Williams-Sonoma, Inc. Common Stock (DE)

Inc. Q1 2022 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 first 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 fiscal 22 and our long-term outlook. 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 obligation 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 filings with the SEC. Finally, the call is being recorded, and a replay will be available on our investor relations website. Now, I'd like to turn the call over to Laura Elber, our president and chief executive officer.

Thanks, Jeremy. Good afternoon, everyone. We've been looking forward to this release. The first quarter of fiscal 22 represented another quarter of outperformance with a 9.5% comp on the top line with both demand and net sales in line with each other and 19.5% growth on the bottom line to $3.50 per share. These results continue to demonstrate the strength of our multi-brand portfolio and our team's ability to navigate challenges and outperform. These results are even more impressive when considering that we were up against last year's strong performance with a comp of more than 40%. We are confident in our annual guidance and longer term goal of 10 billion in revenues by 2024 with growth across our core businesses and within our B2B marketplace and global initiatives. Understanding our industry is key to putting our outstanding results in perspective. We operate in a large and fragmented industry that generates more than half of its sales from smaller brick and mortar retailers that do not have sophisticated e-commerce capabilities. We are one of the strongest market players and we believe we have an opportunity to capture more of this $830 billion total addressable market. Our revenues in FY21 of $8.2 billion represented just about 1% of the opportunity, and we continue to prove our ability to incrementally capture share. The current economic environment is challenging, but the housing market remains strong. Hybrid work means people will continue to spend more time in their homes, and the rising costs related to gas and travel have historically led people to stay at home to cook and entertain. We believe that these three trends will result in continued momentum to outfit and improve the home. And as a company, we are prepared to manage through economic uncertainty. We are a multi-channel portfolio of brands with a management team that has expertise and experience in managing through historical times of economic challenge. Another large point of change in our industry is the movement of the consumer to purchase online. Further compounding this trend is the arrival of the millennial generation to the household creation stage. In an industry occupied by companies who are behind in developing their digital experiences and capabilities and peer plays that don't have experience running stores, we believe we are well positioned as a digital first, but not digital only company. These macro trends are perfectly aligned with our key differentiators. Our customers continue to look for us, turn to us for our exclusive, inspirational, and high-quality products that we are able to value engineer because of our in-house design capabilities. The benefits of our in-house design capabilities extend far beyond physical product design. We've also been able to design our own supply chain efficiencies and proprietary technology that has allowed our business to be resilient. Our channel strategy provides a competitive edge in scaling the business into the future, compared to both retail and marketplace only 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 will continue to be fundamental to our customers who have shown us they will use their disposable income and purchasing power to support what is important to them. In fact, in a recent survey released in April, more than half of consumers said they're willing to pay a premium for sustainable products. All of this, combined with our growth strategies, not only provide for sizable opportunities to grow our core business, but also to 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 markets. Our B2B business had its largest quarter ever, driving almost $250 million in demand and increasing 53% over last year. We are winning in this space by leaning into our best-in-class in-house product design capabilities to develop products specifically for large contract projects. This, along with the continued expansion of our client base, is not only growing our book of business, but also allowing us to focus on a wide breadth of client types and industry verticals. For instance, in the hospitality industry, we continue to establish ourselves as a trusted partner in the large project space, including recent installs at Marriott's new headquarter hotel. In terms of B2B recognition, in April, we won an award for the best booth at the Hospitality Design Expo. which is North America's largest hospitality focused trade show. Heading into Q2, this business has strong momentum and energy. Turning to marketing, we are pleased with the performance of our investments. This quarter, we delivered strong top line growth while leveraging our advertising spend. Key drivers of this efficiency include our proprietary in-house platform, which gives us the ability to identify customers who are in the market for home furnishings, and ensures we are optimizing the spend per customer through our loyalty program and our cross-brand marketing. On the digital front during the quarter, we focused our efforts on two main areas, improving the conversion funnel throughout the customer journey and driving our AUR with enhanced product recommendation functionality and an improved