Williams-Sonoma Inc (WSM) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, welcome to the Williams-Sonoma, Incorporated fourth quarter and fiscal year 2003 earnings and fiscal 2004 guidance call.

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

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

And as a reminder this conference is being recorded.

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

Please go ahead, Mr Nelson.

Good morning.

The 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 current press releases and SEC filings including but not limited to reports on forms 10K, 8K and 10Q for more information on the risks and uncertainties that could cause actual results to differ materially from these forward-looking statements.

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 Mr. Ed Mueller our Chief Executive Officer.

Good morning, and thank you for joining us.

With us today is Howard Lester, our Chairman, Pat Cowl, 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.

Laura Alber, our President of Pottery Barn brands, is not with us today due to the unexpected passing of a family member.

I'd like to begin our call today by discussing our 2003 financial results.

We are very pleased to be here today to deliver to our shareholders another year of record financial performance.

In 2003 we delivered the highest pretax operating margin and diluted earnings per share in the history of the company and met or exceeded the earnings guidance we provided to our shareholders in every quarter.

On revenue growth of 16.7% we increased our earnings per share by 26.9% and our pretax operating margin by 70 basis points.

We are very proud of these results and believe they reflect the ongoing strength of our core brands, the power of our multichannel strategy and the competitive advantage we have created with our strong supply chain execution.

The first highlight of our 2003 operating results was the re-acceleration of our growth rate, increasing from 13.1% in 2002 to 16.7% in 2003.

This was a key strategic initiative in 2003 and our results exceeded our expectations.

In our core brands, net sales increased 14.4%, primarily driven by a low double-digit increase in Williams-Sonoma and Pottery Barn and a 36.4% increase in Pottery Barn Kids.

We continue to believe that a reinstated inventory levels were fundamental to delivering these strong results.

In our emerging brands, including PB Teen, Hold Everything, West Elm and Chambers, net sales increased 64.1%, primarily driven by incremental sales generated from the 2003 launch of PB Teen and substantial year-over-year sales growth in West Elm.

The performance of our newest concept, PB Teen, substantially exceeded our expectations delivering almost 50 million in revenues in its first 10 months.

Although it's still too early to predict the future, the performance to date continues to be very similar to the outstanding performance of Pottery Barn Kids and we are optimistic that we have tapped another underserved market.

The year-over-year sales growth in West Elm was primarily driven by a substantial increase in catalog circulation, from 5.7 million in 2002 to 22.9 million in 2003, of which more than 40% was mailed in the fourth quarter.

Although the fourth quarter performance of West Elm for the first time did not meet our expectations, we are pleased with the insights that it provided as we begin transitioning the brand toward a broader merchandise assortment, a stronger lifestyle image and expanded color pallet.

We continue to believe that this brand has strong potential in its targeted demographic.

The second higher item for 2003 operating results was the improvement in our pretax operating margin, increasing from 8.6% in 2002 to a record 9.3% in 2003.

This was also a key strategic initiative for the year and our results again exceeded our expectations.

This increase in the pretax operating margin was the result of several successful operational improvements.

The greatest contributors were the substantial reduction in shipping costs due to restructuring our carrier network, a reduction in returns, replacements and damages achieved by improving merchandise quality and the order fulfillment accuracy in the distribution center and substantially reducing corporate overhead expenses.

As the majority of these improvements were driven by fundamental changes in the way we operate our business, both in our supply chain and our corporate infrastructure, we believe that the operating and financial disciplines necessary to sustain these improvements going-forward are in place.

The 3rd highlight of our 2003 operating results was a significant progress we made in building our infrastructure to support the growth of our core and emerging brands.

In the information technology area, we made great strides on our five year strategic plan.

In the first half of the year we implemented a new warehouse management system in all of our distribution centers and converted all of our E-commerce sites to a common platform.

We also continued the development of our new direct to customer order management and inventory management systems.

These multiphased, multi-year technology initiatives will be at the heart of our long-term efforts to drive increased sales and reduce costs through productivity and operational efficiency.

In the area of distribution operations we increased our leased square footage by 35% and opened our first coastal distribution center in California.

We are substantially upgraded the majority of our distribution operating systems resulted in long-term scalability and improved operational efficiencies overtime.

Our successful execution of all these initiatives in 2003, combined with the strength and depth of the management team responsible for this success have left us well positioned to drive the business in 2004 and beyond.

I will now turn the call over to Sharon McCollam for details on fourth quarter and fiscal 2003 financial results.

Thank you, Ed, good morning.

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

First, we will review the details of our fourth quarter and fiscal 2003 earnings results.

Second, Ed will discuss our 2004 guidance.

Third, Pat Cowl will provide you with a business update for the Williams-Sonoma brand.

Fourth, Pat Connolly will provide the business update for the Pottery Barn brands in Laura's absence.

And finally, we will open the call for questions.

I would now like to discuss our fourth quarter of fiscal year 2003 earnings results.

In our last conference call we made several commitments to our shareholders.

We committed to driving top line sales growth, improving our pretax operating margin and delivering our earnings per share guidance.

We are very pleased today to be able to report that we were able to deliver against all of these commitments and for the 14 consecutive quarter we have met or exceeded the earnings per share guidance we have provided to our shareholders.

