Williams-Sonoma, Inc. Common Stock (DE)

welcome to the williams simona inc third 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 third quarter earnings call i'm here today with laura elder 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 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 third quarter. First, I'd like to take a moment to thank our team for their continued hard work. Everyone at Williams-Sonoma, Inc. has been focused on our key three priorities this year, which are returning to growth, elevating customer service, and driving earnings. And that focus continues to drive our results. We are proud to deliver strong results in the third quarter of 2025 with an accelerating positive top line comp and continued outperformance in our profitability. In Q3, our comp came in above expectations at 4%, driven by another quarter of positive comps across all of our brands. And we continue to deliver on the bottom line despite the substantial tariff headwinds. Our operating margin came in at 17%, expanding 10 basis points with earnings per share of $1.96, growing 5% year over year. We are encouraged by our continued strong year-to-date performance through Q3 and are confident in our outlook for Q4. And therefore, we are reiterating our outlook for the full year comparable brand revenue growth to be in the range of 2% to 5%. And we are raising Our bottom line guidance, 40 basis points to an operating margin of 17.8 to 18.1 versus 17.4 to 17.8. We drove this improvement in performance despite continued geopolitical uncertainty and no substantive improvement in the housing market. And we continue to gain market share and outperform the industry, which declined again in Q3. Our continued strong results reflect the power of our operating model industry-leading channel experiences, and strong portfolio of brands. We continue to see exceptional performance in our retail channel, which ran a positive 8.5 comp in Q3. Retail continues to benefit from an improved in-store experience with more inventory availability, enhanced design services and events, and the opening of 14 beautiful newly remodeled or repositioned stores so far this year, with seven more to come in Q4. This investment is paying off with almost all of them beating the performance of the prior location. Our stores serve as brand billboards, and we believe a refreshed store improves customer perception of our brands. As we move into the final quarter of 2025, I want to highlight the specific progress we've made on our three key priorities. Starting with growth, our core brands continue to deliver strong results from positive momentum in furniture. Our focus on innovation has driven strong and improving furniture comps. Additionally, we are focused on incremental growth categories like Pottery Barn Dorm and West Elm Kids. We're also broadening our reach through strategic collaborations. These initiatives attract new customers while keeping our brands fresh and relevant. Our B2B business also remains an important growth engine, up 9% this quarter, with strength in both trade and contracts. And our emerging brands, Rejuvenation, Mark & Graham, and Green Row, continue to perform exceptionally well. Together, they delivered a double-digit comp, and we're excited to have recently opened our 13th Rejuvenation store in Salt Lake City. This year, we're also very proud of our improvements in customer service. We are committed to flawless execution, delivering orders on time, damage-free, every time. And we're proud that this year we have record metrics We're focusing on furthering our improvements through fewer split shipments and faster fulfillment. Finally, our third key priority, driving earnings. Our focus on revenue growth, elevating customer service, and maintaining cost discipline has delivered strong earnings, with our year-to-date earnings per share growing 5% in a very tough tariff environment. Also in Q3, we used AI as a key business driver to accelerate our strategy. Across our portfolio, AI-powered chat experiences are now live for all brands, providing customer service, delivery support, and product guidance. These agents are improving speed, consistency, and satisfaction, and we are now resolving over 60% of chats without human assistance, reducing handle times from 23 minutes to just five. Another notable milestone this quarter was the launch of Alice, our new AI culinary and shopping companion, for the Williams-Sonoma brand. Olive helps customers plan, cook, and shop with confidence, combining our culinary authority with cutting edge technology to create a differentiated experience. What makes Williams-Sonoma Inc. unique is how AI can amplify our differentiated foundation with our proprietary data, our vertical integration from design to delivery, our multi-channel engagement and our expertise in home design in the culinary space. Our strong balance sheet coupled with our tech capabilities allows us to apply AI in ways that can drive real scalable impact for our business that others cannot. Looking ahead, we see opportunity to drive down costs and drive up sales with AI, and our early results are reinforcing that confidence. We're using AI to enhance what we do best, guiding customers through shopping and design decisions. Additionally, AI is driving improvements in productivity and empowering associates with tools to amplify their creativity and expertise. Now I'd like to update you on tariffs. Since we last spoke, there have been notable changes in tariffs, such as a new tariff on some furniture, including imported upholstery, kitchen cabinets, and bath vanities. The 20% additional China tariffs are down from 30%. Net-net these changes are a push to our current estimated impact. As we look forward to the future, predictability in the tariff environment and a reduction in the India tariff would certainly be a positive for us. In the meantime, we continue to be actively and aggressively mitigating what we can with our previously discussed six-point plan. To remind you, first, we are obtaining cost concessions from our vendors. Second, we are resourcing goods to get the best cost for our customers. Third, we're identifying further supply chain efficiency. Fourth, we are controlling cost. Fifth, we are expanding our Made in the USA assortment, production, and partnerships. And last, we are taking select price increases with a focus on maintaining competitive pricing. Now let's review our brands. Powder Barn ran a positive 1.3% comp in Q3. We are pleased with the improvement we saw in large ticket, including furniture, upholstery, and lighting. Our Powder Barn stores continue to outperform, led by our standout design crew services and our increased take it home today assortment. Our strategy of focusing on improving retail inventory availability, refreshing product assortments, and enhancing design services is working. We have opened six beautiful, new remodeled or repositioned potter barn stores so far this year with three more to come in q4 finally across the brand we continue a major change that we have made all year which is to substantially reduce promotions in potter barn now i'd like to talk to you about our potter barn children's business which ran a 4.4 percent comp in q3 we saw acceleration in furniture fueled by successful new product launches, continued growth in collaborations and back to school and dorm was a particular highlight in the quarter. In fact, back to school delivered double digit growth and acceleration from Q2. Our brands have become a destination for high quality study solutions, durable backpacks, and on trend dorm decor. Additionally, our enhanced dorm design tools and pick up near campus options have been important for gaining share in a very fragmented market. Now let's review West Elm. West Elm ran a positive 3.3% comp in Q3. We continue to make progress against the brand's four key pillars, product, brand heat, channel excellence, and operational efficiency. Throughout the year, West Elm has brought in new successful collections in both furniture and non-furniture where the brand