Williams-Sonoma, Inc. — Form 10-Q Summary
Period discrepancy: Request metadata identifies “2009 Q2,” but the filing is for the thirteen and twenty-six weeks ended August 1, 2010 (fiscal 2010 second quarter and first half). Comparisons are with the periods ended August 2, 2009. Figures below are in millions unless otherwise stated.
Business context and reporting period
Williams-Sonoma is a specialty retailer of home products, operating retail stores and direct-to-customer catalogs and e-commerce sites. Its reportable segments are retail and direct-to-customer. The filing is unaudited; management says interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | 13 weeks ended Aug. 1, 2010 | 13 weeks ended Aug. 2, 2009 | 26 weeks ended Aug. 1, 2010 | 26 weeks ended Aug. 2, 2009 |
|---|---|---|---|---|
| Net revenues | $775.6 | $672.1 | $1,493.2 | $1,283.7 |
| Gross margin | $286.7; 37.0% of revenue | $215.3; 32.0% | $557.3; 37.3% | $399.3; 31.1% |
| SG&A | $235.5; 30.4% of revenue | $214.9; 32.0% | $473.6; 31.7% | $428.1; 33.3% |
| Pre-tax earnings (loss) | $51.1 | $0.1 | $83.4 | $(29.5) |
| Net earnings (loss) | $30.8 | $0.4 | $50.3 | $(18.3) |
| Diluted EPS | $0.28 | $0.00 | $0.46 | $(0.17) |
- Revenue drivers: Second-quarter retail revenue rose 12.4%, with comparable-store sales up 13.6%; direct-to-customer revenue rose 19.8%. Internet revenue increased 27.6% to $267.5 million. First-half revenue grew 16.3%, with comparable-store sales up 15.2%.
- Cash flow: First-half operating cash flow was a use of $9.1 million, versus a source of $76.0 million in the prior-year period, chiefly reflecting higher inventory and income-tax payments. Investing cash outflow was $32.7 million; financing cash outflow was $68.1 million, including $44.3 million of share repurchases and $27.0 million of dividends.
- Balance sheet and liquidity: At August 1, cash and cash equivalents were $404.0 million, restricted cash $12.5 million, current assets $1,157.0 million and current liabilities $502.2 million. Total debt on the balance sheet was $8.9 million, and the company reported no borrowings on its $300 million revolving credit facility. It had $15.2 million of undrawn standby letters of credit and $29.8 million outstanding under letter-of-credit facilities for future inventory purchases. Management said cash and available facilities should provide adequate liquidity for the next 12 months.
Material changes versus prior comparable period
- Revenue and profitability improved materially from the prior-year quarter and first half. Management attributed higher gross margin rates mainly to fixed-cost leverage, lower markdowns, reduced recall effects, and lower replacement and damage costs.
- Quarter-end cash was $404.0 million, down from $513.9 million at January 31, 2010, but up from $165.3 million a year earlier. Merchandise inventory was $518.6 million, compared with $517.0 million a year earlier.
- Retail leased square footage was down 3.0% year over year, with 20 fewer net stores. The company ended the quarter with 609 stores.
- Direct-to-customer revenue growth included a $3 million reduction from a voluntary product recall. Pottery Barn Kids revenue also benefited from a reduced recall impact.
Outlook, commentary, risks and unusual items
- Fiscal 2010 outlook: Management raised expectations to revenue growth of 9%–11% and diluted EPS of approximately $1.52–$1.59, versus $0.72 in fiscal 2009. It expects a 38%–40% effective tax rate and approximately $75 million of capital expenditures for fiscal 2010.
- Capital returns: The quarterly dividend was increased from $0.13 to $0.15 per share. The company completed its $60 million repurchase authorization after quarter-end and authorized a new program of up to $65 million. First-half dividends paid were $27.0 million.
- Strategy and operations: Management cited momentum from merchandising, targeted marketing, customer experience, supply-chain efficiencies, and online growth. Williams-Sonoma Home was being restructured; eight of its eleven stand-alone stores were planned to close or be rebranded by year-end, with the brand to continue online and in limited Williams-Sonoma store-in-store formats. Management planned five additional franchised international stores in 2011.
- Unusual items: First-half store impairment and early lease-termination charges were $10.3 million. CEO W. Howard Lester’s retirement generated approximately $4.3 million of expense, primarily stock compensation. A net $0.4 million benefit was recorded for exiting excess distribution capacity. The quarter’s diluted EPS included unusual-event charges of $0.03 in 2010 and $0.05 in 2009, according to management.
- Risks and contingencies: The filing highlights sensitivity to consumer confidence and discretionary spending, inventory forecasting and seasonality, competition, sourcing and vendor risks, product recalls, delivery and technology disruptions, foreign operations and currency exposure, and potential impairment charges. Ordinary-course litigation was described as not currently material; management did not expect current matters to have a material adverse effect overall. The credit facility matures October 4, 2011 and has financial and capital-return covenants; the company reported compliance and expected continued compliance for fiscal 2010.
Important facts for investors to verify
- Confirm the intended reporting year: this filing covers fiscal 2010 Q2, despite the request metadata saying 2009 Q2.
- Track whether revenue growth and comparable-store sales momentum continue, and whether margins hold as seasonal inventory builds.
- Assess operating cash generation, inventory levels, and the cash impact of planned capital spending, dividends, and repurchases.
- Review progress on the Williams-Sonoma Home restructuring, store closures or rebranding, and planned international expansion.
- Reconcile debt disclosures: the balance sheet and debt note report $8.9 million of total long-term debt, while the market-risk section states a $175,000 variable-rate principal balance for Memphis bond-related debt. The filing text does not clearly reconcile these figures.
- Monitor credit-facility renewal and covenant compliance, as well as the fiscal 2010 guidance assumptions and identified consumer, supply-chain, recall, and impairment risks.