Williams-Sonoma Inc (WSM) 2005 Q4 法說會逐字稿

Welcome to the Williams-Sonoma Inc. fourth quarter and fiscal year 2005 earnings and fiscal 2006 guidance call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded. I would now like to turn the call over to Steve Nelson, Director, Investor Relations at Williams-Sonoma Inc. to discuss forward-looking statements. Please go ahead, sir.

Good morning. This morning's conference call should be considered in conjunction with the press releases we issued earlier today. The forward-looking statements included in this call 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, business initiatives, guidance, growth plans, and prospects of the Company in 2006 and beyond and are subject to certain risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press releases and SEC filings including reports on Forms 10-K, 10-Q, and 8-K 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. This call contains certain non-GAAP financial measures as defined in regulation G. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management, please see our press release as issued this morning and filed with the SEC on Form 8-K. I will now turn the conference call over to Ed Mueller, our Chief Executive Officer.

Good morning and thank you for joining us. With us today is Howard Lester, our Chairman; Laura Alber, our President of 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 are very pleased to be here today to deliver to our shareholders another year of record financial performance. In 2005 we once again delivered the highest diluted earnings per share and cash flow in the history of the Company and met or exceeded the earnings guidance we provided to our shareholders in every quarter. And excluding the Hold Everything charge that we discussed in our press release this morning, our pretax operating margin for the first time reached double-digit levels, increasing 30 basis points to 10.2%. Our revenue growth of 12.8% diluted earnings per share increased 17.5% excluding the Hold Everything charge and 13.1% including it. We are very proud of these results and believe that they once again demonstrate our ability to significantly invest in our long-term strategic initiatives while consistently delivering on the financial commitments we have set for ourselves.

The first highlight of our 2005 operating results was our revenue growth of 12.8%. This was a key strategic initiative in 2005 and we are extremely pleased to have been able to deliver these results. Despite a significant underperformance in the Hold Everything brand and a disappointing first half of the year in the PBteen brand. In our core brands, net revenues increased 10.9% in 2005. Primarily driven by low double-digit and low teen net revenue increases in the Pottery Barn and Pottery Barn Kids brands respectively. And a high single-digit net revenue increase in the Williams-Sonoma brand. We are extremely pleased with the renewed momentum that we saw in the Williams-Sonoma brand in the fourth quarter.

In our emerging brands including Hold Everything, PBteen, West Elm, and Williams-Sonoma Home net revenues increased 35.6%, primarily driven by the strong performance of the West Elm and Williams-Sonoma Home brands, excluding Hold Everything net revenues in the emerging brands increased 48.8%. Net revenues in the PBteen brand increased 15.6% in 2005. Exceeding our revised expectations after a disappointing first half. A strong consumer response to both our fall and holiday catalog presentation and a compelling merchandise assortment drove these better than expected results. We continue to believe that the strong consumer appeal and mine share of this brand indicates an underserved market segment that can provide long-term growth opportunities for the future.

Net revenues in the West Elm brand increased 96.1%, significantly above our expectations. This increase was primarily driven by strong growth in e-commerce and a successful retail rollout. During 2005, we continued to broaden the brand's appeal by expanding its product assortment, softening the color pallet, and presenting the merchandise in a lifestyle setting in all three channels. During the year, we relaunched the brand's website to enhance the customer's on-line experience and opened eight new stores across the country at an average size of approximately 17,000 square feet. The consumer response to all these initiatives exceeded our expectation, making us increasingly optimistic about the long-term potential of this brand.

In our newest brand, Williams-Sonoma Home, 2005 was a year of significant growth and new learnings. In addition to substantially increasing catalog circulation, we opened three new prototype stores in September and October, including an 18,000-square-foot flagship store in Los Angeles. Throughout the year we saw positive consumer response to our expanded merchandise assortment with particular strength in furniture and bedding. The custom upholstered furniture offering driven by our 45-day delivery program continued to exceed our expectations as did bedroom furniture and case goods. What we found especially encouraging about these results is the long-term competitive advantage that we believe we can create by leveraging our supply chain with a level of quality and design in our merchandise that is currently only available through the interior design tray.

The second highlight of our 2005 operating results was our pretax operating margin, reaching a record 10.2% excluding the Hold Everything charge. This 30-basis-point year-over-year increase was the result of several successful operational initiatives, including a reduction in customer shipping costs driven by the ongoing refining of our furniture delivery network, a reduction in employee benefit costs as a percent of net revenues driven by cost containment strategies and fringe benefits and proactive Workers' Compensation initiatives. And ongoing reductions in corporate overhead expense as a percentage of net revenues due to strong expense management initiatives. As a majority of these improvements were driven by fundamental change 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 are in place.

Third highlight of our 2005 operating results was the significant progress we made in building our infrastructure to support the growth in our core and emerging brands. In the information technology area, we continued to make important progress in our five-year strategic plan. During 2005, we transitioned the majority of our data center operations to IBM while continuing to elevate the long-term strategy for our e-commerce websites. We are also continuing to invest in our direct-to-customer order management and inventory management systems, which are in beta testing today. And we will begin implementing a new retail inventory management system in 2006. These multiphase, multiyear technology initiatives are at the heart of our long-term efforts to drive increased sales and reduce costs through increased productivity and operational efficiency.

In the area of supply chain operations, we successfully implemented daily store replenishment in the retail channel and began testing an in-sourcing strategy for our furniture hub operations on the East Coast. Although it is still early, and our test market was small, we are very pleased with our preliminary results, which include a 30% lower furniture return rate than our third-party provider. We also added to our distribution network by increasing distribution leased square footage by approximately 10%. On our weeks of supply inventory management initiative, we made gradual progress throughout the year in optimizing the flow of our merchandise through the supply chain. We significantly improved our order fulfillment rates and dramatically reduced customer back orders. The full benefit of this initiative, however, will not be realized until we implement our new inventory management systems between now and 2009. Our successful execution of all these initiatives in 2005, combined with the strength and depth of the management team responsible for this success, have left us well positioned to drive the business in 2006 and beyond. I will now turn the call over to Sharon McCollam for more details on the fourth quarter and fiscal year 2005 financial results.

Thank you, Ed. Good morning. I'd like to begin by outlining the agenda for the remainder of this morning's call. First, we will briefly discuss the details and financial impact of the Hold Everything charge. Then we will review our fourth quarter and fiscal year 2005 results. Next, Ed will discuss our 2006 operating strategies and financial guidance. Following Ed, Howard and Laura will provide with you a business update on the Williams-Sonoma and Pottery Barn brands. And finally, we will open the call for questions.

