Williams-Sonoma Inc (WSM) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Williams-Sonoma, Inc. first quarter 2003 earnings release conference call.

At this time all participants are in a listen-only mode.

We will conduct a question and answer session after the presentation.

As a reminder, this conference is being recorded.

I would now like to turn the call over to Bryn Argov, Director of Investor Relations at Williams-Sonoma to discuss forward-looking statements.

Please go ahead, Ms. Argov

Good morning.

Please note that information provided on this call should be considered in conjunction with this morning’s press release.

Forward-looking statements included in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the financial condition, results of operations, and business of the company and are subject to certain risks and uncertainties that could cause actual results to differ materially.

Please refer to the company's currents press releases and SEC filings, including but not limited to reports on forms 10-K, 8-K, and 10-Q for the full text of the forward-looking statements.

The company under takes 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 would now like to turn the conference over to Howard Lester, Chairman.

Good morning.

Thanks for joining us.

With me today is Ed Mueller our, CEO, Laura Alber, our President of the Pottery Barn brands, Pat Cowell, our President of the Williams-Sonoma brand, Pat Connolly, our Executive Vice President and Chief Marketing Officer, and Sharon McCollam, our Executive Vice President and Chief Financial Officer.

As all of you know, Ed Mueller joined the company as the new CEO in January.

Over the past four months, Ed has spent the majority of the time with me, learning our business and meeting our people.

Ed is rapidly assuming the leadership role in the company and is an outstanding complement to our existing management team.

I want to turn the call over to Ed to highlight our first quarter performance, and Ed and I will both be available for questions during the Q&A at the end of the call.

Thank you, Howard.

Before we begin talking about the first quarter, I would like to say that I'm thrilled to be here today.

Having completed my first quarter as CEO, I'm inspired by the greatness of this company and our people.

Although I served on the board for four years, I never had the opportunity to embrace the day-to-day energy that this management team brings to the organization.

The organization is truly driven by passion at every level.

Exemplified by it’s devotion to customer service, ongoing pursuit of operational excellence and preservation of its “people first” culture.

I could not be more excited about the opportunities that lie ahead for us in the next several years, and it is a privilege to have the opportunity to lead this great company to its next level of success.

Turning now to our quarterly results, we are extremely pleased with our first quarter 2003 financial performance.

Despite one of the most unsettled economic environments we have seen in a long time we were able to drive top line sales growth while once again exceeding our earnings per share targets.

With top line revenue growth of 12.2% and diluted earnings per share of 11 cents, first quarter 2003 represented the second highest first quarter earnings performance in the history of the company.

We believe these strong results demonstrate the ongoing strength of our brands and the effectiveness of our multi-channel strategy in the whole market.

During the quarter we successfully launched our newest catalog concept Pottery Barn Teen and accelerated the growth of our merging catalog concept, West Elm.

The consumer response to both Pottery Barn Teen and West Elm exceeded our expectations and we continue to be very excited about the long-term potential of both these brands.

Also during the quarter, we received substantial benefits from supply chain productivity and overhead cost reductions which drove our better than expected operating results.

As we look forward to the second quarter and the balance of the year, we are aggressively working on the strategic initiatives that we outlined during our last call.

Driving top line sales growth, improving our pre-tax operating margin, and most importantly, enhancing shareholder value.

Consistent with our strategic effort to drive top line sales growth, we are excited about the growth potential that exists in both our emerging and existing portfolio brands and we are continuing to invest in new concept opportunities.

For Pottery Barn Teen and West Elm, we are executing aggressive growth plans to acquire new customers and build brand awareness.

In our existing brands we are growing our store base, increasing the penetration of our direct to customer channel, expanding our merchandise assortments, and continuing to launch programs that define our brands as the authority on cooking, entertaining and home design.

Consistent with our strategy to drive pre-tax operating margin improvement, we are continuing to focus on the major cost drivers in our business.

We see substantial opportunity in all of our supply chain areas, including transportation, customer returns, and cost of goods sold, in addition to SG&A opportunities and catalog advertising and general overhead expenses.

Our progress in these areas will be gradual and incremental.

We have dedicated teams in place today to address each opportunity.

Consistent with our final strategy to enhance shareholder value, we remain committed, despite ongoing economic uncertainty, to executing against our key business strategies and delivering the EPS guidance that we have provided to our shareholders.

Although we have seen improved sales momentum over the last several weeks we are remaining cautious in our outlook until we see signs of sustained economic recovery.

Based on this premise, we have increased our full year guidance by three cents to a range of $1.23 to $1.27, only to reflect our EPS achievements in the first quarter.

We believe the unchanged EPS guidance we provided today for the remaining quarters of the year continues to be executable and we are committed to delivering it.

I will now turn the call over to Sharon McCollam to discuss our first quarter 2003 financial results.

Thank you and good morning.

I would like to start by outlining the agenda for remainder of this morning's call.

First, we will review our first quarter 2003 earnings and our second quarter and fiscal year 2003 earnings guidance.

Next, Patrick Cowell will provide you with a business update for the Williams-Sonoma brand.

Then Laura Alber will provide you with a business update for the Pottery Barn brands and finally, as Howard said, we will open the call for questions.

I will now discuss our first quarter 2003 earnings results.

