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Earnings Calls: 
Williams-Sonoma Earnings Call, First Quarter 2008
Author: Rozalina Destanova
123jump.com
Last Update: 6:13 AM EDT June 09 2008

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Net revenues decreased 4.2% to approximately $782 million. Comparable store sales decreased 9%. Gross margin, expressed as a percentage of net revenue, was 35.3% versus 37% in Q1 2007. The effective income tax rate was 38.8% versus 40.3% in Q1 2007, driven by certain favorable income tax resolutions in Q1 2008. Net revenues in fiscal year 2008, a 52-week year, are projected to be in the range of $3.738 billion to $3.804 billion.


Investors Question and Answers

 
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- In West Elm, despite the negative pressures of the macroeconomic environment, the company is pleased with results. Positive net revenue growth was primarily driven by incremental sales from new stores and strength in e-commerce. The company opened two new stores in Puerto Rico, which is off to a great start, and Ohio, and ended the quarter with 29 stores versus 22 last year.

- Pottery Barn brand net revenues decreased 7.9% versus last year, as the benefits of revitalization strategy were more than offset by continued weakness in the macroeconomic environment. Retail was particularly challenging with comparable store sales decreasing 10.5%.
- From a merchandising perspective, the company saw year-over-year sales declines across all major categories. Despite these declines, however, it did see new product introductions outperform all other categories, but their strength was more than offset by the impact of external factors on the core assortment.
- From an operational perspective, the company saw better-than-expected results from returns, replacements, and damages and catalog circulation optimization initiatives.

- Pottery Barn Teen net revenues in the PBteen brand continued to exceed expectations, with net revenues increasing by 29.4% versus last year. All key merchandising categories saw better than expected growth, including furniture, textile, and decorative accessories. Highly targeted marketing, new innovative products, and a stronger in-stock position contributed to these results.

Fiscal 2008 Outlook

- Net revenues in fiscal year 2008, a 52-week year, are projected to be in the range of $3.738 billion to $3.804 billion, versus previous guidance in the range of $3.793 billion to $3.877 billion. This represents a projected decrease in net revenues in the range of 5.2% to 3.6% versus $3.945 billion during the 53 weeks of fiscal year 2007. On a comparable 52-week to 52-week basis, this represents a projected decrease in the range of 3.4% to 1.7%.
- Retail net revenues in fiscal year 2008, a 52-week year, are projected to be in the range of $2.207 billion to $2.245 billion, versus previous guidance in the range of $2.250 billion to $2.298 billion. This represents a projected decrease in retail net revenues in the range of 3.2% to 1.6% versus $2.281 billion during the 53 weeks of fiscal year 2007. On a comparable 52-week to 52-week basis, this represents a projected decrease in the range of 1.8% to 0.1%.

- Change in comparable store sales in fiscal year 2008 is projected to be in the range of 8.3% to 6.3%, versus previous guidance in the range of 5.5% to 3%. This compares to comparable store sales growth in fiscal year 2007 of 0.3%. Comparable stores exclude new retail concepts until such time as the company believes that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. For fiscal year 2008, the company expects to exclude West Elm and Williams-Sonoma Home.
- Retail leased and selling square footage in fiscal year 2008 are projected to increase in the range of 7% to 7.5%, versus previous guidance in the range of 7.5% to 8.5%. This compares to retail leased and selling square footage growth in fiscal year 2007 of 5.3% and 5.5%, respectively.

- Non-GAAP earnings per share guidance have been reduced by 6 cents to 7 cents per share, to $1.31 to $1.44.
- When reconciling current non-GAAP earnings per share guidance to previous guidance, it is important to note that the early lease termination benefit of 5 cents in the first quarter was included in previous guidance but not until the second quarter. Therefore the timing of this benefit only affects first and second quarter guidance, not the full year.
- On a GAAP basis, the company is increasing earnings per share guidance by 2 cents to 3 cents, to $1.45 to $1.58, due to the 9 cents gain from the sale of corporate aircraft, partially offset by lower revenues and softer margins.

Key questions from the first quarter earnings call conducted by Williams-Sonoma, Inc. on June 4, 2008.

Colin McGranahan (Sanford Bernstein): Could you talk specifically about some of the cost reduction and expense management initiatives?

