Williams-Sonoma, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the thirteen weeks ended May 5, 2019 (first quarter of fiscal 2019), compared with the thirteen weeks ended April 29, 2018. This conflicts with the request metadata’s “2018 Q1” label.
Business context and reporting period
Williams-Sonoma is a specialty home-products retailer operating through e-commerce, catalogs, and stores across brands including Pottery Barn, West Elm, Williams Sonoma, Pottery Barn Kids and Teen, and emerging brands. It reported 625 stores at quarter-end and combined retail and e-commerce results at the brand level into one reportable segment beginning in fiscal 2019.
Key financial results
Amounts below are in millions of dollars except per-share figures. The filing presents unaudited quarterly results.
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net revenue | $1,241.1 | $1,203.0 | +3.2% |
| Gross profit | $444.3 | $432.2 | +2.8% |
| Gross margin | 35.8% | 35.9% | -0.1 percentage point |
| Operating income | $74.1 | $66.6 | +11.4% |
| Operating margin | 6.0% | 5.5% | +0.4 percentage point |
| Net earnings | $52.7 | $45.2 | +16.6% |
| Diluted EPS | $0.66 | $0.54 | +$0.12 |
| Operating cash flow | $(98.1) | $10.8 | Changed to cash use |
| Capital expenditures | $36.1 | $34.0 | Cash outflow |
Cost of goods sold was 64.2% of revenue versus 64.1% a year earlier; management attributed the increase mainly to shipping costs, partly offset by occupancy leverage and higher product margins. SG&A was 29.8% of revenue versus 30.4%, reflecting advertising and employment cost leverage, partly offset by higher severance expense. The effective tax rate was 26.7%, compared with 30.9%.
Comparable brand revenue grew 3.5%, down from 5.5% in the prior-year quarter. West Elm grew 11.8% (prior year 9.0%); Pottery Barn grew 1.5% (2.7%); Pottery Barn Kids and Teen grew 1.2% (5.3%); Williams Sonoma declined 1.6% (versus 5.6% growth). International revenue rose 9.0%, primarily reflecting franchise operations.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $107.7 million at May 5, 2019, down from $339.0 million at February 3, 2019. Cash balances are seasonal, with historically higher balances in the fourth quarter.
- Long-term debt was reported at $299.7 million; the company disclosed $300 million outstanding under its term loan, maturing January 8, 2021. There were no revolver borrowings; the unsecured revolver provides $500 million of capacity, with a possible lender-approved increase of up to $250 million.
- Operating lease liabilities totaled $1.367 billion, including $227.4 million current. The company adopted the new lease standard in fiscal 2019, recognizing $1.2 billion of right-of-use assets and approximately $1.4 billion of lease obligations, partly offset by removal of deferred rent and lease incentives. This accounting change materially increased reported assets and liabilities but did not materially affect the income statement.
- Management said it was in compliance with credit-facility covenants and expected to remain compliant over the next 12 months. It believed cash and available credit facilities would provide adequate liquidity for that period.
Material changes, outlook, and risks
- Operating cash flow swung to a $98.1 million use, mainly due to reductions in accounts payable and accrued expenses and higher inventory. Cash used in financing was $96.1 million, including dividends, share repurchases, and stock-award tax withholdings.
- The company returned $70.7 million through $33.8 million of share repurchases and $36.9 million of dividends. It repurchased 593,096 shares at an average $57.07 and had $690.0 million remaining under its repurchase authorization. The quarterly dividend was increased from $0.43 to $0.48 per share.
- Diluted EPS of $0.66 included a $0.09 impact from employment-related expenses, primarily severance, and a $0.06 impact related to Outward. The prior-year $0.54 included impacts of $0.06 from Outward, $0.04 from Tax Act expense, and $0.03 from other discrete items.
- Management highlighted cross-brand initiatives, loyalty-program growth, technology improvements, and migration to a new order-management and fulfillment platform. It stated plans to continue these initiatives through the rest of fiscal 2019, but the supplied filing text gives no numerical full-year revenue or earnings guidance.
- Management cited seasonal demand, with a significant portion of revenue and earnings historically realized October through January. Risks discussed include market and economic conditions, interest-rate changes, foreign currency fluctuations, and potential higher vendor costs. The company hedges some currency exposure and does not use derivatives for speculation.
- Ordinary-course lawsuits and claims were described as not currently material; management did not expect their resolution to materially adversely affect the financial statements as a whole. The filing reported no material changes to the risk factors in the prior annual report.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is Q1 FY2019, despite the request metadata indicating 2018 Q1.
- Assess whether comparable-sales growth can be sustained, particularly given West Elm’s strength and the Williams Sonoma decline.
- Track inventory, payables, and seasonal working-capital movements behind the large quarterly operating cash outflow.
- Evaluate cash and borrowing capacity alongside the $300 million term loan and substantial lease commitments.
- Review the effects of severance and Outward-related costs on reported earnings, and the pace and funding of buybacks and dividends.