Williams-Sonoma, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2013, the 13 weeks ended May 5, 2013, compared with the 13 weeks ended April 29, 2012. The filing is for 2013 Q1; this differs from the request metadata’s “2012 Q1.” Financial statements are unaudited.
Business context and results
Williams-Sonoma is a specialty home-products retailer operating through direct-to-customer channels (e-commerce and catalogs) and retail stores. At quarter-end it had 587 stores. The company reported two segments: direct-to-customer and retail.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenue | $887.8 million | $817.6 million | +8.6% |
| Gross profit | $334.2 million | $309.3 million | +8.0% |
| Operating income | $63.8 million | $49.3 million | +29.3% |
| Net earnings | $39.5 million | $30.7 million | +28.5% |
| Diluted EPS | $0.40 | $0.30 | Up $0.10 |
| Operating cash flow | $(59.8) million | $(20.7) million | Greater cash use |
| Capital expenditures | $47.4 million | $27.8 million | Increased |
Gross margin was approximately 37.6%, versus 37.8%; operating margin approximately 7.2%, versus 6.0%; and net margin approximately 4.4%, versus 3.8%. These percentages are calculated from reported figures. Cost of goods sold rose to 62.4% of revenue from 62.2%, mainly due to lower selling margins; SG&A declined to 30.5% of revenue from 31.8%, reflecting lower advertising costs and reduced employee-separation charges.
Revenue drivers and material changes
- Direct-to-customer revenue increased 11.9% to $419.1 million and rose to 47.2% of company revenue from 45.8%. Growth was reported across all brands.
- Retail revenue increased 5.8% to $468.7 million. Management cited international franchise operations, Pottery Barn and West Elm as drivers, partly offset by a decline at Williams-Sonoma.
- Comparable brand revenue increased 7.2% overall. By brand: Pottery Barn +7.6%, Williams-Sonoma +1.9%, Pottery Barn Kids +6.9%, West Elm +11.8%, and PBteen +16.1%.
- Operating income improved in direct-to-customer to $95.9 million from $78.0 million, while retail operating income was $34.0 million versus $34.4 million. Unallocated operating costs increased to $66.2 million from $63.0 million.
- Revenue growth and lower SG&A as a share of sales supported earnings improvement, while overall gross margin edged down.
Cash, liquidity, debt and capital allocation
- Cash and cash equivalents were $252.5 million at May 5, 2013, down from $424.6 million at February 3, 2013. The company attributed operating cash use mainly to payment timing for payables, payroll-related liabilities and income taxes, as well as higher prepaid expenses and inventory.
- Net cash used in investing was $46.7 million, primarily reflecting property and equipment purchases. Net cash used in financing was $64.8 million, including $41.2 million of share repurchases and $22.0 million of dividends.
- Cash and cash equivalents plus restricted cash totaled $268.6 million. Current assets were $1.189 billion and current liabilities $560.3 million.
- Reported long-term debt was $5.4 million in total, including $1.7 million current and $3.8 million long-term. There were no borrowings on the $300 million revolving credit facility; $5.0 million of issued but undrawn standby letters of credit was outstanding. Separate letter-of-credit reimbursement facilities totaled $90 million, with $12.1 million outstanding.
- The company said it was in compliance with financial covenants and expected cash on hand and available facilities to provide adequate liquidity for the next 12 months. The quarterly dividend was $0.31 per share, compared with $0.22 a year earlier. Repurchases totaled 800,882 shares at an average $51.41; a new three-year authorization allows repurchases of up to $750 million.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management described continued investment in brand growth, global expansion, supply chain and technology, customer experience, and new business and brand extensions.
- The company opened its first company-operated stores and transactional e-commerce sites in Australia, continued Middle East franchise expansion, and planned a further West Elm location in Melbourne and its first West Elm store in London.
- Management noted substantial seasonality: revenue and earnings have historically been highest from October through January. First-quarter results are not necessarily indicative of full-year results.
- Foreign exchange exposure is growing with international operations. The company began using foreign-currency forward contracts in April 2013; contracts outstanding at quarter-end covered $16.1 million of Canadian-dollar exposure. A net loss of about $169,000 was expected to be reclassified from accumulated OCI into cost of goods sold over the next 12 months.
- Ordinary-course lawsuits and claims were described as not currently material; management believed their resolution would not materially adversely affect consolidated financial statements. The filing reported no material changes to the prior annual report’s risk factors.
- SG&A included $2.9 million of employee-separation charges in Q1 FY2013, compared with $6.9 million a year earlier. Stock-based compensation expense was $9.0 million, including $1.3 million related to a former brand president’s retirement.
Important facts for investors to verify
- Whether revenue and comparable-brand growth, particularly at West Elm and PBteen, are sustainable and translate into improved selling margins.
- Whether operating cash use and the large seasonal decline in cash reverse as inventory is sold and working-capital balances normalize.
- The return on increased capital expenditures and ongoing investments in stores, international growth, supply chain and technology.
- The pace and price of share repurchases and dividends relative to cash generation, liquidity needs and the new repurchase authorization.
- Future effects of foreign exchange movements, litigation and other risks referenced in the company’s annual report.