WILLIAMS-SONOMA, INC. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: the continuing impact of the COVID-19 pandemic on our business, results of operations and financial condition; our revenue growth; expanding our operating margin; production, transportation and supply chain; backorder levels; our strategic initiatives; our beliefs regarding customer behavior and industry trends; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash, including our commitment to continue or increase quarterly dividend payments; our future compliance with the financial covenants contained in our credit facility; our belief that our cash on-hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in this document and our Annual Report on Form 10-K for the year endedJanuary 31, 2021 , and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. OVERVIEWWilliams-Sonoma, Inc. is a specialty retailer of high-quality sustainable products for the home. Our products, representing distinct merchandise strategies - Williams Sonoma,Pottery Barn ,Pottery Barn Kids ,Pottery Barn Teen, West Elm,Williams Sonoma Home , Rejuvenation, and Mark and Graham - are marketed through e-commerce websites, direct-mail catalogs and retail stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in theU.S. ,Puerto Rico ,Canada ,Australia and theUnited Kingdom , offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in theMiddle East ,the Philippines ,Mexico ,South Korea , andIndia as well as e-commerce websites in certain locations. We are also proud to be a leader in the industry with our Environmental, Social and Governance ("ESG") efforts. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks endedAugust 1, 2021 ("second quarter of fiscal 2021"), as compared to the thirteen weeks endedAugust 2, 2020 ("second quarter of fiscal 2020") and the twenty-six weeks endedAugust 1, 2021 ("year-to-date fiscal 2021"), as compared to the twenty-six weeks endedAugust 2, 2020 ("year-to-date fiscal 2020"), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude.
COVID-19
InMarch 2020 , we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the COVID-19 pandemic. As ofAugust 1, 2021 , all of ourU.S. -based and the majority of our global retail stores have reopened for in-person shopping. However, we continue to experience intermittent closures or restrictions on retail capacity in certain geographies, in accordance with state and local guidelines, which may continue to impact our store traffic and retail revenues in the future and result in future store impairments. We continue to operate our e-commerce sites and distribution centers and continue to deliver products to our customers. However, we have experienced, and expect to continue to experience, delays in inventory receipts, increased raw material costs and higher shipping-related charges as a result of port slowdowns and congestion, as well as shipping container and foam shortages, due in part to the impact from COVID-19. 15
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Second Quarter of Fiscal 2021 Financial Results Net revenues in the second quarter of fiscal 2021 increased by$457,562,000 or 30.7%, compared to the second quarter of fiscal 2020, with comparable brand revenue growth of 29.8% and growth in all brands. This was primarily driven by strength in both our e-commerce and retail channels primarily due to an increase in furniture and other home decor sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during the second quarter of fiscal 2020. The increase in net revenues also included a 49.7% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 40.3%, with growth in both channels. For the second quarter of fiscal 2021, we delivered comparable brand revenue growth of 29.8%. In West Elm, comparable brand revenue growth was 51.1%, which was an acceleration from the first quarter, and an over 58% comparable brand revenue growth on a two-year basis. We saw strength across all categories with triple-digit growth in our upholstery and outdoor furniture business.Pottery Barn , our largest brand, delivered almost$750,000,000 of revenue, with 29.6% comparable brand revenue growth during the quarter and an almost 38% comparable brand revenue growth on a two-year basis. All categories outperformed with notable strength in our indoor rustic modern casual point of view and in our outdoor business. The Williams Sonoma brand delivered comparable brand revenue growth of 6.4%, on top of 29.4% growth last year, resulting in an almost 36% two-year comparable brand revenue growth. This growth was powered by our content-led marketing and a higher percentage of exclusive and Williams Sonoma branded products. In ourPottery Barn Kids and Teen business, we saw double digit comparable brand revenue growth of 18.0% during the quarter and an almost 23% comparable brand revenue growth on a two-year basis, with strength across our proprietary 100% GREENGUARD GOLD furniture, back-to-school and baby businesses. And, our emerging brands Rejuvenation and Mark and Graham, combined accelerated to 42.3% comparable brand revenue growth, and an almost 58% comparable brand revenue growth on a two-year basis. As ofAugust 1, 2021 , we had approximately$655,211,000 in cash and generated positive operating cash flow of$475,668,000 year-to-date. In addition to our strong cash balance, we also ended the quarter with no amount outstanding under our line of credit. This strong liquidity position