Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 3, 2020 (fiscal 2020 first quarter), compared with the 13 weeks ended May 5, 2019. The request metadata says “2019 Q1,” which does not match the filing period.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenue | $1.235 billion | $1.241 billion | Down 0.5% |
| Gross profit | $414.3 million | $444.3 million | Down 6.8% |
| Gross margin | 33.5% | 35.8% | Down 2.3 percentage points |
| Operating income | $48.6 million | $74.1 million | Down 34.4% |
| Operating margin | 3.9% | 6.0% | Down 2.1 percentage points |
| Net earnings | $35.4 million | $52.7 million | Down 32.7% |
| Diluted EPS | $0.45 | $0.66 | Down $0.21 |
| Operating cash flow | $53.9 million | $(98.1) million | Improved $151.9 million |
| Capital expenditures | $42.3 million | $36.1 million | Cash outflow |
Cost of goods sold rose to 66.5% of revenue from 64.2%, reflecting higher e-commerce shipping costs, China tariffs, inventory write-offs and store-occupancy deleverage, partly offset by fewer promotions. SG&A was $365.6 million, down 1.2%, and equaled 29.6% of revenue versus 29.8%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $861.0 million at May 3, 2020, versus $432.2 million at February 2, 2020 and $107.7 million a year earlier. The quarter-end cash position included substantial revolver borrowing.
- The company drew $487.8 million on its $500 million revolving facility during the quarter; $12.2 million of standby letters of credit brought total revolver usage to $500 million. It also had $300 million outstanding under its term loan. Total borrowings were approximately $800 million, excluding lease liabilities.
- After quarter-end, the company amended its credit facility, extending the term loan maturity to January 2022, and entered into an additional $200 million, 364-day revolving credit agreement. Management said it was compliant with its covenants and expected to remain compliant over the next 12 months.
- Current assets were $2.149 billion and current liabilities were $1.682 billion. Operating lease liabilities totaled approximately $1.334 billion, including current and long-term portions.
- Operating cash flow was positive, aided by lower inventory and working-capital movements. Financing cash flow of $419.5 million was primarily driven by revolving-credit borrowings. Investing cash use was $42.1 million.
Material changes and business developments
- All 616 stores were temporarily closed during the latter part of the quarter because of COVID-19; e-commerce and distribution centers continued operating. After quarter-end, the company announced the reopening of more than 350 stores, while closures continued where restrictions remained.
- Comparable brand revenue grew 2.6% overall. West Elm grew 3.3%, Williams Sonoma 5.4%, and Pottery Barn Kids and Teen 8.5%; Pottery Barn declined 1.1%. The company reported that e-commerce growth almost entirely offset store-closure impacts on total revenue.
- International revenue fell 36.3%, primarily due to temporary store closures. The company reported approximately $55.2 million of international revenue, compared with $86.6 million a year earlier.
- The company declared dividends of $0.48 per share and made no share repurchases in the quarter; it repurchased approximately $33.8 million of stock in the comparable prior-year quarter.
Outlook, risks and unusual items
- Management provided no quantified revenue or earnings guidance. It said the duration and financial effects of COVID-19 remained uncertain, and planned to prioritize its digital-first model and growth initiatives, including West Elm, The Key loyalty program and business-to-business efforts.
- COVID-19-related store asset impairment charges totaled approximately $15.6 million: $11.8 million for property and equipment and $3.8 million for lease right-of-use assets. The company also recorded approximately $11.4 million of inventory write-offs. Management attributed $0.15 and $0.11 per diluted share, respectively, to these items.
- Reported diluted EPS also included a $0.03 per-share impact from Outward acquisition-related compensation expense and acquired-intangible amortization. Management noted the CARES Act impact was not material for the quarter and said it continued to assess potential relief.
- Key risks include prolonged or renewed store closures, weaker consumer spending, disruption to vendors or distribution, further impairments, and borrowing costs or access to credit. Management stated that available cash and credit were expected to support operations for 12 months, subject to no material COVID-related revenue decline.
- Ordinary-course lawsuits were described as not currently material; management did not expect their resolution to materially affect the financial statements as a whole. The filing cautions that outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the intended period: this filing is for Q1 FY2020, not Q1 2019.
- Track store reopening progress, comparable sales and whether e-commerce demand offsets any renewed retail disruption.
- Monitor gross margin, freight and occupancy costs, inventory levels, and any additional impairment or write-off charges.
- Review revolver usage, term-loan terms, covenant compliance and liquidity as pandemic conditions evolve.
- Assess whether the $0.48 quarterly dividend remains sustainable given earnings, cash needs and management’s stated discretion to limit or terminate it.