Williams-Sonoma, Inc. (NYSE: WSM) today announced operating results for the third fiscal quarter ended October 30, 2016 (“Q3 16”) versus the third fiscal quarter ended November 1, 2015 (“Q3 15”).

3rd QUARTER 2016 RESULTS

         

-

    Q3 16 net revenues grew 1.1% to $1.245 billion versus $1.232 billion in Q3 15 with comparable brand revenue decreasing 0.4%.
 

-

Q3 16 operating margin was 8.8% versus 9.0% in Q3 15. Excluding unusual business events due to severance-related reorganization charges (see Note 1 in Exhibit 1), non-GAAP operating margin was 8.9% in Q3 16. See Exhibit 1 for a reconciliation of GAAP to non-GAAP operating margin.
 

-

Q3 16 diluted earnings per share (“EPS”) was $0.78 versus $0.77 in Q3 15. Excluding unusual business events due to severance-related reorganization charges of approximately $0.01 per diluted share, non-GAAP EPS was $0.79 in Q3 16. See Exhibit 1 for a reconciliation of GAAP to non-GAAP EPS.
 

-

Cash returned to stockholders totaled $72 million, comprising $39 million in stock repurchases and $33 million in dividends.
 

Laura Alber, President and Chief Executive Officer, commented: “Our third quarter performance demonstrates our competitive strengths – our differentiated portfolio of brands and profitable multi-channel business model – as well as the ongoing success of our strategic initiatives that we have seen this year. We saw continued double-digit growth in West Elm, our newer businesses Rejuvenation and Mark and Graham, and our international company-owned businesses. We also made additional progress across our supply chain and continued to reduce inventory, which resulted in better gross margins, allowing us to meet our earnings commitment at the high end of our guidance range, despite a more difficult retail environment.”

Alber continued: “Although the current environment is less certain, we remain focused on what we can control, and we are confident that the ongoing progress on our strategic initiatives will improve service for our customers and will drive long-term sustainable profitable growth for our shareholders.”

Net revenues increased to $1.245 billion in Q3 16 from $1.232 billion in Q3 15.

Comparable brand revenue in Q3 16 decreased 0.4% compared to 4.5% growth in Q3 15 as shown in the table below:

 

3rd Quarter Comparable Brand Revenue Growth by Concept*

            Q3 16           Q3 15
Pottery Barn           (4.6%)           2.0%
Williams-Sonoma 0.1% 1.2%
West Elm 12.0% 15.7%
Pottery Barn Kids (1.0%) 4.7%
PBteen           (10.9%)           (0.9%)
Total           (0.4%)           4.5%
* See the Company’s 10-K and 10-Q filings for the definition of comparable brand revenue.
 

E-commerce net revenues in Q3 16 increased 3.3% to $649 million from $628 million in Q3 15. E-commerce net revenues generated 52.1% of total company net revenues in Q3 16 and 51.0% of total company net revenues in Q3 15.

Retail net revenues in Q3 16 decreased 1.2% to $597 million from $604 million in Q3 15.

Operating margin in Q3 16 was 8.8% compared to 9.0% in Q3 15. Excluding unusual business events, non-GAAP operating margin was 8.9% in Q3 16:

         

-

    Gross margin was 36.8% in Q3 16 versus 36.6% in Q3 15.
 

-

Selling, general and administrative (“SG&A”) expenses were $348 million, or 28.0% of net revenues in Q3 16, versus $341 million, or 27.6% of net revenues in Q3 15. Excluding unusual business events due to severance-related reorganization charges of approximately $1.2 million, non-GAAP SG&A expenses were $347 million, or 27.9% of net revenues, in Q3 16.
 

EPS in Q3 16 was $0.78 versus $0.77 in Q3 15. Excluding unusual business events, non-GAAP EPS was $0.79 in Q3 16.

Merchandise inventories at the end of Q3 16 decreased 3.5% to $1.064 billion from $1.102 billion at the end of Q3 15.

STOCK REPURCHASE PROGRAM

During Q3 16, we repurchased 771,327 shares of common stock at an average cost of $50.56 per share and a total cost of approximately $39 million. As of October 30, 2016, there was approximately $447 million remaining under our current stock repurchase program.

