Williams-Sonoma, Inc.

Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in 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 morning, and thank you for joining our Third Quarter Earnings Call. I'm here this morning with Laura Elber, our President and Chief Executive Officer. Jeff Howey, our chief financial officer, Yasser Anwar, our chief digital and technology officer, and Felix Carbolito, our president of the Williams-Sonoma brand. Before we get started, 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 updated 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 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 detailed reconciliation of non-GAAP measures, the most directly comparable GAAP measure, appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our findings with the SEC. Finally, a replay of this call is available on our Investor Relations website. Now, I'd like to turn the call over to Laura.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q3 results, I would like to take a minute to thank the incredible team at Williams-Sonoma, Inc. for another quarter of great results. Without their hard work, dedication, and focus, none of the results we are reporting today would have been achievable. We are proud to deliver another quarter of strong earnings, significantly exceeding expectations, despite a challenging economic backdrop for our industry. We beat profitability estimates with a record third quarter operating margin of 17%, with earnings per share of $3.66. Our comp sales, which reflect the larger macroeconomic backdrop, ran negative 14.6% in Q3, and our two-year comp was negative 6.5, and our four-year comp to 2019 was positive 34.8%. These results were achieved in an environment filled with ongoing consumer hesitancy on high-ticket discretionary furniture and elevated levels of promotional activity. Despite this environment, we continue to drive results because of our unique proposition in the marketplace and our relentless focus on customer service. Our advantage is our portfolio of brands serving a wide range of categories, aesthetics, and life stages. While people are currently buying fewer large-ticket furniture pieces than last year, our portfolio of brands and product offerings has us positioned well for this shift into kitchen purchases, fashion textiles, dorm, baby, and seasonal holiday offerings. Our in-house design capabilities and vertically integrated supply chain are also key in producing proprietary products at the best quality value relationship in the market. We remain firmly committed to reducing promotion despite elevated levels of discounting in the industry. In fact, our third quarter promotional levels were meaningfully lower than last year. Instead, we are meeting our customers' needs for value by introducing a larger offering of new products at mid-tier and lower price points. Not only is this strategy good for profits, but we have also reduced friction with our customers as we give them better value without confusing them with short-term discounts. We strongly believe that this is the right way to run our business as it preserves the design value price equation that we offer and our customers appreciate. Moving on to customer service in the supply chain. We are seeing the year-over-year benefit of selling through inventories with lower supply chain costs, and we continue to increase selling margins by reducing out-of-market and multiple shipments. We have improved our customer service, returning to pre-pandemic, and best-in-class levels. Investments in the final mile delivery experience have resulted in fewer customer accommodations, lower returns, lower damages, and lower replacements. And customer metrics like on-time delivery are at record highs, and backorder create rates have substantially improved. The total benefit from these supply chain and customer service improvements is significant and you can see it in our results today. Regarding marketing, we increased our spend from Q2, but still leveraged in the quarter. We continue to ensure that our marketing investment gives us the ability to test new formats, to connect with new customers, and to showcase our offering to our existing customer base and our highly engaged brand loyalists. We've seen increasing success with our marketing and product collaborations, and we will continue to build upon them. Our ongoing investment in building our proprietary e-commerce technology continues to improve our online experience. We're focused on offering customers inspiring content and dynamic tools to assist with their design projects. And AI is accelerating these efforts. We see many opportunities for our business from developments from AI. And as early adapters of integrating AI, we look forward to leading the retail industry in this area. we will focus on quality authenticity and responsiveness of this new technology and as focused as we are on our e-commerce capabilities we are also continuing to focus on delivering a best-in-class retail business our stores are beautifully designed and curated with inspirational assortments and our continued retail optimization efforts have refocused our fleet on the most profitable inspiring, and strategic locations. On the sustainability front, we are proud to report that in Q3, we were named the top scorer on the Sustainable Furnishings Council Wood Furniture Scorecard for the sixth consecutive year. Using sustainable wood has been a key focus of our strategy and a differentiator of our business. Now I'd like to spend a few minutes talking about our brands. Potter Barn ran a negative 16.6 comp in Q3, but ran a positive 3% on a two-year basis and a positive 43% on a four-year basis. We have substantially reduced the promotional offerings in the brand and have successfully introduced new low and mid-tier programs at great value. And while furniture demand has been most impacted, we are seeing strength in textiles and seasonal decorating. We're excited for the holiday season, given strong early reads on our innovative proprietary collections. Earlier this week, we announced the launch of a new mobile shopping and design app for Pottery Barn following the success of our Pottery Barn Kids and Pottery Barn Teen apps. The Pottery Barn mobile app delivers a convenient customer shopping experience and makes it easy to create and manage a registry on the go. Now customers can explore and shop full rooms easily share their favorite products, and connect with the design expert all through the convenience of their phone or tablet. The Potter Barn children's business ran a negative 6.9% comp in Q3 and was negative 11.7 on a two-year basis and positive 29% on a four-year basis. Across these life-stage brands, we are focused on delivering compelling innovation and elevating the customer experience. One key area of focus in the quarter has been the evolution of our back-to-school offering. Here we saw standout growth in our dorm business as customers gravitated to higher design and quality. We offer a compelling, complete solution that is easy to shop on our part of our teen app, and given the size of the dorm market, we believe this represents a significant opportunity for us for years to come. We also