Williams-Sonoma, Inc. Common Stock (DE)

Q4 2022 Earnings Conference Call

3/16/2023

spk01: Inc. fourth quarter 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.
spk09: Good morning, and thank you for joining our fourth quarter earnings call. I'd like to remind you that during this call, we will make forward-looking statements with respect to future events in financial performance, including guidance for fiscal 23 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation 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. Specifically, we recorded an impairment charge of $17.7 million in the fourth quarter to write off certain software and hardware costs. and goodwill associated with Aperture, a division of our outward subsidiary. This impairment charge does not affect our ongoing use or strategy of the outward technology in our portfolio of brands and in our design and room planning functionality. Accordingly, our non-GAAP results for the fourth quarter and fiscal year 22 have been adjusted for this impairment charge. A full reconciliation of non-GAAP measures for the most directly comparable gap measure appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now, I'd like to turn the call over to Laura Albert, our President and Chief Executive Officer.
spk02: Laura Albert Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. At William Sonoma, Inc., we're proud that despite the declining macro environment, we delivered another year of record revenue and record earnings. With our relentless focus on compelling product, customer service, and profitable growth, we continue to outperform our peers. We continue to gain market share, and we continue to distinguish ourselves as the world's largest digital-first, design-led, sustainable home retailer. And what are these things that distinguish us? No other home furnishings company offers our in-house design capabilities and vertically integrated sourcing organization. It allows us to deliver high quality, sustainable products at the best value to market that cannot be found anywhere else. No other home furnishings company offers our digital first, but not digital only channel strategy that's transforming the customer experience. With our proprietary e-commerce platform, we are one of the largest e-commerce players in the United States. Our in-house CRM and data analytic teams optimize our digital spend and customer connections. And our great stores not only deliver an outstanding customer experience, but also in 2022, we expanded our services with ship to store as we transition our stores to also serve as design centers, and omni-fulfillment hubs. And no other home furnishings company has our strong record on values that many consumers want today. In Q4, we are proud to be named through Newsweek's list of America's most responsible companies. The Morgan Stanley Capital International ESG assessment gave us a triple A rating, the highest possible. And we were included on the 2022 S&P Dow Jones Sustainability Index for North America, the only new retailer added to the North America list in 2022. Along with our key differentiators, our success and profitability has been driven by our new growth initiatives that are cross-brand and or are outside of our core brands. Our largest cross-brand growth driver is business-to-business. William Sonoma Inc. is no longer just a home furnishings company. We furnish our customers everywhere, from restaurants to hotels, from football stadiums to office spaces. We set the ambitious goal this year to reach a billion in demand in our B2B business, and we came very close, driving 27% year-over-year growth and 166% on a two-year basis. And we continue to win B2B accounts, due to our design capabilities and the wide range of products offered in our multi-brand portfolio. Another successful growth initiative is our expansion into global markets. In the massive market of India, our new partnership with the Reliance Group is off to a very strong start. With our exclusive and differentiated product line, our three stores and websites in India are outperforming our expectations in a market where we see tremendous opportunity. And in Canada, we relaunched our websites and saw improvements in conversion and AUR across brands. In our new businesses, Rejuvenation and Mark and Graham have also provided incremental growth. Together, in fiscal 2022, they represented nearly $270 million in revenues and drove nearly a 10% comp on the year. These two brands service white space needs of customers. At Rejuvenation, We're expanding into remodel categories related to kitchen and bathroom, including vanities, cabinet hardware, and custom wall lighting. And at Mark & Graham, our high-quality gift and personalization business is resonating with our customers, and we see outsized growth in the travel space, including luggage and accessories. Our core brands, Potter Barn, Potter Barn Kids, Potter Barn Teens, West Elm, and Williams-Sonoma, are also key contributors to our strong fiscal 2022, together growing at 6.4%. Put it all together, our key differentiators and our growth initiatives, and you see the results that we are reporting today. We're proud that we achieved our fiscal 22 annual guidance and delivered a 6.5% comp on the top line and an operating margin of 17.5%. At the same time, we drove EPS growth of over 11% to $16.54 per share from $14.85 last year. As I said at the top, we continue to outperform our peers. In a year where the industry grew 1%, we grew more than 5%. All of this is particularly impressive given the declining macro backdrop in Q3 and Q4 of 