was previously underdeveloped. West Elm has significantly shifted the composition of their sales towards new products, and the cumulative effect of new introductions since the fall of last year continues to produce results. Retail in West Elm was also a highlight due to improved in-stocks and more new furniture and more new fabrics displayed on the retail floor. And we've opened two beautiful new remodeled or repositioned West Elm stores so far this year, with one more to come in Q4. To remind everyone, we have 119 stores in West Elm, and based on results, we are looking forward to returning to retail unit growth in this brand. As you can hear, we are quite excited by the momentum at West Elm. Now let's review the Williams-Sonoma brand, which continues to fire on all fronts and ran a positive 7.3% comp in Q3. Williamson remains focused on premium quality products that are expertly crafted, combining style and functionality. In Q3, we celebrated many successful culinary stories from the food and flavors of Spain to authentic Indian flavors through a collaboration with Palak Patel, founder of the Chutney Life. We also recently launched a Wicked collection featuring limited edition Le Creuset Dutch ovens inspired by Elphaba and Glinda. And as we continue to connect our customers to the world's best chefs and products, we are seeing great traction with in-store events. Across the country, we hosted 42 in-store book signing events in Q3. We welcome the fans of celebrities and celebrity chefs like Neil Patrick Harris, Dave Burka, and Melissa King into our stores for amazing cooking demos and cookbook signings. Finally, we've opened six beautiful new remodeled repositioned Williams-Sonoma stores so far this year, with two more to come in Q4. Now I'd like to update you on B2B, which grew 9% in Q3, with both trade and contract delivering strong 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. Our biggest success story in Q3 was an increase in commercial workspace wins, including projects with Google, WeWork, TurboTax, and PayPal. Q4 brings the ramp up of our growing corporate gifting program, including our leading assortment of quality giftables that can be customized with logos and company branding. We're also a destination for seasonal favorites that make the perfect client and employee holiday gift if any of you need help. Now I'd like to update you on our emerging brand. With our proven ability to incubate and scale brands in-house, we are confident in the continued growth of our concepts and their ability to deliver profitability to our results. Rejuvenation delivered strong double-digit comps in the quarter, continuing an upward trajectory fueled by product innovation and category expansion. Our high-quality product offer and proprietary designs are resonating with customers. Both channels are performing well, and we continue to open new retail locations to drive brand awareness. This quarter, we expanded our rejuvenation store count to 13, with the opening of two new storefronts, one in Nashville and one in Salt Lake City. The brand also saw a strong performance from its first ever lighting collaboration. Mark and Graham delivered its best Q3 in brand history, driven by successful new categories, M&G Kids and Bark and Graham, as well as continued growth in personalized corporate gifting. As we head into the peak gifting season, the brand is well positioned with thoughtful, personalized gifts for all occasions. I'm also excited to talk about our newest brand, GreenRow, which delivered strong growth this quarter. In Q3, we launched the largest holiday collection to date with handcrafted decor and gifts made from upcycled and natural materials. The brand's colorful and unique products have had a great response, and the product line is incredibly beautiful in person. Therefore, we believe retail stores are the next leg of growth at GreenRow and are looking to test a few store locations as soon as possible. Finally, I'd like to share one highlight in our global business. In the UK, we've broadened our brand presence to the launch of Potter Barn Online and the opening of a pop-up store in our West Elm Tottenham Court Road in London. And so far, we're quite pleased with the performance of Potter Barn in this new market. In summary, we're pleased with our execution and continued outperformance in Q3, marked by accelerating positive comps and strong profitability. Across the company, we remain dedicated to enhancing our channel experiences and strengthening our brand. Each and every day, we prioritize innovation, product design, and exceptional customer service. These are the qualities that set us apart in a fragmented industry and position us to capture additional market share. We see tremendous opportunity to continue to lead our industry as we execute on our vision to own the home and the places where our customers work, stay, and play. As we enter the final quarter of the year, we're filled with optimism for a strong finish. This holiday season, we're ready to showcase our best across our stores and online. From all of us, we wish you and your family a joyful Thanksgiving next week and a happy holiday season. Before I hand things over to Jeff, I want to take another minute to express our thanks to our team, our vendors, and all of our partners. for their ongoing dedication and contributions to our company's success. We appreciate everything they do. 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 reflect Williams-Sonoma, Inc.' 's competitive advantages in the home furnishings industry, including the following. The strength of our multi-brand portfolio. across different categories, aesthetics, and price points. Our size and scale, providing the ability to drive market share gain as we maximize white space opportunities. The competitive advantage of our multi-channel platform, serving customers where they choose to shop, online, in-store, or business-to-business. Our focus on customer service and full price selling, creating efficiency and cost savings across our supply chain. And finally, the power of our operating model to deliver highly profitable earnings. Our headlines for this quarter demonstrate these competitive advantages. We delivered positive comps for the fourth straight quarter. Furniture and non-furniture categories both ran positive comps, reflecting strength across all categories of our offerings. White space opportunities such as dorm, West Elm Kids, and rejuvenation grew double digits. Retail, e-commerce, and business-to-business all drove positive comps. Our supply chain team achieved best-ever results across nearly all customer service metrics while simultaneously improving efficiency and reducing costs. And despite the headwinds from tariffs, we drove operating margin expansion of 10 basis points to 17% and EPS growth of 5% to $1.96 per share. Our results this quarter would not be possible without the team we have at Williams-Sonoma, Inc. I'd like to thank our talented, dedicated team for delivering these outstanding results. Now, let's dive into the numbers. I'll start with our Q3 results and then update guidance for fiscal year 25. Q3 net revenue finished at $1.88 billion for a positive 4% comp. All brands delivered positive comps driven by positive comps in both our furniture and non-furniture categories. We gained market share in the quarter, even as we increased our penetration of full-price selling. From a channel perspective, both channels delivered positive comps with retail up 8.5 percent comp and e-commerce up 1.9 percent comp. Moving down the income statement, gross margin exceeded our expectations, coming in at 46.1 percent, 70 basis points higher than last year. Higher merchandise margins and supply chain efficiencies drove this gross margin improvement, offset by slightly higher occupancy costs. Merchandise margins delivered 60 basis points of our gross margin improvement, exceeding our expectations. Three factors contributed to this improvement in merchandise margins. First, the impact from tariffs is taking longer than anticipated to flow through to