Williams-Sonoma, Inc. Common Stock (DE)

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.

Thank you, Laura, and good morning, everyone. Our results this quarter exceeded our expectations on both the top and the bottom line. Here are some key highlights from Q2. All brands delivered positive comps for the second straight quarter. Furniture and non-furniture categories both ran positive comps, reflecting strength across all facets of our offerings. West-based opportunities such as dorm and Westbound Kids grew double-digit. Our emerging brands continued their streak of double-digit positive comps with rejuvenation having especially strong performance. B2B delivered another strong quarter of growth with a 10% comp and a near record quarter in our contract business. Retail and e-commerce Both drove positive costs. Our supply chain team delivered all-time best across nearly all customer service metrics, while simultaneously improving efficiency and reducing costs. Our marketing team drove more customer engagement and strong sales with less advertising spend. And we drove EPS growth of nearly 20% to $2 per share. We delivered these results amidst a weak housing market, high interest rates, and macroeconomic uncertainty, all while navigating an unprecedented level of tariff volatility. Our results would not be possible without the talented team we have at Williams-Sonoma Inc. I'd like to thank our team for their relentless dedication to delivering strong financial results and outstanding customer service. Our team is the best in retail. Now, let's get to the numbers. I'll start with our Q2 results and then covered guidance for fiscal year 25. Q2 net revenues finished at $1.84 billion. Our revenues exceeded the high end of our expectations at a positive 3.7% comp. We gained market share in the quarter, even as we increased our penetration for full price selling. All brands delivered positive comps for the second consecutive quarter, driven by positive comps in both our furniture and non-furniture categories. From a channel perspective, both the retail and e-commerce channels delivered positive comps, with retail up 7.3% comp and e-commerce up 2% comp. Both channels benefited from improved in-stops from our higher inventory levels. Moving down the income statement, gross margin exceeded our expectations, coming in at 47.1%, 220 basis points higher than last year. Merchandise margins accounted for 190 basis points of our gross margin improvement. Select price increases and higher full price selling drove this improvement. Our Q2 results saw a minimal impact from tariffs due to our tariff mitigation efforts, including the front loading of lower tariff receipts in Q1. Supply chain efficiency drove the remaining 30 basis points of improvement in our gross margins. We continue to realize that spent savings across manufacturing, warehousing, and delivery from our focus on customer experience and efficiency. Key metrics, including return, accommodation, damages, replacements, and outbound shipping expense continue to improve year over year. Occupancy costs, although up 2.1% on a dollar basis, were essentially flat as a percent of revenue. Overall, our gross margin this quarter exceeded our expectations. Turning now to SG&A. Our SG&A ran at 29.2% of revenues, 20 basis points lower than last year. Employment expense deleveraged 100 basis points, primarily due to higher incentive compensation from our strong results this quarter. We continue to manage variable employment costs across our stores, distribution centers, and customer care centers in line with top line trends. Advertising expense was 80 basis points lower year over year. Our in-house marketing team drove more customer engagement and strong sales with less advertising expense. General expenses leveraged 40 basis points from our higher revenues and are keeping a tight lid on expenses. On the bottom line, Our earnings exceeded our expectations. Operating income grew 18% to $328 million. Operating margins at 17.9% was 240 basis points above last year. And diluted earnings per share grew nearly 20% year-over-year to $2. On the balance sheet, we ended the quarter with a cash balance of $986 million. with no outstanding debt. We generated $283 million in operating cash flow during the quarter, invested $52 million in capital expenditures supporting our long-term growth, and returned $280 million to our shareholders through $199 million in stock repurchases and $81 million in dividends. Merchandise inventories stood at $1.4 billion. up 17.7% to last year. Our inventory includes $70 million of a strategic pull forward of receipts at lower tariff rates than expected later in fiscal year 25, and $20 million of incremental tariff costs recorded in inventory. Overall, our inventory level and composition are well positioned to support our sales growth. Summing up our Q2, we're proud to deliver results that exceeded our expectations on both the top and the bottom line. Now, let's turn to our guidance for fiscal year 25. First, some housekeeping. Fiscal year 24 was a 53-week year for William Snowman East. In fiscal year 25, we will report comps on a 52-week versus 