Q3 2024 Williams Sonoma Inc Earnings Call
Gibson, Jeremy Brooks Walker, Jeffrey Howie Ho Thoughter, Jeremy Griffin Francis Grant Alexander Bluitt Imogen Nixon Benjamin Walter ает
Welcome to the Williams-Sonoma Inc. Third Quarter Fiscal 2024 Earnings Conference Call. At this time all participants are in listen-only mode. A question-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.
Jeremy Brooks: Good morning and thank you for joining our third quarter earnings call. I'm here this morning with Laura Alber, our President and Chief Executive Officer, Jeff Howie, our Chief Financial Officer, and Samir Hassan, our Chief Digital and Technology Officer.
Jeremy Brooks: Before we get started, I'd like to remind you that during this call, we will make forward-looking statements with respect to future events in financial performance, including our raised guidance for Fiscal 24 and our long-term outlook.
Jeremy Brooks: We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations.
Jeremy Brooks: The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call.
Additionally, we will refer to certain non-GAAP financial measures.
Jeremy Brooks: These measures should not be considered replacements for, and should be read together with, our GAAP results.
Jeremy Brooks: A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning.
Jeremy Brooks: This call should also be considered in conjunction with our filings with the SEC.
Jeremy Brooks: Finally, a replay of this call will be available on our Investor Relations website.
Now, I'd like to turn the call over to Laura.
Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. At Williams-Sonoma Inc., we continue to have strong performance exceeding both top and bottom line expectations.
Laura Alber: The third quarter was driven by continued improvement in our sales trend, market share gains, and strong profit. Our comp came in at down 2.9 percent with an operating margin of 17.8 percent, delivering a 7 percent increase in earnings per share to $1.96.
Laura Alber: Also, we've bought back $533 million of our stock this quarter and have purchased 4% of our shares outstanding so far this year.
Laura Alber: Our operating results reflect the operational improvements that we've been focused on all year and the strength of our margin profile. Even in a difficult environment, our initiatives continue to gain momentum and we are optimistic and confident about our business.
As a result, we are raising our full-year guidance.
Laura Alber: We now expect full-year revenues to come in at a range of down 3 to down 1.5 percent And we are raising our guidance on operating margin 40 basis points to be in the range of 17.8 to 18.2 percent
Laura Alber: And due to our confidence in our business model and our ability to perform in almost any environment, our board has approved an additional $1 million stock repurchase authorization.
Laura Alber: We continue to be focused on our three key priorities. First, returning to growth. Second, elevating our world-class customer service. And third, driving earnings.
Let's start first with returning to growth.
Laura Alber: Our top line trend improved over Q2, and even though we ran negative in Q3, we outperformed the industry decline of 7% this quarter. Our better-than-industry performance is the result of our focus on innovation from our products to our design services.
Laura Alber: We set ourselves apart from the competition with our unique in-house design capabilities and vertically integrated sourcing organization, which gives us the ability to offer high quality products at compelling price points.
Laura Alber: It is this price-value balance that allows us to continue to significantly reduce our promotional activity
Laura Alber: On the design front, we have been innovating and preparing for the next generation of design services. The new tools that we have launched assist our customers with developing design plans for any size or style of home.
Laura Alber: In October, we also launched our Shop by Style and Design boards in Potterdorn, allowing customers to create and share mood boards online.
Laura Alber: The next key component of our return to growth strategy is our commitment to improving our channel experiences.
Laura Alber: We are continuously investing in a proprietary e-commerce technology. We are actively incorporating AI into our capabilities in areas like personalized emails and homepages, and supply chain decision making.
Laura Alber: From product discovery and selection, to personalization, content, customer care, and the final mile, our team is constantly thinking about how to elevate and evolve our best-in-class e-commerce experience.
Laura Alber: And we are pleased with the strong performance in our retail stores. We have continued to improve our in-store experience with inspiring new products, improved in-stock inventory levels, and next level design services and events.
Laura Alber: Our retail optimization strategy is working. Our new store locations and designs are driving good ROI, and we see continued opportunities to transform our store fleet to be positioned in the most profitable and inspiring locations.
Laura Alber: Now, let's talk through progress on our second and third key priorities.
Laura Alber: We continue to make progress improving our world-class customer service which in turn drives earnings and contributes to our strong operating results.
Laura Alber: Our customer service metrics have improved since Q2 and are all-time record levels. Our supply chain team continues to reduce costs by limiting out-of-market and multiple shipments, reducing customer accommodations, lowering returns and damages, and reducing replacements.
Laura Alber: And despite the progress we have already made, we see more margin opportunity ahead as we continue to drill down on areas for additional optimization and efficiency.
Laura Alber: Now I'd like to update you on the performance of our brands.
Laura Alber: Potterburn ran a negative 7.5% comp in Q3. In the brand, we saw improved furniture performance during the quarter. Also, fall new launches were up to last year, driven by the strength of our new furniture offerings and SKU additions to core.
Laura Alber: Also, the brand continues to see strength in proprietary seasonal offerings. In Q3, we launched Thanksgiving and Holiday, representing the biggest offer of seasonal products this year, and we are pleased with early reads.
Laura Alber: The customers responding to innovation and newness in key collections and our easy decorating updates for the home.
Laura Alber: We believe there are no lifestyle brands in the market that have seasonal decorating and entertaining offerings like ours.
Speaker Change: This is a competitive advantage for PowerGuard that is highly relevant and uniquely positions us in the industry, especially in the fourth quarter.
Speaker Change: We saw widespread comp improvement in the quarter, with all divisions of the business delivering positive comps with particular strength in the areas of textiles and decor.
Speaker Change: Innovation across our product offering has been key to delivering growth in our kids business.
Speaker Change: In the quarter, compelling new product introductions in our fall and holiday assortments drove a significant portion of our comp growth. We are seeing success with new furniture, fresh bedding, and kid-friendly products to celebrate the holidays.
