Williams-Sonoma Inc (WSM) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Williams-Sonoma, Inc.

first-quarter 2011 earnings conference call.

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

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

Also, this conference is being recorded.

Now I'd like to turn the conference over to Steve Nelson, Vice President of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

Please go ahead, sir.

Good morning.

This morning's conference call should be considered in conjunction with the press release 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 measures, and an explanation of why these non-GAAP financial measures are useful, are discussed in Exhibit 1 of this press release.

Also included in this morning's press release and conference call is a new metric, Comparable Brand Revenue Growth, that includes both retail comparable store revenues and total direct-to-customer revenues.

This metric also incorporates outlet stores within their respective brands.

At the brand level, this new metric will replace our existing Comparable Store Sales metric.

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

Please refer to Exhibit 2 of this morning's press release for a five-year history of this metric by brand by quarter.

The forward-looking statements included in this morning's call constitute forward-looking statements in 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 first-quarter 2011 results and our fiscal year 2011 outlook.

Thanks, Steve.

Good morning, and thank you for joining us.

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

The first quarter was another very strong quarter for our company.

Net revenues increased 7% and non-GAAP diluted earnings per share increased 30% to a record $0.30 per share.

Comparable brand revenues increased 9%.

Non-GAAP operating margin increased 110 basis points, including the planned impact of incremental SG&A that is being invested in e-commerce, international and business developments.

What drove these better-than-expected results were an innovative merchandise assortment supported by compelling price points, highly-targeted multi-channel marketing initiatives, and a superior customer experience.

We are particularly pleased to see such strong growth in both channels, as direct-to-customer revenues increased 13% and retail comparable store sales increased 7%.

During the quarter, we continued to invest in our key growth initiatives, including increasing our penetration in e-commerce, expanding the reach of the West Elm brand, and extending our international presence.

In e-commerce, net revenues increased 21% to 38% of total Company revenues, as Web traffic reached a new quarterly high.

Several key initiatives drove these strong results, including the ongoing optimization of natural search and improved relevance of event-triggered marketing.

In West Elm, comparable brand revenues increased a record 31%.

In International, we added two new franchise stores in Saudi Arabia, and launched our first international e-commerce site in PBteen.

Our remaining international sites will launch in Q2.

Across all brands and all channels, we continued to focus on enhancing the customer experience.

During the quarter, we launched a new Professional Chefs Program; we introduced several new online community activities and streamlined website usability.

We also expanded our retail clienteling and in-store event programs.

Each of these initiatives is allowing us to attract new customers to our brands, and taking our existing customer relationships to a new level.

In our core brands, comparable brand revenues increased 7%.

Pottery Barn Kids saw the greatest increase, followed by Pottery Barn and Williams-Sonoma.

Our emerging brands, including West Elm and PBteen, comparable brand revenues increased 22%.

In international, we are onboarding our new leadership team and are now aggressively exploring opportunities for retail expansion in other regions of the world.

Our eight franchised stores in Dubai, Kuwait, and Saudi Arabia continue to exceed expectations, and we expect to add five additional stores in the back half of the year.

In our supply chain, we are continuing to see ongoing customer service and cost reduction benefits from our distribution, transportation, packaging, and upholstered furniture initiatives.

These initiatives include optimizing our inbound and outbound packaging costs, streamlining our Southeast home furniture delivery operations, and leveraging our expanded in-country sourcing operations in Asia.

As we look forward to Q2, our business is on track to deliver another record quarter.

Each of our brands began the year with a strong merchandising and marketing plan.

And despite the ongoing softness in the overall home furnishings category today, we are continuing to gain market share.

As such, we are reiterating our second-quarter non-GAAP EPS guidance of $0.33 to $0.36 per share, and increasing our full-year guidance for the $0.02 outperformance we delivered in Q1.

This brings our fiscal year 2011 revenue growth to a range of 4% to 6%, and our non-GAAP diluted EPS to a range of $2.13 to $2.21 versus $1.95 last year.

I will now turn the call over to Sharon for more details on the first quarter and our guidance.

Thank you, Laura.

Good morning, everyone.

As Laura just said, our first-quarter performance did once again exceed our expectations, particularly with the home furnishings industry reporting softer-than-expected growth during the quarter.

Our net revenues increased a better-than-expected 7% to $771 million, including 9% comparable brand growth.

Direct-to-customer revenues increased 13%, including e-commerce growth of 21%, and retail revenues increased 4%, including comparable store sales growth of 7%.

Non-GAAP diluted earnings per share increased 30% to $0.30 per share, which was $0.02 better than the high end of our guidance.

Successful plan promotions, resulting in highly-productive advertising costs, and greater-than-expected benefits from our cost containment initiatives, drove these better-than-expected results.