I will first talk about the Hold Everything charge. On January 12, we announced that we expected to incur an accounting charge of $0.09 to $0.10 per diluted share associated with our decision to transition the merchandising strategies in the Hold Everything brand into our other existing brands by the end of 2006. Consistent with this expectation, we incurred a pretax charge of 13.5 million, or $0.07 per diluted share in the fourth quarter of 2005. Of this pretax charge, approximately 4.5 million was included in gross margin and approximately 9 million in SG&A. Included in this charge were the initial asset impairment and lease termination costs associated with the shutdown of our Hold Everything retail stores, the asset impairment of the e-commerce websites, and the write-down of impaired merchandise inventories. Not included in this charge were the ongoing operating losses of the Hold Everything brand in the fourth quarter.

In 2006, we expect to incur the remaining $0.03 per diluted share charge for additional costs associated with the Hold Everything transition. Consistent with the accounting treatment of our operating losses in 2005, the charge in 2006 will also not include the operating losses of the brand during the shutdown period. During our call today, we are referring to both of these adjustments as the Hold Everything charge. We are also discussing our financial results excluding these adjustments in order to provide meaningful year-over-year comparisons. As these are non-GAAP comparisons, the information provided in this call today should be analyzed in conjunction with the information that we provided to you in our press release this morning. I would now like to talk about our fourth quarter earnings results.

In the fourth quarter of 2005, diluted earnings per share increased 14.7% to $1.09 versus $0.95 in the fourth quarter of 2004. Throughout the quarter, we remained intently focused on operational execution, including distribution management and daily store replenishment which we believe contributed to increased sales in the retail channel. These operational initiatives, combined with the strong consumer response to our key merchandising strategies, allowed us to deliver another quarter of record financial performance. And for the 22nd consecutive quarter we met or exceeded the earnings per share guidance we provided to our shareholders. Net revenues in the fourth quarter of 2005 increased 12.1% to 1.2 billion. Retail revenues in the fourth quarter of 2005 increased 10.8% to 757 million. This increase was primarily driven by an 8.6% increase in retail leased square footage and a comparable store sales increase of 5.8%.

Net revenues generated in the Williams-Sonoma, Pottery Barn, and West Elm brands were the primary contributors to this year-over-year increase. Direct-to-customer revenues in the fourth quarter of 2005 increased 14.1% to 458 million. This increase was primarily driven by net revenues generated in the Pottery Barn, Pottery Barn Kids, and PBteen brands. All of the brands in the direct-to-customer channels delivered positive growth during the fourth quarter with the exception of Hold Everything. Internet revenues during the fourth quarter of 2005 increased 35.7% to $243 million, contributing 53% of total direct-to-customer revenues versus 44.6% in the fourth quarter of 2004.

Gross margin expressed as a percentage of net revenues in the fourth quarter of 2005, excluding the 40 basis point impact of the Hold Everything charge, was 44% versus 44.8% in the fourth quarter of 2004. This 80-basis-point decrease was primarily driven by higher inventory shrinkage, increased direct-to-customer shipping costs, higher expenses associated with daily store replenishment, and increased markdowns and higher occupancy costs in the Hold Everything brand. These increases were partially offset by a rate reduction in cost of merchandise driven by increased full price selling in the Pottery Barn and Williams-Sonoma brands. Selling, general, and administrative expenses expressed as a percentage of net revenues in the fourth quarter of 2005 excluding the 70-basis-point impact of the Hold Everything charge were 27% versus 27.8% in the fourth quarter of 2004. This 80 basis point decrease was primarily driven by lower employee benefit and Workers' Compensation costs and year-over-year sales leverage in employment and advertising costs.

I will now discuss our fiscal year 2005 earnings results. In fiscal year 2005, excluding the Hold Everything charge, we delivered diluted earnings per share of $1.88, an increase of $0.28 per diluted share, or 17.5%. Net revenues in fiscal year 2005 increased 12.8% to 3.5 billion. Retail net revenues increased 12.3% to $2 billion in fiscal year 2005. This increase was primarily driven by a year-over-year increase in retail lease square footage of 8.6% and a comparable store sales increase of 4.9%. Net revenues generated in the Pottery Barn, Williams-Sonoma, West Elm, and Pottery Barn Kids brands were the primary contributors to the year-over-year revenue increase.

The direct-to-customer net revenues increased 13.6% to 1.5 billion in fiscal year 2005. This year-over-year increase wag primarily driven by net revenues generated in the Pottery Barn, Pottery Barn Kids, West Elm, and Williams-Sonoma brands. All of the brands in the direct-to-customer channel delivered positive growth during the fiscal year with the exception of Hold Everything. Internet revenues increased 36.5% to 766 million in fiscal year 2005. Catalogs mailed during fiscal year 2005 totaled 385 million, an increase of 4.6% versus a 12.1% increase in fiscal year 2004. Paid circulation increased approximately 9.7% in fiscal year 2005, versus 19.5% in fiscal year 2004. Gross margin expressed as a percentage of net revenues in fiscal year 2005, excluding the 10-basis-point impact of the Hold Everything charge, was 40.7% versus 40.5% in fiscal year 2004. This 20-basis-point increase was primarily driven by a rate reduction in shipping and occupancy costs, partially offset by a rate increase in cost of goods sold.

The rate reduction in shipping cost was primarily due to the successful refining of our furniture delivery network partially offset by a year-over-year increase in fuel surcharges. The rate reduction in occupancy expenses was primarily due to sales leverage in the retail channel and a greater percentage of total company net revenues being generated in the direct-to-customer channel. The rate increase in cost of goods sold was primarily due to costs associated with the implementation of the daily store replenishment program and a higher percentage of total company net revenues being driven by furniture which generates a lower than average gross margin rate. Furniture sales in the fourth quarter of 2005 increased approximately 17% versus the prior year.

Selling, general, and administrative expenses expressed as a percent of net revenue in fiscal year 2005 excluding the 20-basis-point impact of the Hold Everything charge were 30.6%, essentially flat to last year. Higher catalog advertising expenses, driven by increased paper costs, were substantially offset by reductions in employee benefit costs as a percentage of net revenues.

I would now like to discuss fiscal year 2005 significant year-over-year working capital balance sheet variances. All comparisons are versus year-end balances at the end of fiscal year 2004 which are included in this morning's press release financial statement. Cash and cash equivalents at the end of fiscal year 2005 increased 122 million, to $361 million, after investing nearly 94 million in share repurchases. This is the highest year-end cash balance in the history of the Company. Our consolidated statements of cash flows are included in this morning's press release.

