Williams-Sonoma Inc (WSM) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Williams-Sonoma, Inc.

third-quarter 2007 earnings conference call.

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

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

This conference is being recorded.

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

to discuss non-GAAP measures and forward-looking statements.

Please go ahead.

Good morning.

This morning's conference call should be considered in conjunction with the press release that we issued earlier today.

I would first like to discuss the non-GAAP financial measures that are included in this morning's press release and today's conference call.

Our press release contains non-GAAP financial measures that exclude the impact of unusual business events and new accounting pronouncements.

For the remainder of today's call we will be discussing our third-quarter 2007 results, our quarterly and fiscal year 2007 guidance, and our fiscal year 2006 results, excluding the impact of these items and will refer to these results as non-GAAP.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation on why these non-GAAP financial measures are useful and how they are used by management are discussed in exhibit one of the press release.

I would now like to discuss our forward-looking statements.

The forward-looking statements included in this morning's 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 2007 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press release and SEC filings including reports on Forms 10-K, 10-Q and 8-K for more information on these risks and uncertainties.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Howard Lester, our Chairman and Chief Executive Officer.

Thanks, Steve.

Good morning and thanks everyone for joining us.

With me today are Laura Alber, our President; Pat Connolly our Chief Marketing Officer; Sharon McCollam our Chief Operating and Chief Financial Officer; and Dave DeMattei, our Group President for the Williams-Sonoma, Williams-Sonoma Home, and West Elm Brands.

I want to begin today with an overview of our third-quarter 2007 business results and then Sharon, Dave, and Laura will follow up with the financial and brand level details.

The home furnishings environment in the third quarter continued to be very challenging, particularly in the areas of the country where housing-related macro issues have had the greatest impact.

Despite these challenges, we delivered year-over-year revenue growth of 5% and non-GAAP diluted earnings per share of $0.25.

We also returned nearly $60 million to our shareholders through share repurchases and dividends.

We are pleased with these results and believe they reflect what is unique about our business model, the strength of our brands, the power of our multichannel strategy, and our proven ability to drive our business in difficult economic times.

In our core brands, which include Williams-Sonoma, Pottery Barn, and Pottery Barn Kids, net revenues in the third quarter increased 1.4% with positive growth in all brands.

We were particularly pleased with the progress we made on our Pottery Barn initiatives during the quarter.

Despite higher back orders that resulted from more stringent quality control measures in our agent sourcing operations.

In our emerging brands, West Elm, Williams-Sonoma Home, and PBteen revenues increased 33.2% with particularly strong momentum in West Elm and PBteen.

In our supply chain, we successfully completed the consolidation of our Memphis based returns processing operations and the insourcing of our West Coast furniture hub.

These initiatives in conjunction with the other quality control initiatives we have implemented over the past 12 months have begun to reduce our return rates.

We are very encouraged by this and because we expect these reductions over time to result in significantly improved operating margins for all of our businesses.

As we look forward to the fourth quarter, we are doing so with a heightened sense of caution due to our belief that the overall macro environment is having a greater impact on retail traffic than we previously anticipated.

This premise was confirmed by the disappointing October comparable store sales results that were reported earlier this month by most other retailers, but while this is a real concern, our strategic focus all year has been on traffic generating merchandising and marketing initiatives.

Even in October, when most other retailers delivered negative comparable store sales growth, ours were positive.

As such we believe we are strategically and competitively well-positioned to deliver against the expectations we set for ourselves in the fourth quarter.

Accordingly, we are reiterating our fourth quarter revenue and non-GAAP diluted earnings per share guidance in the ranges of of $1.390 billion, to $1.42 billion, and $1.20 to $1.26 per share respectively.

That said we believe that the macro environment is weakening and that retail traffic is slower than we would have expected at this time in November.

Therefore, absent a change in the current environment, we would expect our most likely outcome to be at the low end of our guidance ranges.

Let me now turn the conference call over to Sharon for additional details on our third-quarter performance and 2007 guidance.

Thank you, Howard, good morning.

I would first like to talk about the third quarter.

Our third-quarter 2007 results were once again very consistent with our expectations.

The highlights versus the third-quarter of 2006 were as follows.

Non-GAAP diluted earnings per share were flat versus last year at $0.25.

Net revenues increased 5 5% to $895 million.

All brands delivered positive growth.

Key drivers of the growth included a 5.6% increase in retail leased square footage and a comparable store sales increase of 1.1%.