allowed us to fund the operations of the business by investing over$78,000,000 in capital expenditures year-to-date, providing shareholder returns of approximately$542,457,000 year-to-date through share repurchases and dividends, and repaying in full, prior to maturity, our$300,000,000 term loan facility earlier this year. For the second quarter of fiscal 2021, diluted earnings per share was$3.21 (which included a$0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles ofOutward, Inc. ), versus$1.70 in the second quarter of fiscal 2020 (which included a$0.06 impact related to store asset impairments and a$0.04 impact related to acquisition-related compensation expense and amortization of acquired intangibles ofOutward, Inc. ). Looking Ahead Looking forward to the balance of the year, we will continue to focus on driving net revenue and operating margin growth. We believe our operating model and our pricing power resulting from our key differentiators - our in-house design, our digital-first channel strategy, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. We believe our operating margin expansion will be driven by overall sales leverage, including the additional accretion from our growth initiatives that have a higher operating margin, an accelerating shift online where the operating margin profile is higher, continued occupancy leverage from the renegotiation of our lease agreements and further store closures, the pricing power in our merchandise margins (due to our differentiated product positioning, with design-led, value engineered and sustainable products), various supply chain efficiencies (including automation and in-stock inventory levels), as well as from continued emphasis on overall strong financial discipline. Our merchandise inventories increased 12% over last year, however our inventory on-hand and available for sale is still down to last year 2.5%. We continue to be impacted by stronger than expected demand across all brands, as well as various supply chain disruptions including industry-wide container shortages coming out ofAsia , delays due to COVID-19 surges inVietnam andIndonesia and a recent port closure inChina . It is hard to predict with certainty when these supply chain challenges will be fully resolved and as a result, we expect backorder levels to remain elevated with moderate improvement in our inventory levels through the balance of the year. Overall, the long-term impact of COVID-19 on our business, results of operations and financial condition still remains uncertain. For more information on risks associated with COVID-19, please see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . 16 -------------------------------------------------------------------------------- Table of Contents NET REVENUES Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, direct mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards. Net revenues in the second quarter of fiscal 2021 increased by$457,562,000 or 30.7%, compared to the second quarter of fiscal 2020, with comparable brand revenue growth of 29.8% and growth in all brands. This was primarily driven by strength in both our e-commerce and retail channels primarily due to an increase in furniture and other home decor sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during the second quarter of fiscal 2020. The increase in net revenues also included a 49.7% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 40.3%, with growth in both channels. Net revenues for year-to-date fiscal 2021 increased by$971,388,000 , or 35.6%, compared to year-to-date fiscal 2020, with comparable brand revenue growth of 34.6% and double-digit comparable revenue growth across all our brands. This was primarily driven by strength in both our e-commerce and retail channels due to an increase in furniture and other home decor, and the impact of stores operating at a limited capacity due to COVID-19 during fiscal 2020. The increase in net revenues also included a 62.8% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 41.4%, with growth in both channels. Comparable Brand Revenue Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are typically defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Comparable stores that were temporarily closed due to COVID-19 were not excluded from the comparable stores calculation. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand. Thirteen Weeks Ended Twenty-six Weeks Ended August 1, August 2, August 1, August 2, Comparable brand revenue growth 2021 2020 2021 2020 Pottery Barn 29.6 % 8.1 % 35.0 % 3.6 % West Elm 51.1 % 7.0 % 51.0 % 5.3 % Williams Sonoma 6.4 % 29.4 % 19.4 % 17.4 % Pottery Barn Kids and Teen 18.0 % 4.8 % 22.3 % 6.4 % Total 1 29.8 % 10.5 % 34.6 % 6.7 %
1 Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.
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STORE DATA
Average Leased Square
Store Count 1 Footage Per Store
May 2, August 1, August 2, August 1, August 2,
2021 Openings Closings 2021 2020 2021 2020
Williams Sonoma 195 3 (2) 196 210 6,800 6,800
Pottery Barn 195 1 (1) 195 201 14,600 14,400
West Elm 121 2 - 123 121 13,100 13,200
Pottery Barn Kids 57 - - 57 72 7,800 7,800
Rejuvenation 10 - - 10 10 8,500 8,500
Total 578 6 (3) 581 614 10,900 10,700
Store selling square footage at period-end 3,994,000 4,145,000
Store leased square footage at period-end 6,319,000 6,571,000
1Store count data does not reflect temporary closures due to COVID-19.