Non-GAAP gross margin increased by 60 basis points to 38.4%.

This increase was primarily driven by the leverage of fixed occupancy expenses due to increasing net revenues, partially offset by an increase in promotional activity, including shipping fees, and the impact of international franchise operations.

For the quarter, non-GAAP occupancy expense dollars were flat to last year at $125 million.

Non-GAAP SG&A expenses decreased by 40 basis points to 31.5%.

This decrease was primarily driven by lower incentive compensation costs and a decrease in other general expenses, partially offset by a higher proportion of net revenues being driven by the direct-to-customer channel, which incurs advertising costs at a higher rate than the retail channel.

From a segment reporting perspective, the Q1 total company non-GAAP EBT margin expanded 110 basis points to 4.2%, driven by a 60 basis point decline in the direct-to-customer segment; a 60 basis point improvement in the retail segment; and a 70 basis point improvement in the non-allocated segment.

If you exclude the impact of inventory-related costs associated with the shutdown of Williams-Sonoma Home in the first quarter of 2010, however, the direct-to-customer segment EBT margin was flat to last year, and the retail segment actually improved by 10 basis points.

In the direct-to-customer segment, increased promotional activity, including Williams-Sonoma reserve, and increased investment in SG&A to support the growth of e-commerce, was fully offset by sales leverage of fixed occupancy costs and other general expenses.

In the retail segment, sales leverage of fixed occupancy costs, partially offset by higher traffic-generating promotional activity, drove a 10 basis point improvement in the retail EBT margin.

And in the non-allocated segment, lower incentive compensation and other general expenses drove a 70 basis point year-over-year improvement.

From a balance sheet perspective, first-quarter highlights were as follows -- cash and cash equivalents increased $66 million to $471 million, after returning nearly $220 million to shareholders through share repurchase and dividends over the past 12 months.

Merchandise inventory increased $30 million or 6% to $532 million on quarterly revenue growth of 7%.

And accounts payable increased $15 million or 8% to $192 million, primarily driven by the timing of merchandise receipts.

I'd now like to briefly discuss our second quarter and fiscal year 2011 guidance.

As Laura said earlier, we are increasing our full-year guidance for the outperformance we saw in the first quarter.

For the remaining quarters of the year, we are also reiterating our guidance.

In every quarter, the current guidance reflects record non-GAAP EPS performance, and we don't believe it is operationally prudent to get too far ahead of the consumer at this early date.

It also presumes that we will continue to gain substantial market share in every quarter, and we are confident in our ability to do so.

But there are ever-present macro issues that are not in our control that we believe we should be cautious about.

Additionally, as we outlined in March, we plan to fully fund the SG&A necessary to support our e-commerce, international, and business development growth strategies, which have previously been quantified at $25 million.

This equates to approximately $0.15 per diluted share -- the majority of which will be incurred in the remaining quarters of the year.

As such, we are reiterating our second-quarter guidance in the range of $805 million to $825 million in revenue, and our second-quarter non-GAAP EPS guidance in the range of $0.33 to $0.36 per share.

This assumes revenue growth of 4% to 6%; comparable brand revenue growth of 7% to 9%; and non-GAAP diluted earnings per share growth of 6% to 14%.

As it relates to the individual P&L line items within our Q2 guidance, we are reducing gross margin by 30 basis points on both the low end and the high end, and correspondingly, lowering SG&A to reflect the more promotional cadence but better advertising and employment productivity we saw in Q1.

For the full year, net revenues are expected to increase in the range of $3.6 billion to $3.7 billion, and our non-GAAP diluted EPS is expected to increase in the range of $2.13 to $2.21 versus $1.95 last year.

This assumes revenue growth of 4% to 6%, comparable brand revenue growth of 6% to 8%; and non-GAAP diluted EPS growth of 9% to 13%.

From a balance sheet perspective, we are maintaining our fiscal year-end inventory guidance in the range of $540 million to $560 million, and holding our annual capital spending guidance in the range of $135 million to $150 million.

We are excited about 2011 and the opportunities that we see for our brands, and remain committed to executing against the initiatives that we have just shared with you today.

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

Thank you, Sharon.

In the Williams-Sonoma brand, net revenues and comparable brand revenues increased 3% in the first quarter.

From a merchandising perspective, the key drivers of growth during the quarter were new product introductions, particularly in electrics, cookware, and outdoor, and a traffic-generating promotional calendar.

Another driver was the Williams-Sonoma Reserve Shipping Program, which is not only enhancing our competitive positioning against other online retailers, but also allowing us to develop stronger relationships with participating customers.