our gross margin. This is due to the delayed effective dates of the tariffs and our aggressive front-loading of inventory before tariff effective dates. Second, we are seeing margin upside from our six-point tariff mitigation plan, including price increases, as well as strong consumer response to our full price product offering. And finally, lower inbound transportation costs are helping offset tariff costs. Supply chain efficiencies added 30 basis points to our gross margin. Our focus on customer service and in-stock ready-to-sell inventory is delivering tangible margin improvements from lower accommodations, damages, replacements, and out-of-market shipping expense. Occupancy costs were up 5.9% and were 20 basis points higher year over year. This was because of our retail outperformance and the higher occupancy costs in that channel. To recap, Our gross margin results this quarter exceeded our expectations. Our tariff mitigation efforts more than offset the headwinds from tariffs in the third quarter. Turning now to SG&A. Our T3 SG&A ran at 29.1% of revenues, 60 basis points higher than last year. Employment expense deleveraged 50 basis points due to higher incentive compensation from our strong results year to date. We continued to manage variable employment costs across our stores, distribution centers, and customer care centers in line with top line trends. Advertising expenses were 20 basis points higher year over year. Our in-house marketing team continues to test and optimize into different levels of spend. During the quarter, we increased our investment in digital advertising. After testing, and proprietary in-house analytics models indicated we could scale efficiently. The higher spend drove an acceleration in year-over-year site traffic and improved revenue per visit. Our in-house marketing team's ability to test, scale, and optimize across our portfolio of brands is a competitive advantage in the home furnishings industry. Finally, general expenses leveraged 10 basis points. On the bottom line, our earnings exceeded our expectations. Despite the tariff headwinds, our operating margin of 17% was 10 basis points above last year, and diluted earnings per share grew 5% year-over-year to $1.96. On the balance sheet, we entered the quarter with a cash balance of $885 million with no outstanding debt. We generated $316 million in operating cash flow during the quarter and invested $68 million in capital expenditures supporting our long-term growth. During the quarter, we returned $347 million to our shareholders. We did this through $267 million in stock repurchases and $80 million in dividends. Merchandise inventories stood at $1.5 billion, up 9.6% to last year. Our inventory includes $48 million of incremental tariff costs recorded in inventory, as well as $30 million of a strategic pull forward of receipts at lower tariff rates than in effect today. Without this incremental $78 million, our inventory level would be in line with our sales trend. Overall, our inventory level and composition are well positioned to support our upcoming holiday season. Summing up our Q3, we're proud to have delivered strong results, even as we navigated a challenging tariff environment and historically low housing turnover. Now, let's turn to our guidance for fiscal year 25. First, some housekeeping. In the first quarter of fiscal year 24, we recorded a $49 million out-of-period adjustment related to prior year's freight accrual. This benefited fiscal year 24 operating margin results by approximately 70 basis points. Our guidance for fiscal year 25 uses our fiscal year 24 results without the out-of-period adjustment as a comparable basis. Additionally, fiscal year 24 was a 53-week year for William Snowman, Inc. 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. On full year 24 results, the additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin. The discrete impact of the additional week on just Q4 24 was 510 basis points to revenue growth and 60 basis points to operating margin. Now, our guidance. Given our strong Q3 results and our outlook for Q4, we are updating our fiscal year 25 guidance. On the top line, we are reiterating our fiscal year 25 net revenue guidance. We expect full year 25 comps to be in the range of positive 2% to positive 5% with total net revenues in the range of positive 0.5% to positive 3.5% due to the 53rd week impact from last year. Our guidance continues to assume no meaningful changes in the macroeconomic environment or interest rates or housing turnover. Our guide reflects the continued strength in our business, strong customer response to our product lineup, and continued traction across our growth initiatives. On the bottom line, we are raising our full-year operating margin guidance 40 basis points to a range of 17.8% to 18.1%. This means that despite the tariff headwinds, we are now guiding the midpoint of our fiscal year 25 operating margin to be approximately 20 basis points above last year when excluding the 53rd week impact. Our higher operating margin guide reflects both the strong results we have delivered year to date and the expectation that tariffs will have a greater impact on our margins in Q4. Our updated guidance reflects all the tariffs in place as of this call. This includes the new Section 232 tariffs on furniture, the revised 20% additional China tariffs, the 50% India tariff, the 20% Vietnam tariff, and an average 18% tariff on the rest of the world, as well as the 50% steel and aluminum tariffs and the 50% copper tariff. In fact, our incremental tariff rate has more than doubled from 14% earlier this year to 29% today, inclusive of all the tariffs I just mentioned. We believe the strength of our operating model, combined with the six-point mitigation plan Laura outlined, enables us to mitigate a large portion of these tariffs, which is embedded in our guidance. It's important to note the tariff policy has been volatile and subject to multiple revisions. It's hard to say where tariffs will ultimately land and what impact they will have on our business. Our guidance reflects our best estimates of the impact based upon the tariffs in place as of this call. Also today, we are providing some further inputs for modeling purposes. We now expect our full year interest income to be approximately $35 million and our full year effective tax rate to be approximately 26%. Turning now to capital allocation. Our plans for fiscal year 25 continue to prioritize funding our business operations and investing in long-term growth. We expect to spend between 250 million and $275 million on capital expenditures in fiscal year 25. We are investing 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're proud to say that fiscal year 25 is the 16th consecutive year of increased dividend payouts. For share repurchases, we announced today that our board of directors approved an additional $1 billion share repurchase authorization, bringing our total authorization to approximately 1.6 billion. We remain committed to opportunistically repurchasing our stock provide returns to our shareholders. As we look forward to 2026, we will balance our long-term growth potential with the tariff and macroeconomic landscape, and we will provide guidance in March. As we look further into the future beyond 2026, we are reiterating our long-term guidance of mid to high single-digit revenue growth with operating margins in the mid to high team. Wrapping up Laura's and my comments, we delivered another quarter of strong results, despite the headwinds from tariff policy and historically low housing turnover. 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. Our ability to gain market share in the fragmented home furnishings industry. The strength of our in-house proprietary design. The competitive advantage of our digital first, but not digital only channel strategy. The ongoing strength of our growth initiatives. And the resilience of our fortress balance sheet. With that, I'll open the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Max Reclenko from TD Cowan. Your line is open.

