Key questions and answers from the second quarter fiscal 2007 earnings call conducted by Williams-Sonoma Inc. on August 29, 2007.

Armando Lopez (Morgan Stanley): Looking at the 1.8% positive comparable store sales at Pottery Barn, do you think that is from execution or are you seeing some change in the underlying market? Could you elaborate on the test store that you have been working on and how that’s proceeding relative to plan, and what are you thinking about a roll out?

Laura J Alber: When we saw softness last summer in the Pottery Barn brand, we put together a very focused strategy to improve our performance. However, all of them contribute to the success that we are seeing in bringing the brand out to positive growth. We continue to see that we have lots of opportunities to continue to further those initiatives and adjust them as the market changes. As far as the test store, we did re-merchandise one store and tried some new fixtures and that has been a very good process for all of us in looking at what the opportunities are. It is still early in this initiative and we have many different stores of different sizes and also of different ages and we did one store that had an all fixture pack. We’re looking to do an additional store this quarter with a newer fixture pack where we believe we can impact our key businesses that have more growth potential than others and we’re going to do that this quarter. We are then going to look at both sector numbers combined and work on a strategy for roll our into next year.

Rex Henderson (Raymond James & Associates): On Pottery Barn, the catalogue was negative and you said the catalogue out performed your expectations and that negative catalogue results seemed to be from shipping fees. Can you elaborate on this?

Laura J Alber: When we look at our catalogue business, we are looking at both demand and net and the demand was positive, but it was offset by higher back orders at the end of the quarter and lower shipping revenues, which is a strategy to bring back value into the brand and also there’s always revenue recognition.

Lauren Levitan (Cowen and Company): Earlier in the year, you gave a sense of the excess inventory from Pottery Barn and Pottery Barn Kids. How much you have been working that down and could you further update us on what that balance is and where that would be by the end of this fiscal year?

Sharon L McCollam: From the perspective of the guidance, I will say to the drops that went in Home actually about a week or so ago. It relates to the macro environment and our guidance has consistently reflected a cautious outlook. We didn’t revise our guidance. Clearly, our perspective going into the back half is not changed from where we were. We are seeing what we thought could possibly occur and that’s where we are.

As it relates to the inventory, I broke down the components of that $86 million year-over-year increase and about half of that is in the Pottery Barn and Pottery Barn Kids brands. It’s all within our guidance, here’s our strategy, it’s core merchandise, we are staying in stock in the product. We believe that our in-stock positions right now are driving our business. We will continue to work through that and we’re continuing to allow the open-to-buy on the new product introductions so that we don’t starve the business for the back half. But we reiterated our guidance for the back half of the year so there’s been no change in how we are expecting our inventory to flow throughout the balance of the year. It’s been a mid-range of our guidance in Q2 of our range of 13% to 17% and the reason that we weren’t at the high end was because Pottery Barn was better than we expected.

Matt Nemer (Thomas Wiesel Partners): Given your focus on in-stocks, can you quantify the impact of the increased orders in-transit? Can you provide any additional detail on inventory relative to your exposure to outdoor categories?

Sharon L McCollam: We’re not going to start quantifying adjustments on revenue recognition and those things, but in the core brands particularly we did experience higher back orders, we’ve had very strong demand, across all the Pottery Barn brands and then the revenue recognition impact year-over-year was negative. We had more orders in-transit at the end of the quarter, we have a lot of big drops that come at the end of the quarter, as the sales come in and the goods don’t get delivered. The second quarter is always a risk from that point of view based on when the books get in home.

Laura J Alber: One of our key operational focuses is improving our quality, and we’ve been working very hard to do that, both in the first mile in the country of origin, where the goods leave and also here domestically. As a result, we’ve put more quality processes in place overseas to have flowed production with some of our key vendors. It is causing us to have more back orders than we’ve had for a while here, but we believe strongly that it’s going to pay off because we need to ship our customers first quality goods. That’s more important than anything else right now.

Jack Murphy (William Blair): You were specific about why gross margin was down and a little about why it was better than guidance. Could you flesh out the margin a little bit in the second quarter, as to how it was better than guidance?

Sharon McCollam: We saw very strong performance in the Williams-Sonoma brand, and this is selling margins; we had a very good quarter in West Elm, the margins were better. We also saw better margins than we expected from a selling margin point of view in both Pottery Barn and the Pottery Barn brands overall. We had a higher selling margin, so that is the actual margins from the sales, not any other items that we’re not line. Those were the key drivers.

Neely Tamminga (Piper Jaffray): Could you talk a little bit about retail sales pattern in general?

Sharon McCollam: We don’t give out the comps but it’s fair to say that we did see a gradual improvement in retail performance throughout this quarter as a total company so that was how it played out from May through July.

Laura J Alber: Clearly the customer is more careful with their purchases; they are looking for great value. They expect more from quality and where we have newness and relevant design, we are seeing improved performance and where we don’t, we are seeing that we need to do better. Without going through what exactly is working, the new product innovation is a key component of the better than expected results.

Janet Kloppenburg (JJK Research): With respect to the core merchandise at inventory levels at PB and Kids being up where it is, should we expect that core investment to remain at this level for some time until we anniversary it at the end of the first quarter or what is the outlook for the inventory levels in both of those businesses? You’re looking for the year end inventory to be up 9% to 13%. Does that largely reflect increased inventories in Pottery Barn and Pottery Barn Kids?

Sharon McCollam: The year end inventory increases, I would expect them to play out very similarly to where we are at the end of Q2, a bigger piece of that increase will come in the Pottery Barn and Pottery Barn Kids brands, because we are going to continue to rationally level these inventories and make sure that we are feeding our business as we do that.

Colin McGranahan (Bernstein): The company did a fantastic job controlling expenses to date in a choppy and volatile market. In the call you mentioned some aggressive management of the DC and call centers. How much of that is being structurally sustainable versus in this environment you’re really going to tighten the screws a bit?

Sharon McCollam: When we talked about the call centers, the distribution center etc. we were talking versus guidance in my prepared remarks. From a year-over-year point of view, 2006 to 2007 we were favorable on SG&A by 40 basis points. That was driven by the reduced advertising expenses, which is basically on a rate basis at cost leverage in the Pottery Barn and the Pottery Barn Teen brands. In Pottery Barn, we dropped our fall catalogue last year, this is when we started to see our issues with advertising expense, we clearly had no time to adjust because that’s when the macro began to significantly affect us. As a result of that we are seeing ad costs leverage.