Williams-Sonoma Inc (WSM) 2020 Q2 法說會逐字稿

Welcome to the Williams-Sonoma, Inc. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) This call is being recorded.

I would now like to turn the call over to Elise Wang, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release.

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, growth plans and prospects of the company in 2020 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press release and SEC filings, including the most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Elise. Good afternoon, everyone, and thank you all for joining us. Also on the call with me today are Julie Whalen, our Chief Financial Officer; Felix Carbullido, our Chief Marketing Officer; and Yasir Anwar, our Chief Technology Officer.

As you saw in our press release, we delivered an exceptional second quarter, with net comp growth of 10.5%, operating margin expansions nearly doubled that of last year at 13.1% and record earnings growth of over 100%. E-commerce again drove our results, growing 46% in the quarter and our stores performed better than expected, improving throughout the quarter as we reopened.

In a time when home is more important than ever, we have taken this opportunity to push our longer-term plans. We will do this in 3 different ways: first, we will accelerate digital growth and fundamentally shift the channel mix of our business; second, we're focusing our marketing strategy on content and building customer relationships; and third, we're stepping up our profitability and our longer-term earnings outlook.

Our digital-first strategy, our trusted brands, our omnichannel approach and our commitment to sustainability will continue to provide a powerful source of differentiation and a competitive advantage for our business. As always, and especially in challenging times, what makes us proud as a company goes well beyond the products we sell. In the last several months, we've witnessed not only the ongoing impact of the global pandemic, but also heartbreaking reminders of racial injustice in our country. As we continue to support COVID relief efforts in our communities, we are also taking action to help drive positive change and create a more equitable, inclusive future for all. We are committing to multiyear donations to racial justice organizations and increasing black representation internally and deepening our diversity and inclusion efforts.

These are extraordinary times that require us to continuously evolve and rethink how we best serve all of our stakeholders. We are rising to the challenge, learning, adapting and leading with our values in everything we do. We know thoughtful actions now will shape the next phase of our growth. We are firmly focused on this opportunity and investing in long-term strategies.

Now let's talk about Q2 in more detail. While our net comp was at 10.5%, demand comp was substantially higher. Our e-commerce business grew at a net comp of over 46%, and includes purchases made through our omnichannel services, such as curbside pickup and ship from store. We further optimized our digital experience, adding more inspiring content and enhancing the speed and usability of our e-commerce sites.

As it relates to our stores, traffic was down, but conversion was up substantially, and our stores outperformed expectations, improving material -- materially from May to July, with third quarter-to-date demand comp improving to negative high single digits.

Another highlight of the quarter was a significant expansion in our margins. In addition to cost savings across the business, we substantially pulled back our promotions and leaned into content-led marketing. Our value equation is driving lasting, authentic connections with our customers and also attracting record-high new customers. Our e-commerce performance this quarter was a powerful example of our brand and digital strategies at work. The key drivers of our growth were innovative, sustainable products, and engaging content-rich experience and technology improvements. Our newly designed single page checkout experience, improved site speed, extensive product information page improvements, and our Outward powered Design Crew Room Planner enhancements all drove strong results.

Also this quarter, we continue to optimize our digital spend, high-returning investments, leveraging our in-house media capabilities and a strict test and learn agenda across the portfolio. Our content-rich online experience, coupled with our marketing strategies, drove another quarter of very strong customer growth in the e-commerce channel as well as substantial increase in organic traffic.

Now let's talk about our brands. Probably the most impressive was the Williams-Sonoma brand, which delivered a record quarter with a net comp of 29.4%. We maximized the shift to cooking at home during the pandemic and executed on a relevant marketing strategy. Customer growth reached over 15% and we saw an increasing number of new and returning customers turning to us for their cooking and at-home dining needs. Our marketing and relevant content strategies were driven by our food-first approach, highlighting ideas, recipes and culinary skills that revolved around eating well at home.

To support the vendor community across the country, we added perishable products from local restaurants and increased our assortment of foods to meet the rising demand from our customers. As we look forward, we are excited about the growing interest in cooking especially for millennials, which will not only benefit our business in the short term, but as more people learn to cook, it will become a lifelong skill that should drive our business over the longer term.

To continue our growth trajectory in the Williams-Sonoma brand, we are focused on innovative, exclusive products, further improving our digital experience, driving more awareness and interest in cooking at home and optimizing our channel mix.

Our Pottery Barn brand also had a very successful quarter, driving a net comp of 8.1%. Our product line continued to improve, with exciting new aesthetics and high-quality sustainable products at great price points. Businesses that saw a particular strength in the quarter were outdoor furniture, work-from-home solutions and products to update family living spaces. Our growth initiatives, PB Apartment and Marketplace, also grew ahead of expectations and contributed meaningfully to our comp growth.