Relationships are also being enhanced through the expansion of our online community, including the launch of our monthly newsletter, On The Menu, and our proprietary blog, The Blender.

While both of these programs are in their early stages, we believe the customer engagement opportunity they represent is significant, as we further differentiate our overall customer experience from the competition.

Looking forward to the second quarter and the balance of the year, we are excited about the upcoming summer holidays and the opportunities they represent.

We have a substantial number of new initiatives that we did not have a year ago, including Williams-Sonoma Reserve and Professional Chefs.

In addition, we are continuing initiatives that are driving the business today.

These include introducing new, exclusive, and innovative products across all channels; enhancing our value proposition; increasing our investment in e-commerce and e-marketing, including the launch of our international website in the second quarter; engaging our most loyal customers through in-store events, online communities, social media, and special programs; and expanding the reach of the brand through collaboration for the cooking community.

We expect all of these initiatives to allow us to deliver a superior multi-channel experience to our customers, while expanding and affirming the brand's authority as the premier destination for high-quality cooking and home entertaining essentials.

I would now like to talk about Pottery Barn.

Pottery Barn delivered another very strong quarter in Q1, as net revenues increased 6% on top of 23% last year, and the operating margin reached a new high.

Comparable brand revenues increased 8%, with e-commerce continuing to grow as a percentage of the total.

Highly successful online customer acquisition initiatives, combined with a superior customer experience across all channels, drove these better-than-expected results.

From a merchandising perspective, enhanced design services, both in-store and online, drove higher customer engagement and increased sales.

Decorative accessories, textiles and tabletops were top-performing categories.

New product introductions also drove impressive growth.

From an operational perspective during the quarter, margin improvement continued to be a top priority, and the brand delivered record numbers.

Improved selling margins, a successfully executed real estate optimization plan, and ongoing benefits from Asian in-country sourcing initiatives, drove these better-than-expected results.

As we look forward to the second quarter and the balance of the year, we are continuing to execute against those initiatives that are driving Pottery Barn's performance to new levels, including -- increasing our investment in e-commerce and e-marketing to further strengthen our Internet presence; delivering a cohesive merchandising strategy with an artisanal product assortment; providing a strong, competitive value proposition, including planned category promotions; and offering superior customer service, including authoritative design and clienteling services.

We're also continuing to expand the reach of the Pottery Barn brand into new product categories, new markets, and new geographies, including new stores in the Middle East and the launch of our international e-commerce website in the second quarter.

Now I would like to talk about Pottery Barn Kids.

Pottery Barn Kids delivered a very strong first quarter, as net revenues increased a better-than-expected 10% on top of a 21% increase last year.

During the quarter, comparable brand revenues increased 11%, with particularly strong growth in e-commerce.

From a merchandising perspective, all key categories, including furniture, decorative accessories, and textiles, delivered strong results as seasonal product introductions, strategically planned promotions, and a registry momentum fueled stronger-than-expected sales.

From an operational perspective, strategic inventory management and retail profitability continued to be key initiatives as the brand achieved another consecutive year of operating margin expansion.

Improved selling margins and last year's successful execution of the brand's real estate optimization plan drove these better-than-expected Q1 results.

As we look forward to the second quarter and the balance of the year, we are continuing to focus on those initiatives that are driving customer acquisition, customer engagement, and strong multi-channel growth.

These initiatives include creating inspirational and innovative designs at a great value; further leveraging our multi-channel strengths to deliver a superior, personalized customer experience in all channels; driving Internet growth 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 our international website in the second quarter.

I would now like to talk about the PBteen brand.

Net revenues and comparable brand revenues in PBteen increased 7% on top of 22% last year, and the brand delivered its second-highest-ever Q1 operating margin, while at the same time, offering to the customer a significantly greater value proposition.

From a merchandising perspective, new product introductions, primarily in furniture and decorative accessories, planned promotions, and increased web traffic, drove these results.

As we look forward to the second quarter and the balance of the year, we are continuing to focus on initiatives that will drive enhanced brand awareness and a greater level of customer engagement, including broadening the merchandise assortment; increasing traffic and conversion in e-commerce through highly-targeted marketing; improved site functionality; and an expanded social networking presence, further positioning the brand as a design resource for teens and entering new markets, including the launch of our international website at the end of the first quarter.

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 and service.

Finally, I'd like to talk about West Elm.

West Elm delivered another excellent quarter, as revenues and operating profitability reached new highs.

During the first quarter, net revenues increased 26%, and comparable brand revenues increased 31%, reflecting the fifth consecutive quarter of sequential revenue acceleration since the re-merchandising of the brand in early 2010.

All key product categories delivered positive growth during the quarter, as new product introductions, a substantially enhanced value proposition, and a highly impactful multi-channel marketing strategy drove substantially better-than-expected results.

