to get these goods in to fulfill our customer orders. We continue to anticipate our backorder levels will remain elevated in the first half of 'twenty three.
Summarizing our Q3 results we are proud to have delivered another quarter of record revenues and earnings.
I'd like to thank all our associates for their hard work and dedication in driving these great results.
Now turning to our expectations for the remainder of the year and beyond.
We acknowledged that the near term macroeconomic picture remains uncertain.
With conflicting economic signals surrounding consumer spending trends.
Decades high inflation and federal reserve monetary policy intentionally moderating economic demand.
Additionally, our trends have been increasingly inconsistent and less predictable.
This combination of conflicting economic signals and inconsistent trends mix, our guidance unusually difficult to predict.
However, we remain confident in our ability to operate in any environment.
And are therefore, reiterating our fiscal year 'twenty two guidance of mid to high single digit revenue growth with operating margins relatively in line with fiscal year 'twenty one.
Our outlook is grounded in three factors.
First we are currently in the early stages of our upcoming holiday seasonal ramp.
With the biggest weeks yet to come.
Second our Q3 quarter demand trends support a wide range of outcomes.
And third the ongoing improvement, we see in fulfillment of our customer order backlog.
From a profitability perspective, as we said in our last call. We continue to expect cost pressures to persist for the balance of fiscal year 'twenty, two and into the first half of 'twenty three.
Primarily across our supply chain.
These headwinds include our incremental distribution centers.
Higher product and freight costs and our efforts to best serve our customers by delivering products as timely as possible.
Our capital allocation strategy remains unchanged in fiscal year 'twenty, two we expect capital expenditures will be approximately $350 million.
We plan to continue to return excess cash to our shareholders through quarterly dividends and opportunistic share repurchases.
While the near term may be uncertain.
Current management team has successfully navigated challenging environments before.
Including the 2008, great financial crisis, and the 2020 global pandemic.
We know the levers to pull and we've already taken steps to reduce costs and inventory to mitigate downside risks.
Given the increased macro uncertainty.
We will not be reiterating or updating our fiscal year 2000 and for our guidance at this time.
We will be providing guidance for fiscal year, 'twenty, three and beyond at our next call.
We remain confident in our long term fundamentals of our business.
Our confidence remains rooted in our ability to take market share and the fractured home furnishings industry. The.
The strength of our in house proprietary design.
The competitive advantage of our digital first but not digital only channel strategy.
The ongoing strength of our growth initiatives.
The resiliency of our fortress balance sheet.
And having been here before we see opportunity to take an offensive stance and the challenging macro environment.
In summary, we are very proud of our results, we continue to deliver for our customers our associates and our shareholders.
And now I'd like to open the call for questions.
Thank you.
If you would like to ask a question press star followed by the number one on your telephone keypad.
We asked today that you limit yourself to one question and one follow up.
Your first question comes from the line of Peter Benedict with Baird.
Your line is now open.
Hey, guys. Thanks for taking the questions first one is on inventory.
Just wanted to maybe you could give us a little more color youre comfort with the current makeup furniture versus non furniture. It sounds like you've adjusted some receipts I guess in response to the slower back are the softer macro but how should we think about.
The level of inventory you would be comfortable operating with I think you are about 120 days currently.
Houston, Mike 100 days pre Covid I don't know with any benchmark to help us think about as you move through next year, how inventory might look depending on different sales scenario. So that's my first question. Thank you.
Thanks, Peter and I'll, let Jeff take that one good afternoon Peter.
When you think about inventory I really think it's tough to look at on a one year basis and were up 33%, but if you think about this time last year, where they are most aggressive inventory levels. Because if you think back to last year, that's one <unk>.
East Asia was really close and we were still seeing the residual impacts of the COVID-19 closures from India and China. So we are at our lowest inventory levels at that point, we really like to look at it on a three year basis, where our three year on hand inventories up 12% versus our sales up 52% over the same time period.
We're thinking about it is we're making progress, but theres still a lot more work to do our backlog remains at historically high levels and we're working hard to get our composition rates as well as our location of a room of our inventory to service our customer best we anticipate our inventory levels in our back orders to gradually improve through Q4 and in the first half of <unk>.