52-week comparable basis. All other year-over-year compares will be 52 weeks versus 53 weeks. The additional weeks contribute 150 basis points to revenue growth and 20 basis points to operating margin to fiscal year 24 results. Additionally, in the first quarter of fiscal year 24, we recorded a $49 million advocated adjustment related to prior year freighted pools. This benefited fiscal year 24 operating margin results by approximately 70 basis points. Our guidance for fiscal year 25 will use our fiscal year 24 results without the out-of-credit adjustments as a comparable basis. As we turn to guidance for fiscal year 25, we remain focused on what we can control, executing our three key priorities, returning to growth, elevating our world-class customer service, and driving earnings. We're confident in our growth strategy, and we are encouraged by the momentum in our business. On the top line, we are raising our fiscal year 25 net revenue guide. We now expect full year 25 comp to be in the range of positive 2 percent to positive 5 percent, with total net revenues in the range of positive 0.5 percent to positive 3.5 percent due to the 53rd week impact from last year. Our guidance assumes no meaningful changes in the macroeconomic environment or interest rates or housing turnover. Our higher guide reflects the continued strength in our business, strong customer response to our newness and innovation, and continued traction across our key growth initiatives. On the bottom line, we are reiterating our foliar operating margin guidance of 17.4% to 17.8%. The flow-through from our higher revenues will be offset by both the tariffs announced since our last earnings call and the flexibility we are giving ourselves to protect our key priorities of growth and service. Regarding tariffs, our incremental tariff rate has doubled since our last earnings call. At our May earnings call, our incremental tariff rate was 14%. As of today's call, it has doubled to 28%. This includes the additional 30% China tariffs, 50% India tariffs, 20% Vietnam tariffs, an average 18% tariff on the rest of the world, as well as the 50% steel and aluminum tariffs, and the 50% copper tariffs. We believe the strength of our operating model, combined with a six-point mitigation plan, that Laura shared with you enables us to maintain our guidance despite the doubling of tariffs since our last earnings call. Our guidance reflects our best estimate of the impact based upon the tariffs in place as of this call. Given our strong performance this year and our raising top line guidance, we would expect there to be incremental earnings flow throughout the year. Tariff policy has been volatile and subject to multiple revisions. It's hard to say where tariffs will ultimately land and what impact it will have on our business. As we navigate this uncertainty, we tend to stay focused on growth and service. Reiterating our operating margins guidance gives us the flexibility to protect these key priorities. The key point here is we are raising our top-line guidance based upon momentum in our business and reiterating our bottom-line guidance to give us flexibility as we navigate the tariff uncertainty. Also today, we are providing some further input for modeling purposes. We expect our full-year interest income to be approximately $30 million and our full-year effective tax rate to be approximately 26.5%. Turning now to capital allocation. Our plans for fiscal year 25 prioritize funding our business operations and investing in long-term growth. We expect to spend between $250 million and $275 million in capital expenditures in fiscal year 25. We intend to invest 85% of this capital spend on our e-commerce channel, retail optimization, and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, we will continue to pay our quarterly dividend of 66 cents per share, which is a 16% increase year over year. We are proud to say that fiscal year 25 is the 16th consecutive year of increased dividend payouts. For share repurchases, We have $900 million available under our share repurchase authorization through which we will opportunistically repurchase our stock to provide returns to our shareholders. Looking further into the future beyond 2025, we are reiterating our long-term guidance of mid to high single-digit revenue growth with operating margins in the mid to high teens. Wrapping up Laura's and Mike's comments, We're proud to deliver another quarter of strong results for our shareholders that exceeded expectations. While tariff policy has produced uncertainty and headwinds, we are encouraged by the momentum we see in our business. Our focus remains on our three key priorities, returning to growth, elevating our world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth For these five reasons, they remain consistent. Our ability to gain market share in the fragmented home furnishing industry. The strength of our in-house proprietary design. The competitive advantage of our digital first, but not digital only channel strategy. The ongoing strength of our growth initiatives and the resilience of our fortress balance sheet. With that, I'll open the call for questions.