Circulation for catalogs and catalog pages decreased 1% and 1.9% respectively, reflecting increased online marketing and the expanded rollout of catalog versioning.

Gross margin expressed as a percentage of net revenues was flat versus last year at 38.2%, while there was no change in the overall rate, we did see higher costs of goods sold and lower shipping margins in the Pottery Barn and Pottery Barn Kids brands, offset by lower Corporate occupancy costs.

SG&A expenses percentage of net revenues increased 10 basis point to 33.2% due to higher e-Commerce-related marketing costs.

The effective income tax rate increased 470 basis points to 39.4% due to a nonrecurring benefit in the third quarter of 2006 and a 120 basis point negative impact from the 2007 implementation of FIN 48.

Significant year-over-year balance sheet variances at the end of the third quarter of 2007 were as follows.

Cash and cash equivalents decreased by $92 million to $16 million after returning nearly $290 million to our shareholders over the past 12 months through share repurchases and dividends and advancing $70 million on our revolving line of credit.

Our consolidated statements of cash flows are included in this morning's press release.

Merchandise inventories increased $108 million or 16% to $770 million.

Of this increase approximately 40% was driven by the emerging brands in line with sales growth, 25% in the Williams-Sonoma brand due to a year-over-year mix shift toward a higher end assortment, and 35% in the Pottery Barn and Pottery Barn Kids brands driven by an increase in the number of weeks of core inventory on hand as a result of slower sales growth.

Accounts payable increased $23 million or 11% to $242 million.

This increase was primarily driven by higher inventory levels and the timing of the inventory receipts during the quarter.

Customer deposits at the end of the third quarter of 2007 increased $18 million to $200 million.

This 10% increase was driven by a year-over-year increase in customer orders in transit and an increase in unredeemed gift cards.

Also during the third quarter, we satisfactorily resolved the litigation we filed against Oracle Corporation on August 3, 2007, relating to the development of our multichannel order management and inventory management system.

This resolution had no material impact on our third-quarter earnings as it primarily involved the refund of amounts previously paid and recorded as capital expenditures.

We are, however, in the process of reviewing our longer term implementation strategy for these systems which could result in the potential impairment of certain other software assets.

We do not believe, however, that any such future impairment will be material.

I would now like to discuss our fourth-quarter and fiscal-year 2007 guidance.

In our press release this morning, we reiterated our fourth-quarter guidance, including revenue growth in the range of 10.5% to 12.9% and non-GAAP diluted earnings per share growth in the range of 13.2 to 18.9%.

While at first glance, this guidance may appear aggressive, it is important to note that 2007 is a 53-week year, and as such, includes an extra week in the fourth quarter with approximately $70 million in incremental revenue and $0.05 in incremental non-GAAP diluted earnings per share.

If you exclude this extra week from the guidance and compare the fourth-quarter of 2007 to the fourth-quarter of 2006 on a comparable basis, year-over-year revenue and diluted earnings per share growth rates look much more understandable with revenue growth in the range of 4.7 to 6.9% and non-GAAP diluted earnings per share growth in the range of 8.5 to 14.2%.

Even after excluding the impact of the 53rd week, non-GAAP diluted earnings per share growth in the fourth quarter of 2007 is still increasing faster than revenue growth and we want to explain this in more detail.

Inherent in our fourth-quarter 2007 guidance, there are two significant nonoperational drivers of year-over-year diluted earnings per share growth, the first is a $0.05-per-diluted share net benefit from share repurchases.

The second is a $0.03 per diluted share benefit resulting from a Williams-Sonoma Home asset impairment charge in the fourth quarter of 2006, which is not expected to recur in 2007.

These two nonoperational benefits together total $0.08 or 7.5% in year-over-year diluted earnings per share growth.

As these items are nonoperational in nature, similar to the 53rd week, they should be excluded from the diluted earnings per share growth calculation when analyzing the relationship between fourth-quarter 2007 revenue growth and fourth-quarter 2007 diluted earnings per share growth on a comparable basis to 2006.

When these benefits are excluded, our guidance range for non-GAAP diluted earnings per share growth is only 1 to 6.7%, which is below our revenue guidance range of 4.7 to 6.9%.

For this reason, we continue to believe that our fourth-quarter guidance reflects a cautious outlook and one that is appropriate based on the current macro environment.

For the fiscal year, however, based on the positive EPS impact of our third quarter results, partially offset by the negative impact that the weighted average share count will have on our calculated full-year diluted earnings per share in January, we are increasing the low end of our fiscal year 2007 non-GAAP diluted earnings per share guidance by $0.02 to $1.84 to $1.90.

