Williams-Sonoma, Inc.

Welcome to the Williams-Sonoma Incorporated Second Quarter 2020 Earnings 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 call is being recorded. I would now like to turn the call over to Elise Wang. Vice President of Investor Relations to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release. This call also contains forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, which addressed the financial conditions, results of operations, business initiatives, trends, growth plans, and prospects of the company in 2020 and beyond, and are subject to risks and uncertainties that would cause actual results to differ materially from first forward-looking statements. Please refer to the company's current press release and SEC filings, including the most recent 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 Laura Alber, our president and chief executive officer.

Thank you, Elise. Good afternoon, everyone, and thank you all for joining us. Also on the call with me today are Julie Whalen, our chief financial officer, Felix Carbullido, our chief marketing officer, and Yasser Anwar, our chief technology officer. As you saw in our press release, we delivered an exceptional second quarter, with net comp growth of 10.5%, operating margin expansion to nearly double that of last year at 13.1%, and record earnings growth of over 100%. E-commerce again drove our results, growing 46% in the quarter, and our stores performed better than expected, improving throughout the quarter as we reopened. In a time when home is more important than ever, we have taken this opportunity to push our longer-term plans, We will do this in three different ways. First, we will accelerate digital growth and fundamentally shift the channel mix of our business. Second, we're focusing our marketing strategy on content and building customer relationships. And third, we're stepping up our profitability and our longer-term earnings outlook. Our digital-first strategy, our trusted brands, our omnichannel approach, and our commitment to sustainability will continue to provide a powerful source of differentiation and a competitive advantage for our business. As always, and especially in challenging times, what makes us proud as a company goes well beyond the products we sell. In the last several months, we've witnessed not only the ongoing impact of the global pandemic, but also heartbreaking reminders of racial injustice in our country. As we continue to support COVID relief efforts in our communities, we are also taking action to help drive positive change and create a more equitable, inclusive future for all. We are committing to multi-year donations to racial justice organizations and increasing black representation internally and deepening our diversity and inclusion efforts. These are extraordinary times that require us to continuously evolve and rethink how we best serve all of our stakeholders. We are rising to the challenge, learning, adapting, and leading with our values in everything we do. We know thoughtful actions now will shape the next phase of our growth. We are firmly focused on this opportunity and investing in long-term strategies. Now let's talk about Q2 in more detail. While our net comp was at 10.5%, demand comp was substantially higher. Our e-commerce business grew at a net comp of over 46% and included purchases made through our omnichannel services such as curbside pickup and ship from store. We further optimized our digital experience adding more inspiring content and enhancing the speed and usability of our e-commerce sites. As it relates to our stores, traffic was down but conversion was up substantially and our stores outperformed expectations improving materially from May to July with third quarter to date demand comp improving to negative high single digits. Another highlight of the quarter was the significant expansion in our margins. In addition to cost savings across the business, we substantially pulled back on promotions and leaned into content-led marketing. Our value equation is driving lasting, authentic connections with our customers and also attracting record-high new customers. Our e-commerce performance this quarter was a powerful example of our brand and digital strategies at work. The key drivers of our growth were innovative, sustainable products, an engaging content-rich experience, and technology improvements. Our newly designed single-page checkout experience, improved site speed, extensive product information page improvements, and our outward-powered design crew room planner enhancements all drove strong results. Also this quarter, we continued to optimize our digital spend to high returning investments, leveraging our in-house media capabilities and a strict test and learn agenda across the portfolio. Our content-rich online experience, coupled with our marketing strategies, drove another quarter of very strong customer growth in the e-commerce channel, as well as substantial increase in organic traffic. Now let's talk about our brands. Probably the most impressive was the Williams-Sonoma brand, which delivered a record quarter with a net comp of 29.4%. We maximized the shift to cooking at home during the pandemic and executed on a relevant marketing strategy. Customer growth reached over 15%, and we saw an increasing number of new and returning customers turning to us for their cooking and at-home dining needs. Our marketing and relevant content strategies were driven by our food-first approach, highlighting ideas, recipes and culinary skills that revolved around eating well at home. To support the vendor community across the country, we added perishable products from local restaurants and increased our assortment of foods to meet the rising demand from our customers. As we look forward, we are excited about the growing interest in cooking, especially for millennials, which will not only benefit our business in the short term, but as more people learn to cook, it will become a lifelong skill that should drive our business over the longer term. To continue our growth trajectory in the Williams-Sonoma brand, we are focused on innovative exclusive products, further improving our digital experience, driving more awareness and interest in cooking at home, and optimizing our channel mix. Our Potter Bar brand also had a very successful quarter, driving a net comp of 8.1%. Our product line continued to improve with exciting new aesthetics and high-quality, sustainable products at great price points. Businesses that saw particular strength in the quarter were outdoor furniture, work from home solutions, and products to update family living spaces. Our growth initiatives, PV Apartment and Marketplace, also grew ahead of expectations and contributed meaningfully to our comp growth. The foundation of our Q2 performance was the tremendous results in our e-commerce channel, which reached over 70% of our sales. We continued to improve our site experience by adding inspiring content that drove strong organic traffic, high average order value, and units per order. Our product of our children's home furnishings business was also strong in the second quarter, with a net comp of 4.8%. It's clear that customers are responding to our sustainable, high-quality products, Our industry-leading assortment of Green Guard certified organic and fair trade products are resonating with customers more than ever, especially in our baby business, which continue to accelerate in Q2 as a key growth category. One area of softness has been our backpack business, as most schools are starting the academic year with distance learning. But we are seeing a surge in our study-at-home solutions, especially home study furniture, across both Potterburg kids and teens, as we become the destination for study from home for kids of all ages. West Elm continues to deliver very strong net comps year over year at 7% and on a two-year basis of 24.5%. This brand continues to have high appeal particularly in our furniture categories where we saw substantial growth in indoor and outdoor as well as key successes in home office, dining and storage furniture this quarter. We substantially enhanced our digital experience in previously retail-dominant categories, like upholstery, textiles, and decorative accessories, which also contributed to our growth online. Also in the quarter, we expanded our SteelCase partnership with the launch of a new furniture collection aimed at helping our customers work from home comfortably and productively with products that provide form and function. Cross-brand, our business-to-business division, re-accelerated substantially to double-digit growth. As you know, this is a large, highly fragmented industry that we are disrupting. We have invested in a strong sales team and support in our infrastructure to turn this opportunity into a $2 billion business. In the second quarter, as states reopened, we were there for our customers in offering a furniture resource that was immediately available for hotels, restaurants, and corporate public spaces. We also continued to see significantly higher sales growth from our cross-brand loyalty key members compared to non-members and more customers shopping across our portfolio of brands to furnish their homes. It goes without saying that none of these results would be possible without our people. Their ongoing resilience and dedication have never been more apparent than during these difficult times. We are proud to continue to invest in our associates through several initiatives announced this quarter, including increasing the minimum wage for hourly associates and further enhancements to our parental leave policy. Folding on our strong culture, especially in times of real adversity, is not only the right thing to do, but also creates more loyalty and a better experience for our customers. Looking forward to the second half of the year and beyond, we are confident in our growth trajectory. The strong trends from last quarter are continuing. Our product pipeline is one of the best we've ever seen. Our e-commerce initiatives are driving accelerating KPIs and our inventory position will continuously improve. Longer term, we believe the behavioral changes and industry shifts that have emerged from the pandemic will persist and continue to favor our business. Over the past five months, we have seen an acceleration in online sales and with our powerful digital platform, and trusted brands, we are maximizing the shift and driving e-commerce sales to new levels. We expect this trend to continue and are executing to a future where stores will be fewer in number but even better in experience. As a result, we are not only more confident in our long-term financial outlook but in our potential to further expand our profitability. We are investing in the next phase of our growth and the opportunities that position us for accelerated market share gains. and as we look ahead, we are more optimistic than ever about our future. Now we'll turn over to Julie who will provide more detail on our second quarter financial results.

