Williams-Sonoma Inc (WSM) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Williams-Sonoma, Inc., fourth-quarter and fiscal-year 2010 earnings and fiscal-year 2011 guidance 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 now like to turn the call over to Steve Nelson, Director of Investor Relations, to discuss the non-GAAP measures and forward-looking statements.

Good morning.

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

Our press release and this call contain non-GAAP financial measures that exclude the impact of unusual business events.

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 measure, and an explanation of why these non-GAAP financial measures are useful, are discussed in Exhibit 1 of the press release.

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 2011 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 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 Laura Alber, our President and Chief Executive Officer, to discuss our fourth-quarter and fiscal-year 2010 results and our outlook for 2011.

Good morning and thank you for joining us.

With me today are Sharon McCollam, our Chief Operating and Chief Financial Officer, and Pat Connolly, our Chief Marketing Officer.

Fiscal 2010 was a year of record performance for our Company.

Each of our brands ended the year stronger than it began, and aggressive and proactive initiatives across the organization led to new milestones in profitability.

We are particularly pleased with the progress we made in merchandising, marketing, customer acquisition, and customer service as it was these initiatives that allowed us to attract new customers to our brands and gain market share all year.

In the fourth quarter our results, once again, significantly exceeded expectations as net revenues increased 10% and diluted earnings per share increased 26% to $1.08 per share.

We ended the quarter with over $600 million in cash, after returning nearly $185 million to our shareholders over the past 12 months, and today announced a 13% increase in our quarterly dividend on top of the $125 million share repurchase program that we announced in February.

During the fourth quarter, direct-to-customer revenues increased 17% and comparable store sales increased 5.2%.

On a 1-, 2-, and 3-year basis, year-over-year growth rates continued to improve as we introduced more authentic, artisanal, and exclusive product to the market and further enhanced our value proposition.

We also increase our investment in e-Commerce; elevated our in-store experience to a new level; optimized our advertising costs by redeploying less productive catalog circulation into more productive e-marketing initiatives; and reengineered our supply chain, to generate shipping savings for our customers.

In our core brands, the sales trends improved in every concept, and we saw significant growth in new customer acquisitions.

In total, fourth-quarter core brand net revenues increased a better-than-expected 8%.

In our emerging brands, net revenues increased 21%.

West Elm and PBteen continued to exceed expectations on both the top and bottom lines, and the retail restructuring of Williams-Sonoma Home was completed, including the closure of all standalone retail stores.

For the full year, our results also significantly exceeded our expectations.

In fiscal 2010, net revenues increased 13% and non-GAAP diluted earnings per share increased 105% to a record $1.95.

Our non-GAAP pretax operating margin increased 460 basis points to 9.8%, and our direct-to-customer segment reached a new level of profitability as e-Commerce revenues increased 27%.

To achieve these results we drove double-digit revenue increases in both our core and emerging brands.

We also significantly improved our selling margins, lowered our occupancy costs, and increased the efficiency of our total marketing spend.

In our supply chain, we continued to see ongoing customer service and cost-reduction benefits from our distribution, transportation, packaging, and quality returns initiatives.

These initiatives included implementing Phase 1 of our multiyear East Coast distribution consolidation; optimizing our inbound and outbound packaging costs; improving efficiency in our personalization operations; and consolidating shipments of customers' furniture and non-furniture orders into one delivery.

Another significant supply chain initiative was Asian sourcing, where we expanded our in-country operations.

This initiative has allowed us to establish factory-specific expertise; improve vendor performance; and reduce returns, replacements, and damages.

We are gaining similar efficiencies from the expansion of our North Carolina upholstered furniture operation, which is now a major supplier of the Company's upholstered furniture.

In information technology we made significant enhancements to our e-Commerce platform, particularly in the areas of on-site search, customer engagement, mobile and social media.

All of these investments drove increased traffic, higher conversion, and a superior on-site experience for our customers.

We also launched new e-gift card functionality in all brands in the third quarter and member-based shipping in the Williams-Sonoma brand in the fourth quarter.

In direct marketing we implemented new functionality that allowed us to make significant advancements in the relevance of our e-marketing programs.

We were able to increase our targeted impressions by 80%.

While much opportunity lies ahead for us in all of these areas, our 2010 progress in these initiatives allowed us to attract new customers to our brands and capture significant market share.

In real estate, for the second consecutive year we successfully reduced our retail occupancy costs and closed an additional 24 stores, or 2% of our retail leased square footage.

In business development, global expansion was a key focus for us this year, as we opened our first six franchise stores in Dubai and Kuwait.

We are extremely pleased with the performance of these stores and have gained valuable expertise in franchise operations with our Middle East partner, M.H.

Alshaya.

Together we are expecting to open additional stores in this region, including seven next year.

We're also in the preliminary exploration phase for retail expansion in other parts of the world, with a goal to open a new region in fiscal 2012.

As we look forward to 2011 our focus is on gaining market share and improving profitability.

To gain market share we will continue to attract new customers to our brands through creative, innovative, and relevant product offerings, including exclusive Internet assortments; increased investment in e-Commerce; highly targeted multichannel marketing, including the expansion of our in-store clienteling services; and expansion of our brands into new categories, new markets, and new geographies including the rollout of international shipping in the back half of the year.

It is not coincidental that all of these market share initiatives have an e-Commerce facet to them.