Great. Thanks a lot. And congrats on the nice quarter. So first, can you just discuss the elasticity that you're seeing in the business? as you selectively increase prices, and how we should think about the impact to comps from transactions versus ticket in 3Q.

Thanks, Max. Good morning. We look at prices constantly across our brands, across categories, and with our competition. And you know we sell a wide range of products, and so there's not one quick answer to elasticity, because in some cases, There's room to take up prices. In other cases, you need to take down prices based on what the market's doing. This is why we're so focused on innovation and bringing new, innovative, and exclusive products to market, because that gives us better pricing power. Also, I would say that pricing is not just about the product itself, but also the service and the experience. And we have been really, really focused, as you know, on improving our service, which has been a huge driver of our out margin, which I'm sure we'll talk a lot about today. But that's a big, you know, especially as we come up against the holiday season, it's a big deal for customers deciding where to buy their gifts, especially large tickets. If they want to buy gifts from people they trust, they can return things to, and that they're going to stand behind their product quality, and they can get instructions about how to use, you know, that expensive espresso machine. So, you know, it's... It's not just one metric and it's not just one category. You know, it's going to be different depending on the product you asked me about.

Got it. Thanks a lot, Laura. And then, Jeff, you noted that it's taking longer for tariffs to flow through. Just how should we consider the impacts of tariffs over the next several quarters, as it does sound like 4Q will see a pickup? And then, just any guideposts on modeling for the next several quarters?

Yeah, good morning, Max. Thanks. Yeah, let me explain why the tariffs are taking longer to flow through. I think it's important to unpack that. And first, it's really due to the delayed effective dates. For example, the August 7th reciprocal tariff, which applies in most countries like China and Vietnam, et cetera, had an exception for goods that were on the water that had to be received before 10-5. Another example is with the India tariffs that were effective on August 27th, there was an exception for goods in the water to be received before 9-17. So this means that these tariffs do not start being applied to new receipts until mid to late third quarter. And then on top of that, we aggressively front-loaded receipts to bring in inventory at lower tariff rates than are in effect today. So the combination of these two really advantaged us in Q3. As we look to Q4, you know, we've certainly said that the tariffs will have a larger impact upon our margin, and that is embedded in our guidance. As we look beyond Q4, it's a little early to talk about 26. There's a lot that could change between now and then, especially with the tariff landscape. So we'll save that conversation for March.