Thank you, Laura, and good afternoon, everyone. Our second quarter performance demonstrated our ability to deliver strong top line growth at record profitability levels. Our top line acceleration combined with strong financial discipline resulted in the highest operating margin we have seen outside of a holiday fourth quarter and earnings per share of more than double last year. This performance reaffirms the resilience of our digital first model and the enduring appeal of our innovative and sustainable products. It also speaks to the strength of our team and their agility and strong execution during these challenging times. Before I discuss our financial results in more detail, I wanted to give you an update on our response strategy to the current pandemic. As COVID-19 continues to present ongoing challenges, Safety and adaptability remain our guiding principles for how we are operating during this time. This has meant heightened safety measures in all of our supply chain operations, in our reopened stores, and across our corporate offices. From a financial perspective, given the uncertainties in the macro environment going forward, maintaining strong financial health remains a top priority. As we continue to prepare our business for the various economic scenarios that could unfold in the next six to 12 months, We are maintaining tight expense control over all non-essential spend, including the elimination of almost all business travel and other discretionary spend. Advertising investments are limited to those initiatives with the highest returns, and our capital expenditures have been prioritized for those initiatives that support our e-commerce growth and further our long-term competitive positioning, including investments in technology and our supply chain operations, while reducing our investments in store remodels and relocations. These actions and our culture of strong financial disciplines have allowed us to deliver strong profitability despite the incremental operating costs associated with COVID-19. Our liquidity position remains robust as our strong performance year-to-date has generated over $216 million in operating cash flow and has contributed to bringing our cash balance to almost $950 million. And as mentioned on our last call, We further improved our financial flexibility recently by adding a half a billion of liquidity through the extension of our $300 million term loan to January 2022 and the addition of a $200 million 364-day unsecured revolving credit facility. We believe this level of liquidity puts us in a very strong position to continue supporting our operations while investing in the long-term accelerated growth of our business. Now turning back to our second quarter performance, Net revenues in the second quarter grew 8.8% to $1,491,000,000, with a net comp growth of 10.5%, the highest quarterly comp we have seen in the past 10 years. Our demand comp, which includes orders placed but not yet filled in the quarter, was substantially higher at almost 19%. This growth was driven by another quarter of incredibly strong e-commerce growth which accelerated to a net comp of 46.4% and reached almost 76% of our total revenues in the quarter. By brand, Williams Sonoma delivered a record net comp of almost 30% driven by triple digit growth in its e-commerce business. Pottery Barn accelerated to its highest quarterly net comp in recent years of 8.1% and West Elm grew at a net comp of 7% on top of 17.5% last year. Our Pottery Barn children's home furnishings business drove a net comp of 4.8% with particular strength in our teen business. And our emerging brands, Rejuvenation and Mark and Graham, delivered another quarter of double-digit growth. Moving down the income statement, gross margin for the second quarter was 37% compared to 35.4% last year. The 160 basis points of expansion in our gross margin was driven by higher merchandise margins and occupancy leverage. Higher merchandise margins resulted from reduced promotional activity as we continued with our shift to a content-led marketing strategy that focuses on the overall value equation of our high-quality, sustainable products. Occupancy leverage was driven by higher sales and an almost 6% or $11 million reduction in year-over-year occupancy costs, which includes the impact of reduced rent and operating costs from fewer stores, as well as reductions from COVID-19-related renovations. and Vince resulted in occupancy leverage of 170 basis points at $166 million or 11.2% of revenues this year as compared to $177 million or 12.9% last year. The combined impact of these two drivers was partially offset by higher shipping costs. Shipping costs were up in the quarter as a result of the substantial shift to e-commerce sales in the quarter as well as shipping surcharges from our third-party shippers that went into effect in the last month of the quarter. In addition, we continued to be negatively impacted by incremental China tariffs. SG&A leveraged 460 basis points to 23.9% of net revenues compared to 28.5% of revenues last year. This was primarily driven by significant advertising leverage as we further optimized our digital spend on those initiatives that drove high returns in traffic and conversion, employment leverage, and other leverage throughout SG&A, primarily from higher top-line performance Lower Bear of the Store Payroll, and Strong Financial Discipline. These results led to our record profitability with operating income growth of 108% to $195 million and operating margin expansion of 620 basis points to 13.1%, the highest operating margin we have seen outside of a holiday fourth quarter. This resulted in diluted earnings per share of $1.80, which was more than double that of last year at 87 cents. We are very pleased to be able to achieve these levels of profitability while continuing to pay all our corporate associates and store associates who are working over 12 hours per week, as well as absorb the incremental costs to help keep our associates and customers safe during this