'twenty three.
Okay, Great. That's helpful and then my second question.
I know, it's an unpredictable environment that you did.
You have some line of sight here I think in terms of the out of market.
Shipments in the other items that you said would provide some safety any any way you can maybe help frame the size of those opportunities as we think about the back half of 'twenty three.
As those start to come into the P&L. Thanks, so much.
Thanks, Peter I think Thats, a great question and it's really how we're looking at it. So we have tremendous headwinds right now, particularly on our gross margin from higher product costs higher inbound ocean costs, and as you mentioned higher out of market costs as well as.
Shipping multiple shipments to the same customer for the same order when we should really be shipping at once that right now for Q4 and into the first half of 'twenty three as a headwind and it will be impacting our margin, but we're pretty optimistic as we look to the back half of 'twenty. Three 'twenty. Four this is going to be a substantial tailwind and gives us a lot of room to some.
And our margins.
Your next question comes from the line of Steve <unk> with RBC capital markets. Your line is now open.
Hey, good afternoon, and thanks for taking the question.
First one is on the slightly negative demand comp in the quarter can you share any additional perspective on how demand trended throughout the quarter and I guess, where we stand in the first few weeks of November and then as a follow up on on the backlog I mean, it seems like the supply chain lead times.
Pretty meaningfully throughout the quarter just curious.
If that materially changes your view on on when Youll cleared the backlog I know you still said first half 'twenty three but to the extent that's true just curious why why that wouldnt clear sooner.
Let's take your demand question first so in terms of the cadence across Q3, it was incredibly inconsistent and choppy as we described and that's both across our portfolio of brands in the quarter. We started the quarter off a relatively strong mid single digit comps as we talked about in the Q2 call and then we saw it really.
Trail off after labor day, once the fed announced our fourth rate hike.
And <unk>.
Even if you look at it whether it's one one year two year three year and consistent.
One year decelerated across the quarter, two year was up and down and three years actually accelerated constant quarter. So it's tough to get a read on it and then we just described is inconsistent and choppy.
But what we're pretty confident about is even in this choppy environment, we continue to take market share.
Regarding the backlog and your second question, we still have more work to do like I mentioned in the previous question. There is a lot of work left to do to deliver to our customers. The backlog remains sizable and for US some of the challenges are going in the right location and in the right composition. So we can complete our multiline order for a customer.
So we again, we think it's going to take us through Q4 and in the first half to really normalize that level of activity.
Your next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Your line is now open.
Hi, Good afternoon, I wanted to ask also on demand but.
A different way.
Like performance by brand, it's the Virgin I assume that's the same on the demand level any insights you have.
Two customers each or income.
That you see changes in how the different cohorts are are responding to your product.
Okay. Thanks, Kristina for the question.
So you.
You can clearly see even by look at the net comps how strong pottery barn was.
<unk> really been outperforming the rest of the brands are kind of in a similar range, but remember you got to look at more than just a one year. So when you look at west Elm on a three year.
It's really really strong not as far off as you might think so in terms of what we've seen the demos really.
It's.
And careful not to draw any big conclusions from it because the data is very sensitive it looks like the only thing we can see.
This lower income being more affected we don't see necessarily an age issue. We just see lower income being more hurt than higher income, which is consistent with what you'd probably expect out there.
The good news is in total our core costs was pretty affluent.
And we also know that a lot of this is just uncertainty because.
Theres really nothing Thats happened they still have a lot of home appreciation and have more savings than they did before the pandemic and so depending on what happens to the macro this could be short, but if the macro gets worse.
Wage loss happens and the fed continues to do what they are tasked to do which is to stop growth.
Could it could impact those customers more than it even has already so that's the reason we've been.
To give guidance out into 24, it's not that we're not confident in our business.
It's really hard to tell what's going to happen in the macro if that was even just going to be as it is today.
We would predict it but it is changing so rapidly and frankly, none of us here economists.
But we do know that we have a lot of levers to pull we have a lot of growth strategies that are working.
We talked we talked to you about <unk> marketplace Global you can see in our brand when you go through them.
