Williams-Sonoma Inc (WSM) 0 Q0 法說會逐字稿

Welcome to the Williams-Sonoma Incorporated fourth quarter and fiscal year 2008 earnings and fiscal year 2009 financial guidance 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 now like to turn the call over to Steve Nelson, Director of Investor Relations at Williams-Sonoma Incorporated, to discuss nonGAAP measures and forward-looking statements.

Please go ahead, sir.

Good morning.

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

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

Our press release contains nonGAAP financial measures that exclude the impact of unusual business events.

For the remainder of today's call, we will be discussing our fourth quarter and fiscal year 2008 results, excluding the impact of these items, and will refer to these results as nonGAAP.

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

A reconciliation of these nonGAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these nonGAAP financial measures are useful and how they are used by Management are discussed in Exhibit One of the earnings 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 2009 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 releases 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.

As a reminder, the fourth quarter of 2008 was a 13 week quarter versus 14 weeks in 2007 and fiscal year 2008 was a 52 week year versus 53 weeks in fiscal year 2007.

All year-over-year revenue comparisons for the fourth quarter and fiscal year will be on comparable 13 to 13 week and 52 to 52 week bases respectively.

The extra week in 2007 added approximately $70 million or 5% to our fourth quarter 2007 revenue growth and 4% or $0.05 to our diluted earnings per share.

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

Thanks, Steve.

Good morning and thanks to everyone for joining us.

With me today are Laura Alber, our President, Pat Connolly, our Chief Marketing Officer, Dave DeMattei, our Group Vice President -- or group President for Williams-Sonoma and Williams-Sonoma Home and west elm brands, and Sharon McCollam, our Chief Operating and Chief Financial Officer.

I'd like to begin today with an overview of our fourth quarter results and our 2009 outlook.

Then I'll turn the call over to Sharon, Dave and Laura for further details.

While our fourth quarter results were better than expected due to increased promotional activity and tighter expense controls, our ability to drive increased traffic and conversion in this difficult economic environment proved to be a significant challenge.

As such, we focused on aspects of the business that we could control and made significant progress on those initiatives that would strengthen the Company's financial position as we entered 2009.

These initiatives included: One, successfully amending our unsecured credit facilities and ending the year with significant cushions in our covenants.

Two, reducing our year end inventory levels by 17% or $121 million.

Three, initiating and implementing a $75 million infrastructure cost reduction program.

And four, optimizing profitability through aggressive expense management and highly controlled promotional activity.

During the fourth quarter, on a 22% decline in net revenues, we delivered nonGAAP diluted earnings per share of $0.31.

We also increased our cash balance by $30 million to $149 million after returning over $50 million to our shareholders through dividends during the year.

While these results in no way reflect a level of performance we were satisfied with, they do demonstrate the flexibility of our multi-channel business model and our organization's ability to drive rapid change in a down-trending economy.

It is that ability to change that allowed us to deliver the results we did in the fourth quarter of 2008.

Our leaders abandoned business as usual early on and focused on what needed to be done in the short term without ever losing sight of what was important, our customers and our brands.

And while we were committed to driving revenue across all channels, an equal focus was placed on improving operational efficiency, driving down cost and lowering inventories.

In our supply chain, we continued to make significant progress on our key initiatives including restructuring our Asia furniture sourcing network to establish in-country expertise and improved vendor performance, expanded our US upholstery furniture operations to provide shorter lead times, better quality, lower cost and increasing six of our largest local furniture delivery hubs to improve customer service and reduce returns, replacements and damages expense.

These initiatives, combined with tightening of our customer return policies, drove an 80 basis point reduction in our total Company sales return rate and a 30 basis point reduction in returns, replacements and damages expense.

We also reduced distribution capacity by 7%, due to substantial improvements and inventory management.

In information technology, we continued the rollout of our direct-to-customer order management system, this is a phased implementation that's improving efficiency and functionality in an area that we believe still has significant cost and inventory planning opportunities.

In the customer insights area, we implemented new functionality that is allowing us to significantly improve the relevancy of our marketing contacts, and optimize our catalog response rates.

In eCommerce we completed the migration of all of our websites to our next generation platform, with the exception of west elm, which will be transitioned in '09.

We also began testing new functionality in the areas of click-to-call, product reviews and search.

Infrastructure was also a key area of investment this year, including the replacement of our Company-wide point of sale hardware and the rollout of electronic signature and pin debit functionality in our stores.

In addition to our supply chain and information technology advancements, there were also significant direct marketing and brand specific highlights that were very important.

In direct marketing, we reduced catalog advertising costs by $45 million, based on the success of our catalog circulation optimization strategy.

At the same time, we continued to aggressively explore additional traffic drivers through paid and natural search, target-driven direct response and affiliate programs.

While we are still in the early phases of these roll-outs, all of these initiatives have driven increased traffic and incremental sales to the brands.

In west elm, we opened nine stores including our first stores in Canada and Puerto Rico.

Across all brands in 2008, we opened 27 net new stores and increased lease square footage by 7.1%.

While the timing of this additional lease square footage was unfortunate, in this economic environment, the locations are strategic and will be brand enhancing long term.

In PBteen new product information and superior execution drove a 4% increase in year-over-year net revenues, which is impressive in these challenging times.

And as we enter 2009, our focus is in three key areas: One, optimizing our brand positioning and marketing strategies in a reset economy.

Two, improving profitability.

And three, strengthening our balance sheet.

To optimize our brand positioning, we will continue to evolve our merchandise assortment and place a greater emphasis on opening price points and the value proposition.

We'll also continue to make superior customer service our top priority.