In our last conference call, we committed to driving top line sales growth, improving operational efficiency and managing controllable costs.

We also committed to delivering our earnings per share guidance, even if the economic environment remained challenging.

We are very pleased today to report that for the 11th consecutive quarter we were able to meet or exceed the financial guidance we provided to our shareholders.

For the first quarter of 2003, we delivered diluted earnings per share of 11 cents, which was 3 cents above the high end of our guidance and only 2 cents below first quarter 2002.

As you will recall, first quarter 2002 was an extraordinary earnings quarter, exceeding all prior first quarters by at least 9 cents per diluted share.

Net revenues for first quarter 2003 of $536.8m increased 12.2% versus first quarter 2002, with solid growth in both the retail an the direct to customer channels.

Retail net sales of $303.1m increased 13.3% versus first quarter 2002.

This year-over-year increase was primarily driven by incremental sales from 62 net new stores at the end of the first quarter.

This increase was partially offset by a comparable store sale decrease of 0.8%.

This comparable store sales decrease was versus a strong 6.2% increase in 2002.

At the end of the first quarter, the company operated 487 stores versus 425 at the end of first quarter 2002.

Year-over-year, leased and selling square footage increased 17% and 16.5% respectively.

Direct to customer net sales of $198.6m increased 11.4% versus first quarter 2002, with all major brands delivering positive growth can during the quarter.

This sales increase was primarily driven by the Pottery Barn and Pottery Barn Kids brands, in addition to incremental sales from the West Elm and Pottery Barn Teen catalogs.

First quarter 2003 internet sales increased 58% during the quarter and contributed 30.3% of total direct to customer sales versus 21.4% in first quarter 2002.

The company estimates that approximately 40 – 50% of non-bridal e-commerce sales are incremental to the direct to customer channel and approximately 50 - 60% are from mail order customers who would have potentially placed an order via the catalog call center.

Gross margin in first quarter 2003 was 38.1% of net revenues versus 38% in first quarter 2002.

This increase was primarily driven by ongoing operational improvements, including a decrease in customer returns, replacements and damages and increase in shipping profitability for merchandise delivered to customers and lower inventory shrinkage.

These favorable margin improvements were partially offset by a reduction in full price merchandise sales, higher occupancy cost due to the loss of rental income in our San Francisco office facilities, higher insurance costs, and higher freight costs from the distribution center to our stores driven by inventory replenishment initiatives.

SG&A in first quarter 2003 was 34.1% of net revenues versus 32.8% of net revenues in first quarter 2002.

This increase was primarily due to higher catalog advertising and employment costs, offset by a reduction in administrative expenses.

This year-over-year advertising cost increase as a percentage of net revenues in first quarter 2003 was primarily driven by increased circulation in the company's emerging businesses, including West Elm, Pottery Barn, and Hold Everything, in addition to lower productivity in the Pottery Barn and Pottery Barn Kids brands due to increased prospecting.

Higher workers' compensation and employee benefit expenses in addition to higher employment costs to support information technology initiatives drove the increase in employment expenses as a percentage of net revenues.

Net interest expense in first quarter 2003 was a credit of $0.3m versus an expense of $0.3m in the first quarter of 2002.

This decrease in net expense was primarily due to an increase in capitalized interest on long-term capital projects.

Depreciation and amortization expense in first quarter 2003 was $24.3m versus $22.2m in first quarter 2002.

Deferred lease amortization in first quarter 2003 was $4.5m versus $3.6m in first quarter 2002.

I would now like to discuss first quarter 2003 significant year-over-year balance sheet variances and cash flow highlights.

Cash at the end of the first quarter 2003 was $55.0m versus $193.5m at the end of fiscal year 2002.

This decrease in cash since year end was primarily driven by an expected increase in merchandise inventories of $50.9m, capital spending of $24.4m, a reduction in accounts payable due to the timing of expenditures of $43.1m, and a reduction in accrued expenses of $22.4m, primarily driven by the pay out of the company's 2002 incentive compensation in the first quarter of 2003.

Merchandise inventories at the end of first quarter 2003 were $372.5m, versus $252.5m at the end of first quarter 2002.

This increase was a direct result of our strategic management decision in late 2000 to substantially reinstate the retail in stock position on core merchandise inventories in the Williams-Sonoma, Pottery Barn, and Pottery Barn Kids brands.

The retail inventory levels in all of these concepts have been significantly reduced in late 2001 in response to economic concerns after September 11, and then reduced further due to consistently stronger then expected sales in the fourth quarter of 2001 and the first quarter of 2002.

Of the first quarter 2003 increase, approximately 79% was in the retail channel, primarily in Williams-Sonoma.

Pre-paid catalog expenses at the end of first quarter 2003 were $33.6m, up $5.4m versus first quarter 2002.

This increase was primarily due to the timing of expenditures for the Pottery Barn and Hold Everything catalogs, the addition of the Pottery Barn Teen catalog in 2003, increased expenditures for expanded circulation of the West Elm catalog, and an increase in catalog paper inventories.

Pre-paid expenses at the end of the first quarter 2003 were $23.8m, up $4.9m versus first quarter 2002.

This increase was primarily due to higher pre-paid insurance costs due to increased premiums, and higher pre-paid store and occupancy costs due to additional retail stores.