The Internet is our fastest-growing channel and a key component of our future strategy.

We have a long-standing direct-to-customer heritage, a rich house file, and an expansive digital asset portfolio that allows us to interact with our customers in ways our competition cannot.

As such, we are planning to increase our Internet investments next year to capitalize on the significant opportunity we see ahead.

The Internet has changed the way our customers shop, and the online brand experience has to be inspiring and seamless.

Our customer service initiatives are also a key focus this year, as we expand our clienteling services and in-store event programs.

We believe the customer experience, whether online or in our retail stores, is a significant brand differentiator.

These initiatives are engaging new customers to our brands while at the same time allowing us to take our existing customer relationships to new levels.

To improve profitability in fiscal 2011, we will implement new efficiencies in our worldwide supply chain; drive increased traffic and higher sales per square foot in our retail stores, by enhancing the customer experience; and we will continue to expand e-Commerce.

E-Commerce is not only our fastest-growing but also our most profitable channel.

Therefore its growth as a percentage of total Company revenues increases overall corporate profitability.

As such, in 2011 Internet growth is expected to drive the direct-to-customer segment to 43% of total Company revenues versus 41% today.

From an investment perspective in fiscal 2011, we expect capital spending to be in the range of $135 million to $150 million, with over a third of that in e-Commerce and the supply chain that supports it.

An additional $25 million is expected to be invested in incremental SG&A to support our longer-term e-Commerce, international, and business development growth strategies.

While these SG&A investments are dilutive to earnings in fiscal 2011, we expect them to begin to lever in fiscal 2012 and beyond.

From a business development perspective, we will continue to invest in organic growth strategies.

This has always been a key strength of ours, and we believe we should always have several great ideas under development at any time.

But we also believe that there are opportunities to acquire new businesses that could help us more quickly achieve our growth objectives.

And we will assess these opportunities as they come along.

Including all of these investments, we expect fiscal 2011 to be another record financial year, with net revenues increasing in the range of 4% to 6% and non-GAAP diluted earnings per share increasing in the range of 8% to 12%.

Also, during 2011 we expect to return nearly $200 million to shareholders through dividends and share repurchases.

I will now turn the call over to Sharon for additional details on our 2010 performance and 2011 guidance.

Thank you, Laura.

Good morning.

As Laura said earlier, our results for the fourth quarter substantially exceeded our expectations, as the initiatives we set forth for the year delivered greater benefits than we would have expected.

We could not be more pleased with this performance and are encouraged about the opportunity it signals for 2011.

The P&L highlights for the fourth quarter were as follows.

Net revenues increased 10% to $1.2 billion with 17% growth in the direct-to-customer channel and 5.2% comparable store sales growth in the retail channel.

Catalog circulation increased 2%; but based on the benefits of versioning, pages mailed decreased 1%.

Non-GAAP diluted earnings per share increased $0.22 to $1.08 versus $0.86 last year and was $0.10 over the high end of our guidance.

Versus our guidance, higher sales growth, stronger selling margins, lower advertising costs, and lower other general expenses drove these better-than-expected results.

Non-GAAP gross margin increased 80 basis points to 42.3%.

This improvement was primarily driven by sales leverage of fixed occupancy expenses; a reduction in inventory-related reserves; a decrease in occupancy expense dollars; and a channel mix-shift rate benefit due to a higher proportion of total Company revenues being generated by the DTC channel.

This improvement was partially offset by higher inventory shrinkage.

Non-GAAP occupancy costs in the fourth quarter were $130 million versus $132 million last year and leveraged 120 basis points.

Non-GAAP SG&A decreased 130 basis points to 26.6%.

This decrease was primarily driven by lower fourth-quarter incentive compensation and other general expenses.

This decrease was partially offset by a channel mix-shift rate impact that resulted from a higher proportion of total Company revenues being generated by the DTC channel, which incurs higher advertising costs than the retail channel.

I would now like to comment on our non-GAAP earnings before tax as a percentage of revenues in each of our business segments.

At the total Company level, fourth-quarter non-GAAP earnings before tax as a percentage of revenues increased 210 basis points to 15.7%.

This increase was driven by a 90 basis point increase in the retail segment; a 30 basis point decline in the direct-to-customer segment; and a 160 basis point improvement in the unallocated segment, which carries all corporate support costs.

The 90 basis point improvement to 21.1% in the retail segment was primarily driven by the leverage of fixed occupancy costs and a reduction in inventory-related reserves, including a 50 basis point year-over-year benefit in Williams-Sonoma Home, partially offset by increased inventory shrinkage.

The 30 basis point decline to 22.1% in the direct-to-customer segment was primarily driven by a higher promotional cadence during the quarter across all brands and the operating margin impact of member-based shipping in the Williams-Sonoma brand.

These impacts were partially offset by the sales leverage of fixed occupancy and employment expenses.

The 160 basis point improvement to 5.8% in the corporate unallocated segment was primarily driven by lower fourth-quarter incentive compensation costs and a reduction in other general expenses.

Switching now to the full year, fiscal 2010 net revenues increased 13% to $3.5 billion, with 19% growth in the direct-to-customer channel and 9.8% comparable store sales growth in the retail channel.

Internet revenues increased 27%.

Non-GAAP gross margin increased 350 basis points to 39.2%, driven by similar factors as Q4 plus the strong year-over-year recovery of selling margins we saw earlier in the year.