Speaker Change: One particular highlight was our success with product collaborations, which has been a strategic focus.
Speaker Change: We have grown our collections with key partners and are delighted to expand our successful Chris Loves Julia line to span all of the Pottery Barn brands.
Speaker Change: We also see continued strength in our trending Love Shack Fancy partnership. As we look to holiday and the quarters ahead, we have a robust pipeline of new products, exciting partnerships, and channel innovations to fuel continued growth.
Now let's review West Elm.
Speaker Change: West Elm ran a negative 3.5% comp in Q3, a significant improvement from Q2.
Speaker Change: While macroeconomic factors continue to impact overall consumer demand for furniture, West Elm is proving that good, innovative products will always resonate.
Paul Nunes drove double-digit positive comp
Speaker Change: and furniture newness in particular was strong. Holiday, which is West Elm's biggest season of new product intros this year, is also off to a strong start with double-digit positive comps in seasonal textiles, kids, and furniture.
Speaker Change: Additionally, West Elm launched a very exciting kids collaboration with fashion tastemaker and children's book author Eva Chen in September.
Speaker Change: The collection's bright fashion colors, multifunctional furniture, and novelty pieces are driving sales.
Speaker Change: This collab has secured articles and publications like Vogue.com, Architectural Digest, Forbes, and New York Magazine.
Speaker Change: The brand also launched a Halloween capsule collection with Christina Ricci that was popular with press, our customers, and the actresses' large social following.
Speaker Change: We are thrilled with the momentum we're seeing in the West Elm business, especially the positive trends in newness and exciting collaborations.
Now let's talk about lame cinema.
Speaker Change: The Williams Filmo brand was essentially flat in Q3. The brand continues to focus on new, exclusive, and innovative product offerings.
Speaker Change: Strength continues in high-ticket items and electrics, especially espresso machines and stand mixers.
Also tabletop is strong.
Speaker Change: At the Williams-Lima brand, we celebrate great design and quality. We are thrilled to see the consumer and media response to the launch of the new Evergreen KitchenAid mixer. Our customers were quick to embrace the new green base and wood bowl design evolution of the KitchenAid mixer, an item iconic to the Williams-Lima brand.
Speaker Change: The business also benefited from several key collaboration launches in Q3, including the launch of new cookware additions to the popular Stanley Tucci for Green Pan Collection, a food collaboration with the world-famous chef Jean-Georges, and the launch of our Thanksgiving partnership with Ina Garten.
Speaker Change: Ina is on the cover of this year's Thanksgiving catalog, which features an exclusive look at our Thanksgiving menu, recipes, and hosting tips.
Speaker Change: Our team is also proud to be supporting INA as the exclusive bookseller on a five-city book tour.
Speaker Change: In addition to her tour, Williams-Sonoma held more than 50 cookbook signings and events in Q3, hosting top chefs, influencers, and popular celebrities like Bobby Flay, Al Roker, and Eva Longoria in our stores.
Speaker Change: As I said, the tabletop business was also strong in Q3, as people were gearing up for the holiday season and prioritizing eating at home. Williams-Sonoma has launched a robust, art-of-entertainment content marketing campaign designed to drive growth by teaching our customers how to set a table, stock a bar, and host a party.
Speaker Change: We are also encouraged by the improvement of the Williamson Home Business with expanded products across categories. We recently launched a collaboration with artist and designer Josh Young, whose beautiful collection for Williamson on the Home features products inspired by popular original art.
Now I'd like to update you on our other initiatives.
Speaker Change: Business-to-business continuous momentum delivering its largest quarter history to date. The business grew 9% in Q3 with contract growing 17% while trade grew 4%. The contract business represented 36% of the B2B business in the quarter.
Speaker Change: Project and partner wins this quarter include JW Marriott Las Vegas, Ritz Carlton Papagayo, Office Projects for Google and Sony, along with our continued work with Sunrise, Tenure Living, Related Companies, Hanover, and Spring Hill Suites.
Speaker Change: As we move into Q4, we are excited to be ramping up our corporate gifting program, along with focusing on our strategic growth opportunities and pipeline development to support our continued growth moving into FY25 and beyond.
Speaker Change: Now I'd like to talk about our global business. We're pleased to report strong results across key markets including Canada, Mexico, and India.
Speaker Change: In Canada, our strong performance across all brands was driven in our design business. B2B and successful Thanksgiving season.
Speaker Change: In Mexico, our brands continue to gain market share due to our unique product and service offering, and we are well-positioned for a strong holiday season.
Speaker Change: We're excited to expand our presence with four new store openings in Mexico for West Elm, Pottergarn, and Pottergarn Kids in early 2025.
Speaker Change: Our business in India is also growing, demonstrating strength in our design services and an increase in decorating during the festive season.
Speaker Change: We'll be opening two additional West Elm stores in India during the first quarter of 2025.
Speaker Change: In the UK, we have renewed our partnership with John Lewis for the West Elm and Powdery Barn Kids brand, and we are also proud to be selling Williamsonoma products inside Fortnum & Mason this holiday season.
Speaker Change: Initial sales are promising and we look forward to the opportunities these partnerships present for enhancing our marketing and brand awareness in this market and around the globe.
Lastly, I'd like to update you on our emerging brands.
Speaker Change: Rejuvenation continued to have strong performance with another quarter of double-digit growth.
We are seeing success with both consumer and trade customers.
Speaker Change: The brand offers high-quality, exclusively designed products for your home remodel or refresh.
Speaker Change: And the trend of home updates, particularly in kitchen and bathroom, continues, and we have increased our assortments and in-store presence of these categories.
We're also seeing success in furniture and textiles at Rejuvenation.
Speaker Change: Jeremy Brooks, Jeffrey Howie, Jeremy Brooks, Jeffrey Howie, Jeremy Brooks, Jeremy Brooks,
Speaker Change: At Mark & Graham, we launched two new incremental businesses in the fall season, Mark & Graham Kids and Mark & Graham Wedding Shop, both of which our customers responded well to. Also, the brand just launched their holiday gifting collection with many new in-house designed gifts.