2022, and the record demand that we were up against in 2021. Stepping back for a moment and looking at the last 12 years, it's clear that we've consistently delivered. And more recently, since 2019, we've grown our revenues more than 47%, adding $2.8 billion to the top line. We've also more than doubled our operating margin, from 8.6% to 17.5%. Now let's talk specifically about Q4. Our Q4 results were achieved while the macro backdrop weakened. Our demand comps were in the negative mid-single digit comp range and were inconsistent across our portfolio of brands, leading to a net revenue comp of negative 0.6% total company. In addition, although supply chain cost increases pressured our margins, we were able to offset these headwinds with SG&A cost savings producing an operating margin of 19.9% and earnings per share of $5.50 in Q4. Now let's talk about our brands for Q4 and for the full year. Pottery Barn ran a positive 5.8% comp in Q4 and a 14.9% on the full year. On a three-year basis, Pottery Barn generated a 54% comp Powder Barn's inspirational product offering and successful execution of its growth initiatives, like the accessible home, apartment, and marketplace, drove the performance. Also, our holiday offering was successful. As we look to the year ahead, the brand has a strong lineup of product offerings, including new products with great design and sharp price points. The Powder Barn children's business ran a positive 4% comp in Q4 and a positive 0.4% on the year. On a three-year basis, the children's business generated a 28.6% comp. Growth continued to be driven from baby and dorm. And another highlight is our successful introduction of our exclusive collaboration with a trending fashion brand, Love Shack Fancy, which is outperforming our expectations. Also, in both Powderburn Kids and Powderburn Teen, we're excited to have launched a new native shopping app. which brings enhanced functionality and provides customers with an easy-to-use interface. We've only been live with the app for a short time, but we are seeing positive response and will continue to read results to determine if we should launch apps for our other brands. In Q4, the children's business benefited from an improved in-stock position, which is critical to this life stage business and will continue to benefit us this year. The West Elm brand was most affected by the tough macro environment. In Q4, West Elm ran a negative 10.7% coming off very strong multi-year comps. On a full-year basis, West Elm ran a 2.5% comp and very strong operating margins. On a three-year basis, the West Elm brand generated a 50.8% comp. Looking ahead, we're very excited about the recent announcement of Day Corn Blues, as the new brand present effective April 3rd. Day has a proven track record and previous success growing home furnishings brands. She'll lead Westbound through its next chapter of growth with a focus on four areas. Industry-leading design and value, increased brand awareness and customer acquisition, expanding into product white space, and leveraging channel growth opportunity. Given the cautious consumer, we continue to see short-term softness. But with Day Corn Blue leading this brand, the total addressable market opportunity, and the focus on those four areas, we continue to be very optimistic about the long-term growth trajectory of West Elm. Finally, the Williams-Sonoma brand had a successful holiday season, but ran a negative 2.5% comp in Q4, largely driven by softness in January. On the full year, the brand ran a negative 1.7% comp. On a three-year basis, Williams-Sonoma generated a 32.6% comp. And while the housewares market has become extremely promotional, the Williams-Sonoma team remains focused on increasing product exclusivity, innovation, relevant content, and full price selling. We have a pipeline of innovative product launches and chef collaborations planned throughout the year, and we see new opportunities from the integration of the Williams-Sonoma Home Furnishings assortment into our kitchen business. Looking ahead, we recognize that with a weak housing market, layoffs, and a possible recession, there's a lot of uncertainty with the consumer. Nevertheless, we remain confident. With our key differentiators and our growth initiatives, we're confident in our top line. With our focus on reducing costs and managing inventory levels, we're confident on our bottom line. And with the home furnishings market, remaining large and fragmented, including the B2B market at an estimated 80 billion TAM, we're confident that we will continue to gain market share. With our relentless focus on compelling product, customer service, and profitable growth, and its inflation and costs, including shipping, come down, we're confident that we'll drive operating margins of more than 14%, as Jeff will discuss in more detail. Looking even further out, We remain confident in our long-term growth algorithm. I believe we're going to get through the coming environment better than any of our peers. We are going to keep delivering profitable growth, and we believe we can deliver mid to high single-digit top-line growth and sustain our operating margin of at least 15% once the external environment improves. This is a great company with great brands, and with our culture of innovation and talent, our values, and the strength of our team, we're moving ahead with our vision to furnish our customers everywhere. As we do, we're confident that we will continue to outperform our peers and deliver for all of our customers, employees, and shareholders. And with that, I'll turn it over to Jeff.