In the fourth quarter Williams-Sonoma delivered diluted earnings per share of 85 cents which was the high end of the guidance range provided in our holiday press release and 18 cents or 26.9% above last year.

Net revenues for the fourth quarter of fiscal year 2003 increased 16.9% to 1.004 billion versus the fourth quarter of fiscal year 2002.

Retail sales for the fourth quarter of fiscal year 2003 increased 12.2% to 625.1 million versus the fourth quarter of fiscal year 2002.

This increase was primarily driven by an increase in retail leased square footage of 11.8%, including 34 net new stores and a comparable store sales increase of 4.1%.

Net sales generated in the Pottery Barn, Williams-Sonoma and Pottery Barn Kids brands were the primary contributors to this year-over-year increase.

Retail execution during the quarter was very strong and we saw significant sales benefits from our inventory re-instatement initiative.

Direct to customer sales for the fourth quarter of fiscal year 2003 increased 26.3% to 322.2 million versus the fourth quarter of fiscal year 2002.

This increase was primarily driven by net sales generated in the Pottery Barn and Pottery Barn Kids brands in addition to incremental sales from our newest brand, Pottery Barn Teen.

All of the brands delivered positive growth during the quarter.

Internet sales contributed 37.5% of total direct to customer sales during the fourth quarter of fiscal year 2003 versus 27.3% in the fourth quarter of fiscal year 2002.

As we have previously discussed, 50 to 60% of the sales in the internet channel are generated by customers who have recently received a catalog.

Gross margin in the fourth quarter of fiscal year 2003, reported at 44.1% of net revenues, increased 10 basis points versus the fourth quarter of fiscal year 2002.

This increase, as a percentage of net revenues, was primarily driven by a rate reduction in occupancy and freight to store expense partially offset by increased inventory shrinkage and other related inventory costs.

The rate reduction in occupancy and freight to stores resulted from a greater percentage of total company net revenues in the fourth quarter of fiscal year 2003 being generated by the direct to customer channel which does not incur store occupancy or freight to store costs.

Selling general administrative expenses were 276.7 million or 27.5% of net revenues in the fourth quarter of fiscal year 2003, a decrease of 150 basis points.

The year-over-year decrease as a percentage of net revenues was primarily due to lower year-over-year employment expense, partially offset by an increase in catalog advertising expense.

The employment cost decrease was primarily driven by a year-over-year reduction in incentive compensation and employees separation costs associated with the departure of our former Chief Executive Officer during the fourth quarter of fiscal year 2002.

The increase in catalog advertising expense, as a percentage of net revenues, was primarily driven by a greater percentage mix of total revenues during the fourth quarter being generated by the direct to customer channel in addition to relatively higher costs associated with our new and emerging catalog concepts.

Depreciation and amortization expense in the fourth quarter of fiscal year 2003 was 25.7 million versus 23.6 million in the fourth quarter of fiscal year 2002.

The fourth quarter fiscal year 2003 deferred lease amortization credit was 5.2 million versus 4.5 million in the fourth quarter of fiscal year 2002.

Capital spending for the fourth quarter of fiscal year 2003 was 80.1 million versus 38.7 million in fourth quarter of fiscal year 2002, reflecting the purchase of a corporate aircraft.

I will now discuss fiscal year 2003 earnings results.

Diluted earnings per share for the fiscal year 2003 increased 26.9% to $1.32 versus $1.04 per diluted share for fiscal year 2002.

This exceeded the high end of the guidance range provided in our holiday press release.

Net revenues for the fiscal year 2003 increased 16.7% to 2.754 billion versus fiscal year 2002.

Retail sales for fiscal year 2003 increased 14% to 1.6 billion versus fiscal year 2002 with a total comparable store sales increase of 4% versus a 2.7% increase in fiscal 2002.

Average leased square footage per store at the end of fiscal year 2003 by concept is as follows;

Williams-Sonoma 5400 square feet, Pottery Barn 11,700 square feet, Pottery Barn Kids 7,700 square feet, Hold Everything approximately 4,300 square feet and our clearance centers at approximately 14,200 square feet.

Direct-to-customer sales for fiscal year 2003 increased 21.1% to 966.4 million versus fiscal year 2002.

This year-over-year increase was primarily driven by net sales generated in the Pottery Barn and Pottery Barn Kids brands, in addition to the incremental sales from our newest concepts, Pottery Barn Teen and West Elm.

Catalogs mailed during fiscal 2003 totalled 328.4 million, an increase of approximately 17.4% versus a 14.1% increase in fiscal year 2002 with the largest increases led by the Pottery Barn Teen, Pottery Barn Kids and West Elm brands.

Internet sales were 332.9 million in fiscal year 2003, an increase of 66.1% versus 204 million in fiscal year 2002.

Gross margin for the year was reported at 40.3% of net revenues, matching fiscal year 2002's gross margin rate, which was our best gross margin rate in the history of the company.

Within the gross margin for fiscal year 2003, a substantial rate reduction in occupancy expenses and lower shipping costs were offset by increased inventory shrinkage and other inventory related costs.

In addition, negative impacts due to a strengthened Euro affected the gross margin.