furniture shopping experience. On the sustainability front, our ESG leadership continues to distinguish our brands individually and our company as a whole. We are well on our way in our expanded cross-brand commitment to plant 6 million trees through 2023 in partnership with the Arbor Day Foundation. Also, we launched an internal award for sustainable innovation. It's called the Williams-Sonoma Inc. Goodbye Design Changemaker. This award celebrates associates doing great things across the company in sustainability. And we were recognized for the fifth year as a reprieve champion of sustainability for the use of recycled materials. Now I'd like to talk about our global business. We continue our franchise-first strategy, focusing on both retail and digital execution. We are building our franchise presence in markets like the Middle East, with three new stores opening in Dubai during the quarter, and with more global stores coming in 2022. Before we get into the brands, I want to take a minute to talk about the supply chain, where we continue to experience delays, challenges, and additional costs across our network. We continue to navigate through challenging starts and stops from COVID-related pressures and shortages of raw materials and labor. Nonetheless, we are focused on meeting the expectations of our customers And we are pleased that our customer satisfaction scores remain high and that we are beginning to see some improvement with in-stock inventory across our brands. And now let's turn to the performance of our brands that comprise our portfolio. Potter Barn delivered another high-performance quarter with a comp of 14.6 on top of 41.3% last year, or 55.9 on a two-year basis. All channels and product categories contributed to driving incremental demand. Our high-quality proprietary furniture business continues to lead the growth. We see strength across the business in core product, new offerings, and our seasonal inventories. In our stores, we see particular strength in our design services. As we move to Q2 in the summer season, we have further extended these services into outdoor spaces and, Our newly remodeled stores continue to outperform expectations with a reimagined store design that has expanded the footprint for displaying lifestyle furniture in store. Moving to West Elm. West Elm delivered a 12.8% comp in the first quarter on top of 50.9 last year, or 63.7 on a two-year basis. Growth in the quarter was driven by strong performance in furniture. Customers responded to new collections and line extensions in incremental sizes and aesthetics. Additionally, new categories such as kids and baths are also fueling incremental growth. Looking forward to Q2, we are particularly excited to launch our expanded B2B West Elm assortment and customer experience, specifically servicing the many small and medium sized businesses in the US. We are uniquely positioned to offer a broad assortment of full space performance-led design solutions directly to these customers. This is an important initiative in our long-term strategy to capture additional growth to become a $3 billion grant. Now I'd like to update you on our Pottery Barn kids and teen business. In our Q4 call, we talked about the challenges in our children's business driven by supply chain pressure out of Vietnam. This continued into Q1 and the brands ran a negative 3.1 comp. We have seen recovery in inventory in the business. However, our back orders remain at significant levels and our back order rates, our creation rates are still higher than last year. As we look to the balance of the year, we expect to see recovery in inventory levels in the back half. Also impacted by out of stocks is our Williams-Sonoma brand with a first quarter comp of negative 2.2 following a 35.3 comp last year. Unfortunately, these out-of-stocks were in some key programs that had an outsized impact on our exclusive products. On a three-year basis, on-hand inventories are down almost 40% in Williams-Sonoma on sales growth of 30%. We are focused on getting more in stock, and we believe we will see the recovery before Q4. As part of the Williams-Sonoma brand, our Williams-Sonoma home business ran a high double-digit comp this quarter and continues to be an opportunity. Given the strength of the Williams-Sonoma brand name, our expertise in the furniture category, and the clear opportunity in the high-end home market, we believe that Williams-Sonoma Home is destined to be a product leader of distinctive, design-led, high-quality furnishings. And finally, let's not forget about our emerging brands, which include Rejuvenation and Mark & Graham. Together, these businesses ran a 31 comp this quarter, and they continue to outperform. We are confident in these brands and their ability to contribute to the long-term growth of our company. In fact, we believe Rejuvenation, which is on track to generate more than $200 million in revenue this year, has the potential to be our next billion-dollar brand. In summary, we are proud of our continued outperformance. As we look to the balance of the year, we remain confident and committed to our guidance of mid to high single-digit comps with operating margins relatively aligned to fiscal 21. We have a solid lineup of growth initiatives and operational improvements planned for the balance of the year. And as we look further, we are confident in our path to be a $10 billion company by 2024. Before I pass the call to Julie to go through the financials in more detail, I want to thank our customers, our employees, and our shareholders. We are committed to delivering for all of our stakeholders. And with that, I'd like to turn the call to Julie.