Your next question comes from a line of Zach Fatum from Wells Fargo. Your line is open.

Good morning. Could we start with your take on broader category performance from Q2 to Q3 and whether you saw underlying improvement there? And then just curious, stepping back, how you would frame the improvement we've seen in furnishings in your category relative to some of the broader performance macro and pressures that we've seen in home improvement and other bigger ticket categories.

Thanks, Zach. We're really pleased with our continuing improvement across quarters and brands. And in particular, you know, the West Elm increase in comps is really exciting for us to see because we expected it to happen. And there's nothing more fulfilling when you see a strategy come to fruition. And I still think there's a lot of room left to go. in West Elm as they build out certain categories and their seasonal assortments. And we've been continuing to improve our in-store experiences, and that's been really helping. But in terms of the broader merchandise categories across brands, we have been aware, as everyone is, that the housing market has not recovered. And that is really most correlated with furniture. And to be able to improve our furniture comps without a significant improvement in housing is a really, really strong sign. And we love that because a furniture collection that we introduced in a season this year, we can build up on for next year with new piece types and also with better inventory stocking positions. And so the continuation of our furniture strength is very important to the short term and the longer term. And then, you know, in the holiday seasons, the categories that are exciting, we saw dorms, pick up from Q2 to Q3, back to school, you know, the broader category for that. And it was a strong season and really, really a good season for us. The Halloween product categories were strong, autumnal and Thanksgiving. Also, you know, we're not done with Thanksgiving yet, obviously, but we're close. And so we've been pleased with our results there. It's too early to comment about holiday. We're actually on the call a week earlier than we were last year. So those of you who are wondering about the lack of comments there, it's just a little bit too early to comment. But based on what we've seen with the other seasonal holidays, we can see that that's a competitive advantage for us. There's not many other people out there that have the assortment that allows customers to really decorate and entertaining for the holidays. And especially at this time of year, it's a real strength. It's a traffic driver for us.

Your next question comes from the line of Christina Fernandez from Telsey Advisory Group. Your line is open.

Hi, good morning. So I want to follow up a little bit on that last comment on holiday. If you look at the implied Q4 revenue guidance, it's pretty wide. So could you comment on the low-end versus high-end and your ability to continue this calm trend as you face a more difficult year-over-year comparison.

Thank you, Christina. Holiday Velocity is in, and then it includes January. We are really focused on great price selling, and this has been an important part of our margin profile all year and the improvements that you've seen. And we have amazingly increased We've had great success in our margin improvements, even with the tariffs on top of everything. And as we go into the holiday season, we continue to have opportunity from a year-over-year perspective in pulling back on promotions. And so we're focused on right price selling and hope to have less promotions than last year, hence the wide range of comp performance. That's one piece of it. The second is when you look at the multi-year numbers, we're mindful of our strong holiday last year.

Your next question comes from the line of Peter Benedict from Baird. Your line is open.

Oh, hey, guys. Thanks for taking the question. I guess two. One would be the market seems to be really concerned about how you're going to be able to digest these tariffs as they ultimately come through. despite your ability to do so to date. I think expectations next year for operating margins to be lower in the first half of the year. But maybe Jeff, I'm not asking for specific guidance, but just how should we think about the ability of the business to just even maintain operating margins in the face of what you know about tariffs as they sit today? That's my first question. And then my second question would be, around unit growth. Laura, it sounded like maybe a little bit more of an offensive posture there, particularly around West Elm. We know that in aggregate, your units have been kind of coming down. Are you signaling a change there? Should we be thinking about, you know, I'm just thinking about the magnitude of unit growth we might expect as we look out on the horizon? Thank you.

Yeah, good morning, Peter. So, you know, where is the operating margin going? That's a great question. But, you know, if we look beyond our current guidance, that's not really a question we're going to answer today. It's too early to start discussing 26 guidance. Our focus is on the holiday season delivering Q4. And the real reason here is the tariff landscape has been incredibly volatile. Just look at what's happened over the past several quarters. Every quarter there's been new tariffs, repeal tariffs, everything's changing. And there's a lot of uncertainty in this front. I would point out that India is one of our largest sources of goods. And where that tariff is going, which is currently at 50%, is an open question. We also have the Supreme Court decision on IEPA tariffs pending. We'll see where that goes. So it's a little hard to understand beyond our current guidance and beyond, you know, this year in Q4 where the tariff landscape is going to impact us. We believe that our six-point mitigation plan that Laura and I have been articulating all year combined with the power of our ARPANET model will allow us to offset a large portion of the tariffs, but the ultimate amount depends upon where the tariffs ultimately land. What we're really focused on is delivering the current quarter and everything we know about our ability to offset the current tariffs is embedded within our guidance. In terms of your second question, Peter, where is unit growth going? Look, we've been saying all along that we have done an incredible job, and I want to compliment our entire organization regarding our retail repositioning strategy. And there's been multiple legs of the strategy. There's been closing underperforming stores, which I think everyone knows we've closed about 17% of our stores since 2019. It's about repositioning stores from some of the tired indoor malls to more vibrant lifestyle centers. And it's also been about opening new stores. And we see opportunity for new store growth, particularly in the West Elm brand, with rejuvenation, with green row potentially. And, you know, there's a lot of opportunity for us to continue to grow stores. In terms of where overall store count growth is growing, as we've been saying all year, it'll be, you know, mid single digit closures this year. And I think, you know, we're not necessarily guiding 26, but I don't think we'll see a substantial change in the overall store count as we look towards 26. There's still more room to go on our reposition strategy, but there's also white space opportunity to infill, and there's some great new locations that we're working on that will come online in 26 and then 27.