COST OF GOODS SOLD
Thirteen Weeks Ended Twenty-six Weeks Ended
August 1, % Net August 2, % Net August 1, % Net August 2, % Net
In thousands 2021 Revenues 2020 Revenues 2021 Revenues 2020 Revenues
Cost of goods sold 1 $ 1,089,951 55.9 % $ 939,575 63.0 % $ 2,086,127 56.4 % $ 1,760,518 64.6 %
1Includes total occupancy expenses of $176.0 million and $166.2 million for the
second quarter of fiscal 2021 and the second quarter of fiscal 2020,
respectively, and $351.7 million and $341.1 million for year-to-date fiscal 2021
and year-to-date fiscal 2020, respectively.
Cost of goods sold includes cost of goods, occupancy expenses and shipping
costs. Cost of goods consists of cost of merchandise, inbound freight expenses,
freight-to-store expenses and other inventory related costs such as
replacements, damages, obsolescence and shrinkage. Occupancy expenses consist of
rent, depreciation and other occupancy costs, including common area maintenance,
property taxes and utilities. Shipping costs consist of third-party delivery
services and shipping materials.
Our classification of expenses in cost of goods sold may not be comparable to
other public companies, as we do not include non-occupancy related costs
associated with our distribution network in cost of goods sold. These costs,
which include distribution network employment, third-party warehouse management
and other distribution related administrative expenses, are recorded in selling,
general and administrative expenses.
Second Quarter of Fiscal 2021 vs. Second Quarter of Fiscal 2020
Cost of goods sold increased by $150,376,000 , or 16.0%, in the second quarter of
fiscal 2021 compared to the second quarter of fiscal 2020. Cost of goods sold as
a percentage of net revenues decreased to 55.9% in the second quarter of fiscal
2021 from 63.0% in the second quarter of fiscal 2020. This decrease was
primarily driven by higher selling margins from reduced promotional activity and
the leverage of occupancy costs from higher sales and low occupancy dollar
growth.
Year-to-date Fiscal 2021 vs. Year-to-date Fiscal 2020
Cost of goods sold increased by $325,609,000 , or 18.5%, for year-to-date fiscal
2021, compared to year-to-date fiscal 2020. Cost of goods sold as a percentage
of net revenues decreased to 56.4% for year-to-date fiscal 2021 from 64.6% for
year-to-date fiscal 2020. This decrease was primarily driven by higher selling
margins from reduced promotional activity and the leverage of occupancy costs
from higher sales and low occupancy dollar growth, as well as inventory
write-offs of approximately $11,378,000 from the closure of our outlet stores
due to COVID-19 in the first quarter of fiscal 2020 that did not recur in fiscal
2021.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Thirteen Weeks Ended Twenty-six Weeks Ended
August 1, August 2, August 1, August 2,
In thousands 2021 % Net Revenues 2020 % Net Revenues 2021 % Net Revenues 2020 % Net Revenues
Selling, general and
administrative expenses $ 535,288 27.5 % $ 365,841 24.5 % $ 1,012,964 27.4 % $ 731,456 26.8 %
Selling, general and administrative expenses consist of non-occupancy related
costs associated with our retail stores, distribution and manufacturing
facilities, customer care centers, supply chain operations (buying, receiving
and inspection) and corporate administrative functions. These costs include
employment, advertising, third party credit card processing and other general
expenses.
Second Quarter of Fiscal 2021 vs. Second Quarter of Fiscal 2020
Selling, general and administrative expenses increased by $169,447,000 , or
46.3%, in the second quarter of fiscal 2021, compared to the second quarter of
fiscal 2020. Selling, general and administrative expenses as a percentage of net
revenues increased to 27.5% in the second quarter of fiscal 2021 from 24.5% in
the second quarter of fiscal 2020. This increase was primarily driven by higher
advertising costs in the second quarter of fiscal 2021 compared to significantly
reduced advertising costs as a result of our initial financial response to
COVID-19 in the second quarter of fiscal 2020. This increase was partially
offset by the leverage of other general expenses from higher sales and overall
cost discipline.
Year-to-date Fiscal 2021 vs. Year-to-date Fiscal 2020
Selling, general and administrative expenses increased by $281,508,000 , or
38.5%, for year-to-date fiscal 2021, compared to year-to-date fiscal 2020.
Selling, general and administrative expenses as a percentage of net revenues
increased to 27.4% for year-to-date fiscal 2021 from 26.8% for year-to-date
fiscal 2020. This increase was primarily driven by higher advertising costs for
year-to-date fiscal 2021 compared to significantly reduced advertising costs as
a result of our initial financial response to COVID-19 for year-to-date fiscal
2020. This increase was partially offset by the leverage of other general
expenses and employment costs from higher sales and overall cost discipline, as
well as store asset impairment charges of approximately $21,975,000 due to the
impact of COVID-19 on our retail stores in year-to-date fiscal 2020 that did not
recur in year-to-date fiscal 2021.