We continue to believe that the strength of our brands, our multi-channel strategy and superior execution will allow us to gain market share as competitors fail or become less relevant, and big box stores refocus on their core business.

To optimize our marketing strategies, we're taking our catalog circulation optimization strategy to the next level and continuing to shift advertising dollars from catalog to eCommerce.

ECommerce is our most profitable channel and we continue to identify new opportunities to build brand awareness and customer engagement through search, e-mail modeling, affiliate programs and enhanced functionality.

To improve profitability, our most significant initiative is the $75 million infrastructure cost reduction program we implemented in January.

We'll also be realizing increased productivity from catalog circulation optimization strategy, which we expect will drive an additional $20 million in advertising cost reductions.

In addition, we expect to realize a 50 to 100 basis point increase in our selling gross margin, due to fewer markdowns and lower inventory levels as well as an additional $10 million to $15 million in savings from our furniture returns, replacements and damages initiatives.

To strengthen our balance sheet, we will continue to optimize cash flow through aggressive inventory management and lower capital spending.

In 2009, we expect to reduce merchandise inventories by $60 million to $90 million and gross capital spending by up to $100 million.

Based on this reduction, gross capital spending in 2009 is expected to be in the range of $90 million to $100 million, but will be partially offset by store construction allowances of approximately $20 million.

In '09 we are only proceeding with new and remodeled stores that we are already committed to.

Therefore, net of store closings, retail leased square footage is only expected to increase approximately 1%.

To the extent possible, we will reduce this number further as we work with landlords to close underperforming stores.

We believe all these initiatives will continue to improve our competitive positioning and allow us to emerge stronger when the economic headwinds we are currently facing subside.

In 2009, we are expecting net revenues to decline in the range of 12% to 17%.

And diluted earnings per share on a nonGAAP basis to decline $0.30 to $0.50 to a range of negative $0.15 to a positive $0.05.

This guidance is based on a snapshot of how we believe 2009 will look if the top line trends we are seeing today continue and we deliver against the initiatives that I have just described.

We are not intending to signal any type of insight into which direction the economy is headed.

But only that if our trends continue as they are today, this is how we would expect the year to unfold.

Also in 2009, we expect cash flow from operating activities net of capital spending to increase by at least $75 million.

As such, we announced this morning that we are maintaining our quarterly cash dividend at $0.12 per share for the balance of the year for a total annual payout of approximately $51 million.

Assuming there is no significant changes to our business plan and our operating results are within the ranges of financial guidance we provided today net of the dividend, we are targeting a cash balance of at least $200 million at the end of fiscal 2009.

I'll now turn the conference call over to Sharon for additional details on our 2008 performance and our 2009 guidance.

Sharon?

Thank you, Howard.

Good morning.

Before we discuss 2008 results, I want to mention that some financial comparisons may be discussed on a nonGAAP basis as described by Steve earlier in today's call.

The two unusual business events excluded in these comparisons are the $20 million or $0.12 per share asset impairment charge for underperforming retail stores and the $13 million or $0.08 a share charge associated with our infrastructure cost reduction program.

Despite the unprecedented challenges facing the home furnishing sector in the fourth quarter, our results were better than expected and reflect our actions to adapt in a reset economy.

The highlights are as follows: Fourth quarter nonGAAP diluted earnings per share decreased 73% to $0.31 versus $1.15 in the fourth quarter of 2007.

Net revenues in the fourth quarter decreased 22.2% to $1.008 billion.

The decline was broad-based with comparable store sales decreasing 22.3%.

Direct-to-customer revenues declined by 25.5%.

Circulation of catalog and catalog pages decreased 17% and 28.5% respectively on a comparable 13 week to 13 week basis.

In our core brands, net revenues decreased 23.1% compared to a 14.3% decrease in our emerging brands.

NonGAAP gross margin, expressed as a percentage of net revenues, decreased 770 basis points to 33.9% in the fourth quarter.

This decrease was primarily driven by the impact of increased markdowns, the deleverage of fixed occupancy expenses, primarily due to declining sales, and an increase in inventory related reserves, partially offset by favorable inventory shrinkage and replacements and damages expense.

NonGAAP SG&A expenses as a percentage of net revenues in the fourth quarter increased 150 basis points to 28.8%.

This increase was primarily driven by the deleverage of employment and total advertising costs primarily due to declining sales partially offset by reductions in other general expenses.

Now, I'll discuss our fiscal 2008 earnings highlights.

Fiscal 2008 nonGAAP diluted earnings per share decreased $1.41 to $0.35, including the loss of the $0.05 per diluted share benefit from the extra week in 2007.

Net revenues in fiscal year 2008 decreased 13.2% to $3.361 billion.

Comparable store sales decreased 17.2%, despite a 7.1% increase in retail leased square footage.

Direct-to-customer revenues declined by 13.8%.

Comparable week circulation of catalogs and catalog pages decreased 16.2% and 26.3% respectively, reflecting implementation of our catalog circulation optimization strategy beginning in the second quarter.

In our core brands, net revenues decreased 15.2% compared to a 1.7% increase in our emerging brands.

Gross margin expressed as a percentage of net revenues on a nonGAAP basis decreased 500 basis points to 33.9% in fiscal year 2008.

This decrease was driven by the deleverage of fixed occupancy expenses primarily due to declining sales, increased markdowns and an $11 million increase in inventory-related reserves, partially offset by favorable replacements and damages expense.

SG&A expenses as a percentage of net revenues on a nonGAAP basis in fiscal year 2008 increased 130 basis points to 32.3%.

