Williams-Sonoma, Inc.

Welcome to the Williams-Sonoma, Inc. Second Quarter Fiscal 2025 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 morning, and thank you for joining our second quarter earnings call. I'm here today with Laura Albert, our Chief Executive Officer, Jeff Howey, our Chief Financial Officer, and Samir Hassan, our Chief Technology and Digital Officer. 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 our updated guidance for fiscal 25 and our long-term outlook. We believe these statements reflect our best estimates. However, 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. 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.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our second quarter. Before we get into our results, I'd like to acknowledge our team for their hard work. Their commitment, creativity, and focus continues to drive our success. We're proud to deliver strong results in the second quarter of 2025 with another positive top line comp and continued outperformance in our profitability. In Q2, our comp came in above expectations at 3.7%, with all brands again running positive comps. And we exceeded profitability estimates with an operating margin of 17.9% and earnings per share of $2. with earnings growth of nearly 20%. This was our second quarter of accelerated positive comps coming out of 2024, despite continued geopolitical uncertainty and no material improvement in the housing market. And we continued to outperform the industry, which declined in Q2. This growing outperformance was driven by positive comps in both furniture and non-furniture and strong performance in our retail and e-commerce channels. As we move into the second half of 2025, we are continuing to focus on three key priorities. First, returning to growth. Second, elevating our world-class customer service. And third, driving earnings. Let's take a moment to review how we're advancing these priorities. First, in our core brands, we have increased our newness offer and our focus on categories where there is substantial white space in the market. Our product development competency is a distinct competitive advantage and allows us to deliver exclusive, high quality merchandise at a compelling value. And our focus on innovation is driving results, particularly in furniture, where Nunes pushed us into positive furniture comps. Our growth strategy also includes diversifying our assortment and seasonal decor, textiles and housewares. And strategic collaborations are another critical part of our growth plan. These collaborations continue to expand new customer growth and drive sales, and most importantly, drive relevance and excitement for our brands and our customers. Also, our B2B business remains an important part of our growth strategy. B2B grew 10% in Q2 with both trade and contract performing. We continue to build a loyal, expanding client base across multiple industries by leveraging our design expertise, and commercial-grade product range. Our emerging brands, including Rejuvenation, Mark & Graham, and Greenrow, together also continue to grow double-digit. We have a proven ability to build and scale brands, and we are particularly excited about Rejuvenation, which drove its seventh consecutive quarter of double-digit comps in Q2. We currently have 11 Rejuvenation stores and will be opening up our 12th store in Nashville in September. We continue to believe that Rejuvenation will be our next billion dollar brand. Beyond growth, our next priority is to focus on customer service. We are committed to providing flawless customer service with orders that are delivered on time and damage free every time. Our operational performance continues to be better than our benchmarks. And we are focused on further optimizing these metrics by minimizing returns and damages reducing split shipments, and decreasing fulfillment time. We see even further opportunity for supply chain efficiencies in the long term as we implement AI capabilities. And finally, the cumulative results of our focus on returning to growth, improving customer service, and tightly controlling expenses will enable us to drive our third key priority, strong earnings. Now I'd like to share an update on the opportunity we see with AI at Williams-Sonoma. We don't view AI as a standalone function. It is embedded across our business. Our strategy is organized into three areas, enhancing the customer experience, optimizing our supply chain, and automating internal operations. On the customer experience, we are already seeing strong results from our new AI-powered customer service assistant, which we launched with Pot of Barn Kids earlier this summer. and are scaling across all of our brands this week. It is improving issue resolution rates and speed while reducing cost, creating a better experience for both customers and associates. We are also advancing our next generation of digital design tools and preparing to launch a culinary companion that will help customers with everything from cookware discovery to holiday entertaining. In the supply chain, our vertically integrated model gives us unmatched control from design sourcing to final mile delivery. This enables us to apply AI end-to-end, improving forecasting, optimizing inventory, and increasing delivery accuracy. Few in our industry have the breadth of ownership to unlock this level of efficiency. And finally, we're driving meaningful efficiency gains in our internal operations. Through our proprietary AI platform built to rapidly create secure business specific