pandemic, including personal protective equipment, frequent cleaning, testing, and COVID bonuses for our supply chain associates. Going forward, even though our profitability is at record highs, given the uncertainty in the economic environment due to the COVID pandemic, We will continue to eliminate all non-essential spend to ensure that we can continue to fund the operations of our business and to invest through this crisis and emerge as an even stronger and more resilient business delivering sustainable long-term profitable growth. On the balance sheet, as previously mentioned, we ended the quarter with a strong cash balance of almost $950 million compared to $120 million last year. This reflects the strength of our cash balance as we enter 2020. The full drawdown on our $500 million line of credit with the support of our banking partners back in March, as well as the resilience of our business during this pandemic, generating positive operating cash flow of over $216 million year-to-date. This cash balance has allowed us to not only fund the operations of the business, but to also invest over $76 million in capital expenditures in support of our future growth and to return over $79 million in the form of continued quarterly dividend payments to our shareholders. and given the strength of our business and our current liquidity levels, we have made the decision to return our capital expenditures to pre-pandemic levels. We are also contemplating reducing the amount outstanding on our $500 million line of credit during the third quarter. Our decision process will take into account various factors, including the uncertainty that still remains in the macro environment. Moving down the balance sheet, merchandise inventories were $1 billion, $42 million for a decrease of 12.2% compared to last year. This reflects our efforts to cut and push out our inventory purchases to preserve our liquidity at the beginning of the pandemic and the impact of our subsequent substantial e-commerce outperformance in the past two quarters. We have been working closely with our vendor partners, the majority of whom have returned operating at full capacity, and we expect to see continuous improvement in our inventory position. Turning to our outlook for the second half and our fiscal year guidance, we have made the decision not to provide specific full-year guidance at this time given the uncertainty in the economic environment due to the COVID pandemic. What we do know now is that our business continues to be very strong in the third quarter. Quarter to date sales remain robust across all brands and inventory will continuously improve through the balance of the year. However, as much as we expect to improve our overall profitability on the year and going forward, the Q2 level of SG&A is not sustainable. We have significantly reduced payroll and ad cost spend as our sales expectations were lower than what we actually delivered this quarter. In terms of margin, we believe they are going to continue to be able to reduce promotions as well as deliver occupancy leverage, but shipping will be a major headwind in the back half. Various surcharges have been announced by third-party shippers on all retailers, and these higher costs will affect us in Q3 and more so in Q4 as a result of peak surcharges during the holiday season. In addition, we also expect to incur incremental costs associated with keeping our people and customers safe during the pandemic. Regardless, we remain confident in our ability to drive higher operating margins on the year compared to last year due to our strong performance to date, including our robust e-commerce performance, which we believe will persist through the balance of the year. With regards to capital allocation, given our business has not only recovered substantially but excelled during this pandemic, We have increased our capital investments in high returning initiatives that focus on digital to drive our long-term growth. And as it relates to our dividend, we have announced today another quarterly cash dividend of 48 cents per share, which speaks to the confidence we have in our business, as well as our commitment to shareholder returns. Looking further ahead, as Laura mentioned, we are even more confident in our long-term financial outlook. The renewed appreciation for the home and at-home experiences, such as cooking and working from home, Together with the accelerated shift to online for home furnishings continue to favor our business on all fronts. We are executing with speed and agility to capture the unprecedented opportunity that lies ahead for our company. Our strong performance through this crisis reinforces the relevance of our design-led sustainable products and the power of our digital-first platform. With more consolidation expected in our highly fragmented industry, we are confident that we are one of the very few retailers who are best positioned to outperform and to aggressively take share. As a result, we now believe that with the acceleration of our profitable e-commerce business becoming a bigger part of our total growth, we can drive operating margin expansion. In summary, this past quarter was another powerful display of our competitive strengths that continue to extend our leadership in the home industry. Our innovative, sustainable products, our multi-brand digital-first model, and our content-rich marketing are the reasons why customers are choosing us over the competition. And this, combined with our long-term growth roadmap and strong execution, gives us the confidence in our ability to maintain this growth and increase profitability in the years ahead. Before I turn the call over for questions, I want to thank our associates for their ongoing dedication, flexibility, and resilience during these challenging times. They are at the core of our company's success and our ability to continue to serve all our stakeholders Our customers, our associates, and our shareholders. I would now like to open the call for questions. Thank you.

