Williams-Sonoma, Inc.

Good day and welcome to the Williams-Sonoma Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good afternoon and thank you for joining our Third Quarter Earnings Call. I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including guidance for the fourth quarter of 2021. Although we believe these statements reflect our best estimates and all available information, we cannot make any assurances that these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligations to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure, along with an explanation of how and why we use these measures, appears in Exhibit 1 to the press release we issued earlier today. This call should also be considered in conjunction with our periodic and annual financials with the SEC. Finally, the call is being recorded, and a replay will be available on our IR website. Now I'd like to turn the call over to Laura Albert, our President and Chief Executive Officer.

Thank you. Good afternoon, everyone, and thank you all for joining us. We're extremely proud to deliver yet another quarter of outperformance with comps of 16.9%, building to an accelerated two-year stack of 41.3% and operating margin expansion of 60 basis points. These results are a function of both the advantages of our distinctive positioning in the market and our successful execution against our long-term growth strategies. Furthermore, our performance demonstrates that we can continue to take share in a fractured market and deliver high quality, sustainable earnings. As a result, we are raising our full year outlook to reflect revenue growth of 22 to 23% and operating margins of 16.9% to 17.1%. Customers are clearly responding to our product and channel strategies, and we expect to drive an outstanding finish to the year and beyond. On the macro front, the industry remains large and fragmented with more than half of its sales generated from smaller, brick and mortar retailers. We are one of the strongest market players and have incredible opportunity to capture more of an almost $1 trillion market opportunity. We are at a pivotal point of change, both in the way we live and work, and we will intensely focus on our unique ability to capitalize on this change and in turn capture market share. The housing market continues to hold strong with purchases of larger first and second homes. Additionally, hybrid work arrangements continue to gain traction as a permanent work model. Both of these trends result in a stronger need and desire to outfit the home for working, entertaining, and cooking. In addition, another large point of disruption is the shift of the consumer to make purchases online. Certain factors continue to bolster the shift in behavior, including the lasting impact of the stay-at-home dynamics of the pandemic and the entrance of the millennial generation into their home formation years. a customer segment who naturally gravitates towards digital purchasing. In an industry occupied by market players who have not yet made significant investment in their e-commerce capabilities and pure e-commerce players without the service element of a retail business, we believe we are uniquely positioned to benefit from this trend as a digital first, but not digital only company. Our incredible store shopping experience satisfies our cross-channel customers who shop both online and and in-store. Our customers continue to place importance on, and in many instances, demand the prioritization of sustainability. In fact, almost 70% of consumers today want to support brands that are purpose-driven and doing good in the world we share. Our company is committed to being a values-led, sustainable company and is proud to be a leader in the home furnishings industry. In short, the fragmented industry, the strong housing market, the shift of the consumer online, and the consumer demand for sustainability provide specific, unique, and sizable opportunities for our company to continue to grow. And these macro trends are a perfect fit with our key differentiators. Our in-house design capabilities, along with our adept ability to value engineer our products, allows us to offer exclusive, relevant, and high-quality products. Our channel strategy provides a competitive edge in scaling the business into the future compared to both the retail and marketplace dominant players. And of course our values, which are deeply rooted in sustainability, diversity, equity, and inclusion, are embedded in our products and central in our actions. These principles have been and will continue to be fundamental and non-negotiable to the customers and communities we serve. This, combined with our growth strategies, not only provide for sizable opportunities to grow our core businesses, but also drive momentum in reaching new customers, geographies, and industries. This expansion and diversification of our customer base presents many exciting opportunities to deliver solutions for underserved spaces and places. From B2B, which brings an exciting new customer profile, to our global business, which drives expansion across new geographies, to our cross-brand and marketplace opportunities, which expands the reach of our current base, and to the expansion of Williams-Sonoma Home, which attends to an underserved high-end luxury market and has massive future potential for scaling. We have, in fact, many opportunities to drive our business forward into the next chapter of growth. Simply put, it's these macro shifts combined with our key differentiators and our long-term growth prospects that result in us strongly believing in our ability to continue to take market share and deliver earnings well into the future. Before we talk about Q3, let's take a minute to review the supply chain, which I know is top of mind for all. It is no surprise that we have been intensely focused on the supply chain bottlenecks around the world. Like all companies, we are not immune to the ripple effect from these short-term and long-term delays. I want to share with you our status and the extraordinary accomplishments of the team. Our upholstery lead times continue to improve and are industry leading as a result of our in-house domestic capabilities. Our immediate and decisive responsiveness, our strong long-term vendor relationships, and our scale have all minimized production and delivery delays relative to our competition. And as a result, approximately 85% of our holiday receipts have already been received. And finally, when we have delays, customer service is our priority which has resulted in declines in escalations, cancellations, and calls into the care center. All that said, I do want to highlight some important challenges we are facing as a result of this supply chain disruption. First, as you know, we source a sizable amount of inventory out of Vietnam, which was recently shut down for three months. This country has since reopened, but is experiencing significant backlogs across factories as they ramp up. As a result, we are experiencing some inventory delays, particularly in our children's home furnishings businesses. Second, given the ongoing strong demand we are seeing across our business and the impact of the Vietnam delays, we do not expect full recovery of our inventory levels until the middle of 2022. Now let's turn to the results of the third quarter, which clearly demonstrates the strength of our business and our ability to execute with all brands outperforming again this quarter. West Elm delivered a 22.5% comp with all categories driving strong growth. The upholstery