Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: Quarter and first 26 weeks ended August 3, 2014. The request metadata identifies 2013 Q2, but the filing itself reports fiscal 2014 Q2.
Business context
Specialty home-products retailer operating eight merchandising concepts through e-commerce, catalogs and 589 stores. Its reportable channels are direct-to-customer and retail.
Financial performance
| Metric | 13 weeks ended Aug. 3, 2014 | Prior-year quarter | 26 weeks ended Aug. 3, 2014 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1.039 billion | $982.2 million | $2.013 billion | $1.870 billion |
| Gross profit | $382.1 million | $368.9 million | $750.5 million | $703.1 million |
| Operating income | $85.3 million | $78.1 million | $159.7 million | $141.9 million |
| Net earnings | $50.7 million | $48.9 million | $96.9 million | $88.4 million |
| Diluted EPS | $0.53 | $0.49 | $1.01 | $0.89 |
- Quarterly revenue grew 5.8%; comparable brand revenue grew 5.7%. Year-to-date revenue grew 7.7%, with comparable brand revenue growth of 7.8%.
- Quarterly gross margin was 36.8%, down from 37.6%; operating margin was 8.2%, versus 8.0%. Year-to-date gross margin was 37.3%, versus 37.6%, while operating margin improved to 7.9% from 7.6%.
- Direct-to-customer revenue rose 9.4% in the quarter and 13.1% year to date. Retail revenue rose 2.4% and 2.7%, respectively. West Elm had the strongest comparable brand growth; PBteen comparable revenue fell 1.0% in the quarter.
- Operating cash flow was $10.2 million year to date, down from $64.1 million. Investing cash use was $68.9 million; financing cash use was $200.9 million. Capital expenditures were $83.5 million.
- Cash was $70.6 million at quarter-end, versus $205.4 million a year earlier and $330.1 million at fiscal year-end. Merchandise inventory was $894.9 million, up from $736.9 million a year earlier.
- Total debt was approximately $2.0 million, all current; there were no revolver borrowings. The company had a $300 million revolving credit facility, with $17.4 million of standby letters of credit issued and undrawn, plus separate letter-of-credit facilities.
Material changes, outlook and risks
- Quarterly cost of goods sold rose faster than revenue; management cited lower selling margins and occupancy deleverage. SG&A as a share of revenue improved to 28.6% from 29.6%, attributed mainly to advertising efficiency and lower general expenses.
- Year-to-date operating cash flow was pressured by inventory investment and lower accounts payable, accrued liabilities and income taxes payable, which management attributed partly to payment timing. Cash declined substantially after buybacks, dividends and other financing uses.
- Management said cash plus available credit facilities should cover operating needs for the next 12 months, and expected compliance with financial covenants through fiscal 2014. No specific revenue or earnings guidance was provided in the filing text.
- The business is seasonal, with a significant share of revenue and earnings typically generated October through January. Management noted increased PBteen furniture backorders linked to political unrest in Vietnam, as well as weakness in dorm and gear categories.
- Other risks include margin pressure, foreign-exchange exposure that may grow with international expansion, and ordinary-course litigation that management did not expect to materially affect the consolidated financial statements. The filing reported no material change to previously disclosed risk factors.
- During the first half, the company repurchased $112.1 million of stock and paid $64.0 million in dividends. It reported a 39.3% year-to-date effective tax rate, up from 37.8%, citing unfavorable tax matters.
Important facts for investors to verify
- Whether inventory growth and lower working-capital cash generation persist into the holiday season.
- Whether selling-margin weakness and occupancy deleverage continue to offset sales growth.
- Progress resolving Vietnam-related backorders and the performance of PBteen and other brands.
- Cash, credit-facility availability and capital returns after the sharp first-half cash decline.
- The effect of unfavorable tax matters and stock-based-award-related cash-flow items on future results.