Speaker Change: And we are thrilled to roll out our new collection, Bark and Gram, for all of our pet lovers. Please go online and check it out.
Speaker Change: And finally, Green Row, our newest brand, continues to show strong growth with its unique collection of thoughtfully sourced, vintage-inspired furnishings.
Speaker Change: In October, Greenbrow launched its first holiday collection with handcrafted and upcycled gifts and decor.
Speaker Change: The brand continues to inspire with its innovative use of materials and bright, optimistic colors. We're excited to continue to grow GreenRow and look forward to new products and partnerships in the coming months.
Speaker Change: In summary, we're proud of our continued strong results and outperformance at Williams-Sonoma Inc.
Speaker Change: Our strategy of focusing on returning to growth, enhancing our world-class customer service, and driving earnings is working.
Speaker Change: As we head into the last quarter of the year, we are optimistic and confident.
Speaker Change: Our stores are set, the music is on, the lights are twinkling, and you can smell the aroma of the holidays. This is the time of year when we shine, and we welcome you to come visit us at any location.
Speaker Change: and we sincerely wish you and your family a very happy Thanksgiving next week.
Speaker Change: Before I hand it over to Jeff, I also want to take a minute to say thank you to our team, our vendors, and all of our partners for their continued dedication and contributions to our company's performance.
We are grateful for all of you.
Speaker Change: And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.
Thank you for watching.
Thank you, Laura, and good morning, everyone.
Speaker Change: We're proud to report results that surpass expectations on both the top and the bottom line.
Marked by sequential improvement in top-line trend.
ongoing market share gain and robust earnings performance.
Speaker Change: Our results this quarter reinforce the five key drivers underpinning our profitability.
First, our e-commerce salesman.
Speaker Change: with its higher operating margin, sustaining at 66% of total revenues.
Speaker Change: Second, our retail optimization strategy, delivering 3% less occupancy expense than last year, inclusive of additional technology and supply chain investments.
we're
Speaker Change: Our emphasis on full price selling contributed to our 130 basis points improvement to last year in merchandise margins, even as we gained market share.
Speaker Change: Fourth, our ongoing opportunity to achieve cost savings from supply chain efficiency.
Speaker Change: producing a 100 basis point improvement to last year in selling margins.
Speaker Change: And fifth, our ability to control cost to manage our bottom line profitability.
Speaker Change: Our results this quarter demonstrate the flexibility, strength, and durability of our operating model to drive market share gains and deliver highly profitable earnings in almost any environment.
Now, let's dive into the numbers.
Speaker Change: I'll start with our QC results and then provide an update on guidance for 24.
Net Revenues finished above expectations.
Speaker Change: coming in at 1.8 billion with a COP of negative 2.9 percent.
Speaker Change: We gained market share as we outperformed the industry, which declined by approximately 7%, even as we continued to reduce our overall level of promotion in the quarter.
Speaker Change: Our Q3 comps improved in Q2 reflected a better performance in furniture and continued growth in our non-furniture category.
Speaker Change: From a cadence perspective, a trend across the quarter was shocking, reflecting the uncertain macroeconomic backdrop.
Speaker Change: Moving down the income statement, gross margin exceeded expectations, coming in at 46.7%, 230 basis points higher than last year.
There were three drivers behind this improvement. Merchandise margins,
supply chain efficiencies, and occupancy costs.
Speaker Change: Let's start with Merchandise Martin, which improved 130 basis points to last year.
Speaker Change: This improvement was driven by lower input costs and our commitment to full price down.
Next, supply chain efficiency.
Speaker Change: contribute 100 basis points to the year-over-year improvement in gross margins.
We continue to realize cost savings across the supply chain.
Driven by more consistent operations from less promotional excellence.
Speaker Change: These savings are reflected in improved efficiency in manufacturing, warehousing, and delivery expense.
More importantly, these operational gains aren't canopy or customer service.
Key methods including returns,
Speaker Change: accommodations, damages, replacements, out-of-market shipping, and multiple deliveries per order are all better than pre-pandemic levels.
Speaker Change: And finally, occupancy costs, which were down 3% from last year and flat as a percent of revenue.
Speaker Change: We continue to see our retail optimization strategies deliver leverage in retail occupancy offset by our investments in our world-class technology and our supply chain.
Overall, our higher growth margin this quarter exceeded our expectations.
Speaker Change: Turning now to SG&A, which came in at 28.9% of revenue, or 150 basis points higher than last year, from higher employment expense and advertising spend, partially offset by lower general expenses.
Speaker Change: Employment expense was 160 basis points higher year over year, mostly from higher performance-based incentive compensation due to our strong EPS performance.
and from higher employee benefit costs during the quarter.
Speaker Change: Advertising expense, do you leverage 20 basis points as we continue to invest in the higher levels of ad spend?
Our advertising model is a powerful competitive advantage.
Speaker Change: Our multi-brand portfolio allows us to test the ROAS of our incremental spending, while our hands-on approach maximizes the effectiveness of our investment and keeps valuable insights in-house.
Speaker Change: General expenses leverage 30 basis points from timing of administrative expenses.
On the bottom line, our earnings exceeded expectations.
Speaker Change: Operating income came in at $321 million, up 2% to last year.
Speaker Change: Operating margin finished at 17.8% which was 80 basis points above last year.
Speaker Change: Diluted earnings per share was $1.96, up 13 cents, or 7% better than last year.
Speaker Change: On the balance sheet, we ended the quarter with a cash balance of $827 million with no debt outstanding.
Speaker Change: This was after we both invested $83 million in capital expenditures supporting our long-term growth, and we returned $660 million to our shareholders through share repurchases and quarterly dividends.
Speaking of sharing purchases.
Speaker Change: Here today, we have repurchased $707 million, or 4% of our outstanding shares.
