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Williams-Sonoma, Inc. announces second quarter 2017 results

Net revenues grow 3.7% with comparable brand revenue growth of 2.8%
Diluted EPS of $0.61
Reiterates full-year guidance

8/23/17 1:15 PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NYSE:
WSM

SAN FRANCISCO--(BUSINESS WIRE)--Williams-Sonoma, Inc. (NYSE:WSM) today announced operating results for the second fiscal quarter ended July 30, 2017 (“Q2 17”) versus the second fiscal quarter ended July 31, 2016 (“Q2 16”).

2 nd QUARTER 2017 RESULTS

         

-

Q2 17 net revenues grew 3.7% to $1.202 billion versus $1.159 billion in Q2 16 with comparable brand revenue growth of 2.8%.
 

-

Q2 17 operating margin was 6.8% versus 7.2% in Q2 16.
 

-

Q2 17 diluted earnings per share (“EPS”) was $0.61 versus $0.58 in Q2 16.
 

-

Cash returned to stockholders totaled $89 million, comprising $55 million in stock repurchases and $34 million in dividends.
 

Laura Alber, President and Chief Executive Officer, commented: “Our second quarter results with accelerated revenue and comp growth of 3.7% and 2.8%, respectively, demonstrate that the investments and actions we have undertaken to deliver value, quality and excellent customer service are driving improved top-line performance. These results reflect the strength of our brands and our competitive advantages, as well as our relentless focus on our initiatives to drive innovation and operational excellence. And, we are aggressively building upon these initiatives to further differentiate ourselves and to drive profitable growth.”

Net revenues increased to $1.202 billion in Q2 17 from $1.159 billion in Q2 16.

Comparable brand revenue in Q2 17 increased 2.8% on top of 0.6% in Q2 16 as shown in the table below:

 

2 nd Quarter Comparable Brand Revenue Growth by Concept*

            Q2 17           Q2 16
Pottery Barn           1.2 %           (4.8 %)
Williams Sonoma 1.9 % 0.0 %
West Elm 10.1 % 15.8 %
Pottery Barn Kids (3.9 %) 0.1 %
PBteen           0.2 %           (5.2 %)
Total           2.8 %           0.6 %

* See the Company’s 10-K and 10-Q filings for the definition of comparable brand revenue.

E-commerce net revenues in Q2 17 increased 5.2% to $631 million from $600 million in Q2 16. E-commerce net revenues generated 52.5% of total company net revenues in Q2 17 and 51.7% of total company net revenues in Q2 16.

Retail net revenues in Q2 17 increased 2.1% to $571 million from $559 million in Q2 16.

Operating margin in Q2 17 was 6.8% compared to 7.2% in Q2 16:

          - Gross margin was 35.2% in Q2 17 versus 35.4% in Q2 16.
 
- Selling, general and administrative (“SG&A”) expenses were $341 million, or 28.4% of net revenues in Q2 17, versus $327 million, or 28.2% of net revenues, in Q2 16.

The effective income tax rate in Q2 17 was 34.8% versus 37.7% in Q2 16. The year-over-year tax rate improvement was driven by the overall mix and level of earnings, as well as the incremental benefits we are seeing from improved profitability across our international operations, which are taxed at a lower tax rate.

EPS in Q2 17 was $0.61 versus $0.58 in Q2 16.

Merchandise inventories at the end of Q2 17 increased 11.4% to $1.073 billion from $963 million at the end of Q2 16. A large portion of this inventory growth, however, was associated with inventory that is in-transit and not yet received at our distribution centers. The biggest drivers of inventory growth are associated with our higher growth brands, particularly West Elm. There was also higher growth in PBteen, where sales had previously been most impacted by lower in-stock inventory levels.

STOCK REPURCHASE PROGRAM

During Q2 17, we repurchased 1,160,381 shares of common stock at an average cost of $47.41 per share and a total cost of approximately $55 million. As of July 30, 2017, there was approximately $317 million remaining under our current stock repurchase authorization.

FISCAL YEAR 2017 FINANCIAL GUIDANCE

         

3rd Quarter 2017 Financial Guidance

 

Total Net Revenues (millions)

$1,270 – $1,310

Comparable Brand Revenue Growth

2% – 5%

Diluted EPS

$0.80 – $0.87

 
             
 

Fiscal Year 2017 Financial Guidance

 
Total Net Revenues (millions) $5,165 – $5,265
Comparable Brand Revenue Growth 1% – 3%
Non-GAAP Operating Margin* 9.4% – 9.6%
Non-GAAP Diluted EPS* $3.45 – $3.65
Income Tax Rate 36.5% – 37.5%
Capital Spending (millions) $200 – $220
Depreciation and Amortization (millions)           $185 – $195

* Excludes certain items affecting comparability. See Notes 1 and 2 in Exhibit 1. Including

these items, GAAP operating margin guidance would be 9.3% to 9.5%. See Exhibit 1 for a

reconciliation of GAAP to non-GAAP EPS.