Said another way the sum of our four quarters diluted earnings per share will not add up to the full year when we release our year-end earnings.

See Exhibit 1 of today's press release for this reconciliation which quantifies the impact of this at a negative $0.02.

I will now turn the call over to Dave DeMattei to discuss the Williams-Sonoma, Williams-Sonoma Home, and West Elm Brands.

Thank you, Sharon.

Good morning.

I would like to begin this morning by discussing the performance of the Williams-Sonoma brand.

Despite a challenging retail environment, we were pleased with the performance of the Williams-Sonoma brand in the third quarter.

Net revenues increased 2.2%, driven by our ongoing momentum in e-Commerce and a comparable store sales increase of 0.3%.

We also saw continued year-over-year improvements in our merchandise margins.

From a merchandising perspective, sales were driven by continued strengths in cook tools and cookware in addition to linens and cutlery.

These increases were offset however, by softness in our traffic driven categories like books and housewares.

As we look forward to the fourth quarter, we are cautious in our outlook, but optimistic about our holiday assortment and our fourth-quarter brand-building initiatives including the introduction of unique and exclusive product at a broad range of price points, the continued evolution of a new table top and entertaining assortment, increased instore marketing events and additional investments in paid search and the planned January 2008 rollout of our newly redesigned website.

We believe that all of these initiatives will drive increased traffic to the brand across all channels and advance our authority as the destination for high-quality cooking, accessories, gift-giving ideas, and home entertaining essentials.

In the Williams-Sonoma Home brand in the third quarter, our key focus continued to be on brand execution and we are pleased with the progress we have made.

In the retail channel, growth was primarily driven by incremental sales from new stores including our newest store in Plano, Texas.

And the expansion of our non furniture merchandise assortment across all stores.

In the direct-to-customer channel we continued to drive brand awareness through paid search and build upon the momentum we have seen from our catalog redesign and e-Commerce initiative.

From a merchandising perspective, sales were driven by ongoing strength in furniture and decorative accessories.

Expanding out assortment has been a top priority this year and the overall consumer response has been very positive.

As we look forward to the balance of the year, we are focused on the following brand-building initiatives.

Increasing brand exposure by leveraging the namesake Williams-Sonoma brand, continuing to expand our nonfurniture merchandise assortment to drive greater sales productivity, and enhancing the holiday gift-giving assortment including a broader range of price points and improved visual merchandising.

We believe all of these initiatives will allow us to attract new customers to to the brand and drive increased traffic in the fourth quarter.

I would now like to provide you with an update on West Elm.

We continue to be extremely pleased with the performance of the West Elm brand which significantly exceeded top and bottom-line expectations in the third quarter.

In the retail channel, revenue growth was primarily driven by incremental sales from new stores, a strong response to our furniture offering, and an expanded retail assortment.

In the direct-to-customer channel, year-over-year growth was driven by increased catalog circulation and strong momentum in e-Commerce.

From a merchandising perspective during the quarter, furniture and new product introduction were key growth drivers.

Expanding our assortment has been a top priority and the consumer response has been positive.

As we look forward to the fourth quarter, we are encouraged by the year-to-date strength we have seen across all of our channels and are optimistic about the following initiatives for the balance of the year.

Expanding our holiday gift-giving assortment, attracting new customers to the brand with strong marketing behind our newly launched private label credit card, and introducing line extensions in our key merchandising categories.

We believe our unique design driven merchandise offering is a significant competitive advantage for the West Elm brand and are extremely optimistic about its long-term potential.

I would now like to turn the call over to Laura to discuss the Pottery Barn brand.

Thank you, Dave.

Good morning.

First, I would like to start with the Pottery Barn brand.

Net revenue in the Pottery Barn brand increased 0.8% in the third quarter, continuing the reversal in trend from negative growth in the back half of 2006 to positive growth in 2007.

In the retail channel, we delivered positive comparable store sales growth of 0.3% despite a very challenging competitive environment.

Growth in the direct to customer channel was primarily driven by ongoing momentum in e-commerce but was offset by higher year-over-year back orders.

From a merchandising perspective, we saw continued growth in furniture offset by softness in home furnishings and tabletop.

We also saw strong consumer response to new product introductions across all categories.

From an operational perspective during the quarter, we continued to focus on the revitalization strategy for the brand, including the following initiatives.