If you would like to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Oliver Wintermantle from Evercore. Please go ahead. Your line is open.

Yeah, thanks. Good morning, guys. A question on the comp performance. Could you talk a little bit about the transactions versus ticket or AUR, what really drove most of the comp outperformance?

Good morning, Oleg. Good to hear from you. As everyone knows, we don't specifically disclose our AUR ticket transaction metrics. Pricing was one part of the quarter. But our comps are really reflective of the momentum in our business. And we're seeing positive results from nearly every initiative we're after. I talked about that in our prepared remarks. You know, all brands positive comps. Laura talked about how newness innovation is working. Both furniture and non-furniture positive comps. White space opportunities that I've been speaking about for several quarters, like dorm and West Palm Kids double-digit comps. emerging brands especially rejuvenation delivered strong double digit comps and our business to business division was another double digit comp as well really led by the contract business so we are seeing strong momentum in our business and we're very pleased with our comps got it thanks as a follow-up just on the second half on your guidance you're keeping the operating margin guidance the same raising the top line could you maybe talk a little about the

the gross margin versus SG&A outlook for the second half of the year is the gross margins and then press it by tariffs. But SG&A could be helped by the strong three and a half comp that's implied for the second half.

You know, as you know, Ollie, we don't guide the specific lines, but we guide total operating margin. And we are reiterating our operating margin guidance for the full fiscal year. You know, despite the incremental tariffs, Announcements our last earnings call. There's three key points I want to talk about as it relates to our overall guidance. I think each one is important to understand how we came up with the guidance and how we approached it. The first point probably has more to do with the top line, and that's that our guidance assumes no meaningful changes in the macroeconomic environment or interest rates for housing turnover. There's a lot of headlines coming out of Jackson Hole last week, and we haven't accounted for any of that. Our higher guide on the top line reflects the continued strength in our business, the strong customer response we're seeing in newness and innovation, and like I just mentioned, the continued traction in our growth initiatives. The second point I'd like to make is our guidance on the bottom line incorporates the fact that our incremental tariff rate has doubled. At the time of our May earnings, our incremental tariff rate was 14%. Today, it's doubled to 28%. That's a lot to absorb. With our six-point tariff mitigation plan that Laura spoke about on our prepared remarks and our higher revenues, we can maintain our operating margin guide. And that really speaks to the profitability of our operating model. And the third point I'd like to reference is just general tariff uncertainty. Tariffs have been volatile. It's hard to say where tariffs will ultimately land and what impact they will have on our business. And by reiterating our bottom line guidance, we're preserving the flexibility we have as we navigate the tariff uncertainty. So yes, our gross margin overall will be pressured from higher tariffs. They'll be partially offset by supply chain efficiencies, which is one of our six point, one of the points of our six point tariff mitigation plan. And yes, we may generally pull some levers in SG&A, but we guide only our top and bottom line because it gives us the opportunity to pull different levers as we see business and trends evolve. And as you've seen, we know the levers to pull.

Our next question comes from Jonathan Matuszewski from Jefferies. Please go ahead. Your line is open.

Hi. Good morning. This is Andreas. I'm on for Jonathan. So a question on pricing. So I know you guys raised the comp guidance and considering the select price increases you've been taking the past couple quarters. Could you provide more insight into the pricing strategy for the back half? And just more context around that would be helpful.

Yeah, thank you for the question. It is so important to us that our customers get the best value design and quality for their money. And that hasn't changed despite tariffs or anything else for that matter ever. We continue to try to build more innovation into our product lines and more quality and also be smart about where the costs are and taking out costs that the customers don't care about. So we've been really at it knowing the pressure that the tariffs would provide to work with our vendor partners to produce a line that everybody can do well with and the consumers will respond to it. And as you've seen, we've been surgical about where we've taken some price increases where, frankly, we were too cheap in the market for what we were selling. And, you know, we've seen good results from those things and we're watching it carefully. We certainly want to stay competitive and we want to make sure that our product lines and furnishing a whole home is accessible for our customers. So you don't want to move too much. And I feel really good about where we have it through the balance of the year. And we're constantly doing pricing tests to see what matters to our customer against which categories. And we're very thoughtful about it.

Your next question comes from the line of Peter Benedict with Baird. Please go ahead.