spk08: Thank you, Laura, and good morning, everyone. As Laura said, because of our key differentiators and growth initiatives, 2022 was another record year of revenue and earnings. With our relentless focus on compelling product, customer service, and profitable growth, we have outperformed our peers and we continue to gain market share. Now I will walk you through our fiscal 2022 results, our Q4 results, and then 2023 guidance. More specifically, full year 2022 net revenues grew in line with our guidance of mid to high single digit growth. finishing at $8.674 billion, a 6.5% comp, on top of a 22% comp in 2021, and a 17% comp in 2020. With our digital-first but not digital-only platform, we saw growth across both channels, with e-commerce growing 4.5% comp and retail 11.1%. E-commerce now represents 66% of our total revenues. Gross margin at 42.4% of net revenues deleveraged 160 basis points from last year. That happened as we absorbed the ongoing impact of COVID supply chain disruption and global inflationary pressure. With our strong financial discipline and cost control, we were able to materially offset these headwinds in gross margin, as SG&A at 24.9% of net revenues leveraged 140 basis points from last year. Operating margin of 17.5% was consistent with our full year guidance of being materially in line with our fiscal year 21 results and demonstrates the resiliency and profitability of our operating model. Diluted earnings per share of $16.54 grew 11% over last year's $14.85, another record year of earnings for our shareholders. In fact, We're proud that 2022 constitutes the 14th consecutive year of EPS growth for our shareholders, another example of how we've consistently delivered. Likewise, our Fortress balance sheet and consistent ability to generate free cash flow allowed us to fund our business operations, increase our capital investments to $354 million to support our long-term growth, and return over $1 billion in excess cash to our shareholders. Dividend payouts for approximately $217 million, or $3.12 per share, represented the 13th consecutive year we have increased our dividend. Coupled with our share repurchases of $880 million, this shows a strong commitment to maximizing total returns for our shareholders. And here's another example of our financial discipline and commitment to driving long-term growth for our shareholders, our 49% return on invested capital. Inclusive of our higher capital investments and increased inventory levels, our ROIC is among the best in the retail industry. To sum our 2022 results, we're proud to have delivered another year of record revenues and earnings. I want to thank all our associates for their hard work and dedication in driving these great results. Turning to our Q4 results. As Laura said, we continue to outperform our peers. This was despite the quarter's ongoing demand shoppiness and declining macroeconomic backdrop. With our ability to gain market share through the strength of our proprietary in-house design and our family of strong and stable brands, our top line outperformed the industry. Our resilient operating margin demonstrates the power of our operating model to sustain profitability. Net revenues came in at $2.453 billion, with comparable brand revenue growth at negative 0.6%. Demand on the quarter was in the mid single-digit negative comp range, decelerating from Q3's demand trend. We saw a strong holiday season bookended by a soft early November and a soft January. Our net revenues were driven by strong order fulfillment, ongoing momentum in our growth initiatives, and our continued ability to take market share even as we continue to experience inconsistent demand. Moving down the income statement, gross margin at 41.2% was in line with our expectations. Coming in 380 basis points below last year, it reflects the impact of the higher input costs flowing through our income statement, including higher product costs, ocean freight, detention to merge, as well as our efforts to meet our customer service expectations. Merchandise margins decreased from last year as we started to absorb the capitalized costs from higher product costs, ocean freight, detention, and demerge into our income statement. This was partially offset by the higher pricing power, our proprietary products command, and by our ongoing commitment to forego site-wide promotions. The gross margin decline was also attributable to higher outbound customer shipping costs. We continue to incur these higher costs to best serve our customers by shipping from out-of-market distribution centers and, in some cases, shipping multiple times for multi-unit orders, which typically would have been fulfilled in a single shipment. We're working hard to rebalance our inventory composition and regional inventory location to improve our customer service. We expect customer service to gradually improve over the next few quarters. Occupancy costs at 8.3% of net revenues were 60 basis points above last year, with occupancy dollars increasing 5% to approximately $204 million. Our ongoing retail store optimization initiative partially offset incremental costs from our new distribution centers on both the east and west coasts. These new distribution centers will support our long-term growth, improve service time for our customers, and drive cost efficiencies over time. Our SG&A rate continues to be at a historic low at 21.3%, leveraging 270 basis points over last year, showcasing our financial discipline and ability to control costs. Employment leveraged to last year as we manage variable employment costs in accordance with our top line trends and adjusted incentive compensation with business performance. Our advertising leverage reflects the agile, performance-driven proficiency of our marketing team. Our in-house capabilities, first-party data, and multi-brand platform are an underappreciated competitive advantage that allows us to drive efficient advertising spend in near real-time as we see trends evolve in the business. SG&A also includes recoveries from insurance in the