Some really exciting initiatives that are not just.
Interesting, but they are really producing great results big one being accessible home.
For pottery barn, and something that we think we can do across all brands frankly.
Despite what could be an uncertain environment, we see ourselves in a really good place likely where it's.
<unk> is even considering the pandemic I think people are always worried about what happens and we tend to come out much better than most.
So that's my insights of what's happening out there.
How it affects our customer what opportunities are thanks for the question.
And then as a follow up.
NAND were to slow further can you give some examples of the levers you can pull on the cost side to preserve as much of the operating margin in Q as you can.
Go ahead, Jeff.
Sure Kristina, we have quite a few levers, particularly on our SG&A line, where advertising we can definitely adjust as we go and the nice thing here is we have our own hands on the keyboards with our in house marketing team Who's really agile and performance driven we also have opportunities unemployment, which of course leverage with sales with most of our employment and our distribution.
<unk> centers and stores and call centers.
And then there is a number of other cost efficiencies, we can drive throughout our operations to continue to leverage our SG&A to help our operating margin.
Okay.
Your next question comes from the line of Andrea Adrienne <unk> with Barclays. Your line is now open.
Great. Thank you very much good afternoon everybody.
Hi, how are you.
Good how are you.
Okay. Thank you.
Could you Jeff could you just give me the digital penetration our growth, where we're sitting at kind of for the quarter.
Then Laura I really wanted to congratulate you on the Starbucks.
That win.
If you can talk about I know that they are undergoing a massive renovation refresh of their entire store fleet. So I'm wondering where you think you can go from here having done that flagship.
And then also for you Laura is India.
If you look internationally you are opening stores company owned stores in Canada are there any other markets in which you would contemplate owning your storage from a company owned perspective versus.
Franchising them. Thank you very much.
Okay, Let me go backwards forwards.
So India.
Jeff and I actually had a chance to go over to ourselves and see our stores and at the time west down where the old stores open and I will tell you there they're as good as any store here in the United States and our partner Lionsgate are so good at digital in their marketing campaigns and the collaborators that we're working with and we just walked away, saying, we got to really spend more.
And then we can think on this because this is a market.
But it's enormous middle class growing and a real penchant for high quality design and good there's not much out there. So we are the first person out there with a full lifestyle.
Thus it reminds me of when we first started pottery barn.
And bought furniture into our stores and the nineties.
That big of an opportunity so.
<unk>.
We're thrilled that we have a great partner when you have a great partner in some of these very far away more difficult to do business places that's the way to go in my opinion.
Canada is a lot easier.
Then India or on the Middle East you have to have a partner at this point Theres nobody else.
That does nowhere else that we're intending to open company owned stores.
There is an opportunity to do DTC Europe eventually.
When it's the right time to do that this would not be the right time in my opinion to do that but we could do that out of our DTC.
D C and a platform that we have set up in the U K.
Okay Starbucks.
We're thrilled we finally can talk about this we've been.
Working closely with them for three years, we've been doing a lot with them and what I can say.
But I think theyre going to be okay. With me, saying is that they're great partners and they've been very creative with us to allow us to do some designs for them to their specs for their stores.
We've really built this partnership up and I don't know if you've been to that flagship I just got the pictures is spectacular.
And so that's one of many that we've done you will start to notice in CF popping up but I can't give you any sort of roadmap of scale.
On the Starbucks other than to say it its one of the many great opportunities that we have.
And we continue to really believes that vw's any bigger than anyone expects.
And now I'll pass it over to Jeff for digital growth.
Sure Hi, Adrian.
We're proud of both of our channels and they both really did a great job. This past quarter and delivered strong results retail was up 16, 9% may get to your question DTC delivered a four 4% comp and was sequentially in line with our Q2 results coming in about 65% of the total long term, we continue to see E com growing to 70% of revenues.
For both channels remain part of our digital first but not digital Omnichannel strategy and we're happy to serve the customer and every channel they want to sharpen.
<unk> also add Adrian.
And when you really think about last year Thanksgiving to Christmas. This is the timeline.