The foundation of our Q2 performance was the tremendous results in our e-commerce channel, which reached over 70% of our sales. We continue to improve our site experience by adding inspiring content that drove strong organic traffic, high average order value and units per order. Our Pottery Barn children's home furnishings business was also strong in the second quarter, with a net comp of 4.8%.

It's clear that customers are responding to our sustainable, high-quality products. Our industry-leading assortment of GREENGUARD certified organic and fair trade products are resonating with customers more than ever, especially in our baby business, which continued to accelerate in Q2 as a key growth category.

One area of softness has been our backpack business as most schools are starting the academic year with distance learning. But we are seeing a surge in our study-at-home solutions, especially home study furniture across both Pottery Barn Kids and Teen as we become the destination for study from home for kids of all ages.

West Elm continues to deliver very strong net comps year-over-year at 7% and on a 2-year basis of 24.5%. This brand continues to have high appeal, particularly in our furniture categories where we saw substantial growth in indoor and outdoor as well as key successes in home office, dining and storage furniture this quarter. We substantially enhanced our digital experience in previously retail dominant categories like upholstery, textiles and decorative accessories, which also contributed to our growth online. Also in the quarter, we expanded our Steelcase partnership for the launch of a new furniture collection, aimed at helping our customers work from home comfortably and productively with products that provide form and function.

Cross-brand, our business-to-business division reaccelerated substantially to double-digit growth. As you know, this is a large, highly fragmented industry that we are disrupting. We have invested in a strong sales team and support in our infrastructure to turn this opportunity into a $2 billion business.

In the second quarter, as states reopened, we were there for our customers in offering a furniture resource that was immediately available for hotels, restaurants and corporate public spaces. We also continued to see significantly higher sales growth from our cross-brand loyalty key members compared to nonmembers and more customers shopping across our portfolio of brands to furnish their homes. It goes without saying that none of these results will be possible without our people. Their ongoing resilience and dedication have never been more apparent than during these difficult times. We are proud to continue to invest in our associates through several initiatives announced this quarter, including increasing the minimum wage for hourly associates and further enhancements to our [press release] policy. Building on our strong culture, especially in time of real adversity is not only the right thing to do, but also creates more loyalty and a better experience for our customers.

Looking forward to the second half of the year and beyond, we are confident in our growth trajectory. The strong trends from last quarter are continuing. Our product pipeline is one of the best we've ever seen. Our e-commerce initiatives are driving accelerating KPIs and our inventory position will continuously improve. Longer term, we believe the behavioral changes and industry shifts that have emerged from the pandemic will persist and continue to favor our business.

Over the past 5 months, we have seen an acceleration in online sales and with our powerful digital platform and trusted brands, we are maximizing the shift and driving e-commerce sales to new levels. We expect this trend to continue and are executing to a future where stores will be fewer in number but even better in experience. As a result, we are not only more confident in our long-term financial outlook, but in our potential to further expand our profitability. We're investing in the next phase of our growth and the opportunities that position us for accelerated market share gains. And as we look ahead, we are more optimistic than ever about our future.

Now I'll turn it over to Julie, who will provide more detail on our second quarter financial results.

Thank you, Laura, and good afternoon, everyone. Our second quarter performance demonstrated our ability to deliver strong top line growth at record profitability levels. Our top line acceleration, combined with strong financial discipline, resulted in the highest operating margin we have seen outside of a holiday fourth quarter and earnings per share of more than double last year. This performance reaffirms the resilience of our digital-first model and the enduring appeal of our innovative and sustainable products. It also speaks to the strength of our team and their agility and strong execution during these challenging times.

Before I discuss our financial results in more detail, I wanted to give you an update on our response strategy to the current pandemic. As COVID-19 continues to present ongoing challenges, safety and adaptability remain our guiding principles for how we are operating during this time. This has meant heightened safety measures in all of our supply chain operations in our reopened stores and across our corporate offices. From a financial perspective, given the uncertainties in the macro environment going forward, maintaining strong financial health remains a top priority. As we continue to prepare our business to the various economic scenarios that could unfold the next 6 to 12 months, we are maintaining tight expense control over all nonessential spend, including the elimination of almost all business travel and other discretionary spend. Advertising investments are limited to those initiatives with the highest returns and our capital expenditures have been prioritized for those initiatives that support our e-commerce growth and further our long-term competitive positioning, including investments in technology and our supply chain operations, while reducing our investments in store remodels and relocations. These actions and our culture of strong financial discipline have allowed us to deliver strong profitability despite the incremental operating costs associated with COVID-19.

Our liquidity position remains robust as our strong performance year-to-date has generated over $216 million in operating cash flow and has contributed to bringing our cash balance to almost $950 million. And as mentioned on our last call, we further improved our financial flexibility recently by adding $0.5 billion of liquidity through the extension of our $300 million term loan to January 2022 and the addition of a $200 million, 364-day unsecured revolving credit facility. We believe this level of liquidity puts us in a very strong position to continue supporting our operations while investing in the long-term accelerated growth of our business.