Thank you, Laura, and hello, everyone. We are pleased to report another quarter of outstanding financial results with strong top-line growth at record profitability levels, including revenue comps of 9.5%, operating margins expanding 120 basis points to 17.1%, with gross margin expanding 80 basis points, and EPS growing 19.5% to $3.50. Our results are even more impressive, considering we were up against our strongest year-over-year compare, and we outperformed against a backdrop of ongoing macro volatility, including continued global supply chain pressures, rising inflation, increasing interest rates, and the continued evolution of consumer spending in a post-pandemic world. Our results further validate the demand for our proprietary and sustainable products. the success of our growth strategies, and the efficiencies of our operating model, highlighting why we believe we are best positioned to succeed in the short and long term with strong, profitable growth. Moving to our first quarter results in more detail. Net revenues grew to nearly $1.9 billion, with comparable brand revenue growth at 9.5%, which was in line with our demand comp. And this growth was on top of a 40.4% comp last year for a two-year stack of 50%. These strong top-line results actualized in both channels, including retail at a 14.4% comp, which was an 82.1% two-year stack, despite retail traffic still negative 20% to pre-pandemic levels in 2019. And in e-commerce, we delivered a 7.3% comp on top of a 30.6% comp last year, maintaining our e-commerce mix as a percent of total revenues at 65%. Moving down the income statement, gross margin came in at a record 43.8%, an 80 basis point expansion over last year, driven primarily by the strength of our merchandise margins, where we were able to continue to preserve our pricing integrity without utilizing site-wide promotions. The demand for our full-price products once again allowed us to more than offset higher product and freight costs while still delivering record margins and strong top-line sales. Occupancy costs came in at 9.9% of net revenues and leveraged 20 basis points, resulting from another quarter of higher sales and lower occupancy dollar growth. Occupancy dollars increased 6.1% to approximately $186 million, which includes the incremental costs from our new East Coast Distribution Center to support our strong customer demand, as well as higher depreciation costs primarily from our capital expenditures to support our e-commerce business. All of this was partially offset by our ongoing retail optimization action. The occupancy benefits we are seeing from our rent renegotiations and the incremental net closure of 37 stores at the end of 2021 has enabled us to minimize occupancy dollar growth and deliver this leverage. Our SG&A rate was a first quarter low of 26.7%, leveraging 40 basis points over last year, driven primarily by employment and advertising. This leverage was a function of our strong top line performance and operational efficiencies, holding our payroll costs, advertising, and general expense growth below sales growth. We are proud of the discipline culture we have built, which demands efficiency and returns from our spend. These results led to our most profitable Q1 ever with operating income growth of 16% to 323 million and an operating margin at 17.1%, our highest non-holiday quarter ever. expanding 120 basis points over last year. This resulted in diluted earnings per share of $3.50, up 19.5% from last year's record first quarter earnings per share of $2.93. On the balance sheet, we ended the quarter with strong liquidity levels, with a cash balance of $325 million and no debt outstanding. Our strong liquidity and operating cash flow of almost 185 million during the quarter allowed us to not only fund the operations of the business, but to also invest in the business at higher year-over-year levels in the form of $71 million in capital expenditures, to pay incremental dividends increasing to over $58 million in the quarter, and to repurchase a record $500 million in shares, a 60% year-over-year first quarter increase off of a prior year high. These decisions reflect our commitment to maximizing returns for our shareholders and with our strong and disciplined balance sheet combined with our expected cash flow strength and our remaining over 1 billion share repurchase authorization, this allows us the flexibility to continue to opportunistically invest in our own stock and drive long-term shareholder returns. Moving down the balance sheet, merchandise inventories, which include in-transit inventory, were 1,396,000,000, increasing 28.4% over depressed levels last year. Inventory on hand increased 17.7% over last year, and our units were only up 1% year over year, which primarily reflects the mixed shift to higher AUR furniture inventory. And on a three-year basis, our on-hand inventory was down nearly 7% to 2019 pre-pandemic levels, as compared to sales that have grown over 50% over the same timeframe. As a result, given our ongoing higher sales volumes, our continued elevated backorder levels, and the significant macro supply chain disruptions we are still experiencing, we are still below optimal levels, particularly in our best-selling backordered items. And we expect this to continue into the back half of 2022. Now let me turn to our expectations for the rest of the year and beyond. We remain optimistic in the long-term outlook of the business. As a result, we are reiterating our financial outlook of mid to high single-digit revenue growth with operating margins relatively in line with 2021. We are confident in our ability to deliver our revenue outlook, given the strength of our business year to date, the momentum in our growth initiatives, such as B2B, and our expected sequential improvement in our in-stock inventory levels, enabling us to fill our significant back orders and recognize net revenue, and potentially at a higher comp than demand, even if demand were to soften as we move throughout the year. From a profitability perspective, we remain confident in our ability to hold our operating margins relatively in line with 2021, despite expected ongoing cost pressures. Like everyone else, we are experiencing higher product costs and supply chain related costs, including higher freight and incremental distribution center costs for additional space to support our overall growth and our ongoing mixed shift to furniture that is a larger cube. We are also experiencing higher costs to best serve our customers to get product to them as timely as possible by shipping product from out-of-market distribution centers. And for multi-unit orders, we are shipping multiple times to the same customer, which typically would have all been done in one shipment at an incremental cost to us. However, because of the power of our operating model, we believe we are best positioned to mitigate these costs in both the short and long term. whether it is the leverage from our higher sales on our path to 10 billion, the accelerating expansion of our highly accretive growth initiatives such as B2B, the growth of our e-commerce business which operates at a higher margin profile, our strong merchandise margins from the pricing power our proprietary and vertically integrated products provide, our retail optimization efforts reducing rents and other efficiencies to drive margins more in line with e-commerce, various supply chain efficiencies, including automation and in-stock inventory levels over time, and our continued emphasis on strong financial discipline. We continue to believe the combination of all of these opportunities provides several levers we can utilize to drive incremental earnings to offset higher costs. And this is what gives us the confidence to hold our operating margins relatively in line with last year. In summary, we are pleased with our outperformance this quarter. These results further validate that our key differentiators, our incremental growth strategies, and our proven operational execution, combined with an environment where consumers are investing more in their homes, are shifting increasingly online, and are prioritizing value and sustainability in their purchases now more than ever before, leave us uniquely positioned to continue to take market share and profitably in this evolving macro environment. And this combined with our strong operating cash flow and liquidity, Our operational levers that enable us to help mitigate incremental costs, along with a proven track record of strong financial discipline and a tenured management team with a winning culture, give us the confidence to reiterate our accelerated long-term growth and profitability outlook of $10 billion in revenues by 2024, with operating margins relatively in line with last year, and to drive strong financial returns for our shareholders. Finally, I would like to thank our associates for all that they do to make our company great. The commitment, creativity, and integrity of our talent is the backbone for the results we continue to deliver. And now I'd like to open the call for questions. Thank you.

Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also, please limit yourself to one question. Once again, if you would like to ask questions, please press star 1 on your touchtone telephone. And our first question will come from Seth Basham with Wedbush Securities.

Thanks a lot. Good afternoon. Congrats on a set of great results. My question is on the demand outlook. Are you seeing any slowdown in demand as you look into the second quarter here, and how are you considering the demand comp relative to sales comp for the balance of the year?

Hi there, Seth. It's Julie. As far as the – I mean, first of all, the first quarter, we certainly haven't seen it. You can see by our results with a 9.5 comp on top of a 40 last year with a 52-year stack, and we said that demand is in line with net demand. When we're talking about the second quarter, I mean, we're really only three weeks into the quarter. It's super early. But we have seen some short-term moderation in demand sales within our portfolio brands, but nothing to the degree that we're hearing others reporting out there at all. And remember, from a net perspective or our actual reported results, we have seen and expect to continue to see sequential improvement in our in-stock inventory levels, enabling us to fill you know, significant back orders and recognize net revenue, even if demand were to wane as we move throughout the year. So this, you know, of course, combined with, as we said, our key differentiators, our incremental growth strategies, and our operational execution make us best positioned to outperform even, you know, in an evolving macro environment.

Okay. Thank you very much. And just to reframe the question, thinking about that delta between demand and sales comps, how much would demand have to slow for you to come in at the low end of your guidance?

We haven't disclosed that, but I think obviously we have said many times that we have a significant amount of backlog that gives us the confidence to move throughout the year to be able to hit our guidance on the year.

Fair enough. Thank you, and good luck.

And our next question will come from Adrienne Yai with Barclays.

Good afternoon, and I mean, truly, congratulations. Really remarkable results. Thank you. Laura, so I guess here's where the macro and kind of your results don't kind of mesh. A couple days ago, sales of new homes were down about 17% in April, rising prices, higher mortgage rates, et cetera. How do you put what's happening with the overall kind of like the big macro backdrop with your results? And I know that you went over several things, but Is it the millennials that are continuing that home buying where you have really that touch point? And what do you look for in order to see whether the macro might ultimately impact you? Thank you.

That's a good question because on my desk today, I got a report from Google with some, I think, pretty fresh data in it. Here's some interesting stats. Nearly 40% of Americans are pondering a move in 2022 and most hope to buy. The desire for more space is the number one reason Americans plan to move, while others have certain features in mind. Those features include outdoor space and a large kitchen. Also, pet-friendly, which is really consistent with what we do in all of our brands with the casual lifestyle that we show. And so, you know, there's all sorts of different pieces about the macro you can read negatively, and then there's things like this and the reality that I said in the prepared remarks about... people working from home, people learned how to cook, they care more about their homes, they've invested, and now they're moving, they want to move. And when you talk to, you know, we talked in New York about this, we talked to many people, most people are planning a remodel or they're planning to move, and that drives our sales more than anything else. And as we also know, the market is so fractured that But let's say I'm wrong and the housing comes in a little, there's still a lot of room to pick up share because we are so small, even though we're the leader, we're still so small relative to the total addressable market. And so I really believe that with our differentiators, which make us really unique, and that combined with our growth initiatives, they're not just a plan, but you see them actualized. You see us prove it now many quarters in a row, despite... what others might think. We keep proving that we have big runway on these initiatives. Now, those are all things that are really in our favor right now and very real.