Making product more differentiated and relevant and reducing time to market, reintroducing value into the brand from both a range of price points and a shifting value perspective, continuing to evaluate sales productivity strategies for our older generation retail stores, versioning our catalogs and refining our customer contact strategies to drive higher response rate and increase conversion and analyzing new growth opportunities via new product line introductions or brand extensions.

We continue to be pleased with the progress that we are making against these initiatives and believe that they represent important growth opportunities for the brand long term.

As we look forward to the fourth quarter, we continue to be cautious in our outlook due to the ongoing softness we are seeing in the overall home furnishings environment.

But we are encouraged by the early reads on our holiday assortment and excited about the breadth of our new product introductions for our launch of merchandise in January.

All of our go-forward merchandising strategies have been built around fundamental retail disciplines, newness, innovation, quality and value supported by superior marketing and customer service.

And despite the macro challenges we are facing, we believe that the strength of the Pottery Barn brand and its multichannel capabilities leave us well positioned to gain market share during these difficult times.

I now would like to talk about Pottery Barn Kids.

We were pleased with the improved performance in Pottery Barn Kids in the third quarter.

During the quarter, net revenues increased 2% on top of a 9.8% increase in the third quarter of 2006.

This increase was driven by renewed momentum in the retail channel where comparable store sales increased 4.5%.

In the direct-to-customer channel, higher back orders continued to put pressure on year-over-year growth rates.

From a merchandising perspective during the quarter, we saw strong growth in furniture, baby apparel and seasonal merchandise.

These increases were partially offset, however, by ongoing softness in textiles.

As we look forward to the fourth quarter, we are optimistic about the aspects of the business that we can control.

Our early reads on holiday are encouraging and we are excited about our January spring launch, particularly in our girls collections where newness and differentiation is a significant opportunity.

We are also encouraged by the performance of our two new Pottery Barn Kids baby clothing and gift stores called Threads.

They attract new customers to the brand and capitalize on our strength in baby and gift registry.

In addition to our merchandising initiatives in Pottery Barn Kids, we are also going to be expanding the rollout of catalog versioning in the fourth quarter.

Based on our initial success in the third quarter, we believe this initiative has the potential to drive increased sales to both the direct-to-customer and retail channels while allowing us to more aggressively identify new customers for the brand.

I will now update you on Pottery Barn Teen.

We are extremely pleased with the performance of the PBteen brand in the third quarter.

Year-over-year, net revenues increased 26.7% on top of a 14.1% increase in the third quarter of 2006.

From a merchandising perspective, growth was positive in all key merchandising categories with particular strength in furniture, textiles and decorative accessories.

Innovation, relevancy, and on brand presentation both had better-than-expected results.

As we look forward to the fourth quarter, we are encouraged by the initial consumer response to our holiday merchandise assortment and we are also excited about our new product offerings which are innovative and unique and designed specifically for the underserved teen market.

I would now like to open the call for questions.

Ladies and gentlemen, due to time constraints on today's call, we ask that you limit your questions to one per participant.

(OPERATOR INSTRUCTIONS) Our first question is going to come from David Strasser of Bank of America Securities.

Please go ahead.

Thank you.

Can you talk a little bit more about the inventory related to Pottery Barn and how much of that is basics versus seasonal and sort of the relative risk of the inventory that you alluded to being a little bit heavy?

Absolutely.

Laura, would you like to speak to your inventory?

Sure.

We have been looking at opportunities to reduce inventories as we are concerned about the general softness in the -- in the environment.

And we are making good progress.

We do have -- we have most of our heavy inventories in core merchandise, it is actually at regular price and where the customer is clearly telling us that they are very interested in that product.

We don't see a material risk to our margins.

What we have in the guidance reflects the inventories we have, and we are looking to both push out receipts on goods that are not selling and also markdown in the appropriate way during fourth quarter any seasonal goods that aren't go forward.

The next question please.

One moment.

We will take our next -- we will take our next question from Budd Bugatch of Raymond James.

Please go ahead.

Good morning.

Congratulations on operating well in a pretty difficult climate.

Let's talk a little bit about that climate.

Give us a little more color and flavor on how much October may have weakened from what you saw in August and September, and maybe compare October with what you are seeing in November so far in terms of primarily, I guess, affect on comps.

Budd, I will take that question and then I will, of course -- Howard will speak to the issues that he talked about in his prepared remarks, but actually -- we actually saw momentum as a total Company in October.

It was one of our strongest months during the third quarter.

So we left the quarter with momentum, and obviously as Howard said we are a little bit surprised by the traffic levels at this time in November, but we also think there is a lot of shifts going on.