FISCAL YEAR 2016 FINANCIAL GUIDANCE

 

4th Quarter 2016 Guidance Financial Highlights

 
Total Net Revenues (millions)           $1,570 – $1,650
Comparable Brand Revenue Growth/(Decrease) (1%) – 4%
Diluted EPS $1.45 – $1.55
 
 

Fiscal Year 2016 Guidance Financial Highlights

 
Total Net Revenues (millions) $5,070 – $5,150
Comparable Brand Revenue Growth 1% – 2%
Non-GAAP Operating Margin* 9.4% – 9.6%
Non-GAAP Diluted EPS** $3.35 – $3.45
Income Tax Rate 37.0% – 38.0%
Capital Spending (millions) $200 – $220
Depreciation and Amortization (millions)           $170 – $180

* Excludes severance-related reorganization charges of approximately $14 million, or

0.3% of operating margin during Q1 2016 and Q3 2016. Including these charges,

GAAP operating margin guidance would be 9.1% to 9.3%.

** Excludes severance-related reorganization charges of approximately $14 million, or

$0.10 per diluted share during Q1 2016 and Q3 2016.

 

Store Opening and Closing Guidance by Retail Concept*

 
FY 2015 ACT             FY 2016 GUID
             

 Total

          

   New

             Close            

   End

Williams-Sonoma             239           5             (10)             234
Pottery Barn 197 5 (2) 200
Pottery Barn Kids 89 2

(4)

87
West Elm 87 13 (2) 98
Rejuvenation             6           1             -             7
Total             618          

26

             (18)             626

* Included in the FY 15 store count are 19 stores in Australia and one store in the UK.

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, November 17, 2016, 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 SG&A, operating income, operating margin and diluted EPS. These non-GAAP financial measures exclude the impact of severance-related reorganization charges in Q1 16 and Q3 16. 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 quarterly actual results and FY 16 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: the progress on our strategic initiatives; our growth drivers; our future financial guidance, including Q4 16 and FY 2016 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 Q3 16; 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 31, 2016 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 635 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 and the Philippines and stores and e-commerce websites in Mexico.

 
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Earnings (unaudited)
Thirteen weeks ended October 30, 2016 and November 1, 2015
(Dollars and shares in thousands, except per share amounts)
 
         

3rd Quarter

 
2016          

2015

$          

% of
  Revenues

$          

% of
  Revenues

E-commerce net revenues $ 648,743           52.1 % $ 628,191           51.0 %
Retail net revenues   596,642           47.9     603,891           49.0  
Net revenues

1,245,385

100.0

1,232,082

100.0
 
Cost of goods sold   787,162           63.2     780,894           63.4  
Gross profit 458,223 36.8 451,188 36.6
 
Selling, general and administrative expenses   348,244           28.0     340,505           27.6  
Operating income 109,979 8.8 110,683 9.0
 
Interest (income) expense, net   488           -     342           -  
Earnings before income taxes 109,491 8.8 110,341 9.0
 
Income taxes   40,113           3.2     39,859           3.2  
Net earnings $ 69,378           5.6 % $ 70,482           5.7 %
 
Earnings per share (EPS):
Basic $0.78 $0.78
Diluted $0.78 $0.77
 
Shares used in calculation of EPS:
Basic 88,382 90,437
Diluted 89,144 91,801
 
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Earnings (unaudited)
Thirty-nine weeks ended October 30, 2016 and November 1, 2015
(Dollars and shares in thousands, except per share amounts)
 
         

Year-to-Date

 
2016           2015
$          

% of
  Revenues

$          

% of
  Revenues

E-commerce net revenues $ 1,824,660           52.1 % $ 1,730,677           51.1 %
Retail net revenues   1,677,571           47.9     1,659,109           48.9  
Net revenues 3,502,231 100.0 3,389,786 100.0
 
Cost of goods sold   2,240,952           64.0     2,153,132           63.5  
Gross profit 1,261,279 36.0 1,236,654 36.5
 
Selling, general and administrative expenses   1,004,499           28.7     970,700           28.6  
Operating income 256,780 7.3 265,954 7.8
 
Interest (income) expense, net   587           -     625           -  
Earnings before income taxes 256,193 7.3 265,329 7.8
 
