Williams-Sonoma, Inc. Common Stock (DE)

As we stand by, we're about to begin. Welcome to the Williams-Sonoma, Inc. Second Quarter 2021 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 Mr. Brian Yee, Senior Vice President of Corporate Finance and Treasury, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead, sir.

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 a forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995, which addressed the financial condition, results of operations, business initiatives, trends, growth plans, and prospects of the company in 2021 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 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 Auer, our President and Chief Executive Officer.

Laura Auer Thank you, Brian. Good afternoon, everyone. Thank you all for joining us. We are proud to report another quarter of outperformance with a 30% comp, strong growth across all brands and channels, and 360 basis points of operating margin expansion. These second quarter results demonstrate the success of our growth strategies and the earnings power of our company. We have an advantage in our industry due to our exclusive in-house design capability, our channel strategy, which is digital first but not digital only, and our values with sustainability and equity underlying all that we do. Our teams have proven their ability to move with agility and to execute against macro complexities while building for the future and improving the environment for our customers, our communities, and our associates. The momentum we are seeing in our business and our winning positioning set us up to continue to take share in a fractured market. We do not see any evidence that growth trends are waning, and in fact, we see favorability in the macro environment as more people prioritize their homes and home decor. We believe we are at the intersection of a transformative change that will accelerate the growth of our industry and our market share within the industry. Home sales in 2021 are expected to grow more than 20%, the most sales recorded since 2005. The acceptance of remote work is gaining traction, with the number of remote hybrid workers expected to nearly double in five years from pre-COVID metrics. In addition, our growth strategies are gaining traction faster than we predicted, and our key differentiators are further distancing us from our competition. Therefore, we see a clear path to beating our previous revenue and profitability targets, and we are raising our full-year revenue outlook again with revenue growth now expected to be in the high teen to low 20s and operating margins now expected to be in the range of 16% to 17%. Given our increased optimism, we now expect to achieve our long-term goal of $10 billion in revenues in 2024, one year faster than previously expected and with higher profitability, which will now be at or above our increased FY21 operating margins. Now I'd like to talk in more detail about why our model stands out from the competition. First, our positioning. Our customers shop with us because we design high-quality and sustainable products that are engineered for value. Our platform of loved brands allows us to serve customers who are looking for quality and sustainable products at a great value across a wide range of aesthetics and scale. The home furnishings market is extremely fragmented. Our addressable market is $780 billion, and we currently only own approximately 1%. As the disruption from brick and mortar to online continues, our digital first advantage built from decades of investments into our technology, supply chain, and digital marketing infrastructure will only further distinguish us from competition and competitors that are retail dominant. And relative to the other strong online players in the market, our model is the only one with an exclusive product line and a high-service model. Second, our growth strategies are working, and the new opportunities generated from these initiatives are incremental to our business today. From our existing brands, we have a long runway to expand our reach with existing and new customers. In West Elm, we are expanding into product white space, and accelerating our presence both online and through new stores to drive our brand awareness from 20% to 60%. These growth initiatives will fuel our goal of growing this brand to 3 billion in revenues by 2024. In the Powder Barn brands, we expect to reach nearly 5 billion by 2024 by driving incremental growth in categories such as upholstery, bath, baby, and dorm. And our new updated aesthetic is resonating with both existing customers and a younger demographic of customers that are in the household formation mode. Williams-Sonoma is transforming their model to reach new customers with a higher penetration of e-commerce and a winning new store model supported with more product-exclusive products. And we have a substantial growth opportunity to take share in the high-end market with Williams-Sonoma Home. Rejuvenation in Mark and Graham with both having aggressive and profitable e-commerce growth in underserved categories, will further drive market share gains as they scale. Additionally, we have accelerators to our core business, such as B2B, which is positioned to disrupt an underserved industry and further diversify our customer profile. B2B is now on track to reach almost 700 million by this year's end, which is well ahead of our growth goals. to grow this business to at least $2 billion. Our global business, which is led by our Capital Light franchise model, allows us to move into markets faster and more profitably and is targeted to become at least a $700 million business by 2024. Our cross-brand initiatives, which are supported by our best-in-class marketing effectiveness teams and loyalty programs, like our new cross-brand credit card and growing key program, are driving incremental growth within our brands. And finally, our design services, both online and in stores. We have built an ecosystem of design tools which allow us to help furnish our customer spaces with 3D renderings created with our talented design staff or in a self-serve model online with virtual help. We already see the investments we have made in this technology paying off as large ticket orders and cross-brand orders continue to grow. and as return rates continue to come down. The competitive advantage we are creating with our service model and tools will continue to grow into the future, led by our technology talent and digital first and service mindset. In summary, the amplified power of all these factors, i.e. the macro, our winning positioning, and our growth drivers, provides an overwhelming case for outsized returns into the future. Now, as it relates to Q2, I would like to give you a few highlights which foretell the opportunity I outlined above. Our growth this quarter was driven across all brands and channels. E-commerce grew at 12%, and retail drove a 98 comp with both channels, growing at a two-year comp of over 50. And we delivered these sales more profitably, with operating margins expanding another 360 basis points to 16.7% versus last year at 13.1%. In Pottery Barn, we drove an almost 30 comp in the second quarter. All categories are outperforming with notable strength in our indoor, rustic, modern, casual point of view and in our outdoor business. We're also building momentum in our brand partnerships and our new business initiatives, including marketplace, apartment, and bath renovation, which are all growing above 30%. Our early fall results are strong, with inspiring collections across categories. In Pottery Barn Kids and Teen, we drove