Merchandise inventories at the end of fiscal year 2005 increased 68 million, or 15% to 520 million on revenue growth of 12.8%. On a two-year basis, however, inventory growth is in line with revenue growth. Customer deposits at the end of fiscal year 2005 increased 24 million to 173 million. The 16% increase was driven by year-over-year growth in unredeemed gift certificates and gift cards and customer deliveries in transit at year end.

Before I turn the call over to Ed to discuss our fiscal year 2006 financial guidance, I would like to remind everyone that our fiscal year 2006 earnings will be impacted by the prospective implementation of two new accounting pronouncements. FAS 123R accounting for share-based payments, and FSP FAS 13-1, accounting for rental costs during the construction period, in addition to the 2006 Hold Everything charge. This fiscal year 2006 impact of FAS 123R, accounting for share-based payments, is estimated at $0.19 per diluted share, and will be recorded in SG&A expense. The fiscal year 2006 impact of FSP FAS 13-1, accounting foreign tal costs during the construction period, is estimated at $0.03 per diluted share and will be recorded in total cost of goods sold. This fiscal year 2006 impact of the Hold Everything impact charge is estimated at $0.03 per diluted share and will be recorded primarily in total cost of goods sold.

In Ed's discussion of our 2006 guidance, he will be excluding the impact of all of these adjustments to provide meaningful year-over-year comparisons. As these are, however, non-GAAP comparisons again, the information Ed is providing should be interpreted in conjunction with this morning's press releases. I would now like to turn the call over to Ed to discuss our 2006 operating strategies and our fiscal 2006 financial guidance.

Thank you, Sharon. Before discussing our 2006 guidance, I would like to turn the call over to Howard to comment on our announcement this morning to initiate the first ever quarterly dividend in the Company's history.

Thanks, Ed. Good morning, everyone. Well, this is a very important milestone in the history of our company, and I can honestly say that Chuck and Pat Connolly and I can hardly believe that we'll be celebrating the 50th anniversary of the Williams-Sonoma brand this year, but there's another noteworthy event that we're also very excited about. For the 22nd consecutive quarter we've consistently met or exceeded the financial expectations that we've set for ourselves. We're very proud of these results and believe they speak to what is unique about our company today and what will continue to drive it in the future. The strength of our brands, our multichannel strategy, the competitive advantages we've created with our supply chain network, and most importantly, the commitment of our associates to find new ways to take our success to the next level.

So it should be no surprise that we're approaching the future with great confidence. Not only from a long-term growth and profit enhancement perspective, but also from a free cash flow point of view. Based on this confidence, our strong cash position today, and a projected cash flow that far exceeds the funding requirements for our future growth, we believe this is an ideal time to begin returning capital to our shareholders in the form of a quarterly cash dividend. In addition to our ongoing share repurchase programs. The quarterly dividend we declared this morning is $0.10 per share for an indicated annual cash dividend of $0.40 per share.

In addition we authorized another 2 million share purchase -- stock share purchase program. These two programs combined will return nearly 70% of our projected free cash flow to our shareholders in 2006. So to all of you who have supported the Company over the years, I'd like to thank you for all the confidences that you've given us. We appreciate it very much. I'll now turn the call back over to Ed to discuss our 2006 guidance.

Thank you, Howard. As we enter 2006, we continue to be encouraged by the momentum we are seeing in both our core and emerging brands and are excited about the opportunities that lie ahead for the balance of the year. During 2006, we will open our first retail stores in Pottery Barn Bed + Bath and continue to expand the marketing reach of PBteen, West Elm, and Williams-Sonoma home. While we will remain cautious in our outlook on the macro environment, the strength of our brands and our proven track record in driving our business provide us with a strong confidence in our ability to deliver the fiscal 2006 guidance that we have provided today.

In 2006, we will continue to focus on the Company's three long-term strategic initiatives. Driving profitable top-line sales growth, increasing pretax operating margin, and enhancing shareholder value, including consistently delivering on the commitments that we make to our shareholders. Consistent with our initiative to drive profitable top-line sales growth, we expect to increase 2006 net revenues in the range of 10.1 to 12.1% of which 180 to 220 basis points will be driven by the emerging brands. Excluding Hold Everything net revenues are expected to increase in the range of 11.6 to 13.7%, of which 310 to 360 basis points will be driven by the emerging brands. To achieve this growth, we are projecting a 7.5 to 8.5% increase in retail leased square footage, a 3 to 5% increase in comparable store sales, and excluding the impact of Hold Everything, a 5 to 6% increase in catalog circulation with a corresponding 9 to 10% increase in page count.

In our core brands, we expect to add 15 new retail stores, expand the leased square footage of 18 existing stores, and open three new test stores in the Pottery Barn Bed + Bath concept. In the direct-to-customer channel, we expect to increase catalog circulation and electronic direct marketing across all brands and intensify the marketing support behind our e-commerce channel. In our emerging brands, excluding Hold Everything, we expect to add 14 new retail stores and will continue to focus on building brand awareness and enhancing customer access to the brand. In PBteen we will continue to expand our core merchandise categories, increase catalog circulation, and expand successful on-line marketing initiatives. We will also be investing in a number of marketing programs to continue to grow our teen affinity database.

In West Elm we will continue to broaden the appeal of the brand by expanding the merchandise assortment including new classifications previously offered in Hold Everything. And further softening the fabric and finishing choices. We will also increase catalog and page circulation and expand our on-line marketing initiatives. Capturing mine share of this large consumer segment that West Elm serves is key to our long-term marketing strategy for this brand. We will also open ten new retail stores ranging from 15,000 to 25,000 square feet and continue to expand our retail-only assortment to support the increased square footage. We continue to believe that West Elm can be one of our largest brands if we continue to successfully evolve the merchandising strategy, broaden the consumer appeal, and expand our customer database.

In Williams-Sonoma Home, in 2006, in addition to increasing both catalog and paid circulation, we are planning to launch a Williams-Sonoma Home e-commerce website in the third quarter. We will also be expanding both our retail and direct-to-customer assortments in addition to opening four new retail stores. Ranging from 13,000 to 16,000 square feet. We believe that the retail launch in Williams-Sonoma Home is strategic to expanding the multichannel reach of the brand due to the customer's desire to interact with a product and fully experience the design authority of the brand. Operationally in 2006, our focus will be on product development, sourcing, and supply chain customization. In response to the operational challenges we experienced in our distribution network, that resulted in significantly higher than expected returns replacements, and damages in this brand in 2005.

