This summary is based on the second quarter fiscal 2007 earnings call conducted by Williams-Sonoma Inc. (WSM: chart) on August 29, 2007.

Management

Chairman and CEO: Howard Lester
President: Laura Alber
Chief Marketing Officer: Pat Connolly
Chief Operating and Chief Financial Officer: Sharon McCollam,
Group Vice President for the Williams-Sonoma, Williams-Sonoma Home and West Elm Brands: Dave DeMattei

Key Investors Issues

- Earnings per share dropped to 23 cents from 30 cents in the prior year.
- Quarterly revenue grew to $859.4 million versus $825.5 million in previous year.
- For fiscal 2007, GAAP EPS are expected to be in the range of $1.79 to $1.87.

Second Quarter Fiscal 2007 Financial Highlights

In the second quarter, non-GAAP diluted earnings per share decreased 4% to 24 cents versus 25 cents in the second quarter of 2006.

Throughout the quarter, the firm remained intently focused on its operational execution in its cost containment initiatives, which allowed it to deliver diluted earnings per share that were 6 cents above the high end of its guidance and 8 cents above the first call estimate.

The three key drivers of these better than expected results versus the company’s guidance were as follows:
- the firm saw significantly better than expected results in the Williams-Sonoma and West Elm brands due to strong margins, solid cost disciplines and continued productivity in the direct-to-customer channel.
- The company saw better than expected catalogue productivity and selling gross margins in the Pottery Barn brand. The company reduced its operating margin expectation to reflect the risk of a more promotional environment. While the firm did see increased promotional activity, it did not reach the level it anticipated.
- The firm saw better than expected productivity in its distribution and call centers in addition to lower overhead costs due to the aggressive management of its variable and discretionary costs.

Net revenues in the second quarter increased 4.1% to approximately $859 million versus the second quarter of 2006.

Excluding the negative impact of the shut-down of Hold Everything, net revenues increased 4.6% including a 5.1% increase in the retail channel and a 4% increase in the direct-to-customer channel.

Retail net revenues increased 5.1% to $487 million versus $463.4 million in the second quarter of fiscal year 2006. This increase was driven by a 4.1% year-over-year increase in retail leased square footage, including seven net new stores. Net revenues generated in the West Elm, Williams-Sonoma Home and Pottery Barn brands were the primary contributors to the year-over-year revenue increase, partially offset by reduced revenues in the Pottery Barn Kids brand.

Direct-to-customer net revenues (comprised of both catalog and Internet revenues) increased 2.8% to $372.4 million versus $362.2 million in the prior year. This increase was primarily driven by increases in net revenues generated in the West Elm, PBteen, Williams-Sonoma and Williams-Sonoma Home brands. This increase was partially offset by lost revenues in the Hold Everything brand and reduced revenues in the Pottery Barn Kids and Pottery Barn brands. Excluding Hold Everything, direct-to-customer net revenues for the second quarter of fiscal year 2007 increased 4% versus the second quarter of fiscal year 2006. Internet revenues increased 11.1% to $237.4 million versus $213.8 million in last year. Excluding Hold Everything, Internet revenues increased 12.6% versus the second quarter of fiscal year 2006. Although the amount of Internet revenues that are incremental to the firm’s direct-to-customer channel cannot be identified precisely, the firm estimates that approximately 45% of its company-wide non-gift registry Internet revenues are incremental to the direct-to-customer channel and approximately 55% are driven by customers who recently received a catalog.

- Comparable store sales increased a better than expected 1.2% during the quarter.
- Retail lease square footage increased 4.1% including seven net new stores.
- Catalogue circulation during the second quarter excluding Hold Everything increased 9.3%, while paid circulation increased 9.5%. This compares to catalogue circulation increases of 2.1% and a paid circulation increase of 7.6% in the second quarter of 2006.

Gross margin, expressed as a percentage of net revenues in the second quarter, was 37.2%, a 100 basis point decrease on a non-GAAP basis from 38.2% in the second quarter of fiscal 2006.

This decrease was primarily driven by increased markdowns and higher cost of merchandise sold in Pottery Barn and Pottery Barn Kids brands and increased occupancy costs. The increased occupancy costs, as a percentage of net revenues, was primarily driven by the retail roll-out of the emerging brands. The costs were partially offset however by the elimination of all cost of goods sold associated with the Hold Everything brand.

SG&A expenses, as a percentage of net revenues in the second quarter, was 32.3%, a 40 basis point decrease on a non-GAAP basis from 32.7% in prior year.

This 40 basis point decrease is a percentage of net revenues, was primarily driven by reduced advertising expense, primarily in the Pottery Barn and Pottery Barn teen brands, reductions in other general expenses and the elimination of all SG&A expenses associated with the Hold Everything brands. These decreases were partially offset by increased costs associated with the growth of the emerging brands.

The effective income tax rate in the second quarter was 40.2% versus 38.4% in the second quarter of fiscal year 2006.

This increase was primarily driven by the application of Fin 48 Accounting for uncertainty in income taxes, which the firm implemented on January 29 2007. The application of this accounting pronouncement resulted in an approximate 160 basis point increase in the expected income tax rate in the second quarter of fiscal year 2007.