Consistent with our strategy to broaden the brand's appeal and promote the frequency of purchase, textiles, decorative accessories, and tabletops were our strongest performing categories in addition to furniture.

We are particularly pleased with the ongoing strength of e-commerce, which drove as much year-over-year dollar growth during the quarter as the 35 retail stores combined.

A highly productive e-marketing strategy and continued improvements in the on-site experience drove record traffic and increased conversion.

As we look forward to second-quarter and the balance of the year, we will profitably grow the West Elm brand by engaging with a broader range of customers; by continuing to rebalance the product mix and offering the customer greater choices in product, price, and aesthetic; we will further expand our product assortments into categories beyond furniture; and we will further create a seamless and inspirational store, Web, and catalog experience.

We'll also take advantage of opportunities that arise to expand our retail footprint, as retail profitability improves and new milestones are achieved.

I would now like to open the call for questions.

(Operator Instructions).

Budd Bugatch, Raymond James.

This is actually T.J.

filling in for Budd.

Congratulations on the quarter.

The question I had was to the international expansion, to start.

We're going to be rolling out new stores throughout the rest of the year.

Any commentary you want to offer on what brands you might lead with?

What type of acceptance or brand value you hold in those markets is?

And any color you can provide there?

Sure.

It's Laura.

We are very excited that we have just brought on two experienced executives that have been in international expansion for their careers.

And they are currently looking at where we go first and how we go.

We want to deliver the same high-quality customer experience, a multi-channel experience, as we enter new markets.

And we are looking at -- as I said, where to go and how to go.

And obviously, the websites that we -- the website we just launched in international is giving us early indications of where we have demand.

So in addition to market research and talking to our associates around the world, we have the opportunity to really read the results from our current sales as we expand through the summer with the other brands and use that to identify where we may place beacon stores around the globe.

Colin McGranahan, Sanford Bernstein.

It's [Avery Cillian] for Colin.

Congratulations on a great quarter.

I had a question regarding the Williams-Sonoma brand.

Your comparable growth in the brand remains below Pottery Barn and West Elm over the past couple of years -- or said conversely, Pottery Barn and West Elm are outperforming.

I was wondering if you could comment on the drivers of this performance differential?

And any potential impact from increasing price transparency influencing the performance of your nonexclusive versus exclusive products?

Absolutely.

Laura, would you speak to that, please?

Sure.

We are very pleased with the performance of Williams-Sonoma, and very excited about our current initiatives and how they will further expand the reach of our brand.

And when you look at numbers, we really -- we look back at a four-year history to look at our different brands.

And there's nothing about our performance that we are apologetic about in Williams-Sonoma.

In fact, we are really excited about what that brand is delivering, and particularly, the customer experience that they're delivering, that is being enhanced each and every day.

We also have brought in more exclusive products.

We are working very closely with our vendors to continue to introduce differentiated, exclusive product -- and artisanal product into our channels.

And the other place at Williams-Sonoma we see great opportunity is in e-commerce.

The e-commerce opportunity in Williams-Sonoma, we think, is quite substantial.

And we are just getting going, as I said, on community efforts on the website, and also increasing our assortment on the website.

Matt Fassler, Goldman Sachs.

Congratulations on a good quarter.

This is actually [Mark Andre] filling in for Matt.

Just a quick question on merchandise margin.

Could you talk about your expectations for the trajectory going forward?

And in the same line of thought, could you also talk about input cost inflation and pass-through?

That'd be great.

Thank you.

Absolutely.

I'm going to take -- on the promotional cadence going forward, as I said -- as we said in our prepared remarks, we expect that we are going to continue to offer the value through a more promotional cadence throughout the balance of this year.

We believe that that is necessary with the consumer.

We are adding new customers to the brands.

It is attracting new customers to our brands.

And obviously, from the P&L's, you can see it's highly profitable for us.

The other thing I talked about with that promotional cadence in my prepared remarks is the fact that, as these promotions, whether it be from a markdown or from a shipping promotion, we are also seeing opportunity to highly leverage our advertising costs.

So, while you might be looking at the gross margin line, you have to look at that in conjunction with the ad cost line to come to a point of view about the corporate benefit of doing that.

And we see that as very positive.

I'm going to let Laura speak to what is currently happening with our vendors from a cost point of view..

Sure.

We have seen cost increases, but as we have said, we have initiatives that are unique to Williams-Sonoma that are allowing us to offset them.

These include the roll-off of double agent commissions from last year; the expanded role of our Asia sourcing office; and the incorporation of West Elm into our total Company sourcing program.

Janet Kloppenburg, JJK Research.

Congratulations on a great quarter.