         

Store Opening and Closing Guidance by Retail Concept*

 
FY 2016 ACT       FY 2017 GUID
      Total       New     Close     End
Williams Sonoma     234 4     (7)     231
Pottery Barn 201 8 (6) 203
West Elm 98 11 (3) 106
Pottery Barn Kids 89 - (4) 85
Rejuvenation     7       1     -     8
Total     629       24     (20)     633

*  Included in the FY 16 store count are 19 stores in Australia and one store in the UK. 

FY 17 guidance includes one additional UK store.

 

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, August 23, 2017, at 2:00 P.M. (PT). The call, hosted by Laura Alber, President and Chief Executive Officer, will be open to the general public via live webcast and can be accessed at http://ir.williams-sonomainc.com/events. A replay of the webcast will be available at http://ir.williams-sonomainc.com/events.

SEC REGULATION G NON-GAAP INFORMATION

This press release includes non-GAAP operating margin and diluted EPS. These non-GAAP financial measures exclude the impact of severance-related charges in Q1 16, Q3 16 and Q1 17, a one-time favorable tax adjustment associated with intercompany transactions in Q4 16, and tax expense related to the adoption of new accounting rules related to stock-based compensation in Q1 17. We have reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in the text of this release and in Exhibit 1. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our actual results and Q3 17 and FY 17 guidance on a comparable basis with prior periods. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements relating to: our investments and initiatives; our future financial guidance, including Q3 17 and FY 17 guidance; our stock repurchase program; and our proposed store openings and closures.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include: accounting adjustments as we close our books for Q2 17; continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending; new interpretations of or changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; changes in consumer spending based on weather, political, competitive and other conditions beyond our control; delays in store openings; competition from companies with concepts or products similar to ours; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; effective inventory management; our ability to manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in e-marketing, infrastructure and regulation; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; challenges associated with our increasing global presence; dependence on external funding sources for operating capital; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; and other risks and uncertainties described more fully in our public announcements, reports to stockholders and other documents filed with or furnished to the SEC, including our Annual Report on Form 10-K for the fiscal year ended January 29, 2017 and all subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

ABOUT WILLIAMS-SONOMA, INC.

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing eight distinct merchandise strategies – Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and retail stores. Williams-Sonoma, Inc. currently operates in the United States, Canada, Australia and the United Kingdom, offers international shipping to customers worldwide, and has unaffiliated franchisees that operate stores in the Middle East, the Philippines and South Korea, and stores and e-commerce websites in Mexico.

         
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Earnings (unaudited)
Thirteen weeks ended July 30, 2017 and July 31, 2016
(Dollars and shares in thousands, except per share amounts)
 

2 nd Quarter

         
2017 2016
  $    

% of
Revenues

  $    

% of
Revenues

E-commerce net revenues $ 630,793     52.5 % $ 599,683     51.7 %
Retail net revenues   570,813     47.5     559,346     48.3  
Net revenues 1,201,606 100.0 1,159,029 100.0
 
Cost of goods sold   778,895     64.8     748,490     64.6  
Gross profit 422,711 35.2 410,539 35.4
 
Selling, general and administrative expenses   341,127     28.4     327,263     28.2  
Operating income 81,584 6.8 83,276 7.2
 
Interest expense, net   483     -     167     -  
Earnings before income taxes 81,101 6.7 83,109 7.2
 
Income taxes   28,184     2.3     31,324     2.7  
Net earnings $ 52,917     4.4 % $ 51,785     4.5 %
 
Earnings per share (EPS):
Basic $0.61 $0.58
Diluted $0.61 $0.58
 
Shares used in calculation of EPS:
Basic 86,429 89,039
Diluted 86,848 89,736
         
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Earnings (unaudited)
Twenty-six weeks ended July 30, 2017 and July 31, 2016
(Dollars and shares in thousands, except per share amounts)
 

Year-to-Date

         
2017 2016
  $    

% of
Revenues

  $    

% of
Revenues

E-commerce net revenues $ 1,211,303     52.4 % $ 1,175,917     52.1 %
Retail net revenues   1,101,810     47.6     1,080,929     47.9  
Net revenues 2,313,113 100.0 2,256,846 100.0
 
Cost of goods sold   1,494,642     64.6     1,453,790     64.4  
Gross profit 818,471 35.4 803,056 35.6
 
Selling, general and administrative expenses   674,413     29.2     656,255     29.1  
Operating income 144,058 6.2 146,801 6.5
 
