Williams-Sonoma, Inc. reports solid results for the third quarter of 2018

Net revenue growth of 4.4%, with comparable brand revenue growth of 3.1%
GAAP diluted EPS of $1.00; non-GAAP diluted EPS of $0.95 at high-end of guidance
Reiterates 2018 full-year guidance

SAN FRANCISCO--()--Williams-Sonoma, Inc. (NYSE: WSM) today announced operating results for the third fiscal quarter (“Q3 18”) ended October 28, 2018 versus the third fiscal quarter (“Q3 17”) ended October 29, 2017.

KEY HIGHLIGHTS

3rd Quarter 2018

  • Net revenue growth of 4.4%
  • Comparable brand revenue growth of 3.1%
  • E-commerce net revenue growth accelerates to 55.0% of total company net revenues
  • GAAP operating margin of 7.0%; non-GAAP operating margin of 7.6%
  • GAAP diluted EPS of $1.00; non-GAAP diluted EPS of $0.95 at high-end of guidance
  • Merchandise inventories growth of 1.8%, significantly below net revenue growth

Reiterates Fiscal Year 2018 Guidance

  • Non-GAAP net revenue of $5,565 billion – $5,665 billion
  • Comparable brand revenue growth of 3.0% – 5.0%
  • Non-GAAP operating margin of 8.4% – 9.0%
  • Non-GAAP diluted EPS of $4.26 – $4.36

Laura Alber, President and Chief Executive Officer, commented, “We delivered third quarter with EPS at the high end of guidance and continued strength in demand and customer growth. This performance demonstrates our team’s strong execution, the ongoing benefits of our strategic initiatives and the power of our multi-channel, multi-brand model.” Alber continued, “Given the substantial progress we’ve made in our business this year and our compelling pipeline of innovative product and inspiring content, we believe we are well-prepared to deliver this holiday season and remain on track to meet our full year guidance.”

3rd QUARTER 2018 RESULTS

Net revenues increased 4.4% to $1.357 billion in Q3 18 from $1.299 billion in Q3 17. Excluding certain discrete items, non-GAAP net revenues were $1.356 billion in Q3 18 or an increase of 4.4% over Q3 17. See Exhibit 1.

Comparable brand revenue in Q3 18 increased 3.1% compared to an increase of 3.3% in Q3 17 as shown in the table below:

 

3rd Quarter Comparable Brand Revenue Growth (Decline) by Concept*

           
    Q3 18     Q3 17
Pottery Barn   1.4%     (0.3%)
West Elm 8.3% 11.5%
Williams Sonoma 2.1% 2.3%
Pottery Barn Kids and Teen   0.0%     0.9%
Total   3.1%     3.3%

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

E-commerce net revenues in Q3 18 increased 8.2% to $747 million from $690 million in Q3 17. Excluding certain discrete items, non-GAAP e-commerce net revenues were $746 million in Q3 18 or an 8.1% increase over Q3 17. See Exhibit 1.

Retail net revenues in Q3 18 increased 0.2% to $610 million from $609 million in Q3 17.

Operating margin in Q3 18 was 7.0% compared to 8.5% in Q3 17. Excluding certain discrete items, non-GAAP operating margin was 7.6% in Q3 18. See Exhibit 1.

         

-

  Gross margin was 36.5% in Q3 18 versus 35.9% in Q3 17.
 

-

Selling, general and administrative (“SG&A”) expenses were $401 million, or 29.5% of net revenues in Q3 18, versus $356 million, or 27.4% of net revenues in Q3 17. Excluding certain discrete items, non-GAAP SG&A expenses were $392 million, or 28.9% of net revenues in Q3 18. See Exhibit 1.
 

The effective income tax rate in Q3 18 was 11.5% versus 35.3% in Q3 17. Excluding certain discrete items, the non-GAAP effective income tax rate was 23.0% in Q3 18. See Exhibit 1.

EPS in Q3 18 was $1.00 versus $0.84 in Q3 17. Excluding certain discrete items, non-GAAP EPS was $0.95 in Q3 18. See Exhibit 1.

Merchandise inventories at the end of Q3 18 increased 1.8% to $1.198 billion from $1.177 billion at the end of Q3 17.