Current other assets at the end of first quarter 2003 were $8.5m, up $5.4m versus first quarter 2002.

This increase was due to a secured deposit of $5m for the purchase of a corporate aircraft.

Accounts payable at the ends of first quarter 2003 was $123.6m, up $31.5m versus first quarter 2002.

This increase was primarily due to higher freight payables due to a change in freight payment processors, higher inventory payables due to increased inventory levels and higher payables on pre-paid catalog expenses due to the timing of expenditures, the addition of new concepts and overall circulation increases.

Accrued expenses at the end of the first quarter 2003 were $54.9m, up $4m versus first quarter of 2002.

This increase was primarily due to higher employee benefits and workers compensation costs, higher sales returns reserves due to new concepts and increased sales, and higher occupancy costs.

Customer deposits at the end of first quarter 2003 were $99.3m, up $9.7m versus first quarter 2002.

This increase was primarily due to an increase in unredeemed gift certificates, due to strong growth in gift certificate sales.

I would now like to briefly discuss our current guidance for the second quarter and balance of fiscal year 2003.

In this morning's press release we increased our 2003 diluted earnings per share guidance by 3 cents to a $1.23 - $1.27.

The full year increase was driven by the strong earnings performance we delivered in the first quarter.

This revised guidance represents a year-over-year increase in diluted earnings per share of 18.2% to 22.1%.

We also increased our capital spending guidance.

Capital spending for fiscal year 2003 is now estimated to be in the range of $215m to $225m, versus previous guidance of $160m to $180m.

This increase is primarily driven by the anticipated purchase of a corporate aircraft and additional investments in store construction costs.

In April, we entered into an agreement to purchase a corporate aircraft.

We are investing in this asset in response to the increasing complexity of our global sourcing program, currently representing 58% of our annual inventory purchases, the continued expansion of our retail and distribution base, and increasing difficulty and risks associated with worldwide travel.

We expect to accept delivery of the new plane in late 2003.

The additional investment in store construction costs includes 12 additional store remodels to be completed during 2003, as well as the addition of one new store.

As we look forward to the second, third, and fourth quarters of 2003, our revenue and diluted earnings per share guidance has remained unchanged.

While we are cautious in our outlook given the continuing uncertainty in the economic environment, the strength of our brands and our management team's proven track record in driving the business in difficult economic times provides us with strong confidence in our ability to deliver the fiscal year 2003 guidance we have provided today.

I would now turn the call over to Pat Cowell to discuss the Williams-Sonoma brand.

Thanks.

The Williams-Sonoma brand delivered an excellent first quarter.

Despite a challenging economic climate, net sales for the brand increased over 12% with performance deemed particularly strong in the retail channel.

Comparable store sales increased 5.4% and the new store performance exceeded expectations.

A positive consumer response in merchandise assortment, strong retail execution, and a higher in stock position on retail inventories drove this impressive retail performance.

In addition to a strong retail performance in the first quarter, in the e-commerce business also delivered significant growth.

Traffic on the web site nearly doubled and conversion rates exceeded industry norms.

We also continued to build our brand authority in the bridal registry business.

Not only did the number of registries increase over 14% during the quarter, but the average registry value increased by over 30%.

One of the key drivers of this registry value increase was the successful addition of a bed and bath assortment from our Chambers catalog.

This strategic alignment with the Chambers brand provided our brides with the aspiration offering they seek with only one bridal registry to manage.

As for the economy during the first quarter, we are pleased to say that we saw positive trends in sales momentum towards the latter part of the quarter.

We believe this trend demonstrated a favorable shift in consumer spending and it has continued into the first weeks of May.

We are well positioned to capitalize on the opportunity if this positive trend continues, but we remain cautious in our plans until we see sustaining recovery.

As we look at the early results in the second quarter, we are very pleased with the consumer response to our mother's day offering.

We were also encouraged by the initial response to father’s day and outdoor assortments and we are looking forward to the introduction of a brand new summer catalog that will be mailed in the first week of June.

This catalog will fill a significant summer gap for the brand by aligning all three sales channels and providing a fresh assortment during a time that has been typically limited in new product offerings.

For the balance of the year we will be focusing on enhancing our seasonal and core merchandise assortments, expanding our strategic Internet partnerships, and furthering the development of our corporate sales program, and continuing to aggressively manage our in stock position on core merchandise inventories

We believe that all of these initiatives will continue to expand the reach of the Williams-Sonoma brand and leverage the strength of the brand's authority as the premiere destination for high quality cooking accessories, gift giving ideas and home entertaining essentials.

I will turn this call over to Laura Alber.

Thank you, Pat.

Good morning.

I will talk about the performance of the Pottery Barn, Pottery Barn Kids and Pottery Barn Teen brands.

I will start with Pottery Barn.

We are pleased with the overall performance of the Pottery Barn brand in the first quarter.

Despite a difficult economic environment, challenging year-over-year comparisons, and a low in stock position on core merchandising inventories we were able to drive the business and exceed both our net sales and profitability expectations for the first quarter.

Net sales for the Pottery Barn brand increased 6.3% in the first quarter, with performance being particularly strong in the direct to consumer channel.

A positive consumer response to new product offerings, including the new Espadrille stripe collection and strong performance in decorative accessories and entertaining and upholstered furniture, drove the better than expected sales results.

