Williams-Sonoma, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 4, 2019 (fiscal 2019 Q2), not 2018 Q2. The comparable periods ended July 29, 2018. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Williams-Sonoma is a specialty home-products retailer operating through e-commerce, catalogs and stores across brands including Pottery Barn, West Elm and Williams Sonoma. It reported 623 stores at August 4, 2019. Beginning in fiscal 2019, it combined its retail and e-commerce reporting into one reportable segment, with brand-level revenue disclosed.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net revenue | $1,370.8 | $1,275.2 | $2,611.9 | $2,478.2 |
| Gross profit | $483.9 | $463.9 | $928.2 | $896.1 |
| Gross margin | 35.3% | 36.4% | 35.5% | 36.2% |
| Operating income / margin | $86.2 / 6.3% | $74.2 / 5.8% | $160.3 / 6.1% | $140.7 / 5.7% |
| Net earnings | $62.6 | $51.7 | $115.3 | $96.9 |
| Diluted EPS | $0.79 | $0.62 | $1.45 | $1.16 |
| Operating cash flow | Not separately stated | Not separately stated | $(26.6) | $120.1 |
Q2 revenue rose 7.5%, with comparable brand revenue growth of 6.5%; YTD revenue increased 5.4%, with comparable growth of 5.1%. Q2 diluted EPS included impacts of $0.07 from Outward and $0.01 from employment-related expenses. SG&A was 29.0% of Q2 revenue versus 30.6% a year earlier, while cost of goods sold rose to 64.7% of revenue from 63.6%.
YTD investing cash outflow was $76.7, primarily capital expenditures of $77.2. Financing cash outflow was $113.5, including $75.5 of dividends and $72.1 of share repurchases, partly offset by $60.0 of revolving-credit borrowings. Cash declined $218.5 from fiscal year-end to $120.5; $98.5 of the cash balance was held by international subsidiaries.
At August 4, 2019, debt comprised $300.0 outstanding under the term loan and $60.0 under the revolver. The company also reported $1,371.0 of operating lease liabilities. The $500.0 revolver had $12.4 of issued but undrawn standby letters of credit. The company stated it was covenant-compliant and expected to remain so over the next 12 months; it believed cash and available facilities would meet operating needs over that period.
Material changes versus comparable periods
- Q2 comparable growth accelerated to 6.5% from 4.6%; West Elm grew 17.5% and Pottery Barn 4.2%, while Williams Sonoma declined 1.1%.
- Q2 gross margin fell 1.1 percentage points, primarily due to shipping costs from a higher furniture mix and China tariffs, including List 3 tariffs; occupancy-cost leverage partly offset these pressures.
- SG&A leverage improved, helping lift Q2 operating margin by about 0.5 percentage points despite lower gross margin.
- YTD operating cash flow swung to a $26.6 use from $120.1 provided, mainly reflecting lower accounts payable due to payment timing and higher inventory.
- Adoption of the new lease standard in fiscal 2019 added approximately $1.2 billion of right-of-use assets and increased reported liabilities. This accounting change materially affects balance-sheet comparisons; the filing says it did not materially affect earnings.
- YTD repurchases were $72.1 versus $174.8 in the prior-year period. Shares outstanding at period-end were 78.2 million versus 81.0 million a year earlier.
Outlook, management commentary, risks and unusual items
No numerical full-year revenue or earnings guidance is provided in the supplied filing. Management said it planned to pursue cross-brand growth, technology improvements and customer-experience initiatives. It cited strong West Elm performance, growth in Pottery Barn and Pottery Barn Kids and Teen, and continued expansion of its loyalty program and business-to-business activity. The new West Elm West Coast distribution center was expected to be fully operational in September 2019. Management also noted domestic manufacturing shipments were up 30% year over year, helping mitigate China-tariff effects.
Key pressures include tariffs, shipping expense, foreign-exchange volatility, seasonal working-capital needs and variable interest rates on borrowings. The business is seasonally weighted toward October through January. Management reported ordinary-course lawsuits and claims that it did not consider material, and said their ultimate resolution was not expected to materially adversely affect the financial statements. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting year: this is fiscal 2019 Q2, despite the request metadata indicating 2018 Q2.
- Track whether sales growth can continue, especially at West Elm, and whether Williams Sonoma’s comparable-sales decline reverses.
- Assess whether tariff and furniture-shipping costs continue to pressure gross margin.
- Monitor working-capital cash flow, particularly inventory and accounts-payable timing, alongside seasonal cash requirements.
- Review debt maturities, variable-rate exposure, lease obligations and available revolver capacity; the term loan matures January 8, 2021.
- Evaluate ongoing dividends and buybacks against cash generation and investment needs; the repurchase program had $651.7 remaining at quarter-end.