fourth quarter. With regard to the bottom line, we delivered another solid quarter of earnings in a challenging environment. Due for operating income of $487 million and operating margin at 19.9%, which is only 110 basis points below last year, reflects the durability of our profitability, despite significant macroeconomic headwinds and inflationary cost pressures. Our record diluted earnings per share of $5.50 was $0.08, or 1.5% above last year's record fourth quarter earnings per share of $5.42. On the balance sheet, we ended the quarter with a cash balance of $367 million and no debt outstanding. This is inclusive of consistently paying our quarterly dividend and opportunistically repurchasing shares congruent with our commitment to maximizing shareholder value. Merchandise inventories, which include in-transit inventory, at $1.456 billion increased 17% over last year, while inventory on hand increased 40% over last year. There are three important points to emphasize here. First, our inventory on-hand increase is skewed by last year's pandemic-related supply chain disruption, creating an artificially low base. An apple-to-apples comparison versus 2019 highlights how we've improved our inventory turnover as our on-hand inventory levels have increased only 21% against revenue growth of over 47% during that time. Second, supply chain congestion eased earlier than anticipated in Q4. Like many retailers, we adjusted our transit times during the pandemic and received receipts substantially earlier than we expected in Q4 as transit times normalized. While this contributed to our increased inventory levels, it enabled us to substantially reduce our backlog to normalized levels. Third, our lower balance sheet inventory growth reflects a 40% reduction in merchandise in transit, as we've aligned our future on order with cautious forward-looking demand given the macroeconomic outlook. To sum up our Q4 results, we've outperformed our industry. Our top line proves our ability to take market share. Our operating margin demonstrates the resiliency of our profitability. And our record earnings per share is testimony to our commitment to maximize shareholder returns. Now let's look ahead to 2023. Due to the macroeconomic uncertainty, we are providing a wide range of guidance for 23. 2023 net revenues are expected to be in the range of down three comp to positive three comp, with operating margins between 14% and 15%. We expect the first half of the year will be materially tougher. On the top line, our year-over-year demand comparison and last year's high backorder fill, coupled with the declining macro, will likely yield negative comps. On the bottom line, we continue to foresee gross margin pressure, as we saw in Q4. The higher input costs sitting on our balance sheet will continue to amortize into our income statement, as well as ongoing incremental shipping costs to service our customers. In the back half of the year, these headwinds should turn into tailwinds as our top-line year-over-year comparisons get easier and our gross margin pressures become tailwinds that support our profitability. Our capital allocation plans for 2023 prioritize funding our business operations and investing in our long-term growth. We expect to spend $250 million in capital expenditures to invest in the long-term growth of our business. This constitutes a 30% decrease from 2022, with 80% of the spend dedicated to driving our e-commerce leadership through technology enhancements and supply chain efficiency initiatives. We expect to continue to return excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, today we announced another double-digit increase in our quarterly dividend payout. of 15% for 12 cents to 90 cents per share. Again, fiscal year 23 will be the 14th consecutive year of increased dividend payouts, which we are both proud of and committed to. For share repurchases, today we also announced our board has approved a new $1 billion share repurchase authorization, under which we will opportunistically repurchase our stock to deliver returns for our shareholders. Combined, our dividend increase and new share repurchase authorization continue our commitment to returning excess cash to our shareholders. In fact, we've returned over $3.2 billion to our shareholders over the last five years, which is yet another example of how we've consistently delivered. As Laura said, we remain confident in the long-term fundamentals of our business as we look beyond 2023. Our long-term growth algorithm will continue to drive mid-to-high single-digit top-line growth with operating margins exceeding a floor of 15%. As the world's largest digital-first design-led sustainable home retailer, we're confident we'll continue to outperform our peers and deliver profitable growth for these reasons. Our ability to gain market share in the fractured home furnishings industry. The strength of our in-house proprietary design. The competitive advantage of our digital-first but not digital-only channel strategy. the strength of our growth initiatives, our ability to control costs, the durability of our profitability, and the resiliency of our fortress balance sheet. With that, I'll open the call for questions.
spk01: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Anthony Chukamba with Loop Capital Markets. Your line is open.
spk07: Good morning. That was a good pronunciation of my last name. So my question is on the divergence between, I guess, the Pottery Barn brands and the West Elm comps. Because even on a two-year stack basis, you know, Powdery Barn in particular really outperformed West Elm. And you said that West Elm was impacted by the macro. I guess I'm just trying to understand why West Elm was much more impacted by the macro than Powdery Barn was in the fourth quarter.
spk10: Hello, can you hear me? Can you not hear me?
spk02: Yeah.
spk06: Yeah. Hello. Yeah, I'm here. Sorry. Did you guys not get my question?
spk02: Yes, I'm answering it. Can you hear me?
spk06: Okay. I can hear you now. Sorry. I couldn't hear you before.