These results include the adoption of ASU No. 2014-09, which pertains to revenue recognition. See Exhibit 2 for more details.

STOCK REPURCHASE PROGRAM

During Q3 18, we repurchased 742,508 shares of common stock at an average cost of $61.15 per share for a total cost of approximately $45 million. As of October 28, 2018, there was approximately $299 million remaining under our current stock repurchase program.

 

FISCAL YEAR 2018 FINANCIAL GUIDANCE

 

4th Quarter 2018 Financial Guidance*

 
Non-GAAP Total Net Revenues (millions) $1,733 – $1,833
Comparable Brand Revenue Growth 0.0% – 5.0%
Non-GAAP Diluted EPS $1.89 – $1.99
     
 

 Fiscal Year 2018 Financial Guidance*

 
Non-GAAP Total Net Revenues (millions) $5,565 – $5,665
Comparable Brand Revenue Growth 3.0% – 5.0%
Non-GAAP Operating Margin 8.4% – 9.0%
Non-GAAP Diluted EPS $4.26 – $4.36
Non-GAAP Income Tax Rate 24.0% – 26.0%
Capital Spending (millions) $200 – $220
Depreciation and Amortization (millions)   $185 – $195

*We have not provided a reconciliation of non-GAAP guidance measures to the corresponding GAAP
measures on a forward-looking basis due to the potential variability of discrete items.

 

Store Opening and Closing Guidance by Retail Concept**

   
FY 2017 ACTUAL   FY 2018 GUIDANCE
    Total   New   Close   End
Williams Sonoma   228 5   (15 )   218
Pottery Barn 203 6 (5 ) 204
West Elm 106 9 (3 ) 112
Pottery Barn Kids 86 - (10 ) 76
Rejuvenation   8   2   -     10
Total   631   22   (33 )   620

** Included in the FY 17 store count are 19 stores in Australia and two stores in the UK. FY 18 guidance includes one
additional UK store.

 

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, November 15, 2018, 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 financial measures. Exhibit 1 provides reconciliations of these non-GAAP financial measures to the most comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance 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 financial measures should be considered as a supplement to, and not as a substitute for or superior to the GAAP financial measures presented in this press release and our financial statements and other publicly filed reports. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.

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 ability to continue to successfully execute our strategic initiatives; our optimism about the future; our ability to drive long-term profitable growth; our future financial guidance, including Q4 18 and FY 2018 guidance; our stock repurchase program; our preparation for the holiday season; 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: continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending; new interpretations of or changes to current accounting rules or tax regulations; the potential impact of tariffs, including our ability to mitigate the potential impact; 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 28, 2018 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 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. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry.

 

Williams-Sonoma, Inc.

Condensed Consolidated Statements of Earnings

(unaudited)

 
  Thirteen Weeks Ended   Thirty-nine Weeks Ended
October 28, 2018   October 29, 2017 October 28, 2018   October 29, 2017
 

% of

 

% of

 

% of

 

% of

In thousands, except per share amounts   $  

Revenues

  $  

Revenues

  $  

Revenues

  $  

Revenues

E-commerce net revenues 746,716 55.0% 690,045 53.1% 2,079,838 54.2% 1,901,348 52.6%
Retail net revenues   610,267   45.0% 609,291   46.9% 1,755,319   45.8% 1,711,101   47.4%
Net revenues 1,356,983 100.0% 1,299,336 100.0% 3,835,157 100.0% 3,612,449 100.0%
Cost of goods sold   861,999   63.5% 832,269   64.1% 2,444,067   63.7% 2,326,911   64.4%
Gross profit 494,984 36.5% 467,067 35.9% 1,391,090 36.3% 1,285,538 35.6%
Selling, general and administrative expenses   400,600   29.5% 356,254   27.4% 1,155,990   30.1% 1,030,667   28.5%
Operating income 94,384 7.0% 110,813 8.5% 235,100 6.1% 254,871 7.1%
Interest expense, net   2,288   0.2% 594   - 5,073   0.1% 974   -
Earnings before income taxes 92,096 6.8% 110,219 8.5% 230,027 6.0% 253,897 7.0%
Income taxes   10,631   0.8% 38,906   3.0% 51,681   1.3% 90,112   2.5%
Net earnings   81,465   6.0% 71,313   5.5% 178,346   4.7% 163,785   4.5%
Earnings per share (EPS):
Basic $1.01 $0.84 $2.17 $1.90
Diluted   $1.00       $0.84       $2.15       $1.89    
Shares used in calculation of EPS:
Basic 80,475 84,940 82,070 86,111
Diluted   81,641       85,384       82,951       86,582    
 