On a full-year basis, non-GAAP occupancy costs were $506 million versus $515 million last year and leveraged 220 basis points.

Non-GAAP SG&A decreased 110 basis points to 29.4%, driven by lower employment costs, a decrease in other general expenses, and a reduction in the total Company advertising expense rate.

Catalogs circulated during the year increased 1%, and catalog pages decreased 1%.

Finally, non-GAAP diluted earnings per share more than doubled from $0.95 to $1.95.

This increase was primarily driven by our strong recovery of $400 million in revenue at selling margins approaching historical norms, tight expense controls, and the operating margin rate benefit from the continuing channel mix-shift of revenue to the more profitable DTC.

At the total Company and segment level, non-GAAP earnings before tax as a percentage of net revenues in fiscal 2010 increased 460 basis points to 9.8%.

This increase was driven by a 430 basis point increase in the direct-to-customer segment; a 390 basis point increase in the retail segment; and a 40 basis point improvement in the unallocated segment.

The 430 basis point increase to a record 21.5% in the direct-to-customer segment was primarily driven by the optimization of advertising spend, stronger selling margins, and the sales leverage of fixed occupancy and employment costs.

The 390 basis point improvement to 12.9% in the retail segment was primarily driven by sales leverage of occupancy and other fixed costs, stronger selling margins, and a decrease in occupancy expense dollars.

The 40 basis point improvement to 6.6% in the unallocated segment was primarily driven by sales leverage of fixed expenses as well as year-over-year reductions in occupancy and other expenses.

I would now like to discuss our fiscal 2011 guidance.

As we look forward to 2011, on net revenue growth of 4% to 6% we are projecting an improvement in non-GAAP diluted earnings per share in the range of 8% to 12% and an improvement in our non-GAAP pretax operating margin of up to 40 basis points, to a range of 9.8% to 10.2%.

To drive these results we are expecting DTC revenues to increase in the range of 9% to 12% and comparable store sales to increase in the range of 2% to 4%.

Comparable brand revenue growth, a new metric that includes both retail comparable-store revenues and total direct-to-customer revenues, is expected to increase in the range of 6% to 8%.

This new metric will be reported for the first time in Q1.

At the brand level, this metric will replace our existing comparable-store sales metric.

However, we will continue to report comparable store sales at the total Company level.

Non-GAAP gross margin in fiscal 2011 is expected to increase 50 to 70 basis points, driven by 10 to 50 basis points of leverage in occupancy costs and ongoing benefits from supply chain efficiencies.

In dollars, occupancy costs are conservatively estimated to increase approximately 2% to 3%.

Non-GAAP SG&A in fiscal 2011 is expected to increase by 30 to 50 basis points.

This increase will be primarily driven by $25 million or 70 basis points in incremental investments to support our longer term e-Commerce, international, and business development growth strategies.

These costs will be predominantly in IT and e-Commerce headcount and the infrastructure necessary to support them, including additional office space.

This increase will be partially offset by fixed cost sales leverage of approximately 20 to 40 basis points.

Fiscal-year 2011 non-GAAP diluted earnings per share is expected to increase in the range of 8% to 12% to a range of $2.11 to $2.19, primarily driven by earnings flowthrough on incremental sales, partially offset by the incremental SG&A investment we just discussed.

As we enter this call today, we continue to be encouraged by the performance of all of our brands and remain committed to delivering on the expectations we have set for ourselves with our shareholders.

I would now like to turn the call over to Laura to discuss the Williams-Sonoma, Pottery Barn, and West Elm brands.

Thank you, Sharon.

In the Williams-Sonoma brand, fourth-quarter net revenues increased 5% as direct-to-customer revenues reached a quarterly all-time high and comparable store sales increased 2%.

From a merchandising perspective, we saw strong growth in key categories that offered innovation and great value, including electrics, cook's tools, and cookware.

Our competitive professional calendar and the launch of Williams-Sonoma Reserve shipping program, in addition to our great service and innovative and compelling merchandising strategies, drove these better-than-expected results.

We are extremely pleased with the Reserve program's performance and feel this is significantly enhancing our competitive positioning against other online retailers.

As we enter 2011 we will execute against the following initiatives to continue to drive profitable growth and enhance the brand's authority by introducing new, exclusive, innovative products; driving value across the brand to attract and engage more customers; growing customer acquisition through increased e-marketing, including the rollout of international shipping in the back half of the year; engaging our most loyal customers through in-store events, online community, social media, and special programs; and expanding the reach of the brand through collaborations with the cooking community across all channels.

We will also integrate Williams-Sonoma Home into the Williams-Sonoma website in the third quarter to better serve our wedding registrants and allow for a simpler shopping experience for our customers.

In the Pottery Barn brand, net revenues in the fourth quarter increased a substantially better-than-expected 12%.

The direct-to-customer channel traffic and conversion were a key focus, and we achieved very strong results from our highly targeted e-Commerce and catalog marketing initiatives.

Comparable store sales increased 8.9%.

From a merchandising prospective, all key categories -- particularly textiles, furniture, and decorative accessories -- delivered impressive growth.

Our compelling artisanal product assortment, combined with great value and a highly interactive in-store customer experience, drove these stronger-than-expected results.

