Q2 2019 Earnings Call
Please standby.
Welcome to the Williams Sonoma Inc. second quarter 2019 earnings conference call. At this time all participants are in a listen only mode. We will conduct a question and answer session. After the presentation. This call is being recorded I would now like to turn the call over to lease Wang Vice President of Investor Relations to discuss non-GAAP financial measures and forward looking statements. Please go ahead.
Thank you.
This call should be considered in conjunction with the press release that we issued earlier today.
Unless indicated otherwise.
Hey, good result.
Based on certain non-GAAP measures.
A reconciliation of the non-GAAP financial measures the most directly comparable GAAP financial measures announced a nation of why the non-GAAP financial measures may be useful.
Discussed in exhibit one of our press.
This call [laughter] painful statements.
The Securities Litigation Reform Act of 99.
[noise], which address the financial condition results of operations business initiatives trends guidance growth plans and prospects for the company in 2019 and beyond.
And are subject to risks and uncertainties that could cause actual results to differ materially from such forward looking thing.
Please refer to the company's current press release, and SEC filings, including the most recent 10-K for more information on these risks and uncertainties.
The company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise.
After the date of this call.
I will now turn the conference call over to Laura out President and Chief Executive Officer. Thank you leave.
Good afternoon, everyone on the call with me today are Julie Whalen, our Chief Financial Officer, Phil Its car Billeadeau, our chief marketing officer, and Yasir onto our Chief Technology Officer.
We continued to deliver very strong results.
In the second quarter comp revenue growth accelerated to 6.5% operating margin expanded 10 basis points and EPS grew double digits for the sixth consecutive quarter.
The growth strategy that we outlined at the beginning of the year, it's driving results and giving us the competitive advantage to continue to outperform.
West Elm, our biggest growth opportunity continues to accelerate the pottery barn brand to return to strength and our cross brand initiatives such as the key and business to business are becoming more impactful levers of growth.
We're also improving the customer experience through innovation and experimentation and we are seeing the results of this work fuel brand level performance across our portfolio.
In addition, our data driven performance marketing is producing outsized returns on our digital media investments.
Our performance year to date demonstrates that our initiatives are successfully driving consistent profitable growth across the business and we are confident that we will build on our market share gains in the second half and longer term.
As a result, we are raising our full year guidance for net revenues comp revenue growth and EPS.
I would now like to discuss in more detail the underlying drivers of our second quarter performance across our brands starting with the first pillar of our growth strategy and our biggest growth opportunity westell.
West Elm had an outstanding quarter with comp growth accelerating to 17.5% on top of 9.5% last year.
The brand is hyper focused on delivering on the promise of helping our customers elevate their everyday combining industry, leading design values and the quality that comes from our vertically integrated model.
In Q2, our west Elm results were driven by strong execution across all of our key growth strategies accentuating, our designs and values leadership expansion into product white space.
Enhanced strategies to drive new customer acquisition and growth across all channels, including B to B.
New product introductions and line extensions with differentiated design and value attributes drove our product performance. This quarter, while continued growth across both higher and lower price point categories points. This strength in new and retained customers.
Also worth highlighting is a notable acceleration in our ecommerce growth.
Furthermore, our new West Elm stores continue to perform above expectations, delivering incremental topline and bottom line growth.
Overall, the market continues to respond to west Elms unique offering of industry, leading design function and value reinforcing our potential to capture significantly more share domestically and abroad.
We are executing on an aggressive growth strategy and are well on track to doubling the brand's revenue.
The pottery barn brands also had a strong quarter with comp growth accelerating to 4.2% and 3.7% for pottery barn, and pottery barn kids and teen respectively.
In pottery barn growth continued to be led by furniture will strengthen our proprietary upholstery business driven by our talented in home design teams and the service culture in our stores.
Our digital experience is also improved materially through an increased focus on inspiration and friction free shopping which are driving more traffic and product engagement.
As we outlined a couple of years ago, we've been executing on an aggressive plan to reposition pottery barn for growth.
We've diversified our product offering with more statics and scale, including the launch of our successful new businesses pottery barn apartment and marketplace, both of which are driving new customer acquisition and brand reconsideration.
We have also improved our value equation across all product categories transformed our digital experience with more content and functionality and optimize our retail experience through remodels and value added in home services.
We are pleased to see all of these initiatives, taking hold and positioning the brand for strong long term growth.
The pottery barn kids and teen brands delivered their highest two year comp in four years.
Our baby business continues to be an important growth initiatives, where we are fueling growth and customer acquisition with our market, leading offering of Greenguard gold certified furniture.
And organic textiles.
In the quarter, we saw significant growth across our back to school offering, namely backpacks eco friendly food storage and dorm furnishings, and we made strides with our mobile friendly digital shopping experience and in store services during the peak shopping periods.
We continue to see strength in the foundational furniture category, where we pride ourselves in marrying unique design with a highest safety standards and quality that lasts.
Across our children's brands, we are committed to creating products that are good for kids and good for the planet, we are making substantial progress against our sustainability goals, which we believe is an important differentiator in the children's home furnishings market.
Our emerging brands rejuvenation, and Mark and Graham drove another quarter of solid profitable growth and in our global business. We saw continued strength, particularly in our franchise operations. In addition to our entry into India. Early next year. We are looking forward to expanding our wholesale network in both New Zealand and Ireland in the second half of this year.
I'd now like to discuss.
And the Williams Sonoma brand, while we are disappointed with the negative 1.1 comp. This quarter. We did have a positive comp in our full price business and new introductions were solid.