another quarter of double-digit comps at 18%, with strength across our proprietary 100% Green Guard gold furniture, record-setting results in our back-to-school business, and over 30% growth in our baby business. We saw an exceptional customer response to our expansion of personalized backpacks, new recycled fabrications, and reusable eco-friendly food storage and water bottles, as well as our new baby registry app. We are also seeing a very strong response to our Halloween launch, which should indicate a strong back half of the year with all the seasonal celebrations and gifting to come. In West Elm, our momentum continues to build with a 51 comp for the second quarter. We saw strength across all categories with triple-digit growth and our upholstery and outdoor furniture businesses. We've expanded our year-round outdoor assortment and our new product collections and line extensions. New categories such as Bath, Kitchen, and West Elm Kids are also fueling incremental growth for the brand. Our fall season is off to a strong start with continued strength across all categories and an exceptional response to our new opening price points, line extensions, and new introductions. In the Williams-Sonoma brand, we drove another strong quarter with a 6.4 comp on top of last year's 29.4 comp, powered by our content-led marketing and a higher percentage of exclusive and Williams-Sonoma branded products, while at the same time substantially reducing promotional activity. We see strength across key categories and fall is off to a strong start. We're also very excited to share that our new store model is working. In Q2, we opened three new stores with our newly designed inspiring store design. These stores are lighter and brighter with clear destinations improving the shopping experience. These stores are exceeding our forecast and they represent a material opportunity for us to strengthen the brand and drive more profitable retail results. As a reminder, we have nearly 50 of our Williams Cinema stores up for renewal this year. which provides us the opportunity to materially improve profitability or close. Our Williams-Sonoma home business continues to scale with our strategic reposition of the brand as a premium online furniture destination. Our high-end, sustainable, casual aesthetic is resonating with our high-end customers in an underserved market. We saw a triple-digit demand comp in outdoor furniture, further validating our belief With the right assortment and digital presentation, the WS Home brand will be one of our biggest growth opportunities. Cross-brand, our B2B division, continues to accelerate with another record-breaking quarter, up nearly 125% to over $100 million in revenue. We continue to expand our portfolio of customers, which range from Fortune 500 companies to small businesses. Year to date, 71% of our sales have come from repeat customers, and 50% of the B2B customers have shopped from more than one brand in our portfolio. We are a go-to resource for our clients across a range of their purchasing needs, from furniture to corporate gifting. In addition to the sales growth, we are continuing to make notable progress on our strategic initiatives to further accelerate the growth of this business. We continue to believe that our differentiators and our ability to tailor to our customers' unique needs will allow us to further disrupt this industry and gain market share. In addition to B2B, we are making progress migrating our customers across our brands. As a reminder, cross-brand customers spend over two times more than those who shop only one brand. And only 30% of our customers shop cross-brand today. We believe our brands offer an assortment that fulfills all rooms of the home with a product offering that is designed in-house, made from sustainable materials, and of the highest quality. At the core of the cross-brand loyalty program is the key, our free loyalty program that incents and rewards customers for shopping across our portfolio. We also recently announced our partnership with Capital One with a new cross-brand credit card, which just launched and should further incentivize this cross-shopping behavior. Now I'd like to discuss the power of our digital first advantage. E-commerce continues to drive our growth and profitability. Our in-house tech platform and rapid experimentation program continue to differentiate our customer shopping experience by improving speed, visibility to orders, site personalization, and selling capabilities. For example, as we mentioned last quarter, more customers are using our 3D design tool, the Design Crew Room Planner, where we typically see two times as many sales as we do with our average customer. In the second quarter, we saw even more usage. Plans created grew 35% over last year. This engagement with our customers extends with great service and presentation in our stores, and Omni services, which complement our digital platform. This operating model allowed us to generate strong e-commerce growth, maintaining at 65% of our revenue mix, while delivering some of the highest retail growth we have seen on both a one-year and two-year basis. The cohesiveness of our websites, stores, and storytelling brings our products to life, improving our customers' ability to visualize, and imagine our products in their homes. And with the evolving nature of shopping behaviors, the synergy from our digital-first Omni model have never felt more relevant. We are also proud to see quantifiable progress in our commitment to values, which is our third key differentiator. This quarter, we released our 2020 Impact Report, detailing progress on our ESG goals. We are proud to have already exceeded many of our goals, including our use of responsibly sourced wood, our commitment to pay fair trade premiums to our workers, and our goal to invest in education and empowerment for workers. By the end of 2021, we intend to keep 75% of our waste from stores, distribution centers, and offices out of landfill. This year, we have also set new long-term commitments, which includes selling 75% of our products with labels aligning with our social or environmental initiatives, significantly reducing our carbon footprint, and sourcing 75% of our product purchases from suppliers with worker well-being programs. We believe our values of prioritizing the health of our planet, the well-being of our people, and a shared sense of purpose to foster long-term sustainability, resonate with our customers, and will drive positive change in our industry. As we look forward to the second half of the year, we remain confident in our ability to continue taking market share. Our upcoming product pipeline is strong and we anticipate continued momentum across our entertaining and gifting related categories as we move into the holiday season. Quarter to date, we continue to see strong top line growth and strong margins. As we look beyond this year, we have a clear path to drive top line and bottom line growth. Our operating model and our pricing power, resulting from our key differentiators, our in-house design, our digital first channel, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. And this is why we have raised our full year and long-term outlook and have announced another quarterly dividend increase and a new increased share buyback program. Before I pass the call to Julie, I want to thank our team for their incredible commitment and hard work. Their energy, creativity, and integrity are the pillars for the outstanding performance we continue to achieve. And with that, I would now like to pass the call over to Julie to discuss our financial results in more detail.