continue to focus on another key life stage offering, which is baby. the entry point to the children's home furnishings brand. Here we are winning with our innovative nursery seating and a curated selection of high-quality baby gear. In our stores and across our mobile app, customers can register with Powderborn Kids and receive help from our nursery experts. Also, we're really encouraged by the strength of our innovative product introductions and fresh product collaborations. With strong response to our recent Super Mario and Love Shack Fancy launches, And as we look to the quarter ahead, we believe we have a compelling pipeline of collaborations that our customer will love. Moving on to West Elm. West Elm is the brand that has been most impacted by the customer pullback in furniture. In Q3, West Elm ran a negative 22.4% and was negative 18.2% on a two-year basis and ran a positive 26.1% on a four-year basis. West Elm has the highest percentage of its assortment in furniture, the most underdeveloped in other categories, and a customer base as the most impacted by the current macro environment. Despite current challenging dynamics, West Elm saw very strong reception to their new fall products, which marked a real evolution in the brand's modern design voice. Sales from this year's fall assortment are up to last year, with positive customer response to fresh furniture forms, mixed materials, and new textures and innovations in textiles. Early holiday reads have also been positive in seasonal trim and tabletop, as well as hosting and entertaining categories. Given these positive reads, we see sizable opportunity in West Elm as it rebalances more into textiles, decorative accessories, entertainment, and seasonal offerings. We continue to be very optimistic about the long-term growth trajectory of West Elm with its industry-leading design and value. The Williams-Sonoma brand, which includes Williams-Sonoma Home, ran a negative 1.9% comp in Q3. On a two-year basis, the brand ran negative 3.4% and was positive 34.6% on a four-year basis. The Williams-Sonoma kitchen business ran a positive comp for the second consecutive quarter this year, primarily driven by retail. Earlier this quarter, we launched a successful collaboration in cookware with Stanley Tucci, who designed an exclusive collection with green pan for Williams-Sonoma. Collaborations like Tucci's have been an excellent vehicle for growth and new customer acquisition. Kitchen continues to see strength in high-end electrics, particularly in coffee and espresso. And the Williams-Sonoma home business, while still negative, is beginning to see improved trends with a refreshed, more editorial point of view that showcases updated textiles and decorative accessories. Looking to Q4, Williams-Sonoma becomes a bigger part of our business, and early reads on holiday are positive, indicating a strong season of entertaining and gifting ahead. We have an impressive pipeline of new launches with engaging content and corresponding events for our customers to experience both in-store and online. Now I'd like to update you on our other initiatives. We are pleased to report Business to Business delivered a positive quarter, running positive 1.5% in Q3, driven by 30% growth in the contract business. Exciting wins in the quarter included a brand standard program for Pottery Barn with Pendry Hotels for custom outdoor furniture, and a new partnership with a premier developer partner, Jamestown, for two new properties, including a senior living tower and a new residential development. We're also excited by the success of specific B2B product developments like the expansion of our restaurant furniture program that has been key to gaining momentum in the food and beverage space with clients like Dave & Buster's, along with clients in the sports and entertainment space. The future remains bright for this business. Now I'd like to talk about our global business. Our global strategy has not changed and we continue to focus on a franchise-first model. This business has, of course, been affected by the uncertain macro environment, particularly in the Middle East. We are excited to see our brands exceed expectations in other markets, like India. We opened our third West Elm retail location in Pune and expanded our Paderborn brands into the world-famous Geo World Plaza, now open in Mumbai. The Mexico market is also showing strength. driven by improved in-stocks in furniture and strong back-to-school and seasonal assortments. And we continue to see momentum in our Canada business, fueled by our commitment to enhancing the customer experience both online and in retail. We have also grown the brand and service offerings available to Canadian customers by launching Rejuvenation and Marking Graham Online and relaunching Gift Registry in Canada. Lastly, I'd like to update you on our emerging brands. Rejuvenation delivered a positive quarter driven by our remodel and refresh categories as well as new growth initiatives. Customers continue to update their homes, specifically in the spaces of kitchen and bath. We are continuing to grow the brand in new markets by opening a new store in the San Diego market and another new store opening this weekend in North Carolina. We continue to be excited by the opportunity we have for growth from the Rejuvenation brand. We are also pleased with our results in Mark and Graham, our gifting and personalization brand. We are optimistic for Q4 as we head into the key gift-giving holiday season. Customers will benefit from the brand's inspiring content and curated monogram gift guides organized by both recipient and price point. And at GreenRow, we continue to gain momentum in this new brand, which utilizes sustainable materials and manufacturing practices to create colorful, heirloom-quality products. While it's early, we remain optimistic about the potential of this brand and its aesthetic. These successful and exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio of brands and address white space in our product offerings, all with minimal investment and low cost of entry, leveraging our knowledge and infrastructure. In summary, our outperformance this quarter drove a record Q3 operating margin of 17%. Although customers are shifting their spending temporarily away from high ticket furniture purchases, we have a powerful portfolio of brands serving a range of categories, aesthetics, and life stages to meet the demands of customers. And despite our sales running down this year, our execution and the strength of our operating model produce strong earnings again this quarter driven by our full-price selling, supply chain efficiencies, and best-in-class customer service. Our early seasonal reads are strong, and we are optimistic about the holiday season. As we put this all together, we are raising our guidance for the year. We now expect full-year revenues to come in at a range of down 10 to down 12, and we are raising our outlook on operating margin to a range of 16 to 16.5%. It is important to note that the reduction in our revenues outlook is more than offset by our raised operating margin outlook. And with that, I will turn the call over to Jeff to walk you through the numbers in detail.