As we look forward to 2011, we will continue to capitalize on those initiatives that have driven Pottery Barn's strong performance all year, including a cohesive merchandise strategy in every category; a strong value proposition including planned category promotions; a superior customer service offering including authoritative design and entertaining services; and a greater investment in e-Commerce and e-marketing to further strengthen our Internet presence.

We will also continue to expand the reach of the Pottery Barn brand into new products, new markets, and new geographies, including new stores in the Middle East and shipping internationally from the US in the back half of the year.

Now I would like to talk about Pottery Barn Kids.

In the fourth quarter, Pottery Barn Kids net revenues increased 6% despite a 9% reduction in operating retail leased square footage.

In the direct-to-customer channel, new customer acquisition was a significant focus, and we achieved very strong results from our highly targeted e-Commerce and catalog marketing programs.

Comparable store sales increased a better-than-expected 4.6% as our clienteling initiatives continue to drive increased engagement with our customers.

From a merchandising perspective, we saw positive growth across all major product categories, with particular strength in decorative accessories, nursery, and textile.

An expanded product assortment, a significantly improved value proposition, and a traffic-generating promotional calendar drove the better-than-expected performance in these categories.

As we look forward to 2011, we will continue to focus on those initiatives that are driving customer acquisition and customer engagement, as well as profitable multichannel growth.

These initiatives include creating inspirational and innovative designs at a great value; leveraging our strengths in multichannel retailing to deliver the best service and customer experience possible; driving growth to the Internet through improved search functionality, increased conversion, and an enhanced social platform; and expanding into new markets, including new stores in the Middle East and the launch of international shipping later in the year.

I would now like to talk about the PBteen brand.

PBteen was one of the best-performing brands in the Company in the fourth quarter, as net revenues increased 23% on top of an 18% increase last year.

A highly innovative product assortment, a strong value proposition, and substantial growth in the customer house file drove these better-than-expected results.

From a merchandising perspective, all key categories delivered strong growth, as relevant holiday gift offerings, timely planned promotions, and great value extracted new customers to the brand and increased traffic to our website.

As we enter 2011 we will continue to build on our 2010 success.

Our mission is to be the leading home furnishings destination for tweens and teens.

To achieve this objective we will increase brand awareness by investing in highly targeted online and off-line customer acquisition vehicles; expand the reach of the brand by offering a greater number of choices in products, price, and aesthetic; and enhancing our authority as a design resource.

We will increase traffic and conversion in e-Commerce through improved site functionality, social networking, and new levels of customer engagement; grow underserved categories through product line expansions; increase value and category dominance; and enter new markets, including launching international shipping in the back half of the year.

All of these initiatives will allow us to continue to expand our rapidly growing customer base and take the brand to a new level of performance.

Now I would like to discuss West Elm.

West Elm delivered a record fourth quarter as year-over-year revenues and operating profitability reached new highs.

All key product categories delivered positive growth during the quarter and, consistent with our strategy to broaden the appeal of the brand and promote purchase frequency, textiles, decorative accessories, and tabletop were our strongest performing categories.

New product introductions, a substantially enhanced value proposition, and highly effective multichannel marketing drove these better-than-expected results.

We were particularly pleased with the exceptional performance of e-Commerce, which continued to drive significant growth in the brand.

A redesigned e-Commerce platform, highly productive e-marketing, and a significantly improved on-site experience for the customer drove record traffic and increased conversion, which is continuing in 2011.

As we look forward to 2011 we will profitably grow the West Elm brand by engaging with a broader range of customers by rebalancing the product mix and offering the customer greater choices in product, price, and aesthetic; expanding our product assortments into categories beyond furniture; creating an inspirational store, Web, and catalog experience; and offering a compelling value proposition.

We will also take advantage of opportunities that arise to expand our retail portfolio now that retail profitability is achieving new milestones.

As of today, we are expecting to open two new stores in fiscal 2011.

While we are aggressively looking for additional locations to further expand the store base, we are also opportunistically closing two stores this year due to co-tenancy and initial site selection issues.

We believe all of these initiatives will improve our competitive positioning and allow us to profitably grow this brand going forward.

I would now like to open the call for questions.

Thank you.

(Operator Instructions) Matthew Fassler, Goldman Sachs.

Good morning, congratulations on your fine results.

My question focuses on the long-term future of the store portfolio.

You gave us your detailed plan for 2011.

You spoke to West Elm as a growth vehicle.

How do you envision your store portfolio evolving in the years ahead?

Do you see further consolidation in your larger brands, Sonoma and Pottery Barn?

Or would you say that you are at a level that you are comfortable with today?

Well, Matt, in the guidance this morning that we provided, we are closing an additional 20 stores next year; but I think it is important to note that in that base five of those stores are closings that will be replaced by Williams-Sonoma Home -- by other brand stores.

They're Home stores that are closing, and we are moving the other brands into those locations.

So while it looks like 20, the number is 15 plus those five stores.

And now I'm going to let Laura talk about her vision for the retail portfolio.

Great, thanks.

Hi, Matthew.

We are looking at each market individually and the trade area to understand where we want to be positioned for the long term.

We have done that -- and I have been on many of these trips with our real estate department over the past year -- and made some very good decisions about closing stores in markets where either we have too many stores already, or whether the real estate isn't up to par with where we would like it to be.

We have found great success in closing those stores and moving a large portion of those sales to surrounding stores.

So this continues to be our approach.