Interest expense, net   380     -     99     -  
Earnings before income taxes 143,678 6.2 146,702 6.5
 
Income taxes   51,206     2.2     55,320     2.5  
Net earnings $ 92,472     4.0 % $ 91,382     4.0 %
 
Earnings per share (EPS):
Basic $1.07 $1.02
Diluted $1.06 $1.01
 
Shares used in calculation of EPS:
Basic 86,696 89,169
Diluted 87,238 90,098
                             
Williams-Sonoma, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(Dollars and shares in thousands, except per share amounts)
     
Jul. 30, 2017 Jan. 29, 2017 Jul. 31, 2016
Assets
Current assets
Cash and cash equivalents $ 103,109 $ 213,713 $ 111,122
Accounts receivable, net 78,735 88,803 98,053
Merchandise inventories, net 1,072,976 977,505 962,943
Prepaid catalog expenses 23,830 23,625 27,097
Prepaid expenses 73,662 52,882 68,300
Other assets   12,066     10,652     11,589  
Total current assets   1,364,378     1,367,180     1,279,104  
 
Property and equipment, net 929,331 923,283 908,562
Deferred income taxes, net 130,212 135,238 134,721
Other assets, net   55,939     51,178     51,177  
Total assets $ 2,479,860   $ 2,476,879   $ 2,373,564  
 
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 429,700 $ 453,710 $ 391,597
Accrued salaries, benefits and other liabilities 100,550 130,187 103,040
Customer deposits 287,698 294,276 283,779
Borrowings under revolving line of credit 115,000 - 125,000
Income taxes payable 35,582 23,245 1,670
Other liabilities   51,540     59,838     53,331  
Total current liabilities   1,020,070     961,256     958,417  
 
Deferred rent and lease incentives 196,982 196,188 193,819
Other long-term obligations   74,284     71,215     66,516  
Total liabilities   1,291,336     1,228,659     1,218,752  
 
 
Stockholders’ equity

Preferred stock: $.01 par value; 7,500 shares authorized;
none issued

- - -

Common stock: $.01 par value; 253,125 shares authorized;
85,754, 87,325 and 88,738 shares issued and outstanding
at July 30, 2017, January 29, 2017 and July 31, 2016,
respectively

858 873 888
Additional paid-in capital 556,702 556,928 542,711
Retained earnings 640,368 701,702 622,608
Accumulated other comprehensive loss (8,599 ) (9,903 ) (9,860 )
Treasury stock, at cost   (805 )   (1,380 )   (1,535 )
Total stockholders’ equity   1,188,524     1,248,220     1,154,812  
     
Total liabilities and stockholders' equity $ 2,479,860   $ 2,476,879   $ 2,373,564  
 
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
Twenty-six weeks ended July 30, 2017 and July 31, 2016
(Dollars in thousands)
 
          Year-to-Date
                     
  2017     2016  
Cash flows from operating activities
Net earnings $ 92,472 $ 91,382
 
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 90,048 83,369
Loss on disposal/impairment of assets 845 1,520
Amortization of deferred lease incentives (12,680 ) (12,550 )
Deferred income taxes (8,937 ) (10,472 )
Tax benefit related to stock-based awards 14,511 21,864
Excess tax benefit related to stock-based awards - (4,727 )
Stock-based compensation expense 22,829 27,476
Other 102 (866 )
 
Changes in:
Accounts receivable 10,658 (19,021 )
Merchandise inventories (92,711 ) 18,221
Prepaid catalog expenses (205 ) 1,822
Prepaid expenses and other assets (26,918 ) (22,724 )
Accounts payable (37,092 ) (71,614 )
Accrued salaries, benefits and other liabilities (36,036 ) (12,867 )
Customer deposits (6,795 ) (13,500 )
Deferred rent and lease incentives 12,635 21,534
Income taxes payable   12,409     (65,399 )
Net cash provided by operating activities   35,135     33,448  
 
Cash flows from investing activities:
Purchases of property and equipment (82,727 ) (77,877 )
Other   44     363  
Net cash used in investing activities   (82,683 )   (77,514 )
 
Cash flows from financing activities:
Borrowings under revolving line of credit 115,000 125,000
Repurchases of common stock (93,361 ) (76,166 )
Payment of dividends (68,197 ) (67,571 )
Tax withholdings related to stock-based awards (14,117 ) (24,635 )
Excess tax benefit related to stock-based awards - 4,727
Proceeds related to stock-based awards - 1,532
Other   -     (47 )
Net cash used in financing activities   (60,675 )   (37,160 )
 
Effect of exchange rates on cash and cash equivalents (2,381 ) (1,299 )
Net decrease in cash and cash equivalents (110,604 ) (82,525 )
Cash and cash equivalents at beginning of period   213,713     193,647  
Cash and cash equivalents at end of period $ 103,109   $ 111,122  
 