However, they werent strong enough to overcome the clearance volume Mrs and tabletop and the very successful launch of instant pot last year.
Instant part continues to be a high volume product and we are building around it with exclusive food and complimentary assortments.
Areas of strength in the quarter included savory food as well as our Williams Sonoma branded cookware and Bakeware. We also continued momentum in our Williams Sonoma home business, despite pulling back on promotions.
Now, let me spend a moment on the leadership transition that we announced in early July as most of you already know Ryan Ross has been appointed President of Williams Sonoma.
Over the past month, Ryan the team and myself have identified some media opportunities for improvement.
Our priority remains balancing the brands long term growth with improved profitability.
We will aggressively execute on our transformation plan, which includes delivering innovation and relevancy to the customer along with the expansion of our proprietary private label business.
We will also reduced promotional activity and rationalized skus to drive margin improvements.
We see opportunity in our digital business, and our marketing and content strategy.
And we will continue to improve our technology roadmap and assortment opportunities.
At retail we are reducing unprofitable stores, leveraging our high impact Remodels and building on our in store experience together these initiatives will drive meaningful improvements in the business over time.
Another key driver of our accelerated growth is the focus on our portfolio of brands.
Our cross brand loyalty program. The key continues to be an impactful driver of customer engagement and revenue growth.
We added another million key members over the last three months, bringing total membership to $6.4 million, even more encouraging is that approximately 70% of sales from these key members come from multi brand shoppers, which demonstrates the effectiveness of the program and driving cross brand sales.
To further improve the key member experience, we replatformed, our mobile wallet capabilities. This quarter, which now include a digital reward card and personalized mobile notifications regarding promotions and reward expirations.
Another important driver of customer loyalty is our branded credit card programs.
Our credit card holders are currently amongst our most valuable customers spending on average five times more than non royalty customers.
We are improving the user experience with more advanced digital capabilities, such as in reward redemption and Pos access and we are in the process of expanding on our existing programs to drive more customer engagement and cross brand spending.
Our cross brand Williams, Sonoma Inc. business to business Division delivered double digit growth this quarter and our strategies continue to gain traction.
We are executing aggressively on two priorities first putting in place the cross brand cross functional infrastructure to support the growth and second expanding our large scale project pipeline with more strategic partnerships across industry verticals.
Our newly formed cross functional team is prioritizing the development of scalable processes and a real robust roadmap of technology enhancements to best serve the needs of the business to business customer.
To drive more strategic selling we are adding more experienced talent to our sales team and expanding our contract grade product offering across brands.
We're also making strong progress in our discussions with a number of fortune 500 companies, which continues to reinforce our competitive edge in the business to business market and delivering high quality sustainable products that are customizable to individual client needs.
Also this quarter, we made substantial progress on our ongoing efforts to improve the customer experience from order to delivery.
We have significantly fast track our tech experimentation agenda with the launch of over 80, new capabilities over the last six months across each of our brands to deliver more engaging content rich customer experiences.
So far over 30% of these tests, which span across product recommendation merchandising in search have already generated notable improvements in revenue per visitor.
We are in the process of scaling them across brands.
This test and learn results driven approach allows us to bring innovation to market speed and is yet. Another example of our continued evolution into an agile technology rich retail organization.
And the supply chain highlights. This quarter include the launch of our SMS furniture delivery scheduling, which give customers. The option is scheduled for delivery on their mobile devices.
We expect this functionality to improve our self service scheduling participation rate.
From 50% to 75%.
And create a more convenient in home delivery service for our customers.
Also in furniture were pleased to see the favorable trend in our in home delivery service rating continue in Q2, and we reached another historical high of 4.88 stars out of five.
Following the first quarter launch of our string of pearls order tracking capability, which gives our customers and associates unparalleled visibility into their orders at up to 13 milestones. We have added further enhancements such as email and SMS notifications.
That have driven over a 20% reduction in order tracking related customer calls.
Another milestone in Q2 was the opening of our West Elm West Coast, DC and Santana, California, We expect the DC to be fully operational in September facilitating faster delivery times to our customers and the west coast and reducing our operating cost in the region.
Our in House manufacturing Operation Sutter Street continues also to be a strategic advantage.
Shipments included.
Including from our newly established Tupelo facility were up 30% year over year as we continued to drive operational improvements to enable more domestic production, which helps to mitigate the impact of the China tariffs.
As Weve said throughout the year, we start executing on our tariff mitigation strategy earlier than most and as evidenced by our results. This quarter, we were able to cover the financial impact of lift three tariffs.
Julie will discuss the tariffs in more detail shortly but before I turn the call over to her I'd like to provide an update on our very important CSR initiatives.
As all of you know we are a values driven company and is our priority to make a positive impact on the world through the way that we do business.
Across our brands, we are rapidly closing in on our 100% to stone sustainably sourced cotton goal as well as achieving more greenguard certification in furniture as our customers increasingly demand products that are certified as safe and non toxic.
We're also pleased to be recognized as a leader in landfill diversion, having been ordered a reprieve champion of sustainability for diverting Ptwenty 5 million plastic bottles from waste streams.
Our deep commitment to workplace diversity was also recognized this quarter as we were named one of Forbes best employers for women.
Our focus on worker wellbeing also extend far into our supply chain, where we are proud to be the first home furnishings retailer to make a commitment to fair trade.
In October we will be celebrating the fifth year anniversary of our partnership and creating safe and healthy working conditions for those who manufacture our products.