Consistent with our second strategic initiative to improve profitability in our core businesses, we are projecting to increase our 2006 pretax operating margin by 25 to 45 basis points, excluding, as Sharon said, the impacts of the two new accounting pronouncements and the Hold Everything charge. The key drivers of this pretax operating margin improvement are expected to include improving the supply chain cost structure in the areas of customer returns, replacements, and damages, transportation costs in the furniture delivery at the time work, and back room and off site storage management in our retail stores and leveraging general overhead expenses as we continue our efforts to reduce our fixed and variable cost structure. Operationally, key initiatives for the year include implementing operational disciplines throughout the supply chain to reduce returns, replacement, and damages, testing an extension to our daily store replenishment program in high density urban locations whereby both customer delivery and store replenishment operations can be efficiently combined, improving our furniture sourcing and inventory management disciplines and insourcing the management of our East Coast furniture hub to further develop the gold standard in customer service and improve the overall operational efficiency of the furniture supply chain process.

In fiscal year 2005, total furniture sales increased to approximately 28% of net sales versus 26% in fiscal year 2004. Consistent with our strategic initiative, enhanced shareholder value, we remain committed to delivering on the commitments we have made to our shareholders and are confident in our ability to deliver the 2006 guidance we have provided today. As we look beyond 2006, to 2007 and 2008, we are currently projecting low double-digit to teen revenue growth, mid teen to high teen diluted earnings per share growth, and a 20 to 30 basis point per year increase in pretax operating margin. I will now turn the call over to Howard Lester to discuss the Williams-Sonoma brand.

Thanks, Ed. Well, it's a pleasure to be here today to share with you my perspectives on the strong performance of the Williams-Sonoma brand in 2005. And to update you on how we plan to build on this momentum in 2006. In 2005, based on superb execution in the back half of the year, the Williams-Sonoma brand delivered the highest operating margin in its history. This is a tremendous accomplishment and it was clearly the tireless and outstanding efforts of the entire Williams-Sonoma brand team that made it possible. Specifically, net revenues in '05 increased to better than expected 7.2%, driven primarily by new and expanded stores, strong e-commerce growth, and a 2.8% comparable store sales increase. A strong consumer response in the back half of the year in both our core and seasonal merchandising strategies drove this better than expected performance.

In the retail channel, we were pleased to finish the year with very strong performance in the fourth quarter. Although comparable store sales for the year increased 2.8%, fourth quarter comp store sales increased 5.9%, the highest in four years. We believe our successes resulted from several key merchandising strategies. The remerchandising of many of our stores increased free ramp the added to the assortment with improved signage in our smaller stores and the overall commitment to new training programs for all our store associates. In the direct-to-customer channel, we also saw strong growth throughout the year, particularly in e-commerce. As a result of our catalog redesign and e-marketing initiatives. Improved performance was driven by our strategic focus on cooking and entertaining ideas in addition to a refined approach to catalog circulation.

During the year, we optimized our circulation strategy by increasing our contacts with recent retail buyers and expanded our use of customer specific versioning. Traffic on the website increased over 15%, and we continue to benefit from above average conversion rates. We also saw strong results from our on-line marketing efforts, which, in addition to our on-line bridal registry, are significant marketing opportunities for the brand in the future. As we enter 2006 we continue to be encouraged by the ongoing momentum we are seeing in both our retail and DTC businesses and are excited about our new initiatives for '06.

During '06 we will continue to bring new cooking and entertaining ideas to our customers. The key is incorporating our product offering into these areas. We'll also be focusing on building our authority in entertaining to match the authority we've established in cooking, an initiative we believe is essential to the successful execution of our new tabletop strategy. Within the retail channel, based on the positive results we saw in 2005, we'll continue to move forward with our initiatives to remerchandise and refixture our small and mid-size stores. By editing the assortment, reallocating fixture space among merchandise categories, and improving store visuals, we believe we'll be able to provide greater visual clarity to the items we are selling and enhance the shopping experience for our customers.

Building on the positive consumer response to our expanded assortment of prewrapped gifts during the holiday season, we see further opportunities to leverage our gift giving strategy throughout the year. Our commitment to store associate training will also continue with more extensive product training and selling skills development. Within the DTC channel, we're capitalizing on the success of our versioning catalog and optimizing mailings to coordinate with retail events and holidays. Initiatives to drive strong growth in the e-commerce channel include enhancing functionality on our website in the fall, expanding segmentation, targeting and frequency in our electronic data marketing campaigns, and increasing e-commerce marketing through paid search.

Lastly we're continuing our partnership with CBS for our five-minute cooking school series on the CBS Early show. In summary, we believe that executing against these initiatives in 2006 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. With that I would like to turn the call over to Laura.

Thank you, Howard. Good morning. First I will start with the Pottery Barn brand. We are very pleased with the performance of the Pottery Barn brand in 2005 as net revenues increased 10.9% on top of a strong 14.7% increase in 2004. A positive consumer response to key merchandising categories particularly in furniture and decorative accessories and a higher in stock position on core merchandise inventories drove this year-over-year increase across both channels. Innovative merchandising strategies were also important to driving growth in 2005 including our focus on seasonal home decor and shift in timing of our holiday floor sets.

In the retail channel comparable store sales increased an impressive 5.7% on top of a 4.6% increase in 2004 and the performance of our new stores was very strong. This increase was primarily driven by a strong consumer response to a significantly enhanced merchandise assortment and improved product flow that focused on the home centered needs of our customers at relevant times during the year. The direct-to-customer channel also delivered strong growth driven by successful catalog and Internet only merchandising strategies and better than expected growth in e-commerce. Newness in both our marketing strategies and our DTC advantaged merchandise assortment in addition to a substantial increase in our electronic direct marketing drove these strong direct to consumer results. Traffic on our website increased 13% for the year while conversion rates continue to exceed industry norms.

As we enter 2006, we are pleased with the initial consumer response to our spring merchandise assortment and are aggressively pursuing the new growth opportunities that we have identified for the Pottery Barn brand in 2006 and beyond. In 2006 we will be focusing on the following brand building initiatives. Introducing big ideas for small spaces including a dedicated section in the catalog to address decorating ideas for smaller spaces. Testing an outdoor catalog this April with a unique focus on outdoor living. Opening three new Pottery Barn Bed + Bath stores in the third quarter to test the multichannel reach of our successful Pottery Barn Bed + Bath DTC business. Marketing our design authority, upgraded furniture quality and time to delivery of key competitive advantages. Expanding our storage and home office categories to capitalize on the growth opportunities formerly pursued by the Hold Everything brand. We are excited about all of these initiatives and are confident in our ability to executing against them throughout 2006.

