Williams-Sonoma, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended August 4, 2013, compared with periods ended July 29, 2012. Although the request metadata says “2012 Q2,” the filing itself is for fiscal 2013 second quarter.
Business context and results
Williams-Sonoma sells home products through its direct-to-customer channels (e-commerce and catalogs) and retail stores. It reported 590 stores and operated in the U.S., Canada and Australia; an unaffiliated franchisee operated 25 Middle East stores.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $982.2m | $874.3m | $1,870.0m | $1,691.9m |
| Gross profit | $368.9m | $334.5m | $703.1m | $643.7m |
| Operating income | $78.1m | $70.1m | $141.9m | $119.4m |
| Net earnings | $48.9m | $43.4m | $88.4m | $74.1m |
| Diluted EPS | $0.49 | $0.43 | $0.89 | $0.73 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $64.1m | $38.7m |
Q2 revenue rose 12.3%, including comparable brand revenue growth of 8.4%; first-half revenue rose 10.5%, with comparable brand growth of 7.8%. Direct-to-customer revenue grew 15.3% in Q2 and 13.7% year to date; retail revenue grew 9.7% and 7.8%, respectively. Q2 brand comparables were strongest at West Elm (+16.5%) and PBteen (+16.3%); Williams-Sonoma declined 0.4%.
Margins, cash, debt and liquidity
- Q2 gross margin was approximately 37.6%, down from 38.3%; cost of goods sold rose to 62.4% of revenue from 61.7%, primarily due to lower selling margins. First-half gross margin was approximately 37.6%, versus 38.1%.
- Q2 SG&A was $290.8m, or 29.6% of revenue, compared with $264.4m, or 30.2%. Operating margin was approximately 8.0% in Q2 versus 8.0% a year earlier; first-half operating margin improved to approximately 7.6% from 7.1%.
- First-half investing cash outflow was $97.4m, mainly reflecting $97.8m in property and equipment purchases. Financing cash outflow was $184.3m, including $131.0m of share repurchases and $52.2m of dividends.
- Cash and cash equivalents were $205.4m at August 4, 2013, down $219.2m from fiscal year-end; inventory was $736.9m. The current ratio was approximately 1.8. Total reported debt was about $3.8m, including current and long-term portions.
- No borrowings were outstanding under the $300m unsecured revolving credit facility; $5.0m of standby letters of credit used that facility. Separate letter-of-credit facilities had $18.5m outstanding at period-end; the company renewed those facilities on August 30, 2013 for an aggregate $70m.
Material changes, outlook and risks
- Revenue and earnings increased year over year, but Q2 gross margin weakened due to lower selling margins, particularly in retail. SG&A leverage helped offset the pressure.
- The company repurchased 2.4m shares for $131.0m in the first half under a newly authorized $750m three-year program; it paid a quarterly dividend of $0.31 per share, versus $0.22 a year earlier.
- Management gave no specific numerical earnings or revenue guidance in the supplied filing text. It said cash and available credit should provide adequate liquidity for operations over the next 12 months and expected to remain in compliance with financial covenants during fiscal 2013.
- Management emphasized seasonality: a significant share of revenue and earnings is historically generated October through January, with inventory and related spending building ahead of the holiday period.
- Foreign-currency forward contracts were introduced in April 2013 to manage subsidiary currency exposures. The filing reported no material hedge ineffectiveness. Ordinary-course lawsuits were described as not currently material; management did not expect their resolution to materially affect the consolidated financial statements.
- First-half SG&A included $2.9m of employee separation charges. Stock-based compensation included $1.3m associated with the retirement of a former brand president. The filing said there were no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended reporting period: this is a fiscal 2013 Q2 filing, not a 2012 Q2 filing.
- Assess whether lower selling margins—especially in retail—persist and how they affect gross profit.
- Review inventory growth, seasonal working-capital needs, and the cash impact of capital expenditures, dividends and repurchases.
- Verify performance by channel and brand, including the relative strength of direct-to-customer and the Williams-Sonoma brand.
- Monitor liquidity, credit and letter-of-credit availability, covenant compliance, and the company’s use of the remaining repurchase authorization.
- Consider the company’s seasonality, foreign-exchange exposures and the limitations of interim, unaudited results; management noted that first-half results are not necessarily indicative of full-year results.