Each of these achievements adds the reasons why customers choose us over our competitors and why we are focused on amplifying our CSR efforts more broadly across our brands and through the publication of our annual CSR report in fall of this year.
As we look to the back half of the year, we are confident that our product and digital strategies, coupled with the strength of our brands and cross brand initiatives will enable enable us to continue to outperform.
I want to thank our team for their strong execution and relentless commitment to serving our customers and with that I will turn the call over to Julie for a financial review of the second quarter and a more detailed update to our fiscal year 2019 guidance. Thank you Laura and good afternoon, everyone. Our second quarter results reflect the continued acceleration we are seeing in our business and our ability to drive both topline and bottom line outperformance executing upon our roadmap for growth and our operational initiatives has resulted in strong revenue growth, which along with the ongoing success, we're seeing with our cost savings initiatives drove another quarter of operating margin expansion double digit EPS growth and is fueling our confidence in our outlook for the rest of 2019 and beyond.
During the second quarter, we generated net revenues of $1.371 billion for a year over year increase of 7.5%.
Comparable brand revenue growth accelerated 300 basis points from the first quarter to 6.5% on top of 4.6% last year.
This growth was led by another quarter of outperformance from West Elm with a comp growth of 17.5% strong acceleration across our party barn brands, including pottery barn at a 4.2% comp.
Solid growth from our emerging brands, rejuvenation, and Mark and Graham and another quarter of almost 9% growth from our international operations.
Gross margin for the second quarter was 35.4% versus 36.5% last year gross margin was impacted by higher shipping costs, which were primarily driven by a larger mix of furniture sales the incremental impact of the implementation of a list three China tariffs as well as a growing share of our business coming from franchise and trade, which is dilutive to the gross margin, but accretive to the operating margin.
This was partially offset by another quarter of occupancy leverage of approximately 50 basis points, which resulted from our ongoing retail optimization initiatives and the corresponding benefits, we see from reduced rent and other occupancy related costs.
Occupancy cost increased 3.5% or 6 million to $176.8 million compared to $170.8 million last year, primarily reflecting the timing of depreciation and other occupancy related costs as well as the rent associated with our new West Elm West Coast DC.
SGN aid for the second quarter was 28.5% this year versus 29.7% last year, the 120 basis point leverage across employment advertising and general expenses was driven by leverage from higher sales and the continued benefits of our cost savings initiatives across the business as well as our overall expense discipline SGN expense increased 3.2% or $12 million year over year to $390.7 million, primarily resulting from higher variable cost to support the topline results, including higher labor and digital advertising and credit card fees as well as an overall increase in performance based incentive compensation, resulting from our year to date outperformance.
We were pleased to see that despite this increase in SGN expense, we were able to generate record level SGN a leverage.
This resulted in operating income growth of 8.9% over last year to $94 million and operating margin expansion of 10 basis points to 6.9%.
The effective income tax rate during the second quarter of 24% was relatively in line with last year's rate of 24.5%.
And this resulted in bottom line diluted earnings per share of 87 cents, which was 10 cents or 13% higher than last year.
On the balance sheet, we ended the quarter with a cash balance of $120 million versus $175 million last year. During the second quarter, we maintained our balanced capital allocation approach by investing $41 million in the business and returning nearly 77 million to stockholders through dividends and share repurchases, comprising approximately 39 million in dividends and $38 million in share repurchases.
Moving down the balance sheet merchandise inventories were 1.188 billion or an increase of 8% over last year, which includes the pull forward of inventory receipts associated with the list for China tariffs.
As we discussed last quarter, we have strategically plan to expedite these receipts to help mitigate the corresponding tariff impact and therefore, we had expected our inventory levels to be higher.
We are continuing to pull forward as much inventory as possible this quarter, which appears to be a good idea in light of the most recent tariff announcement.
Remaining inventory growth was primarily driven by west down one of our biggest growth initiatives and pottery barn, where customer demand continues to shift to more drop ship and custom made product versus stock inventory.
Operationally, our inventory initiatives continue to drive significant improvements across all brands with Backorders currently down more than 20% to last year and backwater create rates at all time lows driving further cost efficiencies and an improved customer experience.
Now I would like to discuss our fiscal year 2019 guidance.
Given our outperformance year to date and our growing confidence in the substantial growth engines that we are executing against we are raising our fiscal 2019 full year guidance for the second time this year.
This revised guidance includes raising our net revenues and our comparable brand revenue growth as well as our EPS and reflects the financial impact of all confirmed China tariffs, including list for tariffs and the recent increase to lift three tariffs both of which were not contemplated in our previous guidance.
As we outlined last year, we are executing on an aggressive tariff mitigation plan, which includes cost reductions from vendors moving production out of China cost savings in other areas of the business as well as selective price increases.
We now expect net revenues to grow to a range of $5 billion $740 million to $5 billion $900 million, an increase of approximately $60 million to $70 million from our previous guidance range, we expect comp growth to be in the range of 3% to 6% compared to our previous range of 2% to 5%.
And we're also raising our diluted earnings per share by five cents on both the low and high end of the range to $4.60 to $4.80.
We are reiterating our commitment to maintain a balanced capital allocation strategy by utilizing our strong operating cash flow to first invest $200 million to $220 million in the business in those areas that will fuel our growth and provide the highest returns and returning excess cash to our stockholders in the form of share repurchases and dividend payments.
In closing given the success, we are seeing from our growth and operational initiatives and the momentum we continue to see in our business combined with our market differentiators, including a multichannel shopping platform with an industry, leading ecommerce penetration our portfolio of strong brands of server range of demographics and aesthetics.