Unfortunately for a lot of people Thanksgiving or Christmas or both or Hanukkah got cancelled get Togethers got canceled.
Of Covid.
So it wasn't the full open that it is now we actually are I actually believe that retail is going to be the big winner. This holiday season.
You can see people are out and about and were really stocked and ready to go. We are we have staff that we have the goods in the stores already and.
And we put them there earlier, so we can capture the sales and honestly. We also have something we never had before pre pandemic wishes are omni services.
So of course focus is the thing everybody does.
Shipping from store is not a thing everybody does but we have learned to get quite good at it and then also shifting to the store is something we do and we have just enabled which I am quite excited about shipping any to any store in the company. So for example, if you buy online.
PB kids, but theres no PD kits next year, you can ship it to your local Williams Sonoma store and you can go pick it up and we did this and we worked on dorm in our dorm strategy. This summer we saw great results.
So I think this is going to be something that continues to build not just because we don't have stores in every market, but because also it's a convenience play as people are back in the office more and also some people don't want to have to wait at home or UBS won't deliver.
To their ZIP code for tax reasons. This is a way to get around having to be there and wait for it.
To arrive at airports. So this is yet. Another example of how we're taking omni and it optimizes the retail inventory. So for example, if I'm wrong and retail isn't as good as I think it is going to be this inventory can be shipped against DTC orders, which I think is a really exciting advantage that we have.
<unk> stores are.
Brands that don't have retail don't have the opportunity to achieve.
Your next question comes from the line of Anthony <unk> with loop capital. Your line is now open.
Good morning. Thank you first sorry, good evening. Thanks, so much for taking my questions. So just two real quick ones.
First off.
Super exciting about Starbucks I know in the past you said that you expected.
<unk> sales to be about $1 billion. This year and I was just wondering if you'd.
Comment on that so I was just wondering if that's still the right way to think about it.
And then.
And then my second question is just kind of what Youre seeing.
From in terms of the competitive environment, I mean, obviously youre sticking with getting rid of site wide promotions like 100% agree with that but I was wondering if youre seeing your competitors getting any more promotional thank you.
Jeff you want to go ahead with the debate sure Anthony Good evening.
We see our track on <unk> is continuing to propel forward and we are on track to hit the $1 billion. This year the demand pipeline through our projects and our major partners continues to be strong.
And we're very confident in our ability to get there and from long term standpoint. It is such a fractured market total addressable market 80 billion and we think we have a really compelling proposition with our portfolio of brands. Our in house design, our global sourcing capabilities to really capture this and we're seeing a lot of promising signs out there in terms of.
Pent up demand for renovations in the hotels.
And restaurants, we think it's quarter and a great opportunity for US Jeff Let me take the second piece of this question could you repeat your second question Anthony.
What youre seeing in terms of the competitive environment, particularly around promotions.
We're seeing we're definitely seeing more promotions in the environment as the economy softens I think a lot of retailers have been thinking I have been talking about that this week. Our approach has been very consistent in terms of the level of promotions that we've been doing.
And plus I want to reiterate that we remain committed to not offering site wide promotions and our brands.
And we will.
Do whatever it takes to continue to not do that we think that our in house designed proprietary product really resonates with the customer because of its differentiation and command its own pricing power and we're seeing that in our results.
Your next question comes from the line of Max <unk> with Cowen. Your line is now open.
Great. Thanks, a lot. So first on the gross margin pressure, how would you quantify the various headwinds just putting them in different buckets and then how should we think about that pressure in.
<unk> and just any color on puts and takes in July quarter there.
Thanks, Max given that suggest here alright, thanks Max.
I think all of them are heavy pressures on our gross margin as we've been communicating as the product costs, which have been with us all year as part of inflation. There is the ocean costs, which although we see ocean costs overall coming down.
We still have the costs and our balance sheet and need to sell through that higher cost inventory.
Our shipping cost domestically.
It had been high as we talked about because of out of market and shipping multiple times a customer as I said in the answer to the first question, we still have quite a bit of work to do to get our inventory in the right composition as well as the right location to properly service, our customer and work on this backlog. We have so we think it will be continue to be a headwind.
