Williams-Sonoma Inc (WSM) 2004 Q3 法說會逐字稿

Welcome to the Williams-Sonoma Incorporated third quarter 2004 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 Steve Nelson, Director of Investor Relations at Williams-Sonoma Incorporated 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 conditions, results of operations, business and initiatives 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 on reports on forms 10-K, 8-K and 10-Q 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 would now turn the call over to Ed Mueller, our Chief Executive Officer.

Good morning, and thank you for joining us.

With us today are Howard Lester, our Chairman, Laura Alber, our President of the Pottery Barn brands, Pat Connolly, our Executive Vice-President and Chief Marketing Officer, and Sharon McCollam, our Executive Vice-President and Chief Financial Officer.

We're very pleased to be here to deliver to our shareholders another consecutive quarter of strong financial performance.

Despite a number of factors that challenged the business during the quarter.

The third quarter began with the sales impacts of the hurricanes which we estimated over $2 million in lost revenues and then continued with a very high level of sales volatility which we believe was driven by the nationwide focus on the presidential election and ongoing economic uncertainty.

We also experienced an unusually high level of logistics challenges during the quarter including postal service delays, cargo capacity constraints and west coast port congestion.

Our operational flexibility and strong execution, however, combined with the significant consumer appeal of our brands, allowed us to drive our business and deliver the highest third quarter pretax operating margin and diluted earnings-per-share in our history.

On revenue growth of 14.2%, we increased our earnings-per-share by 20% and our pretax operating margins by 30 basis points, a strong consumer response to our merchandising initiatives in the Pottery Barn and emerging brands, impressive growth in our internet channel, and continuing benefits from successful overhead cost initiatives drove these strong results.

During the quarter, the overall performance of both our core and emerging brands was consistent with our expectations.

In our three core brands, net sales increased 12.8%, with Pottery Barn and Pottery Barn Kids driving strong year-over-year sales increases, a positive consumer response to both core and seasonal product offerings, with particularly strong growth in furniture drove the Pottery Barn business.

Williams-Sonoma on the other hand had a challenging quarter, which Howard will address later in this morning's call.

In our emerging brands including PBteen, West Elm, and Hold Everything, and Williams Sonoma Home, net sales increased 54.2% in the third quarter.

This increase was primarily driven by exceptional year-over-year sales growth in West Elm and PBteen and incremental sales from the third quarter launch of our new Williams-Sonoma Home catalogue.

Net sales in the West Elm brand in the third quarter exceeded our expectations in both the direct to consumer and retail channels, and the consumer response to the expanded color pallet and enhanced catalogue presentation continues to be very favorable.

During the third quarter, we opened two of our new prototype stores, one in Chelsea, in New York, and one in Oakbrook, Illinois.

We're extremely pleased with the performance of these stores.

Each of which is performing well above our expectations.

The Chelsea store is the top-grossing sales volume store in the entire Company and the Oakbrook store has consistently ranked in our top 50 stores.

We are particularly encouraged by results of the Oakbrook store, because it is our first test of the retail appeal of the brand in a major suburban market, and the consumer response is exceptionally strong.

In Hold Everything during the third quarter, we continued to transition the merchandise assortment and improve the visual presentation of both the retail stores and the catalogue.

Comparable store sales were positive for the third consecutive quarter and the catalogue response to our new merchandising initiatives including new furniture offerings was encouraging.

Like our other businesses, better-than-expected sales demand has resulted in a higher customer back order position at the end of the quarter impacting short term sales.

We're extremely excited about the successful mid-September launch of Williams-Sonoma Home, our newest brand.

This new premium brand offering classic home furnishings and decorative accessories extends the Williams-Sonoma lifestyle beyond the kitchen into every room of the home.

With the circulation of over 5.6 million catalogues in the third quarter, we are pleased with the consumer response.

From a merchandising perspective, we saw strong performance in textiles, furniture, Lighting and decorative accessories.

Especially promising is the success of the customer upholstered furniture assortment as target, against the void in the market between the high end designer and contemporary home furnishings.

Operationally in the third quarter we finalized the startup of our new 781,000 square foot east coast furniture distribution center in Cranbury, New Jersey.

This new DC has already proven to be very strategic to our distribution network for two reasons.

First it allows us to improve our service levels to our east coast customers.

Second, it has made it operationally efficient for us to bring a large percentage of our furniture containers through the east coast ports, avoiding the congestion on the west coast.

Longer term we expect our coastal distribution network to allow us to reduce our furniture delivery costs as we finetune our inventory allocations between our coastal distribution centers.

Today, we are continuing to ship out of market to our customers, due to the need to fill back orders as we adjust to the challenge of allocating to multiple distribution centers, which is costly.