A vertically integrated supply chain from design to manufacturing to in home delivery and a winning culture distinguished by our unwavering focus on the customer our deep commitment to quality and sustainability of performance driven mindset and an emphasis on strong financial discipline. We remain very confident that we are in a strong position to continue to take market share and to drive sustainable long term shareholder returns.
I would now like to open up the call for questions. Thank you.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to Arsenal Troy equipment again press star one to ask a question.
And we'll take our first question and Dave from Kate Mcshane with Goldman Sachs.
Hi, Thanks. Good afternoon. Thanks for taking my question I wanted to follow up on some of the terrorists commentary if thats okay.
Julie I wondered if you could quantify how much you did impact gross margins in the second quarter and I think originally you had said 15% of your costs are exposed to list one through three but that it was coming down I wondered if you had an updated number in terms of what that represented today and how we should think about Q4 and how much that represents in Cogs sure Hi, Kate.
Thanks for the question as far as the quantification of how much was the tariff piece of the gross margin I put it in order we havent quantified. The exact are provided the exact basis point amount, but it's in order. So we started with a higher shipping costs and men said that it was the tariff impact.
What we have said about the total.
Impact.
Is that we are taking the amount that we're producing out of China and taking it down to half next year.
We have not disclosed the total dollar impact of what this means to us, but obviously, it's material and obviously continues to be a moving target.
But given the strength of our underlying business and our proactive mitigation strategies that are clearly working.
And the fact that we were able to cover that cost within the PML in the second quarter, obviously still have op margin expansion and the fact that we've now covered it within our future guidance.
Gives a lot of confidence in our ability to do that and so as we've said before the fact that we have been executing on this tariff mitigation strategy and continuing to move product out of China accelerating tariff related receipts driving incremental cost renegotiations implementing select price increases in all of the material cost reductions that we're seeing with the S. gionee at 120 basis points of leverage we feel very confident in our ability to cover the impact of these going forward.
Okay, great and if I could just follow up.
With one question on.
Prices I think you mentioned too that you did raise prices slightly because of the impact from tariff I just wondered in your guidance for the rest of the year how much your comp contemplating with regards to unit degradation as you've had to increase in price.
Sure Kate's Laura.
When it comes to price increases every brand every category every product is different.
And what's reflected in our guidance is based on the extensive testing we've been doing on pricing elasticity with our customers and also the cost savings we've identified in the piano.
And of course, we are doing everything else, we can to protect our customers and not raise prices, including us duly went through resourcing and renegotiating cost with our vendors and finding cost opportunities in other areas of the business because as you know our focus remains on providing the best value to our customer and we're always testing are always refining our pricing strategy.
And the good news is that we've been able to take select price increases because our value.
Is so strong and we've also as Julie said move products out we've renegotiated with our current vendors.
And we are also adding more value oriented collections across the brands, which are going to allow us to continue to offer our customers top quality the best value.
Thank you.
Thank you.
Next we'll hear from Michael Lasser with Qbs.
Good evening. Thanks, a lot for taking my question. So last week, you probably had a plan in place.
And that was going to influence what your guidance for the full year is an Friday the new tariff. We're now so what changed within your plan from last week prior to the announcement of the new tariff to today.
Thanks for the question. This is Julie our guidance would have been higher is the short answer to that so clearly given the news that we got on Friday afternoon. It made us.
Rethink about our guidance and the fact that we are committed to absorbing the list for tariffs analysts three tariffs going from 25% to 30% now lists for going to 15%.
That made us rethink our guidance, but for those tariffs that would have been much higher.
And I would say.
You know this.
Were you know as much as there is a lot of macro uncertainty and that we're well aware of.
What's going on in the World, we're not seeing any weakness.
With our customer with our brands, we're seeing very strong metrics across the board from traffic.
To the web sites new customer accounts.
And really strong reaction to our introductions in our big bets. So we don't want to be overly conservative either.
We're we're seeing really strong results and we're very optimistic about the balance of the year and let's hope that we get to a trade agreement that is a benefit and end more upside.
And then my follow up question is if you look within the pottery barn business, how much of the 4.2% comp is being driven by new product launches in some of the new concepts and how much is just.
Business that had been placed in place for.
A long time, I'd say that the the big Unifire in all the growth is.
Furniture.
Both new and core what's great about furniture is that once you find something that's working it has a longer life than you do in fashion apparel Raven in textiles as really it shows you that you have the same opportunity for quarters to come because you can build on the collections and oftentimes no. We'll bring in one piece of a collection and test new finish and then we bring in the whole suite. So that is a really good indicator of future business and then we maximize it.
By adding to the collections.
Thank you very much.
Thank you.
Next we'll hear from Simeon Gutman with Morgan Stanley .
Hi, This is Josh Kim on for Simeon Gutman.
Can you talk about the relationship between top line growth and maybe the inventory you bought ahead of time in the quarter like how much of the comp growth was tied to inventory purchases. You made ahead of tariffs and did you find yourself needing to maybe promote a little bit more than usual to sell through some of that was the merge margin on those sales pretty healthy.
No. So first of all the inventory that we're talking about pulling forward is ahead of the list for tariffs and so those would have been items that we sold in future quarters. So there was no need to take inventory that we pull forward and sell through at quicker in fact from a gross margin perspective, if you back out a lot of the.