I would now like to talk about Pottery Barn Kids. We are extremely pleased to report today that in fiscal year 2005 Pottery Barn Kids reached a new milestone in its seven-year history. On net revenue growth of 13.5%, Pottery Barn Kids for the first time delivered over $0.5 billion in net revenue. Positive year-over-year sales growth in all major merchandising categories drove this strong performance. Particularly impressive was the growth in furniture and decorative accessories despite higher than acceptable back orders throughout the year.

In the retail channel comparable store sales increased 5.2%, the highest full-year increase since we began reporting for the brand, and the performance of new stores continued to exceed our expectations. Our new bedding programs, in addition to bedroom furniture and decorative accessories, drove these strong results. During the year we continued to focus on traffic generating strategies like our wonderful in-store family events, baby and gift registry and seasonally themed home centered floor sets. The direct-to-customer channel delivered strong growth driven by an exceptional consumer response to our catalog and Internet-only merchandising strategies, including personalization and large-scale home furnishings and the ongoing success of e-commerce. Increased electronic direct marketing and better than expected results from on-line advertising initiatives drove this strong e-commerce performance.

Traffic on our website increased over 19% for the year and like Pottery Barn conversion rates continue to exceed industry norms. Another driver of growth during the year was the strength of our baby and gift registry business which we believe is a strategic driver of new customers to the brand. As we enter 2006 we are encouraged by the momentum in both the retail and direct to consumer channel and as we progress through the year we will be focusing on the following growth initiatives. Improving our in-stock position on textiles, furniture, and decorative accessories to reduce lost sales and reestablish service levels expected by our customers. Expanding our nursery assortment to increase dominance in this category including increasing our catalog page count, testing infant apparel in all three channels to enhance our nursery and baby registry businesses and drive repeat traffic to our stores. Differentiating our gift assortment in all three channels to establish top of mind awareness of Pottery Barn Kids as destination for gift giving. And capitalizing on personalization trends by expanding the DTC assortment. We believe that the successful execution of all of these brand building initiatives will allow Pottery Barn Kids to further establish its market position as the authority in children's home furnishings.

I would now like to talk about the PBteen brand. As Ed said earlier net revenues in the PBteen business increased 15.6% in 2005. Although we had a disappointing first and second quarter our fall and holiday seasons substantially exceeded our expectation. What was particularly encouraging about these results is that the back half improvement was driven by new product introduction and a revitalized catalog depiction, both key success factors for the brand long term.

From a merchandising perspective in the back half of the year, we saw a strong consumer response to furniture and decorative accessories in addition to holiday gift giving strategies. As we look forward to 2006 we'll be continuing to refine our catalog presentation and focus on the following brand building initiatives. Introducing new merchandising categories with a more consistent flow. Expanding our merchandise assortment in furniture, bedding, jewelry storage, and personalization including a greater focus on back to school, and optimizing our e-commerce marking program including developing a larger on-line only merchandise assortment to appeal to this web savvy customer. We will also be increasing our year-over-year catalog circulation including page count and significantly expanding our electronic direct marketing initiative. We continue to believe that e-commerce represents a big opportunity for this brand long term as nearly 50% of its revenues are being generated in that channel. I would now like to open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Armando Lopez with Morgan Stanley.

Good morning. Quick question. On the lower furniture return rates, the 30% lower return rate, I was just wondering if you could provide a little bit more color in terms of where you're seeing the benefits there, what's driving that.

Ed, would you like to take that question?

I sure would. Good morning, Armando. How are you today?

Good, how are you?

Fine, thanks. What we're doing in the East Coast is taking the hub operation that we had at Xl and doing it ourselves and what that does for us is not the actual delivery but the scheduling of the customers, we also have furniture medics there and it's an experiment to take more control of the customer experience all the way to the end, and that's -- it's too early to tell the exact -- how far we can go with this but the early returns, as we said, are very promising.

We go next to David Strauss with Banc of America Securities.

When you talked about the operating losses from Hold Everything, as we're thinking about this year and even into '07 a little bit, can you just give a sense of how much that's impacting margin? I know you talked about the one-time losses but we're trying to sort of understand the sort of the pure operating of the company.

Dave, we are not -- we don't give brand's P&Ls, as you know. The Hold Everything operating losses are the losses that we're in occurring as we run the business, including the revenue, the cost of merchandise, occupancy, et cetera. But since these costs are going to be going away we expect probably the latest will be the third quarter of 2006 we don't feel at this point since we don't have fully allocated P&Ls that we should start giving that guidance now. It is putting pressure but it is not material, as we've talked about in the past so at this time we're not going to be breaking it out separately. They're just going to run through the P&L this year as they did last year.

Can I just follow-up with one question from the previous caller? You said furniture has gone from 26 to 28%.

Yes.

As you sort of think out over the next 8, 12, 24 months where do you think that number goes and it seems like margins are getting better in that area but overall still a little bit lower than the overall company average. Is that correct?

In 2006, we do expect furniture to grow as a percentage of total sales due to the significant growth in the emerging brands. Within the individual brands, however, our strategy is not to significantly grow furniture as a percentage of the mix. So we will see an increase in furniture but for that reason, not because of the deliberate strategy within any one brand to grow furniture. As it relates to your question about margins, returns, replacements, and damages in furniture are a significant strategic objective for us, as Ed mentioned, in his prepared remarks. And we believe that there's significant opportunity there. We believe actually it is one of the most significant pretax operating margin expansion opportunities we have in the Company today.

We go next to Alan Rifkin with Lehman Brothers.

Couple of questions if I may. Sharon, can you maybe elaborate on the additional expenses that you foresee in the year due to taking on more capacity at the D.C. as well as implementing new information technology? Will most of those expenses be incurred in the first half, then maybe, if you will, break down what proportion of those are fixed versus variable, then I have a follow-up if possible.

The majority, Alan, of the cost that we will incur this year will be fixed. The first piece of it -- your question is the distribution center. We did increase our distribution leased square footage in 2005 in the back half of the year by approximately 10%. So those costs will be putting pressure on the gross margin in Q1 and Q2 and then of course by Q3 you will be anniversarying them. But just about the time we get to Q3 we will be expecting to increase our distribution leased square footage. However, we don't think that it will be as significant as it was in the prior year.