As going in -- walking the malls ourselves and making those decisions in every market for every single brand across the country.

So I imagine you are going to continue to see us consolidate in some of these multi-store markets as the opportunity arises, particularly if, when we reup the lease, we don't get a favorable rent deal; you may see us close a store.

We also see some markets performing better, and new markets are out there that we believe we can open stores in.

We do see more opportunity in Canada, as an example, to open stores in areas where we don't have them today.

But we are in no rush, and it's going to be based on whether we can achieve the retail profitability benchmarks that we have set for ourselves.

Matt Nemer, Wells Fargo Securities.

Morning.

Congrats on a great performance.

Two questions.

First, on the $25 million in incremental SG&A, have you factored any incremental revenue from international shipping into your back-half guidance?

Then secondly, I realize it is early; but on Williams-Sonoma Reserve, can you talk to what you are seeing in terms of average order values and I guess margins on those orders?

Thank you.

Matt, as it relates to international shipping in the back half, we have some very conservative assumptions in the back half.

I would say that if the program is as successful as we believe it can be -- and why we are investing in the program -- we certainly could see some upside to those numbers in the back half.

On Williams-Sonoma Reserve, we have been in the program now for a quarter, and we believe that the information around Williams-Sonoma Reserve is very competitive.

So we are going to not be releasing metrics on the program today.

We will think about it maybe at some point in the future; but right now we are out there and we are one of few that are, and we really feel like this is something that we need to keep internally here at Williams-Sonoma.

Budd Bugatch, Raymond James.

Good morning, everyone.

It's actually T.J.

McConville filling in Budd.

Congratulations on the quarter and the year.

Thank you.

The question, Sharon, is about some of the guidance.

You gave us a lot of the detail on the puts and takes.

Specifically the gross margin guidance, it looks like you are assuming some fixed occupancy leverage.

How about some of the other buckets in there?

What are the assumptions for things like maybe first cost or any of the other items you have got in there?

I think we have taken a pretty conservative approach to first cost.

Basically we have talked all year and in the last conference call about the fact that, while we see substantial increases in commodity costs -- we can talk about cotton, we can talk about now fuel -- that we are in a position to have offsets that are unique to Williams-Sonoma.

So in 2011 we believe at this time that we will be able to hold our own in the cost of merch.

From the other categories we continue to see the benefits from our supply chain initiatives.

But of course we like all retailers have had to play in an assumption for higher fuel costs, and we have done so.

So that would be the picture.

Clearly, occupancy is going to lever substantially, and we will continue to make progress in that as we close stores and we continue to optimize the real estate portfolio.

Colin McGranahan, Sanford Bernstein.

Good morning.

First, just a comment.

I think the total brand revenue metric is interesting; it will be helpful.

But I am glad you are continuing to report retail comps as well.

I think that is important as well.

So appreciate that.

Question is on DTC margins.

Obviously it was a little bit more promotion, and you had the cost of shipping in there.

Can you give us a little quantification in the quarter of how much shipping pressured DTC margins?

And whether the promotional cadence was planned, or you found you had to step up, given the environment?

Then thinking about DTC margins going forward, clearly some of the investments that you are making in e-Commerce will impact those DTC margins.

So would you expect those to be up for the year, or would you expect them to be down for the year?

In the gross margin for next year, we -- let's talk about the gross margin for the fourth quarter and the promotional cadence.

If you go back to our third-quarter conference call transcript, you will see, Colin, that we talked about the fact that this was a strategy for us, to introduce enhanced value to our customers.

And we think that that strategy is attracting new customers to our brand and allowing us to deliver the kind of results that we delivered here today.

So it was planned, and we will continue to look at programs like Williams-Sonoma Reserve if we believe that they can drive enough incremental revenue to pay for themselves.

We are not going to implement programs that don't bring top-line revenue.

But on the other hand, what we don't want to do -- and this is really important to us -- is what we don't want to do is get obsessed with operating margin metrics and then leave sales on the table because we are not doing what we need to do to introduce new customers to the brand.

Neely Tamminga, Piper Jaffray.

(technical difficulty) consumer.

How are you feeling about outdoor, some of the discretionary entertainment categories, etc.?

Thanks.

Neely, you got cut off in the beginning of your question.

Would you mind repeating it?

Sure.

I am just wondering how some of the (technical difficulty) spring, how some of these key discretionary categories like outdoor entertainment, etc., and what that might be telling you about the consumer and where you are gaining some share.

Thanks.

Laura, would you like to take that?

Yes, thanks.

You know, it's early.

The outdoor season really starts a little bit later than today.

But our initial results are good so far.

We also have had strong response to our seasonal holidays, Valentine's Day.

And Easter, albeit later this year, is off to a good start.

Christian Buss.

Congratulations on a really impressive quarter.

I'm wondering if you can provide some more color for us on the incremental CapEx and SG&A spend.

Maybe bucket for us where that spending is going.

Absolutely.

As I think we mentioned in the prepared remarks, that about a third of it is going into e-Commerce and the supply chain that is supporting e-Commerce.

We continue to see e-Commerce as the fastest-growing channel.

You can see it in the numbers.

We are investing in both new functionality on the site, search.

It is all the things, Christian, that you would expect from that standpoint.

We are also opening some new stores, as I said earlier.

We closed five of our Williams-Sonoma Home stores, but we are also opening additional stores in our brands.