Speaker Change: Merchandise inventory ended the quarter at $1.45 billion, up 3.8% to last year.
Speaker Change: Our inventory levels are well positioned to support the upcoming holiday season.
Speaker Change: And our inventory levels are up only 15% compared to 2019, with revenues up 25% over that time period.
Summing up our Q3 results.
Speaker Change: We're proud to have delivered another quarter of results that exceeded expectations.
Speaker Change: I'd like to thank our talented, dedicated team at Williamson & East for their exceptional work in achieving these results.
Now, let's turn to our 24-caliber.
Just a reminder.
Speaker Change: The fiscal year 24 is a 53-week year for Williams-Dominion, but the fourth quarter will consist of 14 weeks.
Speaker Change: We will report comps on a 53-week versus 53-week comparable basis.
Speaker Change: All other year of your comparison will be 53 weeks versus 52 weeks.
Speaker Change: We anticipate the additional week will contribute 150 basis points to revenue on the year and 10 basis points.
Speaker Change: The Annual Operating Margin, both of which are embedded in our guide.
Now, let's talk through our updated guidance.
Speaker Change: We are raising our full year guidance to reflect our strong Q3 results and our optimism about Q4 with our improving furniture trend and a strong performance of seasonal product all year.
However, considering the holiday calendarship,
Economic Uncertainty
Speaker Change: and Slow Housing Markets, our guidance contemplates a range of possible outcomes.
Speaker Change: On the top line, we are raising our full year 24 Net Revenue Guidance to be in the range of down 3% to down 1.5%.
with comps between down 4.5% to down 3%.
Speaker Change: The midpoint of our guide reflects the continuation of Q3 trends into Q4.
Speaker Change: We believe the high end of our guide implies a strong holiday season, and the low end of our guide reflects the potential for greater impact from the macroeconomic environment on our T4 resort.
Speaker Change: On the bottom line, we are raising our full year operating margin guidance 40 basis points.
based upon our Q3 performance.
Speaker Change: With the 40 basis point increase, our 4-year 24 operating margin will now be in the range of 18.4% to 18.8%.
Speaker Change: which includes a 60 basis point benefit from the full year impact from the Q1-24 out-of-period adjustment.
Speaker Change: Without the Q1 out-of-period adjustment, our full-year operating margin will now be in the range of 17.8% to 18.2%.
We continue to anticipate our Q4 operating margins.
Speaker Change: will be materially in line with 2023 results without the benefits of the 53rd week on the quarter.
Speaker Change: Additionally, we expect our full-year interest income to be approximately $50 million and our full-year effective tax rate to be approximately 25%.
Speaker Change: Turning to our 2024 Capital Allocation Plans, we anticipate investing $250 million in capital expenditures to support the long-term growth of our business.
Speaker Change: Of this amount, 75% will be focused on strengthening our e-commerce leadership and enhancing our supply chain efficiency.
and we have communicated cordially.
Speaker Change: were committed to returning Equifax store shareholders through dividends and share repurchases.
Speaker Change: We will continue to pay our quarterly dividends of $0.57 per share.
Speaker Change: In conjunction with our earnings released today, we announce that our Board of Directors has approved an additional $1 billion share repurchase authorization.
Speaker Change: Combined with our existing authorization, we now have nearly $1.3 billion in share repurchase authorization available to opportunistically repurchase our stock to deliver returns for our shareholders.
Wrapping up Lauren and my comments on Q3.
Speaker Change: We're proud to deliver results exceeding expectations on both the top and the bottom line.
Speaker Change: For the remainder of 24, we're focused on our three key priorities.
Bertrani-Giugro
Elevating a World-Class Customer Service
and Robbie Ernst.
We're confident.
Speaker Change: The flexibility, strength, and durability of our business model will drive market share gain.
and deliver highly profitable earnings in almost any environment.
as we look beyond 24.
Speaker Change: We will provide guidance for fiscal year 25 in March as per our standard practice.
Speaker Change: Looking further into the future, we are reiterating our long-term guidance of mid to high single-digit revenue growth.
with Operating Margins and Invista IT.
We're confident we'll continue to outperform our peers.
Speaker Change: and deliver shareholder growth for these five reasons that remain consistent.
Speaker Change: Our ability to gain market share in a fragmented home furnishings industry.
The strength of our in-house proprietary design.
Speaker Change: The competitive advantage of our digital-first, but not digital-only channel strategy.
The ongoing strength of our growth initiatives.
and the resiliency of our portrait style machines.
With that, I'll open the call for questions.
Thank you for watching.
Speaker Change: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up, then return to the queue for any additional questions you may have. Our first question will come from the line of Christina Fernandez with Telsay Advisory Group. Please go ahead.
Thank you for joining us. We appreciate it.
Speaker Change: Hi, good morning. I wanted to ask about the the trends you saw in the quarter, particularly in furniture, it seemed like seasonal and small ticket is working really well. Furniture, Laura, you commented that it was slightly better. So can you talk about what you're seeing there in any
Speaker Change: signs that, you know, the consumer is, you know, starting to want to spend a bit more on big-ticket furniture items.
Thanks, Christina.
Speaker Change: It's really hard to know exactly what's going on with the consumer, but our opinion is they're probably a little bit better off than everybody thinks, especially our consumer.
Speaker Change: And, you know, we are a lot more than just a furniture brand, as we've talked about, we're life stage brands, we're lifestyle brands, and we've seen the best results in those businesses, like our kids, you look at those comps, and that's, you know, less related.
Speaker Change: The housing, of course, we also seen really good results all year. Our seasonal assortment, which is exciting going into the holidays and partially why we're so optimistic about this quarter for us. We did see furniture.
Speaker Change: improved slightly in West Elm and Potter Barn to cross the board and we're seeing also our newness really work which is great news for us because
Speaker Change: When you bring in a new furniture collection and it works, generally you only bring it in
Speaker Change: may be one item. So you might just bring in the coffee table. And when you see that look, sell, you can expand that out into a whole franchise of a collection that will yield really good non-comp newness for years to come.
