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; our expanded
operating margin; production, transportation and supply chain; 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,"
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"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 ended January 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.
OVERVIEW
Williams-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 the U.S. , Puerto Rico , Canada , Australia and the United
Kingdom , offer international shipping to customers worldwide, and have
unaffiliated franchisees that operate stores in the Middle East , the
Philippines , Mexico , South Korea , and India as well as e-commerce websites in
certain locations. We are also proud to lead 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 ended
May 2, 2021 ("first quarter of fiscal 2021"), as compared to the thirteen weeks
ended May 3, 2020 ("first quarter of 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 ofMay 2, 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 congestions, as well as shipping container and foam shortages, due in part to the impact from COVID-19. First Quarter of Fiscal 2021 Financial Results Net revenues in the first quarter of fiscal 2021 increased by$513,826,000 or 41.6%, compared to the first quarter of fiscal 2020, with comparable brand revenue growth of 40.4% 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 demand for our product and higher average selling prices, which includes the impact of stores operating at a limited capacity due to COVID-19 during the first quarter of fiscal 2020. The increase in net revenues also included an 81.2% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, despite the impact of COVID-19 during the first quarter of fiscal 2020, comparable brand revenues increased 43.0%, with growth in both channels. For the first quarter of fiscal 2021, we delivered double-digit comparable brand revenue growth across all our brands. In West Elm, we delivered strong comparable brand revenue growth of 50.9% during the quarter. Our aggressive expansion in the outdoor category has been successful, and our outdoor furniture business growth was driven by line extensions in our top performing collections and new product introductions. The Pottery Barn brand delivered comparable brand revenue growth of 41.3% for the quarter. Our rustic modern, casual point of view in furniture, home furnishings, and decorating drove growth in all categories. Growth in our bath renovation business accelerated, and our Marketplace business gained momentum. The Williams Sonoma brand delivered comparable brand revenue growth of 35.3% where cooking at home and now entertaining at home are driving our customers' purchases. This quarter we saw significant growth in all areas of entertaining, particularly outdoors and Easter gatherings. In ourPottery Barn Kids and Teen business, we delivered 27.6% comparable brand revenue growth. We continue to strengthen our leadership in the children's home furnishings market with our emphasis on design and sustainability. Our furniture remains a core driver of growth for the brand, and we also saw outsized growth in key initiatives such as Baby, and our aesthetic expansion into Modern. And, our emerging brands Rejuvenation and Mark and Graham, combined delivered another quarter of double-digit comparable brand revenue growth of 35.1%. 13 -------------------------------------------------------------------------------- Table of Contents As ofMay 2, 2021 , we had approximately$639,670,000 in cash and generated positive operating cash flow of$238,881,000 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, provide shareholder returns of approximately$361,105,000 through share repurchases and dividends, and repay in full, prior to maturity, our$300,000,000 term loan facility. For the first quarter of fiscal 2021, diluted earnings per share was$2.90 (which included a$0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles ofOutward, Inc. ), versus$0.45 in the first quarter of fiscal 2020 (which included a$0.15 impact related to store asset impairments, an$0.11 impact related to inventory write-offs, and a$0.03 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 revenue growth will be driven by the continued strength of our business year-to-date, the strong housing environment and people's deeper appreciation for the home, the momentum in our growth initiatives, and planned improvement in our inventory enabling us to fill our backorders throughout the year. We believe our operating margin expansion will be driven by overall sales leverage, continued occupancy leverage from the renegotiation of our lease agreements and store closures, continued expansion in our merchandise margins from our on-going focus on more content-led marketing and more value-engineered products, as well as from overall strong financial discipline. However, production and global transportation constraints remain challenging industry-wide and, as a result, we continue to see elevated backorders and delays throughout the supply chain. Further, we have experienced and may continue to experience shipping and product cost increases that continue to pressure the industry. In addition, 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. 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 . 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 first quarter of fiscal 2021 increased by$513,826,000 or 41.6%, compared to the first quarter of fiscal 2020, with comparable brand revenue growth of 40.4% 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 demand for our product and higher average selling prices, which includes the impact of stores operating at a limited capacity due to COVID-19 during the first quarter of fiscal 2020. The increase in net revenues also included an 81.2% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, despite the impact of COVID-19 during the first quarter of fiscal 2020, comparable brand revenues increased 43.0%, 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. 14
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Thirteen Weeks Ended
May 2, May 3,
Comparable brand revenue growth (decline) 2021 2020
Pottery Barn 41.3 % (1.1 %)
West Elm 50.9 % 3.3 %
Williams Sonoma 35.3 % 5.4 %
Pottery Barn Kids and Teen 27.6 % 8.5 %
Total 1 40.4 % 2.6 %
1 Total comparable brand revenue growth includes the results of Rejuvenation and
Mark and Graham.