In the case of information technology, we are seeing additional costs associated with the rollout of several of our systems initiatives that Ed talked about in our five-year plan. In the first quarter, we actually rolled out, or earlier this quarter, we actually implemented Retech in our Pottery Barn Kids retail brand, and it has been extremely successful but that software will now go in for depreciation and we are seeing significantly higher costs associated with the hosting of these systems. They're more robust systems, they give us increased functionality, we did outsource our data center so we are seeing some higher costs and those will be incurred really ratably throughout 2006. So I expect them both to be fixed, they are both inherent in our guidance, and we would expect them to be ongoing for years to come.

We go next to Dana Telsey with Telsey Advisor Group.

Good morning, everyone.

Good morning, Dana.

Congratulations on a great year. Can you tell us a little bit about when you think of your targeted operating margins where do you think more of the ability to get there comes from? Is it gross margin improvement or is it SG&A? And with what you're doing with the changes in supply chain like this new mid warehouse concept I believe you have it seems like you're still early on in supply chain being optimized for a lower SG&A ratio. And then just lastly how many Williams-Sonoma remodels this year? Thank you.

Dana, let me take your first question about the ongoing pretax operating margin expansion that we see. In Ed's prepared remarks this morning he talked about continuing to see a 20 to 30-basis point increase in the pretax operating margin over the next couple of years. And when we think about the sources of that operating margin, we continued to clearly see benefits coming from returns, replacements, damages, our weeks of supply initiative, which we would better define as reducing our distribution space per sales dollar. That's critically important, which the initiative that Ed spoke about with the mid warehouse is very important. We also believe that we have opportunity in our MMUs as we enhance our sourcing and as the emerging brands get bigger they will be able to buy volume, and that will improve their margin. I also do believe that we will see SG&A expansion, the emerging brands are putting a lot of pressure right now on our SG&A. They have higher retail employment costs, they have higher corporate overhead costs as we invest in their future. So each year that they grow we'll start leveraging that, and I do expect them to see improvements as they learn to better manage the retail stores. They're big stores, and they have a lot to do there in addition to the fact they have a very complex supply chain in those back rooms, so we think that's the employment side of it going forward. But a lot of the initiatives that we're talking about really are going to fall into the gross margin versus the SG&A would be my guess over the next couple of years.

And we go next to Jack Murphy with William Blair.

Good morning. A couple of related questions on furniture. It sounds like the furniture -- you expect furniture to go faster than the average of the Company this year. Do you expect it to moderate relative to the 17% growth in the fourth quarter and also, regarding the expanding furniture hub in sourcing could you give us a sense of what percent of sales or orders as stated in dollars are going through that test today?

Jack, let me speak to your first question about furniture growing. I believe that I responded to that question that furniture will grow because of the growth in the emerging brands. I would expect that that would be higher than our growth rate for the Company, but not as a deliberate strategy to grow furniture within a brand, only to grow furniture as its natural size within each of the brands. That's how we are thinking about that. As far as the initiative relating to the East Coast distribution center, where we've insourced the furniture hub activities, we had taken on approximately 25% of our East Coast zip code. So in relative terms, I think Ed was very specific, it was a small test, and we are going to continue to expand it. The results were extremely favorable. So we will see what that looks like as we come into Q1, and I'm sure we'll talk more about it on each call this year because we will be expanding it gradually and incrementally like we do all things.

I do want to go back and just answer one other question. Dana had asked how many Williams-Sonoma remodels we were going to do in 2006 and the answer to that question is 12.

We'll go next to Mark Friedman of Merrill Lynch.

Sharon, two things. One, building brand awareness, the emerging brands, and marketing on-line, are there any other efforts related to the building brand awareness that you could talk about in addition to circulation and what you're doing on line? And then I was just curious, Laura, on the Pottery Barn Bed + Bath stores, I just want a clarification, are those going to be only bed and bath stores or are they going to be expanded Pottery Barn stores that include a comprehensive Bed + Bath selection? Thanks.

I'm going to let Pat speak to the building brand awareness in the emerging brand. Pat, could you please take that question.

Mark, really three things. The first is, we'll continue to increase catalog circulation in all three brands, in Pottery Barn Teen, West Elm, and Williams-Sonoma Home. We're developing better targeting models to more easily identify those people who are going to respond to those brands. We're increasing our on-line marketing activity, increasing paid key word search, and we have very extensive PR campaigns in terms of product placement with all the brands that are giving us a lot of additional exposure, especially in PBteen and West Elm.

Hi, Mark. It's Laura. We are very excited to be able to expand the multichannel reach of our Pottery Barn Bed + Bath catalog. We're going to be opening three test stores in 2006, one in Chelsea, one in Portland, and one in Orlando. Each of these will complement our existing Pottery Barn stores. We're excited because many of our current Pottery Barn stores only have a couple Bed + Bath -- a couple beds on the floor and a very small bath assortment. And through these new stores we're going to be able to really build dominance in these categories at the retail level.

Each one of them is slightly different. The Portland store will be attached to the current store, and we will be taking Bed + Bath out of the existing store and making it a dominant feature in the new store. In the other two stores, they are not attached. They're stand-alone stores, and will be -- we will not be taking Bed + Bath out of those other stores. We will just be adding on, as I said, probably six or seven beds and substantial bath, very dominant presentation in the bath area, and at the same time we're going to be presenting a more dominant product presentation in our current catalog as well to complement what we are doing at the retail level. So in total I think we have a tremendous opportunity to just gain market share in these two categories, both at retail and also, we know that retail drives our direct business as well.

Thank you. That all the time that we have for Q&A at this time. I'd like to turn the call back over to Ed Miller for any additional--

operator, we'd like to continue the Q&A, please, until 8:15.

One moment, please. [OPERATOR INSTRUCTIONS] We'll go to Chris Argess with Bear Stearns.

Good morning, everybody. Focusing in on the information technology implementations in the supply chain, is there an amount of margin benefit that we can expect just from those implementations in the longer run, and how do you think they ramp up as we look out over the next couple of years?

Well, these information technology implementations will be gradual, we'll be implementing by channel, by brand, so there will be no big bang in the implementation of the technology, which is how we have always planned to do it. And we believe that our rollouts will be completed by 2009. So what I suspect is that we will see very gradual, very methodical improvements in our processes that over a two to three-year period you are going to, without question, start seeing benefit from. We expect to see enhancements in our ability to allocate inventory to our retail stores. This is a very important strategy for us as we try to use -- try to get regional assortments and start digging deeper into our styles and sizes and things of that nature which our systems today currently don't support. We also believe that it is going to be very important on the DTC side to enhance the customer experience in our ability to interact with our customer in the call center. Pat, why don't you speak just briefly to the direct-to-customer implementations that will be occurring in the next two or three years.