Although comparable store sales decreased 4.4%, this decrease was versus a very challenging year-over-year comparison of positive 11.9 in the first quarter of 2002.

E-commerce was the primarily growth driver in the direct to consumer channel.

Site traffic increased over 60% and conversion rates exceeded industry norms.

We also saw strong performance in our bridal registry business.

Not only did the number of registries increase over 25% during the quarter, but the average registry value increased over 70%.

In addition to solid sales performance, Pottery Barn also delivered substantially better than expected earnings in the first quarter, due to the ongoing success of supply chain cost reduction initiatives and strong operational disciplines.

As we look towards the second quarter, we are encouraged by the initial consumer response to our summer merchandise assortments, particularly in outdoor entertaining and seasonal furniture.

We are also encouraged by the progress that we have made in the inventory reinstatement initiatives and are pleased with the positive trend in sales momentum that we have seen in the business over the last several weeks.

Additionally, we are excited about our new late summer merchandising and marketing strategy.

In mid-June, for the first time we will be launching a second summer floor set in our retail stores.

This floor set, in conjunction with the strategically aligned marketing effort in the catalog and internet, will prominently display new additions to our core merchandise assortment, during a time that has been typically limited in new product introductions.

I would now like to talk about the first quarter 2003 performance in Pottery Barn Kids.

Net sales for the Pottery Barn Kids brand increased 36.1% in the first quarter.

This year-over-year increase was primarily driven by retail store growth and strong performance in the direct to customer channel.

Despite a weak economic environment and overall global uncertainty, Pottery Barn Kids was able to drive its business and exceed both its net sales and profitability expectations for the quarter.

Strong execution in the retail channel was a highlight of the quarter.

Consistent with our aggressive retail expansion strategy, we opened seven new stores during the quarter and added one new store to our store development calendar for the year.

At the end of the quarter, Pottery Barn Kids operated 63 stores versus 31 stores a year ago.

Comparable stores decreased 9.7% versus a 4.8% increase in the first quarter of 2002.

This decrease was consistent with our expectations due to significant pressure that the rapid opening of new stores in multi-store markets imposes on the performance of existing comparable stores.

This comparable store sales pressure is consistent with our experience in the early years of the Pottery Barn design studio expansion and should be expected during the growth phase of this concept.

Another highlight in the Pottery Barn Kids business in the first quarter was the sales growth in the direct to consumer channel.

Primarily driven by the ongoing success of e-commerce.

Successful Internet partnerships and significant growth in baby and gift registry sales contributed to the e-commerce increase.

Baby and gift registries increased over 18% and the average registry value increased over 50%.

From a merchandising perspective, strong performance in occasional furniture, seasonal offerings, and nursery accessories drove sales momentum in the quarter.

Both the Valentine’s Day and Easter assortments exceeded our expectations and we saw great success from our expanded personalization strategy in DTC.

In addition to the solid execution of the brand's growth initiative during the quarter, Pottery Barn Kids also delivered better than expected first quarter earnings.

Supply chain execution and SG&A cost reduction initiatives drove this strong earnings performance.

As we enter the second quarter, we are encouraged by initial consumer response to our seasonal merchandising assortment particularly in textiles, outdoor accessories, and furniture.

Also in the second quarter will be the national rollout of our new in store event strategy that will launch in selected Pottery Barn Kids stores in late May.

This brand enhancing marketing strategy is being implemented to create excitement in our stores and build an emotional connection with our customers.

We believe the strategy will differentiate the Pottery Barn Kids brand from the competition and lay a foundation for long-term relationships with our customers and their children

I now would like to talk about the newest addition to the Pottery Barn brand, PB Teen.

The first PB Teen catalog was launched on April 22nd with a circulation of over 3m catalogs.

This is the largest circulation of a new catalog ever test marketed at the company.

Initial customer response has substantially exceeded our expectations.

The launch was supported by an introductory announcement on the back cover the Pottery Barn catalog and through electronic direct marketing initiatives.

In addition, a catalog request web site was established, and prior to launch we received more than 225,000 requests for catalogs.

Press attention has also been very high since the catalog launch, and reviews have been very favorable.

As we look forward to the second quarter and the balance of the year we are extremely optimistic about the potential of the Pottery Barn Teen concept.

The operational aspects of the initial launch were well executed.

We are managing inventory levels to correspond to increased consumer demand.

The product design and merchant selections in the first book were outstanding.

We are very excited but the new fall catalog.

We are also planning to launch a PB Teen e-commerce site in the fourth quarter.

We believe this site will drive significant brand awareness and become a shopping designation for our customers.

In summary, we are excited about our merchandising strategy in the Pottery Barn brand and confident in our ability to drive the business in the second quarter and the remainder of the year.

We believe that our merchandise assortments and execution capabilities are stronger than they have ever been and we are committed to delivering our results.

As we have said before, our continued strategic focus on product design, product assortment, creative merchandising and operational execution has laid the foundation for continued profitable growth in fiscal 2003 even in a weak economy.

All of these initiatives support our number one strategic objective, exceeding the expectations of our customers and our shareholders.

Now I would like to open the call for questions.

Thank you.

If you would like to ask a question today, do so by pressing the star key followed by the digit one on your touchtone telephone at this time.