Fairly so a lot of big noise, but if you back out the noise associated with the shipping costs in the China tariffs and the higher franchise and trade volume that I went through in the prepared remarks, our merch margins were actually slightly up so just to be clear. The gross margin decline has nothing to do with the fact that we had to get through a bunch of inventory, we feel the health of our inventories pretty good if you look at it from an 8% growth perspective, our topline growth grew 7.5. So it's in theory 50 basis points above, but if you factor in the impact from the tariffs absolutely and then the impact from the chairs. We pulled forward is actually below our revenue growth. So that was not a driver all of our gross margin results all right Thats very helpful. Thank you and then just as a quick follow up can you talk about future trajectory of outweighed, how you expect the top and bottom line growth to evolve in that segment and so on if it's still going to be consolidated into your financials next year.
And if so it's been kind of run rating at or maybe 25 cents EPS headwind for the full year is that how we should think about modeling it next year.
Obviously, we're not providing guidance for next year, but as far as what our plans are for the non-GAAP .
Side of it we will be rolling through the operational piece of it you have to remember that within that non-GAAP number. However is also the amortization of the acquisition costs not the sizable piece of it. So I don't think you can take the run rate of what you're seeing from a non-GAAP perspective, and assume thats going to roll through from that perspective, because the amortization of the acquisition costs will continue for tumor years, it's the operational piece that will come through.
Great Thanks, and thanks.
Thank you.
Our next question comes from Chuck Grom with Gordon Haskett.
Hi, Good afternoon. This is actually John Park on for Chuck.
I guess I'm hearing that has gone I guess, given the Twoq gross margin performance understanding that compares do get a little bit easier how should kind of think about gross margins here for the balance of the year.
Well as we've said before I mean, certainly we don't give per se guidance on gross margin, but as we've said before we do expect there to be continued pressure as we move throughout the year, particularly associated with the tariffs now obviously it depends on the mix of the products that we sold which ones are still in China, which ones have the relative negotiation, we had with those particular vendors.
And so you'll see some pressure from that and certainly directionally with the fact that we've got a full quarter.
The lids three tariffs at 25% moving to 30 and then the list for layered in however at the same time, what you will continue to see his incredible occupancy leverage we've had one of the lowest occupancy rates Weve had as we continue to optimize our occupancy costs and as we committed to we may have some geography play where you have pressure on gross margin, but we're making up for it within ESG Eni and you saw again that we have a second quarter ROE of some of the best SGN a leverage we've ever had and so we're committed to doing that going forward.
Got it great and then I guess, just how does the Argus calendar shift impact sales in Twoq you in any way to parse out the headwind here in the back half of the year.
It wasn't material, but it was a slight piece of the noncomp called 70 basis points. It wasn't material piece of it in Q3, we don't expect it to be even as much as that in Q4, obviously it will be a drag because that is the quarter, where we had a 50 threerd week and so you can do the math on that from a to some degree on the $85 million that week, we committed to our told you. It was worth last year you can do the math on it for the fourth quarter on the year, the 85 nights, where the 160 basis points.
Got it all right great. Thank you.
Next we'll hear from Jonathan Minsky with Jefferies.
Yes, thanks for taking my questions I guess just to start off for West Elm, you mentioned expanding into product White space could you just elaborate on a few examples of new categories that could be contributing to some of that visible acceleration. We saw this quarter that cancer sure great question.
We've expanded into the bathroom area again, we had been in that business priest previously and we gotten out and in fact, we've really had great response in all channels to our Bath assortment and we've just begun on that we also continue to see opportunity to build on our children's business with the West Elm PPK collaboration which is interestingly enough driving almost equal amounts of volume both in west Elm and TV Kay and again.
Very.
Just the beginning innings of that work.
And then the other area older children dorm business very.
Important business and one that there is no one person really leading we've had great results this quarter in pottery barn teen in our dorm business, but we also see opportunity because the store base of west Elm to even better service that customer.
That is near West Elm store. So those are some of the areas that were building on I would say that the other thing that's happening with west Elm is that we continue to see it really work in different parts of the world and different suburban and urban areas and so diversity of scale and aesthetic becomes very important and while the west Elm look is pretty.
You know pretty original and people know when it's west Elm. The truth is there is a lot of varieties within that in different ways feed a fresher home with a brand and as we expand on that we're getting more customers, which is really exciting.
And the thing also through number is that although it's doing this well we think the runway is so much greater because.
The market awareness is so low still so.
As we look at market awareness. It only 20 now and you think about that versus a mature brand you can do the math on why we we are certain that this brand is very large.
Yes, that's helpful and.
Leads into my next question I guess I know that the partnership with rent the runway is still very early but.
Any comments there in terms of what Youve been learning.
From that partnership and.
Whether you'd be open to pursuing other alternative distribution channels for for that brand or or other brands. Thank you.
Thanks.
It's really too early to comment I'd say that there's been tremendous customer interest and in that and we've had some great events with them and lot more to come and we're open to trying new things and being where the customer wants us to be in the sustainability is really important to us and so.
Sometimes people don't want to buy things forever. They are moving often we're going to be their service.
Thank you.
Thank you.
Next we'll hear from Oliver Wintermantel with Evercore ISI.
Hi, Good evening, guys, Julie Julie it's a a follow up question for would you describe that on your gross margin and as she and they leverage so looking at the first half we had a we had leverage in operating margins and you said Theres continued pressure on gross margin, but leverage when I asked you name it.
Looking at your full year guidance it looks like it's flat year over year. So should we expect and margins to be down in the second half and is that more driven by you know more de leverage from gross margins or less leverage so unless you know.