This increase was primarily driven by deleverage of our employment and advertising costs due to declining sales, partially offset by reductions in other general expenses.

The effective annual income tax rate for fiscal year 2008 was 28.4% versus 38.1% in 2007.

This decrease was primarily driven by certain favorable income tax resolutions during 2008.

Significant year-over-year working capital balance sheet variances at the end of fiscal year 2008 were as follows: Cash and cash equivalents at the end of fiscal year 2008 were $149 million, an increase of $30 million over year end 2007 with no outstanding borrowings under our $300 million revolving line of credit, which was successfully amended in the fourth quarter.

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

Merchandise inventories decreased $121 million or 17.4% to $573 million.

The primary driver of this decrease was a reduction in units across all brands, except PBteen, including a $72 million reduction in the Pottery Barn core brands, a $34 million reduction in the emerging brands and a $35 million reduction in the Williams-Sonoma brand including cost and mix shift impacts.

These reductions were partially offset by a $20 million increase in new and remodeled stores across all brands.

Prepaid catalog expenses decreased $18 million or 34% to $36 million.

This decrease was primarily driven by reduced catalog circulation, partially offset by cost increases in paper and postage.

Customer deposits decreased $10 million to $192 million.

This 5% decline was driven by a year-over-year decrease in unredeemed gift cards, reflecting this year's lower level of customer demands in the third and fourth quarters.

Accounts payable decreased $35 million or 18% to $162 million.

This decrease was an in alignment with our inventory reduction.

I would now like to discuss the details of our fiscal year 2009 guidance.

Before I begin, however, I would like to point out that to provide meaningful comparisons to our 2009 guidance, we are excluding unusual business events from our 2008 results as I mentioned earlier as these are nonGAAP comparisons, they should be interpreted in conjunction with Exhibit One of this morning's press release.

We have approached our 2009 guidance by basing our planning on the assumption that the trends that we saw in the October/November time period will continue until they anniversary during the third quarter.

This is consistent with our experience since that time, with the exception of seasonally increased demand during holiday and the effect of promotional activities we undertook to take advantage of holiday and post-holiday traffic to clear inventory.

As we do not anticipate repeating the promotionally-driven sales next fall, our guidance reflects negative revenue in all quarters.

In light of our outlook, net revenues in 2009 are projected to decrease in the range of 12% to 17%, with comparable store sales projected to decline in the range of 12% to 16%.

We are expecting an approximate 1% increase in retail leased square footage with eight new stores, seven remodel expansion projects and a minimum of seven permanent closures scheduled.

As we continue our catalog circulation optimization strategy, we expect catalog circulation reductions in the range of 19% to 21% for the year.

Gross margin as a percentage of net revenues in fiscal year 2009 is expected to decrease 180 to 250 basis points on a nonGAAP basis.

This decrease is primarily driven by the fixed cost deleverage of occupancy associated with a mid-teen decrease in net revenues, partially offset by targeted improvements in cost of merchandise sold and replacements and damages.

SG&A expenses as a percent of net revenues in fiscal year 2009 are expected to decrease 10 to 50 basis points on a nonGAAP basis.

This decrease is primarily due to a reduction in advertising costs, as well as the effect of our infrastructure cost reduction program and our ongoing efforts to flex our expense structure to this reset level of business.

Income tax expense as a percentage of pretax earnings in fiscal year 2009 is expected to be in the range of 35% to 41%, versus 28.4% in fiscal year 2008 due to certain favorable income tax resolutions in fiscal year 2008 that are not anticipated to recur in fiscal year 2009 in addition to lower levels of earnings and losses.

Capital spending in fiscal year 2009 is expected to be in the range of $90 million to $100 million of which approximately 50% is for new and expanded stores, 25% for information technology and 25% for store maintenance, distribution centers and other facilities.

Inventory at the end of fiscal year 2009 is expected to be in the range of $480 million to $510 million, a reduction of 11% to 16%.

Consistent with our strategic initiative to enhance shareholder value, we remain committed to optimizing growth and profitability wherever possible in 2009 despite the challenges we face in the current macroeconomic climate.

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 with Williams-Sonoma.

While the Williams-Sonoma brand was our top performing core brand in the fourth quarter, it too was negatively impacted by declines in mall traffic and increased promotional activity.

During the quarter, net revenues declined 14.2% with similar decreases in both channels.

Selling gross margins also declined, particularly in the retail channel, as we introduced several traffic generating promotional events during the holiday period.

The performance in the retail channel was primarily driven by a 16.8% decrease in comparable store sales, partially offset by incremental revenues from new and expanded stores.

From a merchandising perspective, we had negative growth in all key categories, although bakeware, electrics and cookware were less pronounced.

Exclusivity and perceived investment value continued to drive these categories as people are eating out less and entertaining at home more.

As we enter 2009, we are doing so assuming that revenue trends -- that the revenue trends we have seen since the October and November 2008 will continue throughout the year.

Therefore, we are executing against several key initiatives that we believe will resonate with our customer and drive our business in these more challenging times.

These initiatives include: Partnering with key vendors to introduce innovative and exclusive products that are unique in the marketplace, enhancing our value proposition by offering more set pricing options and working with vendors to establish key price points in critical categories, taking the cooking authority that Williams-Sonoma has established over the years and expanding our developed foods to take advantage of the trend in home cooking, and finally, expanding our eCommerce marketing in the areas of paid and natural search, customized e-mail, product reviews and remarketing.

We believe that despite the micro environment -- macro environment, our strong merchandising, innovative marketing and superior customer service will continue to differentiate our brand as a destination of choice for the consumer.