We have a number of initiatives on the direct-to-customer side that will enhance the customer experience. The ability to ship the entire order together and the ability for the sales agents to have much more information when they actually talk to the customer including a good history of the customer experience with us. Those are just two of many.

Then just very simply one of the really critical implementations that we will do this year is creating the ability in our direct-to-customer business to redeem gift cards. Today, we currently cannot redeem gift cards in either our direct-to-customer channel or on-line, so for the holiday season this year we will be able to implement gift cards.

We'll take our next question from Pauline Reader with Thomas Weisel Partners.

Just wondering, it looks like Williams-Sonoma that brand did a lot better in the fourth quarter than planned, just looking at the comps. I'm just wondering, I guess, if that's true, and then if it is, if there were -- where the shortfall came relative to plan in the other concepts?

Howard, would you like to take the strong performance in Williams-Sonoma in the fourth quarter?

Well, as I said, we did have a strong fourth quarter. We had a strong year, actually, and it just accelerated in the fourth quarter. I think, a I said before, we had changed a lot of the visual perimeters in our small stores. We had more of those done in the fourth quarter than we did earlier in the year. We significantly enhanced our gift giving focus in the fourth quarter and expanded our assortment of prewraps, and that responded quite well. We had increased our product training for our associates in the stores all year long. We had that totally rolled out by the fourth quarter. And particularly had emphasis on our holiday merchandising category. So that helped drive the gift giving.

It's always a very strong time in Williams-Sonoma for gifts and we had a particularly good year with our electrics, particularly our coffee makers, the high-end coffee makers, cookware and our cook tools and also our cutlery. So, our direct channel, our channel, we had kind of worked all year and tested on optimizing our catalog circulation strategy and we learned some things and we put that into place in the fourth quarter and it worked so we increased our contacts with our recent retail buyers, expanded the use of versioning as I said earlier for retail and our Internet customers. So those things worked, and it was just a whole lot of little things that turned into significant changes and resulted in a great year. Our team, as I said earlier, just did an outstanding job. They worked really hard, and they got it done. So we're very proud of the results in Williams-Sonoma last year.

Then Pauline, just to speak to your question, our comparable store sales came in at 5.8% versus our guidance at 4 to 5%, and we saw strong results in every brand versus our internal forecast. The greatest variance actually was in Pottery Barn, which we saw substantially better than expected momentum in fiscal January which includes our week after Christmas. Although -- but your question is even though the comparable store sales beat our expectation, our revenues in total were in the middle of our guidance range due to a shift in sales from the direct-to-customer channel into the retail channel. So that's how we're thinking about our total revenue for the quarter.

And we'll go next to Michael Baker with Deutsche Bank.

Thanks and thanks for extending the call. I guess my question is a year ago you forecasted growth in the new concepts to be 2 to 3% of the total top-line growth. Is that -- in retrospect is that ultimately what ended up happening? How did you guys perform relative to that plan?

Yes, it was. If you exclude Hold Everything, the numbers we gave at the beginning of the year of course included Hold Everything. And if you included Hold Everything the growth was 2.2% of 2005 growth, the 220 basis points. If you exclude Hold Everything, it was 280 basis points. So it was exactly in line with where we expected it to be, and really the only -- the only shortfall to the 3% was just our ability to get the stores opened in 2005. We opened two stores just immediately after the end of the fiscal year, so we would have had the other basis point had we opened those stores in fiscal Cal '05.

[OPERATOR INSTRUCTIONS] We go next to Colin McGranahan with Bernstein and Company.

Wanted to focus on the retail business. First, West Elm, where are we in the strategy of the softening and broadening? Secondly, on PBteen, obviously it looks like '06 is not going to be a year of any retail expansion. Is that still contemplated in the future, and when might you think you have some sense of whether or not that would work in retail? And then thirdly, on Pottery Barn Bed + Bath, opening three test stores here, do you have any sense of how the returns on that compare to say Pottery Barn Kids or Pottery Barn Teen in your pro forma? Just the CID being a 10% of your net new store growth in '06 is in another new concept, why are those dollars in capital better spent there than in extending the reach of the core concepts?

Colin, let me have Laura take the questions on Pottery Barn Teen retail, and then the Pottery Barn Bed + Bath test stores, and then I'm going to have Howard take the questions on the West Elm real estate strategy. Laura, could you speak to PBteen and the retail strategy for PBteen, please.

Sure this year as I said in my prepared comments we're going to be really to focusing on driving the growth through direct to consumer and we know that our customers spent a lot of time on-line so we see that that -- we do not see that will hurt our potential for growth in this brand at all. Of course we always contemplate growth in all ways and are still considering a retail test on PBteen but have nothing in firm plan at this point. So I will keep you posted and we will let you know as soon as we make a decision to move forward on that.

In terms of Bed + Bath, some of these stores are conversions from Hold Everything where it was much more beneficial to use them than to not, and in particular in these areas we have very successful current PB stores and we had been looking actually for larger square footage of the current Pottery Barn brand but in those markets our -- the old rent yields are so favorable and we wouldn't necessarily want to move out of our great locations, so it was really fortuitous that we are able to take over these spaces because it allows us to have the bigger store to do what we wanted to do in the -- in our strategy to be more dominant in the marketplace, but maintain our very favorable old rent deal and yet take over the Hold Everything space and use that in a very good way to return to the shareholder.

And Colin, on the Pottery Barn Bed + Bath stores they are targeted to have a similar four wall contribution and return on assets as our other stores, and as Laura said, in these particular locations, we already have existing stores in the other brands, and this was very opportunistic, but it is also supplementing the vision to have larger Pottery Barn stores which are difficult to come by in these malls. I will now turn it over to Howard to talk about the strategy for West Elm in -- the real-estate strategy for West Elm. Howard, could you take that question, please.

Sure. And just to reemphasize what Laura and Sharon are saying, is that we would love to have found 25,000-foot spaces so we could move our better Pottery Barns into larger single stores. It's just very difficult to do in the best centers and in the real-estate locations where we are. It's hard to find those places. So that's another factor there.

