Williams-Sonoma Inc (WSM) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Williams-Sonoma, Inc.

second 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.

This conference is being recorded.

I would now like to turn the call over to Mr.

Steve Nelson, Vice President of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

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 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 second quarter 2011 results and our fiscal year 2011 outlook.

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 second quarter was another strong quarter for the Company as we continued to leverage our multi-channel marketing and operational strength to gain profitable market share.

During the quarter, net revenues increased 5% and non-GAAP diluted earnings per share increased 19% to a second quarter record of $0.37 per share.

Comparable brand revenues increased 6.5% as innovative merchandising, targeted marketing and a quality customer experience continued to attract customers to our brands.

Non-GAAP operating margin climbed 80 basis points to 8% as strategically planned promotions drove higher productivity in advertising costs.

And we saw increased benefit from our ongoing cost containment initiatives.

Throughout 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 18% to 39% of total Company revenues.

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

In West Elm, comparable brand revenues increased 29% on top of 19% last year.

And in international DTC, we completed the launch of our new international shipping websites across all brands, which now allows us to ship from the United States to customers in over 75 countries around the world.

We also launched a new corporate-wide customer service initiative.

The goal of this initiative is to provide our customers with a seamless service experience that is personalized to their needs.

To do so, we are removing the obstacles to yes and through this initiatives see great opportunity to further delight our customers.

The organizational response to this program has been very powerful.

And every one of our leaders is committed to taking it to the next level as we strive to consistently exceed our customers' expectations.

In our core brands, comparable brand revenues increased 3.5% on top of 16% last year.

In our emerging brands including West Elm and PBteen, comparable brand revenues increased 25% on top of 20% last year.

In international, we continued to aggressively explore profitable opportunities for retail expansion in other regions of the world, as our 8 franchise stores in Dubai, Kuwait and Saudi Arabia continue to introduce new customers to our brands.

In the back half of the year, we expect to add 5 additional franchise locations in Saudi Arabia, including 2 Pottery Barns and 3 Pottery Barn Kids stores.

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

These initiatives include optimizing our inbound and outbound packaging costs, further insourcing our home furniture delivery operations, and expanding our Company-managed Asian sourcing operations.

We also significantly expanded our North Carolina upholstered furniture operation as the demand for our exclusive assortments continues to grow.

This new facility, open in July, is state-of-the-art.

And while we are still filling back orders from the initial move, we are already producing record volumes.

As we look forward to Q3, while we are cognizant of the overall macro environment, the early consumer response to our fall merchandising and marketing strategies is strong.

Leaving us well-positioned to continue to gain market share and deliver another highly profitable quarter.

As such, we are reiterating our third quarter non-GAAP EPS guidance of $0.36 to $0.39 per share.

And increasing our full year guidance for the $0.01 outperformance we delivered in Q2.

This brings our fiscal year 2011 revenue growth to a range of 5% to 6% and our non-GAAP diluted EPS to a range of $2.17 to $2.22 versus $1.95 last year.

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

Thank you, Laura.

Good morning, everyone.

As Laura said earlier, in Q2, net revenues increased 5% to $815 million, which was significantly better than the overall growth of the home furnishings industry of approximately 1%.

Comparable brand revenues increased 6.5% driven by comparable store sales growth of 1.4% and direct-to-customer revenue growth of 13%, including 18% growth in e-commerce.

From an earnings perspective, diluted earnings per share increased 19% on a non-GAAP basis to a second quarter record of $0.37 per share which was $0.01 above the high end of guidance.

Higher productivity of advertising costs, combined with greater than expected benefits from our ongoing cost containment initiatives, drove these better than expected results.

Non-GAAP gross margin increased 90 basis points to 37.9%.

This increase was primarily driven by the leverage of fixed occupancy expenses due to increasing net revenues, a decrease in occupancy expense dollars, and higher year over year selling margins.

For the quarter, non-GAAP occupancy expense dollars decreased $2 million to $123 million.

These improvements were partially offset by the gross margin impact of our international franchise operations.

And non-GAAP SG&A expenses increased 20 basis points to 30%.

This increase was primarily driven by higher employment and general expenses, partially offset by lower advertising costs and leverage from our international franchise operations.

