Williams-Sonoma, Inc. (WSM)
Q4 2009 Earnings Call Transcript
March 22, 2010 10:00 a.m. ET

Executives

Steve Nelson – Director, Investor Relations
Howard Lester – Chairman and Chief Executive Officer
Sharon McCollam – Executive VP, Chief Operating Officer and Chief Financial Officer
Laura Alber – President
Pat Connolly – Executive VP and Chief Marketing Officer

Analysts

Budd Bugatch – Raymond James
Matt Nemer – Wells Fargo
Alan Rifkin – Bank of America
Matthew Fassler – Goldman Sachs
Joe Feldman – Telsey Advisory Group
Chris Horvers – JP Morgan
Kate McShane – Citi Investment Research
Colin McGranahan – Bernstein
Scot Ciccarelli – RBC Capital Markets
Michael Lasser – Barclays Capital
Laura Champine – Cowen & Company
Neely Tamminga – Piper Jaffray
Christian Buss – Thomas Weisel Partners
Mike Baker – Deutsche Bank

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Williams-Sonoma Incorporated fourth quarter and fiscal year 2009 earnings and fiscal year 2010 guidance conference call. At this time, all participants are in a listen-only mode. We will 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, to discuss the non-GAAP measures and forward-looking statements.

Steve Nelson – Director of Investor Relations

Good morning. This morning''s conference call should be considered in conjunction with the press releases that we issued earlier today. Our press releases and this call contain non-GAAP financial measures that exclude the impact of unusual business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. A reconciliation of these non-GAAP financial measures, and the most directly comparable GAAP financial measures, and an explanation of why these non-GAAP financial measures are useful are discussed in Exhibit 1 of the earnings press release.

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 2010 and beyond, and are subject to certain 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 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.

Howard Lester – Chief Executive Officer

Good morning and thank you for joining us. With me today is Laura Alber, our President and future CEO; Sharon McCollam, our Chief Operating and Chief Financial Officer; and Pat Connolly, our Chief Marketing Officer. I’d like to begin today with an overview of our fourth quarter and fiscal year 2009 results and our 2010 outlook. Then I''ll turn the call over to Sharon and Laura for further details.

While the industry growth in the home furnishings category continued to decline in the fourth quarter, we saw positive momentum in virtually every aspect of our business, including sales, margin and supply chain efficiency. Our cost containment and inventory management initiatives delivered benefits that were well beyond our expectations, and cash flow reached record levels. On revenue growth of 8%, we delivered non-GAAP diluted earnings per share of $0.86 versus $0.31 last year and continued to strengthen the balance sheet by reducing our inventories to their lowest level in five years. We ended the quarter with over $0.5 billion in cash. During the quarter, comparable store sales increased 7.6% and direct-to-customer sales increased 8.4%.

On, both a one and two-year basis, year-over-year growth trends once again sequentially improved, which validates for us the effectiveness of our merchandising and marketing strategies that were deployed during the year. To put this in perspective, two-year comparable store sales were negative 30% in Q1 versus negative 15% in Q4. In our core brands, sales trends improved in every concept, and we saw significant growth in new customer acquisition. In total, net revenues increased 7%. Williams-Sonoma increased 6%, Pottery Barn Kids increased 9%, and Pottery Barn increased 10%. I’m going to let Laura talk more about Pottery Barn and Pottery Barn Kids brands later in this morning’s call.

In the Williams-Sonoma brand, we continued to see the same economic resilience we have seen all year. During the quarter, comparable store sales increased 6% and selling margins rebounded towards historical levels. Strong merchandising, high inventories, and a focus on exclusivity drove these better than expected results.

As we enter 2010, we will execute against the following initiatives that have been providing momentum in the business over the past 12 months, including partnering with key vendors to introduce new, innovative and exclusive products, enhancing the brand’s value proposition through strategic price points and targeted promotions, and expanding this brand’s ecommerce marketing initiatives to gain market share in its fastest growing and most profitable channel.

In our emerging brands, which include West Elm, PBteen, Williams-Sonoma Home, net revenues increased 9%. In Williams-Sonoma Home, after another difficult quarter in Q4 and an extensive review of our strategic alternatives, we concluded that in the reset economy, the future potential of this brand is limited. As such, we are working on a plan to restructure the unprofitable segments of the business, including the operations of our 11 retail stores. As part of this restructuring, it is our intent to market those merchandising categories that support our bridal registry, expanded flagship, and designer assortments through the Williams-Sonoma Kitchen brand. These categories will be available both online and in select Williams-Sonoma stores. I’ll let Laura talk later about the performance of West Elm and PBteen.

I’d like now to discuss our full year performance. Throughout 2009, we saw improving sales trends and steadily increasing selling margins. As such, despite a soft top line in the first half, net revenues for the full year declined only 8%, while diluted earnings per share on a non-GAAP basis increased from $0.35 last year to $0.95 this year. To generate these results, we delivered the highest operating contribution rate in the history of our direct-to-consumer segment.