Williams-Sonoma, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 30, 2011 (third quarter and year-to-date fiscal 2011), compared with the periods ended October 31, 2010. The request metadata says “2010 Q3,” which does not match the filing period.
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. Its brands include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen and West Elm. Results are unaudited; management cautions that interim results are not necessarily indicative of full-year performance.
| Metric | Q3 FY2011 | Q3 FY2010 | 39 weeks FY2011 | 39 weeks FY2010 |
|---|---|---|---|---|
| Revenue | $867.2 million | $815.5 million | $2,452.8 million | $2,308.7 million |
| Gross margin | $332.0 million; 38.3% | $311.3 million; 38.2% | $936.6 million; 38.2% | $868.6 million; 37.6% |
| SG&A | $263.2 million; 30.4% of revenue | $255.1 million; 31.3% | $752.0 million; 30.7% | $728.7 million; 31.6% |
| Net earnings | $43.4 million | $36.5 million | $114.3 million | $86.8 million |
| Diluted EPS | $0.41 | $0.34 | $1.07 | $0.79 |
Q3 revenue rose 6.3%, diluted EPS rose 20.6%, and comparable brand revenue increased 7.3%. Year-to-date revenue increased 6.2% and comparable brand revenue increased 7.6%. E-commerce revenue grew 14.6% in Q3 and 17.7% year to date; it represented 87.0% of Q3 direct-to-customer revenue. Comparable store sales increased 6.3% in Q3 and 4.8% year to date. West Elm was a standout, with comparable brand revenue growth of 27.0% in Q3 and 28.7% year to date.
Cash flow, balance sheet and capital allocation
- Cash and cash equivalents were $379.4 million at October 30, 2011, down from $628.4 million at fiscal year-end. Working capital was $696.0 million, based on current assets of $1,258.9 million and current liabilities of $562.9 million.
- Year-to-date operating cash flow was a use of $1.9 million, versus $42.5 million provided in the prior-year period. Inventory growth, lower accrued liabilities and income taxes payable, and timing of expenditures were key uses of cash.
- Investing cash outflow was $104.3 million, including $102.3 million of property and equipment purchases; financing cash outflow was $142.8 million. Cash declined by $249.0 million during the 39-week period.
- Total debt was approximately $7.3 million, comprising $1.8 million current and $5.5 million long-term. No revolving-credit borrowings were outstanding. The company had a $300 million unsecured revolving facility, $9.4 million of undrawn standby letters of credit under that facility, and $24.3 million committed under separate letter-of-credit facilities for future inventory purchases.
- Management said it was compliant with bank covenants and expected to remain compliant through fiscal 2011; it believed cash and available facilities would cover operations for the next 12 months.
- The company repurchased 2.53 million shares for $94.0 million year to date, with approximately $31.0 million remaining under the $125 million authorization. The quarterly dividend was $0.17 per share; the indicated annual dividend was $0.68 per share, subject to capital availability.
Changes, outlook and notable items
- Q3 growth was led by direct-to-customer sales and West Elm, Pottery Barn and Pottery Barn Kids. Retail revenue grew more slowly than comparable store sales, amid 4.0% less leased retail space and 20 fewer stores year over year.
- Revenue growth and expense leverage improved gross margin year to date. Q3 cost of goods sold was 61.7% of revenue versus 61.8% a year earlier; year to date it was 61.8% versus 62.4%. Lower selling margins partly offset occupancy leverage. SG&A as a share of revenue also declined, partly reflecting lower advertising and fewer impairment and lease-exit charges.
- Fiscal 2011 priorities included expanding e-commerce and international reach, improving supply-chain efficiency, attracting customers and increasing retail traffic and sales per square foot. Management planned approximately $150 million of fiscal-year capital spending, primarily for stores, systems and distribution infrastructure, including seven new stores and eight remodeled or expanded stores.
- Management expected a fiscal 2011 effective tax rate of 37%–39%; the year-to-date rate was 38.0%. Quarterly tax rates could vary.
- On November 1, 2011, after quarter-end, the company acquired Rejuvenation Inc. Management said it was not then material to total revenue or earnings but expected it to contribute meaningfully over time.
- Year-to-date impairment and early lease-termination charges for underperforming stores were $2.3 million, versus $13.7 million in the prior-year period. The prior-year comparison also included approximately $4.3 million in costs related to the former CEO’s retirement.
- Key risks cited include discretionary consumer demand and economic conditions, changing product tastes and inventory forecasting, competition and promotions, reliance on foreign sourcing and vendors, seasonal operating demands, delivery and technology disruptions, international expansion, and potential volatility in comparable sales and taxes. Ordinary-course litigation was described as not currently material; management did not expect current matters to materially affect the consolidated financial statements. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is for Q3 fiscal 2011, not Q3 2010.
- Track holiday-season sales, comparable brand and store trends, inventory levels, and whether e-commerce growth sustains margins.
- Assess cash conversion and planned capital spending, given negative year-to-date operating cash flow and the decline in cash balances.
- Monitor execution and financial contribution from Rejuvenation, international franchising, and planned store and systems investments.
- Verify future repurchases and dividend payments against liquidity needs, capital availability and the company’s seasonal cash pattern.
- Review the full filing for lease commitments, credit-facility covenants, risk-factor detail and subsequent-period acquisition disclosures.