Now turning back to our second quarter performance. Net revenues in the second quarter grew 8.8% to $1.491 billion, with a net comp growth of 10.5%, the highest quarterly comp we have seen in the past 10 years. Our demand comp, which includes orders placed but not yet filled in the quarter, was substantially higher at almost 19%. This growth was driven by another quarter of incredibly strong e-commerce growth, which accelerated to a net comp of 46.4% and reached almost 76% of our total revenue in the quarter.

By brand, Williams-Sonoma delivered a record net comp of almost 30%, driven by triple-digit growth in its e-commerce business. Pottery Barn accelerated to its highest quarterly net comp in recent years of 8.1% and West Elm grew at a net comp of 7% on top of 17.5% last year. Our Pottery Barn children's home furnishings business drove a net comp of 4.8%, with particular strength in our Teen business. And our emerging brands, Rejuvenation and Mark and Graham, delivered another quarter of double-digit growth.

Moving down the income statement, gross margin for the second quarter was 37% compared to 35.4% last year. The 160 basis points of expansion in our gross margin was driven by higher merchandise margins and occupancy leverage. Higher merchandise margins resulted from reduced promotional activity as we continued with our shift to a content-led marketing strategy that focuses on the overall value equation of our high-quality sustainable products. Occupancy leverage was driven by higher sales and an almost 6% or $11 million reduction in year-over-year occupancy costs, which includes the impact of reduced rent and operating costs from fewer stores as well as reductions from COVID-19-related rent abatements. And this resulted in occupancy leverage of 170 basis points at $166 million or 11.2% of revenues this year as compared to $177 million or 12.9% last year. The combined impact of these 2 drivers was partially offset by higher shipping costs. Shipping costs were up in the quarter as a result of the substantial shift to e-commerce sales in the quarter as well as shipping surcharges from our third-party shippers that went into effect from the last month of the quarter. In addition, we continued to be negatively impacted by incremental China tariffs.

SG&A leveraged 460 basis points to 23.9% of net revenues compared to 28.5% of revenues last year. This was primarily driven by significant advertising leverage as we further optimize our digital spend on those initiatives that drove high returns in traffic and conversion employment leverage and other leverage throughout SG&A, primarily from higher top line performance, lower variable store payroll and strong financial discipline. These results led to our record profitability with operating income growth of 108% to $195 million and operating margin expansion of 620 basis points to 13.1%, the highest operating margin we have seen outside of a holiday fourth quarter. This resulted in diluted earnings per share of $1.80, which was more than double that of last year at $0.87.

We are very pleased to be able to achieve these levels of profitability while continuing to pay all our corporate associates and store associates who are working over 12 hours per week as well as absorb the incremental cost to help keep our associates and customers safe during this pandemic, including personal protective equipment, frequent cleaning, testing and COVID bonuses for our supply chain associates. Going forward, even though our profitability is at record high, given the uncertainty in the economic environment due to the COVID pandemic, we will continue to eliminate all nonessential spend to ensure that we can continue to fund the operations of our business and to invest through this crisis and emerge as an even stronger and more resilient business, delivering sustainable, long-term profitable growth.

On the balance sheet, as previously mentioned, we ended the quarter with a strong cash balance of almost $950 million compared to $120 million last year. This reflects the strength of our cash balance as we enter 2020, the full drawdown on our $500 million line of credit with the support of our banking partners back in March as well as the resilience of our business during this pandemic, generating positive operating cash flow over $216 million year-to-date. This cash balance has allowed us to not only fund the operations of the business, but to also invest over $76 million in capital expenditures in support of our future growth and return over $79 million in the form of continued quarterly dividend payments to our shareholders.

And given the strength of our business and our current liquidity levels, we have made the decision to return our capital expenditures to pre-pandemic levels. We are also contemplating reducing the amount outstanding on our $500 million line of credit during the third quarter. Our decision process will take into account various factors, including the uncertainty that still remains in the macro environment.

Moving down the balance sheet, merchandise inventories were $1.042 billion for a decrease of 12.2% compared to last year. This reflects our efforts to cut and push out our inventory purchases to preserve our liquidity at the beginning of the pandemic and the impact of our subsequent substantial e-commerce outperformance in the past 2 quarters. We have been working closely with our vendor partners, the majority of whom have returned operating at full capacity, and we expect to see continuous improvement in our inventory position.

Turning to our outlook for the second half and our fiscal year guidance. We have made the decision not to provide specific full year guidance at this time, given the uncertainty in the economic environment due to the COVID pandemic. What we do know now is that our business continues to be very strong in the third quarter. Quarter-to-date sales remain robust across all brands and inventory will continuously improve through the balance of the year. However, as much as we expect to improve our overall profitability on the year and going forward, the Q2 level of SG&A is not sustainable. We have significantly reduced payrolls and ad cost spend as our sales expectations were lower than what we actually delivered this quarter.

