Williams-Sonoma, Inc.

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.