INCOME TAXES
The effective tax rate was 20.6% for year-to-date fiscal 2021 compared to 24.6% for year-to-date fiscal 2020. The decrease in the effective tax rate is primarily due to an increase in our excess tax benefit from stock-based compensation in fiscal 2021 compared to fiscal 2020. LIQUIDITY AND CAPITAL RESOURCES
As ofAugust 1, 2021 , we held$655,211,000 in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts and money market funds, and of which$217,580,000 was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods. For the remainder of fiscal 2021, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, stock repurchases and dividend payments, advertising and marketing initiatives, and property and equipment purchases. In addition to our cash balances, we have a credit facility which provides for a$500,000,000 unsecured revolving line of credit ("revolver"). The revolver may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to$250,000,000 , at such lenders' option, to provide for a total of$750,000,000 of unsecured revolving credit. During the second quarter of fiscal 2021, we had no borrowings under the revolver. Additionally, as ofAugust 1, 2021 , a total of$12,927,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were primarily issued to secure the liabilities associated with workers' compensation and other insurance programs. 19
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In addition to the credit facility, during the second quarter of fiscal 2020 we entered into a new agreement (the "364-Day Credit Agreement") for an additional$200,000,000 unsecured revolving line of credit. During the second quarter of fiscal 2021 and for year-to-date fiscal 2021, we had no borrowings under the 364-Day Credit Agreement. We did not renew the 364-Day Credit Agreement upon its maturity inMay 2021 . The credit facility contains and the 364-Day Credit Agreement contained certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and rent expense to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As ofAugust 1, 2021 , we were in compliance with our financial covenants under the credit facility and, based on our current projections, we expect to remain in compliance with the covenants under our credit facility throughout the next 12 months. We believe our cash on hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months. Letter of Credit Facilities As ofAugust 1, 2021 , we had three unsecured letter of credit reimbursement facilities for a total of$35,000,000 . The letter of credit facilities contains covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As ofAugust 1, 2021 , an aggregate of$8,404,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. OnAugust 22, 2021 we renewed all three of our letter of credit facilities on substantially similar terms and extended each of these facilities' maturity dates untilAugust 22, 2022 . The latest expiration date possible for any future letters of credit issued under the facilities isJanuary 19, 2023 . Cash Flows from Operating Activities For year-to-date fiscal 2021, net cash provided by operating activities was$475,668,000 compared to$216,400,000 for year-to-date fiscal 2020. For year-to-date fiscal 2021, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, partially offset by an increase in merchandise inventories. Net cash provided by operating activities for year-to-date fiscal 2021 increased compared to year-to-date fiscal 2020 primarily due to an increase in net earnings and an increase in accounts payable, partially offset by an increase in merchandise inventories.
Cash Flows from Investing Activities
For year-to-date fiscal 2021, net cash used in investing activities was
Cash Flows from Financing Activities For year-to-date fiscal 2021, net cash used in financing activities was$942,617,000 compared to net cash provided by financing activities of$377,910,000 for year-to-date fiscal 2020. For year-to-date fiscal 2021, net cash used in financing activities was primarily attributable to repurchases of common stock, the repayment of our term loan and tax withholdings related to stock-based awards. Net cash used in financing activities for year-to-date fiscal 2021 increased compared to net cash provided by financing activities for year-to-date fiscal 2020 primarily due to borrowings under our revolving line of credit in year-to date fiscal 2020 that did not recur in year-to-date fiscal 2021, an increase in repurchases of common stock, and the repayment of our term loan in year-to-date fiscal 2021. Stock Repurchase Program and Dividends See Note G to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividends, within Item 1 of this Quarterly Report on Form 10-Q for further information. Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts 20 -------------------------------------------------------------------------------- Table of Contents of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the second quarter of fiscal 2021, there were no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 .
Seasonality
Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, customer care centers and distribution facilities, and incur significant fixed catalog production and mailing costs. Contractual Obligations, Commitments, Contingencies and Off-balance Sheet Arrangements Other than the natural expiration of our 364-Day Credit Agreement, there were no material changes during the quarter to the Company's contractual obligations, commitments, contingencies and off-balance sheet arrangements that are described in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , which is incorporated herein by reference.
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