Your next question comes from the line of Chris Horbers from JP Morgan. Your line is open.

Thanks. Good morning. So two quick ones. So I guess you know, playing devil's advocate on the compare in the fourth quarter, Laura. Furniture pull forwards behind you. There's a lot of momentum around, you know, self-help initiatives. And obviously, there's a tech of pricing coming through here. So do you think about where we are in the cycle, particularly with, you know, housing not helpful? You know, why couldn't the growth rate just stay at the growth rate considering, you know, where we are? And then a quick one on gross margin, understanding there was some shift on timing, but, you know, asking the question another way, did the drivers in terms of in the fourth quarter, in terms of the expected tariff headwind versus the expected benefit from the mitigation strategies, did you change those at all in your outlook? Thanks very much.

Yeah, thanks. I'll go forward at first. I don't want to see that. any reason to believe we've seen pull forward of anything for that matter. We absolutely could be at the same cost if not higher. We have a wide range. I was just explaining the differences of why, you know, you might look at it and say it's a little bit lower than where you said. It's very important that, you know, we don't play this emotional game. It's a key aspect of our strategy. At the same time, we're going to have great deals for Black Friday. We have great deals right now for early Black Friday. We bought into them. We have vendor partnerships on them. But we're not going to have as much, we hope, we hope we're not going to have as many needs to promote as we did last year. And so that's the only hesitation on the comp side. And then in terms of the tariff impact in Q4, it's sizably more in Q4 because the way that the cost flows through every single quarter. And so, you know, we did a fantastic job, great success with our mitigation plan in Q3 and throughout the year, and we will continue to do that. And in fact, you know, it's amazing to see the new opportunities that we're finding in supply chain. You know, supply chain has been just a tremendous positive this year in delivering op margins. And what's great about it, as you know, is it means the customer is getting their product delivered more smoothly and on time and without damage. And that's all goes for the brand. It's fantastic for the P&L. And there's still room. You know, if you look at Q4 on the op margin side and the supply chain savings, there's more to go there. We're really optimistic about our ACDC, which is our new DC that came up last year. And honestly, we're doing better than we have done with that. And that could be, that could really help us, especially because You know, the calendar this year for Christmas, similar to last year, is pretty tight. So we want to be able to ship it late and ship it perfectly and not disappoint anyone. That's why people come to us and shop online later with us like they do Amazon and others, because they trust us to deliver before Christmas. So there's a lot of really good things happening, but in terms of the impact of tariffs, you know, please don't get ahead of us on Q4 in terms of the margin. because the tariffs are going to have a greater impact as you can see in our guidance and the implied Q4 guidance than they did in Q3. If you look at our out margin X tariff, it's expanding. And so for all those that are worried about this, just realize that this goes into the base and we're done with it and we move forward and it's about outperforming our competition and continuing to deliver for our shareholders and most importantly for our customers and giving them incredibly beautiful, well-designed, high-quality product at the best price in the market.

Your next question comes from a line of Jonathan Matuszewski from Jefferies. Your line is open.

Great. Good morning. I had one question, one follow-up. The first question was just on the consumer. You mentioned a better response to full-price selling than it seems like what you planned for. So just from like a strategy perspective here, how does that minimal elasticity kind of inform your customer targeting efforts going forward? And is what you're seeing giving you more confidence to target a higher end consumer, a higher income consumer more in the future than in the past? And are there strategies in place to do that? That's my first question.

That's a great question. You know, we're lucky where we sit. So we're going to give them the best price, you know, if it's their first apartment, first baby, or if it's their fifth house. And we do see, when we look at our tic-tac-toe and owning the home, that we haven't covered the real super high end at scale yet. It's not surprising to me that rejuvenation is doing so well. You know, why do we have such great growth? It's expensive. It's absolutely gorgeous. high-quality product. I hope that you've all visited a store, bought some products, or seen it in someone's house, because when you see it, you understand why we're really growing that business and why we believe SoStrong is the next billion-dollar brand. That sits at the high end. GreenRope sits at the high end. We haven't talked about it a lot because it's tiny, but we're seeing that it's a new aesthetic. It's very, very original. It is not in the marketplace. and it is entirely green products and people care about that. At least that customer cares about that. And so that's at the high end. And we see that we can have retail stores in that brand, which tells me it's bigger than you might think. And then there's Lansing on the home, which we continue to see as an opportunity for us into the future. But don't, you know, mistake the importance of us also covering, you know, the upper middle customer, the Pottery Barn, the West Zone, and making sure that also those brands are so appealing that people trade into them. If I can decorate your house more beautifully and more affordably than the high end, why wouldn't you come to us? And by the way, we'll do the whole thing for you. We'll set it up. And I think you'll see that we can do it for a fraction of the price of what other people do and have it be super interesting and gorgeous. So we're going after all those pieces. And there's opportunity right across that, that tic tac toe bar from, from what we define as our value customer, which is different than the market all the way to the high end consumer.