This is a cost reduction opportunity as currently our furniture sales represent 25% of our total Company annual revenues on a trailing 12-month basis.

Also during the quarter, we continued to make progress on our weeks of supply inventory management initiative.

Inventories for the third quarter increased 6.6% be, which was 760 basis points below our sales growth for the quarter.

Although we estimate that our progress to date on this initiative drove 400 to 500 basis points for this year-over-year favorability, we believe that there is still upside.

The full benefit of this project, however, will be realized as we implement our new merchandising systems.

The completions of these systems will be in 2006.

The remaining 200 to 300 basis points of favorability in our inventory growth rate at the end of the third quarter was primarily due to a lower-than-planned in-stock position on key furniture collections is has resulted from substantially better-than-expected sales demand over the last several months.

Although we have continued to work with our vendors to increase production in these programs to replenish our in-stock position, our higher quality standards require longer lead times.

Therefore, over the next several months we believe we will continue to take and fill back orders.

But not fully reinstate our distribution center reserve inventories until the end of the first quarter 2005.

As we look forward to the fourth quarter, we are continuing to focus on the strategic initiatives that are fueling our success driving top-line sales growth, increasing pretax operating margin and enhancing shareholder value including delivering consistent and predictable earnings.

Consistent with our strategic effort to drive top-line sales growth, we're continuing to invest in new growth opportunities in both our core and emerging brands.

In our core brands, we're increasing retail lease square footage and catalogue circulation, introducing new core and seasonal merchandise assortments continuing to enhance product quality with a particular focus on furniture, closely monitoring our in-stock positions on retail and DTC inventories and implementing new marketing initiatives that will continue to expand the reach of our brands.

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

We believe, however, that the long term potential of all these brands represents a significant growth opportunity in underserved markets for the home.

In PBteen which Laura will address later in the call we're continuing to increase page counts per catalogue and expand our extremely successful online marketing initiatives.

In Hold Everything we'll be launching our first e-commerce website in the fourth quarter reflecting our growing confidence in the long term potential of the brand, we have already opened two new prototype stores this month, one in Troy, Michigan and one in Orlando, Florida.

Early results for the new stores are consistent with our expectations, and we'll be opening our third prototype store next week in Emeryville, California.

We're positioning Hold Everything as an upscale lifestyle brand offering an expanded assortment of organizational solutions for all areas of the home in a contemporary esthetic.

In West Elm, we're continuing to expand our online search and electronic direct marketing initiatives, as the internet continues to be an extremely strong revenue driver in the West Elm brand.

In reflection of our growing confidence in the brand, we opened our third prototype store this month in Corta Madeira, California, to an extremely strong consumer response.

This store has performed in the top five stores in the company since its opening.

We continue to believe with the broadening of its assortment West Elm, has the potential to appeal to a much wider segment and become one of our largest brands over time.

In Williams Sonoma Home in the fourth quarter, we will continue to expand catalogue circulation and focus on identifying customers in the underserved premium market segment.

We will also continue to enhance the catalogue presentation of key items and further refine our visual merchandising.

E-mail marketing initiatives will also be expanded to grow our customer database and to attract new customers to the interactive e-catalogue.

Consistent with our second strategic initiative to improve profitability, in our core businesses we're projecting 2004 pretax operating margin of 40 to 60 basis points versus 2003.

The key drivers of this pretax operating margin improvement are expected to include improving the supply chain cost structure in the areas of sourcing, customer returns, transportation, and inventory management, including the weeks of supply initiative and leveraging general overhead as we continue our efforts to consistently improve our fixed and variable cost structure.

Consistent with our initiative to enhance shareholder value we remain committed to executing against our key strategic initiatives while delivering the EPS guidance that we have provided to our shareholders.

While the strength of our brands and our proven track record in driving our business in difficult economic times provide us with a high level of confidence in our ability to execute against these initiatives, and deliver the earnings guidance that we are providing to our shareholders today, we believe it is prudent to remain conservative in our outlook for the balance of 2004.

As we look at our guidance for fiscal year 2004, we are once again pleased to be able to provide dilutive earnings-per-share guidance within the range that we had previously set for ourselves.

In our previous guidance we estimated our fiscal year 2004 dilutive earnings-per-share in the range of $1.57 to $1.61.

Today we're increasing this range to $1.58 to $1.62 based on a better-than-expected performance in the third quarter, and a slightly revised estimate for the fourth quarter.

I will now turn the call over to Sharon McCollam to discuss third-quarter results.

Thanks, Ed.

Good morning.

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

First, we will review our third-quarter 2004 financial results and our fourth quarter and fiscal year 2004 earnings guidance.

Second, Howard Lester will provide you with a business update for the Williams-Sonoma brand.