STORE DATA
Average Leased Square
Store Count 1 Footage Per Store
January 31, May 2, May 3, May 2, May 3,
2021 Openings Closings 2021 2020 2021 2020
Williams Sonoma 198 - (3) 195 212 6,800 6,900
Pottery Barn 195 2 (2) 195 201 14,600 14,400
West Elm 121 - - 121 119 13,100 13,200
Pottery Barn Kids 57 - - 57 74 7,800 7,700
Rejuvenation 10 - - 10 10 8,500 8,500
Total 581 2 (5) 578 616 10,900 10,700
Store selling square footage at period-end 3,972,000 4,148,000
Store leased square footage at period-end 6,289,000 6,580,000
1Store count data does not reflect temporary closures due to COVID-19.
COST OF GOODS SOLD
Thirteen Weeks Ended
May 2, % Net May 3, % Net
In thousands 2021 Revenues 2020 Revenues
Cost of goods sold 1 $ 996,176 57.0 % $ 820,943 66.5 %
1Includes total occupancy expenses of
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. First Quarter of Fiscal 2021 vs. First Quarter of Fiscal 2020 Cost of goods sold increased by$175,233,000 , or 21.3%, in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Cost of goods sold as a percentage of net revenues decreased to 57.0% in the first quarter of fiscal 2021 from 66.5% in the first quarter of fiscal 2020. This decrease was primarily driven by higher merchandise margins, driven by reduced promotional activity, the leverage of occupancy costs, inventory write-offs of$11,378,000 (from the closure of our outlet stores 15 -------------------------------------------------------------------------------- Table of Contents due to COVID-19 in the first quarter of fiscal 2020 that did not recur in the first quarter of fiscal 2021), and the leverage of shipping costs (which reflects a higher mix of retail revenues versus the first quarter of fiscal 2020).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Thirteen Weeks Ended
May 2, May 3,
In thousands 2021 % Net Revenues 2020 % Net Revenues
Selling, general and administrative expenses $ 477,676 27.3 % $ 365,615 29.6 %
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.
First Quarter of Fiscal 2021 vs. First Quarter of Fiscal 2020
Selling, general and administrative expenses increased by $112,061,000 , or
30.7%, in the first quarter of fiscal 2021, compared to the first quarter of
fiscal 2020. Selling, general and administrative expenses as a percentage of net
revenues decreased to 27.3% in the first quarter of fiscal 2021 from 29.6% in
the first quarter of fiscal 2020. This decrease was primarily driven by the
leverage of employment costs and other general expenses from higher sales and
overall cost discipline, as well as store asset impairment charges of
approximately $15,620,000 due to the impact of COVID-19 on our retail stores in
the first quarter of fiscal 2020 that did not recur in fiscal 2021. This
decrease was partially offset by higher advertising costs in the first quarter
of fiscal 2021 compared to significantly reduced advertising costs as a result
of our initial financial response to COVID-19 in the first quarter of fiscal
2020.
INCOME TAXES
The effective tax rate was 16.6% for the first quarter of fiscal 2021 compared
to 23.8% for the first quarter of 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 the first quarter of fiscal 2021 compared to the first quarter
of fiscal 2020.
LIQUIDITY AND CAPITAL RESOURCES
As of
For the remainder of fiscal 2021, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, advertising and marketing initiatives, stock repurchases and dividend payments, 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. Our credit facility also provided for a$300,000,000 unsecured term loan facility ("term loan"). InFebruary 2021 , prior to maturity, we repaid the full outstanding balance of$300,000,000 on our term loan. During the first quarter of fiscal 2021, we had no borrowings under the revolver. Additionally, as ofMay 2, 2021 , a total of$12,601,000 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. 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 first quarter of 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 . 16
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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 ofMay 2, 2021 , we were in compliance with our financial covenants under the credit facility and the 364-Day Credit Agreement and, based on our current projections, we expect to remain in compliance with the remaining 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 We have three unsecured letter of credit reimbursement facilities for a total of$35,000,000 , each of which matures onAugust 22, 2021 . The letter of credit facilities contain 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 ofMay 2, 2021 , an aggregate of$5,836,000 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. The latest expiration date possible for any future letters of credit issued under the facilities isJanuary 19, 2022 . Cash Flows from Operating Activities For the first quarter of fiscal 2021, net cash provided by operating activities was$238,881,000 compared to$53,873,000 for the first quarter of fiscal 2020. For the first quarter of fiscal 2021, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, partially offset by a decrease in accrued expenses and other liabilities as well as an increase in merchandise inventories. Net cash provided by operating activities for the first quarter of fiscal 2021 increased compared to the first quarter of 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 the first quarter of fiscal 2021, net cash used in investing activities was$42,267,000 compared to$42,079,000 for the first quarter of fiscal 2020, and was primarily attributable to purchases of property and equipment. Cash Flows from Financing Activities For the first quarter of fiscal 2021, net cash used in financing activities was$759,556,000 compared to net cash provided by financing activities of$419,520,000 for the first quarter of fiscal 2020. For the first quarter of fiscal 2021, net cash used in financing activities was primarily attributable to the 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 the first quarter of fiscal 2021 increased compared to net cash provided by financing activities for the first quarter of fiscal 2020 primarily due to borrowings under our revolving line of credit in the first quarter of fiscal 2020 that did not recur in the first quarter of fiscal 2021, an increase in repurchases of common stock, and the repayment of our term loan in the first quarter of 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 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 first 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 . 17
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Table of Contents 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 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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