In terms of margin, we believe they were going to continue to be able to reduce promotions as well as deliver occupancy leverage, but shipping will be a major headwind in the back half. Various surcharges have been announced by third-party shippers on all retailers, and these higher costs will affect us in Q3 and more so in Q4 as a result of peak surcharges during the holiday season. In addition, we also expect to incur incremental costs associated with keeping our people and customers safe during the pandemic.

Regardless, we remain confident in our ability to drive higher operating margins on the year compared to last year due to our strong performance to date, including our robust e-commerce performance, which we believe will persist through the balance of the year.

With regards to capital allocation, given our business has not only recovered substantially but excelled during this pandemic, we have increased our capital investments in high-returning initiatives that focus on digital to drive our long-term growth. And as it relates to our dividend, we have announced today another quarterly cash dividend of $0.48 per share, which speaks to the confidence we have in our business as well as our commitment to shareholder returns.

Looking further ahead, as Laura mentioned, we are even more confident in our long-term financial outlook. The renewed appreciation for the home and at-home experiences, such as cooking and working from home, together with the accelerated shift to online for home furnishings, continue to favor our business on all fronts. We are executing with speed and agility to capture the unprecedented opportunity that lies ahead for our company. Our strong performance through this crisis reinforces the relevance of our design-led, sustainable products, and the power of our digital-first platform.

With more consolidation expected in our highly fragmented industry, we are confident that we are one of the very few retailers who are best positioned to outperform and to aggressively take share. As a result, we now believe that with the acceleration of our profitable e-commerce business, becoming a bigger part of our total growth, we can drive operating margin expansion.

In summary, this past quarter was another powerful display of our competitive strengths that continue to extend our leadership in the home industry. Our innovative, sustainable products, our multi-brand digital-first model and our content-rich marketing are the reasons why customers are choosing us over the competition. And this, combined with our long-term growth road map and strong execution, gives us the confidence in our ability to maintain this growth and increase profitability in the years ahead.

Before I turn the call over for questions, I want to thank our associates for their ongoing dedication, flexibility and resilience during these challenging times. They are at the core of our company's success and our ability to continue to serve all our stakeholders, our customers, our associates and our shareholders.

I would now like to open the call for questions. Thank you.

(Operator Instructions) We'll go ahead and take our first question from Adrienne Yih with Barclays.

Let me say, a remarkable quarter, really truly remarkable. Laura, I was wondering if -- or actually, Laura or Julie, if you can talk about what drove the late quarter demand comp? The differential between the 19% and the 10.5%, should we assume that, that sort of a tailwind that should be recognized on top of whatever kind of momentum comp you had in the third quarter?

And then just really quickly, are you seeing trends outside of major metropolitan suburbs, this notion of de-urbanization as a sustainable trend? How do you think about that going forward?

Adrienne, it's Laura. So we saw -- we've seen very strong demand. And as you know, when the pandemic began, we substantially cut our inventories and our business partners are so reactive that they were able to do that. And so obviously, as our demand exceeded the inventory levels, not only do you not fill it in some cases, you put it on that order, but also the demand itself is constrained. So one could say that the demand comps have actually been even higher had we had the inventory in stock. So the inventory levels were point one.

Point two is mix. So our business is growing really across the board, but more rapidly in furniture and specifically drop ship furniture. We made a big strategic move to move a lot of our Asian upholstery, particularly for West Elm into our Sutter Street operations. And so of course, that inventory previously was stored in our distribution center and now we're making it to order. So there's a natural delay that also just happens because we're shifting into domestic upholstery.

In terms of your second question about demographics, we have Felix here. Felix, if you want to talk about our customers and what we're seeing across the board?

Sure. You got it. In terms of urban and suburban, we haven't seen dramatic shifts, but I think what's noteworthy is the shift into a suddenly younger demographic, with the millennial population getting into household formation. We also are seeing a nice growth in condo and apartment dwellers, where I think we've spent a lot of time and energy focused on the size and scale of our furniture as well as our opening price points. I think that, coupled with the fact that we do offer such a great assortment that is sustainably built is part of the attraction of what millennials are finding. So I think those are 2 trends that we're starting to see from a demographic perspective.

We'll go ahead and take our next question from Peter Benedict with Robert W. Baird.

So I guess, maybe, Julie, can you maybe frame the tariffs hit this quarter? And as we think about the second half year, the tariff headwind should basically be a push, I would think. But I just wanted to confirm that and when you think about that, how is the shipping cost headwind in comparison to the size of the tariff headwind -- that shipping headwind just basically replaced what's been the tariff headwind. So kind of a cost question. I know you mentioned in your prepared remarks, but can you give us maybe a little bit more detail around those so we can think about that correctly?

