Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended May 1, 2011, compared with the thirteen weeks ended May 2, 2010. This differs from the request metadata of “2010 Q1”; the filing identifies the quarter as the first quarter of fiscal 2011.
Business context and results
Williams-Sonoma is a specialty home-products retailer operating direct-to-customer channels (catalogs and e-commerce) and retail stores. Its brands include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and PBteen. The results are unaudited, and management cautions that the quarter is not necessarily indicative of full-year results.
| Metric | Thirteen weeks ended May 1, 2011 | Prior-year period | Change |
|---|---|---|---|
| Net revenues | $770.8 million | $717.6 million | Up 7.4% |
| Gross profit / gross margin | $295.9 million / 38.4% | $270.6 million / 37.7% | Margin up 0.7 percentage points |
| SG&A | $244.2 million / 31.7% of revenue | $238.1 million / 33.2% | Expense up 2.6%; revenue share down |
| Earnings before income taxes | $51.7 million | $32.3 million | Up 59.9% |
| Net earnings | $31.6 million | $19.5 million | Up 61.8% |
| Diluted EPS | $0.29 | $0.18 | Up 61.1% |
Net margin was approximately 4.1%, compared with 2.7% a year earlier. Net interest expense was negligible at $1,000, versus $128,000. Comparable brand revenue grew 9.0%; comparable store sales rose 6.7%.
Revenue channels, cash flow and financial position
- Direct-to-customer revenue rose 12.5% to $344.1 million; Internet revenue increased 20.8% to $289.8 million and represented 84.2% of direct-to-customer revenue.
- Retail revenue increased 3.6% to $426.7 million, with comparable store sales up 6.7%. Retail leased square footage fell 4.3% year over year, including 21 fewer net stores.
- Operating cash flow was negative $91.3 million, versus negative $70.3 million in the prior-year quarter. The filing attributes the outflow mainly to timing-related declines in payables and accrued liabilities, tax payments and higher inventory.
- Investing cash outflow was $22.2 million, including $22.2 million of capital expenditures. Financing cash outflow was $45.0 million, including $31.3 million of share repurchases and $15.8 million of dividends.
- Cash and cash equivalents were $471.0 million at May 1, down $157.4 million from January 30, 2011; inventory was $532.1 million. Current assets were $1.221 billion and current liabilities $486.8 million.
- Total reported debt was $8.6 million, consisting primarily of debt associated with a Memphis distribution facility. The company had no borrowings on its $300 million revolving credit facility; $9.4 million of standby letters of credit was issued but undrawn. Separate letter-of-credit facilities totaled $90 million, with $20.5 million outstanding as future commitments for inventory purchases.
Material changes and unusual items
- Revenue growth was driven by Pottery Barn, West Elm and Pottery Barn Kids, with online sales a key contributor. Retail revenue growth was tempered by reduced store area and store count.
- Cost of goods sold fell to 61.6% of revenue from 62.3%, primarily reflecting better fixed-occupancy leverage, partly offset by greater promotional activity and shipping-related promotions.
- SG&A as a share of revenue declined to 31.7% from 33.2%. The comparison benefited from lower store impairment and lease-termination charges ($1.5 million versus $6.0 million) and the absence of $3.3 million of prior-year costs associated with the former CEO’s retirement.
- The company repurchased 760,226 shares for approximately $31.3 million at a weighted-average $41.11 per share under a $125 million authorization; approximately $93.8 million remained.
- The quarterly dividend was increased from $0.15 to $0.17 per share in March 2011. A ten-year operating lease for an aircraft began May 16, 2011, following the assignment of the company’s option to purchase the aircraft to Wells Fargo Equipment Finance.
Outlook, management commentary and risks
Management described the quarter as strong and cited merchandise, targeted multichannel marketing, customer experience and supply-chain initiatives. For fiscal 2011, it forecast revenue growth of 4%–6%, comparable brand revenue growth of 6%–8%, and diluted EPS of $2.11–$2.19, versus $1.83 in the prior year. It expected to return nearly $200 million to shareholders through dividends and repurchases and planned capital expenditures of $135 million–$150 million. Management expected a 37%–39% effective tax rate and said cash and available credit should support operations for the next 12 months; it reported compliance with credit-facility covenants and expected to remain compliant.
Management noted substantial seasonality, with a significant share of revenue and earnings historically generated from October through December. Principal disclosed risks include changes in consumer spending and home demand, competition and promotional pressure, forecasting and inventory-management errors, vendor and foreign-sourcing disruption or cost increases, delivery and technology-system interruptions, execution of international expansion, and fluctuations in comparable sales and taxes. The company reported ordinary-course litigation that it did not believe would materially affect the consolidated financial statements. Actual results may differ from guidance, and the filing states that quarterly tax rates may vary.
Important facts for investors to verify
- Confirm the reporting-period classification: the filing is for fiscal Q1 2011, notwithstanding the “2010 Q1” request metadata.
- Assess whether the negative operating cash flow and seasonal inventory build reverse as expected, and monitor cash use for capital spending, dividends and repurchases.
- Compare performance with fiscal 2011 guidance, particularly revenue, comparable brand growth, EPS and the planned shareholder distributions.
- Review comparable-brand results alongside channel and store trends; the filing reports West Elm comparable brand revenue growth of 31.1%, while its separately stated net revenue growth is 26.2%.
- Track the aircraft operating-lease commitment, Memphis facility obligations, credit-facility covenant compliance and any material changes in litigation or other contingencies.