Thank you for tuning in. We'll see you next time.
Speaker Change: And then my follow-up is for Jeff. On the operating margin, this quarter you got it to flat. It came in a lot better. Where was the upside and why would that not continue in the fourth quarter with the better sales outlook?
Speaker Change: Good morning, Christina, and thanks for asking that question. I know it's probably on top of everybody's mind, but look Q3 operating margin exceeded expectations for three reasons. First, merchandise margins.
Speaker Change: We're stronger than we anticipated, really driven by lower input costs and our focus on full price selling and I think Laura touched on this, you know, we continue to see a positive customer response to our consistent pricing, our focus on selling and service, and the newness and the breadth of product assortment that we offer.
Speaker Change: And second, the supply chain efficiencies, which I've been talking about all year, also came in better, attributable to our commitment to full-price selling, really smoothing out the peaks and troughs driven by promotional activity.
Speaker Change: This is through delivering significant cost savings for more consistent operations across manufacturing, warehousing, and delivery expenses. And I have to really compliment our entire supply chain organization for their diligence and really the way they've attacked the supply chain and really gone after these cost savings.
Speaker Change: And the third thing on why we beat the op margin in the quarter is we deleverage the advertising expense less in Q2 than in Q1.
Speaker Change: We continue to evaluate that spend and adjust weekly as we see the effectiveness. And, you know, I think it's the Q3 results is really testimony to how we continue to deliver strong profitability despite the tough environment for home furnishings.
Speaker Change: Blue Cross Blue Shield is a proud sponsor of Second Opinion. Live Fearless
Speaker Change: As far as the second part of your question is, why wouldn't that continue into Q2, I mean our guidance is based on Q4.
Speaker Change: Our guidance is based upon the facts and trends we know today, and there's a few factors in Q4 that make it very unusual. The first one is the holiday calendar shifts, and you hear us talk about that today. With the late Thanksgiving and the shorter holiday shopping period, it makes reading the business really difficult. And then the second piece is we've started lapping the reduction in promos, so there's less upside than there was in prior quarters. And finally, our guide reflects the potential for greater impact on the economic environment in this low-housing market.
Speaker Change: But here's the thing, we got top line revenues and bottom line operating margins because it gives us the flexibility to respond to any changes in the business.
Speaker Change: To the extent there might be an upside in one line, we'll take a look and see where we might offset that in others. But it gives us the flexibility to pull levers as the business ebbs and flows. And as you've seen in Q3 and other quarters this year, we know the levers to pull to deliver results.
Thank you and best of luck this holiday season.
Speaker Change: Our next question comes from the line of Peter Benedict with Baird. Please go ahead.
Speaker Change: All right, guys, thanks for taking the question. First, just a little bit more on your approach to marketing and promo this holiday. Consumers have been responding, at least we're hearing from a lot of folks.
Speaker Change: that they're responding more to promotions and events, and that's been going on for some time, but maybe that's getting a little more pronounced of late. I know you guys are very tactical and strategic with how you use promotions. I'm just curious how you...
Speaker Change: How you guys have planned this holiday relative to maybe last year and and what you're what you're kind of seeing from competitors in the space when it comes to to to promotions in this holiday season, that's my first question.
Thank you.
Okay, great. Thanks, Peter.
Speaker Change: I don't know if you've been in our stores or in the malls, but there is no one.
who has the holiday headquarters that we have, from Thanksgiving.
Speaker Change: to Christmas, Hanukkah, New Year, entertaining, decorating, gift giving. There's nobody who does that and that is a huge competitive advantage when you go to the malls and you go online that we have.
Speaker Change: Not just one category, but we have a fully integrated holiday assortment on top of Incredible foundation of core and furniture and all the things that already exist in your house And we show the customer how to put those things together
Speaker Change: That is a big deal, and it's very relevant, particularly this year, as people are very excited about the holidays. And we saw it in the beginning of the year from Easter to Halloween, now Thanksgiving and Christmas, and it's still early, but that is something that we said earlier in the year we're going to continue to flex, as we knew that likely the furniture part of the business wasn't going to recover as soon as we thought.
Speaker Change: As it relates to pricing, let's just talk about pricing versus promotions.
Speaker Change: We have an incredible sourcing platform. We have worked with vendors for decades.
Speaker Change: We design our own goods, we source them ourselves with our people overseas, and as a result, we get better prices. We have lots of loyalty, we have approachable prices with great quality.
Speaker Change: and we know that. We've learned that many times in good business and in bad business and we made the decision, as you know, to stop this up-down pricing and this constant promotion. Once you're in that loop, you can't stop it. You have to comp it and over the last several years we have been reducing and reducing and reducing the level of promotion and it has been working.
Speaker Change: The customer doesn't have to wait to see if they're going to have a better price on that sofa in two weeks. They know the price is the price. But it's also incumbent on retailers like us to make sure that we give that great value the first time to the customer.
Speaker Change: So we think we're very, very competitively priced all in versus anyone.
Speaker Change: with the same level of design and quality, which allows us to be less promotional.
Speaker Change: And as Jeff said, you know, we still have been reducing it every quarter. We have less of it to reduce as we lap these quarters, but there's still opportunity to do a better job also in buying the winners.
Speaker Change: and maximizing selling because we're seeing great units results and so buying back into those things and when we buy back in getting better margins is another key part of our strategy.
Thank you.
Speaker Change: That's helpful. Thanks, Laura. And it kind of leads me to my next question, maybe for Jeff. I mean, you're talking about smoothing out demand and how that helps on the supply chain. Jeff, you mentioned some additional or further opportunities for efficiency and optimization as you look out going forward. If we maybe put the smoothing of demand aside, what are the other buckets?
Speaker Change: that you see the most, where you see the most opportunity. You've done such a great job so far on all that. Just curious kind of where the next leg of savings might lie. Thank you.