Okay. And then for Julie, you know, always helping to shape the near-end quarter, the quarter that we're in 2Q. I know you gave sort of long, long-term LRP guidance and then for the year. But how should we think about kind of the trends, the momentum continuing into May and How should we think about gross margin? Should we just think of Q2 as a continuum of what we're seeing here today in Q1? Thank you.

Yeah, I mean, obviously we're not providing quarterly guidance, but, you know, we would say, as we've said before, you need to kind of stick within our band range on the top line that we've said for the year. I would say, you know, on the gross margin line, certainly there could be pressure from, you know, supply chain costs that we've been experiencing like everybody else has. but we're committed on the year to hitting our operating margin relatively in line with 2021, which, as a reminder, is more than 2x where it was two years ago. So we feel really good about that, and obviously we've proven that we can do that with this quarter's results being off 120 basis points.

Fantastic. Well done. Best of luck.

Thank you.

And our next question will come from Chuck Grom with Gordon Haskett.

Hey, thanks very much. Congrats on a really tremendous quarter. I just wanted to follow up on Seth's question on the slowing of AmeriComp. I'm curious when that began in the quarter. We've heard from a lot of retailers that business started to slow in the middle of March, and I didn't know if that started for you at that point in time. And I guess I'm curious if it happened across all four banners equally or if it was the PD and West Elm parts of the business where the tickets are greater.

Yeah, so I mean, I guess I wouldn't read too much into it. As I said before, it's been three weeks into the second quarter, clearly with our performance in Q1 and the demands in line with net, we don't really see it in Q1. In Q2, it's three weeks in. And so, you know, I specifically said that it's within our portfolio brand, so it's not necessarily across all. And, you know, we've seen things improve as well. So it's just, it's very short term, this moderation we have seen. And at the end of the day, because of our net fill and B2B and everything else that we have going, From our growth initiatives perspective, we feel very confident in our outlook for the year.

Okay, great. Thanks a lot. And just a quick follow-up would be, you've had great success raising prices over the past 12 to 24 months. When you look at recent trends, and more particularly demand trends, is there any pushback on higher prices and any demand destruction? It doesn't sound like it, but we're hearing that from other retailers, and we didn't know if you were seeing it so far.

No, we haven't seen it. I mean, furniture is our biggest growth vehicle. Furniture has been very, very good for us, and so you would think that if there was a problem with big ticket or higher prices or things like that, we'd see that coming down, and we have not. That furniture has been very strong for us.

Okay, awesome. Congrats again.

And our next question will come from Christina Fernandez with the Telsey Advisory Group.

Yeah, good afternoon, and congratulations also on a really great result. I wanted to ask about promotions, and it definitely looks like a lot of retailers either are starting to get more promotional or expect to be as the year progresses. What is your stance in case, you know, in the event the industry gets more promotional?

Yes, thanks, Christina and Laura. We've definitely seen more promotional environments, especially, you know, as you heard about the general softness out there. And it really hasn't changed our stance at all, as you can see by the results we just put up. We made a strategic decision not to do site-wide promotions, and that has not changed. And you can see, you know, from pre-pandemic to now, we are a much more profitable business. And this is a structural change for us and one that we continue to see opportunity in once we get out of this supply chain. costly year that we're in. There's a lot of things that we expect to have the improvements to our operations, not this year, but into the future. And so we are always looking at turning our inventory, being better at inventory accuracy, and getting rid of slow movers. And you're going to constantly see us package those things up and make them really appealing to our customers. So it's very different than wholesale price reductions across the board that you see many using right now.

Thank you.

And our next question will come from Jason Haas with Bank of America.

Hey, good afternoon. Thanks for taking my question. The first is just on a definition question. When you say that demand and net sales were in line with each other, are you referring to the dollar amount, or is that also the growth rates were in line with each other?

Relatively one and the same, but yeah. I mean, I would focus on the growth rate, but if the growth rates are the same, then the demand has to be – I mean, the dollars have to be close as well. So, yes.

Got it. That's helpful. That makes sense. That's what I thought. Okay. In terms of, I wanted to dig into the advertising expense a little bit. I think there was a point of deleverage through last year and I think in 4Q as well. And I know you called it out as a point of leverage now. So I'm curious, what are you changing there that's different there to drive that leverage?