Thank you very much. If you'd like to ask a question on today's call, please press star 1 on your telephone keypad. If you're listening today using a speakerphone, please pick up your handset before pressing the corresponding digits. Please limit yourself to only one question. We'll go ahead and take our first question from Adrienne with Barclays. Please go ahead.

Good afternoon, and let me say a remarkable quarter, really truly remarkable. Laura, I was wondering if, or actually Laura or Julie, if you can talk about what drove the late quarter demand comp, the differential between the 19 and the 10.5.

Should we assume that that's sort of a tailwind that should be recognized on top of whatever kind of momentum comp you had? in the third quarter. And then just really quickly, are you seeing trends outside of major metropolitan suburbs, this notion of de-urbanization as a sustainable trend? How do you think about that going forward? Thank you very much.

Thanks, Adrienne. It's Laura. So we've seen very strong demand. And as you know, when the pandemic began, we substantially cut our inventory. and our vendor partners are so reactive that they were able to do that. And so obviously as our demand exceeded the inventory levels, not only do you not fill it in some cases, you put it on back order, but also the demand itself is constrained. So one could say that the demand comps have actually been even higher had we had the inventory in stock. So the inventory levels were point one. Point two is nixed. So our business is growing really across the board, but more rapidly in furniture, and specifically dropped ship furniture. We made a big strategic move to move a lot of our Asian upholstery, particularly for West Elm, into our Sutter Street operations. And so, of course, that inventory previously was stored in our distribution center, and now we're making it to order. So there's a natural delay that also just happens because we're shifting into domestic upholstery. In terms of your second question about demographics, we have Felix here. Felix, do you want to talk about our customers and what we're seeing across the board?

You got it. In terms of urban, suburban, we haven't seen dramatic shifts, but I think what's noteworthy is the shift into a slightly younger demographic with the millennial population getting into household formation. We also are seeing a nice growth in condo and apartment dwellers where I think we've spent a lot of time and energy focused on the size and scale of our furniture as well as our opening price points. I think that coupled with the fact that we do offer such a great assortment that is Thank you very much. Thank you.

Maybe, Julie, can you frame the tariffs hit this quarter? And as we think about the second half here, the tariff headwinds should basically be a push, I would think, but I just wanted to confirm that. And when you think about that, how's the shipping cost headwind in comparison to the size of the tariff headwind? That shipping headwind just basically replaced what's been the tariff headwind. So kind of a cost question. I know you mentioned it in your prepared remarks, but Can you give us maybe a little bit more detail around those so we can think about that correctly? Thank you.

