Williams-Sonoma, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies “2016 Q2,” but the supplied filing is for the 13 and 26 weeks ended July 30, 2017, compared with periods ended July 31, 2016. The filing is unaudited.
Business context and reporting period
Williams-Sonoma is a specialty home-products retailer operating e-commerce and retail channels across brands including Williams Sonoma, Pottery Barn and West Elm. At quarter-end it operated 635 stores. E-commerce represented 52.5% of quarterly revenue; retail represented 47.5%.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $1,201.6 million | $1,159.0 million | $2,313.1 million | $2,256.8 million |
| Gross profit / margin | $422.7 million / 35.2% | $410.5 million / 35.4% | $818.5 million / 35.4% | $803.1 million / 35.6% |
| Operating income / margin | $81.6 million / 6.8% | $83.3 million / 7.2% | $144.1 million / 6.2% | $146.8 million / 6.5% |
| Net earnings | $52.9 million | $51.8 million | $92.5 million | $91.4 million |
| Diluted EPS | $0.61 | $0.58 | $1.06 | $1.01 |
Q2 revenue rose 3.7% and comparable brand revenue grew 2.8%; first-half revenue increased 2.5%, with comparable brand revenue growth of 1.5%. Q2 e-commerce revenue increased 5.2% and retail revenue 2.1%. West Elm comparable revenue grew 10.1% in Q2, while Pottery Barn Kids declined 3.9%. First-half results included $5.7 million of severance-related charges, versus $13.2 million in the prior-year period.
For the first half, operating cash flow was $35.1 million, capital expenditures were $82.7 million, and cash declined $110.6 million to $103.1 million. Financing included $115.0 million of revolver borrowings, $93.4 million of share repurchases and $68.2 million of dividends. Current assets were $1,364.4 million and current liabilities $1,020.1 million. The company had $115.0 million outstanding under its $500 million revolving facility; it reported compliance with covenants. Cash and available credit were described as adequate for operations over the next 12 months.
Material changes and management commentary
- Revenue growth was driven by e-commerce, furniture strength, nine net new stores, and 2.7% growth in leased store square footage. The store count increased from 626 a year earlier to 635.
- Gross margin declined 0.2 percentage points in both Q2 and the first half. Management cited lower selling margins, particularly reduced shipping income; first-half retail costs also reflected higher occupancy expenses.
- SG&A rose 4.2% in Q2 and 2.8% in the first half. As a share of revenue it increased to 28.4% from 28.2% for Q2 and to 29.2% from 29.1% year to date, primarily due to higher digital advertising and growth-related employment costs.
- The first-half effective tax rate was 35.6%, down from 37.7%, reflecting earnings mix and improved profitability in lower-tax international operations, partly offset by adoption of share-based payment accounting rules.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the supplied filing. Management expects cash and credit availability to support operations for the next 12 months and expects covenant compliance over that period. The business is seasonal, with a significant share of revenue and earnings historically generated from October through January. Risks discussed include retail and economic conditions, foreign exchange and interest-rate exposure, and execution of growth initiatives. Ordinary-course lawsuits and claims were described as not currently material; management did not expect their resolution to materially affect the consolidated financial statements. No material changes to previously reported risk factors were identified.
The company adopted ASU 2016-09 in fiscal 2017, affecting the income-tax treatment and cash-flow classification of share-based award tax effects. It expects new revenue-recognition standards to change timing for certain merchandise, gift-card breakage and advertising expense, but does not expect a material financial-statement impact. It expects the lease standard to substantially increase reported long-term assets and liabilities.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing covers Q2 2017, not Q2 2016.
- Track margin trends and whether reduced shipping income and higher digital advertising continue to pressure profitability.
- Assess inventory growth and working-capital needs: inventory was $1,073.0 million at July 30, 2017, up from $977.5 million at January 29, 2017.
- Monitor liquidity and capital returns alongside revolver use, capital expenditures, dividends and ongoing buybacks; $317.2 million remained under the stated repurchase authorization at quarter-end.
- Review seasonality, international currency exposure, and the effects of forthcoming revenue and lease accounting changes.