applications and through partnerships with best of class providers, we are automating workflows across functions such as finance, HR, and technology. Early adoption has already yielded measurable improvements in productivity, software development velocity, and creative production. The foundation across all of this is our proprietary data. combined with decades of expertise in design, culinary, and omnichannel retail. We are already seeing very real impact and financial results from these investments, from higher conversion and sales growth to measurable cost savings and productivity gains. AI is not just a future opportunity for us. It is delivering results today. And we believe it positions Williams-Sonoma to lead our industry in applying AI with both creativity and discipline. Turning to guidance, we are encouraged by our strong sales trend so far in 2025. And therefore, we are raising our top line guidance. We now expect full year comparable brand revenue growth to be in the range of 2% to 5%. In terms of how that incremental revenue flows through to our operating margin, we expect that this additional top line growth will be pressured by incremental tariff costs. Therefore, we are not raising our operating margin guidance And we are reiterating our expectation that our full year operating margin will be in the range of 17.4% to 17.8%. Since we last gave guidance, the tariff environment has evolved. Specifically, our incremental tariff rates have doubled since our Q1 earnings call. Jeff will walk you through more details around our updated guidance. I would like to update you now on our tariff mitigation efforts. We continue to be actively and aggressively mitigating what we can with our six-point plan. First, we are successfully obtaining cost concessions from our strong vendor community. This includes reductions on current products, but also reductions in price on the newness that we are bringing in and developing. Second, we are actively resourcing goods to get the best cost for our customers. Third, we are identifying further supply chain efficiencies in our network. Fourth, we are optimizing expense through tight cost control and financial discipline. Fifth, we are expanding our made in the USA assortment production and partnerships. And lastly, we are carefully taking select price increases on products with a focus on maintaining competitive pricing. We expect the next time we talk about tariffs with you, the landscape may be different. But for today, all effective tariffs are reflected in our updated guidance. Now let's review our brands. Potter Barn ran a positive 1.1% comp in Q2. And since 2019, the brand ran a 42.6% comp. Potter Barn is executing its strategy to step up innovation, provide better value, improve channel experiences, and reduce promotions. And we are pleased with the initial reads of our fall launch. In particular, customers continue to respond to our innovation in proprietary design and furniture. Our Powder Barn stores are a key part of our success and continue to outperform. Customers have shown their love for the in-store shopping experience. And we have responded by focusing on improving retail inventory availability, refreshing product assortments, and enhancing design services. We are pleased to see our strategies working at Potter Barn. We believe the brand will continue to improve its sales trend through increased newness, exciting brand collaborations, and strong design services. Now I'd like to talk to you about our Potter Barn children's business, which ran a 5.3% comp in Q2, representing the sixth consecutive quarter of positive comps. And since 2019, Potty Burn Kids and Teens ran a 25.9% comp. Innovation across our product offering and the shopping experience has been key to delivering this growth. The children's business continues to see strong response to our new product launches as we address evolving trends in furniture and decor, and our effective collaborations are driving demand and new customer growth In these life stage brands, the journey starts with baby. In the baby business, we deliver growth in nursery furniture and our expanded offering of keepsake gifts. Moving to our back to school business, which has been strong, we are focused on offering high quality gear, at home study solutions, and everything students need for the dorm. We continue to acquire new customers with our dorm decorating solutions, market leading quality, and exclusive collaborations. We are making shopping easier through our enhanced pickup near campus program. Our customers can ship to any of our over 450 Williams-Sonoma Inc. stores nearest to their school. Additionally, we've expanded our offering in store and provide free design services for dorm. And in the quarter, we acquired the intellectual property of Dormify, which we believe will expand our presence in the dorm space as we develop it as our 10th brand. As we look to balance the air, we feel confident in our pipeline of product innovation and our consistent brand promise. We continue to focus on quality, sustainable goods that are built to last over the childhood years at a compelling value. Now let's review West Elm. West Elm ran a positive 3.3% comp in Q2. Since 2019, West Elm has grown 41.9%. We continue to make progress against the brand's four key pillars, product, brand heat, channel excellence, and operational efficiencies. In Q2, West Elm drove positive comps in both furniture and non-furniture. Product innovation is driving strong performance with newness of double digits year over