Then Laura will provide you a business update for the Pottery Barn, Pottery Barn Kids and Pottery Barn Teen brands, and finally we will open the call for questions.

I would now like to discuss our third-quarter 2004 financial 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 have delivered on all of these commitments.

And for the 17th consecutive quarter we have met or exceeded the earnings-per-share guidance we have provided to our shareholders.

In the third quarter of 2004, we delivered earnings per share of 24 cents, which was 4 cents or 20% higher than the 20 cents we reported for the third quarter of 2003.

Net revenues in the third quarter of 2004 increased 14.2%, to $722.8 million, with strong performance in both the retail and direct to customer channels.

Retail sales in the third quarter of 2004 increased 11.6% to $392.1 million, this increase was primarily driven by a 10% increase in retail lease square footage, including 26 new stores, and a comparable store sales increase of 3.1%.

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

Direct to customer sales in the third quarter of 2004 increased 17.7% to $281.5 million, this increase was primarily driven by net sales generated in the Pottery Barn, Pottery Barn teen, West Elm and Pottery Barn Kids brands.

All of the brands in the direct to customer channel delivered positive growth during the quarter.

Williams-Sonoma Home mailed its initial catalogue in mid-September and, therefore, had no prior comparisons.

Internet sales during the quarter increased 43.6% to $118.3 million contributing 42% of total direct to customer sales in the third quarter of 2004 versus 34.4% in the third quarter of 2003.

We estimate, however, that 60% of non-bridal Internet sales are catalogue driven sales.

Gross margin in the third quarter of 2004 reported at 38.9% of net revenues, decreased 40 basis points versus the third quarter of 2003.

This decrease as a percentage of net revenues was primarily driven by a higher percentage of total company net revenues being driven by furniture which generates a lower than average gross margin rate, partially offset by a rate reduction in occupancy expenses.

The rate reduction in occupancy expenses, resulted from a greater percent of total Company revenues being generated in the direct to customer channel, which does not incur store-related occupancy expenses, in addition to the overall leverage of fixed occupancy expenses that resulted from strong revenue growth during the quarter.

SG&A in the third quarter of 2004 was $235 million or 32.5% of net revenue versus $210 million or 33.2% of net revenues in the third quarter of fiscal year 2003.

This 70-basis point decrease as a percentage of net revenues was primarily driven by rate reductions in employment and advertising expenses.

The employment rate decrease was primarily driven by year-over-year revenue leverage and corporate employment and employee benefit expenses.

The advertising rate reduction was primarily driven by a greater percentage of total company net revenues in the third quarter of 2004 being generated in the e-commerce channel, which incurs advertising expenses at a lower average rate than the company average.

I would now like to discuss significant year-over-year balance sheet variances.

The balance sheet at the end of the third quarter of 2004 reflects the fourth quarter 2003 implementation of FIN 46R.

The consolidation of variable interest entities, which required us, at that time to consolidate two of our Memphis based distribution centers.

The consolidation resulted in year-over-year increases in our consolidated balance sheet of approximately $19 million in property and equipment, $1.3 million in the current portion of long-term debt. $1.8 million in other liabilities and $15.9 million in long-term debt.

Balance sheet at the end of the third quarter of 2004 also includes the accounting impact of a $15 million debt transaction that we entered into in June 2004 to utilize state and local tax incentives that were offered to us by the state of Mississippi for expanding our distribution operations in December of 2003.

All proceeds of this debt must be used for fixed infrastructure and operating equipment investments in the new leased facility.

The accounting for this debt resulted in a $9.5 million increase in other current assets, a $5.3 million in other long-term assets and a $15 million increase in short-term debt.

Cash and cash equivalents at the end of the third quarter of 2004 were $88.8 million, an increase of $46.2 million or 109% versus the end of the third quarter of 2003.

Accounts receivable at end of the third quarter of 2004 were $54.8 million, an increase of $9 million versus the end of the third quarter of 2003.

This increase was primarily due to a year-over-year increase in credit card receivables.

Merchandise inventories at the end of the third quarter of 2004 were $497 million, up $30.7 million or 6.6% versus the end of the third quarter of 2003.

This lower than expected year-over-year increase was primarily driven by the ongoing success of our newly implemented weeks of supply inventory management initiatives, and lower than planned in-stock position on key furniture collections.

Prepaid catalogue expenses at end of the third quarter of 2004 were $65.5 million, up $10.5 million versus the end of the third quarter of 2003.

This increase was primarily due to the timing of expenditures for the Pottery Barn, Pottery Barn Kids, and the PBteen, and the initial catalogue circulation for the Williams-Sonoma Home catalog.