business was very strong, and customers responded well to new products, including best sellers in bedroom, dining, and occasional categories. Additionally, new categories such as bath, kids, and kitchen also contributed to incremental growth. Pottery Barn delivered another high-performance quarter with a comp of 15.9%, driven by strong growth in all product categories, including our seasonal decorating business. In addition, we saw strength across our core lifestyle furniture category, our design services, and our furniture advantage growth initiatives, such as apartment and our curated marketplace assortments. Potterbine Kids and Teen grew with a comp of 16.9%. The demand for our Green Guard Gold Certified Furniture remains strong, emphasizing the importance of both our proprietary design aesthetic and our commitment to sustainability in our customers' buying decisions. Our baby business continues to accelerate as our customers expand their families. And the response to our holiday and gifting offerings was strong, with Halloween products driving record results. The Williams-Sonoma brand accelerated to a 7.6% comp, with growth across all key categories, driven by product innovation, edited and relevant assortments, and high demand for Thanksgiving and holiday products. Both our exclusive products and WS branded products continued to grow and we saw strength in key entertaining items. Operationally, an intensified focus in our key vendor partnerships has allowed us to increase inventory positions in high demand categories despite a supply chain constrained environment. And we believe the improvements made to our online and store experience yielded momentum in the quarter. Finally, last week the brand launched a new recipe app and a reserved membership program, both of which provide a new way for our customers to engage with the brand while supporting our ongoing strategic initiative to develop and deploy content distribution. Our Williams-Sonoma home business is also accelerating as a result of our strategy to reposition the brand as a premium online furniture destination. We believe that with a refined curated assortment and an appealing digital presentation, Williams-Sonoma Home will be one of our biggest growth opportunities. Cross-brand, we're excited to share that our B2B growth initiative continues to produce record performance, with our largest quarter ever generating over 200 million of sales, nearly double that of last year. Significant accomplishments of the business include an increase of 44% in new clients over last year, an acceleration of our contract-grade lineup as businesses reopen, and growth and diversification in our large project pipeline. The business is also building across industries, capturing additional market share. This growth initiative continues to outperform, and we see significant opportunities for this business to contribute long-term. In our cross-brand global business, we are focused on expansion, but through a disciplined, capital-light, brand-enhancing franchise model. This quarter, we opened our first franchise store in India, and rolled out e-commerce capabilities across that country to great success. As we look forward, we see additional opportunities to lead in digital around the world. Additionally, our initiatives to promote selling across our brands continue to yield results. Cross-selling metrics including total customers and percent to total of customers shopping across brands are at record levels. Not surprisingly, the spend of a cross-brand customer is a multiple of that of a single-brand shopper. And increasing our share of spend with these customers will have a significant impact on incremental volume for the long term. We are excited about the many initiatives we have in place to capture this opportunity. Also in this quarter, we launched our new cross-brand credit card program, where customers can apply for credit, purchase, and earn rewards at any of our brands. This new initiative complements our existing loyalty program for all other tenders, These two tiers of loyalty programs help us acquire and retain customers irrespective of their method of payment. The advantage of our loyalty program is twofold. First, as we previously shared, the multi-brand customer is worth two to three times more than the single brand customer. We know we have an opportunity to increase our share of wallet with these customers. And with our portfolio of complimentary brands, this is a tremendous competitive advantage few, if any, have in our industry. Second, our loyalty program dramatically enhances the richness of our first-party data. With almost 70% of our volume derived from e-commerce, we understand the importance of first-party data in the cookie-less future that is rapidly approaching. The loyalty program, along with hundreds of other attributes in our in-house file, is consolidated across our brands and channels which allows us the ability to aggregate browsing behavior, transactions, demographics, channel preferences, and many other attributes. This rich first-party data, along with our own in-house advertising expertise, allows us to be prepared and equipped as privacy rules evolve across the digital space. And finally, I'd like to spend a minute on our impact initiatives. We are proud to announce that in the third quarter, we raised minimum wages again to at least $15 an hour for all of our employees. Additionally, we also announced new goals to both expand our purchase of NEP's ethically handicrafted product to $50 million and to nearly double our investment in Fairtrade certified products to $10 million by 2025. As the first home furnishings retailer to set significant ESG goals, we continue to lead the industry. These actions not only positively impact the peoples and communities that make, source, and distribute our products, but also deliver value to our stakeholders, customers, vendors, shareholders, and our communities. And our unwavering commitment to values is gaining further recognition. For example, our Pottery Barn Renew program was included in Fast Company's 2021 Innovation by Design Awards. We were rated top scorer by the Sustainability Furnishings Council for the fourth year running. And our MSCI ESG rating was upgraded to AA, driven by our strong commitment to ethical production and our newly announced climate goals, which further distinguishes our company as a leader in sustainability. As we enter the fourth quarter, we are seeing strong sales and margins continuing. We are thrilled with our customers' response to our holiday and gifting assortments, and we are ready to drive an outstanding finish to the year. Our teams are prepared to fulfill record orders, leveraging our new technological capabilities, and maximizing our digital-first omni-advantage to meet the outsized demand we are seeing from our customers. In summary, with our strong results to date, our winning positioning in the industry, and our outperforming growth strategies, we are more confident than ever in the long-term strength of our business into fiscal 2022 and beyond. We continue to be confident in our outlook of at least mid to high single digit comps, accelerating our revenues to 10 billion by 2024 with operating margins at least at a fiscal 2021. Before I pass the call to Julie, I want to thank our team for their outstanding work, creativity, and relentless focus on driving the business. Their talent, energy, and commitment underscores all of the success that we have had. And with that, I'd like to wish you all a happy holiday season.