Business context and reporting period
Williams-Sonoma, Inc. is a multi-brand home-products retailer operating through e-commerce, catalogs and stores. Its brands include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Rejuvenation and Mark and Graham. This Form 10-K covers fiscal 2013, the 52 weeks ended February 2, 2014; fiscal 2012 was a 53-week year. The filing also reports fourth-quarter results, but the prior-year fourth quarter included 14 weeks, complicating the comparison.
Financial performance and position
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net revenue | $4,387.9 million | $4,042.9 million |
| Gross margin | $1,704.2 million; 38.8% | $1,592.5 million; 39.4% |
| Operating income | $452.1 million; 10.3% margin | $409.2 million; 10.1% margin |
| Net earnings | $278.9 million | $256.7 million |
| Diluted EPS | $2.82 | $2.54 |
| Operating cash flow | $453.8 million | $364.1 million |
| Capital expenditures | $194.0 million | $205.4 million |
Revenue rose 8.5% and comparable brand revenue increased 8.8%; fiscal 2012’s extra week contributed to the comparison. Direct-to-customer revenue grew 13.1% to $2,115.0 million and represented 48.2% of sales. Retail revenue grew 4.6% to $2,272.9 million. Gross margin declined 0.6 percentage points, principally from lower selling margins; SG&A fell to 28.5% of revenue from 29.3%, helped by advertising efficiency and lower impairment and separation charges.
Fourth-quarter fiscal 2013 revenue was $1,466.3 million, operating income $217.7 million, net earnings $133.8 million and diluted EPS $1.38. The corresponding fiscal 2012 figures were $1,406.4 million, $210.4 million, $133.7 million and $1.34, respectively; note the prior quarter had an extra week.
At year-end, cash and cash equivalents were $330.1 million, down from $424.6 million; working capital was $558.0 million, versus $659.6 million. Merchandise inventory increased to $813.2 million from $640.0 million. Total assets were $2,336.7 million and equity was $1,256.0 million. Debt was $3.8 million; there were no borrowings under the $300 million revolving facility. The company reported compliance with its financial covenants and expected available cash and credit to meet liquidity needs for the next 12 months. Fiscal 2013 cash used in investing was $190.6 million and cash used in financing was $355.4 million, including $239.3 million of repurchases and $111.6 million of dividends paid.
Material changes versus the prior comparable period
- Net revenue increased $345.0 million; management noted that the comparison was partly offset by losing fiscal 2012’s extra week.
- Direct-to-customer continued to gain mix, rising from 46.2% to 48.2% of revenue; e-commerce represented 92.2% of direct-to-customer revenue.
- Comparable brand revenue was strongest at West Elm (+17.4%), PBteen (+14.1%) and Pottery Barn (+10.4%); Williams-Sonoma grew 1.5% and Pottery Barn Kids 7.8%.
- Operating income and earnings increased, while gross margin percentage declined. Operating cash flow rose, but cash declined amid higher inventory, capital investment, buybacks and dividends.
- The company repurchased 4.3 million shares for $239.3 million, compared with $155.1 million in fiscal 2012. Annual dividends declared increased to $1.24 per share from $0.88.
Outlook, risks and unusual items
Management provided no specific fiscal 2014 revenue or earnings guidance in the supplied filing text. Its stated priorities were strengthening brands, preparing for global expansion, improving supply-chain cost and service, and investing in e-commerce, technology and infrastructure. Fiscal 2014 cash is planned for inventory, marketing, repurchases, dividends and property and equipment. In March 2014, the company announced a 6% quarterly dividend increase, from $0.31 to $0.33 per share, subject to capital availability; the board may change or end dividends and repurchases.
Key risks include discretionary consumer demand and housing-market conditions; fashion and inventory forecasting; intense retail and e-commerce competition; reliance on foreign sourcing (64% of fiscal 2013 merchandise purchases, primarily Asia and Europe); fulfillment and carrier dependence; cybersecurity and customer-data protection; global expansion and foreign exchange; and execution of multi-year information-system changes. Seasonality is significant, with a substantial share of revenue and earnings typically generated October through January. The company also disclosed $1,431.6 million of fixed operating-lease commitments and $708.8 million of purchase obligations, including $692.3 million due in fiscal 2014.
Fiscal 2013 included $2.9 million of employee-separation charges and approximately $0.6 million of asset-impairment charges. No goodwill impairment was recorded. Ordinary-course lawsuits were described as not currently material, and management did not expect their resolution to materially affect the consolidated financial statements. The independent auditor gave unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- Assess the quality and durability of comparable-sales growth, particularly the divergence between strong West Elm and Pottery Barn results and modest Williams-Sonoma growth.
- Check whether inventory growth supports demand or creates markdown, working-capital or cash-flow pressure.
- Monitor gross-margin recovery, selling margins and the cost of store and global expansion.
- Review execution and costs of technology, supply-chain and fulfillment investments, including the new Arlington distribution facility.
- Confirm liquidity and capital-return capacity against lease and purchase commitments, planned repurchases, and the announced dividend increase.
- Account for the 52-week versus 53-week fiscal-year difference when comparing annual and fourth-quarter results.