Thank you, Laura, and good afternoon, everyone. The continuation of our strong top line growth at record profitability levels was validated again with another quarter of outperformance on top of elevated growth last year. Our second quarter results reflect the power of our operating model and our three key differentiators. We are one of the only companies with an exclusive in-house design capability combined with a channel strategy that is digital first but not digital only. and that leads with sustainability and values across our business and in the communities where we work. All of this is becoming increasingly more important to the consumer as evidenced by our strong second quarter results. Turning to our second quarter results in more detail. Net revenues grew over 30% to approximately $1.95 billion with comparable brand revenue growth of 29.8% and 40.3% on a two-year stack. Growth was broad-based starting with West Elm with a record comp of 51.1% which was an acceleration from the first quarter and an over 58% comp on a two-year basis. Pottery Barn, our largest brand, delivered almost $750 million of revenue with a 29.6% comp and an almost 38% two-year comp. Pottery Barn kids and teen drove another quarter of double-digit comps at 18% and an almost 23% comp on a two-year basis. In the Williams-Sonoma brand, comps were 6.4% on top of the highest prior year compare of a 29.4% comp, resulting in an almost 36% two-year comp. Our emerging brands, Rejuvenation and Mark & Graham combined, accelerated to a 42.3% comp and an almost 58% comp on a two-year basis. And our global business, grew almost 50% to approximately $116 million. Moving down the income statement, we saw another quarter of substantial gross margin expansion of 710 basis points to 44%. Our selling margins drove 500 basis points of this expansion, which was an acceleration from the first quarter. It is evident our strategic decision to materially pull back on promotions is proving to be viable, even with tougher compares. The fact that the products we sell are proprietary, high quality, and sustainable and are engineered for value enables us the pricing power to provide product at an initial great price in lieu of site-wide promotions. Occupancy costs also leveraged approximately 210 basis points resulting from higher sales and low occupancy dollar growth. Occupancy costs were approximately 176 million or flat to the first quarter. Year-over-year occupancy costs grew 5.9%, primarily due to several rent abatements that were recorded last year during the second quarter. The occupancy benefits we are seeing from our rent renegotiations and the net closure of 33 stores at the end of 2020 has enabled us to minimize occupancy dollar growth and deliver this leverage. And we expect this benefit to continue based on our plan to close approximately 25% of our fleet over the next five years. SG&A in the second quarter was 27.3% of net revenues compared to 23.9% last year, deleveraging 340 basis points year over year. This rate held relatively in line with the first quarter and reflects the lowest second quarter SG&A rate we have had outside of last year, where we had substantially reduced our spend across the business in response to COVID and particularly in advertising. As a result, the year-over-year deleverage is primarily in advertising where we have made incremental investments to drive our profitable top line growth and market share gains. Given the strength in our business, we have made a strategic decision to incrementally invest in high ROI advertising to drive new customer acquisition and to drive our growth in the back half and beyond. We see this as a competitive advantage as we are able to make these investments and still drive record profitability levels at a time where this may not be possible for others. and it is paying off with record new customer counts, including e-commerce customers growing almost 30% on a two-year basis, the highest growth we have seen. We are pleased to see that despite these incremental costs, our overall cost discipline throughout SG&A allowed us to hold our rate at a pre-COVID historically low level, helping to deliver another quarter of record profitability. Operating income grew to a record $326 million, resulting in an operating margin of 16.7%, expanding 360 basis points over last year. This resulted in diluted earnings per share of $3.24, up 80% from last year's record second quarter earnings per share of $1.80. On the balance sheet, liquidity levels remain strong. With $476 million year-to-date in operating cash flow, or more than double last year, We ended the quarter with $655 million in cash after funding the operations of the business, paying off our term loan of $300 million earlier this year, and maximizing shareholder returns. During the second quarter, we invested another $36 million in capital expenditures and returned over $180 million to shareholders in the form of $45 million in dividends and $135 million in share repurchases. Year to date, we have repurchased over 450 million of our shares, or approximately three times our full year typical share buyback level, which reflects our