But with respect to West Elm, first of all, you've got to keep in perspective that we only had 12 stores opened at the end of '05, and all of these stores, only four have been open for a full year. So these four stores, which include our original laboratory in Brooklyn, and Chelsea, our first real store in New York, Oak Brook, Illinois, and Cordo Madera in northern California are all exceeding our pro forma expectations. The remaining eight stores, which have been open for less than six months as of today, we believe that they, too, as a group, will meet or exceed our pro forma expectations in the first full years of operation. Just -- I would say two other things. Our long-term strategy, real-estate strategy, for the brand, we knew would be a learning experience here, as it is for -- going to be for Williams-Sonoma Home. We always felt that it wasn't a traditional real-estate strategy, where it was 70 or 80% mall based. It was more a place where the customer could go, pull up and buy, take the furniture with them, have access to parking near the store, et cetera. And have a bit of a different feeling, perhaps, than you get in a mall environment. So we've leaned towards that. Those stores, in fact, are our better producers. We're very excited about some of the returns that we're getting in some really nontraditional locations, and we're looking for more of those, and that's the focus of our real estate, and we're being as aggressive as we can be within good business practices.

With respect to the question about the softening, we still have, of the pallet and the merchandise, our product team, which I think has really come together, it's an outstanding group of people, have really got the eye of the customer. I think now if you have been in the stores recently you're seeing a much, much improved color pallet. The stores, the colors look wonderful. They're very acceptable colors to a much broader group of customers than they were a year ago, and I think we're just making great progress and on the right track. You'll continue to see I think gradual improvement in West Elm as we broaden the assortment, improve the catalog and the direct side of the business gets wiser about how to do that, and continue to put more programs in the stores that are productive as we eliminate some and upgrade others. So we're very excited about West Elm, and I -- every time we're out there, I think we're making constant improvement.

And we'll go next to Rex Henderson with Raymond James & Associates.

Thank you very much for taking my call and congratulations on a good year. I had a couple of questions on the supply chain. I wanted to focus on that. You mentioned several supply chain initiatives including reduction of return and replacement in the furniture business. Can you give us some quantification of what you think the overall opportunity for that is and how much of that opportunity we'll see in 2006 and the years beyond?

Rex, we have not publicly quantified what we believe about the opportunity but let me put it in some context for you. Currently our total company return rate runs about 12%. And furniture does not run that different. It is predominantly in case goods, however, not upholstered furniture. Our in case goods are actually higher than the average, which is what brings the furniture to the average. As a result of that, the cost -- the focus of our returns, replacements, and damage initiatives today are specifically focused on furniture returns because of the extraordinary costs of those returns.

Different models in the Company, different people in the Company have analyzed what the impact is of reducing returns by 1% in furniture, and there's a belief that of that 1% of the -- 28% of our business right now is furniture, you can do the math, but if you think about that the belief is that anywhere from 50 to 100 basis points of that will ultimately fall to the bottom line once it's part of your process. One-time fix is not going to do that. It has to be systemic. So that is what our task forces are currently working on and we do believe that it is a significant opportunity for our pretax operating margin.

I believe that long-term, if we were successful at continuing to make the types of enhancements that we have over the last couple of years, that we can revisit our 20 to 30 basis point a year improvement because this is a big number. So over time. But again, we are going to approach it gradually, incrementally, we're not going to turn our supply chain upside down and have a missed step in the process. We're going after it in a way that will allow us to make it sustainable for the long term.

And we go next to Kristine Koerber with JMP Securities.

Can you talk about your outdoor catalog and what you're planning, how many catalogs you plan to distribute, and are you targeting the Pottery Barn customer?

Yes, it's Laura. We're doing a small test this year of the outdoor catalog to best customers and we believe that it's a very exciting presentation of both outdoor furniture and accessories, so that you can really create an outdoor room that is just wonderful to spend time entertaining and relaxing, and this is a test year, as I said, and next year you're going to see a more expansive presentation, more so than even this year, and we are still putting together our plans, our circulation plans on that and how many mailings we will mail and that will all come after we see the results of this year's test.

We have a question from Laura Champine with Morgan Keegan.

Excuse me if you've already answered this question, but it does look like the comp guidance is a little back-end loaded this year. Can you talk a little bit about what makes you feel that the comps should accelerate as we go into Q2 and beyond?

Absolutely. We were up against pretty strong numbers in -- especially in Q1 in 2005, coming into Q1 of '06. So as we look at it and we look at the strength of our business and the new merchandising assortment that we feel very confident that we are going to be able to continue to see the momentum build throughout the year. So, Laura, they're tweaked really when you look at them, and we just feel very confident in the way we're flowing it into the year. Sonoma started to get better toward the back half. I think there's big opportunities in Pottery Barn. We also had low inventories in Pottery Barn Kids in the back half of the year which I expect that we will recover from in Q3 and Q4, so those will be a important contributor to the year-over-year comp growth. Those are the things that we see at this time.

You had mentioned before I think at a conference, that the daily replenishment plan was helping drive the Williams-Sonoma concept comp. Do you expect that to continue into this year?

We do actually. When you think about daily store replenishment, when we implemented it, our results this year were very consistent with our expectation. The only thing that was a little different was the cost of the program a little higher than we had projected. In 2005 our total cost was about $0.03, and our original estimate was $0.01 to $0.02. So it was higher mix of larger cubed cartons and increased damages that brought that cost up. But what we do believe is there's no question, especially in the Williams-Sonoma brand, that we could not have delivered what we delivered in Q4 probably without daily store replenishment and also in the West Elm brand it is fundamental to the operations of that brand. So it's very important to us. In 2006 we're going to be working with UPS to reduce damages in their network and we'll begin reducing inventories in the back rooms of all of our stores particularly in Pottery Barn where our inventories are continuing to be quite high. We think that's going to help reduce our damages and help us better manage our inventories. So we're excited about it.

I would expect that by 2007 we'll be able to flow the inventory back as far as the vendor, and at that point be able to significantly improve our inventory turns as a total company but it definitely did drive improved sales and I think it was clear to us in Williams-Sonoma and because of the high inventories in Pottery Barn it was less clear but we're sure that we'll be able to have some good metrics in 2006.

Thank you. That is all the time we have for Q&A at this time. I'd like to turn the call back over to Ed Mueller for any additional or closing comments.

Thank you for joining us for the Williams-Sonoma fourth quarter and 2005 earnings conference call. We are very proud of our results, and we do remain committed to delivering the 2006 guidance that we provided here today. With that, have a great day.

And that does conclude today's teleconference. Again, thank you for your participation. You may disconnect at this time.