As with the fourth quarter, the rate reduction in occupancy expenses was attributable to a greater percentage of total company net revenues being generated in the direct to customer channel which does not incur store occupancy costs.

Selling general and administrative expenses were 855.8 million or 31.1% of net revenues in fiscal year 2003, an improvement of 60 basis points versus fiscal year 2002.

This decrease as a percentage of net revenues was primarily driven by a reduction in employment expense partially offset by higher advertising costs.

The employment cost decrease was primarily driven by a year-over-year reduction in incentive compensation and the employee separation cost associated with the departure of our CEO during fiscal year 2002.

This increase in catalog advertising expense, as a percentage of net revenues, was primarily driven by a greater percentage of total company revenues in fiscal year 2003 being generated in the direct to customer channel which incurs substantially higher catalog advertising costs than the retail channel.

In addition, we saw significantly higher advert typing costs as a percentage of net revenues being incurred in our new and emerging brands.

Depreciation and amortization expense for fiscal year 2003 was approximately 99.5 million versus 91.5 million in fiscal year 2002.

The fiscal year 2003 deferred lease incentive amortization credit was approximately 19.5 million versus 16.1 million in fiscal 2002.

I would now like to discuss the fiscal year 2003 cash flow and significant year-over-year balance sheet experiences.

Cash and cash equivalents at fiscal year 2003 year end were 163.9 million, the second highest year-end balance ever in the history of the company, versus 193.5 million at the end of fiscal 2002.

This year-over-year decrease of 29.6 million was primarily due to capital spending of 212 million, repurchases of common stock totaling $59.7 million and repayments of long-term obligations of 7.6 million offset by net cash provided by operating activities of 209.4 million and 39.1 million in proceeds from the exercise of stock options.

Capital spending for the fiscal year 2003 was 212 million.

This includes approximately 109 million for stores, 56 million for systems and internet development and 46.8 million for distribution and facility infrastructure projects which include the purchase of a corporate aircraft.

Deferred rent and lease incentives for the year were 34.8 million.

Non cash tax benefit from exercise of stock options was 20.4 million.

Merchandise inventories at the end of fiscal year 2003 were 404.1 million versus 321.2 million at the end of fiscal year 2002, a year-over-year increase of 82.9 million or 25.8%.

This increase was due to a strategic management decision in late 2002 to improve the in stock position on core merchandise in our Williams-Sonoma, Pottery Barn and Pottery Barn Kids brands, in addition to support the introduction of our new and emerging brands.

Of the 82.9 million merchandise inventory increase at the end of fiscal year 2003, approximately 60% was in the retail channel, 26% was in the direct-to-customer channel and 14% was in transit from vendors.

The 26% of this year-over-year inventory increase in the direct-to-customer channel primarily supported the increased circulation in PB Teen and West Elm brands.

Prepaid catalog expenses at the end of fiscal year 2003 were 38.5 million up 3.3 million versus fiscal year 2002.

This increase was primarily due to the new PB Teen catalog which was not launched until April 2003 and the timing of expenditures for the Pottery Barn and West Elm catalogs.

Prepaid expenses at the end of fiscal year 2003 were 24.8 million up 3 million versus fiscal year 2002.

This increase was primarily due to increases in prepaid rent, prepaid maintenance agreements and prepaid insurance.

Other long-term assets were 17.8 million at the end of fiscal year 2003, up 10.5 million versus fiscal year 2002.

This increase was primarily due to higher prepaid maintenance costs from entering a long-term maintenance agreement with a strategic computer vendor and an increase in the cash surrender value of life insurance policies held in conjunction with our non-qualified executive deferred compensation plan.

Accounts payable at the end of fiscal year 2003 was 155.9 million down 10.2 million versus fiscal year 2002.

This decrease was primarily due to lower inventory and freight payables due to a change in timing of receipts.

Accrued expenses at the end of fiscal year 2003 were 78.7 million, down 3.4 million versus fiscal year 2002.

This decrease is primarily due to lower accrual balances and incentive compensation and rent partially offset by higher accruals for worker's compensation insurance.

Customer deposits at the end of fiscal year 2003 were 116.2 million up 23.1 million versus fiscal year 2002.

This increase was primarily due to substantial growth in both customer gift cards and corporate gift certificate sales.

Our fiscal year-end balance sheet reflects the implementation of FIN 46-R, the consolidation of variable interest entities, which requires us to consolidate our two variable interest entity partnerships from which we lease our Memphis based distribution facilities as of February 1, 2004.

This consolidation resulted in increases to our consolidated balance sheet of 19.5 million in assets, primarily in buildings, 18.2 million in long-term debt and approximately 1.3 million in other liabilities with no cumulative effect charge to our fiscal year 2003 consolidated statements of earnings.

I would now like to turn the call over to Ed Mueller to discuss our fiscal year 2004 guidance.

Thank you, Sharon.

As we enter 2004 we are extremely pleased with the current performance of all our brands and are excited about the opportunities that lie ahead.

In 2004 we will launch our newest concept, Williams-Sonoma Home, and continue to expand the reach of PB Teen, West Elm and Hold Everything.

While we are remaining conservative in our outlook for 2004, the strength of our brands and our proven track record in driving the business provide us with a strong confidence in our ability to deliver the fiscal year 2004 guidance we have provided today.