Your next question comes from a line of Simeon Goodman from Morgan Stanley. Your line is open.

Hey Laura. Hey Jeff. Can I ask on tariffs again? You know, the six-point plan seems to be beneficial, and it sounds like the elasticities aren't awful. What's the chance that we get to the fourth quarter or even the first quarter as this inventory turns that the impacts are going to be a lot more minimal than we think? And I'm just trying to size up, you know, the conviction that we haven't seen anything yet. And then if some of this IEPA stuff gets, I don't know, invalidated, Do you suspect that industry prices go back down, or do you think retail prices, especially ones that have already changed, they're just going to hold?

First of all, I just want to say that the last thing I want you to think is that we're immune to tariffs. We've done a really great job of offsetting them so far, but the amount that they hit us in Q4 is visibly different than it was in Q3. So just That's why, look at our guidance, please, and understand the impact. IEFA, you know, there's other tariffs. I'm not focused on that. We're focused on how we give, in the current tariff environment, the greatest value to our consumers and where should we be pricing things and where should we be moving things. So, I wouldn't spend a lot of time worrying about that. I think it's just one more thing that could change and be, of distracting in the short term you know there's also really good things that like if the india tariff is repealed that or reduced by half that would be great for us um but you know all that is is backdrop that affects the entire industry and once it's in and it's rolled through on a yearly basis we're done with it um so i just As I said, just to recap, please don't think that we are in Q4 beyond. We will offset as much as we possibly can. We've done a better job than I think we even thought we could do in offsetting all of it this quarter. But we have a few things going on in Q4 that I want to make sure Jeff reminded you in his prepared remarks. I'll let him remind you again about the 53rd week.

Yeah, I mean, a couple other things that I want to highlight too, Simeon, is, and as Laura said, don't get ahead of us there. You know, we did have an improvement in our merchandise margins, particularly against what we expected in Q3. But it goes back to the timing factor that I talked about, I think, on the first question. The effective dates were delayed for all the tariffs. So as we get to Q4, there will be a substantially larger impact to our operating margin than there was in Q3. And our guidance embeds in there our best estimates of what that impact is. inclusive of all of our tariff mitigation efforts. So I, you know, I can't say it any other way other than we do not expect a repeat of Q3 and Q4, which is what our guidance is. In terms of the 53rd week, I do want to remind everyone that this is the 53rd week for Williams. We are coming up against the 53rd week for William Soma Inc. On the year, it was worth 150 basis points to revenue growth and 20 basis points to operating margin. But in Q4, where the 53rd week comes into play, it had a pretty big impact at 510 basis points of revenue growth and 60 basis points of operating margin growth. So just on that, the 53rd week and those 60 basis points, we would be down normally on a year-over-year 13-week, I'm sorry, yeah, 13-week to 13-week comparison.

Your next question comes from a line of Steven Zaccone from Citigroup. Your line is open.

Great. Good morning. Thanks very much for taking my question. I wanted to ask on Totterie Barn, because the business is accelerating a little bit there on the two-year stack, and it's actually lagging the rest of the segments of the business. You know, you referenced some pullback and promotions. Can you just talk about what's new this year? Because I think that's been the strategy for the past couple of years. And when you think about the performance of that business, you know, what are you seeing from a competitive perspective? You know, any sort of kind of trade down from the consumer and deal with some of these earlier questions around pricing? Is there anything to call out from a pricing perspective competitively?

We haven't seen that yet. Pottery Gardens Furniture has improved this year, especially on the multi-year stack, and that's been good to see. They did have more promotions to reduce out of their base than you might have expected, and so we continue to work on that, and there's still opportunity.

Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, thanks very much. Just in the largest, bigger picture, a lot of people have asked about tariffs. I want to ask a little bit about category growth and how you see sustainability moving into 2026. Broadly speaking, a lot of your peers are doing better. Do you think that continues? And one more near term, just cadence throughout the quarter. Some of your peers have had a lot of volatility. Anything you want to highlight for us and anything you want to speak to so far in November? Thank you.

Yeah, you know, we don't talk about I do want to talk about the excitement we have as we look forward. We have not seen a housing recovery. It's like the worst housing market in the last 40 years, as you know. And that is a big deal. Now, there's really not a lot of great signs that it's getting better quickly, but there are some green shoes. And I personally am very optimistic about housing next year. That'd be a big change for us if that happens, because we know that when you move, you buy a lot when you refurnish your house. And we've been very good at getting the remodeler and the redecorator to come to us, but we're excited to be ready with a much more powerful furniture supply chain than we've ever had before when those sales come to us. And we know that when that turns and you see upside again, it's a really big deal. Some people I don't think are going to be ready for it. But the things we've done to really improve our supply chain are so strategic. I believe and have always believed that the person that owns the furniture network is the one who wins the whole thing. And that is where we've been focused and continue to build and have all sorts of tech projects in play to make that happen. And you can see it in our numbers this year. how much improvement year on year. I read through last year's script, and it's funny when you read it, because we were talking about all the supply chain improvements then, but I think if you'd asked me, I wouldn't have expected that we would have this much more. And yet we still have more, and that's what's exciting. When you think about the power of our operating model and this multi-brand, multi-channel company, and where this could go in the future as we're an insurance company.

