Williams-Sonoma, Inc. — FY2011 Form 10-K
Reporting period: Fiscal 2011, the 52 weeks ended January 29, 2012. The filing also provides fourth-quarter results; it is not a standalone 2010 Q4 filing. Williams-Sonoma is a multi-channel home-products retailer operating six e-commerce websites, catalogs and 576 stores. Direct-to-customer sales were 43.9% of revenue and retail sales 56.1%.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $3,720.9 million | $3,504.2 million |
| Gross margin | $1,459.9 million; 39.2% | $1,373.9 million; 39.2% |
| Operating income / margin | $381.7 million; 10.3% | $323.4 million; 9.2% |
| Net earnings | $236.9 million | $200.2 million |
| Diluted EPS | $2.22 | $1.83 |
| Operating cash flow | $291.3 million | $356.0 million |
| Capital expenditures | $130.4 million | $61.9 million |
Revenue increased 6.2%; comparable brand revenue rose 7.3%. E-commerce revenue grew 17.9% to $1,410.2 million. Direct-to-customer revenue increased 12.4%, while retail revenue rose 1.8% and comparable store sales increased 3.5%. West Elm posted 30.3% comparable brand growth; Williams-Sonoma comparable brand revenue declined 0.3%.
FY2011 fourth-quarter revenue was $1,268.1 million versus $1,195.5 million; operating income was $197.2 million versus $183.6 million; net earnings were $122.6 million versus $113.4 million; and diluted EPS was $1.17 versus $1.05.
Liquidity, debt and capital allocation
Cash and cash equivalents were $502.8 million at year-end, down from $628.4 million. Working capital was $704.6 million, compared with $735.9 million. Current assets were $1,276.4 million and current liabilities $571.8 million. Total debt was $7.3 million, primarily related to a Memphis distribution facility; no borrowings were outstanding under the $300 million revolving credit facility. The company reported compliance with credit covenants and expected to remain compliant in FY2012.
Operating cash flow fell 18.2%, chiefly due to lower accounts payable and accrued liabilities and lower income taxes payable. Investing cash outflow was $157.7 million, including $130.4 million of property and equipment purchases and the Rejuvenation acquisition. Financing cash outflow was $259.0 million, including $194.4 million of share repurchases and $68.9 million of dividends paid. Long-term operating lease commitments totaled $1,386.2 million.
Changes, outlook and notable items
- Revenue growth moderated from 12.9% in FY2010 to 6.2% in FY2011; comparable brand growth slowed from 13.9% to 7.3%. Gross margin held at 39.2%, while operating margin improved from 9.2% to 10.3%.
- On November 1, 2011, the company acquired Rejuvenation for approximately $25.7 million. Its results were included from the acquisition date and were not material to consolidated results.
- FY2012 is expected to be a 53-week year. Management forecast revenue growth of 6%–8% and diluted EPS of $2.37–$2.47, with capital investment of $200–$220 million, incremental SG&A investment of $15–$20 million, and more than $240 million returned through repurchases and dividends.
- Management planned to expand global shipping from 75 to 99 countries and Middle East franchising from 13 to 18 stores. It also said direct-to-customer sales could exceed 50% of revenue within three years. These are forward-looking expectations, not guarantees.
- FY2011 included $3.2 million of asset impairment and early lease termination charges for underperforming stores, down from $17.5 million in FY2010. The company also disclosed related-party Memphis distribution leases and a 10-year aircraft operating lease.
Risks and contingencies
Key risks include discretionary consumer spending and economic conditions, changing tastes and inventory forecasting, heavy seasonality, intense discount and online competition, foreign sourcing and vendor disruption, delivery and fulfillment dependencies, e-commerce security and technology, catalog costs, and execution of global expansion and multi-year IT and supply-chain projects. The company self-insures certain employee and product-liability exposures. Ordinary-course litigation was described as not currently material; management did not expect current matters to materially affect consolidated financial statements. Future dividends and repurchases are discretionary and depend on cash generation and other conditions.
Investor verification priorities
- Compare FY2012 guidance with subsequent reported results, especially revenue, diluted EPS and planned investment.
- Assess whether operating cash flow can support higher planned capital spending, dividends and repurchases while preserving liquidity.
- Track e-commerce and direct-to-customer growth, comparable sales, and the performance of Williams-Sonoma and newer brands.
- Review lease commitments, store closure and opening plans, and the company’s ability to reduce retail space and manage occupancy costs.
- Monitor execution and returns from Rejuvenation, global shipping/franchising, and IT and distribution investments, as well as inventory and sourcing risks.