In 2004 we will continue to focus on the company's three strategic initiatives; driving profitable top line sales growth, increasing pretax operating margin and enhancing shareholder value including delivering consistent and predictable earnings.

Consistent with our initiative to drive profitable top line sales growth, we are projecting total revenues to increase in the range of 13 to 15%.

To achieve this growth, including the emerging brands, we're projecting an 8 to 9% increase in retail leased square footage, a 2 to 4% increase in comparable store sales growth and a 10 to 12% increase in catalog circulation.

Of our total growth rate of 13 to 15% in 2004, we estimate that approximately 2% will be generated by the new and emerging brands due to the majority of our emerging brand initiatives occurring later in the year.

In our emerging brands the growth strategies for 2004, by brand are different due to each of the brands being at a different stage of growth.

In PB Teen we will be aggressively increasing catalog circulation and expanding our extremely successful online marketing initiatives.

In Hold Everything we'll be increasing catalog circulation gradually throughout the year.

Launching our first E-commerce website at the end of the 3rd quarter and opening our first prototype retail store in the fourth quarter.

In West Elm we'll be opening two new prototype retail stores and launching a new version of the E-commerce website.

E-commerce has been an extremely strong revenue driver for the West Elm brand.

Catalog circulation, however, is being reduced from 22 million in 2003 to 13 million in 2004 as we begin transitioning the brand to appeal to a broader range of customers.

Although West Elm has been very successful in highly urban markets, we believe that with a broadening of the assortment it has the potential to appeal to a much larger market segment and become one of our larger brands overtime.

We'll also be launching our newest concept, Williams-Sonoma Home, in the third quarter.

Williams-Sonoma Home is our premium home furnishings concept that will cater to the upscale customer.

Upon the launch of Williams-Sonoma Home catalog, the Chambers catalog will be retired.

For this reason the 2004 circulation of the Williams-Sonoma Home catalog will be substantially offset by the elimination of the Chambers catalog.

Consistent with our second strategic initiative to improve profitability in our core businesses, we are projecting to increase our 2004 pretax operating margin by 20 to 40 basis points.

The key drivers of this pretax operating margin improvement are: improving the supply chain cost structure in the area of transportation, customer returns and inventory management and leveraging general overhead expenses as we continue our efforts to reduce our fixed and variable cost structure.

Consistent with our strategic initiative to enhance shareholder value, we are remaining committed to delivering consistent and predictable earnings to our shareholders and are confident in our ability to deliver the 2004 guidance we provided to our shareholders today.

As we look beyond 2004 over a 3 to 5 year planning horizon, we are currently projecting long-term revenue growth in the range of 13 to 15%.

We're also projecting that a pretax operating margin will continue to advance, gradually and incremental, within the previously guided range of 9 to 11%.

I will now turn the call over to Pat Cowl to discuss the Williams-Sonoma brand.

Thank you, Ed.

Good morning.

We are extremely pleased with the performance of the Williams-Sonoma brand in 2003.

Net sales for the year increased 11.2% with strong performance in every quarter.

Comparable store sales for the year increased 6.7%, including a 1.2% benefit from the table top transition that we began in the second quarter.

The direct to customer channel also delivered strong growth, driven primarily by the momentum in our E-commerce business and the introduction of a new summer catalog.

Traffic on the website increased approximately 71% and conversion continued to exceed industry norms.

We also saw strong results from our online marketing efforts which we believe will be a significant marketing opportunity for the brand and a source of new customers in the future.

Throughout 2003 we continued to see a strong consumer response to our seasonal merchandise assortments and new product introductions including exclusive premieres on Kitchen Aid, Proline Electrics and Calphalon One cook wear.

Even more encouraging, however, was the strong performance all year of our core merchandise assortment.

Another strong driver of sales performance was the success of our wedding and gift registry business.

Registries created during the year increased 18% and registry value increased 29%.

Bridal registry continues to be a strategic multi-channel growth initiative and another key driver of new customers to the brand.

A final growth highlight of 2003 was the opening of two new flagship stores, one in San Francisco's Union Square and one in New York's Time Warner Center.

These stores serve as billboards for the brand and represent the best of everything the brand has to offer.

The media coverage of both these stores has been extensive and we believe that they will bring tremendous long-term equity and brand authority to an already powerful brand.

As we enter 2004 we are very encouraged by the momentum we are seeing in the brand.

To capitalize on this momentum, we'll be continuing to focus on the following strategic growth initiatives: enhancing our seasonal and core merchandise assortments, growing our customer base through catalog prospecting and online marketing, expanding our electronic direct marketing efforts to drive increased traffic to both the retail and the direct-to-customer channels and extending the corporate sales program.

We'll also be adding one additional floor set in 2004 between Father's Day and Labor Day in order to leverage the success of the new summer catalog strategy in 2003.

This additional floor set in the second quarter will allow us to further align the summer catalog offering with the retail channel and provide a fresh visual presentation during a time that has historically been limited in new offerings.

In summary, we believe that executing against these initiatives in 2004 will allow us to continue to expand the reach of the brand and leverage the strength of the brand's authority as a destination for high-quality cooking accessories, gift-giving ideas and home entertaining essentials.