Sharon and Laura, I just was wondering about this focus on value.

It seems like you're getting increasingly focused on this.

And I'm wondering, Laura or Sharon, if you're able to develop programs where your margins are healthy, but where you're still offering the Company -- or the customer a perceived value through these promotions?

That is exactly what we're doing.

We put together last year a promotional calendar to attract new customers and delight our current customers.

And we believe that by giving value and allowing someone to buy something at a small discount connects them more deeply to the brand.

And then they come in and buy other items.

And it is a very important strategy that we think successful retailers will continue to execute against, until we see a change in the behavior.

And you can see many articles written about this -- how all parts of the customer -- all parts of the demographics are focused on great value.

And there's no tricking them; it has to be excellent value.

And so as we develop products and price products -- we look at, obviously, the costs; but more importantly, we look at what we're delivering to our customers vis-a-vis our competition, to make sure that they will shop with us.

And Janet, the key is planning the promotional cadence to drive traffic as opposed to just having markdowns.

This is a strategy, it's planned, it's well-executed.

It's marketed behind in the way that we're trying to attract customers.

So I think that, as you think about the value strategy for us, you need to think about it as just exactly that -- a planned traffic-generating promotional strategy.

Brian Nagel, Oppenheimer.

I too would like to add my congratulations on another nice quarter.

To not beat a dead horse here, but my question is also around margins.

Just to be clear, Sharon and Laura, I know you guys have talked about this for a while, what you're doing with this commercial product, but -- so I'm understanding it, is the commentary -- or, I guess, let's ask it this way -- in Q1, has this effort intensified?

And will it continue to intensify through the balance of 2011?

Or is it basically just staying the course?

And I'll have a follow-up after that.

I think what we're seeing, based on our original guidance, clearly, in Q2, I just moved 30 basis points of margin into SG&A because of the highly productive advertising and employment that we're getting out of the increased revenue.

So, we did accelerate some of this as the strategic acceleration of it into the second quarter.

We think it's going to continue into the second quarter.

I'm going to let Laura speak to the strategy behind that, because one of the things, Brian, that you do is when you see something be so highly effective at attracting new customers to the brand, it's something that you want to study, and you want to be sure that you do more of it.

But I'll let Laura speak to that on the overall brand level.

I think, Sharon, you covered it and I -- and probably in my last remarks did also.

But I'll just add one more thing, that there is really nothing structurally in the way of improving margins.

But we've decided that, strategically, we don't believe it's the right strategy to raise prices in the short-term and have that be what we do.

Because as a growth company, as Sharon said, we want to attract new customers and deliver incredible, exclusive products priced competitively, and deliver the great values that our brands have always stood for.

Matt McGinley, ISI.

When you look at the sales growth you've had over the past couple of quarters, who do you think the incremental buyers of your products are?

Are you seeing -- continuing to see strong activation as you were last year?

Or do you have the same customers that came back to the brands last year that are building a basket?

And then, secondly, when you reclassify the stores from the Pottery Barn brand and the Williams-Sonoma brand into the outlet, does that change the product mix in the stores at all?

Or is it effectively just a sign change on the front of the door?

Actually, it is not -- I'm going to speak to the outlet, and then Pat Connolly is going to speak to the health of our house file and some of the exciting things that are happening in the house file right now.

The outlet -- nothing has changed operationally.

This is only a reporting change.

Historically, we had the 18 outlet stores treated like a brand, but each of them has its own brand identity.

So when we went from the comparable store sales metric by brand to the comparable revenue metric, you have to include the outlet.

So you can see in the store table in the press release, how we just credited out the 18 stores in the outlet and pushed them up into the other brands.

I will also say that with the outlets in or the outlets out of the brand, it doesn't make a material difference either today or in any of the prior years, because as you all know, if you know, we did give you five years of comparable brand revenue history in a new attachment to the press release that we thought might be helpful to you.

And then, Pat, could you speak to what's happening with the health of the house file?

Sure, I can, Sharon.

I think we're seeing, across our catalog mailings, consistent performance across all the segments of the file -- not only among our current customers, but also reactivation and new customer acquisition efforts.

On the e-commerce side, I think what's notable is that the sales, while they were up about 20%, the traffic was also up about 20%.

So we're bringing in the same quality of customer across the file.

On the email side, while the number of emails delivered in the quarter was only up about 2%, our conversion improved 20%.

And that's really a function of our ability to make them more effective and more targeted.

One little highlight -- we're seeing an increased amount of sales on mobile devices, which was, in the last quarter, about 5%.

It's not a large amount, but it's growing about 10% month-over-month, which could be significant in the future.

About 80% of that is with the iPad and iPhone.

Our customer base is very Mac-friendly.