In the Williams-Sonoma Home brand, the fourth quarter continued to be very challenging as the October/November 2008 turndown in the high end retail sector continued to have a substantial impact on the brand's performance.

During the quarter, despite a substantial increase in promotional activity, brand net revenues declined significantly in all stores and in the direct-to-customer channel.

While we are disappointed with these results, we believe that this customer has been particularly impacted by the macro environment and that these trends are likely to continue in the foreseeable future.

Therefore, we are approaching 2009 as a year of transition in which we are going to aggressively implement strategies that will prioritize profitability over growth.

These strategies include: Refining the product assortment to cater to our best customers including merchandising at the store level, integrating bridal registry with the Williams-Sonoma Kitchen brand to take advantage of their bridal traffic, reinventing the direct-to-customer strategy with a significantly greater emphasis on eCommerce versus catalog and leveraging the new furniture sourcing network to lower inventories and reduce returns, replacements and damages expense.

While these initiatives will improve profitability in 2009, there is still tremendous fixed cost pressure from underperforming retail stores that have to be addressed.

Therefore, in addition to these initiatives above, we are also working with our landlords on three potential store closings.

All three of these stores have been fully impaired as of the end of 2008.

Additionally, we will continue to assess the brand's overall market potential in this economic environment as we progress through the year.

And finally, west elm.

While west elm continued to be more resilient than our other home furnishings brands, net revenues during the fourth quarter did decline due to lower traffic and conversion.

These declines were partially offset, however, by incremental sales from nine new stores.

Selling gross margins also declined due to significant promotional activity during the quarter.

West elm ended the quarter with 36 stores including our first stores in Puerto Rico and Canada.

From a merchandising perspective during the quarter, while we did see positive growth in table top, it was more than offset by declines in furniture and decorative accessories.

As we enter 2009, our focus in west elm will be on continuing to expand the reach of the brand and improving profitability, despite our expectation that comparable store sales will be negative.

To expand the reach of the brand, we are opening four new stores in 2009.

One in Emeryville, California and one in Manhattan, both of which have already opened, as well as Scottsdale, which is opening within the quarter, and Austin later in the year.

We are also developing a new opening price point merchandising strategy and emphasizing our value proposition through our brand marketing.

To improve profitability, we are optimizing our vendor base through factory consolidation, improving packaging to further reduce returns, replacements and damages, refining our product mix, such that a larger percentage of the mix is in higher margin categories, and lowering brand advertising costs by continuing to reduce and version catalog circulation while at the same time investing in higher productivity Internet opportunities.

We believe our good design at great prices in west elm will prove relevant in these trying times and provide a significant competitive advantage over the long term.

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

Thank you, Dave.

Good morning.

First I will start with the Pottery Barn brand.

Fourth quarter year-over-year net revenues decreased 31.8% including a 260 basis point impact related to the catalog circulation optimization strategy.

Retail comparable store sales declined 29%.

Selling margins also declined due to aggressive markdowns related to inventory clearance and higher promotional activity in both the retail and direct-to-consumer channels.

From a merchandising perspective we saw significant decreases across all major categories including furniture.

Our best categories, while still negative, were textiles and flooring but was driven by promotional initiatives.

From an operational perspective during the quarter our returns, replacements and damage initiatives generated significant customer service and financial benefits as we continue to reduce our rates.

We also successfully reduced our inventory levels in both units and dollars despite the significant sales decline during the quarter.

To provide greater value to our customer we introduced 12 month 0% financing and enhanced our third party private label credit card rewards program.

These programs increased our card penetration and have correlated with an improvement in our furniture demand.

In 2009 we recognize that the environment is difficult and as such have built our brand strategies to drive profitable sales.

These opportunities include clear and consistent merchandise strategies with improvements in every category.

As part of this, we are aggressively shifting our value proposition through competitive and cheaper prices, additional category promotions and our third party private label credit card program.

We are also enhancing our value proposition to increase marketing of our great opening price points and offers in all channels.

Differentiated service is also a key component of our strategy.

We are increasing our interior design services, particularly at retail, and have added clientelling and new store events to improve the in store customer experience.

We also recognize how important the Internet is to our future and we are focused on our selling effectiveness online and we have increased our Internet marketing to drive conversions.

And we are taking our catalog circulation optimization strategy to the next level.

During 2009, we'll also remain intensely focused on our ability to successfully reduce inventories, tightly manage operating costs and maximize profitability in order to keep aligned with the changing trends of sales.

Now I would like to talk about Pottery Barn Kids.

Fourth quarter net revenues in Pottery Barn Kids declined 23.1% including a 370 basis point impact related to the catalog circulation optimization strategy.

Retail comparable store sales declined 24.9%.

Selling margins also declined due to increased markdowns and significant inventory clearance.

From an operational perspective during the quarter, we continue to reduce inventory levels in tandem with our sales declines and made significant progress on our returns, replacement and damage initiatives.

We also achieved significant benefit from the catalog circulation optimization initiative.

As we look forward to 2009, we share the same theme as Pottery Barn, to deliver great product at a great value.

We will continue to focus on opportunities to maximize sales in the current environment while protecting our strong competitive presence.

Offering customers a wider range of opening price points by engineering value into key categories without sacrificing quality, marketing our private label credit card with its one year same as cash financing offer that is key for customers in need of children's furniture as a life stage purchase, expanding our assortment in license programs with premium brand names to create a clear destination for decorative themes, expanding our eCommerce marketing in the areas of paid and natural search, customized e-mail and remarketing and improving our four wall contribution in each and every one of our stores including removing underperforming categories such as baby apparel and party consumables.