For Q4 and into the first half of 'twenty three the thing I'm really optimistic about is when we turned the corner and we start to look to the back half of 'twenty three and into 24, it's going to be a tremendous tailwind.
And I'm optimistic that we can really sustained our margins when I think about all the cost pressures, we've been under and still delivered the results. We are delivering today. The other piece of this is we are starting to see our vendors reduce their pricing to us and I'm not just talking about shifting I'm talking about product vendors.
And that is a pretty sizable thing as you think about the future.
Some cases.
It's going to be important to pass along part of that to the consumer.
Because everybody had to take a price increase and when it comes down we want to make sure that we have the best the best value out there. So we're always scrubbing to see how is our design vis vis our competition has our quality has a sustainability problems and how is our price and so as we get better prices from our vendor.
<unk>, which we're already starting to see there will be some that are passed along to the consumers. So that we can really continue to grab market share because we're going to offer an even better value and so there are in addition to just the cost theme.
Normalized I think there's some real opportunities.
As you think about the back half of next year and beyond to really improve the margin from here.
Your next question comes from the line of Oliver Winter mantle with Evercore. Your line is now open.
Hi, Thanks, very much and Jeff congratulations on the new role.
I had a question regarding retail I think you said.
16, 69% can you give us a little bit more detail what drove that is that AUR or is that mix or traffic versus ticket that would be great.
Okay, Oliver it's Laura.
Remember the 16, 9% the net com.
So demand comp, it's driven by AUR.
And.
The resulting traffic fell from the.
The previous sales.
As we look at it.
Yes, as you look at demand comps now at retail our traffic is better than our competition better than the industry, which is really exciting and you. All know Christmas is the holidays are time that people love to come into our stores.
I've said before you use validate just thinking about walking until Williams Sonoma store and so we're really focused on conversion we have the traffic. So that's why I tend to be quite optimistic that retail is going to be.
The retail for us at least is going to continue to over deliver in the short term as we're comping the pandemic.
Not completely out of the house that we were in last year.
Got it.
And my second question was regarding B to B.
Think about.
The macro environment.
There is a.
There is a slowdown.
How do you think <unk> is holding up versus the consumer business do you think there's more headwinds or could that hold up better than the consumer business.
That's a great question, Oliver I think that the <unk> business will hold up stronger than potentially.
And.
Soft macro environment and the consumer.
Thinking about the dynamics of the past couple of years the consumer market.
Took off during the pandemic as people are home and they sort of chopping.
Thats, possibly trailing off a little bit with with the fed's monetary actions in the macroeconomic environment <unk> on the other hand, a lot of those verticals. They were shut down for several quarters and even even over a year and there was a big backlog of work and renovation work and projects that werent done and all of that.
Pipeline of those that pent up demand and deferred projects is really coming online now we're seeing it in rfps, we have out talking to.
Our customers and B to B.
When I attend trade shows that there's just a general energy about the amount of projects that are out there funded projects Lauder renovations.
Great article in Wall Street Journal I think it was last week and the week before talking about the hotel experience.
Hi.
Theres just a dearth of.
Hotels with a lot of them need to be.
Updated and renovated and that just speaks well to our opportunity with <unk> to be so in sum it can really be countercyclical or if there is a macroeconomic downturn.
Your next question comes from the line of Stephens account with Citi. Your line is now open.
Great. Good afternoon. Thanks for taking my question and I'll extend my congrats to Jeff as well on the new role.
First question I had was just how much do you think the competitive environment is factoring into the slowing demand trends that youre seeing in your business.
Macro is difficult we understand but the home furnishing industry has also gotten a little bit more promotional and I guess more as you look across the industry are you concerned inventory levels are getting high in the channel.
Yeah, so yeah.
Yeah.
The macro environment or the.
Competitive environment has always been commercial.
Now when you really go back and you think about even before all of these new startups came about.
There was Macy's.
In the home business and a lot of other big players and then Amazon came along and way fared they've always been after price first.
What we do versus them is very different and that we're designing their own goods.
And we've been doing it for a lot of years and so we tend to be first with new trends.
<unk> able to bring out finishes that others can't replicate even when they try to copy us they can't replicate and so when you actually go and look at the difference between our furniture.