Just a reminder, that's star one if you do have a question.

If you are on a speaker phone, please turn off the mute function so your signal can reach our equipment.

Going first today to Mark Friedman at Merrill Lynch.

Thank you.

Good morning, everybody.

Great job on the first quarter.

I was wondering if you can talk a little bit about inventory as it relates to, one, the progress in the business the last couple weeks.

How much of that do you attribute to the improvement in the in stock versus the product offering and just the general environment?

And then, Sharon, if you can give us a little bit better sense, you were talking about inventory being up 35 to 40% at the end of the first quarter.

It came up 47%.

I know you walked us through a little bit of how it is, but how would you differentiate why that number came in stronger?

Great.

Mark, this is Sharon.

I'll take that question.

Your first question was how much of the performance in first quarter do we attribute to the increases in inventory?

As we look at the inventory increases in Q1, the majority of the increase was actually in the Williams-Sonoma brand.

And when you look at the performance in the Williams-Sonoma brand delivering mid-single digit comp, in addition to the strong earnings performance that they had during the quarter, there is no doubt in our minds that reinstating the inventory levels in Williams-Sonoma was a strategic decision for us as a company.

To put that in perspective for you, in Williams-Sonoma on an inventory per leased square foot basis in Williams-Sonoma at the end of the first quarter, it is now back to levels that we had in 2001.

So Williams-Sonoma's reinstatement program was obviously easier to execute and we feel very good about the levels that we currently see in Sonoma.

We also believe, however, that --.

Mark, you have to have good merchandising along with inventory in order to drive that type of a performance.

Those were working in Williams-Sonoma.

Pottery Barn, on the other hand, is still at the second lowest inventory per leased square foot in the last five years at retail.

So that means that they have made progress.

This is not as low as it was at the end of the year.

They’ve made progress.

But they still have, in Q2 they are still going to be increasing their inventory levels in order to reinstate their levels back to our 2001 inventory per leased square foot which we believe was a good level for the retail business to be operating at.

So in Pottery Barn, the performance was more about merchandising than it was about having inventory improvements during the quarter.

The other thing that I'll point out in Pottery Barn is that it's much more difficult for Pottery Barn to get back in stock.

Your last question was why is the inventory up 47% versus our guidance, which would peak in the high end at 40%?

We were very -- in Williams-Sonoma, the biggest piece of that increase was in Williams-Sonoma and we saw the performance in the brand.

There were key categories that Pat Cowell made a decision that we needed to dominate.

We chose to do that.

We got in stock a little bit faster than we would have anticipated in our guidance.

Again, in Williams-Sonoma it's all core inventory.

But we are feeling very good about the progress, Mark, that we are making in reinstating our inventories.

We believe by the end of, you know -- as we said, by the end of this year.

The reason you're seeing the big numbers is because the inventory was so extraordinarily low at the end of the first quarter 2002.

So by the end of this year, remember, our guidance did not change.

This is about timing.

At the end of the year we are still projecting a 15 - 20% increase, which is just slightly bigger than sales growth.

This is a timing issue.

Thank you.

We will be going next to Lauren Leviton (ph) at SG Cowen.

Sharon, with respect to the inventories, could you give us an update on what kind of stock out levels you are still faced with, particularly at Pottery Barn to give us a sense of how much more you need to build there?

In addition, could you give us an update on circulation?

I know you told us going into the first quarter that we would have some incremental circulation associated with the new books as well as some other shift in timing.

Can you give us a sense of what we should be thinking about for the remainder of the year and how much these incremental June catalogs will affect the second quarter circulation?

Lastly, I'm wondering if you can comment on the financial analysis that went into the decision to buy the airplane versus leasing?

Or are you contemplating a future sale lease back?

Thank you.

Lauren, I'm going to let Laura take the question that you have on her current inventory position and how she feels about it and the progress they made.

I will let Pat talk about catalog circulation.

Then I will answer your question regarding the analysis that we went through as we considered the purchase of the aircraft.

Thank you.

In Pottery Barn because we are a life style brand the customer orders multiple items on a single order and expects in the stores we have all the co-dependents use when they go in to buy dinner ware or even their living room furnishings.

And so, really the way we look at it is, the amount of goods that we have to fill a customer's first order.

And we are not to the levels that we would like to be.

We would like to see our in stock position improve by at least 10%.

We think that that's absolutely achievable and have great strategies in place to sustain that over the long-term.

Being in stock for us is key to serving our customer and driving sales so it's really a key focus right now.

Do you think you have sufficient stock level to achieve positive comps at Pottery Barn for the second quarter?

Yes, we do.

Thank you.

On the second question related to circulation, for the year our total circulation would be up about 14%.

The majority of that increase is coming from Pottery Barn Teen and West Elm.

In the first quarter, again because of Pottery Barn Teen and West Elm, circulation was up 18%.

In the second quarter it will be up about 15.4%.

Your question about the summer catalog for Williams-Sonoma, what we are doing is instead of re-mailing the spring book additional times, we are actually introducing a new catalog.

That is really driven by the amount of new merchandise that is coming into the line.

So we felt it was a better opportunity for us because of all the new goods to introduce, to go back to a four catalogs season, four catalogs per year that we had several years ago

The total circulation in Williams-Sonoma brand is roughly the same?