We have one of the highest percentage -- penetrations of Safari as the native browser.

So we're in a great position to take advantage of that going forward.

Brad Thomas, KeyBanc Capital Markets.

Just wanted to follow-up in terms of the guidance.

Sharon, you referenced some potential macro overhangs.

Obviously, comps during the quarter, very strong and acceleration on a two and three-year rate.

Could you just talk a little bit more about what you saw during the quarter?

Is there anything that occurred maybe from a cadence standpoint that's worrisome?

Or is this being just conservative?

And then just as a quick follow-up on the $25 million in incremental SG&A for this year, if you could just remind us what your plans were for timing through the year?

I know you referenced a majority of it was coming in remaining quarters.

But if you could just make sure we're clear on how much of it was incurred in the first quarter relative to your original expectations, would be great.

Okay.

Let's first talk about the question associated with the cadence of the quarter.

As like every other retailer, Q1 was a very strange quarter, because the shift of Easter, and then for us, remember, Mother's Day becomes -- is a big holiday for us.

So, as a result of that, of course, everyone moves revenue out of March into April.

So the cadence was fantastic -- you know what I'm saying?

So, I think to take a look at the first quarter from a cadence point of view is not helpful.

Where we are right now is we are excited about the consumer response to our summer product offering.

And we are very optimistic about the ability to continue to capitalize on the initiatives that we have in e-commerce, to continue to drive that going forward.

The question as it related to the investments in SG&A -- we were absolutely on track as it relates to the SG&A investment.

We're not going to quantify it by quarter.

But when you think about what we're doing, Brad, a fairly large amount of that is the addition of approximately, let's call it, 100 people for round numbers' sake.

And those people are highly specialized in e-commerce and direct marketing, and some of the areas that you would expect, to support the growth of our e-commerce business.

Additionally, those investments are in the talent and the leadership that we have brought into international -- all the expenses that go along with putting together a very robust international strategy.

And then, of course, from a business development standpoint, the costs are clear about what it would take to do that too.

When I think about it, it's going to grow throughout the year.

Hiring these highly talented people takes time; so you bring on the first wave.

They seem to come very quickly, and then they come in waves after that.

So I expect the cadence to be very heavy in Q2 and in Q3.

And then in Q4, we won't be adding that much because, you know, you're very focused on executing peak.

So that's how I kind of see it playing out.

Joe Feldman, Telsey Advisory Group.

Congratulations on a good quarter.

Just wanted to follow-up -- did you guys see any impact from the weather or the government stimulus from last year, all those comparisons?

Because I know you mentioned also getting a little more promotional, and was curious if that was to help offset some of those pressures?

Or if it was anything you're seeing different in the competitive environment?

As it relates to the government incentives, we said last year that we do not believe -- and we have data to support the fact that the housing incentive did not appear to have any impact that is material on our Company.

We believe that is because those incentives went to people who were not in our demographic.

So, we can't take any credit or take any detriment from the with-or-without the incentives, because we actually don't believe that it had a material impact on us.

From a quote "weather point of view," I'm going to let Laura speak more holistically to the change in our seasons.

And Laura, you want to take that?

Yes -- I mean, you never know, right?

But clearly, you know when there's a tornado or there's a flood that people are not shopping.

And we had a lot of that.

And it was awful for our customers and we're very happy the weather is better.

The thing that may be most related is outdoor furniture, which started off a little bit slower, and has now accelerated substantially.

And our current sales are exactly on track to where we thought.

Our business is very strong.

And just to add, as I'm talking about outdoor furniture, in Pottery Barn, where our outdoor furniture is the largest of all of our brands, we improved our quality dramatically.

And our customer is noticing.

So we're very proud of that too.

Matt Nemer, Wells Fargo.

Two quick questions, if I could.

One, could you just talk to the impact of reserve on the P&L?

I understand the strategic value, but I'm just wondering if in the early days, you have sort of the buffet effect when people go up to get a second or third plate, and it maybe impacts the profitability in the beginning.

And then, secondly, could you just comment on your plans in the daily deal or flash sale space?

I've noticed that One Kings Lane seems to be having some early success, and Gilt Groupe launched a food cooking-related channel this week.

So, just wondering what your plans are in that channel?

Thank you.

Okay.

So, Matt, as it relates to Williams-Sonoma Reserve, I say this with the utmost respect -- we believe that information details on Reserve are so competitively advantageous for someone else, that we're not going to speak publicly a lot about the metrics.

However, we will just blanket it to say that we could not be more pleased with the performance of the Williams-Sonoma Reserve Program, and will not be precluded from thinking about the program in other parts of our business going forward.

On the daily deal, over the holiday season, we did some one-day deals on our websites and in our stores.

