Williams-Sonoma, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for fiscal 2019, the 52 weeks ended February 2, 2020, filed March 27, 2020. Although the request metadata says “2018 Q4,” the filing’s fourth-quarter figures are for fiscal 2019 Q4. Fiscal 2018 had 53 weeks, including an additional week that contributed about $85 million of revenue and $0.10 of diluted EPS.
Business context
Williams-Sonoma is an omnichannel home-products retailer operating brands including Pottery Barn, West Elm, Williams Sonoma, Pottery Barn Kids and Teen, Rejuvenation, and Mark and Graham. It sells through e-commerce, catalogs, stores, and franchise operations. At year-end it operated 614 stores and had 129 franchised stores. E-commerce represented more than half of sales and profits; company-operated retail stores generated approximately 44% of net revenue.
Financial performance
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net revenue | $5.898 billion | $5.672 billion |
| Comparable brand revenue growth | 6.0% | 3.7% |
| Gross profit / margin | $2.139 billion / 36.3% | $2.101 billion / 37.0% |
| Operating income / margin | $465.9 million / 7.9% | $436.0 million / 7.7% |
| Net earnings | $356.1 million | $333.7 million |
| Diluted EPS | $4.49 | $4.05 |
| Cash from operations | $607.3 million | $586.0 million |
| Capital expenditures | $186.3 million | $190.1 million |
Revenue increased 4.0% despite the shorter fiscal year. West Elm led growth, with 14.4% comparable brand revenue growth; Pottery Barn grew 4.1%, Pottery Barn Kids and Teen 4.5%, and Williams Sonoma 0.4%. Gross margin declined 0.7 percentage points, reflecting weaker occupancy leverage from one fewer selling week, higher shipping costs from furniture and drop-ship mix, and China tariffs. SG&A fell to 28.4% of revenue from 29.4%, supporting operating-margin expansion. Management cited Outward and employment-related expenses and a deferred-tax adjustment among fiscal 2019 EPS items.
Fiscal 2019 Q4: Revenue was $1.844 billion versus $1.836 billion; operating income was $203.7 million versus $200.9 million; net earnings were $166.0 million versus $155.3 million; diluted EPS was $2.10 versus $1.93. Fiscal 2018 Q4 included 14 weeks, compared with 13 weeks in fiscal 2019 Q4.
Liquidity, debt, and capital allocation
At February 2, 2020, cash and cash equivalents were $432.2 million, including $201.9 million held by foreign subsidiaries. Working capital was $146.1 million. The company had $300 million outstanding under its term loan, due January 2021, and no revolver borrowings at year-end; it stated it intended to renew and extend the term loan. It also had $1.323 billion of operating lease liabilities, including $227.9 million current. Fiscal 2019 operating cash flow was $607.3 million; cash dividends paid were $150.6 million and share repurchases were $148.8 million. Dividends declared were $1.92 per share.
After year-end, on March 23, 2020, the company drew $488 million on its $500 million revolving facility, bringing revolver borrowings to $500 million, to increase available cash amid the pandemic. Management said cash and available facilities were expected to support operations for 12 months, but noted this assessment depended on the duration of store and distribution-center disruptions and revenue declines.
Changes, outlook, and risks
- Fiscal 2019 net revenue rose 4.0%, comparable brand revenue growth accelerated to 6.0%, and operating margin improved to 7.9%; gross margin nevertheless contracted.
- The company adopted lease accounting standard ASC 842 in fiscal 2019, recognizing approximately $1.2 billion of right-of-use assets and a similar increase in liabilities at adoption. This materially increased reported assets and liabilities but did not materially affect the income statement.
- COVID-19 was identified as an expected material risk to fiscal 2020 results, financial position, and liquidity. U.S. and Canadian stores were temporarily closed beginning March 17, 2020, initially through at least April 2; e-commerce and distribution centers remained operating as of the filing date. The company said it could not reasonably estimate the pandemic’s impact and delayed fiscal 2020 guidance pending better visibility.
- Other notable risks include discretionary consumer demand, competition and promotional pressure, dependence on foreign sourcing (approximately 65% of fiscal 2019 merchandise purchases), tariffs and supply-chain disruption, inventory forecasting, cybersecurity and privacy compliance, and execution of major technology and operating-system changes.
- Management reported no material adverse effect expected from ordinary-course litigation. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Audit focus areas included store-asset impairment estimates and lease discount rates.
Important facts for investors to verify
- Track store reopening, e-commerce and distribution capacity, customer demand, and the realized effects of COVID-19 on revenue, cash flow, and liquidity.
- Review the $500 million revolver balance drawn after year-end, the term-loan renewal or repayment plan, covenant compliance, and actual cash availability.
- Assess the durability of West Elm and Pottery Barn growth and whether tariff mitigation and higher shipping costs continue to pressure gross margin.
- Distinguish lease liabilities from funded debt and evaluate the company’s substantial future lease and purchase obligations.
- Compare periods on a consistent week basis and account for the disclosed fiscal 2018 extra week and fiscal 2019 unusual tax and operating items.