Accounts payable at end of the third quarter of 2004 was 225.2 million, up $28.9 million for 14.7% versus the end of the third quarter of fiscal year 2003.

This increase was primarily driven by higher freight payables associated with increased volume and the timing of expenditures.

Accrued salaries, benefits, and other expenses at the end of the third quarter of 2004 were $73.3 million, up 10.6 million versus at the end of the third-quarter of 2003.

This increase was primarily due to higher accrual balances for worker's compensation, employee vacation, sales returns, incentive compensation and product liability reserves.

Customer deposits at the end of the third quarter of 2004 were $136.3 million, up $21.1 million or 18.3% versus the end of the third quarter of 2003.

This increase was primarily due to continued growth in our unredeemed gift certificates and gift card liabilities.

Partially offset by a lower balance for customer deliveries in transit.

Income taxes payable at end of the third quarter of 2004 were $0.8 million, a decrease of $31.4 million from the end the third quarter of 2003, primarily due to a year-over-year increase in quarterly estimated tax payments, which resulted from a reduction in quarterly timing differences.

The current portion of long-term debt at the end of the third quarter was $24.1 million, and increase of 16.4 million versus the end of the third quarter 2003.

This increase was primarily driven by the $15 million Mississippi debt transaction in addition to the $1.3 million consolidation impact of FIN 46R.

I would now like to briefly discuss our fourth quarter and fiscal year 2004 guidance.

Looking specifically at the fourth quarter, we are encouraged by the overall consumer response to our merchandise assortment, and excited about the potential of our emerging brands.

We recognize, however, that approximately 35% of our full-year revenues and approximately 60% of our full-year earnings will be generated in this quarter.

For this reason, we are continuing to be cautious in our economic outlook which we believe is prudent.

For the fourth quarter as announced in this morning's press release, our diluted earnings-per-share is in the range of 93 to 97 cents.

This represents a projected dilutive earnings-per-share increase of 9% to 14%, during a quarter in which we are investing heavily in future growth, including the first full quarter of our new brands Williams-Sonoma Home, the first quarter for new stores in our emerging brands, increasing catalogue prospecting in all of our core brands, and expected 23% of our planned catalogue circulation in the emerging brands.

For the full year, we have increased our diluted earnings-per-share guidance from $1.57 to $1.61, to $1.58 to 1.62 reflecting our better-than-expected earnings results in the third quarter.

This revised guidance represents a projected diluted earnings-per-share increase in the range of 19.7 to 22.7% for the year.

We believe and are confident that the strength of our brands, our strong operational execution, and the consistency in which we have delivered on our commitments provides us with the ability to deliver the earnings-per-share guidance we have provided you today.

I will now turn the call over to Howard Lester to discuss the Williams-Sonoma brands.

Thanks, Sharon, and good morning.

Well, the third quarter of 2004 was a very challenging quarter for our Williams-Sonoma brand.

With net sales increasing 1.3%, versus 11% increase in 2003.

Although we expected our growth to be substantially lower than the prior year due to difficult sales comparisons and economic uncertainty, our actual sales growth for the quarter at 1.3% was below expectations primarily in the retail channel.

In retail comparable store sales decreased 4.2% versus the 6.9% increase in 2003.

We did, however, realize an improvement in our gross margin rate, due to the 2003 rate being negatively impacted by substantially higher markdowns associated with a deeply promotional table top transition.

In the direct to customer channel, sales growth during the quarter was driven by e-commerce unique visitors to the website increased 41%, and we continue to expand our online search and electronic direct marketing initiatives, which we believe continue to be a significant growth opportunity for the brand.

From a merchandising perspective during the quarter, we saw positive growth in electrics, housewares, linens and books, driven primarily by new product offerings.

The performance, however, in outdoor, table top and cookware was below our expectations.

Including the weak consumer response to our multichannel launch of our newest Calphalon cookware programs.

We believe the challenges we faced in the third quarter in these categories will be overcome in future quarters with stronger merchandising, improved sourcing and enhanced retail execution.

As we look forward to the fourth quarter, we're remaining cautious in our outlook due to the sales volatility that we're continuing to experience.

But we are encouraged by the initial consumer response to our core and seasonal merchandising assortments, including electrics, holiday cooking, entertaining essentials our seasonal food and housewares.

We've shifted our retail focus in cookware back to our core assortment, which is historically performed well for the brand and have expanded our table top offering.

We do believe, however, that we'll continue to face challenges in this category until we fully implemented our new table top merchandising strategy next year.

We're also encouraged by the national broadcast exposure we're receiving this week as part of our five-day cooking and entertaining series on the CBS early show.

The series, the Perfect Thanksgiving, was taped at our Columbus Circle flagship store and is providing significant brand recognition during the key holiday shopping period.