confidence in the sustainability of our strong growth and profitability and our commitment to maximizing returns for our shareholders. Moving down the balance sheet, merchandise inventories, including inventory in transit, were $1,171,000,000 for an increase of 12% over last year. However, our inventory on hand and available for sale is still down to last year with a 2.5% decline. Our inventory levels have sequentially improved. However, they are not at the levels we had expected at this time. We continue to be impacted by our stronger than expected demand across all brands, as well as various supply chain disruptions, including industry-wide container shortages coming out of Asia, delays due to COVID surges in Vietnam and Indonesia, and a recent port closure in China. and it's hard to predict with certainty when these supply chain challenges will be fully resolved. As a result, at this point, we expect back-order levels to remain elevated with moderate improvements in our inventory levels through the balance of the year. Now let me turn to our expectations for the rest of the year and longer term. As Laura said, we are raising our 2021 outlook from low double-digit to mid-teen revenue growth to high teens to low 20s revenue growth, with operating margins now projected to be in the range of 16% to 17%. We are confident in our ability to deliver this higher outlook given the strength of our business year to date, the accelerating momentum in our growth initiatives, and the macro trends that will fuel our business for years to come. As a result of our strong expectations for 2021 and beyond, we see an accelerated path to growth and profitability longer term. We now believe we will hit our long-term target of $10 billion in revenues by 2024, or one year earlier, and with higher profitability holding at least at our further raised fiscal year 21 operating margin. I would now like to tell you why we are so confident in maintaining these operating margin levels. We believe we are best positioned to continue to deliver record level operating margins despite increased raw materials, freight costs, and distribution center labor for the following reasons. Ongoing overall sales leverage, including the additional accretion from our growth initiatives that have a higher operating margin. An accelerating shift online, where the operating margin profile is higher. Continued occupancy leverage from the renegotiation of our lease agreements and further store closures. The pricing power in our merchandise margins due to our differentiated product positioning with design-led, value-engineered, and sustainable products. Various supply chain efficiencies, including automation and in-stock inventory levels, and from a continued emphasis on overall strong financial discipline. As far as our capital allocation in 2021, we are maintaining our balanced approach of first investing in the business and then returning excess cash to shareholders. We are on track to invest towards the higher end of our range at approximately $250 million in the business this year, with spend prioritized on technology and supply chain initiatives that primarily support our e-commerce growth. Given the strength of our business and liquidity, we are taking this opportunity to aggressively pursue incremental investments in the business to support our long-term elevated growth. We also plan to return excess cash to our shareholders in the form of further increased quarterly dividend payouts and an increased level of share repurchases. Year to date, we have paid $91 million in dividends, a 15% increase, and over $450 million in share repurchases compared to no repurchases last year. And today, given the strength in our business and our liquidity, we announced an additional quarterly dividend increase of 20% and a new share repurchase authorization to $1,025,700,000 increase to what is remaining on our existing share repurchase authorization. We are committed to maximizing shareholder returns, and given our long-term growth and profitability outlook, we continue to believe that our stock is undervalued. As a result, we believe investing even more in our own stock will drive long-term financial returns for our shareholders. In summary, our results in the second quarter further validate our ability to deliver sustainable strong growth and profitability. We believe we are uniquely positioned with the favorable long-term macro trends, including a strong housing market driving ongoing investment in the home, the disruption of brick and mortar and an accelerating shift to e-commerce, the increasing importance of sustainability and being a values-driven company, combined with our key differentiators, our accelerating growth initiatives, our strong operating cash flow and liquidity, and a proven track record of strong financial discipline. All of this will enable us to drive long-term growth and profitability and strong financial returns for our shareholders for years to come. I would now like to open the call for questions. Thank you.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll take our first question from Adrian Yee from Barclays. Please go ahead.