Thank you. Bye.
Speaker Change: So, just to talk about that, you know, we have been delivering record customer service.
And this customer service has built tremendous brand loyalty.
Speaker Change: But we still have room to go in specific areas where we need to be even more efficient.
Speaker Change: So we are drilling down in the supply chain, in every hub, in every furniture area. And remember, we just did a full conversion out of one facility.
to another and that is
Speaker Change: We're at the beginning of that cycle. We did that this year Into our new Arizona DC out of our CMO building Sonoma Cove
Speaker Change: That's a big deal. So, you know, there's a lot of efficiency in some of those areas and we don't believe that we are done with supply chain efficiency.
We have also some continued opportunity in occupancy.
where we are continuing to close.
Speaker Change: less profitable stores that are in old centers and move them to better lifestyle centers and Also, you know reduce in some cases some brands and and increase others and we've seen really good results from our remodels
and our retail footprint.
Speaker Change: and our new stores are doing quite well. So that's another example of in the same size box, can we do more dollars per square foot? We believe we can. And that is also gonna help us with our occupancy leverage.
Speaker Change: In terms of ad costs, this is an area that is a strength of ours, and we use it competitively
Speaker Change: both in the short term and gain customers for the long term.
Speaker Change: The work that we're doing with influencers and collaborators is driving brand heat and bringing new customers into brands and driving traffic to our stores. So you're going to continue to see us drive collaborations higher.
Speaker Change: which is really good to drive at cost actually and also sales.
Speaker Change: Those are the big buckets. You know payroll is obviously another very large bucket.
Speaker Change: and you know there's opportunity to both continue to be more efficient in areas in our company but then also to fund other areas that we believe are sales driving and we're in the early innings of testing there.
Thank you so much.
Speaker Change: Our next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead.
Kate Mcshane: Hi, good morning. Thanks for taking our questions. I wanted to follow up on Christina's earlier question with regards to furniture sales, and just ask if you have a view on when furniture sales could stabilize and, you know, can furniture sales grow, just given some of the success that, again, you've seen with innovation and new product introduction, if housing turnover were to remain muted in 2025?
Speaker Change: We're assuming housing turnover remains muted, which is why we've been working so hard to improve our business despite it.
Okay, and you've seen us have consecutively improved our comps.
Speaker Change: and we have improved our furniture comps too. There's no doubt based on what we're seeing that there's opportunity to continue to improve them in my mind.
Speaker Change: We believe that the newness, the percent of newness to total, will continue to yield better results for us in furniture, even if housing doesn't improve. Now, if housing really collapses, obviously that's not in our...
Speaker Change: That's not something that is contemplated, a huge collapse or a black swan event or something, but we think if it's a normalized environment, our operational execution, the things we can control will help us improve our furniture business.
Speaker Change: On the flip side, you get, you know, big housing rebound, we'll see very good results in furnishing.
Speaker Change: So I'm sorry that I don't have a date for you. I wish I did, but your guess is as good as mine of when housing turns around.
Speaker Change: Okay, thank you. And then our second question was just around inventory. It looks like inventory grew about 3.8% in the quarter. We wondered if there was any pull forward that you did in anticipation of some of the noise that was going on with regards to the port strike. And I know there's still a lot of uncertainty around tariffs, but now that we are through the election, could you remind us, you know, how you're thinking about operating in a higher tariff environment and how much you can mitigate?
Speaker Change: Yeah, thanks, Gabe. Good morning. Yeah, our inventory at the end of the quarter was up 4% to last year and, you know, notably our inventory levels are only at 15% versus 2019 compared to the revenue growth of over 25% of that time.
Speaker Change: And in terms of your question about did we pull forward some regarding the
Speaker Change: Fort Strike activity, that wasn't really a big factor for us. This is really about getting well-positioned for holiday and being in stock, and if you've been in any of our stores, even on the website, you can see that we're in stock and we're well-positioned for holiday, and that's reflected in the guidance ranges that we've provided. In terms of China tariffs and our outlook on that, first, there's a lot of uncertainty in terms of what's happening there, and I just want to remind everyone that it's not our first time at this. We've always been a leader in proactively responding to changes in the trade environment.
Speaker Change: And a lot has changed since the last time this came up. First, we've significantly reduced our China-sourced goods from 50% to 25% over the last few years.
Speaker Change: So, exposure is significantly less than the last time in 2018 that we saw this activity.
Speaker Change: Second, and I think this is something that we don't talk enough about, the U.S. is already a major manufacturing hub for Williams-Sonoma Inc. Much of our upholstery is manufactured domestically at our facilities in North Carolina and Mississippi. Our lighting from rejuvenation is manufactured in Oregon. And a large portion of the Williams-Sonoma assortment is produced domestically.
Speaker Change: You know, Peppermint Bark, everyone's favorite skew this time of year, is made here in the San Francisco Bay Area.
Speaker Change: Third, we're prepared to reduce our exports to China further if tariffs increase. We've mapped out a category-by-category plan to reduce China's sourcing if conditions warrant, and we're currently evaluating and quantifying the impact from additional tariffs.
Speaker Change: We have a wide range of mitigation options. In fact, you know, everything is on the table. We'll probably move some things to other countries.
Speaker Change: We may at some point in 25 front notes and goods.
Speaker Change: I'm sure the vendors will pay some, and there may be some that the consumers absorb as well. But that is really a lot of uncertainty right now. We're working through that, and as the landscape changes, we have the scale and strategy to pivot. But here's a really big strategic thing that I want you to take away, and that is our vertically integrated supply chain is a competitive advantage.
90% of the products
Speaker Change: We sell our proprietary, designed and exclusively made for our brands.
Speaker Change: We operate our own in-house best-in-class global sourcing operation with 12 overseas offices. It's our own boots on the ground managing sourcing decisions, production, and shipping. We are the 11th largest container importer in the United States, so we have scale and relationships others do not. Punchline being is as the tariff landscape changes, we have the scale and strategy to pivot.