W. Howard Lester: We have virtually leaving no stone unturned. We have gone through and continue to all the essential activities in the company and we have looked at can we do those better. In some cases, we have had some reorganization; in some cases, we set more stringent goals for ourselves and we have had some favorable results in achieving those, like returns and replacements, as part of our whole supply chain initiatives. We have got a lot of those underway. We have made great progress throughout our domestic delivery to our customers. The final mile and in-sourcing are up, all the things we have talked about. In our corporate cost centers, the same thing has been true. We have done some reorganization. We have been thoughtful about new hires, although we are continuing to run our business in the most effective way that we can. We did this year froze our merit increases for the year for our associates, while at the same time we reviewed every associate’s compensation with the market and if they were not in line with the market, then we did correct that. We have made improvement, as we have talked about, on our advertising expense where we had done other things with paid search and other activities there, led by Pat Connelly and all the teams in the brands. We have made real progress there. You saw some of that in the first quarter and you will continue to do it. Our emerging brands, the profitability is up, so we have improved that over a year ago considerably. So across the board, we have got a lot of things. I could go on for a long time here about everything from how we are photographing our catalogs to how we are buying paper to how we are doing - virtually everything that we do in the company, we are looking at everything methodically and we are not through. We have more things that we will be doing in the future.

Dana Telsey (Telsey Advisory Group): How do you see the inventory progression continuing?

Sharon L. McCollam: There is aggressive action happening in Pottery Barn but we are looking at tightening our inventories in every brand and improving our turn to the extent that it does not negatively impact customer service. Dave has substantial initiatives in all three of his brands, as does Laura, to improve turns and to improve asset efficiency, as we discussed. By the end of the year, our guidance currently says that we could have inventories going down, low single digits, and on the high-end of our guidance, we would be up in the mid-single-digit positive range, but we are targeting the low-end of that range at this time, in light of the macro.

Dana Telsey (Telsey Advisory Group): As you think about Pottery Barn, how are you doing on opening price points and what are you seeing in terms of the new product offering and how you position it?

Laura J. Alber: We were pleased during the first quarter to see the Pottery Barn and Pottery Barn Kids inventory virtually flat year over year. We have been aggressive as we see top line decline in cutting back our slow-turning core receipts and we are starting to see the results of that, which should not impact or will not impact our newness and our ability to execute against our service metrics. Our service metrics are up versus last year so we are mindful of that but we do have a substantial opportunity to continue to reduce receipts through the balance of the year. We were able in the first quarter to get out of an off-site storage location in Memphis this quarter, which was a big achievement and we continue to push to have those operational efficiencies through the back half of the year. You are going to see inventory decline versus last year progressively through the balance of this year. As it relates to opening price points, we have been focused on areas in our business where the customer can easily update their home, those being decorative accessories, pillows, linens, and lighting, and those happen to be our strongest categories and we have been strategically marketing them and buying into a broader and better designed line there. Those are the highlights of our business, those easy updates. In terms of specifically opening price points on other products, we see success when we have a great combination of design quality and price, and in some cases, some of our best new furniture collections have been mid-priced, not at the lower level but the value is better than what you can buy elsewhere.

Matt Nemer (Thomas Weisel Partners): Can you talk about the cost differential between sending a catalog and the cost per click?

David DeMattei: What we are always doing is looking at the productivity of the last catalog mailed versus the next dollar that we can spend on paid search, and over the past couple of years, we have been able to intensify the efforts in search and reduce some of the marginal catalog mailings, and that is the best way to answer that.

Matt Nemer (Thomas Weisel Partners): How you get to the sequential improvement in year-over-year earnings and are you willing to protect these numbers with additional reduced circulation if you need to?

Sharon L. McCollam: We will continue to evaluate that and I believe that across all brands, to the extent that we see increased changes in the macro environment or opportunities as we continue with our versioning, we will be prepared to capitalize on those opportunities in the back half.

Budd Bugatch (Raymond James): Income tax rate for the second quarter was 31% to 32%. Is that affected significantly by the aircraft sale or are there other issues that are affecting that?

Sharon L. McCollam: No, we are aggressively looking at several unresolved tax situations that we have and we believe we are going to see, like we did in the first quarter, certain favorable income tax resolutions that will occur in the second quarter. The aircraft has no impact on the tax rate. It has an impact on cash flow but not on the tax rate.
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