Williams-Sonoma, Inc. — Form 10-Q Summary
Period clarification: The supplied metadata says 2019 Q3, but this filing covers the 13 and 39 weeks ended November 1, 2020, compared with periods ended November 3, 2019. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Williams-Sonoma is a specialty retailer of home products operating through e-commerce, catalogs, 614 stores and franchise channels. Its brands include Pottery Barn, West Elm, Williams Sonoma, and Pottery Barn Kids and Teen. The filing reports one aggregated operating segment.
Financial results and key metrics
| Metric | 13 weeks ended Nov. 1, 2020 | 13 weeks ended Nov. 3, 2019 | 39 weeks ended Nov. 1, 2020 | 39 weeks ended Nov. 3, 2019 |
|---|---|---|---|---|
| Revenue | $1,764.5 | $1,442.5 | $4,490.5 | $4,054.4 |
| Gross profit | $705.6 | $518.2 | $1,671.0 | $1,446.4 |
| Operating income | $274.6 | $101.9 | $508.6 | $262.2 |
| Net earnings | $201.8 | $74.7 | $371.8 | $190.0 |
| Diluted EPS | $2.54 | $0.94 | $4.71 | $2.39 |
| Gross margin | 40.0% | 35.9% | 37.2% | 35.7% |
| Operating margin | 15.6% | 7.1% | 11.3% | 6.5% |
Quarterly revenue grew 22.3%, with comparable brand revenue growth of 24.4%; year-to-date revenue rose 10.8%, with comparable brand growth of 13.1%. E-commerce growth drove results, partly offset by reduced store traffic and capacity restrictions. All brands delivered double-digit comparable growth in the quarter.
Cost of goods sold was 60.0% of quarterly revenue versus 64.1% a year earlier; SG&A was 24.4% versus 28.9%. Management attributed margin improvement to stronger merchandise margins from reduced promotions, occupancy leverage, lower advertising expense and expense discipline, partly offset by higher shipping costs. Year-to-date SG&A included approximately $22.0 million of store asset impairment charges.
Year-to-date operating cash flow was $726.6, versus $90.0 in the prior-year period. Investing cash outflow was $124.4, principally capital expenditures of $124.9. Financing cash outflow was $260.0, including dividends of $116.8, share repurchases of $109.0 and repayment of revolving borrowings. Cash at November 1 was $773.2.
At November 1, total debt was approximately $299.2, comprising a $300 million term loan net of issuance costs; there were no revolver borrowings. The $500 million revolver had $12.5 million in issued but undrawn standby letters of credit. Current assets were $2,137.0 and current liabilities $1,460.1. Operating lease liabilities totaled approximately $1,244.6, current and long-term combined. The company reported compliance with credit covenants and expected to remain compliant over the next 12 months.
Material changes versus prior comparable period
- Quarterly net earnings increased to $201.8 from $74.7; diluted EPS rose to $2.54 from $0.94.
- Year-to-date net earnings nearly doubled to $371.8 from $190.0, while operating cash flow increased substantially from $90.0 to $726.6.
- Cash rose to $773.2 from $155.0 at November 3, 2019. The company drew and repaid $487.8 million on its revolver during the year to date.
- Quarterly dividend was increased 10.4%, from $0.48 to $0.53 per share. The company resumed repurchases in the third quarter, buying 1.12 million shares for $109.0 million; $465.9 million remained authorized.
Outlook, commentary, risks and unusual items
Management expected robust e-commerce trends to continue through the fourth quarter, with year-over-year merchandise-margin expansion, occupancy leverage and significant operating-margin expansion versus the prior year. It also anticipated higher holiday shipping surcharges, supply-chain employment costs and expenses to protect employees and customers. No specific revenue, EPS or margin guidance range was provided.
COVID-19 remained a material uncertainty. All stores were open at quarter-end, but subsequent local closures and capacity restrictions had returned in some areas. Further restrictions, reduced traffic, distribution-center or vendor disruption, and weaker consumer spending could affect revenue, cash flow and liquidity. Higher e-commerce volumes also increased shipping costs. The company warned that prolonged pandemic effects could trigger further asset impairments.
Year-to-date charges included $22.0 million of store asset impairments ($16.5 million in property and equipment and $5.5 million in lease right-of-use assets) and $11.4 million of damaged-inventory write-offs. No store impairment or such inventory write-off was recorded in the quarter. The company had finalized rent concessions with some landlords and expected further negotiations to conclude during the rest of fiscal 2020. Ordinary-course litigation was described as not currently material; management did not expect current matters to materially affect the financial statements.
Important facts for investors to verify
- Confirm the period: this is the quarter ended November 1, 2020, not 2019 Q3.
- Assess whether e-commerce-led comparable growth and improved margins persisted after the quarter, including the effect of higher shipping and fulfillment costs.
- Track subsequent COVID-related store restrictions, vendor and distribution disruptions, and any additional impairment charges.
- Review the term loan’s January 8, 2022 maturity, available revolving credit, covenant headroom and liquidity needs.
- Verify the sustainability of cash generation, the increased dividend and share repurchases against seasonal inventory and capital requirements.