Williams-Sonoma, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2017 Q3, but the filing is for the 13 and 39 weeks ended October 28, 2018, compared with periods ended October 29, 2017. The summary below follows the filing.
Business context and reporting period
Williams-Sonoma is a specialty home-products retailer operating through e-commerce and retail channels across brands including Williams Sonoma, Pottery Barn and West Elm. It reported 633 stores and two reportable segments: e-commerce and retail. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year performance. Its business is seasonal, with a significant share of revenue and earnings historically generated from October through January.
Financial performance
| Metric | 13 weeks ended Oct. 28, 2018 | 13 weeks ended Oct. 29, 2017 | 39 weeks ended Oct. 28, 2018 | 39 weeks ended Oct. 29, 2017 |
|---|---|---|---|---|
| Net revenue | $1.357B (+4.4%) | $1.299B | $3.835B (+6.2%) | $3.612B |
| Gross profit | $495.0M | $467.1M | $1.391B | $1.286B |
| Operating income | $94.4M | $110.8M | $235.1M | $254.9M |
| Net earnings | $81.5M | $71.3M | $178.3M | $163.8M |
| Diluted EPS | $1.00 | $0.84 | $2.15 | $1.89 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $179.5M | $112.9M |
Reported gross margin was approximately 36.5% in the quarter (35.9% prior year) and 36.3% year to date (35.6%). Operating margin was approximately 7.0% in the quarter (8.5%) and 6.1% year to date (7.1%). SG&A rose 12.4% in the quarter and 12.2% year to date, outpacing revenue growth. The effective tax rate was 22.5% year to date versus 35.5% in the prior-year period.
E-commerce revenue grew 8.2% in the quarter and 9.4% year to date; retail revenue grew 0.2% and 2.6%, respectively. Comparable brand revenue growth was 3.1% for the quarter and 4.4% year to date.
Balance sheet, cash flow and capital allocation
- At October 28, 2018, cash and cash equivalents were $164.4M; current assets were $1.591B and current liabilities were $1.037B.
- Debt included $300M outstanding under a term loan and $60M under the revolving facility, or $360M total. The term loan matures January 2021; the revolver matures January 2023. The company reported covenant compliance and expected to remain compliant for the next 12 months.
- Year-to-date operating cash flow of $179.5M exceeded capital expenditures of $128.3M. Investing cash use was $126.5M. Financing cash use was $279.8M, including $220.2M of share repurchases and $105.7M of dividends.
- Cash declined $225.7M from the fiscal-year start, to $164.4M. Management said cash is seasonal and historically higher in the fourth quarter, and considered cash plus available credit adequate for the next 12 months.
Material changes, outlook, risks and unusual items
- Quarterly revenue increased 4.4%, but operating income fell 14.8%, as higher SG&A more than offset gross-profit growth. Net earnings and EPS rose partly with lower taxes; quarterly diluted EPS included a stated $0.13 benefit related to U.S. tax legislation.
- Revenue growth benefited from adoption of the new revenue standard, including reclassification of certain income into revenue. The company disclosed a $17.4M quarterly revenue reduction and $4.3M operating-income reduction as the standard’s estimated presentation impact; prior periods were not retrospectively adjusted, limiting comparability.
- Quarterly EPS also included stated impacts of $0.06 from Outward, $0.02 from a one-time special equity grant and $0.01 primarily from impairment and early lease termination charges. Year-to-date segment disclosures include $17.9M of Outward-related expense, $5.4M for the special equity grant and $6.4M of impairment and early lease termination charges.
- Management cited delayed product receipts from China and higher-than-expected drop-ship sales as constraints on fulfilling orders. It also described progress on digital initiatives, store transformation, product innovation and supply-chain efficiency. No specific revenue or earnings guidance is provided in the supplied filing text.
- Risks include tariffs on goods and materials sourced from China, possible further trade restrictions, vendor delays, cost increases, foreign-currency exposure and variable-rate debt. Management said fiscal 2018 tariff impact was expected to be minimal, but it might not be able to fully mitigate costs or pass increases to customers.
- The company reported ordinary-course lawsuits and claims that it did not consider material, and did not expect their resolution to materially adversely affect the consolidated financial statements. It also expected adoption of lease accounting in fiscal 2019 to substantially increase long-term assets and liabilities, without a material earnings impact.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2018, not Q3 2017.
- Assess revenue growth and margins with the revenue-standard presentation change in view; the filing says prior periods were not retrospectively adjusted.
- Track whether SG&A growth, store impairments and acquisition-related costs continue to pressure operating income.
- Monitor China-related supply delays, tariff exposure, inventory levels and the company’s ability to fulfill orders profitably.
- Review liquidity and capital returns alongside $360M of reported debt, seasonal cash needs and continued repurchases and dividends.