The opportunity to partner with CBS on this project has clearly demonstrated the brands' authority as the nation's leading provider of premium home cooking and entertaining ideas.

Looking to 2005, there are several strategic initiatives that are in development today that we believe are going to be a significant opportunity for the brand going forward.

Including reducing the brand's dependant on seasonal merchandising strategies, and expanding the core merchandising assortment.

We're redesigning the catalogue to be more inspirational to the customer by focusing on cooking and entertaining ideas, and promoting stronger themes and that first catalogue will be mailed just after Christmas.

Increasing retail traffic by maximizing the coordination of catalogue mailings with our retail initiatives and expanding the online merchandising assortment by adding internet only SKUs, including an enhanced bridal offering.

These initiatives will continue to expand the reach of the brand and leverage the strength of our authority as a destination for high quality cooking accessories, gift giving ideas and home entertaining essentials.

Let me now turn the call over to Laura Alber to discuss the Pottery Barn brands.

I would now like to discuss the third quarter performance of the Pottery Barn, Pottery Barn Kids and PBteen brands.

I'll be begin with Pottery Barn.

We're extremely pleased with the Pottery Barn brand in the third quarter.

Net sales increased 17.3% and all channels performed above expectations.

A positive consumer response to both our core and seasonal merchandise assortments including furniture, decorative accessories, bedding, and core dinnerware drove these better than expected results.

Furniture sales substantially exceeded expectations for the quarter.

In the retail channel comparable store sales for the third quarter increased 5.7% on top of a 5.4% increase last year.

And the performance of new and expanded stores was very strong.

The direct to consumer channel also delivered impressive sales growth during the quarter.

Strong merchandising, a positive consumer response to a strengthened DTC only assortment, improved editorial contents including entertaining and interior design ideas and a strong circulation strategy drove these better-than-expected results.

Traffic on the website increased over 30% and conversion continued to exceed our expectations.

Wedding and gift registry sales were also very strong, due to enhanced retail signage, in-store collateral and print media tie-ins.

We also increased our internet marketing efforts, including increased EDMs, increased online search and enhanced creative on our home page, all of which delivered extremely positive results during the quarter.

We continue to believe the online marketing will be a significant growth opportunity for the brand and a source of new customers for the future.

As we look forward to the fourth quarter, we are encouraged by the consumer response to our overall merchandising assortment including dining, home office, media source and textiles.

Our holiday gift giving message has been significantly expanded and is prominently merchandised across all channels.

Now I would like to discuss Pottery Barn Kids.

Net sales in the Pottery Barn Kids brand increased 15.1% in the third quarter.

This year-over-year increase was driven by incremental sales from new stores and strong momentum in the E-commerce channel.

At the end of the third quarter we operated 85 stores, versus 77 stores in 2003, In the retail channel, our comparable store sales for the quarter increased 5.6% on top of a 6.3% increase in 2003.

What is particularly encouraging about this performance, is that comparable store sales were positive in both our single store and multistore markets.

At the end of the third quarter, 72 stores were included in the comp base.

In the direct to consumer channels, sales growth continued to be driven by the ongoing success of e-commerce.

Highly productive online marketing programs including electronic direct marketing partnerships and other Internet initiatives, and a strong increase on online gift registry sales contributed to the strong growth of this channel.

From a merchandising perspective, strength in our core and seasonal businesses including bedroom furniture, upholstered furniture, wall systems and textiles were the significant contributors to our growth during the quarter.

In store marketing strategies were also extremely important, including our new design studion visuals, and our expanded focus on consumables.

We also saw a strong consumer response to personalization in the direct consumer channel.

As we look forward to the fourth quarter, we are encouraged early consumer response to both our core and seasonal merchandise assortments, and continue to be excited about our new merchandising strategies, including the expansion of our core furniture collections, the introduction of our holiday stocking stuffer bar to increase consumable offerings and the enhancement of our nursery presentation.

Gift giving will be made easier by an expanded assortment of gift alternatives, specifically tailored to appeal to different age groups of children in a broader range of price points.

I would now like to talk about the newest addition to the Pottery Barn brands, PBteen.

We are once again extremely pleased with the performance of PBteen.

Net sales growth in the third quarter continued to exceed expectations in both the catalogue and e-commerce channels, and the consumer response to the overall merchandise assortments, including textiles, furniture and decorative accessories was very positive.

As we look forward to the fourth quarter, we'll continue focus on driving top-line sales growth and enhancing the authority of the brand.

To date we are extremely pleased with the initial consumer response to our holiday merchandise strategies, including our expanded focus on gift giving.

We believe teenage home centered gifts are significant opportunity for the PBteen brand, and based on the success of last year's limited offering have broadened our assortment to fill this market void.