Sure. So from a China tariff perspective, as we've said before, as we move throughout the year, the year-over-year impact becomes less. There's still a year-over-year impact in the back half, but it's not as big as Q1 and Q2. And so that will reduce as we move throughout the year, but we'll still have, obviously, the China tariffs.

As far as the shipping, the shipping charges are material. I think you've heard from the third-party shippers that they are imposing surcharges on all retailers. And so that will be a headwind as we move into the back half, particularly in the fourth quarter with peak surcharges. And it will be sizable. We haven't disclosed the amount, obviously, it's confidential from a contractual perspective, we can't speak about it. But it is something that will have -- put pressure on our gross margins. But of course, with occupancy leverage and higher merch margins that are expected and ongoing SG&A leverage, we are very confident in our ability to drive off margin expansion.

(Operator Instructions) We'll go ahead and take our next question from Brian Nagel with Oppenheimer.

Great quarter, congratulations. So I'll stick to the one question rule. Just maybe to elaborate further, just on the trended business through the quarter. I think, Laura, you had mentioned in your comments about how stores were tracking. I'm looking at just how the business trended through the quarter, both in-store and online, in particular, as the stores open, then maybe if you could elaborate further on just what we're seeing so far into the third quarter.

Yes. I mean it's not -- there's nothing really there that would be interesting, I don't think, to you, even if you saw everything, it's very consistently strong as it is still now. Of course, the stores open and then now we have, I think, 22 currently we shut. So that doesn't help when I read you the comp, and I told you earlier where the comp is right now, that includes that. So we have just rock star store people, who are driving business, not just when the stores are open, but also driving online through design and virtual chats, which is quite amazing.

And so they're just so dedicated. We're so proud of them. And that's a big part of, I think these results is what they're doing, and they're training. We kept them all working, and they're so valuable to us because they know how to sell furniture, they know our line of furniture and they're able to do it from home. So it wasn't great, that stores we closed. That was hard for everyone, but they're making the most of it.

So the big question becomes, I think, as we look in the second half, is what happens. Do more stores shut, do more stores open. And that would be a benefit. I think the stores are really an add to our digital-first strategy. And they certainly bring to life our product and allow you to make even a better decision. So we're very hopeful that they'll stay open, and we'll keep everybody safe as we have been with our appointments and our safety protocol and constant cleaning.

So we're very optimistic about the back half. We have a lot of things in our favor. And we feel very lucky at the time where I know it's not the case for everyone, and we're very cognizant of that and empathetic about what's going on in the world and doing our part to use our strength to also make a big difference in the communities and with our employees to drive both safety but also mental health and racial justice.

So I know it's a lot of an answer to your one question, but it's important to us, and it's our true North right now, and our values are driving our business, and our business is allowing us to do more for our stakeholders.

And so this -- so in -- through Q2, though, the business strength through the second quarter?

A strong throughout -- it's strong. It's a strong throughout. There's different things that happen when you comp different promos, you decide not to comp a promo, and that has nothing to do with demand. It's just how it flows, but there's not a lot of change there.

We'll take our next question from Oliver Wintermantel with Evercore ISI.

Yes. Laura, you mentioned several times in the prepared remarks, like your digital-first strategy and investments in CapEx more on the e-commerce side and the IT investments. What does that mean for your store base? Is there an underlying message that we might see an accelerated store closures? Or I just want to see, in 2 years or 3 years, how would your store base look compared to today?

Yes, sure. So first of all, we have been investing in e-commerce for many years. So we have a very sophisticated platform. It's not as if we have some big hockey stick to come with the tech back. I'm going to let Yasir in a minute who's with us talk about the things we are adding that are driving significant performance, but let me answer your store question specifically.

So we see stores as an addition to our strategy. That said, we have significant amounts of leases up for renewal. In the next 3 years, over half come up. Over half. So whether we keep them, close them, renegotiate them or relocate, we are sitting in a very strategic place in this time. And we are investing in our stores where we operate, and we are closing others so that we can be very focused on running great stores with great experiences in them. The mix will continue to shift. Obviously, because the growth in DTC is much greater and stores are contracting. And this is giving us a lot of occupancy leverage. And our landlord partners, we have some very, very good ones, really see us as a very strong partner. They want to keep us, and we're working together with them to stay in those stores and have very high profit levels. And where that doesn't work for them, we just -- we go somewhere else to re-lease entirely to market.

I think this pandemic has shown us that we are agile and we can operate regardless. And those store people are the people who make this happen, whether they have their stores open or are talking to customers from home. And that was something that I think we're all really just -- we hope would happen, but we're so impressed, continues to be a strength. Okay. So now I'd like to pass it over to Yasir to talk about our stance on technology and investment in e-commerce.