[laughter] I think on the year, we guided to essentially flat to last year, which could be higher I mean, we're in we're saying relatively in line with last year. So I wouldn't necessarily guide your op margin to be below last year, you will see pressure as I said earlier on the gross margin and that should be offset with SGN AG and so we're still committed to delivering op margins that are flat or higher to last year.
Okay got it thanks, and then to follow up on on a working capital that that seems to be a a bigger outflow. This year in the first half I'm on working capital Dan.
Last years of free cash flow was down in the first half <unk> can you help us with the flow through for the rest of the year, maybe on working capital of free cash flow.
Yeah, that's primarily associated with accounts payable on or to really get a timing I'm. We had elevated levels that you ran in comparison to prior year. So when you compare to the Q2 year to date and just I just started that and so it's all timing and so you should see that come back in the back half I wouldn't read anything more into it.
Great. Thanks, very much and good luck.
Thank you.
Next we'll hear from Bobby Griffin with Raymond James.
Good afternoon, everybody and congrats on a good revenue quarter.
Thank you.
First I just wanted to unpack a little bit more detail about the price increases when you look across your portfolio. Maybe just on average what is the ultimate price increase the consumer is seen from the terrorists is it mid single digits high single digits or low double digits anything to help us frame, what the consumer might be seeing.
It's not even close to that.
So like low single digits. When you translate all the impacts from lists one through three in and then would it maybe move a little bit higher with with less for you have to remember it's not every season, we're bringing a lot of newness and so it's not the same product necessarily and then also it's a different value equations as I said earlier, but it's not a material change in pricing.
It's one that we feel very comfortable with and the most important thing as I said earlier is to make sure that on an item by item basis.
The value equation is still better than anyone else, including when you add the shipping it and that's how we think about it.
So it's not to do any averages on this wouldn't be appropriate.
Okay, and then is it possible given that it's such a you know that it's not as meaningful with maybe some of US would have thought originally that they're really might not be that much unit or degradation or have you seen any change in unit volumes really at all.
You know it that's an interesting question, we haven't seen a material degradation now and units.
Selling based on the slight price increases.
Okay and then lastly for me is more just a a further out type question. When we look at the long run revenue targets of mid to high single digit revenue growth, how does new store growth start to play into that after you get through some of the closings here.
You know on the store as we have seen.
Very strong results from our new stores and are Relos I mean, the Relos and then really materially incremental and the west Elm stores have been better than plan as I said earlier and we still haven't even really started to openreach you stores not to say that that's our focus but retail is really the motor around our business and we are you know we are a direct to consumer company with a retail motor sway I want you to think about it and whenever we open a store we see awareness go up it gives them confidence in buying online and it's a it's a great ecosystem.
We're also you know really working with the lifestyle centers to open in these great new centers, where people can just park their car maybe go grocery shopping and then come into our stores and that's a really exciting new kind of real estate strategy for us as we think about the future.
All right perfect I appreciate all the detail best of luck in the second half.
Thank you so much I appreciate your question.
Brad Thomas with Keybanc capital markets has our next question.
Thanks, Good afternoon and.
Good quarter.
Thank you.
Wanted to ask about X gene a you know it's been very well controlled the last few quarters here and I guess as you all think about the business. The next few years.
Is this low single digit growth rate something that you think is sustainable on would be enough to to plants enough seeds to continue to drive the long term financial targets, you're outlining because it's really been some impressive control here. These last few quarters.
I mean, yes, obviously, we're not giving guidance for the out years on yesterday line, but certainly you know something that we are very focused on and weve demonstrated that weve been able to do and it's you know that they the good part is that it across multiple lines is not one particular line that we've been working toward so you know in particular this quarter last quarter Weve seen incredible leverage unemployment I'm, even though it's a sensitive subject we had the reduction in force in Q1 and not you know, it's really helped us and that'll continue to help us with the lower employment cost we've already lapped some of the higher hourly wages some of that will come back, but we block a big piece of the higher hourly wages that we needed to and so that's helping drive leverage as well and then from an advertising perspective, we're continuing to shift more advertising dollars away from catalog into digital advertising that is much more efficient and so we think that's an opportunity to continue to do that maybe Felix do you want to talk a little bit more about that yeah, I think as Julie said we.
We will continue to find higher performing marketing vehicles in our growth in our customer base is in line with the sales growth we reported for the quarter and I think you know, even though we're getting more efficient with our marketing spend what gives us confidence is that we began the year with a record high number of activism for the past two quarters, we continue to grow on top of that base.
Resulting in an all time high as we head into the back half of the year.
So we're very excited about the customer growth in the momentum it gives us.
So the next two quarters and for the years ahead.
That's very helpful and if I could ask a follow up on on the trends in Williams Sonoma that that business become seasonally more important when you get into the fourth quarter. I was hoping you could give us an early look on on maybe what you can do to try to drive positive comps in that brand in for Q.
Sure you know I. It I mean, we obviously recognize how important it is in Q4 and so we've been going through everything that we have in place to ensure that we have the big buys on the right stuff.
And I think you know a really important thing that will allow us to.
Even further differentiate us is to really return to more content messaging and more recipes and.
Experience in our stores, but also digitally into really take the next step in digital reinvention about how we you know really expand our our food education of our customers, which is the thing that the brands always been famous for and so we have some really nice launches coming up that where we're seeing some good early bites on and we are going to continue to reduce our promotional activity. We've done a good job reducing clearance in the stores. We're also going to continue to exit these stores that are not performing as well, which is a good thing to do and we have some closes at the end of the year that as we've talked about are coming up so that's going to give us even more leverage on the occupancy, but really the growth here is going to continue to be online and so we're going to continue to focus on the Pip the conversion content storytelling, our messaging to our customers and we believe that that is going to drive improved business not just long term, but in the back half.