Our next question comes from a line of Michael Lasser from UBS. Your line is open.

Good morning. Thank you so much for taking my question. Laura, one of the interpretations of some of your comments over the last hour is that Williams-Sonoma has gone through this significant change where it's reduced promotion, improved its profitability while it's been able to drive consistent sales growth. And now it may be at the point at which it can no longer lower promotional activity without it having some impact on the sales. Is that the right interpretation of what has been said on this call? And second, was the magnitude of the benefit to your margin in the third quarter from selling older, lower cost inventory at new, higher prices equal to or greater than it might have been in the second quarter? such that we should think about these not repeating in 2026, understanding you're not providing any guidance on 2026 at this point. Thank you very much.

In terms of your first question, I mean, you took some liberties there, Michael. I think, you know, what I'm saying is that key strategies for our company continue to work, and it's been a focus on innovative product design, high quality, high service, and a regular price business. Investing in our brands, investing in our test staff, our supply chain to deliver great operating margins. But I will remind you, our key, our first initiative this year was Return to Grow. I kept joking, it's one, two, and three, Return to Grow. We are obsessed with where we can grow, what brands it is, which categories it is, and how we outperform. do not mistake that that is where our head is and what we're driving towards. On the second question, I'll hand it to Jeff.

Yeah, Michael, honestly, I'm not tracking with you on the question, because actually our margin expansion year over year in Q2 was 200, gross margin was 220 basis points. There's only 70 basis points in Q3, with the difference, of course, being the impact of the tariffs. So, not sure I understood your question, but, that there was a greater impact of the tariffs in Q3. And while certainly, you know, we have our mitigation efforts, the tariff impact will increase sequentially quarter over quarter every year this year. And as we said on the call, it will have an impact on us in Q4 in a much more substantial way than it did in prior quarters this year.

Your next question, and this will be the final question, comes from the line of Oliver Wintermantle from Evercore ISI. Your line is open.

Thanks very much, guys. And yes, I think the message on gross margin in 4Q came across. I just want to focus on SG&A. You guys have lowered general expenses for the last several quarters, and especially in 4Q, I think there was 80 basis points and incentive comp headwind and advertising was also up a headwind of 30 basis points in the fourth quarter. So maybe could you talk a little bit about SG&A moving parts into the fourth quarter, how you expect that to shake out? Thank you.

Yeah, Ali. I mean, as you know, we don't guide the specific lines. We guide the top line and the bottom line because it gives us the flexibility to pull different levers as we see results come in. In Q3, our higher employment expense was really almost entirely attributable to higher incentive compensation due to our strong performance here to date. And then as I explained in our prepared remarks, advertising deleveraged about 20 basis points because we saw some opportunities during Q3 to spend some additional advertising in the digital space. And one of our competitive advantages is our in-house marketing team that has ability across our portfolio of brands to test scale and optimize our spend. And they saw some opportunity to spend in Q3 that gave us great returns, drove incremental traffic to the web and higher revenue per visit, and so we leaned into that. So as we think about Q4, we don't guide the specific lines, but our approach is always the same, is we're looking to control our SG&A, but where we see opportunities that are going to give us good return on investment, we will, of course, lean into those. But it all depends upon the overall macro.

And I thought that it might be worth spending another minute, even though we're a couple minutes past the hour, talking about our SG&A reductions due to our AI initiatives. Because, you know, we were joking earlier that we have a six-point mitigation plan for tariffs, but I think maybe we should launch our seventh as AI because we're seeing some really exciting results both on the sales side and also on the market side. And let's hear a few comments about that before we close the call.

Sure. Thank you, Laura. Like Laura mentioned earlier, in Q3, we are seeing really, really impactful results. She shared a couple of the data points around our customer service automation. She shared our launch of Olive, our AI agent that's customer-facing. If you haven't used that, I really encourage you to go on the Williams-Sonoma site today. Super helpful for planning for the holidays and is driving sales, driving engagement, driving loyalty. It's really exciting. And We're already, just on the topic of SG&A, we're already seeing reduced payroll costs where automation absorbs, AI automation absorbs repeatable work. Reduced vendor costs when we streamline external spend. And we're also seeing the same tech go to the top line. In supply chain, we're cutting out of market shipments, improving routes, lowering damages, replacements, trimming shipping costs. Inventory, we're using AI to raise in-stock rates on key items. All the stuff supports conversion. It's driving down costs, but it's also driving the top line. digital guided journeys, better content coverage. All of this is driving the SG&A leverage. It's all of it's driving reduced cost, but it's also driving demand leverage, which is really exciting to see it impact both on the cost side as well as the top line side. So we really see this compounding benefit as we head into 2026. I'm really excited about the continued impact we're seeing from our AI roadmap.

And we have reached the end of our question and answer session. I will now turn the call back over to Laura Albrecht for closing remarks.

Yeah, thank you all for joining us today. As I said earlier, I wish you all a very happy Thanksgiving with your families. Hopefully you get a chance to stop by our stores and do some shopping. Look forward to talking to you in the new year. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.