We are opening the new West Elm stores.

We are doing some refreshes and remodels, of course, of our existing store base, which we think is critical.

And we will continue to have an ongoing base level of capital invested in that.

We are also investing in enhanced technology in our stores.

I think this -- some -- this goes along with this conversation about comparable brand revenue reporting.

Because in our stores our associates are interacting with customers, and customers want to interact in multiple medias, both personal interaction and then of course there is the technology interaction.

So we will be continuing to invest there as well.

Also, we are making investments in our East Coast distribution consolidation.

We talked about completing Phase 1; and of course we will have Phase 2 to complete this year.

That will be done by the third quarter.

Matt McGinley, ISI Group/McGinley.

Can you please tell me about what you are seeing in regard to promotion trends in the category?

Do you see to your tight inventory as preventing you from being price competitive in some categories?

As a follow-up to the CapEx question, can you talk about the gating you would expect to see on the CapEx in the year?

Thanks.

Laura, would you talk about the promotional environment?

Sure.

The promotional environment continued across all retailers.

You can see everybody -- big-box, including specialty -- running different promotions.

Some of them -- we track them.

Some of them are the same that they run every year; and then there's additional promotions out there.

It is clear that this is going to continue on until the customer is more comfortable.

So we are mindful of that.

We are bringing better value into our designs to combat that.

Excellent innovative design is always the best defense against promotions and copies at lower prices.

But also we are working very hard to deliver great value to our customers.

As we continue to make supply-chain improvements we are passing along a portion of those improvements to our customer in terms of better pricing, which we think is very important.

Our inventory?

As we beat our sales there are areas, pockets of inventory where we are a little tight and where we are replenishing core inventories and seasonal inventories in some cases, and seeing new categories take off faster than expected.

So obviously when that happens you don't have to take a markdown -- which is a wonderful thing, because we love regular-price selling.

I don't believe in those cases that it's impacting our competitiveness, because clearly the demand is very strong in those categories and a promotion wasn't needed.

On CapEx, Sharon, do you want to --?

Absolutely.

The capital spending -- I think what your question was, Greg, is what -- is there incremental revenue included in the guidance for the capital?

I need to take the capital in some buckets in order to answer that question.

Clearly, the biggest increase in our investment this year is in e-Commerce.

E-Commerce functionality will be rolled out through the year.

So you have a rollout that happens, and of course you are not getting the full benefit of that for the entire year as we implement the different phases of our strategy.

Search is another area that we are very focused.

Customer engagement.

You heard Laura in each of her prepared remarks about each of the brands, customer engagement is an important issue.

Social media is a key focus of ours right now.

Mobile is big.

But the issue with those is you need to be there.

You need to start interacting in those channels, and the revenue is going to follow in future periods.

So those are areas where you have to be there.

It drives customer engagement.

But the revenue is hard to project.

We will do a better job of that as we learn more about it, along with other multichannel retailers.

On the DC side we will see benefit from Phase 2 of our distribution consolidation.

You are seeing some expense savings of that, but we won't actually be doing that till the third quarter.

So again, that capital goes in this year but you get the full-year benefit in 2012.

So I think that Laura articulated it perfectly in her prepared remarks.

We're investing capital this year, and these investments will create some deleverage this year on the bottom line; but we expect to start seeing benefits for this capital to come into 2012 and beyond.

David Magee, SunTrust Robinson Humphrey.

Yes, hi.

Good morning, good quarter.

My question has to do with the international shipping later this year.

How well known is your brand overseas?

Or I guess, where is your brand best known overseas?

How do you gauge what the demand might be?

Is this something that could be meaningful in the second half of the year to the overall numbers?

I am going to let Pat Connolly take that question, Dave.

It's a great question.

Thank you.

David, we think that over the long term our brands have great appeal internationally.

The anecdotal evidence is very strong in terms of brand recognition.

Although Canada is close to the United States, we had great success in Canada.

We have had very good success in the Middle East.

So we think we can continue that around the world.

This first program of international ordering and shipping will give us a strong indication of where -- which countries have the greatest promise.

Certainly we know that the ones that are primarily English speaking in the beginning have that, but we also see other opportunities.

Anthony Chukumba, BB&T Capital Markets.

Good morning.

Just had a quick question on West Elm then one on other the international markets.

In terms of West Elm, you commented on how it was a record Q4 for sales and profitability.

It sounds like everything is going very well there.

So I guess I was a little surprised that you're not going to have any net store openings.

You're going to open two and close two.

I just would have expected you to be a little bit more aggressive in terms of opening stores.

So I just wanted to reconcile those two.

Then just in international, you mentioned entering a new international market in 2012.

I was just wondering if that would be through another sort of licensing, sort of franchising agreement -- that would be a Company-owned store?

Thanks.

On your comments about West Elm stores, what we have been doing is setting benchmarks and metrics for West Elm.

And as they achieve them we are getting more aggressive about retail store openings.

Clearly we have been talking about better-than-expected performance of West Elm now for four consecutive quarters.

Anthony, as you do that, then you are starting to look at real estate; you're getting more confident; you are moving forward.

So while we have two stores right now, our real estate teams are aggressively looking for additional real estate.

I suspect there are scenarios under which we might see maybe a few additional stores this year, a small number.

We are not committing to that.

But I will say that for 2012 we would expect that number to be greater.