Thank you.
Speaker Change: Our next question comes from the line of Jonathan Matuszewski with Jeffreys. Please go ahead.
Speaker Change: Good morning. Thanks for taking my question. The first one was on newness here that it's contributing to the sales.
Here.
Speaker Change: frame the magnitude of this year maybe relative to last and and any aspirations for kind of you know the magnitude of new collections you can bring forward to 2025? That's my first question, thanks.
Speaker Change: Great, Johnson. Thank you. Yes, newness and innovation are key parts of our strategy to return to growth in 2024, and we've seen a strong response to newness. I should say 2024 and beyond, and West Elm has been really benefiting from the increase in newness across all categories, particularly in furniture.
Speaker Change: and they've seen double-digit positives come in their new furniture introductions.
and they've also really increased substantially the amount of
Speaker Change: products in the holiday assortments, which is also an important opportunity for them. I've mentioned before that when you look at the scale of West Elm and then you compare the departments to Pottery Barn's percent total, you see some clear areas of opportunity.
Speaker Change: and the non-furniture business is a big area of opportunity in West Elm so we've been really pushing newness there.
Speaker Change: Potter Barn is also seeing good response to newness, especially in furniture and seasonal decorating. Kids and teens really seeing the big pop in baby and dorm and the collaborations that we brought and the new collaborations and building on Love Shack Fancy have been seeing tremendous consumer response.
Speaker Change: And in Williams-Sonoma, they have premium electric cookware newness and seasonal that's only found there, and we've seen great results in Sonoma from our exciting holiday lineup and the newness that we've brought in. So in terms of quantifying this,
Speaker Change: It's double-digit increases. It's across categories. It's a very competitive area, you know the numbers Although they may
Speaker Change: be indicative of how important it is to us. You know, it's more in the quality of the newness. So making sure that it's truly incremental newness and that we have reason to believe that it's going to work and not just getting over a shortage. And I think we're really balancing that well and it's going to be a key part of staying ahead and giving us pricing power to continually design our own products and bring them to market.
Speaker Change: Jeremy Brooks, Jeffrey Howie, Jeremy Brooks, Jeffrey Howie, Jeremy Brooks, Jeremy Brooks,
Speaker Change: It's really helpful. Thanks so much. And just a question on trade. Maybe you could update us on your approach there and how, you know, your business is continuing to make inroads. Looks like Trump's mid-single digits this quarter, category down seven. So, are you doing anything differently in terms of working?
Speaker Change: designers to to get their business and plans for the future. Thanks.
Speaker Change: Yeah, thanks, Jonathan. You know, our trade business did grow 4% in the quarter, and it's been up all year, and it's really a function of the outstanding performance that our retail teams have done engaging with the trade community. A lot of trade is the local interior designer that works with the designers within our stores, and we set out a goal early this year to really ask our store retail teams to re-engage with that interior designer community, and to their credit, our retail teams have taken that on, and they're doing a really good job, and that really explains the 4% increase in this quarter and why we're seeing that trade business pop a little bit.
Speaker Change: You know, I think it's important to note that while trade is a component of the B2B business, it's really the contract side of the business.
Speaker Change: that we are really excited about. And that had another outstanding quarter, growing 17% in Q3. And this accounts for about 36% of our overall volume in the quarter. And it's where we really have a competitive advantage in bringing the scale of our brand, the variety assortment, our supply chain, and really becoming a disruptor in that $80 billion business-to-business market, where we think we compete favorably and have a lot of opportunity to gain market share.
Thanks.
Speaker Change: And ladies and gentlemen, in order to take questions from as many individuals as possible, we ask that you please limit your questions to one. We'll take our next question from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Hello, everyone.
Speaker Change: Hi, good morning, everyone. I'm going to ask about full price selling. I don't know if this is quantifiable, if we should be asking, I don't think you'll tell us what the mix is, but is that run rate accelerating? And does it ever reach a ceiling? The business will have a certain amount of product that gets sold on some type of clearance, I suppose. And is that run rate accelerating? And how much more ceiling do we have to go? Thank you.
Speaker Change: I'll just start by saying we're absolutely committed to the stance of running the business without promotional pricing.
reduced the amount from last year.
Speaker Change: We have always said we'll take markdowns. We do take markdowns. And so, of course, in a better sales environment, you'd have less markdowns. You might actually have scarcity. So you could see that happen over time where we're actually chasing goods and there are less clearance goods. We are definitely seeing improvements in our regular price comps, which is great. And our clearance inventory is in great shape too. As Jeff said, inventory is pretty clean. And we like that. That does mean that there's less clearance.
Speaker Change: failed, and I will just point out that in Q3, you know, there's some brands that had more promotional comp roll-off than others, like Potter Barn had more to cut than we would have liked. And, you know, we made the decision, as we've said before, and
Speaker Change: We've said we're going to always choose to go after the operating earnings and to not go up and down pricing. And so, you know, I do expect that because we've reduced this kind of behavior,
Speaker Change: substantially, the go forward is going to be a lot cleaner and easier to understand for all of us.
Speaker Change: Our next question will come from the line of Max Recklenko with TD Cowen. Please go ahead.
Max Recklenko: Great, thanks a lot. Laura, in the past I think that you've noted that your regular price business was outcomping your discounted or promoted business. I'm curious, did that occur this quarter once again? And why do you think this phenomenon is occurring and just the key learnings from that? Thanks a lot.
Laura Alber: Yes, sure. Yes, that's true. Regice is outperforming because we're reducing the promotional substantially. And as much as we reduced it last year to the year before, we have continued to reduce it.
Laura Alber: and so as I said it's good for margins it's actually good for the customer because we don't have them having to wait they can trust us on a pricing integrity.
Speaker Change: Our next question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead.