year. Fall is on track to be the brand's most successful launch of the year. with standout collections across all categories. Collaborations are also an important part of West Elm's growth. The brand's collaboration with award-winning designers Pearson Ward continued to be a huge success throughout Q2. This collection is West Elm's top-selling collaboration to date. The co-designed line received widespread acclaim, earning top-tier press coverage. Also in July, the brand launched their second kids collaboration with Joseph Altazura. We're excited by the momentum at Westome. Their growth strategy is working and we have a sizable opportunity for this brand. Now let's review the Williams-Sonoma brand. We're thrilled to report the brand's third consecutive quarter of positive comps, running a 5.1% comp. And since 2019, the brand ran a 39.9% comp. Our design-led approach and exclusive partnerships continue to expand our market reach and relevance. Customers are responding to our inspirational product stories with amazing chefs and innovative product launches to introduce color into their kitchens, as well as new technologies. From chef-driven collaborations to the ongoing success of Williams-Sonoma exclusive products, we are providing our customers with what they want. We're thrilled to build on this momentum with additional launches planned for the second half of the year across all categories. I also want to mention that in early July, we kicked off our annual fundraising with No Kid Hungry to support their fight against childhood hunger in America. And to date, we have raised over $20 million for No Kid Hungry through customer donations, events, and our Tools for Change collection of spatulas designed by celebrities, chefs, and influencers. I want to thank everyone that has helped us raise both money and awareness for this very important cause. Turning to the Williams-Sonoma home business, strong launches in lighting, textiles, and decor partially offset softness in the furniture this quarter. In Q2, all non-furniture categories grew, demonstrating our ability to provide elevated decorating updates for the home. Now I'd like to update you on B2B growing 10% in Q2 with both trade and contract delivering double-digit comps. Leveraging our design expertise and commercial grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator and we are seeing continued momentum. Now I'd like to update you on our emerging brands, which continue to drive strong growth and profitability. Rejuvenation delivered another strong quarter of growth with double digit comps. The brand's strong performance continues to be fueled by strength in core renovation categories, and product innovation continues to drive growth. In Q2, we expanded finishes across categories, introduced new statement lighting collections and size options to our vanities and bath hardware to better meet project needs. We also see strong demand in newer hardware categories. Rejuvenation is well positioned to sustain growth through the second half of 2025 and beyond. Mark and Graham ended the quarter with strong momentum, also driven by ongoing growth in their new baby and pet categories, along with a successful launch of their new back to school and early fall collection. As they head into the holiday selling season, corporate gifting becomes a larger focus for the brand, and we are excited by the potential of this great business. Now turning to our newest and smallest brand, Green Row. The brand delivered strong growth in Q2, driven by increased demand for core vintage-inspired furniture collections, printed upholstery fabrics, and a launch of fall newness in June. Green Row continues to innovate with new materials, thoughtful collaborations, and uniquely optimistic products. The product line is incredibly beautiful in person, and we are actively looking for a couple of store locations to test this concept at retail. Last, I'd like to talk about our global business. We continue to deliver strong performance across our strategic global markets, including Canada, Mexico, India, and the UK. In Canada, both retail and DTC channels are outperforming, supported by a differentiated product offering, an enhanced omnichannel strategy, and the expansion of our B2B program. In Mexico, where we partner with Liverpool, results remain strong, driven by the success of our expanded summer assortment. and strategic growth in the design and trade business. In India, where we work with Reliance, growth is driven by new marketing initiatives that are driving brand awareness. And in the UK, we are leveraging strong trade segment momentum while executing against our plan for the upcoming online launch of Pottery Barn UK this fall. In summary, we are proud of our strong execution and outperformance in Q2 with accelerating positive comps and strong profitability. The current level of macroeconomic uncertainty does not distract us from our focus and determination. Across the company, we are all committed to improving our channel experiences and building strong brands. Every day we come to work with a focus on innovation, product design, and customer service, which differentiates us across the industry. This differentiation allows us to shine in this highly fragmented industry and ultimately positions us to pick up market share. With our three key priorities, returning to growth, enhancing our world-class customer service, and driving earnings, we are set up well to continue executing in 2025 and beyond. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.