And they were successful.

And it's, again, competitive, but it's something that we will do periodically.

It's particularly helpful when you are giving gifts.

So you will see us to do -- use that strategy as we go forward.

Laura Champine, Cowen and Company.

I had a question about the international business.

I mean, bringing on some fairly high-level folks to help explore those opportunities -- does that signal that you would be looking at significant company-owned expansion?

And as a follow-on to that, would you want the e-commerce business to grow to a certain size before you moved into a country, to show that you have a brand there?

Or how would you manage that roll-out?

Sure, it's Laura.

As I said, we want to launch into these new markets in a very powerful and brand-appropriate way.

And so we may -- where we can, we would own it ourselves, but there are parts of the world where that is not possible and where there are great partners.

And we've had tremendous success with our Alshaya partner, and that has given us a lot of confidence to go into new markets with them as well.

As it relates to multi-channel retailing, we see the opportunity across channels, but have -- because we haven't built out a lot of stores globally or any other than in the Middle East, we can actually launch with a larger percentage of direct business than some of the people who went earlier with multiple stores.

And so, as I said, the word we're using is "beacon stores," that allow the customer to come in, touch and feel, and experience the brands that then enable our direct business in those markets.

Michael Baker, Deutsche Bank.

Just following-up with a promotional question.

It sounds like you said you were attracting more customers.

Is it in retail or direct customer, or both?

And I guess, more importantly, do you feel like it's a different customer demographic than you had previously attracted?

And so, eventually, with that customer, really always acquired the promotional activity?

Or is this something that you sort of bring in the customer [through] promotional activity to get them familiar with the brand, and then can sort of wean them off, that type of thing?

Thanks.

Pat, would you take that?

I will, Sharon.

Thanks for the question, Michael.

We're seeing the same quality of customer come in, because the promotions are so targeted.

We're targeting them at the right segment of our prospect base as well as our existing customer base.

And there's an aspect of this, I think, that's very important to understand -- and it's sort of a follow-up answer to the question that Matt asked just before.

And that is, the difference between what we're doing and what, say, the flash sale sides are doing, is that we have a much broader assortment.

And so, in almost every case, the sales that accrue from this promotion are on items other than the one we're promoting.

And so, it doesn't have nearly the impact that selling a single item only would have.

And that's sort of the beauty of what we're doing here.

Peter Benedict, Robert W.

Baird.

Thanks for taking the question.

Thinking about in the gross margin line, Sharon, could you maybe talk about the outlook for occupancy costs in the second quarter and for the full year?

I know they were flat in the first quarter, but how should we think about that going forward?

And then related in the gross margin, can you quantify maybe the impact of the international franchise business, what that had on the gross margin in the first quarter?

Thanks.

I would say that from an occupancy perspective, we're not going to, of course, guide individual line items at that level now like occupancy.

But, in the second quarter, I would not expect substantially different performance -- maybe slightly -- you'll see some slightly higher numbers probably in Q2, and that will progress through the year -- as it always does, by the way.

So -- but I don't think that -- there's no big story that we have to tell in occupancy until we get later in the year and we're going to open a couple of West Elm stores.

And they are going to be great stores.

So we'll have some costs, but we're going to have some revenues and some great performance, too.

So, needless to say, again, I'm not going to get nailed down on a dollar amount, but we continue to feel very good about the real estate initiatives that we've had in place.

As it relates to our franchise operations or the impact of that, the only reason we bring that up is just because of the way it gets accounted for.

It's similar to wholesale business, and therefore, you have revenue and you have costs, and you have the margins, clearly.

But because of the nature of the transaction, having no SG&A, your margin is lower but you have no SG&A -- or less SG&A associated with it.

So it does put impact -- a little bit of impact on the gross margin.

But then, by the time you get to the bottom line, of course, it's a terrific deal.

So, that's why we had to call it out for the first time this quarter, because, quite frankly, our partnership with Alshaya is growing.

And it's very successful.

(Operator Instructions) Marni Shapiro, The Retail Tracker.

Congratulations.

I was kind of curious about -- Laura, if you would talk a little bit to the industry, you talked above the competition and pricing issues.

We've heard from some retailers in the off-price space that this has been very strong and people like Target talk about raising prices.

I've walked several of your competitors; I don't think many of them look very good right now.

And I just feel like there's a lot of inconsistency out there.

If you could just talk about your broad view on the consumer and the industry right now as it relates to you guys and in general.

Sure.

It's clear the customer is very choosy, both in what they buy and they expect very high levels of service.

And they expect the price to be competitive.

And I have high respect for our competition.

People are doing a lot of things.

What they're probably not doing as well is taking service to the next level and being as innovative about how to do that.