Sure. So from a China tariff perspective, as we've said before, as we move throughout the year, the year-over-year impact becomes less. There's still a year-over-year impact in the back half, but it's not as big as Q1 and Q2. And so that will reduce as we move throughout the year, but we'll still have, obviously, the China tariffs. As far as the shipping, the shipping charges are material. You know, I think you've heard from the third-party shippers that they are imposing surcharges on all retailers. And so that will be a headwind as we move into the back half, particularly in the fourth quarter with peak surcharges. And it'll be sizable. We haven't disclosed the amount. Obviously, it's confidential. From a contractual perspective, we can't speak about it. But it is something that will put pressure on our gross margins. But of course, with, you know, occupancy leverage and higher merge margins that are expected and ongoing SG&A leverage, we are very confident in our ability to drive off margin expansion.

Okay, great. Thank you very much.

And as a reminder that please limit yourself to one question, we'll go ahead and take our next question from Brian Nagel with Oppenheimer. Please go ahead.

Good afternoon. Great quarter. Congratulations. Thank you. I'll stick to the one-question rule. Just maybe to elaborate further, just on the trend in business through the quarter. I think, Laura, you had mentioned in your comments about how stores are tracking. I'm looking at just how the business trended through the quarter, both in-store and online, and particularly as the stores opened. And maybe if you could elaborate further on just what we're seeing so far into the third quarter.

Yeah, I mean, it's not, there's nothing really there that would be interesting, I don't think, to you, even if you saw everything. It's very consistently strong as it is still now. You know, of course the stores opened and then now we have, I think, 22 currently reshut. So that doesn't help when I read you, you know, the comp and I told you earlier where the comp is right now. That includes that. So, you know, we have just rock star store people who are driving business, not just when the stores are open, but also driving online through design and virtual chats, which is quite amazing. And so, you know, they're just so dedicated. We're so proud of them. And, you know, that's a big part of, I think, these results is what they're doing. And their training, you know, we kept them all working, and they're so valuable to us because they know how to sell furniture, they know our line of furniture, and they're able to do it from home. It wasn't great that stores reclosed. That was hard for everyone, but they're making the most of it. The big question becomes, I think as we look in the second half, is what happens? Do more stores shut? Do more stores open? That would be a benefit. I think the stores are really an add to our digital first strategy. They certainly bring to life our products and allow you to make even a better decision. Very hopeful that they'll stay open and we'll keep everybody safe as we have been with our appointments and our safety protocol and constant cleaning. So we're very optimistic about the back half. We have a lot of things in our favor and we feel very lucky in a time where I know it's not the case for everyone and we're very cognizant of that and empathetic about what's going on in the world and doing our part to use our strength to also make a big difference in the communities and with our employees to drive both safety but also mental health and racial justice. I know it's a lot of an answer to your one question but it's important to us and it's our true north right now. Our values are driving our business and our business is allowing us to do more for our stakeholders.

So through Q2, though, did the business strengthen through the second quarter?

It was strong throughout. It's strong. It's a strong throughout. There's different things that happen when you comp different promos. You decide not to comp a promo, and that has nothing to do with demand. It's just how it flows. But there's not a lot of change there.

Got it. Okay. Congrats again, and thank you.

Thanks.

We'll take our next question from Oliver Wintermantle with Evercore ISI. Please go ahead.

Yeah, thanks very much. Laura, you mentioned several times in the prepared remarks like your digital first strategy and investments in CapEx more on the e-commerce side and IT investments. What does that mean for your store base? Is there an underlying message that we might see an accelerated store closures or I just want to see you in two years or three years, how would your store base look compared to today?

Yeah, sure. So first of all, we have been investing in e-commerce for many years, so we have a very sophisticated platform. It's not as if we have some big hockey stick to come with a tech stack. I'm going to let Yasser in a minute, who's with us, talk about the things we are adding that are driving significant growth. Performance, but let me answer your store question specifically. So we see stores as an addition to our strategy. That said, we have significant amounts of leases up for renewal in the next three years. Over half come up. Over half. So whether we keep them, close them, renegotiate them, or Relocate, we are sitting in a very strategic place in this time. And we are investing in our stores where we operate and we are closing others so that we can be very focused on running great stores with great experiences in them. The mix will continue to shift, obviously because the growth in DTC is much greater and stores are contracting and this is giving us a lot of occupancy leverage. and our landlord partners, we have some very, very good ones, really see us as a very strong partner. They want to keep us and we're working together with them to stay in those stores and have very high profit levels. And where that doesn't work for them, we go somewhere else or we leave entirely the market. I think this pandemic has shown us that we are agile and we can operate regardless. and those store people are the people who make this happen, whether they have their stores open or they're talking to customers from home. And that was something that I think we were all really just, we hoped would happen, but we're so impressed, continues to be a strength. Okay, so now I'd like to pass it over to Yasir to talk about our stance on technology and investment in e-commerce.