Income taxes   95,433           2.7     96,389           2.8  
Net earnings $ 160,760           4.6 % $ 168,940           5.0 %
 
Earnings per share (EPS):
Basic $1.81 $1.85
Diluted $1.79 $1.82
 
Shares used in calculation of EPS:
Basic 88,906 91,129
Diluted 89,764 92,576
 
Williams-Sonoma, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(Dollars and shares in thousands, except per share amounts)
 
 
          Oct. 30, 2016           Jan. 31, 2016           Nov. 1, 2015
Assets
Current assets
Cash and cash equivalents $ 75,381 $ 193,647 $ 72,264
Accounts receivable, net 96,386 79,304 88,535
Merchandise inventories, net 1,063,747 978,138 1,102,349
Prepaid catalog expenses 25,329 28,919 35,762
Prepaid expenses 74,195 44,654 59,276
Deferred income taxes, net - - 130,684
Other assets   12,176     11,438     12,966  
Total current assets   1,347,214     1,336,100     1,501,836  
 
Property and equipment, net 918,020 886,813 883,459
Non-current deferred income taxes, net 136,558 141,784 2,560
Other assets, net   51,540     52,730     47,821  
Total assets $ 2,453,332   $ 2,417,427   $ 2,435,676  
 
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 450,144 $ 447,412 $ 395,033
Accrued salaries, benefits and other 111,445 127,122 115,720
Customer deposits 289,737 296,827 293,317
Borrowings under revolving line of credit 125,000 - 200,000
Income taxes payable 1,122 67,052 35,317
Other liabilities   53,423     58,014     55,152  
Total current liabilities   1,030,871     996,427     1,094,539  
 
Deferred rent and lease incentives 192,948 173,061 174,059
Other long-term obligations   70,031     49,713     50,545  
Total liabilities   1,293,850     1,219,201     1,319,143  
 
 
Stockholders’ equity

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

- - -

Common stock: $.01 par value; 253,125 shares authorized;
  88,014, 89,563 and 90,010 shares issued and outstanding
  at October 30, 2016, January 31, 2016 and November 1,
  2015, respectively

881 896 901
Additional paid-in capital 547,513 541,307 538,737
Retained earnings 623,243 668,545 585,928
Accumulated other comprehensive loss (10,772 ) (10,616 ) (7,127 )
Treasury stock, at cost   (1,383 )   (1,906 )   (1,906 )
Total stockholders’ equity   1,159,482     1,198,226     1,116,533  
     
Total liabilities and stockholders' equity $ 2,453,332   $ 2,417,427   $ 2,435,676  
 
Williams-Sonoma, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
Thirty-nine weeks ended October 30, 2016 and November 1, 2015
(Dollars in thousands)
 
 
          Year-to-Date
                     
  2016     2015  
Cash flows from operating activities
Net earnings $ 160,760 $ 168,940
 
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 127,745 125,093
Loss on disposal/impairment of assets 1,852 3,558
Amortization of deferred lease incentives (18,789 ) (18,326 )
Deferred income taxes (14,461 ) (13,526 )
Tax benefit related to stock-based awards 23,571 29,603
Excess tax benefit related to stock-based awards (4,817 ) (14,283 )
Stock-based compensation expense 37,975 36,182
Other (647 ) 91
 
Changes in:
Accounts receivable (17,400 ) (21,875 )
Merchandise inventories (82,410 ) (216,294 )
Prepaid catalog expenses 3,591 (1,820 )
Prepaid expenses and other assets (29,205 ) (20,909 )
Accounts payable (17,403 ) (10,179 )
Accrued salaries, benefits and other current and long-term liabilities (507 ) (13,494 )
Customer deposits (7,445 ) 32,016
Deferred rent and lease incentives 25,969 25,561
Income taxes payable   (65,915 )   2,707  
Net cash provided by operating activities   122,464     93,045  
 
Cash flows from investing activities:
Purchases of property and equipment (127,169 ) (136,069 )
Other   370     535  
Net cash used in investing activities   (126,799 )   (135,534 )
 