So, Howard, would you like to then just add on to that?

Well, just a couple of points.

I think in -- the comments that I made relative to the balance of the year, we just can't ignore all that is going on around with us our competitors and peer group of companies who are clearly struggling.

So we are just being ultra cautious.

As Sharon said October was actually encouraging for us.

From the standpoint of sales momentum.

I think the comps are getting to be more -- a little deceiving as we are probably seeing some small shift that takes place each year probably from retail to the Internet.

And I don't know how to quantify that, but I suspect that that is happening a bit.

And -- and could accelerate in the fourth quarter just because the ease of doing your -- your gift-giving, which makes comps a little bit confusing to us.

But we are clearly, as I mentioned in my remarks in parts of the country where the housing issues have been the worst, we are seeing negative traffic and negative sales.

So we are just being ultra cautious here as we go into the quarter

Our next question comes from Joe Feldman of the Telsey Advisory Group.

Please go ahead.

Hi, guys, thanks.

Quick question.

It sounded like furniture in some of -- like at Williams-Sonoma Home was fairly solid and even in Pottery Barn.

I am just wondering if you could talk about that a little bit more, what you might attribute that to given the current environment.

Actually, Joe.

I will speak to the total Company.

Furniture continued to be strong for us.

And on a trailing 12-month basis, it represented now 30% of our sales.

And Laura, would you like to speak to Pottery Barn and then Dave you can speak to your home furnishing brands.

Sure.

We have a key competitive advantage in our furniture in that we develop our own furniture.

It is exclusive to our brands.

The quality is superior to a lot of people particularly at the prices that we offer.

And we have just continued to see the -- we have been on top of the different changing trends in furniture whether it be media or modular customized desks.

So it is a strength of ours and one we are continuing to build our competency in and we are seeing also as mentioned in the speech that Howard gave that we are reducing our damages to customers which is a really important strategic initiative for us which will help us further differentiate ourselves from the competition all the way through the supply chain.

We are pleased and our furniture business is one that we think will continue to become stronger.

And then Dave?

I would just echo what Laura is saying of the strength of our offerings.

I think in West Elm, we talk about our designed product being unique and a great value in the marketplace.

And in home, the customization aspect that we offer and the great value and the great products.

I think it really is just a testament to our offering in the marketplace.

Our next question comes from Chris Horvers of Bear Stearns.

Please go ahead.

Thanks and good morning.

Can you talk a little bit about the back orders?

You mentioned this also on the second-quarter call.

What exactly is driving that?

How many weeks are we talking about?

And what the change was sequentially 2Q to 3Q.

And do you think that we resolve a good portion of that in 4Q and that can help your sales.

Chris, I think that when we think about the back orders in Q3 to Q4 -- or Q2 to Q3, they were very similar.

Year-over-year, however, they are up substantially, and that, Howard mentioned in his prepared remarks that we have put into place much greater stringent quality control measures in Asia, and we have been willing to accept the delays in order to ensure that we deliver superior quality to the customer.

You heard Laura say a moment ago we have seen a reduction in our damages and our returns, and that, of course, is the outcome of some of these initiatives.

So we are going to have to work through this.

I don't think it is realistic to think that we will be through it by the end of Q4, but we are working very hard to do that, and we will see how it plays out.

But I think we are probably looking at Q1 before we really get through these issues.

Just an added -- you asked the question also, Chris, about the -- the amount of time that they are on back order.

And actually we have -- in most cases pretty good flow.

The wait time is not causing people to drop off.

It is more that -- it is just we are not bringing enough to completely clear it.

But it's a rolling inventory in, fill the back orders and the customers waiting longer situation.

Our next question will come from Marni Shapiro of Retail Tracker.

Hi, guys.

Good luck with the holiday season in case I forget to mention that.

If you could talk a little bit about Pottery Barn, the textiles.

You mentioned in the kids business that that was one of the weaker spots.

Are you seeing the same weakness at the core Pottery Barn business, because you didn't mention Pottery Barn bed and bath very much on the call?

And also at West Elm, if you can give us a little insight there as to the textile business?

Laura?

Sure.

We have seen a softness in our textile business, throughout the year, particularly in bedding, where the market has a lot of offer and a lot of different, reduced price points from our competition.

And we have also seen some softness in our rug and window category, again, highly promotional in the marketplace.

There are areas of brightness.

I am not going to go through the specifics because it is highly confidential and competitive, but I will say that -- that it is something that we are seeing across the board actually in almost all of our brands that the textiles business is softer than we would like, and we are working hard to deliver new, more innovative and differentiated products particularly in 2008.