I would now like to turn the call over to Pat Connolly.

Thank you, Pat.

And good morning, everyone.

First I would like to talk about Pottery Barn.

We are extremely pleased with the performance of the Pottery Barn brand in 2003.

Net sales for the year increased 11.4% with growth rates accelerating in every quarter.

Retail comparable store sales increased 2.3% for the year with especially stronger comps in the second half of the year reflecting our improved inventory position.

The direct to customer channel also delivered strong growth, driven primarily by the momentum in our E-commerce business where traffic on the website increased 57% with conversion rates continuing to exceed industry norms.

Our electronic direct marketing efforts were significantly expanded to drive both E-commerce and retail sales.

We also saw rewarding results from our online marketing efforts which we will believe will become a significant marketing opportunity for the brand and a source of new customers in the future.

The overall consumer response to our key merchandising strategies throughout the year was also positive.

Consistent with our plans, furniture was one of our key growth categories in 2003, in addition to growth within flooring, decorative accessories and core tabletop.

Another driver of strong sales performance was the success of our bridal and gift registry business.

Registries created during the year increased 26%.

And we continue to see registries as a key driver of new customers to the brand.

As we enter 2004 we are very encouraged by the momentum we are seeing in the brand currently and will focus on the following key initiatives.

Our first key initiative is to drive top line sales growth by upgrading product aesthetics, quality and presentation for assortments in key product categories, balancing assortments between core and seasonal merchandise, marketing improved furniture quality as a competitive advantage, optimizing inventory productivity to maximize our in stock positions, expanding our electronic direct marketing efforts to drive increased traffic to both our retail and direct-to-customer businesses, and acquiring new customers through increased catalog prospecting, online marketing efforts, and increased customer information capture in our retail stores.

Our second key initiative is to continue to build brand authority in the wedding and gift registry.

We will do this by leveraging on and offline partnerships to drive registry awareness, developing improved consistency across seasons in core registry classifications, particularly in tabletop, and providing targeted communications to all registrants.

We'll continue to enhance Pottery Barn's position as the style authority for the home by hosting in store design clinics and publishing two new titles to our successful Pottery Barn Design library series.

I would now like to talk about Pottery Barn Kids. 2003 was a very strong year for the Pottery Barn Kids brand.

Net sales in the brand increased by over 36% and operating margin rates improved in both the retail and DTC channels.

In its fifth full year of operation the Pottery Barn Kids brands generated revenue of nearly 400 million.

Our primary objective in Pottery Barn Kids for 2003 was to drive top line sales growth by continuing our aggressive retail expansion strategy and extending the reach of our direct customer channel.

In 2003 we opened 22 new stores which added 41% to the square footage base and expanded into 12 new markets.

At the end of the year we operated 78 stores, 56 of which were in the comparable store base.

The rapid growth of our new stores, however, did place significant pressure on existing comparable stores as we opened new stores in what were once single store markets.

Although the comparable store sales in single store markets were positive in 2003, the impact of rapid store growth and multiple store comparable markets, particularly early in the year, negatively impacted the overall comparable store sales comparison for the year resulting in a net positive comp of 0.4%.

We continue to believe that comparable store sales in this brand will stay volatile until there are at least 75 stores in the comp base.

The strength of the Pottery Barn Kids brand is demonstrated by the fact that the direct-to-customer channel continues its very strong growth despite our aggressive retail store rollout during the past three years.

Productive internet partnerships and significant growth in baby and gift registry sales were the primary drivers of the E-commerce business.

The increased response to the baby and gift registry continued to be very positive with a 95% increase in new registries created in 2003.

Increased offers of personalized merchandise drove sales in both the E-commerce and catalog channels.

As we look forward to 2004 our primary objective is to drive top line sales growth by maximizing sales per square foot in our retail stores with assortments that generate repeat customer visits, dominating the nursery classification, focusing on quality design and manufacturing, extending the reach of our direct to customer channel by increasing prospecting and electronic direct marketing initiatives, and expanding successful internet partnerships and improving our inventory management process to maximize our in stock positions.

Meeting these objectives will further enable us to position Pottery Barn Kids as the authority in children's home furnishings.

I would now like to talk about the newest addition to the Pottery Barn brands, PB Teens, a concept that has far exceeded our expectations in the first 10 months since its launch in late April of 2003.

Our merchandise designs were a hit with teens and their personal feedback to our unique catalog design has provided many learnings and opportunities for 2004.

We are pleased to report that the first year of the PB Teen business is looking remarkably like the first year of the Pottery Barn Kids business in 1999, generating approximately 50 million in revenue during 2003.

Based upon the initial success of PB Teen catalog mailings, circulation was increased to over 18 million from the originally planned 15 million.

The introduction of the E-commerce site for the PB Teen last September was extremely well received by its target audience.

It has driven substantial brand awareness and is rapidly becoming the shopping channel of choice for our customers.

We are very encouraged with the initial success of PB Teen and it's contribution to our life stage marketing strategy in the Pottery Barn brands.

As evidence of the strength of this young brand we have received extensive unsolicited media coverage with promotional tie-ins with the WB-network to maintain the positive momentum and drive profitable top line sales growth in 2004.

