This summary is based on the third quarter fiscal 2008 earnings call conducted by Williams Sonoma Inc. (WSM) on December 4, 2008.
Management:
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Chairman and CEO: Howard Lester
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CFO, COO and EVP: Sharon McCollam
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Group President of Williams-Sonoma, Williams-Sonoma Home and West Elm: Dave DeMattei
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President: Laura Alber
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Director of IR: Steve Nelson
Key Investors Issues
- Revenue fell 16% to $752 million from $895.1 million in 2007.
- The firm realized a loss of $11 million or 10 cents a share from a profit of $27 million or 25 cents a share in the prior year.
Year to Date Highlights:
- Net revenues decreased 8.4% to $2.353 billion versus $2.571 billion in 2007.
- Income was $17.8 million or 17 cents a share, down 75% from $71 million or 65 cents a share in the prior year.
Third Quarter Highlights
Revenue fell 16% to $752 million from $895.1 million driven by a 21.4% reduction in comparable store sales and 14.6% and 26.1% decrease in catalog and paid circulation respectively offset by an 8.3% increase in retail rate square footage.
- The firm realized a loss of $11 million or 10 cents a share, from a profit of $27 million or 25 cents a share in the prior year on weaker revenues.
- Gross margin expressed as a percentage of net revenues was 32 versus 38.2% in the third quarter last year with the 620 basis point decrease driven by the deleverage of fixed occupancy expenses primarily due to declining sales and increase in cost of merchandize.
- These increases were partially offset however, by a 30 basis point reduction in replacement and damages expense.
- SG&A expense was $260 million or 34.6% of net revenues versus $297 million or 33.2% of net revenues in 2007 driven by an approximate $12.3 million impairment charge associated with underperforming retail stores.
Cash and cash equivalents were $23 million with no borrowings under the $300 million revolving line of credit.
- Merchandize inventory decreased $75 million or 9.8% to $695 million, which was significantly better than expectations due to a reduction in units across all brands offset by a $23 million increase in new and remodeled stores for all brands.
- Prepaid catalog expenses decreased $22 million or 28.8% to $54 million driven by catalog circulation optimization strategy partially offset by cost increases in paper and postage.
- The Company’s Board of Directors terminated the $150 million share repurchase program that it had authorized in January 2008 in response to current economic conditions.
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William-Sonoma brand revenues declined 5.7%, with similar decreases in both channels.
- Performance in the retail channel was primarily driven by 11.4% decrease in comparable store sales partially offset by incremental revenues from new and expanded stores.
- Comparable store sales like all other brands declined progressively throughout the quarter with the month of October ending at a negative 17.4%.
In the West Elm brand, the impact of the macro environment was much less pronounced than in many other home furnishing brands.
- Although revenues did decline due to lower traffic in our existing retail stores and a weaker consumer response to the direct to customer channel, these declines were partially offset by incremental sales from new stores.
- From a merchandizing perspective, there was positive year-over-year growth in textiles, lighting and table top.
- But these increases were more than offset by declines in furniture and decorative accessories.
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Pottery Barn Brand net revenues decreased 23.8% with declining trends throughout the quarter in all channels.
- Of this revenue decrease, approximately 215 basis points were driven by the catalog circulation optimization strategy.
- Merchandize margins were also lower during the quarter as the firm increased markdowns to react to weak retail traffic, lower direct to consumer conversion rates, and a more promotional environment.
- Retail was particularly challenging with third quarter comparable store sales decreasing 27.6%.
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Pottery Barn Kids net revenue decreased 16% driven by reduction in catalog circulation as expected.
- Merchandize margins were also significantly lower than last year due to increased markdowns and promotions to drive increased traffic.
- Retail was particularly impacted with comp stores sales declining 20%.
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Pottery Barn Teen net revenues declined so dramatically in October that the brand ended the quarter with negative revenue growth for the first time in its history.
- Net revenues in the PBteen brand declined 2.4% in the third quarter of 2008.
- Initiatives include leveraging the August launch of an upgraded e-commerce website, testing Pottery Barn Teen merchandize for the first time at retail in one Pottery Barn Kid store which opened in November.
Operational Highlights:
- In direct marketing, the firm continues to move forward with its catalog circulation optimization strategy, which greatly contributed to 14.5% reduction in advertising expense during the quarter.
- Due to the success of this initiative, it is looking at new ways to expand this strategy over the next several quarters.
- In supply chain, it delivered meaningful customer service and financial benefits from returns, replacements, and damages initiatives, including a 140 basis point reduction in the total company sales return rate.
- It also made significant progress on the inventory reduction initiative.
The firm is taking dramatic action to protect the bottom line in the balance sheet through a targeted 10% reduction in 2009 inventory receipts.