spk02: Okay. No problem. I was saying that the stack on the two compares actually West Elm stack is a little greater than the Potter Barn stack. That being said, Potter Barn has a wider range of products. than West Elm does. And they had a very, very successful seasonal assortment. So that was one area of variation. But also, there are some nuances in the psychographic and demographic of the West Elm customer. And we keep looking at all of this customer data to understand it, because any change creates opportunity for us. And we keep looking at, how do we better position ourselves for this inflection point where consumers are more uncertain? And there's not a lot of great things to hang on to in terms of the demos themselves other than income. The income levels of the consumer seem to really matter in terms of what they're buying. And then also, of course, you know, the new mover section of our business is very different than it was a year ago, of course, when housing was much more robust. And so that has an outsized impact. As we look at the future, the same fundamentals exist as have existed for the opportunity for West Elm. And we're very excited about our new leader who is coming, who I mentioned in my prepared remarks, her experience and her strong leadership. And we also know that we've seen cycles before where you get some retraction and you come out stronger on the other side. And the design value equation that West Elm has is really hard to compete with anywhere else. that coupled with their Omni experience in store, and they're very fresh and exciting stores. And the reality is we've got our head down, we're working on our initiative, and we're also working on making sure that we're positioning our marketing to be as relevant now as it was in the pandemic. And things have shifted. You know, I just think it's important that we remember that at this time last year, you know, we were not dealing with the high interest rates. We were not seeing the wave of layoffs, and we didn't have the events of last week, which are now weighing heavily on the customer. And even though there are, you know, Anthony, there's many negatives out there, honestly, this creates opportunity. It creates opportunity for West Elm and all of our brands. Opportunity to reduce costs, be more efficient, and leapfrog our peers on service. It also gives us the opportunity to take market share as weaker peers struggle. And as I said, our opportunity to come out stronger than anyone else and drive profitable growth.
spk07: Got it. Very helpful. And then just one real quick follow-up. B2B sales continue to grow like a weed. We'd love just your thoughts in terms of expectation for B2B sales growth in 2023. Thanks.
spk08: Good morning, Anthony. B2B is one of our most exciting growth initiatives, as you know, and we finished this year just shy of a billion, growing 27% in a one year and 166% on a two year. In terms of where we see next year, it should continue to be accretive to our comps, probably in the neighborhood of about 100 basis points to our comps in 23. There's some really exciting things going on in B2B. And as you know, we're not always at liberty to talk about our clients, but in Q4, we saw some notable wins we can talk about. In office space, we outfitted Carl's Jr.' 's corporate office, and unfortunately, there was no free food. It was not part of the deal. We also outfitted Google's Midpoint office. In stadium space, we furnished the Golden Guardians eSports facility in Los Angeles. And in hotel space, we saw a large number of hotel projects complete with Marriott Spring Hill. Now, one thing to remember with B2B is there's two customer groups, trade and contract. While trade is more volume, contract is our source of growth. Trade may be more sensitive to B2C trends, but contract continues to drive the growth in B2B. We're not seeing a slowdown in the commercial side as there's a backlog of projects coming out of the pandemic, and we have a steady pipeline of RFPs we've gone out on. In fact, Q4 was the largest quarter of contract to date. The key point here is B2B continues to be a winning strategy for us. And we continue to capture market share in the $80 billion fragmented B2B market. It leverages our portfolio of brands, in-house design, and global sourcing capabilities. And our digital-first but not digital-only strategy means we can service the B2B customer in multiple ways.
spk10: Very helpful. Keep up the good work, guys. Thank you.
spk01: Your next question comes from a line of Max Bracleno with TD Cowen. Your line is open.
spk04: Great. Thanks a lot. So first, can you walk us through the scenarios and market dynamics that get you to both the low end versus the high end of both the comps as well as even margin guidance for 23? And how should we think about the strong comp guide versus demand running and down mid-singles in 4Q, including the softer January.
spk10: Thank you.
spk08: Good morning, Max. Well, here's what we're seeing. As we anticipate continued choppiness in demand and ongoing macroeconomic uncertainty, certainly the events of the past week don't help. And all this is reflected in our guidance, which contemplates a wide range of outcomes. As we said in our prepared remarks, the first half of the year will be materially tougher. On the top line, our year-over-year demand comps and last year's high backorder fill coupled with the declining macro is likely going to yield negative comps. And that's where we'll see our toughest headwinds on the top line. And we'll also see headwinds on the bottom line as we continue to see the gross margin pressures we did in Q4 from the higher input costs we've all talked about sitting on our balance sheet and as they amortize in our P&L, as well as our ongoing incremental shipping costs to service our customer. But here's the back half of the different story. Our top line year-over-year demand comparisons get easier, especially as we started to see demand decelerate after Labor Day last year. And as we've mentioned before, our gross margin headwinds become tailwinds in the back half. But here's the key point I'd like to make. we're uniquely positioned to take market share in any environment. Our key differentiators and growth initiatives position us to take market share in any environment. And our Fortress balance sheet enables us to withstand pressures many of our competitors will not.