Yeah, I think if you recall last year, we were basically getting our advertising dollars back to the level they were previously. So in 2020, it was one of the big drivers to leverage. for, you know, cost cuts as we were moving throughout that year. And so as we said all throughout 2021, that we are investing back into advertising for the future, you know, long-term health of business. And so last year was more of a year of, you know, the leverage. And now that we've sort of lapped that, we now are back to more normalized levels of advertising. And we're very happy to see that we were able to generate, you know, leverage with the top line sales and our philosophy of, you know, ROI on advertising spend. We don't, spend advertising to go get customer accounts or traffic numbers, or we do advertising to get a return because we think that's the right thing to do. And so that's what we generated this quarter.

I'd just say also as a portfolio of brands, we have a big advantage because we're bidding as one. We're not bidding separately. And also we're looking at what works in one brand and applying it to the other. And that's a huge advantage as a multi-brand company that we have. Felix, do you want to – I know we just stole your thunder. We're so excited about marketing. Do you want to add to what Julie and I already said?

No, I think Julie is right. I mean, you know, everything we do is ROI focused. And so when we see the return on investment, even if advertising costs go up, you know, if we see AUR increases and dollars per customer increase exceed that, we'll invest. So we have that ability to throttle given the business conditions because we manage it in-house and because we're all committed to the op margin growth.

Thank you. That's helpful, Collar.

Thank you.

Thanks for the question.

And our next question will come from Max Ricklenko with Cowan & Company.

Thanks a lot. So first, just if the industry were to slow, what are some tools and strategies that you have to play offense? And then what are some of those initiatives that you alluded to in your prepared remarks?

Yeah, so I mean, from a levers perspective, in a downturn, I think, first of all, we've, you know, we just went through this at the beginning of the pandemic. We've all been through it in 08 and 09. And thankfully, we have a lot of the same management team that's here, so we know how to do it. Hopefully, we're not in that situation. Certainly, we're not seeing anything close to that situation today, but we know how to pull back on expenses. We know how to cut inventory, capital, advertising, put a cease to all discretionary spend. On the flip side to your point about being on the offense, as we're seeing other folks not have the same results as us, and here we are with these incredible results and we're seeing that momentum continue, You know, there's lots of opportunities there. I mean, advertising is one example where, you know, if people are pulling out from advertising, that could be an interesting play for us to play. But, you know, it really depends. Obviously, it's confidential as to what we want to, what levers we can pull, but certainly we can if we're generating the cash flow and the earnings that we are.

And then in terms of supply chain efficiencies, I think you asked that question as well as your second piece. So there's a lot of things, you know, that we're, you know, that are getting better. They're still not where they should be. I do want to bring up a couple. So our Sutter Street, Pulse Street operation has cut its lead time down in half from where it was last year. It's still too high, frankly, but we have the best custom quote times, I believe, in the market right now. In-stock improvement, less out-of-market, less duplicate shipping, you know, reduction in damages, return rates, you know, utilization of hubs, retail stores to drive efficiencies. I think we talked about this year, we've told you we're putting together, we're opening a new Arizona distribution center and we'll have more automation there. That should give us some efficiencies. And eventual reduction of shipping costs in general and reduction of the cost I've brought up before of customer accommodations because we've been late, so late. And unfortunately, in some cases with the Vietnam slowdown, so embarrassingly having to tell a customer one or two or three times even that their delivery is delayed because of all the problems that we've had due to COVID in some of those countries. So let's just begin the list of things I think about when you ask me about efficiencies into the future. And I'm excited when I hear about these opportunities because it means we can do better. And that's our mantra is to just make it better.

Great, that's helpful. And just very quickly, I don't know if I missed it, but did you call out how your cancel rates are trending? And then I imagine that you check a lot of your competitors, but how would you rate how your lead times are today versus some of your top peers? Thank you.

As far as cancel rates, they're really low. I mean, we haven't seen much movement from week to week, thankfully. I mean, you know, the customers obviously voting with their wallet and they're willing to stay on and work with us to get the product that they want. And so we haven't seen that change at all. I don't know if you want to talk about the lead times. Oh, lead times.

Well, I mentioned the upholstery. It looks like we're significantly lower. Most people have about 100 days. On the other things, and we have so many different brands, product lines. I could answer on one, but not on all of them. So I'll hesitate to say what it is specifically other than It seems, based on what the customers are telling us, that we're faster. And exciting, we have some new tools that allow us to see what's in stock across brands. Yasir, do you want to comment about that?

Yeah, hi. I think we've been continuously working on this opportunity of the challenges that we're seeing in inventory. And we have built an in-house cross-brand product finding tool that allows us to serve the customers, even upfront, especially in the B2B channels, but also when there is situations where there are gaps and delays, we can quickly find across the brand the right product the customer needs for their design. And it is turning out to be a very, very strong, powerful tool for us.

And our next question will come from Oliver Wintermantle with Evercore ISI.