Great. Thanks, Laura. So I think, you know, connecting it with the stores, and then I'll get into the e-commerce. Like, stores also, like, you know, we have provided, continue to provide and invest great tools into the hands of our associates, especially our designers, who are connected deep into the community. The design experiences Laura just mentioned about the design tools, the virtual chat, the appointments, all of that, that has given strong tools into the hands of our designers, and that have made an impact in engaging with the customers. and, you know, we have also been continuously investing in converting stores into more omni-experiences, like whether it's buy online, pick up in stores, ship from store, ship to store, curbside pickup, especially providing safety to the customers during the COVID times. And that has worked very well for our customers and for our associates. And, you know, our e-commerce, which has been a huge business and has been a big growth engine for us, continues to invest in COVID, Thank you. Thank you. Thank you. During these COVID times, as you know, many companies have gone through faster transformation, digital transformation. We have done the same many, many X times. We have gone faster in implementing, building things, which might have taken six months in a regular time period. My teams have built it in two months, one and a half months. We have gone very fast to the market to experiment with the customers and learn the signals from the customers, what they need in our sites and experiences, using our own homegrown experimentation platforms. using our own homegrown recommendations platform. And you know the outward power which Laura and everybody on the leadership talks about is like we're trying to be connecting outward much better than ever with our website experiences, with our store experiences and design. So I can go on and on. The supply chain transformation we're doing and one important thing to see is like the transformation in the past two years has been to focus and drive our decisions based on data, analytics, and powered by artificial intelligence and ML, whether it's search engine, whether it's outward experiences and all. So I think we have developed a very, very strong package, talent, platform, technology and the innovation stream is going very fast and we believe this is like sort of the, it's not the end, it's at the beginning and we're going to build so much more which is going to be very long lasting beyond COVID and beyond 2021 and further.

Got it. Thanks very much and good luck.

Go ahead and take our next question from Chris Horvitz with JP Morgan. Please go ahead.

Thanks. Good evening. Very nice quarter. A couple questions on the margins. First, in the near term, do you expect gross margin to be down in the back half but leverage operating margin overall on the SG&A? And secondly, as you think about the SG&A, Some of what happened in this quarter, what's the right baseline that we should be building off of? What would you consider the one-time cost bucket, just as we think about normal seasonality of SG&A dollars?

Hi, Chris. This is Julie. I'll take that. So from a gross margin perspective, I think what we were really excited to see was the expansion we saw this quarter, and that's both from the fact that we had higher merchandise margins and occupancy leverage, and we have every reason to believe that that's going to continue. Certainly, there'll be higher pressure on shipping costs, but we're not, you know, obviously guiding to where the gross margin is going to be, but we're really thrilled to be able to drive that gross margin expansion, even with this quarter having some pressure from the shipping costs. and certainly SG&A has been leveraging for a while now and we expect that to continue. We've been having some obviously really strong cost controls, eliminating all non-essential spend and being very thoughtful about that because there's different scenarios you can model and we've got to make sure we're ready to continue to invest in this business and take market share as we come out of this even more so. But I will say Q2 was certainly some of the lowest levels we've seen. and so as we move into the back half with the peak holiday season and things like that, we may have to spend a little bit more in advertising and a little bit more in variable store payroll. So I wouldn't necessarily take our Q2 levels and model those out, but we do expect to have SGA leverage and we absolutely expect to have operating margin expansion.

We'll go ahead and take our next question from Chuck Grom with Gordon Haskett. Please go ahead.

Hey, thanks. Good afternoon. Just a couple for me. On the spread again between net comp and demand, can you just help us think about that from a banner perspective and I guess how that's going to impact third quarter results? Do you expect to recapture that demand comp? And then on the long-term guide, can you provide us some guideposts on where you think operating margins can go to or maybe said differently what you think the flow through will look like going forward? Thanks.

Hi, Chuck. So, sorry, we're not going to give you the guidepost you're looking for. We're not ready to do that. What we're changing is to say that previously we said our out margin at 8.6 would stay there and we'd drive sales. Now what we're saying is we're going to drive sales, but we're also going to drive profit ahead of the 8.6. Okay, so that's all we're willing to say at this point. In terms of by banner, that's an interesting question. So, of course, because of the dynamic I talked about with furniture, the spread is larger with the furniture brands because Williams-Sonoma, although there is components that are to come and that are furniture, it's a much smaller percent. So the other brands have more higher demand comp versus net than the Sonoma banner. And then let's see. Third quarter, you asked me, remind me what you asked me about third quarter.

I guess just, well, I'd like to know what the quarter-to-day count is, but I know you're not going to answer that. But I guess, like, when do you expect it, when would you expect this to recapture that? I mean, how long does it take to recapture? Oh, I remember.