And as much as we've made improvements, we continue to see even more opportunity to be the best at serving customers in our space, and helping them cook, entertain and decorate their homes, which is not -- these are not easy things to do.

It's -- very considered purchases and it takes a lot of help to understand our products, and also learn how to put them together.

And that is something that we're becoming, I think, better at than most in all of our channels.

So, as an example, on our Pottery Barn website, you can go and look at our design studio, which is a new launch -- probably not marketed as largely as we could in the future, but you can go and read a lot of great information from incredible designers who we work with, about tips and advice.

And then, also, we have a room planner that you can use with our products.

And it's very -- it's really user-friendly and, we think, pretty revolutionary in our space.

So we're going to continue to add content to that and new tools to make it easier, as I said, to decorate and entertain, whether it's going into our stores for our classes, but also, if you want to work on it at home on the weekend, or even have our associates in our stores help you with those tools.

So, I think, those are the things that are important to our customers.

I get a lot of letters telling to me about how great the service is and how differentiated it is from other people in the mall.

In fact, I love hearing from different people.

They always start with, "I was just in your store and I just had this most incredible, friendly, warm experience." And they create relationships that make it about a community store versus a big brand.

And that is so, so important to us.

Back to the industry -- the focus on price is important, but it needs -- as I said, it needs to be authentic.

Some people, the -- it's a constant high/low, and I think after a while, the customer waits.

And it needs to be pulsed so that that doesn't happen, and that they're not just trading down all the time and delaying purchases.

Our customers know that oftentimes when you go to buy a specific item, whether it be -- rugs could be 15% off, but the rug you want may not be there in a month.

So, there's an urgency because we're equally focused on our designs, and the appeal of our designs, and the exclusivity and differentiation from our competition.

And I think it's that powerful combination of exclusive, innovative products and then a great price that is allowing us to outperform the industry.

Scot Ciccarelli, RBC Capital Markets.

This is [Austin] on for Scott.

My question is on market share.

You mentioned a couple of times in your prepared remarks that you think you're taking market share.

I was hoping you could talk a little bit about where you think you're taking share.

And also, going forward, if you think there's a better opportunity to take share at the retain channel or online?

Thanks.

Laura, do you want to talk about how we think about market share?

Sure.

You know, it's an interesting question.

What do I think -- from every piece of data that I look at, I think it's clear that we're taking market share on upholstery, as a specific example, where we have really changed the game with our own manufacturing.

And we're really a dominant, top-of-mind, multi-channel retailer as its comes to upholstery.

Within each brand, I could go through and tell you a similar story about a specific area.

West Elm as a brand is poised to really help us gain market share at a slightly different demographic than our other brands, which is so exciting, because there's actually more people in that demographic.

And I'm so proud of what that team has done with incredible design at such amazing prices.

Every time I go in and look, I just continue to be impressed by the innovations in that brand and the quality levels that they're able to deliver.

So, clearly, there's going to be, as that brand grows and has a bigger footprint, and is more top-of-mind, we're going to grab market share in that demographic.

Whether retail versus direct -- that's a harder one to, I think, comment on.

Our goal is to be the best in both.

(laughter) So -- and I think our numbers would show you, and when you compare them to others, that clearly, with the economy flat, and particularly our segment flat to negative, we are gaining market share across both channels.

And [Scott], when you think about the public retailers that announce -- and then, of course, I know you guys are always talking to the private equity people that are holding investments and many of the others -- clearly, our performance versus what's being reported publicly is outstanding in many cases.

And we think the usual suspects are continuing to lose share.

We believe that the biggest competitive advantages we have is our multi-channel strategy and our ability to use this incredibly powerful house file to communicate relevantly to the customer.

You know, they're waiting for the customer to show up.

What we believe about how we are gaining market share is that, if you are a traditional retailer, you may have a website, but it's like a second sort of thing in your company -- we believe that we are able to serve them in both channels.

We are not waiting for the customer to show up.

We have the ability to speak to them in a personal and authentic way, and help them think about the needs that they probably are going to have.

So, that's a big difference.

And I don't know if you saw the Internet retailer numbers that came out a couple of weeks ago, but we just moved up again.

We're now -- we just ranked the 25th largest.

And in our category -- I think I spoke to this at a conference, or Pat did -- in our category in home furnishing specialty, home furnishings again, we are so far ahead of anyone in the game that it's [just] whole list below us, the five top five add up to our revenues.

So, it's really that multi-channel ability to address the customer that we think is really giving us a huge competitive advantage.

And that's all the time we have for questions.

Ms.

Alber, I'll turn the call back to you for any closing or additional remarks.

Well, thank you for your support and we look forward to talking to you again next quarter.