Yes, good afternoon. Another stunning quarter, so congratulations to the entire team. Thank you. you're welcome so I guess Julie I'll start with you about this second quarter of you know 43 percent gross margin last quarter 44 percent gross margin externally reported this quarter if you can can you help us how does that kind of roll back up into merchandise margins relative to history and how much more room is there to the upside on pure merch margins and then secondarily wanted to see AUC right so the the average unit cost any color on what that's up maybe this quarter and does that get worse in the third and fourth quarters as we've heard from many people thank you very much thanks Adrienne as far as merchandise margins I think first of all I want to remind you know everybody that we saw merch margin expansion back even in 2018

So this is something we've been working on, obviously not to this degree. We've had a fundamental shift in the company to substantially pull back on site-wide promotions. And the reason we can do that is because of our pricing power, because of what we sell, that it's in-house designed, it's proprietary, and it's designed for value, engineered for value. And so we can then come out with an initial price that is relevant to the customer and of good value and allow us to not do as many site-wide promotions. And so that's a fundamental shift that we have now been pursuing pretty aggressively for a while now. And so we think this can continue. Will it continue at the same degree? Probably not. I wouldn't model that to the same degree. We're very pleased to see continuing, you know, strong selling margin expansion from I think it was 400 last quarter to 500 this quarter. You know, obviously we also are going to have some raw material price increases and freight cost increases, so that's going to put pressure. on that line, but I think the team has done an incredible job of managing through that and mitigating those costs. And because we're vertically integrated, we're better positioned than most to be able to do that. So we do think this is sustainable, but maybe not to the same level.

Thank you. We'll now take our next question from Christina Fernandez from the Telsea Advisory Group.

Good afternoon and congratulations on a strong quarter. Can you talk about how demand progressed through the quarter and any additional color that you can give us about the third quarter so far?

The demand was incredibly strong pretty much all quarter long. I mean, obviously with these kinds of results, we've just had phenomenal top line performance. And as we said in our prepared remarks, we have not seen that wane. So we are very optimistic, clearly, and confident about the future of our business. And it's just, you know, even on top of these elevated compares, we're seeing strong growth with, you know, 40 comps, both demand and net, and Q1 and Q2 holding, and strong growth as we venture into the third quarter.

Thank you.

And if I could ask a second question, you know, thinking about the 16 to 17% operating margin in the longer term, What does that imply for the mix of the business between e-commerce and retail? Does it need to stay at the current level?

Well, we have assumed that e-commerce will continue to grow. Obviously, we're pleased we're able to hold at 65% despite the fact that we have the retail recovery this year, and so that makes it a little bit volatile, so to speak. But we're still holding at 65%. We've said before we plan to at least grow it to 70%, and so that's assumed within our numbers. But we have many opportunities to drive operating margin expansion and to be able to at least hold where we plan to come out in 2021. First, we'll have the ongoing sales leverage with additional accretion, by the way, from our growth initiatives, which I think is really important to understand that in B2B, in marketplace, and in franchise, for example, they may have some pressure on the gross margin line, but they are incredibly accretive to the total company operating margin. So as those have an outsized growth potential, as we've seen, they will, by themselves, help with the operating margin expansion going forward. And then you have an accelerating shift to online, which has always been more profitable. As you may recall, back for years, we used to report that it was above a 20% operating margin. And it's even higher today, obviously, with the top-line sales flow through. So as that shifts more and more online, we expect that to drive operating margin expansion. Continued occupancy leverage will drive that, given the fact that we're still optimizing our retail fleet and we're renegotiating leases and we're closing less profitable stores. I think we've demonstrated that we've been able to do that and hold our operating costs down while we're driving top line. And then it's back to our pricing power, the fact that we design our own product and engineer it for value. That gives us a lot of leverage on the operating margin line. plus everything else from supply chain efficiencies and all kinds of things. But all of that gives us the confidence to believe that we at least can hold the 16% to 17% for this year and then going forward as accelerated pace on the top line.

Thank you.

We'll take our next question from Curtis Nagel with Bank of America.