And Dave, on West Elm?

And I would probably add pretty much the same sentiments as Laura that we have seen a weakness in West Elm in the bed and bath areas, however there have been some very good aspects of it.

Our organic offerings have been really quite good and we are excited about the spring offerings as we continue to build on those.

Our next question will come from David Weiner of Deutsche Bank.

Please go ahead.

Thanks.

Good morning, everyone.

Just a question on reduction of price points.

Laura, I think you mentioned that in the Pottery Barn brand, your -- you are not only reducing price points but you are also increasing the mix allocation to the lower price point merchandise.

I was just wondering if you could maybe give a little more color on kind of what percent maybe of mix that applies to on Pottery Barn and then maybe within other brands, does it apply to the same degree?

Or is this mostly a Pottery Barn thing?

Thank you.

Laura, are you going to take that question?

Sure.

This initiative really relates to Pottery Barn where the customer has a wide range of income brackets and where in particular we want to attract our younger customers again to the brand.

It is important to have great value so that they can try something in the brand and then as they go through different life stages, buy things that are more expensive.

We do have a wide range.

We are focused on the value piece it which is, our definition is striking the right balance between the quality and the price to deliver great value for our customers.

In some cases the best values are at higher price points and in some cases where the market has got a lot of competition, we have had to reduce prices if our product wasn't differentiated.

Where we have newness it is not as price sensitive.

Where there is less saturation, same.

So I hesitate to go through it in terms of percentages, because it really depends on the category of the market and what the market is doing in that category, and we are looking at in each one what the right balance is and making the adjustments.

It is not just reducing prices.

It is building into price points that we used to have, and then also reducing our shipping charges to our customer which we believe is a really strategic and important factor as the -- as the online business becomes more and more important to us.

Our next question comes from Matt Nemer of Thomas Weisel.

Please go ahead.

Good morning, everyone.

My first question is, could you differentiate between the traffic decline that you saw in November between retail and DTC?

And then just a quick follow-up.

Did the -- on the inventory growth breakdown, did the percentage related to Pottery Barn and Pottery Barn Kids come down?

I seem to recall that was closer to 50% of the inventory increase.

Thank you.

Yes it did come down Matt, on the inventory question regarding Pottery Barn and kids.

It actually was at 40%.

It has previously been higher than that.

As Laura said they have been aggressively working down that number, and we continue to be very focused on working through it between now and the end of the year and you have seen our guidance for the balance of the year as it relates to that inventory.

That's where we see that.

Your question on the November traffic.

What we have seen is softer retail, and we actually have been relatively pleased with where the direct-to-customer business is in light of -- you know where our guidance is for Q4.

We are very cautious is our guidance, but within that we have been, we have seen a better consumer or more active consumer response in DTC than we have in retail; however, it is so volatile.

So we just think it is coming slower and we think there could be some shift issues with that as well, but to your question, it would be softer in retail than in D-TC.

Lauren Levitan of Cowan, please go ahead.

I was hoping to get a little bit more commentary on some of the comments regarding holiday.

Specifically maybe you could help us reconcile your comments that you have seen favorable early reads on holiday merchandise.

And the commentary around November.

How should we reconcile those two.

Is it really a retail versus DTC issue or is there something else here at play?

And related to holiday, can you also give us any sense of how the shipping calendar is going to work this year and whether or not that should help or not.

And then lastly, Laura, I know you talked about how the opening price points may have shifted somewhat at Pottery Barn.

I was wondering if you and Dave can talk about merchandising, specifically for incremental gift giving, either in terms of price or in terms of newness and categories.

And then just a quick clarification for you, Sharon, you said -- are you saying that we should expect the excess inventory for PB and PB kids to the be largely gone by the end of the fourth quarter or is that something you think we will still have some flow through going into the first part of next year?

Thanks.

Lauren, let me take your first question because it is a simple answer.

We expect that inventory will flow into the first half of next year.

On the question regarding the comments we made on holiday.

Laura, would you speak to the Pottery Barn comments that you made in kids and teen and then Dave you can speak to your brands which will have different answers obviously.

So Laura.

Sure.

We are really excited about our gift-giving strategies that we have set in place to -- after the Thanksgiving holiday.

It is really too early to assess the holiday in totality.

It has just begun.

So we are seeing pockets of strength, but really the business is yet to come, and we are just focused on our execution and doing what we do at holiday season the best we can.

So I really -- I hesitate to go through any specific highlights right now, because it is so very early.