We'll strengthen our focus on key items, refine our assortment, add new merchandise categories and improve customer fill rates.

We'll also aggressively expand circulation, add page count and extend internet partnerships in order to increase customer access to the brand .

Our marketing initiatives will seek to increase interactions with teens through a variety of contests and campaigns to create affinity with the brand and drive new customer acquisition.

We remain very confident in the long term potential of PB Teen.

We are continuing to evaluate the potential for a retail store strategy appropriate to the brand and expect to make a decision whether or not to go forward with stores over the next 18 months.

In summary, we are excited about our merchandising and marketing plans and confident in our ability to drive the Pottery Barn, Pottery Barn Kids and Pottery Barn teen business in 2004.

Our continued strategic focus on retail execution, product design, creative merchandising and operational execution has laid the foundation for continued profitable growth in each of the brands and we are committed to delivering our results.

I would now like to open the call for questions.

Thank you, sir.

If you'd like to ask a question today please do so by pressing the star key followed by the digit one on your touchtone telephone.

If you're on a speakerphone today please turn off the mute function first and then signal for your question.

Again, that will be star one to ask a question today.

Today's first question comes from Lauren Levitan of SG Cowen.

Thanks, good morning.

I have two questions.

First I'm wondering if you could comment on the square footage growth plans, not just for this year, but going-forward.

Obviously a lot of the big growth initiatives for '04 are still primarily direct to consumer based.

I'm just curious if the site reduction in square footage plan is something that you think is more likely to be extended or if that's specific to what's going on in the business currently and then secondly, both Pat and Pat talked about emphasizing your online marketing initiatives for both Pottery Barn and Williams-Sonoma.

I'm wondering if you could elaborate on that.

Are you referring mostly to e-mail campaigns or are these additional partnerships and does this have any long term impact on your overall advertising and marketing spending levels over the long-term?

Thanks very much.

I'm going to ask Howard to talk about the lease square footage question.

Thank you, Sharon.

Good morning, everyone.

I think in the short term we've given you the guidance and as our new emerging brands will continue to grow in the right consistent with the revenue growth that we've given you, Lauren.

Our next question comes from Mark Friedman at Merrill lynch.

Thank you.

Good morning, everybody.

Nice job on the quarter.

A couple questions, Sharon.

First quarter guidance 4 to 6% on a comp basis.

Can you give us any more insight on business trending through the first five or six weeks of the quarter?

Secondly on Chambers, I just wanted to fully understand that, will you discontinue the use of the Chambers name within Williams-Sonoma Home or you'll continue to use that name in the future for particular product.

And then on West Elm, just a little bit more insight on some of the initiatives that are being put in place as you look to broaden the business in '04 versus some of the trends that sound like we're a little bit sluggish toward the end of last year.

Thank you.

Mark, I'm going to take your first question about the top guidance for Q 1.

As you point out we are 5 to 6 weeks into this fiscal year into the quarter, so we feel very good about the current trends that we're seeing, actually it's in all of our brands, and we've had very strong momentums and we have a very good merchandise assortment.

I think if you've been in the stores, I think you would say that the stores visually look strong.

So we're very pleased with the performance that we're seeing in Q1.

As it relates to your question regarding Chambers, I'm going to let Pat Connolly address the question about the future of the chamber's name.

Mark, the Williams-Sonoma Home catalog will contain much of the core Chambers bed and bath merchandise, but it's our plan to transition the brand name from Chambers to Williams-Sonoma Home.

We have an extensive communication plan for our Chambers customer.

One question I would also answer is the one that Lauren asked on the previous question and that is that we have seen good success in acquiring customers through online marketing where some of our online marketing dollars are more efficient than our least efficient catalog prospecting dollars.

Of course the first thing we do when we acquire a customer online is mail them a catalog and that's very efficient.

I think you're seeing a trend to using more online marketing for customer acquisition and I think we've had some great success there.

And, Ed, would you like to take the question on West Elm?

I'd love to, thank you, Sharon.

West Elm is proceeding like we had told you before.

We found in the fourth quarter, as we've guided, that our circulation probably got to the point where the urban part of our product design has been maximized so we are cutting back, prudently, to make sure that we don't over circ and I think as we progress with our two store rollouts, which we're really happy about, and as we broaden the product category, then we'll move ahead in a really, I think, conservative way.

That's pretty typical of the way we roll out our new brands.

We'll go next to Rex Henderson at Raymond James and associates.

Thank you very much.

My question's been answered.

Thank you.

Then we'll go to Dana Telsey at Bear Stearns.

Good morning, everyone, and congratulations.

Hi, Dana.

Hi.

Can you talk a little bit any color on the exchange impact of the weak U.S. dollar, what you've been seeing lately and how you've been planning for it.

And, Pat, you mentioned a lot about PB Teen, new merchandise categories expanding circulation.

Any more color on that in terms of categories and things like that.

And with the circulation that you're doing this year, how much prospecting will it be and what did you learn from the prospecting that you did in '03.

How is the response rate, any change to the customer type, or age, average transaction.

Thank you.

Dana, I'll take the first question regarding the Euro and then let Pat take the question on PB Teen.

As our point of view on the Euro, last year, obviously, it had an impact on our gross margin in Williams-Sonoma.