Yeah, thanks, guys. I had a question regarding the divergence between the Wilms-Sonoma and Pottery Barn kids and teens versus Pottery Barn and West Elm. Is that, in your prepared remarks, you said it was out of stocks or you don't have enough inventory. Were these the only drivers for the divergence there? And when do you expect that to be getting better? And then on top of that, would you expect Pottery Barn and West Elm to slow down in the second half? Or could we see then you being at the upper end of the spectrum of your guidance if that William Snowman Potter Barn Teen and Kids improves?

Oh, Oliver, I wish I had the crystal ball. You know, we're confident in our guidance, is what I'll say again, like Julie has said. You know, in terms of our portfolio of brands, you know, they serve sometimes similar markets, but often different, and life stages and product types. The product types that kids and teens serve for A lot, many more were from Vietnam, unfortunately. Furniture and a big backbone of that business is the furniture. And, you know, we all know what happened in Vietnam with the full shutdown. So it's been the one that has had the most out of stocks, the highest back order percent, still continues to have the highest back order create rates. Versus Potterburn and West Elm have seen more recovery in their inventory. You can measure that by all the numbers we look at. And so that's been an advantage to them. And then Williamson was in a totally different business, kitchenware, housewares, furniture. So they don't have the benefit of the strong furniture trend that we have. And as I said earlier, they had some out of stocks that were pretty unfortunate. And unfortunately, they affected the amount of exclusives that we presented to the customer, which is a big part of our strategy. You've heard us talk about that before. And I'm optimistic that we are going to get them in this year before holiday. Kids and teen, I think it's going to be sooner than that. But, you know, I've predicted this before, and unfortunately I've been wrong because you get one thing fixed and you have another problem happen in the supply chain. So, you know, it's good to have a portfolio of brands to produce results, and we are on top of the details. But, you know, in terms of second half, that would be my best estimate.

All right. Thanks very much, and good luck.

Thanks.

And our next question will come from Peter Benedict with Baird.

So, hey, guys. Good afternoon. I wanted to talk a little bit about the – or to ask you about the B2B business. It looks like it was probably over 60% of your growth in the first quarter, so incredibly robust. Can you help us maybe break down the future opportunity you see there? I know you expect to double it. I think, in the next three years, so another $750 million or so in revenue. Where's that coming from? I guess the real question is, is that less exposed to, let's say, the macro concerns that people have in the market right now around consumer spending and housing and all these types of things? Is that a business that you think can be, I guess, a bit acyclical over the next few years? Thanks.

Yeah, it's great. It's a different customer. And the slowdown of the building and the pandemic means there's a backlog of all this. Remember, they build, then they furnish. So there's, I think, more opportunity even now than there was. And, you know, we write estimates. We see our book. Our business is very strong. We haven't seen slowdown. Big win for us. Clearly one of our differentiators, even if it's a more challenging environment in the future. And so, you know, it's across multiple verticals. We've told you that. We're excited because we're designing for people, products that are specific to their needs. And then we're finding that those are just great wins for even consumer. So it's a really interesting innovator also of new product wins. And, you know, it's interesting also, this is becoming a real, you know, at first this was just an idea. Now it's big business. People are starting to take notice of it. And it's really a source of confidence. You know, furniture is everywhere. It's not just in your home. And we're going to continue to invest in this white space, and we're winning awards, and we're building this business, and it's a competitive advantage.

Absolutely. Sounds like it. I know you guys asked only one question, but everyone seems to be asking two, so I'll just throw one in deep. Can you give us a sense for how many shares you bought back? in the quarter with that $500 million. Thank you.

I think that'll be in the queue when we release the queue. So we'll give it to you then. But certainly it was, as I said in my prepared remarks, that it's up 60% off of last year's all-time high. So it is considerable, the amount of shares that we bought. And we believe wholeheartedly, obviously, in the strength of our business and believe certainly that we're you know, at a level of our stock price that we shouldn't be at. So we're going to continue to opportunistically invest in our own company.

Yeah, that makes sense. Thanks so much, guys. Good luck.

And moving on to Simeon Gutman with Morgan Stanley.

Hi, everyone. Hey, Laura. Hey, Julie. My question is on Ticket. Is there anything that's surprising you or maybe the spread between ticket and unit? Is it widening? And then it sounds like given that there's higher costs coming into the system, that maybe even higher prices, maybe by the back half of the year. So how do you kind of weigh that tradeoff with, look, maybe macro headwinds, maybe not. But it feels like prices probably go even higher in the back half. And, you know, you're reiterating your guide, but curious how that fits into it.