You asked me where the net comes. I mean, it's an interesting question. If demand continues to exceed our expectations, then the inventory constraint will just be kicked down the line because demand You'll run out faster. So if everything stuck to where we think it's going to be, you'd see recovery in the back half all the way into next year, by the way. But if we beat the numbers again, then you're going to be hearing me say this next time. The numbers are within what you're seeing us hit now. There's some variation here and there, but they're within the same range of what the comp is that we just shared with you for Q2. I hope that's helpful.

Yeah, I got it. Thanks a lot.

We'll go ahead and take our next question from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot, and good afternoon and great quarter. My question is around SG&A. Clearly, over time, you're planning to reduce your store footprint, which will reduce your occupancy costs but also take out store labor. As it relates to store labor in the interim, would you plan to reduce that even ahead of store closures because of reduced traffic levels?

No, in fact, it might be the opposite because, you know, things get more complicated. The baiting factor is that we can't have that many people in our stores, so even if the demand is there, we can only have so many people. But you should not model that store labor will leverage any further. Holiday will cause us to bring more people in because the sales are higher.

Got it. Okay, that's helpful. And if I could just follow up, if you don't mind, as it relates to SG&A, thinking about the go-forward run rate, clearly we're talking about levels that are higher than the second quarter. Just to reframe the question that others have asked, we're thinking about it on a year-over-year basis. Would you expect SG&A to be down year-over-year in the back half of the year?

SG&A down to, we expect SG&A in the back half to be down to last year's SG&A in the back half.

Thank you.

And as a reminder, please limit yourself to one question. We'll go ahead and take our next question from Brad Thomas with KeyBank Capital Markets. Please go ahead.

Hi, thanks for taking my question. Congratulations for me as well. I want to ask about the dynamic of You know, sustainability and pull forward that we're all asking of many, you know, home-related companies right now. You know, I've been asked by investors, how many bread makers does an American need to buy? I'm of the belief that these trends are probably pretty sustainable, but I was hoping you could share some more data on maybe how the customer is shopping you now and what you're seeing in terms of repeat purchases and ability to, you know, cross-pollinate customers across your brand. Thank you.

Yeah, our cross-brand performance has never been better, and we've been driving it. It's not a surprise. I mean, we're driving it through our key rewards and our cross-brand marketing. You know, it's interesting. In the beginning, we saw the obvious bread maker trend, ice cream maker. But now the strength is broad-based, and you can just see that people are very interested in making their home more comfortable, and we are top of mind with our curated products and our trusted brands. and we're delivering it for them in a way that they can expect to get it and we stand behind it. So there's a lot that we have going for us right now that's very relevant to this time and a competitive advantage that will continue to drive our results.

We'll go ahead and take our next question from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. Laura, you probably saw some of your competitors' reports, like 80% growth at Wayfair, Target comping up 30% in the home category. Why do you think, in light of those, you might have lost share in the quarter? And also, how much demand comp was realized that was coming out of 1Q into 2Q to contribute to the comp? in QQ.

Okay, we'll have to come back to that piece. But versus competitors, I want you to look at our profit levels versus last year, first and foremost, and compare to some of these other people. You can drive sales. We could drive them higher. Frankly, we didn't have the inventory to do that. We want to have a great customer experience. We don't want Any more than we have to have on backorder. We know the items they're willing to wait for that don't become excessive, but if you put too much on backorder, it's a bad customer experience. We're very focused on taking shares. I've said before, it's not an either or with us in Wayfair. As the disruption in brick and mortar happens and the smaller players, there's a couple people who are going to win, and we're one of those people. because, you know, currently 80% has been done at retail. And that has obviously changed forever now. And so they are going to us and they're going to go to those other retailers too. And the thing that is really the differentiator with us is that we have curated brands. You don't have to search through a ton of products. You can trust the level of quality. The products are sustainable. The value equation is fair. and, you know, those are all very important attributes to a customer. And we're able to do that because we design our own products. We make our own products. So we're giving you a great price point for what we're selling you. So, you know, it doesn't faze me to, you know, to think about their growth slightly higher. We also, obviously, in terms of a demand question, let me try to understand what you asked. I think you're asking... We're always going to fill from the other quarter. We have more of a gap than we have a benefit. We have more demand than we can fill now. That affected the Q2 net negatively.

Understood. Could I ask one quick one on the Williams-Sonoma concept? How much of that growth came from consumable products or a lot of food that that business sells versus Devices, and other items that go into the support of Clicking Something.

All good.

All good. Okay. Thank you very much.

Thank you. And we'll go ahead and take our next question from Anthony Chukumbo with Lupa Capital Markets. Please go ahead.

Good morning. Let me thank Edmack. Congratulations on the next quarter as well. I guess my question is, I mean, obviously your e-commerce penetration sounds like it was at an all-time high, and it sounds like that's kind of where the business is shifting. Historically, you've been sort of like 50-50 between in-store revenues, DTC. What do you envision as sort of a long, even just kind of direction, kind of a long-term kind of sustainable mix going forward? Is it more like 60-40 e-commerce stores, is it maybe 70-30? How do you sort of think about that? Thank you.