Or in our tabletop for any of the categories versus bearish youre going to see a big difference in quality and the resulting price even with their markdowns or value is better.
We keep looking at that.
Looking at whether it's the sofa the coffee table the rug I mean, when you take.
The product down like for like and you really look at it in person and look at the price I feel very good about where we sit there is always a few exceptions as always a few opening price points to I wish with sharper.
Both of the opening price points are the place that I want to get back to be more competitive as we were pre pandemic. Those are the areas, where I think everybody got a little too high but in total.
I really don't think its a competitive pricing issue because its hard to match our goods against anyone else's goods.
Now in terms of inventory in the channel bed Bath and beyond has a ton of inventory that they're pressing.
And going to continue to press it deep markdowns again different products, but will that for everybody on the fringes that one might be.
The biggest factor going but.
The wafer and the Amazon those guys are.
The biggest out there, but it's just it's a very different business. So you might buy one thing from them for your garage or something but youre not going to furnish your living room. Your full bedroom from some of those brands are customer win anyway, because he is or what theyre looking for is a much higher quality level and design sensibility and they want somebody to.
Help them put it together.
So those are the I think the factors at play and we just have to make sure that we're.
Not distracted.
By a short term blip.
And that we are all focused on what we've built here and continuing to feed it which means innovation innovation in products and service.
And continuing to press forward when everyone else is doing that can cover and that's the thing I mean, it's.
Citing.
Even though it's a different hand, then we expect it to be dealt right now it's an exciting time to really think about it authentically and and what is the company that we want to look like and again make improvements to if this is a recession what are we going to look like on the other side of it.
And I think you saw us come out of Hawaii are stronger and were much stronger coming out of the pandemic and whatever this is going to be I would say the same thing we're going to be much stronger coming out of this too.
Your next question comes from the line of Chuck Grom with Gordon Haskett. Your line is now open.
Okay. Thanks very much.
Laura.
<unk> there has been a nice lead lag relationship between housing turnover and furniture sales I'm curious Laura do you think that relationship still exists or has it been decoupled.
If you listen to the home improvement names over the past over the past week. So theres seeming to suggest this time is different and that we are seeing some decoupling, which could indirectly would be good for your business over the next couple of years.
Yeah I just think this is a people are nervous so the situation as I said earlier.
<unk> home depot, they really very optimistic and I am sure everybody listen to their calls.
People still love their homes and the <unk>.
Sentiment is still I want a nicer home I want a second Homer I want a bigger home now they're not going to buy one because nobody wants to buy right now that doesn't mean, they don't still love. Your home you don't want to still spend money on it and so the renovation a lot of those renovation projects are still lagging from the pandemic when you couldn't even get a refrigerator.
I thought you still can't get a refrigerator and so you're not done with their kitchens furnishing your kitchen, yet so it's interesting.
Those projects are still lagging in this still there should be my opinion, there should be still a big upside as they finished those projects and then they go to spruce up the furnishings. Because if you spent a lot of money on your new bathrooms, and your new kitchen, which are usually where people go first generally speaking you buy furniture next so it should be a very.
Positive thing for Us what I think is happening is right now is more fear than reality, and we'll see what happens and what which way that goes but as I said earlier.
Our customers still in really good economic shape.
They are taking a small pause for a minute as everyone's been talking about.
Okay. Thanks very much.
So directionally beauty is more accretive than the <unk>.
Additional retail business.
Clearly some of the optimism I think on the longer term margin structure is MPW, particularly as it ramps I.
I was wondering if you or Jeff could just maybe speak to.
Some of the buckets of why that <unk> business is.
So much stronger on the margin front, because I think it would help bridge the gap from some of the fears.
Some of the costs starting to come.
Come back into the P&L as an offset.
Couple of things there Chuck So first of all <unk> is likely accretive to our op margin.
And really the dynamic there is you don't have the overhead at some of the retail.
And then on as much advertising costs.
It does lend some.
Accretion from that standpoint.
But I think when you think about the costs that are hitting the P&L and the second part of your question.
