Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 29, 2017 (fiscal 2017 Q3 and year to date), compared with the periods ended October 30, 2016. Although the request metadata says 2016 Q3, the supplied filing is for 2017 Q3. Williams-Sonoma operates home-products brands through e-commerce, catalogs, stores, and franchisees; it reported 636 stores at quarter-end.
Financial results
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net revenue | $1,299.3 million | $1,245.4 million | $3,612.4 million | $3,502.2 million |
| Gross profit | $467.1 million | $458.2 million | $1,285.5 million | $1,261.3 million |
| Operating income | $110.8 million | $110.0 million | $254.9 million | $256.8 million |
| Net earnings | $71.3 million | $69.4 million | $163.8 million | $160.8 million |
| Diluted EPS | $0.84 | $0.78 | $1.89 | $1.79 |
- Q3 revenue grew 4.3%; comparable brand revenue grew 3.3%. E-commerce revenue rose 6.4% and retail revenue 2.1%. Year-to-date revenue increased 3.1%, with comparable brand growth of 2.1%.
- Q3 gross margin was 35.9%, versus 36.8% a year earlier; operating margin was 8.5%, versus 8.8%. Year-to-date gross margin was 35.6%, versus 36.0%, and operating margin was 7.1%, versus 7.3%.
- Management attributed margin pressure primarily to lower merchandise margins, higher shipping costs, and reduced shipping income. SG&A declined as a share of revenue, helped by lower unallocated employment costs, partly offset by higher digital advertising.
- Year-to-date operating cash flow was $112.9 million, versus $122.5 million. Capital expenditures were $135.8 million, versus $127.2 million; cash used in investing was $135.4 million. Cash declined $122.9 million during the period to $90.8 million.
- At October 29, cash was $90.8 million, including $58.6 million held by foreign subsidiaries; inventory was $1,176.9 million. The company had $170 million outstanding on its $500 million revolving facility and $8.4 million outstanding under letter-of-credit reimbursement facilities. It reported covenant compliance and expected adequate liquidity for the next 12 months.
- Year-to-date share repurchases were $154.3 million and dividends paid were $101.9 million. The company declared dividends of $1.17 per share year to date. Operating cash flow was below capital expenditures, repurchases, and dividends combined.
Changes, outlook, and notable items
- Q3 comparable brand results improved from a 0.4% decline in 2016 to 3.3% growth. West Elm grew 11.5%; Pottery Barn declined 0.3%. Year-to-date, West Elm grew 9.4%, while Pottery Barn Kids and PBteen declined 3.0% and 2.9%, respectively.
- Hurricanes in Florida, Texas, and Puerto Rico reduced sales and temporarily closed five stores; management expected those stores to reopen in Q4 fiscal 2017. Store leased square footage increased 1.4% year over year.
- The filing gives no specific earnings or revenue guidance. Management expected to amend and extend the revolving facility in Q4 and, in connection with that amendment, enter into a $300 million term loan. It expected seasonal cash levels to be higher in Q4; the business historically earns a significant portion of revenue and earnings from October through January.
- On December 1, 2017, after quarter-end, the company acquired Outward, a 3-D imaging and augmented-reality platform, for $112 million in cash.
- Risks discussed include seasonal demand, foreign-exchange movements, variable-rate borrowings, and ordinary-course litigation. Management said current legal matters were not material and expected no material adverse effect; outcomes cannot be predicted with certainty. The filing reported no material change to previously disclosed risk factors.
- Upcoming accounting changes include revenue-recognition guidance, which the company expected to accelerate recognition for certain shipped merchandise and gift-card breakage, and lease accounting, which it expected to substantially increase reported long-term assets and liabilities.
Investor facts to verify
- Whether revenue growth and comparable-brand trends continued, particularly at West Elm and the weaker Pottery Barn Kids and PBteen brands.
- Whether merchandise and shipping margin pressures persisted and how they affected gross margin.
- How inventory, seasonal working-capital needs, and cash generation developed relative to capital spending, dividends, and buybacks.
- The final terms and effects of the planned credit-facility amendment and $300 million term loan, including leverage and covenant headroom.
- Outward’s integration, purchase accounting, and contribution following the $112 million acquisition.