Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 30, 2017 (first quarter of fiscal 2017), compared with the 13 weeks ended May 1, 2016. This differs from the request metadata’s “2016 Q1.” Williams-Sonoma is a home-products retailer operating e-commerce and retail channels across multiple brands; it reported 628 stores at quarter-end.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenue | $1,111.5 million | $1,097.8 million | +1.2% |
| Gross profit / margin | $395.8 million / 35.6% | $392.5 million / 35.8% | Margin down 0.2 percentage points |
| Operating income / margin | $62.5 million / 5.6% | $63.5 million / 5.8% | Income down 1.7% |
| Net earnings | $39.6 million | $39.6 million | Essentially flat |
| Diluted EPS | $0.45 | $0.44 | Up $0.01 |
| Operating cash flow | $(46.4) million | $(72.7) million | Cash use narrowed |
| Capital expenditures | $32.2 million | $28.1 million | Increased |
| Cash and cash equivalents | $94.0 million | $99.2 million at May 1, 2016 | Down year over year |
Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $(78.5) million, versus $(100.8) million in the prior-year quarter. Cash fell $119.7 million during the quarter, reflecting operating and investing outflows, repurchases, and dividends.
E-commerce revenue rose 0.7% to $580.5 million; retail revenue rose 1.8% to $531.0 million. Segment operating income was $132.0 million for e-commerce, $21.7 million for retail, and $(91.2) million unallocated. Gross margin pressure reflected higher occupancy costs, partly offset by lower shipping and fulfillment costs. SG&A was 30.0% of revenue in both periods.
Material changes and management commentary
- Comparable brand revenue growth slowed to 0.1% from 4.5%. West Elm grew 6.0% and Williams Sonoma 3.2%; Pottery Barn declined 1.4%, Pottery Barn Kids declined 5.7%, and PBteen declined 14.3%.
- Management cited strength in furniture and West Elm outdoor collections, but inventory stockouts in key Pottery Barn Kids and PBteen categories and softness in textiles and accessories.
- Diluted EPS included $0.04 of severance-related charges and an unfavorable $0.02 tax impact from adopting share-based-payment accounting guidance. Prior-year EPS included $0.09 of severance-related charges. Severance charges were $5.7 million versus $13.2 million.
- The effective tax rate was 36.8%, compared with 37.7%; the filing attributes the reduction primarily to improved profitability in lower-tax international operations, partly offset by the new accounting standard.
Liquidity, debt, and capital allocation
At April 30, 2017, current assets were $1,291.0 million and current liabilities were $912.7 million (current ratio approximately 1.41). Inventory was $1,037.1 million, up from $977.5 million at fiscal year-end. The company had $45.0 million outstanding on its $500 million unsecured revolving credit facility, with a 2.01% weighted-average borrowing rate; $12.1 million of standby letters of credit was also issued but undrawn. A separate $70 million letter-of-credit capacity had $6.8 million outstanding for future inventory commitments. The company said it was covenant-compliant and expected adequate liquidity for the next 12 months.
During the quarter, the company repurchased 764,543 shares for $38.4 million and paid $34.2 million in dividends, returning $72.5 million to stockholders. The declared quarterly dividend was $0.39 per share. Capital spending was $32.2 million.
Outlook, risks, and contingencies
- The filing provides no specific quantitative revenue, earnings, or comparable-sales guidance. Management described cash seasonality, with the fourth quarter historically strongest and February through September typically weaker.
- Risks discussed include seasonal demand, inventory availability, operating and occupancy costs, economic conditions, foreign-exchange movements, and possible increases in vendor costs. Management uses foreign-currency forwards 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, while noting outcomes are uncertain.
- Upcoming revenue and lease accounting standards were still under assessment. Management expected revenue-standard adoption to change timing for some merchandise and gift-card breakage revenue, and expected the lease standard to substantially increase reported assets and liabilities.
Facts investors should verify
- Whether low comparable-sales growth and declines at Pottery Barn Kids and PBteen persisted in subsequent quarters, and whether inventory stockouts were resolved.
- Whether gross-margin pressure, especially occupancy expense, was offset by continued fulfillment savings and revenue growth.
- How inventory levels, operating cash flow, and seasonal cash needs evolved after quarter-end.
- Subsequent borrowing, repurchase, and dividend activity, and whether the company remained within credit-facility covenants.
- The eventual quantified financial effects and implementation timing of the revenue-recognition and lease-accounting standards.