spk10: Got it.
spk04: That's very helpful. And then, so both your 2023 as well as your long-term EBIT margin outlooks lock in a significant step up from 2019 levels. Can you walk us through the factors that give you confidence that this is achievable, as well as the embedded expectations of meaningfully lower promotions? Thank you, and best regards.
spk08: Sure. Look, we've expanded our op margin by almost 900 basis points since 2019 as a result of our growth initiatives, our channel strategy, and our cost discipline. In the near term, as we've guided and I just talked about, we have some short-term cost pressures that will be a headwind through the first half of 23, but then become a significant tailwind in the back half of 23 and into 24 that gives us confidence and sustainability of our margins. As we look beyond 23 and the current macroeconomic uncertainty, we remain confident in the long-term fundamentals of our business. Our growth algorithm will continue to drive mid to high single-digit top-line growth, with operating margins exceeding a floor of 15%. We see six key drivers underpinning this 15% operating margin floor. First is our supply chain efficiency. Like I've been talking to, our first half headwinds will become tailwinds that will sustain our gross margin over the long term. Second is our ad cost optimization. Our in-house model with first-party data and our own hands on the keyboard allows us to continue to optimize ad spend. Second is our third is our pricing power. Our in-house design, proprietary products command a higher price point in the market and enable us to forego site-wide promotions. And I'll mention that we remain committed to foregoing site-wide promotions as an ongoing basis. Fourth, our cost and inventory reductions. Our results speak to our financial discipline and cost controls. Next is our e-commerce sales mix, where we continue to drive growth in the higher contribution channel of the e-commerce. And finally is our retail optimization strategy, which we've spoken to, where we're targeting fewer and more profitable stores. The key point here is our operating margin is sustainable at 15% and could even go higher with more leverage from higher revenues.
spk10: Great, thanks a lot. It's very helpful.
spk01: Your next question comes from the line of Oliver Wintermendel with Evercore. Your line is open.
spk00: Yeah, good morning. You mentioned the soft January, but now we're already a month and a half into the first quarter, so pretty good outlook for the quarter. How did the first quarter perform so far? You said the first half is meaningfully lower than the second half, but maybe some details on how the quarter started would be helpful.
spk08: Good morning, Ali. So our recent performance continues to be choppy and inconsistent, much like it was in Q4. And the macro environment is not helping, especially with events in the past week. All of this is reflected in our guidance, which contemplates a wide range of outcomes. Here's the thing we know. Our three key differentiators uniquely position us to capitalize on opportunities to take market share in any environment. So for us, it's not so much about the macro. It's about what we can do to take market share and drive profitable growth in our business.
spk10: Got it. Thank you. And as a
spk00: A follow-up, you've done a really good job in the cost-cutting areas. How sustainable is that longer term, and what comp would you have to achieve to leverage SG&A?
spk08: Thank you. Yes, we've been very successful in managing our SG&A. I think it speaks to our operating model and our commitment to financial discipline and cost control. We believe we can sustain our SG&A and continue to perform and manage those costs effectively. And our leverage comes from a mix of employment and ad costs. The majority of our employment is in our stores, distribution centers, and call centers. So we have the ability to flex with sales. And our advertising leverage reflects the agile performance driven proficiency of our in-house capabilities. which again, as I mentioned in my prepared remarks, I think is an underappreciated competitive advantage. So our SG&A leverage shows the flexibility of our operating model, our commitment to financial discipline, and our ability to control costs in any environment, which we're confident we can continue to do so in the future.