Williams-Sonoma, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

     
In thousands, except per share amounts   October 28,

2018

  January 28,

2018

  October 29,

2017

ASSETS
Current assets
Cash and cash equivalents $ 164,414 $ 390,136 $ 90,779
Accounts receivable, net 113,582 90,119 92,282
Merchandise inventories, net 1,197,554 1,061,593 1,176,941
Prepaid catalog expenses 20,517 19,051
Prepaid expenses

94,071

62,204 69,267
Other current assets    

21,805

      11,876       12,141  
Total current assets    

1,591,426

      1,636,445       1,460,461  
Property and equipment, net 931,361 932,283 931,131
Deferred income taxes, net

45,999

67,306 131,793
Goodwill 85,649 18,838 18,769
Other long-term assets, net    

64,324

      130,877       38,230  
Total assets   $ 2,718,759     $ 2,785,749     $ 2,580,384  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 487,733 $ 457,144 $ 468,566
Accrued expenses 132,398 134,207 101,434
Gift card and other deferred revenue 275,567 300,607 299,031
Borrowings under revolving line of credit 60,000 170,000
Income taxes payable 9,903 56,783 48,865
Other current liabilities     71,119       59,082       49,655  
Total current liabilities     1,036,720       1,007,823       1,137,551  
Deferred rent and lease incentives 205,143 202,134 195,220
Long-term debt 299,571 299,422

Other long-term liabilities

    85,388       72,804       75,439  

Total liabilities

    1,626,822       1,582,183       1,408,210  
Stockholders’ equity
Preferred stock: $.01 par value; 7,500 shares authorized; none issued
Common stock: $.01 par value; 253,125 shares authorized; 80,282, 83,726 and 84,478 shares issued and outstanding at October 28, 2018, January 28, 2018 and October 29, 2017, respectively 803 837 845
Additional paid-in capital 570,924 562,814 557,198
Retained earnings 532,172 647,422 623,170
Accumulated other comprehensive loss (11,757 ) (6,782 ) (8,314 )
Treasury stock, at cost     (205 )     (725 )     (725 )
Total stockholders’ equity     1,091,937       1,203,566       1,172,174  
Total liabilities and stockholders’ equity   $ 2,718,759     $ 2,785,749     $ 2,580,384  
 
         
Retail Store Data
(unaudited)
                 
    July 29, 2018   Openings   Closings   October 28, 2018   October 29, 2017
Williams Sonoma 226 226 233
Pottery Barn 205 205 202
West Elm 109 3 112 105
Pottery Barn Kids 84 (2) 82 88
Rejuvenation   8       8   8
Total   632   3   (2)   633   636
 
 

Williams-Sonoma, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

   
Thirty-nine
Weeks Ended
In thousands   October 28,

2018

  October 29,

2017

Cash flows from operating activities:
Net earnings $ 178,346 $ 163,785
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization 141,167 135,473
Loss on disposal/impairment of assets 5,290 1,299
Amortization of deferred lease incentives (19,728 ) (18,987 )
Deferred income taxes

12,170

 

(11,884 )
Tax benefit related to stock-based awards 10,361 15,439
Stock-based compensation expense 40,953 30,164
Other

(389

) (416 )
Changes in:
Accounts receivable (21,851 ) (2,341 )
Merchandise inventories (143,723 ) (197,757 )
Prepaid catalog expenses 447
Prepaid expenses and other assets