Great. Thanks, Laura. So I think connecting with the stores and then I'll get into the e-commerce, like stores also, like I said, we have provided -- continue to provide and invest great tools into the hands of our associates, especially of our designers, who are connected deep into the communities. The design experiences Laura just mentioned about the design tools, the virtual chat, the appointments, all of that, that has given strong tools into the hands of our designers and that have made an impact in engaging with the customers. And we have also been continuously investing in converting stores into more omni experiences, right? Whether it's buy online, pick up in stores, ship from store, ship to store, curbside pickup, especially be providing safety to the customers during the COVID times and that has worked very well for our customers and for our associates.

And our e-commerce, which is a huge -- has been a huge business and has been a big growth engine for us, continues -- we continue to invest. In COVID time, we took understanding, we took a step back and looked at the optimized way to keep investing in tech. And right now, we are trending back towards our pre-COVID investment in technology all over, including definitely and doubling down on e-commerce. And the whole technology team, I would say at this time is I'm so proud to have such a growth mindset and everybody in my technology team, agility, commitment and willing to fight against all odds. So during these COVID times, many companies have gone through faster transformation, digital transformation, we have done the same many, many X times, and we have gone faster in implementing building things, which might have taken 6 months in a regular time period. My teams have built it in 2 months or 1.5 months.

We have gone very fast to the market to experiment with the customers and learn the signals from the customers what they need in our sites and experiences, using our own homegrown experimentation platform, using our own homegrown recommendations platform, and the outward power, which Laura and everybody on the leadership talks about, is like we're trying to -- we're connecting out for much better than ever with our website experiences, with our store experiences and design.

So I can go on and on, the supply chain transformation we're doing. And a lot -- one important thing to see is like the transformation in the past 2 years has been to focus and drive our decisions based on data, analytics and powered by artificial intelligence and ML, whether it's search engine, whether it's outward experiences and all. So I think we are -- we have developed a very, very strong package, talent, platform, technology, and the innovation stream is going very fast. And we believe this is like sort of the -- it's not the end, it's at the beginning, if we're going to build so much more, which is going to be very long-lasting beyond COVID and beyond 2021 and further.

We'll go ahead and take our next question from Chris Horvers with JPMorgan.

Very nice quarter. A couple of questions on the margin. First, in the near term, do you expect gross margin to be down in the back half, but leverage operating margin overall on the SG&A? And secondly, as you think about the SG&A, some of what happened in this quarter, what's the right baseline that we should be building off of what would you consider sort of the one cost -- onetime cost bucket, just as we think about normal seasonality of SG&A dollars?

Chris, this is Julie. I'll take that. So from a gross margin perspective, I think what we were really excited to see was the expansion we saw this quarter, and that's both from the fact that we had higher merchandise margins and occupancy leverage. And we have every reason to believe that that's going to continue. Certainly, there'll be higher pressure on shipping costs. But we're not obviously guiding to where the gross margin is going to be, but we're really thrilled to be able to drive that gross margin expansion even with this quarter having some pressure from the shipping costs. And certainly, SG&A has been leveraging for a while now, and we expect that to continue. We've been having some, obviously, really strong cost controls, eliminating all nonessential spends and being very thoughtful about that because there's different scenarios you can model. And we got to make sure we're ready to continue to invest in this business and take market share as we come out of this even more so.

But I will say Q2 is certainly some of the lowest levels we've seen. And so there -- as we move into the back half, with the holiday -- peak holiday season and things like that, we may have to spend a little bit more in advertising and a little bit more variable store payroll. So I wouldn't necessarily take our Q2 levels and model those out, but we do expect to have SG&A leverage, and we absolutely expect to have operating margin expansion.

We'll go ahead and take our next question from Chuck Grom with Gordon Haskett.

Just a couple for me. On the spread again between net comp and demand, can you just help us think about that from a banner perspective? And I guess how that's going to impact third quarter results? Do you expect to recapture that demand comp?

And then on the long term guide, can you provide us some guidepost on where you think operating margins can go to? Or maybe said differently, what you think the flow-through will look like going forward?

Chuck. So sorry, we're not going to give you the guidepost you're looking for. We're not ready to do that. What was changing is to say that previously, we said we -- our op margin at 8.6% would stay there, and we drive sales. Now what we're saying is we're going to drive sales, but we're also going to drive profit ahead of the 8.6%. Okay? So that's all we're willing to say at this point.

In terms of by banner, that's an interesting question. So of course, because of the dynamic I talked about with furniture, the spread is larger with the furniture brands. Because Williams-Sonoma, although there is components that are to come and that our furniture is a much smaller percent, so the other brands have more higher demand comp versus net than the Sonoma banner.

And then let's see. Third quarter, you asked me -- what -- remind me what you asked me about third quarter?

I guess just -- I'd like to know what the quarter-to-date account is, but I know you're not going to answer that. But I guess like when do you expect -- when would you expect this to recapture that? I mean how long does it take to recapture...