Lastly, we are closing our two Threads test stores.

Our Manhattan location will be used as a test showroom for PBteen merchandise and the other location has been given back to the landlord.

For both of the Pottery Barn and Pottery Barn Kids brands our initiatives in 2009 will update our core assortment to reflect today's economic environment and manage the aspects of the business that we can control while at the same time protecting our brand image.

By focusing on all of these initiatives, we believe that the Pottery Barn and Pottery Barn Kids brands will emerge from these challenging times with an even stronger competitive presence.

I would now like to talk about Pottery Barn Teen.

During the fourth quarter net revenues in the PBteen brand declined by 14.5%, and while this decline was disappointing, PBteen was still our best performing brand in the Company during the quarter.

We're also very proud of the fact that PBteen was also the best performing brand for the year with 4% positive net revenue growth.

As Howard said earlier, in this environment, that is impressive performance.

From a merchandising perspective, like our other home furnishing brands we did see sales declines in all categories.

Textiles, however, was our best performing category.

As we enter 2009, we will continue to focus on extending the reach of the brand and maintaining its positioning as a top of mind destination for home furnishings for teens.

Expanding our merchandise assortment across a wider range of price points to serve a broader range of teens, creating a PBteen online community through select social networking sites, increasing eCommerce conversion through improved site usability, merchandising and customer interaction and testing PBteen merchandise at retail in a small showroom in New York and within the four walls of three Pottery Barn Kids stores.

We continue to be excited about the long-term growth potential of PBteen as it solidifies it's positioning in the Pottery Barn portfolio of brands.

I would now like to open the call for questions.

Thank you.

Thank you.

(Operator Instructions).

We'll go to our first question Colin McGranahan with Bernstein.

Good morning.

Couple quick questions here.

Just doing the calculation on the comp, looks like maybe January, given the holiday comp, January was maybe in the negative 16% to negative 17% range.

Was that really -- was that a sequential improvement driven more by clearance activity?

Was there any real demand improvement?

And to the degree that you're willing to -- given you're almost through with March, what have you seen since then?

Colin, I'll take that.

Yes, January calculation is right in that range and it was driven by clearance.

So as -- what we would say about the current environment is we believe we have stability and we are seeing the October/November trend be our baseline.

We see it's volatile.

But that's what we're seeing.

And our next question comes from Alan Rifkin with Banc of America Merrill Lynch.

Yes, couple of questions if I may and I think I'll ask them both up front if you don't mind.

Your outlook for SG&A leverage, with a negative 12% to 16% comp, is quite admirable.

Sharon, could you maybe just provide a little bit color on how much of that reduction in SG&A is due specifically to the infrastructure reduction program?

And then on a more going forward basis, what do you think the opportunities are for SG&A leverage?

That's question number one.

And then question number two is as you continue with the catalog circulation optimization program, can you just provide some color as to your opinion as to the returns that that program is yielding?

Obviously, you're giving up revenues, but could you maybe just shed some color on the ROIC of that program?

Thank you very much.

Okay.

I will take the question on the SG&A and then Pat, if you could take the question on the catalog circulation optimization strategy, that would be great.

Okay.

On SG&A-- on the SG&A side, Alan, the-- there's two primary drivers.

On the infrastructure cost reduction program, year-over-year $60 million of that is in SG&A.

So when you do the math on that, on the revenue base, within the range of guidance we provided you, that is clearly driving a substantial piece of that number.

In addition to that, we also discussed the ad cost benefit, Howard mentioned the $20 million.

We consider that sort of the fixed, semi-fixed that is not having a major impact on revenue but in addition, because of the flexibility of the business model, in this declining sales environment we are also reducing catalog circulation.

So the reduction program, the infrastructure cost reduction program, is the largest driver but you also have a substantial driver coming from catalog ad cost.

Then, which we didn't call out in the infrastructure cost reduction program per se, throughout the Company all year we have been reducing our SG&A in virtually every area.

These other fixed expense -- other general expenses areas, and that is also driving a portion of that.

And finally, we have made some substantial progress in our labor scheduling model -- modules in virtually every aspect of our variable labor, starting with the stores and then in the call centers and the DC.

As a result of that, we are seeing important leverage in every one of the aspects of our business where we have variable labor.

So those are really the drivers of that.

Then Pat, could you please speak to the catalog circulation changes?

Sure.

Thank you, Sharon.

Alan, we're seeing-- the books that we're eliminating from in as part of our optimization strategy are-- would have had ad cost in the 80% to 100% range.

That means if we took $10 million out of costs, we're looking at about between $10 to $14 million in sales to the Company that we're using four techniques to do that.

Outside data which helps us analyze marginal names.

We're extensively using versioning.

We now have some brands that are up to 50% of our total circulation or versions.

We've right sized all of our page counts by really focusing on sales per square inch productivity.

And we're adjusting the trim sizes of all of our catalogs to uniform size so that we can take maximum advantage of co-mail opportunities.

So we're doing all of that in 2009.

We'll now move on to Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning to you.

My question focuses on your discussion of essentially emphasizing value, seems like you alluded to that in the release and in your comments, to acclimate to the new environment.

Can you talk about -- can you talk in a little more detail about how you plan to do that, which brands you pretend-- intend to focus on, or are you plans uniform across all brands?

And then also as you've tested your approach how have customers responded to promotions, to lower price points and I guess to more value oriented marketing, assuming that those are some of the options you have for pursuing that strategy?

Laura, would you speak to Matt's question, please?

Great.

Thank you, Matt.

Good morning.

Sure, good morning.

I want to just to reiterate that we are seeing the customer look for value in everything they buy.