Great. Thank you Laura.
Next we'll hear from Brian Nagel with Oppenheimer.
Hi, good afternoon.
Nice quarter.
Thank you.
So a question right now he's parked stride, you're continuing to tweak your store base. So is this is this occurs with these efforts occur any update on the sales recapture rate is you're shutting stores and presumably helping to drive hoping to drive those sales through other stores or your e-commerce effort.
You know there is some but it's not as much else I'd like it to be honestly, what it does is it helps make that neighboring store, even more profitable, but you're not picking up the whole thing and nor do we need to because in some cases those sales on is profitable anyway.
Okay, Okay that answers your question.
Yes, no I get it as easy I get it so yes, because I know in the in in the past other other retailers are talking about specific number but it sounds like it's not that's not really how are they kind of dependent. So for example, if you're in a store market, where the store is 15 minutes away you're going to get more pick up and if the store at 45 minutes away.
So we have models that tell us exactly on that store, how much we pick up and generally speaking we are doing better than those models, but it can be anywhere from 5% to 25% depending.
But it's certainly not in the 75 ranges I wish.
Got it.
And then second question a bigger picture.
You and others are talking about tariffs in the in the efforts you with your vendors to to mitigate the impacts in price.
Have you consider it as you think about the balance of this year what impact.
Again, it's obviously very fluid with tariffs or what impact is tear ups could have on the consumer broadly you had with your business being.
Discretionary nature could that be or some type of sale a bigger sales headwind.
I'm, not saying that I mean, the customer you know we're in the business of home.
And people its a biggest SASSA and they've shown us that it continues to be the thing they value. The most and home prices are still up we've seen the good numbers they've seen a consumer confidence numbers and we're continuing to take share from.
From really the mom and Pops, the retail people, who had all these little stores you know in our business, 50% comes from all the small players and 80% until industry is actually done at retail and so were one of those special disruptors who's going to be able to benefit from that disruption from retail to online and the advantage. We have actually it's funny. The advantage. We have is that where a gray online player. But we also have these retail stores to give the customer the confidence about the quality and allows them to go visit things you know somewhere near them.
So they can they can feel they can buy whole home full furniture. So we're actually I actually see the future as really in our favor.
As people shop, more and more online and we take share from all these mom and pop you know on the street people, who people are not shopping with as much anymore.
Thank you very much very helpful.
Great.
Next we'll hear from Marni Shapiro with retail tracker.
Hey, guys congrats on a great quarter. Thanks, Thank you give us.
Can you give us a little bit of an update on the international business you have some exposure in the UK and I know with Brexit things have been a little up and down there and then just in Australia.
And then could you also give us a little guidance about furniture is.
Going very well and has been for quite a while and you've talked quite a bit about moving furniture back to the U.S. and things like that can you just talk about where the company stands today as far as furniture production here versus China versus other countries in general.
Sure.
You know our total international business continued to show strength, our we see a lot of strength in Canada actually and a franchise business and our franchise business continues to accelerate in the same you know on a same store basis and that's despite a challenging business environment across the globe, but as you know we're going into one of the biggest markets were so excited to go into India and our UK business is solid our Australia business is probably the weakest honestly, but there were able to continue to reduce costs as we change our our operating model. There. So that is a good thing too and we are in general very optimistic.
About our ability to really grow in these international markets and do it profitably.
As it relates to furniture.
You know we are always looking for the best quality is the best place to make things and as we've said before that you know the shipping cost overseas on the upholstery.
Offsets the labor increase in America, and so you're able to we're able to move a lot here and we've been doing it for a long time. It also gives us the ability to do more made to order and where we've opened to another location in tupelo, and we're already more or less where anymore. [laughter]. So we're going to continue to grow it here carefully and we're making a beautiful products at great value for the customer and clearly through the sales. They recognize that we have not moved case goods.
Our case goods are in many places, but mostly Vietnam.
Now in China, and you know we have a lot of flexibility there weve double source and triple source many of our products in our case pieces, but that continues to be overseas with the exception of some rejuvenation.
When some home product that we make domestically.
And as you guys have moved stuff out of China to places like Vietnam and other countries have you been able to get the same kind of.
Efficiencies and product quality and shipping because China is a very mature manufacturing market and the others are fairly mature, but not quite to the same level are you finding that it's been a fairly seamless transition I mean, I'd say I don't want to make it sound to seamless because our teams have worked so hard [laughter]. It's one of the good fairly [laughter], but it's it's not pleasant I'd, rather be working on other things, but they have done a beautiful job and we're not having any you know quality degradation and we're not seeing any disruption in shipments the vendors are great they've been our partners and our team is amazing.
Fantastic Best of luck for the fall season. Thank you.
Well move onto Seth Basham with Wedbush Securities.
Thanks, a lot and good afternoon.
My question is a follow up Laura you mentioned that you haven't seen any material degradation, let's face it looks like price increases. Your question you got the tariffs in your guidance are you crying for any demand pressure in the second half and if so how.
Now let me understand your question a little bit more for somebody that was on muffled did you say Oh my planning for.
The man's degradation like any.
Yeah, any demand unit demand decline because of price increases in the second half in your guidance absolutely not [laughter] no.
Got it Okay. That's helpful. And then secondly, I started you want to say no no I just want to make sure I'm getting your question right.