Exhibit 1

(Unaudited)

2 nd Quarter Operating Margin by Segment*

($ in thousands)

               
      E-commerce Retail Unallocated Total
      Q2 17   Q2 16 Q2 17   Q2 16 Q2 17   Q2 16 Q2 17   Q2 16
Net Revenues $ 630,793   $ 599,683 $ 570,813   $ 559,346 $ -   $ - $ 1,201,606   $ 1,159,029
Operating Income/(Expense)       135,139       132,733     34,592       33,217     (88,147 )     (82,674 )   81,584       83,276  
Operating Margin       21.4 %     22.1 %   6.1 %     5.9 %   (7.3 %)     (7.1 %)   6.8 %     7.2 %

* See the Company’s 10-K and 10-Q filings for additional information on segment reporting and the definition of Operating Income/(Expense) and Operating Margin.

                                       
Reconciliation of Quarterly and Fiscal Year GAAP to Non-GAAP
Diluted Earnings Per Share**

(Totals rounded to the nearest cent per diluted share)

                                                 
Q1 17 Q2 17 Q3 17 FY 17
            ACT           ACT           GUID           GUID
2017 GAAP Diluted EPS           $0.45           $0.61           $0.80 - $0.87           $3.39 - $3.59
Impact of Severance-related Charges(1)           $0.04           -           -           $0.04
Unfavorable Tax Impact from the Adoption of New Accounting Rules (2)           $0.02           -           -           $0.02
2017 Non-GAAP Diluted EPS (5)           $0.51           $0.61          

$0.80 - $0.87

         

$3.45 - $3.65

 
 
                                                 
Q1 16 Q2 16 Q3 16 FY 16
            ACT           ACT           ACT           ACT
2016 GAAP Diluted EPS           $0.44           $0.58           $0.78           $3.41
Impact of Severance-related Charges(3)           $0.09           -           $0.01           $0.10
One-time Favorable Tax Adjustment(4)           -           -           -           ($0.08)
2016 Non-GAAP Diluted EPS (5)           $0.53           $0.58           $0.79           $3.43

** Due to the differences between the quarterly and year-to-date weighted average share count calculations and rounding to the nearest cent per diluted share, totals may not equal the sum of the line items and fiscal year diluted EPS may not equal the sum of the quarters.

 

Store Statistics

 

      Avg. Leased Square Footage

 

Store Count

Per Store

 

          Apr. 30, 2017     Openings     Closings     Jul. 30, 2017    

Jul. 31, 2016

Jul. 30, 2017

 

  Jul. 31, 2016
Williams Sonoma         233     1     -     234     241 6,600   6,600
Pottery Barn 199 6 (1) 204 201 13,800 13,800
West Elm 99 2 - 101 89 13,200 13,300
Pottery Barn Kids 89 - (1) 88 89 7,400 7,500
Rejuvenation           8     -     -     8     6 8,800     9,000
Total           628     9     (2)     635     626 10,100     10,000
                                                     
Apr. 30, 2017 Jul. 30, 2017 Jul. 31, 2016
Total store selling square footage 3,942,000 3,998,000

3,894,000

Total store leased square footage 6,341,000 6,428,000 6,262,000
 

Notes:

(1) During Q1 17 we incurred severance-related charges associated with the previously announced departure of the former President of the Pottery Barn brands, as well as other severance-related charges, of approximately $6 million, or $0.04 per diluted share. These charges were recorded as SG&A expense within the unallocated segment.
(2) During Q1 17 we incurred tax expense of approximately $1 million, or $0.02 per diluted share, associated with the adoption of new accounting rules related to stock-based compensation.
(3) During Q1 16 and Q3 16 we incurred severance-related reorganization charges due to headcount reduction primarily in our corporate functions totaling approximately $13 million, or $0.09 per diluted share, and $1 million, or $0.01 per diluted share, respectively. These charges were recorded as SG&A expense within the unallocated segment.
(4) During Q4 16 we incurred a benefit of approximately $8 million, or $0.08 per diluted share, related to a one-time tax adjustment associated with intercompany transactions.
(5)

SEC Regulation G – Non-GAAP Information – These tables include non-GAAP diluted EPS. We believe that this non-GAAP financial measure provides meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful evaluation of our actual results and Q3 17 and FY 17 guidance on a comparable basis with prior periods. Our management uses this non-GAAP financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. This non-GAAP financial measure should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

Contact:

WILLIAMS-SONOMA, INC.
Julie P. Whalen, 415-616-8524
EVP, Chief Financial Officer
-or-
Beth Potillo-Miller, 415-616-8643
SVP, Finance & Corporate Treasurer
Investor Relations