The other thing you don't want us to do is to miss these opportunities to close stores where we are in a situation where the recession created co-tenancy failure that is not being resolved, or where we believe that the initial site selection isn't optimal for the West Elm brand.

So from an investor point of view and from a Company point of view, we want to continue to take advantage of those opportunities and not hang on to real estate for the long term that isn't helpful, just so that we can show a net increase in the number of stores.

On the international question, we are in the preliminary stages of looking at where to go and how to go.

We are building our international team here, and we are going to bring great experience into the Company with -- and that is going to help us really cement this plan for how we go overseas.

But at this point we don't have specific plans.

We are open to all ways of going, and each market is very different depending on the political climate and the ease of entry to the market and how much help we need.

The thing that is most critical to us is that wherever we open stores we want them to have the same standard of excellence as we do for our stores in the United States.

And that is our commitment.

Scot Ciccarelli, RBC Capital Markets.

Good morning.

This is Austin Pauls in for Scot.

My question is on the continued growth you expect to see in e-Commerce.

Is it possible at all to break out the biggest drivers there?

Whether it is higher traffic or increased conversion rates.

Also does the growth there assume continued channel shift from your retail locations?

Thanks.

Austin, we would tell you that there is nothing that we are doing in e-Commerce that is not driving incremental revenue.

Clearly we have had stated objectives as it relates to driving increased traffic and conversions.

We have said consistently that we are redeploying catalog circulation into e-marketing to enhance the revenues actually of all channels.

We continue to see that where we redeploy catalog advertising costs -- and this of course has to be measured -- we see not only incremental revenues in the e-Commerce channel but we also see incremental revenues go to the retail channel.

So this is a very fine -- you have to square-root this; it requires a lot of square-rooting.

But truly everything Laura talked about in her prepared remarks about the brands, all of those initiatives are driving increased revenue.

The one that we continue to be excited about and we continue to figure out ways to measure and to grow, because we do believe it is so important, is going to be the area of social media.

And that is an area where we are making some investments this year, and we are going to know a lot more about that as we get more aggressive into that arena.

Chris Horvers, JPMorgan.

Thanks and good morning.

I want to focus on the cash on the balance sheet.

Assuming that you return a bit over the $125 million in repurchase and $70 million to $80 million in dividend, it looks like -- on my projections -- you would end with an excess, I don't know, 6?

Now you'd maintain about $600 million on your balance sheet.

Just curious how you are thinking about that.

Is that keeping the powder dry for potentially store acceleration in '12 internationally?

Is that maybe a tack-on brand acquisition?

Or is it just a function of getting through the $125 million in repurchase and then authorizing more?

I'm going to take that question.

This is Sharon.

We believe that in this post-recession period, first of all, we have said consistently that we want to keep approximately $300 million on the balance sheet at any point in time in order to ensure that we are not dependent in any way on the capital market.

So I don't know how long we will want to do that; but at this point in the back of our minds there is still a sense of security that needs to be held on corporate balance sheet.

As we look at the return of capital to shareholders next year, when you combine the share repurchase program with the dividend that we are paying, including the 13% increase we announced this morning, that is $200 million that we are returning.

We will continue to assess our cash balances.

We as a management team and a Board do not believe that holding large cash balances earning very small returns, because of such low interest rates, is good for shareholders.

But we believe that dry powder to do big -- to be able to accelerate our growth objectives is good for the Company.

So we are just taking a look at that.

We have already announced $125 million, and we are only one month into the quarter.

So give us some time and we will keep looking at it.

Brad Thomas, KeyBanc Capital Markets.

Thanks, good morning and let me add my congratulations as well.

I was hoping that you all could just provide a little bit more color around the trends that you're seeing in your selling margin.

I believe you noted that the 4Q results were better than your expectations; but at the same time noted a higher level of promotions that you were seeing in DTC.

To that end, if you could talk a little bit more about the pricing trends, I know that over the last year you have had a great deal of success rolling out lower price point items.

Is that something that can continue, given some of the inflationary pressures?

I am going to let Laura speak to the rolling out of value in our brands, because it is a key objective for us in several of the brand sectors.

So, Laura, why don't you talk about that?

Then I will talk about the gross margin and the guidance.

Yes, the pricing trends are really product by product.

I think we have four brands with very different products in them -- from anchovies to armoires, as we like to say around here.

Each one has a different elasticity of demand, and changing every day.

We also have different opportunities by product category.

So I could say one thing about out textile programs, and of course there is pricing pressure there.

We are working very hard to hold our retailers so we don't increase them.

We are seeing our competitors raise their retails; we are tracking that closely.

A lot of people are raising their towel prices, their sheet prices.

Everywhere from the big boxes to specialty, we are seeing price increases happen there.

So that is a very different situation than exclusively designed furniture in our Sutter Street operation.

So it is a hard thing to give a categorical generalized answer to.

I guess my best answer is that across every single brand in every category we are studying the market and understanding how we can deliver to our customer and making sure that there is a reason to buy it from us.

That reason may be that we have a very competitive price.

It may be that it is exclusive to us and very new.

It may be that it goes with the rest of the assortment and therefore is the perfect pillow add-on to the rug.

Each one of those factors goes into how we price a product.

We saw further -- I guess more accelerated than we expected as we dropped some prices during the holiday season.