It's just a different book instead of a re-mail?

That's right.

Actually, in the second quarter catalog circulation will be up about 14% in Williams-Sonoma.

Okay.

In response to your question about the corporate aircraft, we said in the call earlier that the increasing complexity that we are seeing in our global sourcing program, last year if you look at the 10-K you are going to see that we had our international sourcing was about 58% of our cost of goods sold.

We've got stores right now in 42 states.

We've expanded into Canada.

As we talked about on last quarter's call, we are now expanding our distribution so that we now have our Memphis distribution and then we'll have West Coast distribution.

Eventually we’re going to have East Coast distribution, not to mention the call centers we are running.

The challenge we’re having as a business, and it is a difficult challenge, we are struggling with being able to get our people into the stores.

The time that it takes has tripled or quadrupled since prior years.

On the global sourcing side, it has become increasingly difficult to get our people over to the countries in which we are doing a substantial piece of our business.

As we looked at the financial analysis of doing this, it is sales driven, it is cost driven because the quality of the merchandise that comes when we don't travel is not what it needs to be.

We have invested in a sourcing organization.

We have invested in furniture engineering, et cetera.

And we need to have these investments return.

In order to do that, we need to have the access to our vendors overseas.

We need to have our presidents of our brands in our stores on a more frequent basis.

That's the justification and financial reason why we chose to do it.

As far as how we choose to structure the financing, we went into this transaction as a result of a very opportunistic price on the aircraft and we are now working on deciding what the best acquisition structure is.

But from a conservative standpoint, and to make sure that our shareholders know what we are doing, we have shown it in the capital spending guidance.

If we did choose to lease or have some other alternative, of course, we will be updating you.

But we have a purchase agreement signed to acquire the aircraft.

You mentioned the need to be traveling internationally.

Can you update us on what that means relative to the SARS situation and if people are currently visiting factories and if not, when you expect they will be?

Absolutely.

Currently what we are doing is we are having more of our samples, et cetera, flown in, Lauren, but it's expensive.

It's in our guidance and we expected we were going to have to do that.

But the cost of air freighting in samples or bringing them into the U.S. from our vendors is extraordinarily high.

I know you know that from your previous experience.

To continue to run our business in that manner is not cost effective.

Now, for the short-term, which is what we anticipated we would do, we are accomplishing that and I would say that we are doing an outstanding job.

But long-term, that is not an efficient way for us to run our business.

It is much too expensive for us to run our business in that manner

Thank you.

We will go next to Mark Rowen at Prudential.

Thank you and good morning.

A couple questions.

First, for Laura, on Pottery Barn and Pottery Barn Kids, you've identified inventory as one of the main culprits for the weak comp store sales.

Are there other things that you are looking to do or that you need to do to turn that around other than inventory?

And at Pottery Barn Kids in particular, with comps being negative for the last three quarters, do you think the market for upscale kids furniture and furnishings is smaller than you initially anticipated or is it more competition?

Or could you elaborate on what you think is going on there?

Has your thinking changed on the market size for that?

And then I have a question for Pat on catalog circulation.

Do you have the actual circulation number for the first quarter?

And why do you think productivity was down?

I guess sales if you include the Internet were up about 11% versus your circulation being up 14% or actually 18% for the first quarter.

Thanks.

Thanks, Mark, it's Laura.

In Pottery Barn and Pottery Barn Kids we are up against both tough comparables and a tough economy.

Recent sales, as I said, have improved in all channels and we are really confident in our strategies going forward.

In terms of Pottery Barn Kids, as I said earlier, the multiple store markets is really, the addition of stores in multiple store markets has really put increased pressure on our comparable store sales.

And it's something that is expected and is consistent with Pottery Barn's rapid growth.

I will point out that Pottery Barn Kids is incredibly profitable.

The growth is exponential at 36% this quarter.

We are really thrilled with the performance of this concept

And, you know, the other thing I really wanted to just reiterate is of course we are always looking for improvements that we can make in our merchandising assortments and operational excellence.

And right now we have never been more confident in where we are going and we see the opportunity to take our business to a whole new level.

And really the assortments you will see from us are fantastic.

We have incredible timeless design, great quality, unbeatable value.

We have never been more confident in our ability to continue to grow the Pottery Barn brand and Pottery Barn Kids Brand

Mark, on the catalog circulation, we don't give out how many books we circulate by quarter, but we have said we will grow circulation from 279m books to about 317m to 320m books overall.

With respect to the first quarter, we count all the books we mail in the quarter.

So even though Pottery Barn Teen was mailed on April 22, close to the end of the quarter, those books went into the first quarter, which contributes to part of the 18% increase.

There weren't very many sales compared to the life of the book that were accrued to that book in the first quarter.

The productivity was impacted by three factors.

By the introduction of Pottery Barn Teen and West Elm which are newer books and don't have the customer base yet, that our more mature brands do.

And secondly, by Pottery Barn Kids, where we are expanding the store base rapidly and the productivity when we open a store drops in the short-term.

It does that for all of our brands as we open stores.

We are encouraged by the productivity trends that we are seeing, particularly recently in Pottery Barn.

So I'm very pleased with the productivity, especially when you include the sales that we can measure, which have shifted from the catalog customers ordering over the phone, continuing to order over the Internet or with the quick shop feature on the Internet.