I think the best way to think about it is how big do you think the total business could be? You know, I mean, clearly we're ahead of our targets with respect to e-commerce as a percent of our total, and that's where the growth is going to come from. Our results show that, you know, our digital-first platform has a lot of capacity to meet our customers' demand online. and it also depends on how many stores we close and what our landlords do with our leases in the future but our physical stores play an important role in continuing to differentiate our offering to the customer and they are experiential and they offer our customers the convenience of omni-channel services too which we haven't talked about but that is a real benefit in getting the products close to the customer particularly as we see the shipping battlefield and so We're currently at 70. Could you say could it go higher? Yeah, but you might see better than expected store results through the back half as well.

Got it. That's helpful. Thank you so much. Sure.

We'll go ahead and take our next question from Cristina Fernandez with Hesley Advisory Group. Please go ahead.

Hi, and I'll add my congratulations for the quarter. I wanted to ask about the holiday season. How are you planning it differently this year, given the cadence of events and store limits? And do you think the merchandise that has worked so far will continue to drive that demand through the holiday season? Thanks.

Yeah, thank you for the question. Of course, yes. We always know that getting a running start in the holiday with both customers, new customers, but also products that are selling makes for a better season and also gives us the ability to get the inventory levels right because we can chase it. That is all good. In terms of the competitive posture and how we're planning the holiday season, I hesitate to go through that now because it is so competitive, but we're very optimistic and planning for a variety of different outcomes that could occur, as I mentioned earlier, in case we have a second wave of store closures, how will we handle that, and if we continue to beat demand in BTC, how we make sure that we get it to our customers on time.

We'll go ahead and take our next question from Bobby Griffin with Raymond James. Please go ahead.

Good afternoon. Let me add my congrats on a great quarter. Just real quickly from a high-level perspective, Laura, do you think the pandemic has delayed any of the new product innovation or development that the industry typically has? Or is once the industry gets caught up kind of in this from this demand and kind of supply chain gets back to normal, will we be back on a typical product introduction cycle as we have been in the past?

We are not delayed in our product introductions. I don't know if maybe others are, but we are not. Our teams have been doing it virtually and approving samples via Zoom. It's been pretty amazing what they've been able to do. So no, we're not behind. In fact, it's an interesting point that I hadn't thought of. We're probably gaining speed on others who aren't as agile.

We'll go ahead and take our next question from Marnie Shapiro with Retail Tracker. Please go ahead.

Really outstanding. Could you give us an update on some of your smaller brands, a little bit on Mark and Graham and Rejuvenation, and just an update as well on your international businesses?

I don't recall hearing an update on that.

Yeah, sure. Thank you for that question. So Rejuvenation delivered a very strong quarter, strong customer engagement, big time increase in traffic, and stores have shown vast improvement. The AOV is up. Substantially, and as I said, customer growth. You can imagine with customers spending more time in their homes focused on home projects, we've seen our core categories like lighting, hard bar, and kitchen and bath all drive strong quarter-to-date double-digit comps. And we saw the furniture that was impacted more greatly because of store closures rebound later in the quarter. And we remain really focused and bullish on this strategy, accelerating our digital growth, optimizing our marketing strategy. and accelerating our contract trade strategy, which is a big part of this business. Mark and Graham also had a very strong quarter despite the fact that they are not as focused on home, which is quite interesting. And they continue to pivot that merchandising strategy to areas that are the strongest and incremental categories like pet and baby are working. And we're really focused on optimizing the customer site experience there. We're updating the PIP with a new creative overhaul. Cleaner Personalization Experience, etc. In terms of global, this is a good one because we did see some weakness in Q2 due to franchise orders being down, but that quickly changed directions and now we are chasing orders. Just to reiterate, our strategy for global is franchise. It's not company-owned. As it relates to our company-owned note, Australia is doing pretty well. The UK is under a little pressure. We are well-positioned to continue to drive e-commerce across our franchises and our company. The thing you didn't ask, which we did mention, was B2B, which is quickly becoming a very sizable business for us and one that I think people questioned whether would stay healthy during the pandemic. And we are gaining momentum and confidence in this business with very large companies who are investing with us and are Speed to Market is a huge competitive advantage here. Our team is very aggressive, out hunting new deals all the time versus just waiting for them to come in, and that's a big change, frankly. And then also people love that they can shop across brands with a single person and have us coordinate delivery for them. So it makes it a lot easier versus going to a bunch of different purveyors. So thank you for the question, Marty.

And that does conclude today's question and answer session. I'd like to turn the call back over to Laura Alber for any additional or closing remarks.

Well, thank you all for joining us today. Thank you for your thoughtful questions, and we look forward to seeing you and talking to you soon at the next quarter earnings results.

Once again, that does conclude today's conference. Thank you so much for your participation. You may now disconnect your phone lines.