In some categories, the customer was extremely interested in buying our promotions, and that is the reference point we made to more promotional activities and higher demand driven by promotions in the fourth quarter.

So I hope that answers your question somewhat.

We will continue to, as I said, watch it, study it, and test new things and find areas where we should potentially raise prices and/or drop prices.

Then when you think about the margin, that is the selling margin that is inherent in the guidance that we provided this morning, as I said earlier we are going to have -- we see some cost pressure next year.

We are working on offsetting that.

We have assumed that we will be able to source into some of the value that we offered this year, particularly in brands like West Elm.

So we will see some expansion of the selling margin coming from that area.

But I think we need to be conservative -- and we were in our guidance -- about potential additional inflationary issues that may come up as we progress through the year.

One thing I will point out is that versus our peak selling margins that we delivered in 2005, we talked a lot about this in our fourth quarter call last year.

We are still 75 to 100 basis points off of that peak.

So we still have a lot of runway in front of us to recover that -- if we believe that that is the best strategy to continue to grow the Company.

One area of that, for instance, one area that we may choose -- there's different ways to deal with pricing.

Pricing comes in merchandise price; but it also comes in the value that you offer to a customer through shipping.

This year, as you know from Laura's prepared remarks, we did reduce our shipping.

We increased or enhanced our shipping value to our customers, reduced our shipping to our customers, and we offset it with some supply chain efficiencies.

So we will not stand on the sidelines and not be more promotional in that area if we believe that it can drive substantial incremental revenue.

Peter Benedict, Robert Baird.

Hey, guys.

Thanks for taking the questions.

Just one follow-up on that last question.

Just, Sharon, continue on your thoughts there on the long-term operating margin potential for the business.

That was some good insights into the selling margin; but I think in the past you have indicated maybe something 12% or better.

Where are you thinking about that right now?

How would you get there if that is the direction you want to go?

Then secondly, on that $25 million of incremental SG&A that is coming in, in 2011, should we assume that that line item goes to zero in 2012?

Or does it just remain flattish at around $25 million and that is how you get the leverage?

Thanks.

As it relates to the investment, we have -- this is obviously a significant investment for us.

We are very tight with our SG&A dollars.

You guys know that; you have followed us for years.

But again, if we see opportunity to be able to expand our business, you are always going to have to invest in front of it.

So if we decide to make a substantial investment in international, of course you're going to see some additional dollars come into those numbers.

But I feel like this year this was a significant investment for us, and we believe that a good chunk of that will sustain us for a couple of years to come.

As it relates to your operating margin question, I again just want to reiterate that what we don't want to do is obsess over the operating margin and start getting married to those if we can drive increased revenue.

However, answering your question I did mention previously that we are still about 75 to 100 basis points off of our peak selling margins.

We are also still 150 basis points -- 2005 was our best reported year.

We are still 150 basis points on occupancy away from that number.

It's 150 to 190, something like that.

So in that area, when you just add those two together, if you could just recover those, there you go with the number you threw out earlier.

But we just want to be -- you guys, what we are focused on right now is growth.

But we are -- we see significant growth in front of this business and we believe that we are gaining market share and it's profitable.

You can see them in the Q4 results, highly profitable market share.

So we are just not going to spend as much time obsessing on these little basis points on the operating margin.

Brian Nagel, Oppenheimer.

Hi, good morning.

I too would like to add my congratulations on a very nice quarter and a nice end to the year.

Thank you.

Just one quick maintenance question.

As you look at the gross margin for the fourth quarter, in your release and then your prepared comments you called out the 40 basis points from the Williams-Sonoma Home issue.

Was that embedded in the initial guidance you gave, or the guidance you gave a couple months ago?

Yes, there was -- a big part piece of that was embedded in there.

The reason for that is because we could see the liquidation initiatives being very successful, particularly coming into the fourth quarter.

We actually -- we were actually struggling; we almost ran out off inventory in Williams-Sonoma Home.

They just did an exceptional job of transitioning out of the retail channel and then of course holding only the inventory we need for DTC.

So yes, it was -- a significant piece of it was already inherent in our guidance.

Okay, perfect.

The second question I have, and at the risk of being repetitive, I know we have discussed occupancy costs a lot.

But given the adjustments you have made to the business model thus far and then some of the other adjustments you will make as we push into 2011, with respect to store closings, how should we think about the actual growth/decline in that occupancy cost line for the next several quarters?

Well, the good news or the bad news is that landlords are still very proud of their real estate.

So we're going to have lease expirations; we are going to have to have negotiations with landlords on these leases.

And we are going to stay in the best locations in the country.

So I have already guided for you or given you a purview of this year at 2% to 3% increase in occupancy.

Now a piece of that, which I am sure you picked up from Laura's prepared remarks, is coming from some new office space in San Francisco.

As we add all of these people of course we need additional space to support that.

So in the retail side we are closing -- net-net you have got 20 closings next year.

You have got some closings next year.

You will have closings out there.

So between those and the negotiation we are doing with the landlords, we feel that you are going to see increases probably in the low single digits would be my guess.

That is all the time we have for questions today.

I would like to turn the call back to Laura Alber for any closing remarks.

Thank you all for joining us today.

We appreciate your time and your support, and we will talk to you next quarter.

Have a great day.

Thank you for joining us today.

We appreciate your time and support, and we will talk to you next quarter.

Have a great day.