They're also very focused on still great quality design that will last and stand the test of time.

And so we've looked at, and this is in all of our brands, competitive pricing across every category and really researched our competition heavily to understand where they've moved down and potentially are out-marketing us or out-pricing us.

And we, starting last year, started making the necessary adjustments to compete in this new world of pricing and promotions and we've been working on this for a long time so you're going to see this year us introduce more opening price points.

And in the Pottery Barn brands, I'll let Dave speak to west elm and Williams-Sonoma, but we have actually reduced our actual opening price points themselves so there's more of them and the starting point is lower.

We're also looking at on a 12-month calendar promotions monthly that are organized and in print to bring our customers into certain categories that will drive repeat purchases in the future.

So for example, you saw us do a white sale.

That was successful.

And we believe that the customer, when they buy our towels, will love them so much that they will come in and buy more towels later.

And we've seen that occur and seen that the financials actually give us payback on margin dollars.

So we are looking at lower price points, more promotions on a regular basis.

And then of course our private label credit card, I talked about.

And finally shipping value.

We continue to look at ways to improve our costs, so that we can pass along to our customer the savings and improve our shipping values where the price points are too high as a percent of the total sales.

We're marketing all of these promotional -- all this promotional activity in our value proposition more dominantly, even than in the catalogs and in the stores in the back half of the year than you've seen now.

So as you see the summer books and subsequent fall books that come out, you'll see very relevant voice that's very focused on value and understanding the consumer's mindset.

So we're really excited about this strategy, we think it's completely solid and it's been in the works for the last year.

Dave, do you want to add?

Yeah, on-- Matt, as I said in my prepared comments for Williams-Sonoma, we've been really looking at working on our set pricing.

If you look in our stores right now, you would see a roll-back in our prices in our Apilco French Porcelain, you would also see set pricing Mix & Match which we see working well, we've-- or went to set pricing in our Riedel Glassware, in our exclusive products in Shun Cutlery, we've worked on with the vendors and getting better pricing and reducing our opening price points, we are making sure in our cookware that in our open stock that we have key price points that are under $100, and in our -- and I think one of the bigger things that we see happening is the trend in our food, so we are continuing to develop our prepared foods.

You've seen in the windows the Sloppy Joe mixes, the new Bouchon programs, so we continue to work on that trend and we will be introducing new food programs for the remainder of the year which we're very excited about.

In-- finally, in our seasonal goods, that are exclusive to us that are developed by us, we're making sure that we price those appropriately and have compelling price points in our assortment where we control the complete assortment.

In west elm, very similar to what Laura added.

We now have been marketing in our stores on our website and in our catalog for three months now good design at great prices.

Affordability has always been kind of the ethos of the brand.

We are now playing up the marketing of that.

We have developed, like Pottery Barn brands, monthly favorites that we're merchandising into.

We are using those as EDMs and as store events to drive traffic and conversion.

We'll be testing shipping in our direct channel as we continue to find the right equation on that.

And we are now sinking all of these promotions with the books as we move into the summer seasons and fall seasons where we're paying a little bit of catch-up in the early part of the year.

We are now syncing this so we will be marking them.

And like Pottery Barn, west elm has adopted the private label credit card, under 100-- over $100,000 purchase, interest free and no payments for a year, and that seems to be helping us with our furniture business.

We'll now take our next question from Budd Bugatch with Raymond James.

Good morning, this is actually T.J.

McConville filling in for Budd.

I had a couple of questions here, so I'll ask them both at the same time.

First is on the private label credit card, a little bit more detail there.

First, have we seen any types of pushback as far as approvals have gone, maybe wouldn't think so with your customer, but wanted to get your thoughts there?

And second, just how far can the penetration go on this and how much of that is baked into the 180 to 250 basis point reduction in gross margin?

The question on whether or not we are seeing any decline in approval rates on the private label credit card, the answer is no.

And then I'm going to let Laura and Dave, because their businesses are very different, speak to the penetration and how far they could take the cards.

So Laura, would you speak to Pottery Barn?

Yeah.

I think the card is particularly relevant right now, so it's hard to predict where it will go in the future because I think that largely depends on a lot of other factors outside of our control.

But in the Pottery Barn brands, we have substantially increased the program differently-- it's different than what Dave will talk to you about west elm where they already had a pretty robust rewards program.

So we're seeing quite an uptick I would say, four fold approximately, from where we were previous to the program and as I said, where that will go, I imagine it will stay in this range until the climate changes.

And Laura alluded to west elm introduced a private label credit card over a year ago and when we introduced it, we introduced the design dollars so with every purchase you got a certain amount of design dollars, because what we wanted to do and what we did see happen was for the customers to return and then return-- and then redeem those design dollars for a substantially high-- higher purchase so we continue to have them returning.

We have still seen -- and that has been a pretty robust program.

It is understood by our store employees.

It is used to sell furniture.

We have still see a pretty substantial intake-- uptake in that program as we educate the customers to the benefits now.

We are ongoingly evaluating the pros and cons of it and we will continue to refine it as we move forward.

On the gross margin impact of the private label credit card, there's two things to keep in mind.

The first is that before we offered these programs like the 12 months same as cash, the fees associated with this private label credit card were accounts there-- they're accounted for in SG&A.

Of course, when you do these programs, the way that we're doing them, there is a cost associated with these, it's equivalent to a markdown.

And so that cost is traded as an offset to the selling price.

So it does have an impact on our gross margin because it is treated like a markdown.

So when you're thinking about where that goes, that is what we see.

Our next question will come from Joe Feldman with Telsey Advisory Group.