A couple things. First of all, it's not just about ticket of one thing. It's about our mix of business, right? So we are growing our furniture business, which has a higher ticket. And that's where our growth is coming versus the small business. So that is going to continue to be an interesting dynamic as we think about these things. So I don't think worrying about that as just an inflationary issue is the right way to think about it. Because I know that it's also because we're very deliberately building the world's greatest furniture business. So that's going to mean that ticket goes up. So that's the first. And then Pottery Barn is a higher ticket, obviously, than some of our other brands. It's even higher than, you know, a bed is more expensive than a crib. So if you don't have any cribs to sell. I mean, there's so many dynamics underneath ticket as a question. So it's not just as easy as saying it's a... inflationary issue in terms of pricing. You know, I mean, the first thing is, um, you know, we just beat the out margin substantially. We're not guiding that beat through the balance of this year. Okay. So that's because we know there's additional costs that are coming through the balance this year. So it's not that we're raising prices. It's that we don't expect to be by how much we'd be by July 120, 120 basis points. We said, we're going to be in line for the balance of the year.

Fair enough. If I can sneak in my first follow-up question, is outdoor and seasonal, is anything deferred, whether because it's coming in late or because the weather didn't break? And how do you plan that category?

I mean, there's no specific weather pattern that I've ever seen, frankly, impact us. But versus last year, of course, coming out of COVID, or because we were still in COVID, we sold it early. And so we're back at a more normalized curve for outdoor that's later in the season, which is actually a really good thing. We have a year-round business, so it's not a business that we just have during the summertime. And that also helps us with stability of inventory. But outdoor business is a very strong business for us. It's one where we continue to gain market share and push our assortments and have better product and better marketing. And it's a real growth vehicle for us.

Okay, thanks. Nice quarter. Take care.

Thank you. Our next question will come from Jonathan Matuszewski with Jefferies.

Hi, Laura. Hi, Julie. Great results. Thanks for taking my question. Follow-up question about a scenario of the economy slowing. Could you remind us how much of your COGS and SG&A could flex – the fixed and variable split for both, if you could share.

We've never really disclosed that. And I guess what I would say, what we've learned is nothing's fixed. If you're depending on the environment, we go after it all. And we've been very successful at that. So it's kind of irrelevant for us. We've been very successful at going after it.

Remember, if prices come down, costs come down too from our vendors.

Okay. And just a quick follow-up on B2B. lot of traction there any sense of how much of your business on b2b has been driven by repeat engagement presumably if you've done a hotel or a satellite office for one hospitality or a corporate client you know how often does that translate into a future project trying to get a sense of you know how much of this is relationship driven and or would be open to kind of recurring competitive bidding. Thanks so much.

Yeah, so that piece of the business is growing, but we still have a lot of small projects too. We love both. So teasing it out that way, I don't think there's anything really to that yet other than to say that we're building this more consistent annuity business, and that will get more and more stable as we grow.

Appreciate the call. Best of luck. And moving on to Stephen Zucconi with Citi.

Great. Thanks for taking my question. Good afternoon, everybody. I wanted to follow up on Simeon's question. So you referenced inventory on hand was up 17%, and then I think units on hand were up about 1%. Is that spread a good proxy to think about how much AUR is up?

Not necessarily. It's mixed shift. It's pricing. It's all sorts of things that are a combination that make up that delta. But I think the point there is to really think about that we don't have excess inventory like the other companies that have been reporting. We have been very thoughtful about that, and we only have 1% up in units to make the point that the 28% is overstayed relative to what we've heard from others.

Got it. Perfect. Thank you. The other question, just to follow up, I just want to make sure I understand the messaging correctly. So it sounds like there's some more costs coming online as we think about the balance of the year. You know, should we interpret that, that gross margin expansion gets a bit more challenging as we go through the year? I'm just trying to understand if that's, you know, new or is it just, you know, this is still a little bit of conservatism that you're factoring in on the gross margin line. Thanks very much.

It's possible. I mean, certainly we do have higher costs coming throughout the year. As we've said, we've got higher product costs, higher freight costs. There's costs that we're incurring to have additional distribution space to house the fact that we've got this mixed shift furniture, which is a larger cube. And we're also doing the right thing by our customers. As I said before, you know, we are shipping things to them that are out of market. It's from out of market distribution centers because we want to get it to them faster. Customer service is critical for us. And, you know, we might ship multiple times to a same customer if they've got a multi-unit order, and we want to do the right thing by the customer. And so, yes, there could be pressures moving through, but at the end of the day, we're committed to obviously doing everything we can to mitigate it, as we've done in the past, and we are committed to holding our up margin on the year relatively in line, which, again, is more than 2x where it's been.

Okay, that's very helpful. Thanks for that.

Thank you. And that does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closing remarks.

Yes, I just want to thank all of you for your support and interest in our company, and we look forward to talking to you next quarter.

Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.