Sure and then secondly, Julie there's of course, you've talked about trends in product margin you give some color on how it's part of product margin.
Decline this quarter and are confirming the outlook is for declines and brought a quite large in the back half the year.
Yeah, So what I, what I did say is that if you take out the impact from the higher shipping costs, and obviously, the China tariffs, which is relatively new especially going to 25% this quarter and the impact from the higher franchise and trade volume the pure merch margins the health of the business of what we're selling the product out. If you will is up slightly and that's a topic I qualified.
Okay and that contract how that compared to the first quarter of the year.
Oh, it's relatively similar and obviously it will ebb and flow as we move to the back half, but but certainly we're holding that level of merge margin, which makes us feel really great about our promotional strategy and the fact that it's working and we're being more thoughtful about how we're promoting products and being more relevant and personalized with our marketing strategy. So we feel good about it.
Great. Thank you so much.
Next we'll hear from Cristina Fernandez with Telsey Advisory group.
Hi, good afternoon, and congratulations on a good quarter. Thank you.
I have a big picture question, you have a lot of initiatives to drive the accelerated comp at west Elm and pottery barn, whether it's product marketing improvements to the website.
Do you work to rank these initiatives how would you feel about their contribution to the com.
The contribution to the comp you mean this quarter yeah. The exploration you're seeing this quarter. Yeah. I mean, we you can see the comps in PB and West Elm, where you know PV was even better than we expected West Elm was also better than we expected I would say the other thing that's embedded that you can't see that we can see is how material. This business to business or you know is to us and in fact, I'll say it out loud it drove almost a full comp point business to business this quarter and that's all incremental so you know it it's an accelerator. It makes me think about you know what how much more can we add in the future because we're still only sort of gathering were not hunting, yet where we're taking calls in and we're not ready yet to go get them and so can you imagine if we're if we're driving almost a full comp point now in business to business what that could be worth we said that you know we laid out the strategy in the beginning of the year when we talked about West Elm Cross brand initiatives Paderborn restore it to grow well.
Delivering on all of them and in some cases, there they're bigger than we thought so that's what gives us a lot of confidence.
In the future.
Beyond one quarter, but it really in the future.
And as it relates to the cost savings that you've been able to pull out of as she any how should we think about the incremental cost saving tools to offset the list for <unk> versus what you've done for like three like what are we got started <unk> are those coming from.
And we should expect them to continue quite quite frankly, all lines, but remember that it's not just an absolute increase from the from the fact, we're adding was three analysts for we're still proactively addressing those costs themselves. So whether it's again continuing with the resourcing of the product out of China are going back and getting being more aggressive with the negotiations I mean with the devaluation of the WAM certainly weve opened up the door again with our vendors to say hey, how about smart money. Please they've been great and they've been they've been great about it and so you know we're we're tacking attacking it from every angle and it's so it's not just enough today play that we need to do but I have absolute confidence in our ability to continue with our cost cutting initiatives and drive that for the back half were actually yes. The think of it. This way I mean, we've identified a lot of things and we have some cost savings that some things are just in the works that haven't yielded the cost savings yet and you may remember I think it was a quarter ago that we talked about this big bucket that we call indirect vendor savings, which are all the other non product vendors and we've actually pulled that.
All together, we have a team specifically dedicated to cutting cost renegotiating doing things differently to be an additional.
Offset to tariffs and so that does come in the form of S. DNA, but it's as real as a vendor savings.
That comes from products better.
Thank you and good luck in the second.
Thank you. Thank you.
Next we'll hear from Anthony Chukumba with loop capital markets.
Hi, good afternoon. Thanks for taking my question I'm, just I didn't know that the wire.
[laughter], Yeah, just under the wire.
But never right [laughter].
So I'll keep this quick given that its just under the wire I just wanted to talk a little bit about or delve a little bit more into it to west Elm and I know you talked little bit about <unk> about this in response to one of the earlier questions. But you just saw such a nice sequential comp acceleration there, including on a two year stack basis is actually a little bit better whats your spec basis.
I was just wondering if you could just talk a little bit more about what specifically is driving that I know you talked about you know the new product introductions are line extensions.
Commerce and sounds like B to B, but if if you speak just give us a little bit more color on that that would be great. Sure. I mean, you do have the list right. So thank you for recapping that but our art.
Our Q2 performance was strong across the board success in all of our key growth strategies, you know our design of values leadership is probably the most important thing about this brand.
It's very accessible to people and that's the design the product quality is great and we're one of the few people you can do the whole home I mean, it's not just a single chair this well price that you can find if you're hunting on you know site on the Internet. This is a full lifestyle brand.
As I said earlier, we expanded into new product white space like the Bath.
We enhanced our strategies, our digital strategy is to drive new customer acquisition, which is working.
And we had growth across all of our channels, new stores and including B to B.
But the really the biggest growth as the notable acceleration in our ecommerce performance, which continues to really Cline and feed on itself and that is not just because of all the things I've I've mentioned earlier, but because the technology advancements we are making on line and all the testing and experimentation we're doing across all of our brands to put the best experience online for our customers.
And so its bet a big priority this year to double down on west.
I give it more resources given more attention from all of US we have a great team in place and they are really executing.
Got it that's helpful.
Good luck on the back half of the year. Thank you.
That will conclude today's question and answer session I will now turn the conference over to Laura Alber CEO for any additional closing remarks. Thank you guys I really appreciate all the great questions today, and your support and I look forward to talking to you again soon.
Thank you that does conclude today's conference call. Thank you for your participation you may now disconnect.
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