Williams-Sonoma, Inc. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended November 1, 2015 (third quarter of fiscal 2015), not 2014 Q3 as stated in the request. Comparisons below are with the quarter ended November 2, 2014; year-to-date figures cover 39 weeks.
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, West Elm, Pottery Barn Kids, PBteen, Rejuvenation and others. At quarter-end it operated 623 stores. E-commerce represented 51.0% of quarterly revenue and retail 49.0%.
Financial performance
| Metric | 13 weeks to Nov. 1, 2015 | 13 weeks to Nov. 2, 2014 | 39 weeks to Nov. 1, 2015 | 39 weeks to Nov. 2, 2014 |
|---|---|---|---|---|
| Revenue | $1,232.1 million | $1,143.2 million | $3,389.8 million | $3,156.6 million |
| Gross profit | $451.2 million | $431.4 million | $1,236.7 million | $1,181.9 million |
| Operating income | $110.7 million | $104.7 million | $266.0 million | $264.4 million |
| Net earnings | $70.5 million | $64.9 million | $168.9 million | $161.8 million |
| Diluted EPS | $0.77 | $0.68 | $1.82 | $1.69 |
- Quarterly revenue rose 7.8%; comparable brand revenue grew 4.5%. E-commerce revenue increased 7.0% and retail revenue 8.6%. Year-to-date revenue rose 7.4%, with comparable brand revenue growth of 5.1%.
- Quarterly gross margin was 36.6%, versus 37.7% a year earlier; operating margin was 9.0%, versus 9.2%. Cost of goods sold increased to 63.4% of revenue from 62.3%, reflecting lower selling margins, higher franchise revenue mix, and increased shipping and fulfillment costs. SG&A declined to 27.6% of revenue from 28.6%, aided by advertising efficiencies and expense leverage.
- West Elm was the strongest reported comparable brand: growth of 15.7% for the quarter. Pottery Barn grew 2.0%, Pottery Barn Kids 4.7%, Williams-Sonoma 1.2%; PBteen declined 0.9%.
- Year-to-date operating cash flow was $93.0 million, down from $121.8 million. Capital expenditures were $136.1 million, making operating cash flow less capital expenditures negative $42.5 million. Investing cash outflow was $135.5 million.
- Cash was $72.3 million at quarter-end, including $52.8 million held by foreign subsidiaries. Inventory was $1,102.3 million. Current assets were $1,501.8 million and current liabilities $1,094.5 million.
- Revolver borrowings were $200.0 million at a weighted average interest rate of 1.11%; there was no current portion of long-term debt. Cash less revolver borrowings was negative $127.7 million. The company reported a $500 million unsecured revolver, with $13.3 million of issued but undrawn letters of credit, and separate letter-of-credit facilities of $70 million, of which $8.1 million was outstanding.
Material changes and capital allocation
- Quarterly diluted EPS increased 13% year over year; net earnings rose about 9%. Revenue growth outpaced operating-income growth, while gross margin weakened.
- International revenue grew 46.5% in the quarter and 25.2% year to date, primarily from international franchise operations. Store leased square footage increased 3.3%; 20 net new stores were added year to date.
- Year-to-date share repurchases totaled $196.5 million and dividends paid totaled $96.0 million. Quarterly repurchases were 922,127 shares at an average $77.54 per share. Dividends declared were $0.35 per share for the quarter.
- Cash declined by $150.7 million from the fiscal-year start, while revolver borrowing increased to $200 million.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management said cash on hand and available credit facilities were expected to provide adequate liquidity for the next 12 months and expected continued compliance with credit-facility covenants during fiscal 2015.
- Management emphasized seasonality: revenue and earnings have historically been concentrated from October through January, with lower levels from February through September. Fourth-quarter cash balances are typically higher.
- Risks discussed include variable-rate debt, foreign-exchange volatility, economic and market conditions, vendor costs, and increased currency exposure as international operations expand. The company hedges part of its foreign-currency exposure and stated that exchange-rate effects were not material in the quarter.
- Ordinary-course lawsuits and claims were described as not currently material; management did not expect their resolution to materially adversely affect the consolidated financial statements, while noting outcomes are uncertain. The filing reported no material changes to previously disclosed risk factors.
- The company reported no significant changes to critical accounting policies. It was assessing the impact of new revenue-recognition and deferred-tax presentation accounting standards.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2015 Q3, not fiscal 2014 Q3.
- Assess whether continued revenue growth can offset the reported gross-margin decline and fulfillment-cost pressures.
- Track holiday-season sales, inventory levels and operating cash conversion, given seasonality and the year-to-date operating cash flow decline.
- Review the funding of repurchases and dividends alongside revolver usage, available credit capacity and covenant compliance.
- Monitor brand-level momentum, particularly West Elm’s growth and softness in PBteen, and the contribution and margin effects of franchise and international revenue.