Williams-Sonoma, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the 53 weeks ended February 3, 2013 (fiscal 2012), not a 2011 fourth-quarter filing. Fiscal 2012’s fourth quarter comprised 14 weeks; the filing provides unaudited quarterly results.
Business context and reporting period
Williams-Sonoma is a multi-channel home-products retailer operating brands including Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen and Rejuvenation. It sells through retail stores, e-commerce and catalogs. At year-end it operated 581 stores and reported two segments: direct-to-customer and retail.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $4.043 billion | $3.721 billion |
| Gross margin | $1.592 billion; 39.4% of revenue | $1.460 billion; 39.2% |
| Operating income | $409.2 million; 10.1% margin | $381.7 million; 10.3% margin |
| Net earnings | $256.7 million | $236.9 million |
| Diluted EPS | $2.54 | $2.22 |
| Operating cash flow | $364.1 million | $291.3 million |
| Capital expenditures | $205.4 million | $130.4 million |
| Cash and cash equivalents at year-end | $424.6 million | $502.8 million |
| Working capital | $659.6 million | $704.6 million |
| Total debt | $5.5 million | $7.3 million |
Fiscal 2012 operating cash flow less capital expenditures was approximately $158.7 million. The company had no borrowings on its $300 million revolving credit facility and said it was in compliance with its financial covenants. Current liabilities were $657.1 million and total liabilities $878.5 million at year-end. Non-cancelable operating lease commitments totaled $1.444 billion.
Material changes versus the prior comparable period
- Revenue rose 8.7%, including an estimated $70 million and $0.07 of diluted EPS attributable to fiscal 2012’s extra week. Comparable brand revenue increased 6.1%, versus 7.3% in fiscal 2011.
- Direct-to-customer revenue increased 14.5% to $1.869 billion and reached 46.2% of total revenue; e-commerce revenue grew 17.4%. Retail revenue increased 4.1% to $2.173 billion, while comparable store sales rose 2.3%, down from 3.5%.
- West Elm was a growth leader, with comparable brand revenue up 17.4%; Pottery Barn rose 8.5%. Williams-Sonoma comparable brand revenue declined 1.1%, and PBteen grew 1.7%.
- Gross margin improved 0.2 percentage points, but operating margin declined 0.2 points as selling, general and administrative expenses increased to 29.3% of revenue from 29.0%.
- Operating cash flow improved, while cash declined by $78.2 million. Higher capital spending, including investment in stores, systems and distribution infrastructure, contributed to investing outflows.
- The company repurchased $155.1 million of stock and declared $88.5 million of dividends in fiscal 2012. Weighted-average diluted shares fell to 101.1 million from 106.6 million.
In the 14-week fourth quarter, revenue was $1.406 billion versus $1.268 billion in the prior-year quarter; net earnings were $133.7 million versus $122.6 million, and diluted EPS was $1.34 versus $1.17.
Outlook, commentary, risks and unusual items
- Management described priorities including expanding brands and global operations, investing in e-commerce and technology, and redesigning the supply chain to lower costs and improve service. It planned to enter Australia in fiscal 2013 with four company-operated stores, an e-commerce site and distribution operations.
- Management expected cash on hand and available credit to support operations for at least 12 months. Planned fiscal 2013 cash uses included inventory, marketing, capital expenditures, dividends and share repurchases; no specific earnings or revenue guidance is stated in the supplied filing text.
- After year-end, the board authorized a new stock repurchase program of up to $750 million over three years and raised the quarterly dividend 41%, from $0.22 to $0.31 per share. Both remain subject to capital availability and may be changed or discontinued.
- Fiscal 2012 included $6.1 million of asset impairment charges, primarily for underperforming stores, and $6.9 million of employee separation charges, primarily related to the former operations and finance executive’s retirement. No goodwill impairment was recorded.
- Principal risks include discretionary consumer demand and economic conditions; forecasting trends and managing inventory; foreign sourcing and vendor disruption; intense competition and promotional pressure; seasonal concentration; delivery, catalog, technology and cybersecurity disruptions; and execution of global expansion and new brands. Approximately 61% of merchandise purchases were foreign-sourced, although about 98% of those purchases were negotiated and paid in U.S. dollars.
- The company disclosed ordinary-course litigation that it did not consider material and stated that resolution was not expected to materially adversely affect its consolidated financial statements. Deloitte issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Separate the extra week’s estimated revenue and EPS contribution from underlying growth when assessing fiscal 2012 comparability.
- Track direct-to-customer growth against retail performance, especially the weaker Williams-Sonoma and PBteen comparable results.
- Assess whether higher capital spending and investments in systems, distribution and global expansion produce expected returns.
- Review liquidity alongside the $1.444 billion of operating lease commitments, planned capital spending, dividend increase and proposed buybacks.
- Monitor inventory levels and margins amid promotional competition, foreign sourcing exposure and seasonal demand.
- Verify execution and costs of the planned Australian launch, new brand extensions and supply-chain and technology initiatives.