Williams-Sonoma, Inc. (WSM)
Q1 2009 Earnings Call Transcript
June 3, 2009 10:00 a.m. ET

Executives

Stephen C. Nelson - Director, Investor Relations
W. Howard Lester - Chairman of the Board, Chief Executive Officer
Sharon L. McCollam - Chief Financial Officer, Chief Operating Officer
David DeMattei - Group President - Williams-Sonoma, Williams-Sonoma Home, West Elm
Laura J. Alber- President
Patrick J. Connolly - Executive Vice President, Chief Marketing Officer, Director

Analysts

Budd Bugatch - Raymond James
Alan Rifkin - Merrill Lynch
Joe Feldman - Telsey Advisory Group
Matthew Fassler - Goldman Sachs
Colin McGranahan - Sanford C. Bernstein
Janet Kloppenberg - JJK Research
David Magee - SunTrust Robinson Humphrey
Anthony Chukumba - FTN Equity Capital Markets
Neely Tamminga - Piper Jaffray
Laura Champine - Cowen & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Williams-Sonoma Inc. first quarter 2009 earnings conference call. (Operator Instructions) At this time all participants are in a listen-only mode. We’ll conduct a question-and-answer session after the presentation. This conference is being recorded. I would now like to turn the call over to Steve Nelson, Director of Investor Relations at Williams-Sonoma Inc., to discuss non-GAAP measures and forward-looking statements.

Stephen C. Nelson – Director of Investor relations

Good morning. This morning’s conference call should be considered in conjunction with the press release that we issued earlier today. I would first like to discuss the non-GAAP financial measures that are included in this morning’s press release and today’s conference call. Our press release and this call contain non-GAAP financial measures that exclude the impact of unusual business events. For the remainder of today’s call, we will be discussing our first quarter 2009 results, our fiscal year 2009 guidance, and our 2008 results excluding the impact of these items and will refer to these results as non-GAAP. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management are discussed in Exhibit 1 of the press release.

I would now like to discuss our forward-looking statements. The forward-looking statements included in this morning’s call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, guidance, growth plans, and prospects of the company in 2009 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company’s current press releases and SEC filings, including the company’s Form 10-K, for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Howard Lester, our Chairman and Chief Executive Officer.

W. Howard Lester – Chief Executive Officer

Good morning and thank you for joining us. With me today is Laura Alber, our President; Pat Connolly, our Chief Marketing Officer; Sharon McCollam, our Chief Operating and Chief Financial Officer; and Dave DeMattei, our Group President for the Williams-Sonoma, Williams-Sonoma Home, and West Elm brands. I am going to begin today with an overview of our first quarter 2009 results and our outlook for the balance of the year. Then I’ll turn the call over to Sharon, Dave, and Laura for further details.

While the home furnishing sector continued to be under significant macro pressure in the first quarter, a realistic sales plan and aggressive cost actions allowed us to deliver better than expected results in an extremely difficult environment. During the quarter, revenue stabilized at the October-November two-year trend and we substantially exceeded our expense reduction and cash flow targets by optimizing advertising costs, managing promotional activity, expense reductions, and tightly controlled inventories and SG&A. In the first quarter, net revenues declined 22% versus last year, resulting in a non-GAAP loss of $0.14 per diluted share. During the quarter, comparable store sales declined a better than expected 21% and selling margins were above expectations. In our core brands, net revenues decreased 23%. This decline was driven by a 27% decrease in the Pottery Barns Kids brand, a 26% decrease in the Pottery Barn brand, and an 11% decrease in the Williams-Sonoma brand. And what those numbers don’t yet reflect is the significant progress we’ve made in the Pottery Barn brand, both in merchandising and retail execution. We’ve been working on this initiative for some time and feel confident that our current merchandising strategies, combined with our superior service in our stores, is the best we’ve seen here in several years.

In our emerging brands, which include West Elm, PBTeen, and Williams-Sonoma Home, net revenues decreased 17% but while the top line continued to be a challenge throughout the quarter, we’ve made significant progress on several of our key initiatives. During the quarter, we continue to focus on exclusivity, perceived value, and accessibility of price points across our merchandise assortment. We are making meaningful progress in this area, particularly in our Williams-Sonoma and Pottery Barn brands, and are expecting substantially greater penetration in the back half of the year. In direct marketing, we continue to move forward with our catalog circulation optimization strategy, which combined with catalog production savings drove a 30% reduction in advertising expense during the quarter. These savings were net of a 25% increase in online marketing, which resulted in the e-commerce channel being our best-performing channel on a two-year trend basis. We continue to believe there’s significant opportunity in the refinement of the balance between catalog circulation and online marketing and we’ll be evaluating these opportunities as the year progresses.

In the supply chain, we saw both customer service and financial benefits from our ongoing returns, replacements and damages initiative. This is a key initiative for us and we believe there’s still a significant opportunity to further reduce our costs as we assume greater control over our Asian furniture operations and consolidate our remaining large cube home furnishings inventories into our regional hubs. We’ve also made significant progress on our inventory reduction initiative. At the end of the first quarter, year-over-year inventory was down a better than expected $166 million, or 23%. As we look forward to the balance of the year, we are guiding revenues to remain in line with the October/November trend and the promotional environment to potentially accelerate based on ongoing competitor announcements of store closings, inventory liquidations, and bankruptcies. As this is consistent with our previous view, we are reiterating the quarterly guidance we provided in March. But while this guidance may be reflective of the current environment, we remain committed to changing the outcome. Therefore, we are focused on the things we can control and are committed to delivering against the following initiatives for the balance of the year.

Capturing market share through innovative merchandising, superior customer service, and a greater emphasis on opening price points; continuing to optimize our advertising spend through refinements in catalog circulation and Internet marketing; driving efficiencies in our supply chain, including the continuation of our returns, replacements, and damages and worldwide sourcing initiatives; developing an aggressive plan to reduce fixed occupancy costs where possible, including the closure and lease renegotiation of under-performing retail stores and the elimination of excess distribution and corporate office space; and maximizing profitability and cash flow through aggressive cost reduction, inventory management, and capital spending initiatives. All of these actions will improve our bottom line, strengthen our balance sheet, and position our brands to emerge stronger when the economy improves. While we recognize that our business is being significantly impacted by economic issues far beyond our control, people’s homes are still one of their most material assets and they will invest in them over time and when they do, our brands will be well-positioned to capitalize on the opportunity.

I would like to now turn the call over to Sharon.

Sharon L. McCollam – Chief Financial Officer