Well, I remember, you ask me where the net comes. I mean it's an interesting question. If demand continues to exceed our expectations, then the inventory constraint will just be kicked down the line because you'll run out faster. So if everything stuck to where we think it's going to be, you'd see recovery in the back half, all the way into next year, by the way. But if we beat the numbers again, then you're going to be hearing me say this next time. The numbers are within what you're seeing us hit now. There is some variation here and there, but there was in the same range of what the comp is that we just share with you for Q2. I hope that helps.

We'll go ahead and take our next question from Seth Basham with Wedbush Securities.

Great quarter. My question is around SG&A. Clearly, over time, you're planning to reduce your store footprint, which will produce your occupancy costs, but also take out store labor. As it relates to store labor in the interim, would you plan to reduce that even ahead of store closures because of reduced traffic levels?

No. In fact, it might be the opposite because things get more complicated. The abating factor is that we can't have that many people in our stores. So even if the demand is there, we can only have so many people. But you should not model that store labor will leverage any further. Holiday will cause us to bring more people in because the sales are higher.

Got it. Okay. That's helpful. And if I could just follow-up, if you don't mind, as it relates to SG&A, thinking about the go-forward run rate. Clearly, we're talking about levels that are higher than the second quarter. Just to reframe the question that others have asked, we're thinking about it on a year-over-year basis, would you expect SG&A to be down year-over-year in the back half of the year?

SG&A down. We expect SG&A in the back half to be down to last year's SG&A in the back half.

(Operator Instructions) We'll go ahead and take our next question from Brad Thomas with KeyBanc Capital Markets.

Congratulations from me as well. I want to ask about the dynamic of sustainability and pull forward that we're all asking of many home-related companies right now. I've been asked by investors, how many bread makers does the American need to buy? I know the belief that these trends are probably pretty sustainable. But I was hoping you could share some more data on maybe how the customer is shopping you now and what you're seeing in terms of repeat purchases and ability to cross-pollinate customers across your brands?

Yes. Our cross-brand performance has never been better. And we've been driving it. It's not a surprise. I mean we're driving it through our key rewards and our cross-brand marketing. It's interesting in the beginning. We started -- we saw the obvious bread maker trends, ice cream maker. But now the strength is broad-based. And you can just see that people are very interested in making their home more comfortable, and we are top of mind with our curated products and our trusted brands, and we're delivering it for them in a way that they can expect to get it, and we stand behind it. So there's a lot that we have going for us right now. It's very relevant to this time and a competitive advantage that will continue to drive our results.

We'll go ahead and take our next question from Michael Lasser with UBS.

Laura, you probably saw some of your competitors report like 80% growth at Wayfair, Target comping up 30% in the home category. Why do you think in light of those, you might have lost share in the quarter? And also, how much demand comp was realized that was coming out of 1Q into 2Q to contribute to the comp in 2Q?

Okay. I don't -- we'll have to come back to that piece. But versus competitors, I want you to look at our profit levels versus last year, first and foremost and compare to some of these other people. You can drive sales. We could drive them higher. Frankly, we didn't have the inventory to do that. And we want to have a great customer experience. We don't want any more than we have to have on back order. We know the items they're willing to wait for that don't become excessive. But if you put too much on back order, it's a bad customer experience. So we're very focused on taking share.

I've said before, it's not an either/or with us in Wayfair as the disruption in brick-and-mortar happens and the smaller players. There's a couple of people who are going to win, and we're one of those people, because currently, 80% has been done at retail. And that has obviously changed forever now. And so they are going to us and they're going to go to those other retailers, too. And the thing that is really the differentiator with us is that we have curated brands, you don't have to search through a ton of products. You can trust the level of quality. The products are sustainable. The value equation is fair. And those are all very important attributes to a customer. And we're able to do that because we design our own products. We make our own products. So we're giving you a great price point for what we're selling you. So it doesn't phase me to think about their growth slightly higher.

We also obviously -- in terms of the demand question, let me try to understand what you asked. I think you're asking, did we fill -- we're always going to fill from the other quarter, we have more of a gap than we have the benefit, right? I mean we have more demand than we can fill now, and that affected the Q3 -- the Q2 net negatively.

Okay. Understood. Could I ask one quick one on the Williams-Sonoma concept? How much of that growth came from like consumable products? There's a lot of food that, that business sells versus devices and other items that go into the support of clicking something.

All good.

And we'll go ahead and take our next question from Anthony Chukumba with Loop Capital Markets.

Let me add my congratulations on a nice quarter as well. I guess my question is, I mean, obviously, your e-commerce penetration was -- it sounds like it was at all-time high. And it sounds like that's kind of where the business is shifting. And historically, you've been sort of like 50-50 between in-store revenues, DTC. What do you in business sort of along -- even just kind of direction, kind of a long-term kind of sustainable mix going forward? Is it more like a 60-40 e-commerce stores? Is it maybe 70-30? How do you sort of think about that?