spk02: I would just add to that, you know, we've been here for a while, Jeff and I, and through the pandemic and also the 2008 recession, We have many levers we can pull, as he said. We certainly don't want to be in this situation, but we're one of the best positioned companies to weather any storm and come out stronger. And we've proven this time and time again. First and foremost, we have a tenured management team who's been through it before. They know how to navigate this better than most. You know about our strong balance sheet that puts us in a much better situation than most. And then we are not waiting. to see a full blown recession, we are cost cutting aggressively as we speak and pulling the levers that we have to set us up for more efficient operations, which by the way, drives better service. So as Jeff mentioned, our supply chain costs have been under tremendous pressure and will continue to be because of the higher inbound and transportation costs of last year. And we do continue to incur additional costs resulting from servicing our customers. But these costs will come down and they will serve as large tailwinds. Our service has improved. We've normalized service. We've normalized back orders. But it is not where we want it to be. Our standard is much higher. It's a level we've never seen before. And we've been investing in our supply chain so we can reach that level. And that will yield a lot of improvements in margin for us. Also, remember, inflation affects vendor costs. we have been seeing higher costs across across the board from our vendors and suppliers from higher raw material costs higher labor costs higher fuel but the reality is it's changing and we are starting to mitigate these expenses and seeing the cost come down from our vendors and then also you know we mentioned our channels and how what a competitive advantage this is and you see you know, people with large e-commerce businesses, but no stores. You see people who have enormous stores, but they really don't invest much in e-commerce. And we know that the multi-channel shopper shops more and it's the experience they're looking for. So they can research online and go sit in the sofa in the store. And as I said earlier, you know, we're expanding what we do in these stores and using them differently. And this is a big advantage for us. We're actually able to better turn our inventory because we can ship it from store and people can pick it up in store. And we've also been, as we said, looking at our ad costs and looking at how we can ramp down with immediacy. And we're able to do this because, as Jeff said, we have first-party data, we have hands-on keyboards, and we are constantly investing in tech that helps us improve our ad costs. On labor, you know, it's important to note that we, unlike others, have been extremely cautious on backfilling positions when people leave. We did this in Q3 and Q4, and that has positioned us well in regard to labor cuts. However, we have restructured and rationalized some of our organizations to drive more efficiency because of the uncertain macro environments. And we know that this gives us a little head space as we go through the year and see if we see continued choppiness through the first half.
spk10: Thank you very much for all the details and good luck. Thank you.
spk01: Your next question is from the line of Christina Fernandez with the Tesley Advisory Group. Your line is open.
spk11: Thank you. Good morning. I had a question on demand. I wanted to see if you could provide some color on what, I guess, what is the consumer responding to what is doing better and what is worse? And I was particularly interested in categories like furniture versus decor. I know furniture has been very strong over the past couple of years, but how does that typically perform in an environment of lower existing home sales and home price depreciation?
spk02: Sure. It's so early in the year to make any conclusions. And, you know, high ticket is very mixed from, you know, espresso machines to high end selling really well and then some softness and furniture. So I don't want to go too far into reading into this for the year because we see these things move around all the time. I mean, the good news is that with our portfolio of brands that serve both life stage and price points and aesthetics and scale, we have more durability than others who may not have that exciting Easter assortment that brings people into their stores or a baby assortment on gear. You know, the trends on registry continue to be very strong. And as I said, you know, seasonal people are still going to celebrate the holidays and they're still going to give gifts. And I think there's really not a lot of people set up better from a gift-giving perspective than Williams-Sonoma Brands. I know housing is top of mind for all of us, and especially the people on this call know that home sales have decreased 37%, but home values have increased 40%. And for most of our customers, home is their greatest asset. People love their homes. They learned how to cook in the pandemic, and now, as they continue to cut back spending elsewhere, they realize that going out to dinner is really expensive. So the dinner party is back in full force, and it's an area that we're really focusing on. The other dynamic, just to remind everybody, is if you can't move, what do you do? Eventually, you remodel. When you remodel, you buy new furniture. So those are some of the things that we are able to, because of our portfolio of brands, think about, market to, and build as we look at what we think is another inflection point with our consumer.
spk11: Thank you. That's helpful. And then the second question I had, you know, more probably for Jeff, but in the 2023 outlook, just thinking about the gross margin versus SG&A, you know, how to get to the decline for the year. It looks like you're controlling costs. So should we expect most of the decline to be due to the gross margin and those headwinds you mentioned in the first half, or would it be a combination of deliberation both?
spk08: Thank you, Christina. I'm glad you brought that up. So we don't guide the specific line items, as I think everyone knows. But I will say, as I said in my prepared remarks, our pressure will be on the gross margin line. And especially in the first half, as the capitalized costs of all the higher ocean freight and product costs and tension emerge, continue to amortize into our P&L. Those will become a tailwind in the back half of 23 and into 24. So that's where we'll see the pressure from a P&L standpoint in 23. From an SG&A standpoint, as we've said, we continue to believe that our financial discipline and cost control will allow us to continue to manage that line effectively. So we're not going to guide the specifics, but I think that will give you a flavor of how we're thinking about it.
spk10: Thank you.
spk01: Your next question comes from the line of Marnie Shapiro with Retail Tracker. Your line is open.
spk10: Marnie, are you there? Do we have Marnie? Hello?
spk08: Hello, Marnie. Good morning.
spk05: I'm here. I'm here. Hello. Hello, hello, hello.
spk08: We can hear you.