Good afternoon, Eric. Good evening. Thanks very much. So two quick ones. One, just kind of out of curiosity, thinking about, you know, I'm not asking any questions on sort of the cadence or the 3Q, but, you know, you guys have been working on registry, right, you know, both for baby and weddings. Those businesses, you know, probably weren't in great shape, you know, last year. Thinking about it, things are kind of opening up. You know, how much has, I guess, wedding in particular changed? you know, started to help, or I guess is it helping, you know, just given, you know, we finally are starting to see people get married again and, you know, actually celebrate. That's the first one. And then just second, just could you give any clarity in terms of, Julie, I think you'd mentioned that, you know, some investments or more investments were being made in marketing or advertising dollars. How should we think about that relative to 1Q or, you know, kind of, I guess, quarter, year over year in 2Q?

Yeah, thanks. Let me start. It's Laura with a question. I'm so glad you brought up wedding registry. I probably should have said it in my prepared remarks. It is phenomenal. As you can imagine, I mean, there weren't any weddings. Now there are weddings. And, you know, I just asked Julie if I could tell you, we're up 98% in wedding registry. I mean, that's in the sales. That's a big number. And, you know, baby's been up the whole time. We have a new baby app, which is very successful and We're learning that across all of our brands, the more time we spend on mobile, the better, because it drives conversion, and it's really the choice for our customers. So you're going to see us do even more things with mobile and make it really help the selling proposition. But in those two very important life stage buying opportunities, we're seeing tremendous growth, and we're continuing to support it with technology. Likewise, these trends, as I said, hybrid work, And then the reality of, you know, people learned how to cook and they're still cooking and they love cooking. And so we're continuing to see, you know, those businesses in Williams-Sonoma that support those, whether it be coffee or, you know, food at home. Those businesses are quite strong for us today, even though we had the big surge last year. And then, you know, the back to school. I mentioned kids are going back to school and, you know, those backpacks are a big part of that tradition. And so, of course, that's a business that we've seen really strong growth in. As we crest into the season of holidays, Halloween is tremendous. If anybody on the call needs to buy anything, you should buy it now because we're seeing a very strong, fast curve. I imagine that we'll see the same with Thanksgiving and Christmas, which was a tough time for everybody last year and should be, hopefully, one where you can at least have small gatherings, if not more. I think there's a lot of natural upside in life stage trends that we are going to be right there with our customers on appropriately to help them make the most of those. So thanks for that question. And then I'll pass it over to Julie to answer the marketing advertising question.

Yeah, so as far as the advertising, we have said before that certainly we're going to be incrementally investing in advertising year over year. Last year certainly that was a big lever for us to pull back on. Q2 was some of the lowest spend in SG&A period, which advertising was a big piece of it, until we could, you know, read the business and make sure that we were okay going forward. And so you're going to see year over year, you know, pressure on that line and on SG&A because of it. But I think the key takeaway for you guys is to realize that it's a competitive advantage right now. I mean, most companies don't have the same kind of margin expansion, whether it's merch margin, gross margin, or operating margin expansion that we have. that where we can take that and reinvest back into advertising when others may not be able to do so right now. They may have to pull back because they're trying to pay for freight or they're trying to pay for raw material increases or whatever it may be, and we don't have to do that right now. So we're taking that opportunity and investing to drive new customer acquisition and to fuel future growth, and we think that's a real big competitive advantage.

Okay. Fair enough. Thanks very much. Thank you.

Thank you. We'll hear next from Seth Bisham with Wedbush Securities.

Thanks a lot and good afternoon. Congrats on the strong results. I have one bigger picture question and one specific question. Bigger picture, I am very intrigued by your thoughts on this transformational investment in the home and the drivers behind that. When you think about the trend towards hybrid work environment, is that the primary thing that you're considering if you think about higher investment levels in the home furnishings, home furniture, et cetera, going forward? Or are there bigger things that you're thinking about?

Yeah, I think it's, you know, the time we've all spent more at home has made us realize the importance of home. It's always been, you know, people's primary investment. And So that's not a new piece, but the amount of time and the ability for you to improve that space is so real, and the happiness that that gives you and the productivity. And so it's not just hybrid work. It's everything. It's learning how to cook. You see trends of families having their kids come back and live with them or bringing in their parents to live with them and all those moves. At the same time, The supply of houses is still too low, and there's a lot of people who are out looking for second homes, and even if they can't afford it themselves, pulling their resources together with friends to complete that fantasy of buying a getaway home. And those are the things that when you talk to people about what they're thinking about now and what's important to them, this is what you hear. You hear about their kitchen remodel. You hear about the second home they wish they could buy. I mean, I'm sure you're hearing it with your friends and family. And this is a really, really important trend that I don't think is going to be transient. I think it's one that will continue to last for a long time and one that puts us in a very good position to not only take advantage of the trend but also gain share because, as I said earlier, there's just nobody really has much share in this world and nobody's doing what we're doing.