Speaker Change: Hey, thanks very much. You know, if we if we double click here on your cost of goods sold line in the third quarter, you're roughly 42%, which is, you know, about 1000 basis points better than where you were in the third quarter of 2019. I'm curious if it's possible to sort of unpack how much of that you see as structural. In other words, as we start to see the top line improve, which I think you all hope next year, how much of that can be sticky? Thanks.
and Jeremy Brooks. Thanks for joining us. I'm Jeremy Brooks.
Speaker Change: Chuck, we think a lot of it, you know, can be sticky. We're pretty confident in our operating margin. And I think it goes back to the five drivers I talk about and what's really happening within gross margin. You know, e-commerce, sales mix,
Really.
Speaker Change: at 66% is sustaining. I think everyone knows that we have a substantially higher operating margin and less occupancy expense in our e-commerce business.
Speaker Change: The Retail Optimization Strategy, our second big driver, is also kicking in. Again, elevating the profitability of our retail chain. It also comes with less occupancy.
Speaker Change: A big part of the improvement since 2019 has been our pricing power. That accounts for about 390 of the basis points of that, about 1,000. And that comes from our merchandise margin team, the benefit of our focus on full-price selling, and the strength of our in-house design for prior trade products.
Speaker Change: that obviously, given our results compared to the competition, are resonating with consumers.
Speaker Change: And the last is the supply chain efficiencies. You've heard Laura and I talk about how all of our metrics, our KPIs that we look at, are performing better than pre-pandemic.
Speaker Change: levels. And here, this is our own internal version of the four-minute mile. If you're not familiar with that story, there's
Speaker Change: For years, it was thought that human beings couldn't run a four-minute mile. It was even said, there's no way that can happen. And as soon as one person was able to break it, everyone was able to run a four-minute mile. Well, that's the same thing for us. For years, we thought that the KPIs had to run at a certain level, and that's just the way our business ran.
Speaker Change: and post-pandemic, as we try to get back to those, we have a simple question of why are those metrics at those levels?
Speaker Change: and to our supply chain team's credit, they said, well, we think we can do better. Laura and I said, yeah, let's see you do that. And not only did they achieve those levels, but as soon as they broke through those levels, they said, you know what? There's actually even more here.
Speaker Change: So this is an ongoing opportunity for us, and we think, you know, we're excited about what that can bring. I think the key point here is since 2019, we've transformed our profitability and can sustain these operating margins at a higher level.
Speaker Change: Our next question will come from the line of Brian Nagel with Oppenheimer. Please go ahead.
Hi, good morning.
Thanks for taking my question.
Speaker Change: I want to go back to a couple of the prior questions just with regard to sales.
Speaker Change: So look, you've done a phenomenal job managing the business through what has been a difficult demand environment, now for several quarters.
Speaker Change: Your comps are down 2.9 in Q3, this versus down 3.3 in Q2, so I mean slightly better there, but on any stack basis, you know, it seems like the business actually decelerated. So I guess my question will be twofold. One, am I looking at the data correctly?
Speaker Change: What's the offset to those, what's keeping, if you're starting to see these better sales trends as you articulate, what's the offset keeping sales weak?
Speaker Change: Well, I should say that, you know, we're, we're not copying the promise is the 1st answer and that definitely.
Speaker Change: gave us some sales that you could pull forward, call them what you will, but lower quality sales. And then secondly, furniture is still relatively weak.
Speaker Change: Right, so as much as we're talking about improvements in furniture and we have some categories that are positive, furniture has been weak.
Speaker Change: and so you know this is the opportunity. We've been focused on the areas we knew would be stronger which are life-stage pieces of our business and holiday decorating but can you imagine what happens when the furniture picks up?
Speaker Change: and we've used the word coil spring about our platform. We have said that when this picks up.
Speaker Change: You know, we've been doing, we've been focused on operating margin with a down sales environment. But can you imagine the kind of operating margin improvements we could have if sales pick up, even if there are some negatives next year, even if tariffs cost us something, even if there's other cost increases, there should be sales leverage on that operating margin.
Thank you for watching.
Speaker Change: Our final question will come from the line of Oliver Wintermantle with Evercore. Please go ahead.
Speaker Change: Thanks very much. Maybe just to that point, Laura, your sales leverage, what kind of comp do you need to see to get some sales leverage on SG&A? And with your cost taken out over the last few years, how would that compare to pre-pandemic? Thank you.
Laura Alber: Yeah I mean it's not a linear relationship there's not like a box that one number goes in the other number comes out because there's a lot of choices.
Laura Alber: And you can't predict all the variables. You've seen it's like a game of life, where next thing you know, you've got something new you have to deal with that you didn't expect and that you have to invest in. And with growth, there's always different opportunities. You can be more competitive on ad cost.
Laura Alber: So, you know, we have a lot of brands here in different stages. Not all brands have the same operating margin. We may decide to, you know, push a few of our smaller brands heavier. And the most important thing of all, I'd say, is being competitive for our consumers.
Laura Alber: We want to give them the best quality, the best designs, at the best value. And we think we sit at the sweet spot of the industry with what we're doing, which is why I think we have better results.
Laura Alber: because they love our product. I mean, there's all these things that we talk about on these calls, but at the end of the day, the customer votes, right? And they vote based on what they see and what the price is.
Laura Alber: and we've built this loyalty over years that that makes them come back. They trust us to shop online on big ticket. A lot of people can't get them to do that but because they see our stores in their mind's eye and they can sit on the stuff up they will pull the trigger and buy it online.
Laura Alber: and that is something that not a lot of people can say because of our channel excellence and our customer service we have built up so much goodwill with our customers that's been so important to driving our results even in a tough environment.
Speaker Change: I will now turn the call back over to Laura Alber for closing remarks.
Laura Alber: Okay, well, thank you. Thank you all again for joining our call this morning. And all of us here at Williams-Sonoma wish you a very enjoyable holiday season. And of course, as I like to say, please go into our stores and happy shopping. We'll talk again in March, thank you.
Speaker Change: That will conclude today's call. Thank you all for joining. You may now disconnect.
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