Also during the quarter, we'll continue to increase our interactions with our teen customers through contests, print media and entertainment-related promotions that will build brand affinity and drive consumer acquisitions.

In summary we're excited about the merchandise strategies inside all our Pottery Barn brands, and are confident in our ability to deliver our business in the fourth quarter.

Although we will be challenged with a low in-stock position on furniture inventories, our year-long focus on product design, improved quality, visual merchandising and operational execution, has laid the foundation for profitable growth, and we remain committed to delivering our results.

I would now like to open the call for questions.

Thank you, ma'am.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone.

If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment.

Please limit yourself to one question.

We'll pause for just a moment to give everyone an opportunity to signal for questions.

And we'll take our first question from Marni Shapiro Merrill Lynch, please go ahead.

Good morning, it's Mark Friedman from Merrill Lynch.

Hi, Mark.

Appreciate a little bit more color on Sonoma just as far as understanding the table top.

Last year you had phased out of the table top and introduced new lines.

Are you saying that the lines you've introduced aren't working and you've got to go back to the board, and then on the outdoor, now that shouldn't be as much a focus in the fourth quarter because of the season, so we can assume that part of the business doesn't impact.

And then finally on the cookware, were you able to make enough adjustments to get back to the core stuff for the holiday season?

So how much of these issues are moving product around versus taking time for the consumer to kind of come back and respond to it?

Thank you.

Thanks, Mark, and good morning.

On your part of your question about the table top transition, we started the table top transition, as you recall about a year ago.

And parts of it didn't work as well as we had hoped.

So about three months ago, we rethought the whole process of table top, and the part of it has -- it's really in three pieces.

The dinnerware, the glassware and the linen assortment.

And in the dinnerware business, our plans are to phase out of the fashion dinnerware.

I think, you know, as you know, we've tried for many years to establish authority with the customer and the fashion dinnerware business, and I think due to the size of our stores and the amount of perimeters that we have available for that, we've just been unable to be successful there.

And so, at the same time, though, our white French porcelain has continued to comp up each year.

So we're now -- we have experimented in our upholstery store and a couple of others with a much larger white porcelain assortment.

Where I think we own a part of the customer's mind, and it's been very successful in the early trials.

And so our plans are to expand that substantial, more serving pieces, more choices in the Apilco line, for the customer to have a larger fundamental assortment of dinnerware, bowls, salad pieces, things like that where I think the customer for years has counted on our brand to deliver that, to provide that to them.

So that's where we're going over the next let's see, by April, our plans are by April to be fully transitioned out of the fashion dinnerware and have the expanded assortment of white porcelain and associated pieces in the stores completely done.

I think that in the glassware and linens, and glassware first, we have attempted again to have too much fashion glassware in the stores.

That's not what the Williams-Sonoma customer thinks of, and looks to us to provide them.

We're going to do a better job with our core assortment of glassware, where we've been so successful over the past few years.

I think we've ignored that some, so we'll enhance that over the next six months substantially, get back to what we really do well.

The linens have been a very strong business for us, and we'll continue to expand that and add a much more basic assortment, like our hem stitched napkins and placemats and things that we've been very successful with, so we should have all of that pretty much in the stores.

I think that's going to take the better part of next year but certainly by fall we'll have that in place.

So those are the things we're working on there.

I think the rest of it, you asked me about cookware.

Cookware is just a matter of moving around.

I mentioned the Calphalon, it was a big disappointment to us.

I think we confused our customer in the launch, and comparing that to all clad of which we're by far the biggest seller in the country, and it remains our core cookware programs.

So that'll be a quick transition to that, and we're in good stock position, so I look forward to a good fourth quarter in cookware, and I don't think that'll be a difficult transition at all.

The rest of it is just moving merchandise around.

I think finetuning our assortments.

We've just gotten a little off track obviously, and little things, it's not one big thing.

Particularly in our stores that are 4,000 to 6,000 feet, which represent about 75 to 80% of our total store count.

As we focus more on the larger formatted stores, we may have ignored those stores a little bit, and I think with some finetuning we'll be able to improve those stores assortments.

We have oversorted them a bit, because we carry a lot more SKUs than the larger stores, and we haven't given enough attention to those smaller stores, which really are our bread and butter, so we're out in the stores currently planning what we're going to do there.

I think we see a lot of opportunity and by the end of the first quarter I think we ought to be, you know, fairly far along with improving those assortments out there so I'm very encouraged.

I think it's a lot of little things.

Our team's highly motivated and most of it is not, doesn't require a lot of new sourcing.

It's just a matter of our visual presentation and getting the stores so they get that last 5% of edge and excite our customers again.