Thanks for taking the question. I guess my one question will just be maybe an update on your view of your ability to kind of resource where you're getting products, given the changes in tariffs. I think, you know, you talked about made in the USA. I think that you were maybe an 18% mix in 2024, if I recall correctly. Just, it gives a sense of what's realistic on that front, and also just throughout some of these other markets, what you're doing in terms of resourcing. Thank you.

Yeah, thanks, Peter. It's a good question. I think, you know, you know very well how strong our sourcing capabilities are. We have a lot of relationships all over the world, including the United States, longstanding relationships, and we know how to move products quickly and effectively. So we have been carefully spreading out the risk outside the United States and making the best decisions we can without making too much knee-jerk reaction because there's so much change that we've seen. of tariffs that were once very high going lower, and it's still yet to be seen where it's going to land. And so flexibility on our key items and having multiple sources, one, two, three, or two, three sources versus just one is a key part of our strategy. As it relates to non-USA furniture threats of tariffs, it's really too early to speculate. You know, I think we're day five of a 50-day probe. There's not a lot of information on this subject. But I will say that, you know, it's going to be very difficult for the industry, even if tariffs are put on, to bring a huge amount back to the United States in a short window of time because there aren't the factories available to do a lot of production. And also, particularly for the lower end of the market, it will be difficult because those consumers, you know, are buying mostly Asian products. For us, you know, of course, we will be in a much better position than most if that were to happen because of our strong USA manufacturing, you know, capabilities already. You know, we have most of our, not most, I said good chunk of our upholstery United States as we speak, and we could do more there. And that would be something we'd really push. We have, you know, factories in Mississippi and North Carolina. And then we have our rejuvenation Portland manufacturing unit that we love and has been running for many, many years. And because we know manufacturing, we know we know we know how to move more. So we'd be in much better shape if that were to happen. But I think you know, the administration is realistic and understanding that this can't happen overnight. And we will continue to watch whatever they do and make our changes accordingly.

Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Good morning. Thank you so much for taking my question. How much price have you seen being taken across the industry thus far and how much price has William Sonoma taken across its various brands and has did that contribute to some gross margin expansion in the second quarter given that you were selling some older lower cost inventory thank you so much you said price like retail price yes ma'am okay so

You know it's hard to know what other people are doing, because there's a lot of up down pricing in the market, so someone will take their price up only to take it down with a promo you know or an email offer credit card offer. is a lot of promotions continually in our industry that that has not changed and people have really stepped up. their everyday discounts. And at the same time, I do think that they've taken prices up. So it's more very, very money to understand what is happening with other people's prices. As I said earlier, we've been very carefully looking at where prices make sense. And you have to remember, also, we sell everything from anchovies to armoire. So, you know, depending on what, like they could move to the higher end of our furniture, or the mid prices from the low end. And that also drives AUR, which is why we're always really reluctant to give you those metrics because you could think it's one thing when it's really another. And as we said, we're pleased and thrilled to see furniture comping. And, you know, obviously furniture is a higher AUR, higher ticket than some of the other categories. So dimensionalizing it is, is not what we're doing today, other than to say that our pricing strategies, our product strategies are resonating with our customers, and we still have a very accessible, beautiful, high-quality line that we're offering.

Your next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please go ahead.

Hi, good morning, and congratulations on the good results. I wanted to ask on the furniture category, it's been positive for the last two quarters. What signals are you seeing, I guess, more broadly around consumers wanting to shop furniture? And do you think it's just newness you're offering or more kind of broad-based improvement?

Yeah, I mean, there's nothing that would indicate that there's something going on in the macro, right? Christina, I mean, you're not seeing housing improve. You know, did we hit the bottom? Could be, but it's really related to the product offer. You know, we can see it completely linked to the newness we're bringing in. I mean, I talked about West Elm just really hitting it out of park with this fall assortment and a lot more newness on the floor and, you know, at DTC and it's really resonating with our customers and we're seeing, you know, similar response in all of our brands. So where there's strong newness, we're seeing really strong furniture results.

Your next question comes from the line of Christopher Horvers with JP Morgan. Please go ahead. Christopher, your line is open.