As I think we have to think about that really in two phases. The first is the near term, which is Q4 four in the first half of 'twenty, three where we've seen the higher product costs, the higher inbound shipping costs and all of our additional costs.
As we work through our backlog.
Wow.
We will become a tailwind for us.
As we turn the corner in the back half of 'twenty, three and 'twenty four I think that in of itself will support our margins long term and then b to B will really just be the icing on the cake on top of it.
Your next question comes from the line of Seth Basham with Wedbush Securities. Your line is now open.
Okay.
Thanks, a lot and good afternoon. My first question is around merchandise margins you guys have been doing a great job holding the line on merchandize margins. Despite some of the pressures as you move forward could you help us understand the puts and takes the arco merchandise margins in the fourth quarter and through the first half of 2023.
Thanks, Jeff We don't guide specific line items like that but we are giving you a guidance on the overall direction in gross margin with March margin is one component of that and we do see headwinds there in Q4 and in the first half of 'twenty three for all the reasons that we've talked about the product costs the ocean costs.
And then our own challenges with getting through our backlog without a market shipments and multiple shipments to customers and again I think that that becomes a huge tailwind as we look to the back half of 'twenty three 'twenty four that gives us optimism from the long term sustainability of our margins.
Got it just to frame the question differently than Jeff.
Thinking about the.
Merchandize margins.
And how you're down to hold them flat year over year, given the level of inventory that's rising.
Likely higher level of clearance and discounting in lines that you'll have going forward would you expect to be able to offset those pressures on merchandise margins with things like product cost and.
Inbox shipping costs.
Reductions.
So I think I think one thing to think about with our inventory thats different from say, an apparel retailer fashion retailers they were much higher penetration of core.
So we don't have that seasonal pressure to move.
Other like other companies do that are in the retail industry.
And from a long term standpoint again to the back half of 'twenty three 'twenty. Four these headwinds were experiencing really become tailwind and that's where we see opportunity on the on the margin from a long term standpoint.
Thank you.
Your next question comes from the line of Brad Thomas with Keybanc. Your line is now open.
Hi, Thanks.
Two financial questions, if I could the first.
Just thinking about sales for the fourth quarter I know you reiterated the full year guidance, but yes, technically if we back into what's implied a pretty wide range.
If there's any more color you could share with us with how to think about the fourth quarter revenues and then.
We get a lot of questions about the structural margins of Williams Sonoma, Inc.
It does seem to me that you've.
You've done some great things with the brands and probably deserve a higher merchandise margin than pre pandemic levels and similarly, you've done a great job of getting more efficient with occupancy expansion, having a greater mix of ecommerce sales and perhaps that should support a higher margin, but would love to hear your latest thoughts on perhaps what structural margins look for you as we think about perhaps.
Our trends ahead. Thanks, Okay, let's start with the Q4 implied sales and yes, it's a wide range as I spoke to in my prepared remarks, we saw a tremendous amount of Choppiness. In Q3. The result of that Choppiness is there is a wide range of estimates, but our guidance is a blend of those ranges of estimates and reflects.
Our best estimate is what we see potentially happen in Q4.
As a result.
Related to structural margin theres been quite a bit of change within the structural margin and here I think there's a lot to talk about in terms of how we've really improved our operating model. The first one is the impact of elimination sitewide promotion that is really buttressing our merchandise margins.
<unk> given us a lot of opportunity there to continue to sustain that and I think it speaks to something we really learned and sort of maybe relearned independencia is that our proprietary differentiated product that our in house design and produce really command, it's one price in the marketplace and that product really resonates with the customer and they are really willing to pay for the second.
Thing is throughout the pandemic, we really number one improve the profitability of our retail stores and as mix has shifted the e-commerce, which by nature is more profitable for us. So a combination of those different factors really helps us.
Sustaining the margin and then over the long term.
We see additional opportunity to take cost and drive efficiency throughout our P&L.
This concludes our question and answer portion for today I now turn the call back to management for closing remarks.
Well. Thank you all for joining us I want to wish you a very happy holiday season, and look forward to talking to you next year.
This concludes today's conference call. Thank you for attending you may now disconnect.
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