I think we spoke to you about our new floor features, where we cut back on the seasonal food in the front of the stores.

It has not affected our food sales at all.

And we've got overwhelming response from our kids in the stores.

We've been doing that since the end of September, and we're very pleased with the results of that have so far.

So I'm kind of excited about the changes we're going to be making.

And we'll take our next question from Dana Telsey, Bear Stearns.

Please go ahead.

Good morning, everyone.

Sharon, can you talk a little bit about furniture.

How long do you think it'll take to get caught up in furniture, and over time what do you see the margin impact of furniture being.

And Howard, the President of Williams-Sonoma slot continues to remain open, what do you want in that position, and how close are you.

And just lastly Laura, congratulations on a success of Pottery Barn.

How do you see the merchandise evolving next year?

Thank you.

Dana, I'm going to let Laura start with answering your question about the furniture.

The biggest impact of that is in Pottery Barn and they have a significant number of initiatives that I would like her to share with you.

So I'm going to turn this question over to Laura.

Hi, thank you, for the compliment on our strong results this quarter.

Our furniture business continues to be extremely strong, due to the improved quality and designs changes we've made this year, and it's been a focus to also improve the operational support to this business.

We are because of our strong sales have a shortfall in inventory currently, but we have constant flow, so we have a back order situation but the customers who've been on back order the longest are, of course, filled first, and we will see that continue through the first quarter where we get back in stock and rebuild our DC inventory, and that's really what we're doing now.

Our increased quality requires more time, and we believe it is extremely important to produce the highest quality level for our customers, and we see that they're willing to wait, so it is a short-term issue at this point.

We also are very focused on furniture profitability, and have a number of initiatives in place and underway to continue to improve our furniture profitability and we have seen significant improvement over the last year with some of these initiatives.

So I'm confident about our ability to continue to improve this area.

In terms of the Pottery Barn assortment, we have so much opportunity to continue to bring fresh ideas to our customer.

We continue see their appetite for higher end goods from us, and really believe we have gotten our core customer back, and have put ourselves in the dominant position again for home furnishings in the market, so we have a lot of new ideas both in product category, and in product offer, and we're thrilled that our customer is really responding well, so you'll continue to see freshness from us, as well as opportunity to expand our core merchandise and in the catalogue we've seen tremendous success with building on furniture collections, so where we may have a desk we add a additional pieces to that desk, so they can really outfit their entire home office, or their entire bedroom, or their entire living room from us.

And --

Dana, it's Howard.

On the part of your question that you asked me, right now I'm filling in, and kind of invigorated by the experience.

We're into fall and so we're currently just working with our existing team, which has a lot of talent and is highly motivated, so I'm spending from now till the end of the year with them, and try to set the initiatives and get the action programs in place and going.

And really evaluate the team better than I have been able to do in the past.

And we'll make a decision after the holidays, as to where we're going with a new President for the brand.

We've got internal people that we're -- that we'll look at and perhaps we'll look outside, but right now we're just focused on the fall season and trying to make it as best we can, and get the programs that I've talked about in place.

And I'm having a great time doing it, although that's not a forever kind of thing.

But we want to take our time and be sure we do the right thing, so we'll deal with that in the first quarter.

And we'll take our next question from Collin McGranahan, Sanford Bernstein, please go ahead.

Thank you, good morning.

Good morning.

Sharon, first question for you.

Circulation now looks to be up 11 to 13%, I think you were looking to 12 to 14% before.

Where have you cut circulation and what's the rational behind that?

Then I have a follow-up.

I'm going to let Pat Connolly take that question.

Would you like to respond to that please?

Sure, Collin.

How are you?

The major difference in circulation this year to last is really in West Elm, where we're generate substantially more sales on less circulation, our circulation is down about 30% for the year, but yet our sales are going to be up substantially, and we're in the range of 11 to 13% in terms of circulation growth for this year overall, with excellent circulation growth in our emerging brands.

Collin, we do not believe that the tweak in circulation is going to have a sales impact because of the tremendous strength of e-commerce.

And we'll take our next question from Neelie Tominga Piper Jaffray.

Leaps could.

Thank you, my question really relates more on a general level.

You guys talked about how the high level consumer continued to spend throughout the second quarter on your last quarterly conference call.

I'm wondering what you've changes you might have seen in this consumer throughout the third quarter, and so far here in the fourth, if you could give some comments.

Absolutely, this is Sharon.

Thank you.

In the second quarter we did see a dynamic high end consumer, and I would say that based on the sales numbers we delivered in Q3, you would have to say we also saw that customer in Q3.

What Ed talked about earlier, is what we are seeing is more volatility than we would expect to be seeing around this time, and what that means is your days are extremely high and your days are low, and there are different trends than you saw last year.