Thanks. Good morning, and thanks for taking my question. So I did want to follow up on some of the inflation dynamics. You know, it looks like if you use the CPI data, the category saw inflation accelerate around 270 basis points from 1Q to 2Q. You know, your comps accelerated modestly. So is there, was there some elasticity perhaps that showed up? Is that just not representative of the price perhaps? Or was there perhaps some maybe pull forward into the first quarter as a consumer tried to get ahead of tariffs? Thanks so much.

Good morning, Chris. Five questions in one. So let me start with demand pull forward. We did not see any indications of demand pull forward in the quarter. You know, if you look at our past three quarters, our comps have been almost, you know, all in the same ballpark, 3.1, 3.4, 3.7. So there's not a huge indication of any demand pull forward there. They've been consistent. And we haven't seen any short-term spikes that would be indicative of a demand pull forward. I think what's happening in demand is more what Laura just touched on, is the customers responding to our initiatives. That's the efforts we put in the brands around newness, innovation. It's a lot of our white space opportunities. It is the way we're merchandising our stores and our websites. It's our emerging brands like Rejuvenation. It's just been a broad-based strength and momentum across across our businesses. Regarding your question on inflation and elasticity, you know, inflation, you know, pricing was one part of the overall equation for us during the quarter. But as Laura talked about, as we talked about ticket transactions, all that, there's a lot of variables in there for us because of the wide mix of our assortment. And customers can trade between that, and the mix can produce a very different result. And I'm trying to remember the other part of your question. Oh, in terms of elasticity, you know, what we're seeing from elasticity is it really just depends. It's category by category, SKU by SKU specific. And the key point is the more differentiated a product is, the less elasticity it is and the more opportunity to take price. The less differentiated, the more commoditized the product is, the more pricing is sensitive. Going into more specifics would be playbook. But for us, the thing isn't just about price. It's about value. It's about the quality equation. It's about the service equation. And we're winning on all those fronts.

Your next question comes from the line of Steven Zaccone with Citi. Please go ahead.

Great. Good morning. Thanks very much for taking my question. I wanted to focus on the second half and just how you're thinking about the third quarter versus the fourth quarter in terms of same-store sales growth. It seems like the business has had this broad-based trend. Would you expect that to continue? And then, Laura, specifically, holiday was pretty good for retail last year. You saw an acceleration in your business. What's your view on holiday and how the consumer responds? Thank you.

Yeah, it's really, you know, when you think about the back half, But as we said in our prepared remarks, we're pleased with our current sales and the momentum is continuing. And getting furniture to positive comp is a huge piece of that equation. And then we've had, you know, great momentum in our most holiday-specific brands, i.e., Kids and Williams-Sonoma. And that is great because when they're doing well, they're more naturally giftable than some of our other brands that are more decorate your own home. And so that makes us optimistic. And then, of course, there's the product line. And we've gotten to see it. We got to see the online demonstration of it. And it's very, very compelling and builds on the things that are working today. And while we're doing well, there's still a lot of things that we can continue to improve. And I believe we've improved them in the fourth quarter and the third quarter more than we had last year. And that will be good for sales, in my opinion.

Your next question comes from the line of Seth Siegman with Barclays. Please go ahead.

Hey, good morning everyone. Nice quarter. I'm just trying to understand how the higher tariff costs will start to phase in here. So merchandise margin in Q3 historically has been pretty similar to Q2. If that holds, it would point to pretty meaningful upside year over year. But can you just help us bridge Q2 to Q3 on the margins a little bit more? Even if not gross margin, maybe just broadly. And then just a related follow up as I think about how you've embedded tariffs here for the back half of the year. Just remind us how to think about how these costs wrap into next year, and should we assume that you get better at mitigating it as time goes on? Thank you.

Good morning, Seth. A lot to go over in that column. In terms of, you know, what we're thinking about for Q3 margin, as you know, we don't guide the specific quarters. We provide annual guidance that gives us flexibility to adjust and pull different levers as we go through and see the business. What we will guide in terms of overall how the tariffs will start to flow into our margins is we do see an impact accelerating across the year. We're on the way to the average cost method of accounting, and as those higher tariff costs work their way into our cost of goods sold, there'll be a gradually building process across the year. In terms of how we think about next year and what it means, you know, we're only halfway through 25, and there's a lot of you left this year to go. I think it's probably too early to just start discussing 26 guidance. You know, we're very confident in our growth strategies and really encouraged, as we said all morning, by the momentum in our business. The big unknown variable is tariffs. As you know, we've seen multiple round of changes, revisions, postponements. It seems almost every other day we're adjusting to something, and we don't have a crystal ball where it finally lands. So, you know, with this earnings release, we've reiterated our long-term guidance beyond 25, but a lot could change over the next six months, and we'll leave it at that.