(50,171

) (19,814 )
Accounts payable 8,689 7,728
Accrued expenses and other liabilities 19,002 (28,775 )
Gift card and other deferred revenue 24,048 (4,108 )
Deferred rent and lease incentives 23,695 17,000
Income taxes payable     (48,358 )     25,677  
Net cash provided by operating activities     179,501       112,930  
Cash flows from investing activities:
Purchases of property and equipment (128,326 ) (135,821 )
Other     1,804       458  
Net cash used in investing activities     (126,522 )     (135,363 )
Cash flows from financing activities:
Repurchases of common stock (220,221 ) (154,321 )
Payment of dividends (105,654 ) (101,928 )
Borrowings under revolving line of credit 60,000 170,000
Tax withholdings related to stock-based awards (13,906 ) (14,836 )
Other           (20 )
Net cash used in financing activities     (279,781 )     (101,105 )
Effect of exchange rates on cash and cash equivalents 1,080 604
Net decrease in cash and cash equivalents (225,722 ) (122,934 )
Cash and cash equivalents at beginning of period     390,136       213,713  
Cash and cash equivalents at end of period   $ 164,414     $ 90,779  
 
 

Exhibit 1

3rd Quarter and Year-to-Date GAAP to Non-GAAP Reconciliation*

(unaudited)

(Dollars in thousands, except per share data)

 

 

Thirteen Weeks Ended October 28, 2018

         
 

GAAP Basis
(as reported)

Outward-related1

Employment-
related Expense2

Impairment and
Early Termination
Charges3

Tax
Legislation4

Non-GAAP Basis

Net revenues $ 1,356,983 $ (1,110 ) - - - $ 1,355,873
Gross profit 494,984 (124 ) - $ 190 - 495,050
% of Revenues 36.5 % 36.5 %
Selling, general and administrative expenses 400,600 (6,128 ) $ (1,869 ) (937 ) - 391,666
% of Revenues 29.5 % 28.9 %
Operating income 94,384 6,004 1,869 1,127 - 103,384
% of Revenues 7.0 % 7.6 %
Earnings before income taxes 92,096 6,007 1,869 1,127 - 101,099
Income taxes 10,631 1,300 479 303 $ 10,564 23,277
Tax rate     11.5 %               23.0 %
Net earnings   $ 81,465   $ 4,707     $ 1,390   $ 824   $ (10,564 )   $ 77,822  
Diluted EPS $ 1.00 $ 0.06 $ 0.02 $ 0.01 $ (0.13 ) $ 0.95
 

 

Thirty-nine Weeks Ended October 28, 2018

           
 

GAAP Basis
(as reported)

Outward-related1

Employment-
related Expense2

Impairment and
Early Termination
Charges3

Tax
Legislation4

Impact of Equity
Accounting Rules5

Non-GAAP
Basis

Net revenues $ 3,835,157 $ (2,511 ) - - - $ 3,832,646
Gross profit 1,391,090 727 - $ 909 - - 1,392,726
% of Revenues 36.3 % 36.3 %
Selling, general and administrative expenses 1,155,990 (17,192 ) $ (5,445 ) (5,515 ) - - 1,127,838
% of Revenues 30.1 % 29.4 %
Operating income 235,100 17,919 5,445 6,424 - - 264,888
% of Revenues 6.1 % 6.9 %
Earnings before income taxes 230,027 17,929 5,445 6,424 - - 259,825
Income taxes 51,681 3,822 1,349 1,592 $ 4,378 $ (1,146 ) 61,676
Tax rate     22.5 %                         23.7 %
Net earnings   $ 178,346     $ 14,107     $ 4,096     $ 4,832     $ (4,378 )   $ 1,146     $ 198,149  
Diluted EPS $ 2.15 $ 0.17 $ 0.05 $ 0.06 $ (0.05 ) $ 0.01 $ 2.39
 

 

Thirty-nine Weeks Ended October 29, 2017

     
 

GAAP Basis
(as reported)

Severance-related
Expense6

Impact of Equity
Accounting Rules5

Non-GAAP Basis
Selling, general and administrative expenses $ 1,030,667 $ (5,705 ) - $ 1,024,962
% of Revenues 28.5 % 28.4 %
Operating income 254,871 5,705 - 260,576
% of Revenues 7.1 % 7.2 %
Earnings before income taxes 253,897 5,705 - 259,602
Income taxes 90,112 1,971 $ (1,429 ) 90,654
Tax rate     35.5 %             34.9 %
Net earnings   $ 163,785     $ 3,734     $ 1,429     $ 168,948  
Diluted EPS $ 1.89 $ 0.04 $ 0.02 $ 1.95
*Per share amounts may not sum across due to rounding to the nearest cent per diluted share.
   

