Williams-Sonoma, Inc.

Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2025 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 fourth quarter earnings call. 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 annual guidance for fiscal 26 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. This call should also be considered in conjunction with our filings with the FDC. Finally, a replay of this call will be available on our investor relations website. Now, I'd like to turn the call to Laura Albert, our President and Chief Executive Officer.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you today about our fourth quarter and our full year 2025 results. In 2025, we delivered sustainable, profitable growth in a dynamic environment. This performance is a testament to strong consumer demand for our distinctive products and brands and our world-class team. In Q4, our comp came in at 3.2%. We drove an operating margin of 20.3%. with earnings per share of $3.04. We delivered these results despite no material changes in the macro environment and continued unpredictability around geopolitics and tariffs. Normalizing for the 53rd week last year and the tariff impact this year, we delivered substantial operating margin improvements versus last year. As we look forward to 2026 and beyond, we are confident in our competitive advantages that have allowed us to take market share and our focus is on widening that advantage. Just a few things on Q4 before we spend more time on the year and our outlook for 2026. In Q4 2025, we saw strength and momentum across our strong portfolio of brands and in our channels. Our retail team drove a 4.3% comp in the quarter, and there was a continued acceleration in our gift-giving brands. Both Williams-Sonoma and our Pottery Barn children's business outperformed, with Williams-Sonoma driving a 7.2% comp and our children's business driving a 4% comp. And West Elm continued to pick up the pace with a 4.8% comp. Finally, our DTC channel was strong due to an improved customer experience, continued personalization, and incredible service. Thank you to our teams. They continue to define leadership in our industry across product, service, and disciplined execution. Turning to the full year, we outperformed the industry with a comp of 3.5%. We delivered an operating margin of 18.1%. And full year earnings per share increased 1% to a record $8.84. We beat internal and external expectations on both the top and bottom lines. And in fact, we raised our guidance twice during the year. Before we get into the year, let's talk about tariffs. The tariff landscape was uncertain and unpredictable in 2025, and we expect it will remain that way in 2026. As we all know, policy can shift quickly. But as you saw in 25, we have proven that we are resilient and capable of mitigation. As we look to 2026, we will continue to execute our mitigation strategies, which include vendor negotiations, resourcing where it makes sense, supply chain efficiencies, cost improvements, and select pricing actions. We will stay flexible and continue to adjust quickly as the tariff environment evolves. We entered 2025 with a focus on three key priorities, returning to growth, elevating our world-class customer service, and driving earnings. Let me highlight the progress we made on each of these priorities in 2025, starting with growth. We have been focused on building growth strategies across our portfolio of brands. In 2025, we drove positive top-line comps in all of our brands, and even as full price selling increased, we gained market share. We focused on newness and innovation in product and brand development. We are not just competing on price. We are really competing on and winning on authority, aspiration, quality, design, exclusivity, and service. Collaborations were also an important part of our growth strategy in 2025. These partnerships drove relevance and excitement. They continue to bring in new customers while increasing engagement with our existing customers. B2B was another standout for the year. In 2025, B2B grew 10%. We continue to win because we've paired design expertise with commercial-grade products and end-to-end service. That combination is a clear market differentiator in the B2B space. Our emerging brands also delivered strong performance in 2025 with double digit comps all year. We've invested in the growth of our emerging brands with expansion in categories and new product development. Our ability to incubate and develop brands in a portfolio approach is one of our long-term advantages. Our second priority for 2025 is customer service, and we are very proud of our progress. Our goal stayed simple, to deliver the perfect order on time and damage-free every time. Our supply chain team focused on operational excellence every day. They made industry-leading progress again on supply chain delivery and customer service metrics. Also, we are pleased with our improved customer handling by both our teams and our AI capabilities. That brings me to our third priority, driving earnings. Our profitability in 2025 reflected strong execution across the company. We've maintained tight control on SG&A. We also stayed lean on employment with a focus on productivity. The implementation of AI helps by automating work and allowing our teams to do more with the same resources. We also extended AI more deeply across our e-commerce and operations platforms. For example, we extended personalization deepen product discovery and ranking, and increase the influence of data-driven recommendations. These enhancements are improving relevance, engagement, and monetization efficiency across our brands. AI is also embedded in friction reduction, from smarter product discovery to accelerated checkout experiences, supporting stronger conversion and a more intuitive shopping journey. Beyond digital e-commerce, AI and advanced analytics continue to improve forecasting, routing logic, and customer service workflows, driving operational efficiency across our supply chain and care operations. What differentiates Williams-Sonoma is how AI amplifies our proprietary data, vertical integration, and deep brand expertise. Because we control the full ecosystem, we can apply AI in tightly integrated and scalable ways. In summary, AI is delivering measurable impact today and strengthening our long-term competitive advantages. Looking ahead, we are confident in our competitive advantages, and as I said earlier, we plan to further widen our