Yeah, that's helpful perspective. And then secondly, thinking about the outlook for the balance of the year, obviously your guidance phrase is impressive, but it does imply material deceleration in comparable store sales on a two-year basis from the first half of the year, despite the fact that you guys mentioned that you see a very strong start and expect strong holiday outlooks. Is that just due to conservatism, or is there something else that we should be thinking about?

Yeah, I wouldn't read anything more into that. As we've said, we've had a very strong success year to date, and for quite a few quarters now. And we've seen it strong going into the third quarter. You know, on the high end, we're guiding to low 20s, which is still very high on a two-year basis. Certainly, we are taking into consideration, like everybody else, the impacts from supply chain challenges that are out there. But I think, you know, with our incredible supply chain team, we're best positioned to maneuver through that. better than anybody, but we're being thoughtful of that, and that's why we have the range that we have. But with that said, there's absolutely no fundamental difference in our outlook for our business.

Thank you very much.

Thank you.

We'll take our next question from Chuck Grom with Gordon Haskett.

Hey, thanks. Congrats on an awesome quarter. Laura, you talked about not seeing any signs of a slowdown, but I'm actually curious if you're If you're seeing an acceleration in your business with back to school here, summer ending, et cetera, and I guess if so, at what banner? And then at the same time, you've sized up B2B as I think a 700 million long-term opportunity. Can you just remind us what you think Williams-Sonoma Home could be long-term?

Yeah, sure. I'm going to need Julie's help on this. First of all, you know, the obvious business that gets the most bang from back to school is our kids and teen businesses because that is, you know, what we really address that. If you go to the home pages right now, you'll see that. And so, of course, that would imply that those have the most upside relative to back to school. In terms of B2B, first of all, let me make sure that I didn't misspeak earlier. As Julie wrote me a note and said she thought I said 100 million when I meant to say 180 million for the quarter. So I'm going to take this opportunity with your question to correct myself if I misspoke. I apologize. So B2B... You know, it is a really good question on how big this can be and when. It's certainly faster than we ever expected. And we keep making jokes about, you know, how much bigger could it be. But we're certainly on track to, we said a billion in what, Julie?

Originally five years. In five years. 700 million this year, which is 100%.

Yeah, 700 million this year. So, you know, the reason I didn't put a number out there is because, I don't want to be too small-minded about it. I can say a number, and then that is not even close to what our opportunity is. It's a monster opportunity.

Gotcha. And what about Williamson on the Home?

Williamson on the Home, I don't think we've put that number out there. We've really changed our strategy from doing, you know, parts of the stores being online focused, which we think is a huge advantage in the market. And we just brought a new leader in, and it's too early for us to put a number around it, but so far so good. And I do see it as a big growth driver in a large underserved market.

Got it. And then one for Julie. Just in order to get to that 16% to 17% EBIT margin here in 21 on a, let's say, a 20% revenue growth implies, you know, less flow through. In the second half of the year, it sounds like there's going to be some incremental ad spend, but can you just help us think about the puts and the takes and any variability between the third and the fourth quarter that you want us to think about? Thanks.

Yeah, I mean, certainly ad spend will come into play on the SG&A line, but also we still believe we're going to have gross margin expansion, both from merged margin expansion and from occupancy leverage. I wouldn't focus too much on that. I mean, the reality is if you look at the 16% to 17%, it's almost 2x where we were in 2019. So we're just being thoughtful of that, and certainly we're also keeping in mind the increase in raw material costs and freight costs that everyone is maneuvering through. But could it be higher? Sure. But right now we think this is the right target, given we've got a big back half to go, and we'll update you as we move through the year.

Great. Thank you.

Thank you. We'll take our next question from Simeon Gutman with Morgan Stanley.

Hey, everyone. Nice quarter. Two quick questions. I missed prepared remarks. I didn't know what you talked about regarding freight, how you're navigating the environment, how your inventory position looks, and then even into next year. And then the second part is on the advertising spend. I did catch some of that. Can you talk about the timeframe in terms of return? Are you spending because you're seeing the immediate return, or is this medium, longer-term branding?