Cash flows from financing activities:
Borrowings under revolving line of credit 125,000 200,000
Repurchase of common stock (115,167 ) (196,497 )
Payment of dividends (100,854 ) (96,020 )
Tax withholdings related to stock-based awards (26,518 ) (31,019 )
Excess tax benefit related to stock-based awards 4,817 14,283
Net proceeds related to stock-based awards 1,532 2,647
Repayment of long-term obligations - (1,968 )
Other   (48 )   -  
Net cash used in financing activities   (111,238 )   (108,574 )
 
Effect of exchange rates on cash and cash equivalents (2,693 ) 400
Net decrease in cash and cash equivalents (118,266 ) (150,663 )
Cash and cash equivalents at beginning of period   193,647     222,927  
Cash and cash equivalents at end of period $ 75,381   $ 72,264  
 
Exhibit 1

3rd Quarter Operating Margin By Segment*

($ in thousands)

 
          E-commerce       Retail       Unallocated       Total
         

Q3 16 

    

Q3 15 

    

Q3 16 

    

Q3 15 

    

Q3 16  

    

Q3 15  

    

Q3 16 

    

Q3 15 

Net Revenues         $

  648,743

    $

  628,191

    $

  596,642

    $

  603,891

    $ -     $ -     $ 1,245,385     $ 1,232,082

GAAP Operating Income/(Expense)

          150,164         137,828         47,080         49,213         (87,265 )      

(76,358

)       109,979         110,683  

GAAP Operating Margin

           23.1 %       21.9 %       7.9 %       8.1 %       (7.0 %)       (6.2 %)       8.8 %       9.0 %
Unusual Business Events (1)           -         -         -         -         1,185         -         1,185         -  

Non-GAAP Operating Income/
(Expense) Excluding Unusual
Business Events (2)

        

 

$

 

150,164

     

 

$

 

137,828

     

 

$

 

47,080

     

 

$

 

49,213

     

$

 

(86,080

 

)

   

$

 

(76,358

 

)

   

 

$

 

111,164

     

 

$

 

110,683

 
Non-GAAP Operating Margin (2)           23.1 %       21.9 %       7.9 %       8.1 %       (6.9 %)       (6.2 %)       8.9 %       9.0 %

* 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 16
ACT

        

Q2 16
ACT

        

Q3 16
ACT

        

Q4 16
GUID

        

FY 16
GUID

2016 GAAP Diluted EPS            

     $0.44     

       

     $0.58     

       

     $0.78     

       

$1.45 - $1.55

       

$3.25 - $3.35

Impact of Unusual Business Events (1)            

$0.09

        -         $0.01         -         $0.10
2016 Non-GAAP Diluted EPS Excluding Unusual Business Events (2)            

$0.53

         $0.58         $0.79         $1.45 - $1.55         $3.35 - $3.45
                                           
                                                       
             

Q1 15
ACT

        

Q2 15
ACT

        

Q3 15
ACT

        

Q4 15
ACT

        

FY 15
ACT

2015 GAAP Diluted EPS             $0.48         $0.58         $0.77         $1.55         $3.37

** 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

Store Count

      

Avg. Leased Square Footage
Per Store

 

        Jul. 31, 2016    

   Openings  

    

   Closings  

     Oct. 30, 2016    

 Nov. 1, 2015

Oct. 30, 2016

        

 Nov. 1, 2015

Williams-Sonoma         241     1     (1)     241     243 6,600         6,600
Pottery Barn 201 1 - 202 200 13,800 13,700
Pottery Barn Kids 89 - - 89 90 7,500 7,500
West Elm 89 10 (2) 97 84 13,300 13,400
Rejuvenation         6     -     -     6     6 9,300         9,000
Total         626     12     (3)     635     623 10,000         9,900
                                                                   

Jul. 31, 2016

Oct. 30, 2016

 Nov. 1, 2015

Total store selling square footage 3,894,000 3,966,000 3,839,000
Total store leased square footage 6,262,000 6,381,000 6,188,000
 

Notes:

(1) Impact of Unusual Business Events – During Q1 16 and Q3 16, we incurred severance-related reorganization charges due to headcount reduction primarily in our corporate functions totaling approximately $14 million, or $0.10 per diluted share. These charges were recorded as SG&A expense within the unallocated segment.
(2) SEC Regulation G – Non-GAAP Information – These tables include non-GAAP operating income, operating margin 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 and FY 16 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 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.