Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 29, 2018 (13 weeks) and first half of fiscal 2018 (26 weeks), compared with the corresponding 2017 periods. The request metadata says “2017 Q2,” but the filing itself is for 2018 Q2.
Business context and performance
The company operates home-furnishings brands through e-commerce, catalogs and retail stores. It reported 632 stores at quarter-end. E-commerce and retail are its two reportable segments.
- Second-quarter revenue: $1.275 billion, up 6.1%; comparable brand revenue grew 4.6%. E-commerce revenue increased 8.9% and retail revenue 3.1%. Management cited strength in furniture and growth across e-commerce brands.
- First-half revenue: $2.478 billion, up 7.1%; comparable brand revenue grew 5.1%. E-commerce rose 10.1% and retail 3.9%.
- Second-quarter earnings: Gross profit was $463.9 million; operating income $74.2 million; net earnings $51.7 million. Diluted EPS was $0.62 versus $0.61 a year earlier.
- First-half earnings: Gross profit was $896.1 million; operating income $140.7 million; net earnings $96.9 million. Diluted EPS was $1.16 versus $1.06.
- Margins: Second-quarter gross margin was 36.4% versus 35.2% and operating margin was 5.8% versus 6.8%. First-half gross margin was 36.2% versus 35.4%; operating margin was 5.7% versus 6.2%. SG&A rose faster than revenue, reaching 30.6% of quarterly revenue versus 28.4%.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $120.1 million versus $35.1 million in 2017; capital expenditures were $80.0 million versus $82.7 million. Cash flow after capital expenditures was therefore approximately $40.6 million.
- Cash and equivalents were $174.6 million at July 29, down from $390.1 million at fiscal year-end. First-half financing outflows were $257.5 million, including $174.8 million of share repurchases and $70.3 million of dividends.
- Debt included $300 million outstanding under the term loan, with a 3.00% weighted-average rate and January 2021 maturity. There were no revolver borrowings; the $500 million revolver matures in January 2023. The company said it was in covenant compliance and expected adequate liquidity for the next 12 months.
- Inventory was $1.100 billion, up from $1.062 billion at fiscal year-end. Current assets were $1.477 billion and current liabilities $947.9 million.
- During the quarter, the company repurchased 2.41 million shares for $137.1 million at an average $56.90 per share. $344.3 million remained under the repurchase authorization. The quarterly dividend was $0.43 per share.
Changes, outlook and notable items
- Quarterly net earnings declined from $52.9 million to $51.7 million despite higher revenue; operating income fell from $81.6 million. First-half net earnings increased from $92.5 million to $96.9 million, while operating income decreased from $144.1 million to $140.7 million.
- Reported revenue and expense comparisons are affected by adoption of the new revenue standard in fiscal 2018; prior periods were not retrospectively adjusted. The filing’s pro forma adjustments reduce 2018 reported revenue by $16.8 million for the quarter and $41.9 million year to date, and reduce operating income by $3.7 million and $10.4 million, respectively. Consider this when assessing underlying growth.
- Quarterly diluted EPS included stated impacts of $0.05 from impairment and early lease termination charges, $0.05 from Outward, $0.03 from U.S. tax legislation and $0.02 from employment-related expense. The filing reports $5.3 million of impairment and lease termination expense for the quarter.
- Outward, acquired in December 2017, contributed acquisition-related and operating expenses; the filing recorded $66.9 million of goodwill and $18.3 million of acquired intangible assets. Management cited its visualization technology as supporting digital initiatives.
- Management emphasized digital leadership, product innovation, store transformation and operational efficiency, including inventory controls and supply-chain cost reductions. It gave no specific full-year revenue or earnings guidance in the provided filing text. Results are seasonal, with revenue and earnings historically weighted toward October–January.
- Proposed U.S. tariffs on goods sourced from China could raise costs or prices and affect sales. Management expected minimal fiscal 2018 impact if proposed tariffs were enacted, but said the effect was difficult to quantify and mitigation was uncertain. Other cited exposures include foreign exchange, variable interest rates and ordinary-course litigation, which management did not expect to have a material adverse effect.
Important facts for investors to verify
- Assess comparable sales and earnings excluding the revenue-standard transition effects and the disclosed one-time or acquisition-related costs.
- Monitor whether SG&A growth, digital advertising and wage investment can be absorbed while sustaining revenue and margin trends.
- Verify tariff developments, sourcing alternatives and any resulting changes in product costs, pricing or demand.
- Track liquidity after substantial buybacks and dividends, alongside inventory needs, term-loan obligations and seasonal cash patterns.
- Review the final tax-accounting effects of U.S. tax legislation and the expected balance-sheet impact of adopting the lease-accounting standard in fiscal 2019.