Now we have a different calendar this year.

We have 29 days between Thanksgiving and Christmas but then there's another dynamic about the fact that you lose a Saturday right before the holidays, so as a result of that, we're seeing more volatility and that's causing us to be cautious.

That's not to say that the customer, that we believe that there's been a significant change in the high end consumer.

We're just having difficulty reading that.

The other thing that's a little challenging for us is we do have 23% of our circulation in Q4 in our emerging brands, and as you might recall from last year we had very little holiday assortment in any of our emerging brand books.

This year they have significantly expanded the gift offering in PBteen and West Elm and Hold Everything, and obviously Williams-Sonoma Home is a brand new book this year, so we're being cautious in how we're looking at Q4.

And we'll take our next question from Lauren Levitan, SG Cowen.

Please go ahead.

Thanks, good morning.

Sharon, you explained some of the reasons why the inventory came in a little bit lower than expected.

Can you give us some sense of how you expect those inventory levels to look going forward?

And I'm guessing that certainly the lack of furniture inventory put that number down currently, but the weeks of supply initiatives are creating more permanent opportunities to reduce inventory levels. if you could give us a little bit more color on that .

And then for Pat, I was hoping you could give us some sense as to what having a Saturday Christmas means, in terms of catalogue shipment cutoffs, and how you would expect the flow of your business to look this holiday season.

Maybe comparing it to previous holiday seasons where Christmas fell on a Saturday.

Thank you.

Lauren, I'm going to let Pat address your second question, and then I'll take the first question.

Pat, could you address the shift for DTC?

It gives us a pretty big week the week before Christmas, every year we see where customers are ordering a little more in the third week.

Five, six years ago, you'd have a peak the weed after Thanksgiving, and then those weeks would drop off fairly rapidly.

This is ideal from a DTC standpoint, because we'll be able to ship until Thursday for Friday delivery this year, so that's really one more day of shipping than we've had in the past.

And then Lauren, as it relates to the inventory, we gave guidance for Q4 at 10 to 15%.

We believe that the weeks of supply initiative will be a sustaining lower level of inventory.

And when you think about that going into Q1 and Q2 of next year, this really kicked in Q2 slightly and then Q3 of this year, so when your anniversarying this, just kind of keep those in mind.

It would be our hope that the guidance that we gave you at the 10 to 15% in that range, that we will be there in the fourth quarter.

The sourcing teams are aggressively going after the replenishment of these furniture inventories, and they are making significant progress.

Ed and the entire team has spent a significant amount of time in Asia working with our vendors.

They're excited about our trends, and our vendors are excited about our growth, there are so few companies in furniture out there that are seeing the kind of performance that we are seeing.

So we are a highly attractive customer in Asia right now.

And we think that's going to bode well for us.

It's going to be all about timing though.

As Ed said is what we are doing is we're flowing merchandise.

We're clearly getting these goods in every week, every other week, but we're taking a back order.

We're filling the back order.

What we want to see as a company is an increase in this inventory number, getting our growth more in line with our sales growth, and being able to rebuild those DC reserve inventories.

Due to time constraints, we'll take our last question from David Magee, SunTrust, Robinson Humphrey.

Please go ahead.

Hi, good morning.

A two-part question.

One is on the Williams-Sonoma side, you know, with the changes that you've made in some of it works, some of is hasn't, is there any underlying competitive reason why you've made the changes over the last 12 months or so, table top and other, is there anything happening there from competition that's prompting these changes?

Not at all.

I think just as I said, I think we've struggled with fashion dinnerware for many years, really, and at the same time we just see our core dinnerware, the white French porcelain which we're known for, continue to grow, we see increased demand for serving pieces, that sort of thing, and we continue to mark down our fashion dinnerware, and it's probably long overdue to make this kind of directional change.

Then on the gross margin with regard to the furniture mix impacting that in the third quarter, did furniture accelerate from the first half of the year into the third quarter, as far as its growth to have more of an impact than you had on the gross margin in the first half?

Yes, it did.

Dave, this is Sharon.

It did accelerate, in the press release, we said that in the third quarter furniture was 35% increase year-over-year.

And so that was a significant increase.

And due to time constraints that does conclude's today's question-and-answer session.

Mr. Mueller, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you.

We appreciate you joining us today for our third-quarter earnings release.

We've enjoyed sharing our results and vision with you this morning.

We're proud of our performance during the third quarter, excited about the many opportunities ahead.

And we really believe we're well-positioned to execute against our guidance for the fourth quarter.

Thank you.

And have a great day.

Thank you.

This concludes today's Williams-Sonoma Incorporated third quarter 2004 earnings release conference call.

You may now disconnect.