I hope that answers your question.

We will go next to Anne-Marie Peterson at Thomas Weisel Partners.

Good morning.

If you can address a couple of things.

First of all, the progress in terms of return rates, could you quantify that for us, and remind us what your goal is for the year?

Secondly, if you could give us some more color on Pottery Barn Teen?

The trends by category, by region, and maybe even what you’re seeing in terms of the customer base of Williams-Sonoma versus Pottery Barn?

And then finally, you’d mentioned you’re encouraged by recent trends.

So is it fair to say that you’re trending at the high end of your top line guidance or above that?

If you could help us think about the recent trends.

Thank you very much.

Anne-Marie, I'll take your question on progress in return rates and recent trends.

I'll let Laura first respond to the Pottery Barn Teen question.

Sure.

On Pottery Barn Teen, as I said, we are really thrilled.

It amazing because we got so much concern from people about the inability to predict the juniors business.

Unbelievably, the inventory team did such an outstanding job, the fill rate is great.

We picked the categories extremely well from a percent to sales.

It is highly competitive as you can imagine, but I will say that our strategies are working.

Our percent to total, if you look at the book, the way it's merchandised – boy, girl, unisex, lounge room versus bedroom, we really did a good job in putting it together.

It's exciting, because the things that are selling are things we wouldn't have offered in Pottery Barn or Pottery Barn Kids.

So we believe strongly that it's very incremental.

We are continuing to analyze the business and work on our future roll out strategies and also analyze the customer base.

We don't have that information as of yet, but that's really top of mind for us as well.

Hope that answers your question.

Anne-Marie, on the progress in the return rates, if you remember last summer we implemented new programs in the call centers and really made some of our greatest progress in the back half of 2002.

So what we are experiencing right now is the ongoing benefit, the un-anniversaried benefit of many of those improvements we made last year, in addition to continued focus by the management team in the organization and the distribution centers on delivering a high quality product to the customer on the first delivery.

That's coming from our carriers where we are, you know, where we are using AEI and Excel, we will be consolidating carriers and we have seen success in getting the furniture delivered the first time where the customer is accepting the furniture.

Of course, our most expensive returns.

Your question was as we think about this year's guidance and what our goals were relating to returns, replacements, damages.

What we have said is that we would be disappointed if we didn't see 25 to 50 basis points of return.

Of course, that's built into our guidance for the year.

That's helping us with the improvement and our pre-tax operating margin on the high end of that as we look going forward.

As far as recent trends go, we did see recent trends towards the latter half of April that were significantly better than the trends we had seen in February and March.

Those continued into the first couple of weeks of May, but what we continue to see in the, and the reason we were very clear earlier in the call about sustaining recovery, is that we continue to see where the economy appears to be having a moment.

And as a result of that, we are remaining cautious.

The trends are clearly better.

Of course, I'm not going to specifically speak to where that falls in the guidance.

Our guidance is our guidance.

But we need to keep in mind that I still think there's a lot of uncertainty in the economy.

We are going to execute like we have over the last two years since we have been going through this for now almost --, at least since September 11.

We feel very good, though, about what we are seeing today.

We will go next to David Ricci at William Blair.

Good morning.

Wonderful performance.

Hey, a couple questions on the catalog side.

On PB Teen, given the strong response, I'm wondering if you are considering accelerating the rate at which you previously were thinking for mailings in that book.

Secondly, could you give us an update on what you are thinking for West Elm?

Given how well that's doing.

Lastly, related to this question on PB Kids comps, can you give us a sense of how that plays out over time?

I understand the multiple store impact.

Does that continue for a couple of years?

Is there a point where that bottoms out and starts to improve and reverse?

Some sense of how that might play out?

Thanks.

This is Pat, I'll take the question on PB Teen circulation.

The same group of people who launched the PB Kids brand were responsible for the marketing plan for PB Teen.

They did an outstanding job in identifying the teens in our (inaudible) house files but also in their selection of outside lists.

So we will look at that more closely as we get into future mailings, but to mail 3m in a test is much larger than we have ever done before.

You know the industry and you know that's a large test.

So I think we are cautiously optimistic about PB Teen.

We have said previously we intend to circulate about 15m catalogs this year.

On the West Elm side we are very pleased with the performance of the catalog now that we substantially increased the circulation.

Our circulation in the first quarter of this year was up about 500% over its test mailings during the first quarter of last year.

And we are exceeding our expectations.

We are exceeding our expectations in terms of the response for that book, particularly we are pleased with its response to outside lists.

We are not having to rely on our house file alone to build that file.

David, in response to your question about the PBK comp, as we mentioned, in the 63 stores that we have in Pottery Barn Kids today, 42 of those stores are in multi-store markets.

When you look at how many of those stores are actually in the comp base of the 63 stores, 30 of them are in the comp base.

And 20 of those in the comp base are in multi-store markets.

So you can clearly see that this multi-store market issue is significant.

Now, as we look at that, the best analysis that we have is to give us a future idea of how this is going to play out is, when we went back, we talked about it in the last call.

We went back and we looked at the experience that we had when we expanded the Pottery Barn design studio stores starting in 1995.

What we saw when we reviewed those comps is that there is a couple-year period of time where what you have is inconsistent.