And then Dave?

Well, it is very early but we have seen some positive reads in our food areas.

We actually had the floor set up -- we have a Thanksgiving floor set right now that some of the holiday product is in, and we have seen the food and a lot -- some of our new table-top entertaining areas have really started to begin to pop.

So we are excited about that.

In West Elm I talked about the expanded assortment that we have in our stores.

We have set up the gift bars.

If you have been where there are boxed gifts in the stores that you can just pick up and go.

We have seen a great response to those.

And then in Williams-Sonoma Home, we have set up gifting -- what we are calling the gift gallery and have the expanded decorative accessory stores which again, are focused on multiple price points and great distinctive gifts and we have seen great response to those both in the catalog and on the web.

Lauren, you asked about the shipping calendar and that is favorable this year compared to last year because of Christmas falling on a Tuesday.

Customers will be able to receive merchandise on a Monday.

And it's not that we get a lot of orders on that very last day, but we will get more business throughout that last week which gets stronger every year.

And we have our -- our distribution center just executes flawlessly during these periods.

Together with UPS we have been able to execute those last-minute orders effectively.

We are pretty optimistic about what we are going to see for it at the end of the season.

And then, Lauren, you didn't ask the question but it goes right along with that.

We also this year made a major personalization and monogramming expansion in our distribution center and last year you might recall that we were limited on our capacity and we are very optimistic based on the early reads on personalization that we are going to have a very strong holiday in that area.

Our next question comes from Laura Champine of Keegan.

Please go ahead, ma'am.

Good morning.

I had a question about Pottery Barn's sales trends.

I noticed a deceleration from a strong Q2 even though the comp was easier in Q3.

And I am wondering how much of that weaker comp sequentially was driven by this furniture back order issue and what your expectations are for any potential lift for that in Q4?

Laura, would you like to speak to that?

Sure.

The comp is more a reflection of the tougher environment at retail versus the -- at retail in particular versus the back order situation.

Because in retail the back orders don't really play a part unless the item is completely out of stock in which case it wouldn't be in the store at all.

But we just, we are seeing a tougher environment.

We are seeing a lot more promotions in other retailers and that is putting pressure on us.

And that is what I would really say the difference is between Q2 and also, and Q3; however, as we said earlier, we are clearly outperforming a lot of people in this area, and that's -- our focus is just to continue to focus on those things that will build the brand long-term and strengthen our offer.

Strengthen our service into the future quarters.

Our next question comes from Anthony Chukumba of FTN Midwest Securities.

Thank you.

Congrats on a good quarter given the competitive -- the environment.

But just wanted to take a step back and talk about sort of the competitive landscape.

Clearly Bombay is closing all of their U.S.

stores and now Restoration Hardware is being taken private.

I was just wondering what your thoughts were in terms of the short-term and long-term implications of some of these changes?

Howard, would you like to speak to that?

Okay.

Well, also mentioned earlier and as you are noting, it is tough out there on home furnishings companies.

And many of the -- many of our competitors are finding it very difficult much more so than we are.

As you say, we have seen Bombay go down.

I don't know what this means for Resto.

They were clearly struggling.

Levitz has filed for the third or fourth time.

And you are seeing negative numbers out of a lot of them, and some of the other companies probably are -- are pretty vulnerable for the long term.

So I think that what has happened is over the last ten years -- when we got in the home furnishings business really with Pottery Barn in a meaningful way in the middle '90s, we were kind of the first ones out there.

Bombay was there, but there wasn't much out there.

Pier One, but there wasn't much out there.

And nobody doing what we're doing.

And then everybody wanted to get into the business, so the field has become crowded, and probably overly so, and now we are having some more difficult times and it is weeding the weaker ones out and I think that's a good thing.

And I suspect that it will continue for a while, and as we keep saying, we are just going to keep our head down and keep doing what we are doing because we believe in our strategy and our business model and our ability to execute in our brands.

And I think we are going to gain market share and come out of this stronger.

At least that is our belief.

Our next question is from Brian Nagel of UBS.

Thank you.

Good morning.

My question -- I just wanted to dig a little deeper into the fourth-quarter guidance just to make sure we are clear on it.

As you look at your prepared remarks, you suggested that traffic slowed here in the early -- in Q4 and November.

So excluding all the items that you talked about in earlier, Sharon, to make the numbers in Q4, we basically are assuming the trends kind of stay where they are now after the traffic weakness in November?

Is there some type of assumed pickup built in there?

No.