If you recall the timing was very unfortunate for us because we had just placed a significant number of purchase orders in order to reinstate our inventories in the first part of last year when the Euro was starting to strengthen.

That was very problematic because our goods were coming in and our prices were already labeled and it was problematic.

But the Williams-Sonoma brand has been very aggressive where it's appropriate, going back with our vendors and negotiating, we also have in many cases, some flexibility in our pricing, in which we would take advantage of that, if it was appropriate.

But then there are also vendors that are very special and important to us, where we're going to have to work through this.

Now, our point of view, as far as our guidance goes with the Euro, is that it's going to stay where it is, probably today very high, and if that turns into an opportunity then so be it.

But remember that if the EURO moves right now in our costs and our inventories, you're going to still have the purchases that you've been making and it isn't the minute the Euro moves you're going to see a reduction in our cost of goods.

It'sgoing to take time to work through the inventory.

And I'll let Pat take the question on PB Teen.

Dana, with respect to PB Teen, obviously, for competitive reasons, we're not going to go through each classification, but I would say that one of the things we've noticed is that the trend factor, which seems to be so important in some of the teen businesses like apparel, does not seem to be as much of a factor for us.

We're having great success in our core merchandising categories and offerings which is terrific for us.

On the prospecting, as you know, when we started PB Kids, we were able to launch the business by identifying presence of children among our 30 million named database, which is really what is the key factor here in order to start a business as rapidly as we did with Kids.

With Teen we did the same thing, we were able to identify millions of our customer base who had teens in the home and that has been the primary driver of growth.

On the prospecting side we see many outside lists that work for us, we have great partnerships with everything from people like the WB network, many of the teen magazines and other television shows and we're seeing very good response from catalog requests, better response than we see with some of our other concepts.

We'll go next to Peter Benedict at CIBC World Markets.

Hi, guys, I was wondering if someone could just talk a little bit more about your efforts to reduce return rates, particularly in the furniture business.

Thanks.

Absolutely.

I'm going to let Ed take that question.

Hi, Peter, how are you?

Good, Ed, thank you.

As we've spoken about before, we continue to work the complete supply chain and our furniture quality effort that we announced last year is really paying off.

I can't really probably give you a lot more color on that because it's a day in day out process, but our agents overseas have been beefed up, are looking at who should be our suppliers, and then all the way through the supply chain, the delivery, our home delivery people, I think it's just going to be a continual journey and we're really happy with where we are.

We'll go to Mark Rowen of Prudential.

Thanks, good morning.

A couple questions.

First I'd like to followup on West Elm.

Ed, you mentioned that it didn't meet your expectations in the fourth quarter and you're scaling back the catalog mailings pretty significantly.

Can you give us a sense of what the new color pallet has been doing and what kind of response you've been getting from that because I would have thought if you're trying to broaden out the line to have more appeal to middle America, that you'd actually be increasing circulation given the new focus of the designs.

And then my second question is on Pottery Barn Kids.

It looked like the last couple of quarters you had a nice turnaround in the comps and this quarter went negative.

It looks like you're slowing the square footage growth pretty significantly next year.

How many stores do you think the U.S. can support now in that division and what's going on, what caused the weakness this quarter after a couple of quarters of strength.

Thanks.

I'm going to ask Ed to respond to the West Elm question, and then I will take the Pottery Barn Kids question on the comp.

On the West Elm the color pallet isn't the big deal for West Elm.

It is a broadening, obviously, but as we've told you before, the furniture part of this takes a lot of lead time.

So I think we're just being prudent in scaling back our circulation and when we get, not only just the color pallet, as we move forward with the more broadened assortment that we have on the drawing board that will be coming later in the year, then we'll evaluate the circulation.

I think on the heels of the fourth quarter what we learned it would not be prudent for us to keep circing with what we have today and as we have these new broadened products coming out and with the two new stores, I think we're in a really good position to do the right thing for our shareholders.

Mark, on the Pottery Barn Kids comp, I'll take the question on the comp, and then I'm going to ask Howard to talk about the real estate.

But as we think about Pottery Barn Kids in the fourth quarter, we really had in our minds a very good quarter.

Our single store markets performed very well, but this year we continued to seem to buy some of the really hot items in holiday short and Pottery Barn Kids, so we think that's an opportunity for us.

But, we are continuing to look at programs, Pat mentioned several of them, where they're doing events in the stores and bringing people into the stores but I think we've consistently said that it's difficult to evaluate Pottery Barn Kids until you have 75 stores in the comp base..

We've said every quarter, even in going as far as putting it in our 10 Q, that we expected this number to be volatile because we can look at it store by store.

So I think that starting in third quarter of next year is when I think we should start really focusing on that issue.

But we are always aggressively looking at opportunities to increase the sales per square foot in all of the stores.

I'll let Howard talk about the potential of Pottery Barn Kids and the real estate strategy that you mentioned.

All these specialty chains in the home business, we've learned, have an eventual capacity of somewhere 200 to 350 or so stores, kind of seems to be the range in the areas where we play demographically.

I don't think Kids is any exception.

We're learning about that, it's probably much closer to 200 than it is 400, but it's a learning experience for us.