I think the best way to think about it is how big do you think the total business could be. I mean, clearly, we're ahead of our targets with respect to e-commerce as a percent of our total. And that's where the growth is going to come from. Our results show that our digital-first platform has a lot of capacity to meet our customers' demand online. And it also depends on how many stores we close and what our landlords do with our leases in the future. But our physical stores play an important role in continuing to differentiate our offering to the customer and they are experiential, and they offer our customers the convenience of omnichannel services, too, which we haven't talked about, but that is a real benefit in getting the products closer to customer, particularly as we see the shifting battlefield. And so it's a -- we're currently at 70%. Could you say, could it go higher? Yes, but you might see better-than-expected store results through the back half as well.

We'll go ahead and take our next question from Cristina Fernández with Telsey Advisory Group.

I'd add my congratulations for the quarter. I wanted to ask about the holiday season. How are you planning it differently this year given the cadence of events and store limits? And do you think merchandise that has worked so far will continue to drive that demand through the holiday season?

Yes. Thank you for the question. Of course, yes. We always know that getting a running start in the holiday with both customers, new customers, but also products that are selling, makes for a better season and also gives us the ability to get the inventory levels right because we can chase it. So that is all good.

In terms of the competitive posture and how we're playing the holiday season, I hesitate to go through that now because it is so competitive. But we're very optimistic and planning for a variety of different outcomes that could occur, as I mentioned earlier, in case we have a second wave of store closures, how will we handle that. And if we continue to beat demand in DTC, how we make sure that we get it to our customers on time.

We'll go ahead and take our next question from Bobby Griffin with Raymond James.

Let me add my congrats on a great quarter. Just real quickly, from a high-level perspective, Laura, do you think the pandemic has delayed any of the new product innovation or development that the industry typically has? Or is once the industry gets caught up kind of in this -- from this demand and kind of supply chain gets back to normal, will we be back on a typical product introduction cycle as we have been in the past?

We are not delayed in our product introductions. I don't know if maybe others are, but we are not. Our teams have been doing it virtually and approving samples via Zoom, and it's been pretty amazing, what they've been able to do. So no, we're not behind. In fact, we're probably -- it's an interesting point that I haven't thought of. We're probably gaining speed on others who aren't as agile.

We'll go ahead and take our next question from Marni Shapiro with Retail Tracker.

It's really outstanding. Could you talk -- can you give us an update on some of your smaller brands a little bit on Mark and Graham and Rejuvenation? And just an update as well on your international businesses? I don't recall hearing an update on that.

Yes. Sure. Thank you for that question. So Rejuvenation delivered a very strong quarter, strong customer engagement, big time increase in traffic. And the stores have shown vast improvement, the AOV is up substantially. And as I said, customer growth, you can imagine with customers spending more time in the home is focused on home projects. We've seen our core categories like lighting, hardware and kitchen and bath, all drive strong quarter-to-date double-digit comps. And we saw the furniture that was impacted more greatly because of the store closures, rebound later in the quarter. And we remain really focused and bullish on this strategy, accelerating our digital growth, optimizing our marketing strategy and accelerating our contract trade strategy, which is a big part of this business.

Mark and Graham also had a very strong quarter despite the fact that they are not as focused on home, which is quite interesting. And they continue to pivot that merchandising strategy to areas that are the strongest and incremental categories like pet and baby are working. And we're really focused on optimizing the customer site experience there. We're updating [it] with the new creative overhaul, cleaner personalization experience, et cetera.

In terms of global, this is a good one because we did see some weakness in Q2 due to franchise orders being down, but that quickly changed directions. And now we are shaping orders. And just to reiterate, our strategy for global is franchise. It's not company-owned. As it relates to our company-owned though, Australia is doing pretty well. U.K. is under a little pressure. And we are well positioned to continue to drive e-commerce across our franchises and our company-owned.

The thing you didn't ask, which we did mention was B2B, which is quickly becoming a very sizable business for us and one that I think people questioned whether would stay healthy during the pandemic, and we are gaining momentum and confidence in this business with very large companies who are investing with us and our speed to market is a huge competitive advantage here. Our team is very aggressive, out hunting new deals all the time versus just waiting for them to come in, and that's a big change, frankly. And then also, people love that they can shop across brands, with a single person and have us coordinate delivery for them. So it makes it a lot easier versus going through a bunch of different purveyors. So thank you for the question, Marni.

That does conclude today's question-and-answer session. I'd like to turn the call back over to Laura Alber for any additional or closing remarks.

Well, thank you all for joining us today. Thank you for your thoughtful questions. And we look forward to seeing you and talking to you soon at the next quarter earnings results.

Once again, that does conclude today's conference. Thank you so much for your participation. You may now disconnect your phone lines.