Yeah hi, guys, how are you?

Hi.

Wanted to ask about the lease negotiations.

I know that's something you guys have been focused on for some time and you mentioned you're working towards some reductions in rents and also I'm just wondering kind of what your-- what kind of pushback you're seeing from the landlords and are you getting the reductions you're seeking?

Are you getting concessions in cam charges?

Where are the gives and takes in that?

Howard?

Well, we just continue to push.

I can't say that it's going as well as we'd like for it to.

You do have leases with the landlords but on a selective basis, we're-- we've made some progress, we'd like to make more.

I think it's just -- it's just a process that's going to be a grind.

Without leverage, which means that you have expiring leases or you're opening new stores that you can put in these landlords's other malls, it's a difficult situation to get them to just arbitrarily let you out of a center and we've been unwilling by and large to pay to get out.

So it's just a process.

I'd say that, again, I'd characterize our -- with certain landlords we've had some real success and others are more difficult, but it continues.

(Operator Instructions).

Our next question comes from Matt Nemer with Thomas Weisel.

Good morning, everyone.

My question is can you comment on the potential for a higher number of store closings, assuming that your discussions with landlords end up favorable?

What's sort of the optimal number of stores or closings, I guess, should everything go your way?

And then also, secondly, it sounds like you're closing the Threads test stores and a couple of Williams-Sonoma Home stores.

What would be the profit impact if you decided to discontinue the Williams-Sonoma Home brand?

Thank you.

Howard, would you like to comment on the number of stores that would be potential for store closings?

Let me take the first part of that, then I'll let Sharon take the second part, Sharon or Dave.

With respect to the first part, we've been fortunate that we've had a strong real estate portfolio and so we don't have a large number of stores that we would close tomorrow if we had an option to do so.

What we'd rather do on the larger number is where we've had serious sales declines, like we've seen for the last year or so and particularly since last fall, we'd like to have rent reductions while we get through this.

And I think that's probably preferable to the landlords so that we can get through this period together, but leave the store there because by and large, they probably don't have anybody to take the store.

I can't really put a number on exactly how many we would close.

I would say that if we had our option, it'd be somewhere, it's not that many.

It'd probably be somewhere around 5% of our stores today we would close, if we could.

And that would help us where we may have overstored some markets, where we may have made some bad early decisions with west elm, some of our Kids' stores, say Williams-Sonoma we're in pretty good shape.

There's not hardly anything we would like to close in Williams-Sonoma.

And Pottery Barn, I think we're more in to trying to -- there may be a few that we'd like to close, but it's a few and the rest that we'd like to deal with with rent reductions.

So hard to put an exact number on it for you.

And Matt, to your question about the impact of the Thread stores or of the closing of Williams-Sonoma Homes, we have said consistently that Williams-Sonoma Home is negatively impacting our earnings this year to the tune of somewhere in the neighborhood of well over $0.10 a share.

But I will say this, the-- Dave spoke to in his prepared remarks, that the focus in Home is profitability this year, not growth.

They've been pushing to grow the business and they recognize that in this environment, that is going to be difficult to do.

So what we're focused on right now is profit optimization and I can tell you with great certainty that in 2009 we expect that to get substantially better.

The exit costs of Williams-Sonoma Home are pretty simple, the majority of that brand's sales are coming from stores.

They're brand-new leases and they're large stores.

So you would have the cost of vacating those facilities and then you'd have the cost of liquidating the inventory.

But we're really not at that point and it's not something that we're discussing at this point so-- but those would be the implications of that.

But yes, the Home is putting-- is depressing our operating contribution today.

It's going to get substantially better in 2009 and then the actions we're taking in '09 are actually going to have a very favorable impact in 2010, so that's how we're progressing with Home.

Our next question comes from Michael Lasser with Barclays Capital.

Good morning.

Thanks for taking my question.

Two, if I may.

Number one, as we calculate it, you're looking for a roughly 20% revenue decline in the first half of this year and approximately 400 to 500 basis points of operating margin erosion.

In the second half of the year you're looking for call it 10% revenue decline and an operating margin of flat to slightly up.

Is there something that would change in the back half of the year to suggest that your margins are going to improve that much in spite of what will continue to be a challenging top line?

And then secondly, can you talk about how the mix shift to the Williams-Sonoma brand away from Pottery Barn, has impacted your merchandise margin during 2008 and what's your expectation for this trend during 2009?

And I'm going to sneak one more in there.

Can you talk a little bit more about the alternative rent agreements that have you in place, what is the penetration of those and how has that impacted your profitability recently?

Thanks.

The question regarding the back half of the year is a really easy one.

The inventory reduction that we had, we had substantial inventory clearance in the back half and quite frankly, we wouldn't even have the inventory now with our inventories as tight as they are, we wouldn't even have the inventory to run a program like that in 2009.

So that margin change that you see in the back half is substantially coming from the mix of full priced selling versus markdowns.

As it relates from a shift from Pottery Barn to Williams-Sonoma, we are -- both brands, as you know, will be down in 2009 and we don't disclose brand profitability.

So we're going to let you go to the third question, Howard, which is the discussion of alt rents and how that might work or benefit us in this kind of an environment.

Well that's not something we talked a lot about publicly.

We do have a variety of leases and one of those is a lease that you're calling I guess an alternative rent lease and that's where the sales drop below some fixed -- pre-fixed number and at that point the expense to the landlord's charges change from a fixed rent to a gross rent, percentage of the gross, which would include his rent and charges as a percent to sales.

So it would tend to help us in a down period.

That's why we did them and we do have a significant number of those, wouldn't want to say exactly how many but it's a significant number of our leases.