As I think we talked to you about last year that we learned a great deal with our first 50 stores in terms of the kind of demographic coverage that we needed to drive a store, and it was a little greater than we thought initially.

And we're learning.

So I think that's still the right answer, it's somewhere in that range and we'll know more next year than we know today.

But we continue to open stores, we continue to grow the chain, we're very happy with the results and we're learning a great deal as we go.

So it's somewhere in that range, I think.

Mark, let me followup with another comment on West Elm.

This is Pat to followup on what Ed said.

We are very, very optimistic about where we're going with West Elm.

And we're really just tuning the circulation to match the arrival of new merchandise.

I'd also say that we are very pleased with the internet, the E-commerce performance on West Elm, which is very strong and we intend to make more changes, but we have made some changes to the website which it really accelerated conversion and sales there.

In addition to that, Mark, we did see a rebound in West Elm when we came into Q1and if you think about the catalogs that we mailed, I know you and I talked about it, we didn't have a holiday assortment.

That was by design and I think that that may have had some impact on the Q4 performance of the book.

We'll go next to Alan Rifkin at Lehman Brothers.

Yes, a couple questions, if I may.

If you look at the delta between your circulation and your revenue growth in both '03 and '04, it appears that you're looking for greater response rates from the house file.

Is that in fact true and if so, what would be the rational behind that.

And then secondly, with respect to shrink, I realize that you lost some leverage on the gross margin line year-over-year due to, probably, higher inventory levels, but how is the shrink compared Q4 on a sequential basis.

And then lastly if I may, looking at the Williams-Sonoma concept it looks like after a year of relatively static growth in '03 you guys are really looking for significant expansion in '04.

Are you seeing newfound opportunities for Williams-Sonoma stores out there?

Thank you.

Alan, let me take your first question first, that being the catalog response in relation to the circulation growth of the catalog.

We gave guidance of catalog circulation increases of 10 to 12%, I think, and if you take out West Elm decrease, that will raise that by about 400 basis points or four percentage points.

So that would be more in line with the kinds of increases we've had in the past.

We are seeing increased response rates when we factor in our E-commerce business.

And then Sharon, the next part of that?

Yes.

Alan, your question was about the change in Williams-Sonoma in the number of stores and lease square footage growth.

One of the things that we disclosed last year, if you recall, is that in Williams-Sonoma, although we did not increase a large number of stores, we did have significant number of remodels in Williams-Sonoma.

So Williams-Sonoma's growth strategy from a lease square footage basis is really two fold.

One is the expansions of existing stores and we have said consistently that when we take a Williams-Sonoma store and we remodel it and we're running the same sales per square foot after the store opens with a bigger store.

So it's been a very compelling business decision in order to do that.

So I think that what you're seeing this year is the opening of more stores, last year we had a significant number of remodels that we had available to us and, by the way, we're doing some remodels this year too.

I think that it just looks like that net increase last year was a small increase, but it was not reflective of the lease square footage growth in Sonoma.

Our final question today will come from Colin McGranahan at Sanford Bernstein.

Good morning.

Most of my questions have been answered.

But maybe you can just comment a little bit about PB Teen.

You did 50 million in the first 10 months.

Obviously very impressive, but with aggressive prospecting, aggressive growth and circulation there in '04, what are you thinking about the revenue potential for that business and then connected to that question, obviously, with aggressive prospecting that's going to negatively impact profitability, but how do we think about when this business might reach scale where it could be material to operating profit.

Let me start by addressing your question about the guidance and the circulation increase.

Part of the circulation, remember that they were only out 10 months this year, so they're going to have an extra couple of months circ just by definition of anniversaring their launch.

So we're going to have increased circulation there, and the brand, as far as the contribution, we don't give brand profitability as you know, but as we said, we were very pleased with the performance of PB Teen.

At this point it's much too early to tell what the potential of the brand is going to be long term.

Currently it's doing extremely well in the catalog.

The E-commerce side of PB Teen, this is their demographic, and ever since we launched the website it's had great consumer response.

Colin, I think that we'll be able to speak to that probably during 2004 more clearly after we've had - We haven't even had a full year really of circulation data to analyze.

So that'show we are looking at PB Teen and I'll let Howard talk about the retail side of PB Teen and how we're thinking about that.

Thanks, Sharon.

As Pat mentioned earlier in the call, the PB Teen early results are amazingly close to those that we had with Kids.

And we're evaluating Teen just like we did Kids as to a retail strategy.

I think it's too early to make the commitment.

We continue to think about it and it's a distinct possibility.

In the short term, we're building the brand and the customer base through the direct to customer channels, and as I say, we're just extremely pleased with the results we've had so far.

That concludes our question-and-answer session today.

I'll turn the conference back over to our speakers.

I'd like to conclude by thanking you for being on the call.

We've had a great year.

We have, I think, great prospects for the future, and I think we have a team that can deliver this.

And we're following the strategy that's made Williams-Sonoma successful in the past of being careful but being prudent and using all three channels, including the DTC to open all of our new concepts and I think that's a formula that works really well for us that's hard for our competitors to duplicate.

So with that, we appreciate your attention and we look forward to continuing delivering shareholder value as we move forward.

Thank you, everyone, for your participation in today's conference.

You may disconnect at this time.