From an inventory perspective, what we said is you'll see sequential improvement. I think last quarter it was 1.7 or something like that, and we moved to a 12% increase. But if you look at our inventory that's on hand and available for sale, it's still a decline of 2.5%. So we're not where we expected to be. And that's just, quite frankly, because, one, our demand just hasn't stopped. So it's constantly really high demand. So to get back in stock is really challenging. And then you combine that with the supply chain challenges that all are facing, and We are better positioned than most, I guarantee that, given our scale and long-term relationships and our incredible supply chain team, and who always jumps ahead of this, way ahead of anybody. Think about the tariffs and everything else that we did. Certainly, that is impacting us. We're not immune to it. And so that will cause us to have higher backorder levels and, you know, throughout the balance of the year. But we do expect inventory to, you know, improve moderately as we move throughout the year.

And there's things that I'm really proud of I want to make sure we mention that, you know, are very competitive. So, for example, right now in our upholstery business where we make our own, a large percent of our own upholstery, Um, we were previously quoting about a hundred days, which is when you look at a lot of people's sites, you know, still better than most, but we are now down to 80 days and looking at dropping that further as our incredible, um, upholster teams are really producing more than anyone else. And so we're thrilled about that. And that's the kind of thing, you know, you give us a good challenge and, and I think most times you're going to see, we're going to outperform. and take that challenge and make it into an opportunity for us, because it's all about vis-a-vis custom furniture from anyone else. So, Felix, would you like to answer the question about advertising without being too competitive about telling everybody how we do it, but answer the... Sure.

Yeah, you got it. Hi, Simeon. So, you know, short-term or long-term, I guess what we focus mostly on is return on investment and... we really focus on customers who are in market. So in market for furniture, we're very focused on, you know, people looking to who are either moving, as Laura mentioned, wedding, having a baby. Those are high-value customers, and so our acquisition strategies around there are very strong and are prevalent throughout all of our banners. From a long-term perspective, you know, again, When we see this uptick in furniture, that's always a good signal for us in terms of what it means from lifetime value. So I would say, you know, without percenting it out, we're focused on in-market in the short term and then high-value customers in the long term.

Okay, thanks. That's helpful.

Thank you. We'll take our next question from Zach Fadim with Wells Fargo.

Hi, this is David Lanson for Zach. Thanks for taking our questions. To start within merchandise margins, we were wondering if you could unpack that a little bit in terms of price increases, mix, and the absence of promotions and clearance. And then a follow-up would be, how did traffic and ticket trend in the quarter, and what was the impact of inflation?

Oh, boy. Impact of inflation, I mean, you know... That's a hard one to tease out. But in terms of promos, you know, our strategy is to offer the customer great value in our products, but not to run a promotional business. And this quote reflects that strategy. You know, it's interesting. The broader competitive set, I think, is actually getting more promotional based on our research. And yet we were able to outperform top line and bottom line without running promotions. We are aggressive about our inventory turn and about slow movers. And, you know, interesting fact, is that our clearance inventory is down 34% year over year because of our aggressiveness in clearing some of those slow movers, which is really, really important for us to continue to do with our large cube furniture. Traffic's another really interesting story because in our retail stores, believe it or not, as much as traffic has improved, it's still down to 2019, and we're running these crazy good comps. They're doing such a good job in our stores and our product is so appealing to our customers, but imagine when the traffic comps how much better it could even be. So, yes, we are not back to 2019-level traffic in our stores, but it is an opportunity. We're seeing customers buy more from us. You know, they're buying more furniture and they're buying more pieces as they look at decorating their whole homes with us. And also, as I said earlier online, they're shopping cross-brands. And we're pushing that. It's not just luck. It's that we are pushing cross-brand sales. And we just launched this week the new credit card. I think it might be, before we run out of time, the opportunity to hand it over to Felix to talk about what makes this credit card different from our PLCC and Williams-Sonoma card before, Felix.

Yeah, I mean, this week, Monday, in fact, we launched our new cross-brand credit card in partnership with Capital One. as part of our ever-expanding loyalty program. And so when you shop with any of our brands online or in store, you get 5% back in rewards. You get 10% back in your first 30 days. When you shop at, what's incremental to our past programs is when you shop at grocery stores and restaurants, you receive 4% back. And when you shop anywhere else, you get 1% back in rewards. all cardholders, regardless of which brand they sign up with, get free shipping at Williams-Sonoma as well. So, you know, the card is designed to drive an increased retention in each individual brand, but it's also to incent and reward customer shopping across our brands. So as Laura said, that average sale per customer is one of our key weapons in terms of growth, and we continue to believe that that we can increase our share of wallet by introducing our sister brands across our portfolios to our customer. Great, thanks.

Thank you, and that does conclude today's question and answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

I just want to say thank you to you all for joining us and for your support, and I Look forward to hopefully seeing you in person, and if not, talking to you again at the next quarter. Happy shopping.

Thank you. That does conclude today's conference. We do thank you all for your participation, and you may now disconnect.