There is go going to be volatility in these comps.

Realistically, I think with the aggressive store openings, this year we’ll have opened 22, 23 stores on top of our store base last year.

I think we will continue to see that until we are opening a smaller percentage of stores in the current year as a percentage of the total.

I think this is going to go on for an extended period of time, for several quarters, but you will see positive comps in some quarters and negative.

It's just going to be volatile.

What we are trying to get everyone to focus on is that the comp is not the measure that we should be using today to analyze the kids' business.

It is one metric.

But overall, we are looking at the overall performance of the retail channel.

The tremendous strength of the e-commerce and the catalog business, which continues to be strong, and the overall profitability of that business during this growth phase.

What is amazing to us about Kids, is its strong profitability in its high growth phase.

That has been very impressive for us.

We will go next to Peter Benedict at CIBC World Markets.

Hi, Sharon, how are you?

Great.

A couple of questions to dovetail on the last one.

Can you just remind us quickly the thinking behind the strategy of going into the existing markets as opposed to new markets for PB Kids as far as the stores?

Secondly on the gross margin as we go forward, they are doing a very good job on the shipping gross margins.

How should we think about product gross margins as we look through the balance of the year?

Thanks.

Let me start with the Pottery Barn Kids and why we have chosen to open stores in multi-store markets.

Actually, Howard is with us today on the call.

I'm going to let Howard talk a little bit about the real estate strategy for Pottery Barn Kids.

Well, you know, we are very selective with the real estate that we try to find for our strategies.

And you kind of take it as it comes, to some extent.

So, you know, for instance, we have a strategy in a place like Chicago.

There's probably half a dozen places that we want to be long-term with the kids store there.

And as the locations come up, we take them down because they are not available every day.

So that's kind of dictated our strategy.

That is the reason it's happened that way.

Probably in an ideal world, we would have managed the whole thing better, but I think, you know, as Sharon said, really the metric of comps is not -- probably until we get 75 stores or so, comps is not as meaningful as really store growth and how we are building the brand and starting to dominate markets with Kids compared to others.

Then, following up on the second question, which is the shipping profitability, and the cost of merchandise equation as we look at long-term in our gross margin.

As we think about, in our guidance, I would like to discuss 2003 guidance.

As we had mentioned when we gave guidance originally, in our 2003 guidance we were very conservative in the gross margin as it related to full price selling.

We expected because of the weakness in the economy that we would see a more promotional environment.

Therefore, as you look at our guidance for this year, what you are seeing is the impact of our conservatism as it relates to more mark downs because of the economy.

But as we go forward, as the vertically integrated businesses become a bigger percentage of the total company P&L, you are going to naturally see an increase or a decrease in cost of merchandise, because the margins in our vertically integrated businesses, of course, are higher than they are in our non-vertically integrated business.

There is opportunity in the gross margin as it relates specifically to cost of merchandise.

On every other component of gross margin we see significant opportunity.

Remember, cost of merchandise is one aspect of it.

But also included in the margin is our [base] stores, replacements, damages, et cetera.

And we continue to see big opportunities in those areas.

We will take our last question today from Joan Storms at Wedbush Morgan.

Couple of question, I guess, related Pottery Barn inventory, we talked about that.

Are we on track to up to where the levels for your goal by the end of the second quarter?

And also, the number of versions of the new PB Teen catalog and also the West Elm that you will be introducing this year.

Also, currently I am seeing few mark downs at the Pottery Barn concept.

I'm just wondering, probably because you've just introduced, you know, the outdoor set, but you know, potentially in the first quarter was some of that merchandise and mark down shifted through the outlets to get the positive comp there?

Okay.

Joan, why don't we take your questions.

I want to summarize the your questions and let Laura take the Pottery Barn related question.

Laura, why don't you go ahead and take that question?

As I said, the Pottery Barn inventory we continue to make improvements in our in stock position in Pottery Barn.

And feel much better going into the second quarter than we did into the first.

However, there are pockets where we have core merchandise that still is not in stock.

And we are still working to get in stock towards the ends of Q2.

But in total, the strategy is much improved from last year.

At this time last year we really ran short of inventory.

So we see this as a big opportunity for us as we go forward.

Also it continues to be an area that we can improve over time, not just in this quarter but for future quarters.

As it relates to the mark down activity at Pottery Barn, we have been fortunate in that we have managed our mark downs effectively in season.

This has been a continued strategy that has driven profitability in Pottery Barn.

So what you are seeing is that we read our sales and take our medicine in season and it's a very profitable strategy for us.

And it really allows us to move into new merchandise seasonally.

With respect to the catalog issues on Hold Everything or on West Elm, last year we had a spring and fall catalog.

This year we are introducing a summer and a holiday issue as well.

So we will have four issues of the West Elm catalog this year.

In Pottery Barn Teen, the next big change in the catalog with new pages is in the fall season.

We will have small, wraps that wrap the front of the catalog that provide newness to the customer, both in the next drop of the book and then at Christmas.

The biggest substantial new offering comes in fall.

This concludes today's question and answer session.

I'll give the call back to our speakers for additional or closing remarks.

Thank you very much for joining us today.

We look forward to talking to you soon.

Thank you for your participation in today's conference.

You may disconnect at this time.