We guided, Brian, to the low end of our guidance range.

We have got a fairly wide guidance range on comp, 0.5% to 2.5%.

So we got a pretty wide range, and we, of course, have advised everybody that we are more focused on the low-end right now than the high end.

But I think that we had gone out, you recall very cautiously.

We had this perspective on the year when we started the year.

I think that is why within this range of guidance we still feel comfortable based on the performance of our business.

Also remember that this is Sonoma's time.

The WS brand is not a home furnishings retailer.

Support of our business.

We actually feel that that business is going to execute extremely well.

They are in stock.

The product looks great, the stores look fantastic.

They are all going to benefit from the capital initiatives we had last year this holiday.

So we have that to be optimistic about on the other side of it, West Elm, we have had great performance there with Williams-Sonoma homes.

Has improved its performance dramatically.

We have a lot of really good things happening.

We can't ignore this macro but we also don't want to overlook the things in the Company right now that are very positive.

I would like to just also say if I might, Sharon, that I am focused on the high end the range, not the low end, and we are just trying to be cautious with our guidance to the Street relative to what is going on but don't think for a minute that we are not focused on making or exceeding the high end of the range if we can.

Laura Richardson of BB&T, please go ahead.

Yes, I was just wondering if you had any thoughts on new or different things you might be doing promotionally to drive traffic?

Then the follow-up to that is things like decorating classes and the color seminars I have been getting E-mails about.

Do those help?

Thanks.

Laura, could you speak to that?

Sure, yes.

We have seen great consumer response to our decorating classes, our color seminars.

We have also done some art-to-collect events in our stores.

And they just -- the customers really are looking for those extra -- for the help in pulling some of these ideas together and it brings the community together in our stores and we are going to continue to do that and we are trying new things.

So we are really excited about the future for the Pottery Barn brands.

Of course, in the kids brands we do our sing-alongs and story readings all the time and some also decorating events in that brand.

So that continues to be a key part of our strategy, similar to the Williams-Sonoma technique in cooking classes and really believe that it adds richness to our instore experience.

In terms of promotions, we are mindful of what everyone is doing and we are looking at where we are potentially overpriced and not competitive and we are making those appropriate changes.

Also, really, looking at what that does long term and not making any short-term choices that would hurt our brand's long term, because we think that that is really important.

So we are careful.

We -- we really like to markdown things that aren't moving.

That is our first and foremost strategy on our markdowns, but there are some areas where -- because I've talked to you about our value initiative in Pottery Barn where we know we need to make adjustments, we already have, and you can see that in our catalogs and in our stores right now where we have taken 20% off some items.

It is interesting in those items we actually run fairly healthy margins.

Even at 20% off, we are above the Company -- our margin -- our Company margin with the markdowns.

So those are good strategies for us and I think it is pretty different from some of the other retailers who are just taking across the board 10% off everything in the store all the time.

That is not what we do.

Then Dave would you like to speak to the activities and store activity and marketing that you are doing and then the promotional environment in your brand?

Yes, we have -- Sonoma has been doing for a long time, the technique classes and the cooking classes and I think the customer out there is looking for help and love to be engaged and they love relevancy and I think that is one of the things we focus on.

For us it is a long-term strategy, it's all about continuing to build ourselves as a cooking authority in the marketplace with Williams-Sonoma.

We have found that these strategies create that sense of community in the store, create a relationship between the sales person and the customer and it's one that we capitalize on long term.

I think that is the strategy there.

In terms of the promotional environment, we are just sticking to what we do best and that is sell great product.

We watch our inventories and manage our inventories and take promotions where we need to to clear through seasonal goods.

I think we do that every day whether it be a promotional environment or a regular environment.

We are looking to maximize our profits, maximize our sales and minimize our inventory liabilities.

Then Pat, could you speak to the direct marketing activities that we have for Q4.

Sure, Sharon.

Laura, one of the initiatives that we have launched this Fall holiday season is our new E-mail platform which has allowed us to send much more relevant E-mails than in prior years.

We are seeing significant increases in sales related to E-mails that we are sending and revenues are increasing greater than the number that we are sending due to the fact that they are more relevant and that is very helpful especially during the holiday period.

Thank you.

That is all the time we have for questions today.

I will now turn the call over to Howard Lester for closing comments.

Well, thank you all of you for joining us today and for your support.

We will look forward to talking to you at the end of the next quarter.

Have a great day.

This concludes today's teleconference.

You may disconnect at any time.

Thank you for your participation and have a great day.

Thank you.