spk05: Okay. I don't know why it's not connecting nicely, but congrats on actually making it through what's been a very tough environment for you guys. Laura, I just want to focus a little bit big picture and step away from the housing market and interest rates and banks for the moment. You've had some really good collaborations, most recently Love Shack Fancy. Could you talk a little bit, I guess, bigger picture about these collaborations? Are they bringing in new customers? Are they driving traffic to the stores? And then I wanted to follow up on a comment you said about stores, that you're one of the few that actually people could come in and sit down on couches. And I witness this on a regular basis. So can you talk a little bit about what you're thinking about the stores going forward? I guess more in the sense of servicing these stores. It seems to me from spending a lot of time in your stores that people come in kind of prepared to buy stores. As opposed to browsing, they've done their work online and they just want to now sit in the couch or touch the sheets or see how that kitchen, you know, the dining chair feels. So how has that changed kind of the staffing and how you approach sales and the store model? Thank you, Marnie.
spk02: So let's begin with collaboration. It's interesting. As much as we have our own in-house design team, We know that there are so many incredible designers out in the world doing adjacent things, sometimes in different categories. And our kids, our children's business actually taught us the importance of collaborations as we recognize that children love Star Wars and Harry Potter and all those things. And to not give them that when they're young seems like... you know, a real myth. So we had for years been working on all of those kids collaborations and then started to bring in other collaborations in our adult brands. And we've seen success, you know, things that are, you know, sort of historic designs like William Morris has been phenomenal for us. And then turning to a trending, you know, design group, Love Shack Fancy, that is, you know, the hottest thing for young women now. And, and, bringing that to bedding for children has been better than we even expected. And we thought it'd be good. And it really is dynamite. You know, chef collaborations are another category that you don't want to forget about how important the chef community is to us. And it's mutually symbiotic. And we are not, we work with chefs to not just have them talk about our products, but also to develop products because oftentimes, you know, who knows better than what the best pan would be. than a chef. And you've seen all these chefs that have come in and we've done exclusive collaborations with in our brands. So this does have the impact of driving sales, but also bringing new customers in because sometimes these collaborators have a very different set of consumers that don't know our brands. And so that helps us bring in new people and these people are very, very loyal. to these collaborators. Julia B. in Potter Barn is a really good example of that. So we're going to continue to feed that pipeline. We have some very exciting, competitive, confidential ones coming up this year. That's great. And then in terms of stores, you know, we operate world-class retail business. And as I said earlier, our stores, you know, they're not flagships. They're billboards for our brand and their profit centers. And they're beautifully designed and curated with aspirational assortments And we believe, we continue to believe that these serve as competitive advantages. It's possible because we invest in them. We keep them relevant and attractive with fresh, new store formats. But we do it through testing. We don't just change everything at once. You might have seen a couple years back, we put together a new Williams-Sonoma. And we tested it right in our backyard here. in Corte Madera, and we were thrilled with it. And that format is really outperforming. And so as things come up for renewal, we are carefully making the investment to freshen up those stores. And it means that we're able to do more in the same or less space. And so you're right that people come in prepared to buy. We're destinations. We like to have parking. We want to make it comfortable. But when you come in and you're prepared to buy, you also might come in and be inspired to buy something you don't need. And that is why we think that our mix of furniture, but also decorative accessories and dinnerware and tabletop and all those other things that we sell in Williamstown, the food, create more visits to stores than some of the traditional home furnishings and furniture-based retailers.
spk05: That's very helpful. And can I follow up also just on the B2B perspective? because you guys have seen really extraordinary growth. And I think you mentioned that there's still a backlog due to COVID. People are rethinking, I guess, the way their offices are. Some of them are downsizing and moving, which necessitates the same renovation. Are you growing this team? Are you still able to keep it really kind of small and nimble at this point?
spk08: Fortunately, what B2B does is it leverages all of the resources we have as a company, our in-house design team, our global sourcing organization, our supply chain team, as well as our merchandising and inventory teams. So we're able to keep this team pretty tight. There is a dedicated team that works with the contract space and customer service to make sure the larger orders are taken care of. But overall, we're able to really leverage our existing resources without much incremental investment to drive the B2B business. It's really more about what we have as our advantages in terms of our portfolio of brands, our in-house design, our global sourcing capability, and then our digital-first but not digital-only channel strategy means we can service the customer in multiple ways. So for us, it continues to be a winning strategy, and we continue to capture market share in a fragmented marketplace.
spk01: At this time, I would like to turn the call back over to the company for closing remarks.
spk02: Thank you all for joining us and look forward to talking to you next time. Goodbye.
spk01: Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.
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