moat. We have a powerful portfolio of brands, an in-house design team that drives exclusive product and newness, a vertically integrated sourcing and supply chain model, and leading omnichannel capabilities. And underpinning all of this is our experienced leadership team who knows how to execute. In 2026, our plan is centered on the same three priorities we laid out last year. We just changed the word returning to growth to accelerating growth. We're going to accelerate growth, deliver world-class customer service, and drive earnings. These priorities all relate to one another. Growth creates leverage in our operating model and improve customer service drives loyal and satisfied customers. When the customer is happy, our costs go down, driving earnings. Let's start with growth. We're focused on four areas, brand growth, product pipeline, brand heat, and channel experience. First, brand growth. In 2026, we're focused on comp growth throughout the company, specifically accelerating the product of our comp and building on the momentum of the West Zone comp. We expect Williams-Sonoma to continue performing well, supported by premium quality, authority in the kitchen, and strong seasonal storytelling. We're planning for growth in the children's business with baby and dorm as highlights. And our emerging brands will contribute meaningfully, led by rejuvenation. Finally, B2B remains a major opportunity for growth. Second, product pipelines. In 2026, our product pipeline will include an increased level of product newness. We'll increase newness by offering new collections, finishes, and design details that are timely, on-trend, and unique. Also, we will expand into proven collections that are built around newness that performed well last year, adding SKUs to add sales. We will also lean into advantage growth categories that expand our reach and create new reasons for customers to shop with us. A great example is West Elm Office, our new collection of modern and flexible office furniture made with high-quality materials with endless configurations. We see other outsized opportunities for growth in dorm, baby, and certain powder barn categories. And at Williams-Sonoma, we will continue to expand our successful branded and exclusive assortment. This strategy increases differentiation, and supports value and margin. Third, brand team. We'll continue to create excitement and buzz for our brands. First, collaborations will be a key driver with all brands delivering double-digit sales growth and collabs. Second, we will increase our social and influencer partnerships, and we will improve our storytelling across our websites, emails, and catalogs. Our fourth growth initiative is channel experience. We will continue to improve how customers discover and shop our brands, and we will build on the momentum we've seen in both DTC and retail. In DTC, our plan is to accelerate growth with elevated discovery, both onsite and externally. We will also drive DTC advantage categories, and we will continue to use AI to create more personalized shopping journeys that improve engagement and conversions. In retail, we will build on our momentum by expanding Take It Home Today, scaling Design Services 3.0, and investing in new stores, repositions, and relocations where the returns are compelling. Now turning to delivering world-class customer service. We have always been a leader here and will continue to raise the bar as we keep pursuing the perfect order on time and damage-free every time. We believe we have continued opportunity from supply chain efficiencies across distribution centers, shipping costs, returns, replacements, and damages. AI is a key enabler here. Our AI service initiatives are expected to further reduce call center escalations and accommodations, while also improving inventory in stocks and accuracy for customers. And we are expanding AI tools to enhance supply chain intelligence, including better visibility into inventory and shipping. Finally, driving earnings. In addition to regular price testing, we will continue emphasizing full price selling and improving product margin by reducing markdown depth. We will also continue to drive sourcing efficiencies through vendor cost reductions, resourcing, and organizational productivity. We will stay disciplined in controlling variable costs, including employment and ad spend, and we will drive AI-enabled efficiencies, including savings and engineering costs, care center payroll, and creative costs. Turning to our outlook for 2026, our assumptions reflect what we know today. We are not building into our assumptions a meaningful housing recovery. And allowing for all the uncertainties we know are out there and that we've discussed, We are guiding comp brand revenue growth of 2 to 6% with a midpoint of 4 and operating margin in the range of 17.5 to 18.1 with a midpoint of 17.8. This outlook reflects our current initiatives and the tariff environment in place today. Now, let's review our brand. Patagon ran a negative 2.3 comp in Q4 after delivering positive comp in each of the first three quarters. While Q4 was disappointing, Potter Barn ran a positive 0.4 comp on the year, and Potter Barn's two-year comp improved over the year. Different than other quarters, the percentage of our decorating assortment is larger in the fourth quarter, and that assortment relied heavily on last year's program, and sales did not meet our expectations. While furniture was better, it was not enough to offset the softness in non-furniture. A highlight was our retail performance, which was strong in Potter Barn, with customers responding to our inspirational stores and the in-person shopping experience. But DTC lagged retail, hence the lower comp. As we look at 2026, we are focused on driving stronger growth in Potter Barn, and we are working as a team on quarter-by-quarter strategy and execution. Potter Barn is refocusing on its heritage aesthetic and strengthening its product pipeline. We are also optimizing the core assortment, rebuilding proprietary collections, and creating more brand heat through collaborations, influencers, storytelling, and store events. And we are investing in both digital and retail with a focus on conversion and personalization. The good news is that we are seeing better comp performance quarter to date. Now I'd like to talk about part of our children's business, which delivered a strong fourth quarter, running a positive, For the full year, kids and teens delivered a positive 4.4 comp with strength across both furniture and non-furniture. Collaborations and licensing remained key drivers, led by fashion favorite Love Shack Fancy and the launch of the NHL Collection. Innovation was strong and holiday gifting outperformed driven by high-quality, personalized gifts across life stages. As the largest specialty retailer of home furnishings for children, we see significant growth ahead. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited to launch Dormify in late April, which expands our reach in the college and dorm market and strengthens our position with the next generation of customers. Now let's talk about West Elm. West Elm ran a positive 4.8 comp in Q4, accelerating from Q3, and delivered a positive 2.9% comp for the full year. I'm proud to say that West Elm is officially on a roll. West Elm made improvements across products, brand key, and channel excellence. New introductions in both furniture and non-furniture drove results, and the brand's mix shifted meaningfully towards new products. In Q4, the brand delivered positive comps across the board. Retail also performed well in West Elm. When customers walked the store as they saw more newness and better availability, and that showed up in the results. The strength in the brand and at retail gives us confidence to return to store account growth with five openings planned in 2026. Finally, collaborations have been a big part of the strategy at West Elm, and we could not be more excited than right now when we are launching our collaboration with Emma Chamberlain. a leading Gen Z voice known for authenticity and unique style. With over 14 million Instagram followers, her collaboration with West Zone marks her first venture into the home space. If you haven't seen it, be sure to check out the exciting personality-driven assortment, which launched yesterday. Now let's review the Williams-Sonoma brand. Williams-Sonoma finished 2025 strong with a positive 7.2 comp in Q4, and a positive 6.9 comp for the year. The Williamsville brand continued to outperform across the board. 2026 marks our 70th anniversary. At 70 years, this brand is not mature. It is gaining momentum. The core of our kitchen business is accelerating, and our pipeline of proprietary in-house design products and market exclusives continue to separate us from the competition. In Q4, customers came to us for holiday gifting, cooking, and entertaining. Also, Williams-Sonoma benefited from a strong gift assortment with products that perform, design that is distinctive, and assortments that reflect both who our customer is and who they aspire to be. 2025 was our biggest year ever for in-store events at Sonoma. We held skill series classes on Sundays, and we hosted 120 celebrity chefs and influencer book signings. Highlights from the events in Q4 included signings with Marcus Stewart, Tricia Yearwood, and Wishbone Kitchen. We look forward to welcoming customers into our stores throughout 2026 with even more opportunities to learn, engage, and be inspired. Now I'd like to update you on B2B. B2B had another record-breaking quarter at 13.7%, anchored by our largest contract quarter in our history. Both contract and trade delivered double-digit growth, and corporate gifting had its best quarter ever. We saw strength in our core hospitality and residential designer businesses, and we gained momentum in emerging verticals like higher education, sports, and entertainment. We also delivered several marquee projects, including the Waldorf Astoria Beverly Hills, the Hilton Canopy in New York City, the Opryland Hotel in Nashville, multiple locations for WeWork, and corporate gifting for several premier clients, including the New York Yankees. For the full year, B2B grew 10%, and we exited the year with a strong pipeline heading into 26. We remain excited about B2B as a growth engine. Now I'd like to update you on our emerging brands, which continue to deliver strong growth and profitability. Rejuvenation had another quarter of double-digit comp growth, exceeding both our top line and bottom line expectations. Performance was driven by momentum in cabinet hardware, bath, and lighting, as customers remained highly engaged in project-driven purchases. Product innovation continued to build with high quality, design-driven products, distinctive details, and customizable options. With only 13 stores and great online growth, we are thrilled with the progress in Rejuve. And we continue to believe in the potential for Rejuvenation to be our next billion-dollar brand. Mark and Graham finished 2025 also with solid momentum, driven by a record-breaking holiday season and positive comps. We entered 2026 well-positioned with a focused pipeline of launches across key gifting occasions, reinforcing the brand's growth opportunity ahead. And I can't forget our newest brand, Green Row. We're thrilled that on March 6th, Green Row opened the brand's first store in Soho, New York. And if you're in New York, I'd encourage you to stop by and see it in person. The store truly captures the entrepreneurial spirit that exists in our company that allows us to bring new concepts to life and scale and profitably. We look forward to building the business of Green Row in 2026 and beyond. Finally, I'd like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico, and the UK, due to differentiated products, omnichannel enhancements, and growth in our design and trade businesses. We're particularly encouraged by the customer response to the launch of Potter Barn in the UK. As we reflect on the year, oh, what a year it was, we had many highlights and we had a lot of things coming our way that we didn't expect. However, at Williamson on the Inc., we delivered. We delivered a strong operating margin and record EPS. Our powerful portfolio of brands, strong channel execution, and growth strategies drove our results in 2025. As we look to 2026, we are focused on accelerating this growth. We are focused on delivering world-class customer service, and we are focused on driving earnings. We are confident in our future growth strategy and our profit profile. Our company is competitively distinct with advantages that set us apart from the team that delivers. And with that, I want to thank our teams again for their hard work and their commitment, and I also want to thank our vendors and our shareholders for their partnership and support. And with that, we'll turn it over to Jeff to walk you through the numbers and our outlook in more detail.