Reconciliation of GAAP to Non-GAAP By Segment**

(unaudited)

           
In thousands   E-commerce   Retail   Unallocated   Total
    Q3 2018   Q3 2017   Q3 2018   Q3 2017   Q3 2018   Q3 2017   Q3 2018   Q3 2017
Net revenues $746,716 $690,045 $610,267 $609,291 - - $1,356,983 $1,299,336
Outward-related1   (1,110)                       (1,110)    
Non-GAAP net revenues   745,606   690,045   610,267   609,291   -   -   1,355,873   1,299,336
Net revenue growth 8.2% 0.2% 4.4%
Non-GAAP net revenue growth   8.1%       0.2%               4.4%    
GAAP operating income (expense)   152,204   142,865   45,052   42,804   (102,872)   (74,856)   94,384   110,813
GAAP operating margin   20.4%   20.7%   7.4%   7.0%   (7.6)%   (5.8)%   7.0%   8.5%
Outward-related1 4,622 1,382 6,004
Employment-related expense2 1,869 1,869
Impairment and Early Termination Charges3           1,127               1,127    
Non-GAAP operating income (expense)   156,826   142,865   46,179   42,804   (99,621)   (74,856)   103,384   110,813
Non-GAAP operating margin   21.0%   20.7%   7.6%   7.0%   (7.3)%   (5.8)%   7.6%   8.5%
 

**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.

SEC Regulation G – Non-GAAP Information – These tables include non-GAAP net revenues, gross profit, gross margin, SG&A, operating income, operating margin, earnings before income taxes, income taxes, effective tax rate, net earnings and diluted EPS. 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 quarterly actual results 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 financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.

Notes to Exhibit 1:

1

  During Q3 and year-to-date 2018, we incurred approximately $6.0 million and $17.9 million of expense, respectively, primarily associated with acquisition-related compensation expense, amortization of intangible assets, as well as the operations of Outward, Inc.

2

During Q3 and year-to-date 2018, we incurred approximately $1.9 million and $5.4 million, respectively, of employment-related expense associated with a one-time special equity grant.

3

During Q3 and year-to-date 2018, we incurred approximately $1.1 million and $6.4 million of expense, respectively, primarily associated with impairment and early lease termination charges.

4

During Q3 and year-to-date 2018, we recorded a net income tax benefit of approximately $10.6 million and $4.4 million, respectively, associated with tax legislation changes.

5

During Q1 18 and Q1 17, we recorded income tax expense of approximately $1.1 million and $1.4 million, respectively, associated with the adoption of accounting rules related to stock-based compensation.

6

During Q1 17, we incurred approximately $5.7 million for severance-related reorganization expenses primarily in our corporate functions.

 

Exhibit 2

ASU No. 2014-09 Impact of Adoption

(unaudited)

(Dollars in thousands)

             
  Q3 2018     Q3 2018
GAAP ASU 2014-09 GAAP
    As Reported   Adjustment   As Adjusted
Net revenues $ 1,356,983 $ (17,390 ) $ 1,339,593
Cost of goods sold 861,999 (2,775 ) 859,224
Gross profit 494,984 (14,615 ) 480,369
SG&A expenses 400,600 (10,334 ) 390,266
Operating income   $ 94,384   $ (4,281 )   $ 90,103

Contacts

WILLIAMS-SONOMA, INC.
Julie Whalen, 415-616-8524
EVP, Chief Financial Officer
-or-
Elise Wang, 415-616-8571
Vice President, Investor Relations

Contacts

WILLIAMS-SONOMA, INC.
Julie Whalen, 415-616-8524
EVP, Chief Financial Officer
-or-
Elise Wang, 415-616-8571
Vice President, Investor Relations