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, everyone. Nice quarter. I want to, I guess, hone in again on tariff for a minute. I know you said it's built into the back half. I'm curious how you thought about demand elasticity for the second half. And I want to sort of put out something, how to think about how it impacted the first half for a second. Because I think we were under the impression that at least at the initial rate, there was some sharing, if that's a fair assumption, but some sharing with vendors. And because it was a relatively manageable amount. You didn't have to raise price as much, but maybe price was taken up in advance. So now you have a higher run rate for the second half. How does that sharing look like? Does the guidance mean you have to take price up more and you're more concerned about elasticity and hence margin? Just curious if you can give us a little more detail of how it's progressed throughout the year.

Yeah, sure. The most important piece of this is the innovation piece. And I don't think you can underestimate what a big factor that is in our guidance and in our results. And it's not about everything that everyone else is doing to us. It's about what we're making happen. We've talked a lot today on this call about product innovation and brand strength and channel excellence. And those initiatives in those categories are what's making us confident in our guidance and the back half. And, you know, in terms of your question about vendor sharing, you know, we have incredible partnerships with our vendors. And they're continuing to help us as much as they can navigate this situation. I want to thank them publicly for all that they've done. And they're the key to this long term is to keep them in business and strong and at the same time have everybody share in what we're doing. And we're very mindful to keep our wits about us about pricing because it matters to consumers. And so this price value relationship will be held throughout the back half of the year in the same way that we've done it carefully in the first half. So I don't see us. doing anything dramatic or we don't have plans to do anything dramatic that would be unexpected that should put a damper on sales. You know, of course, as Jeff said, we're not also, you know, assuming in our guidance a black swan event. So, you know, if anything terrible happened, obviously things would change. But it's really about our initiatives and what we're doing. And there is one thing I mentioned today that we haven't had a question on, and I have Samir here with us, and I'd love to have him talk about our channel experience and how we're moving forward our online experience through the back half and also how AI plays in that strategy.

Thanks, Laura. Appreciate it. So Laura mentioned earlier the results that we're seeing from our investments in AI, which are really exciting. And I think one thing that I'd love to highlight that's important to understand is how we're delivering those results. when it's been pretty well publicized that most companies aren't seeing that type of ROI with their AI investments. And that's because AI is an amplifier, and we're seeing it succeed for us because of the strengths we already have. And there's a few I'd love to highlight. One is our vertical integration. We own design, sourcing, manufacturing, last mile delivery, and we're in a position to be able to apply AI across that entire value chain. That puts us in a unique position there. Then you think about our multi-channel model, all the different ways that we connect with our customers. It's not just an online play. It's not just a digital play. We connect with our customers through our stores, through our in-home programs. And AI, again, allows us to amplify those experiences in really exciting ways. And then category authority, you take AI and you pair it with our design expertise in home, our expertise in culinary. And again, that just differentiates us in terms of the experiences we can create from competitors that are creating more generic chatbots. And all of this is built on our decades and decades of proprietary data that we've been building. Our DTC model has allowed us to, and we have invested heavily, to make our rich customer product operational data clean and actionable. And while we can say AI is the engine that's driving all this growth, data is the fuel that makes it work. And our CRM and business data is making that engine run. And it's really exciting to see the results we've already delivered and we can expect to get to come.

Thanks, Tamir. And ladies and gentlemen, that does conclude our question and answer session. And I will now turn the conference back over to Laura Alber for closing comments.

Yeah, thank you, everyone, for joining. And I would just say I really appreciate your support, your good questions, your interest. And please, if there's ever a question, go to our source and see what we're doing. because I think that the beauty of what we're doing at retail really tells the story. And there's only better things to come through the holiday season. And when we talk to you next time, we'll be in the thick of it and we can't wait. So thank you for joining us today.