It's less than half, but significant.

Our next question will come from Scot Ciccarelli with RBC Capital Markets.

Hey, guys, Scot Ciccarelli.

Two questions, if I may.

First of all, I know it's not necessarily practice but there's a lot of questions regarding regional discrepancies and sales trends.

Any color on that would be very helpful.

Also, any kind of details regarding the decline that we're seeing in gross margins, Sharon, can you give us a better feel for what portion of that is the deleveraging of occupancy versus what is the actual reduction in merchandise margins?

The question regarding regional discrepancy, we are not seeing any material call out that you could take away and say if this got better in that region, then this clearly would help.

The housing areas in the country, the areas that we all know about, those areas of course have been more challenged than the others.

But in general, there is nothing there that I would say is something that you could take away from and you could really pull out and say this is where we are.

As it relates to the question about the occupancy versus the cost of merch, as you know, we don't break out those two line items separately.

However, it is in the fourth quarter and into the full year this year, the inventory clearance was a substantial issue for us and they were both material contributors to the decline, the 770 basis point decline.

Going into 2009 of course the selling margins, we talked in our prepared remarks, is expected to improve by 50 to 100 basis points, that's the selling margin.

I want to make sure that we don't confuse that with gross margin because we will also have occupancy deleverage next year.

But we are already within our numbers assuming a 50 to 100 basis point improvement and would hope to see something better than that but it all depends on the promotional environment outside the Company.

But as far as having the inventory, with the type of inventory clearance we did in the third and fourth quarters, we just don't have that kind of inventory.

Our next question comes from Laura Champine with Cowen and Company.

Good morning.

We're just trying to get a better sense of your leverage points with the big changes that you're making in your overall cost structure.

Can you talk about what kind of a comp you would need to have flat operating margins?

And then if we can think about it this way, whatever incremental percentage of sales, what impact that has on your overall operating margins?

Laura, I think for the conference call today, I think that is a difficult question for our Company because for most retailers, they can take their fixed occupancy cost and they can answer that question.

With 40% of our business coming from direct and then not having clear visibility to where the sales are going to come from, it is a much more complex question and it's what, quite frankly, has allowed our performance to be in the spirit of the way we're doing it strong, because we have the flexibility to flex that direct business and if we-- depending on what is happening in the environment, decisions will be made about catalog circulation.

So it is not a simple answer and I think for the benefit of time on this call this morning, that is something that-- this is an interesting question for all of you, I'm sure, perhaps we'll discuss going forward in further.

But in the spirit of this call today, I don't think that we can give you a specific answer because there's too many scenarios you have to consider.

And we will now take our final question from Marni Shapiro with The Retail Tracker.

Hey, guys.

Thanks for getting me in there.

I have two housekeeping questions and then just one bigger picture.

I'm curious about your shrink reserve for '09 if you've planned it up, given that the economy is weaker, we sometimes see those things go hand-in-hand.

And if you can clarify on your circulation, you guys are calling it down for '09.

I was curious if this was across all of the brands and if it was number of books or pages?

And then just a big picture question, if you wouldn't mind.

I appreciate that you guys are playing very strong defense, which is important right now.

But you've lost a lot of competition or a lot of your competition is struggling at both the low end and the high end.

So I guess I just want to hear from you guys that at the same time that you're aggressively playing defense, that you're also aggressively playing offense to secure your position in the market when we do eventually come out of this as the strongest player.

Okay.

Marni on your question about shrink in 2009 the answer to that is inherent in our guidance is an assumption that the shrink that we saw in 2008 would not recur in 2009 and there is definitely a level-- a higher level of shrink in the 2009 number.

So I don't want you to turn that into something highly material but shrink isn't material to our Company just in total but yes we are assuming that.

On the catalog circulation question, the answer is yes, that circulation is down in all brands and there's different degrees, but we definitely will be down in all brands and the catalog circulation optimization strategy is more mature in some brands and in some areas and then we keep finding new ideas.

So that would take us to a different place so those are -- that's the answer to that one.

And then as far as this question about the offense versus the -- taking the offense versus the defense, Howard, could you speak to the competitive environment, how we see ourselves playing in that?

Yeah.

Marni, while we have spent the last six to 12 months really working on resizing our cost structure, we really throughout that whole process, we've not lost touch with the customer and improving everything from our price points to our service to our people, all the things that we do, and I hope that we never do.

I mean, I would say that now our major programs are in the area of improving the service in our stores and the programs that we have in our stores for our customers.

We put in designer stores in Pottery Barn, designer services I mean in Pottery Barn where we're reaching out to the customer and going into their homes, which is a new program for us.

We've driven about 14% of our sales in Pottery Barn, I think it is, with what we call clientelling which is personal book selling or where our people are calling their best customers as new goods come in and asking them about -- getting them back into the store to look at the merchandise.

That's on the merchandise front.

I mean we've-- we're spending a huge amount of time across the board in trying to improve every single category of goods in all of our brands.

And we've made some changes personnel-wise to do that.

We've got a very strong focus on that and that's also true with our direct business.

I mean, Internet, we've reprioritized the Internet.

We're spending a lot more money and time on it.

We've got a much more advanced vision probably than we had three years ago and we are starting to see some results from it.

So across the board, let me assure you, that we're on offense and we do think that we ought to gain share as these people drop out along the way.

So-- hello?

Did I lose everyone?

Okay.

So is that the last question?

That is the last question.

Well, let me thank all of you for joining us today and we appreciate your time and support and we'll talk to you next quarter.

Have a great day.

Thank you for your participation and have a great day.