The employment increase was reflective of our planned incremental investment in our e-commerce, international and business development growth strategies.

The general expense increase was primarily due to a 30 basis point benefit from a gain on sale of assets last year which did not recur this year.

From a segment reporting perspective, the Q2 total Company non-GAAP EBT margin expanded 80 basis points to a record 8%, driven by a 160 basis point improvement in the direct-to-customer segment and a 10 basis point improvement in the retail segment.

These improvements were partially offset though by a 50 basis point expense increase in the non-allocated segments, which was driven by the 30 basis point non-recurring gain on sale of assets from last year and the planned incremental SG&A to support our long-term growth strategies.

In the direct-to-customer segment, increased productivity of our advertising spend, sales leverage of fixed occupancy expenses, and ongoing benefits from supply chain, partially offset by increased promotional activity and planned incremental expenses in e-commerce, drove the 160 basis point improvement in the direct-to-customer EBT margin.

In the retail segment, improved year over year selling margins and reduced fixed occupancy costs from closed stores, partially offset by higher employment costs, drove the 10 basis point improvement in the retail EBT margin.

From a balance sheet perspective, cash and cash equivalents increased $21 million to $425 million after returning nearly $210 million to shareholders through share repurchases and dividends over the past 12 months.

Merchandise inventories increased $38 million or 7% to $557 million.

Back orders, however, at the end of the quarter were higher than last year due to strong sales in several runaway categories that we are working aggressively to replenish.

Accounts receivable increased $14 million to $51 million due to the timing of landlord construction and other miscellaneous receivables.

And accounts payable increased $13 million or 7% to $197 million primarily driven by the timing of merchandising receipts.

I would now like to briefly discuss our third quarter and fiscal year 2011 guidance.

As Laura said, the early consumer response to our fall merchandising and marketing strategies has been strong across brands.

As such, we are increasing our full-year guidance for the outperformance we saw in Q2.

And are reiterating our guidance for the back half of the year, including the incremental investment we have previously discussed to support our long-term growth strategies.

In the third quarter, net revenues are expected to be in the range of $845 million to $865 million.

And non-GAAP diluted EPS is expected to be in the range of $0.36 to $0.39 versus $0.35 last year.

This assumes revenue growth of 4% to 6%, comparable brand revenue growth of 5% to 7%, and non-GAAP diluted EPS growth of 3% to 11%.

For the full year, net revenues are expected to be in the range of $3.67 billion to $3.72 billion.

And non-GAAP diluted EPS is expected to be in the range of $2.17 to $2.22 versus $1.95 last year.

This assumes revenue growth of 5% to 6%, comparable brand revenue growth of 6.5% to 7.5%, and non-GAAP diluted EPS growth of 11% to 14%.

In both the third and fourth quarters, the non-GAAP diluted EPS growth, even at the low end, represents record operating profitability for the Company, as we lever our multi-channel business model and grow DTC as a percentage of our mix.

At the same time, it also includes investing in the next phase of growth for e-commerce, exploring new geographies for global expansion and finding white space in the marketplace that a new brand or small acquisition could fill.

From a balance sheet perspective, inventory guidance remains flat with previous guidance at $540 million to $560 million.

And capital spending is expected to be at the high end of our previous range of approximately $150 million.

From a uses of cash perspective, our business model continues to generate significant cash flow.

And we have virtually no debt.

So we are well-positioned to invest in growth while at the same time, return excess capital to shareholders.

As such, in the back half, we will continue to do both, as we strive to further enhance long-term shareholder value.

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

Thank you, Sharon.

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

Comparable brand revenue for the Williams-Sonoma brand grew 0.7% as planned traffic-generating promotions drove higher-selling margins.

From a merchandising perspective during the quarter, we continued to see growth in our high-end assortments, particularly in electrics and cookware.

These increases were partially offset, however, by outdoor and dinnerware.

As we look forward to the third quarter and the balance of the year, we will continue to focus on those key initiatives that are driving our business today and several new initiatives that we will be rolling out in the back half.

We'll be introducing new compelling marketing themes and a larger percentage of new and exclusive products.

We're also keenly focused on peak execution and improving our gift strategies.

We will continue to drive increased loyalty through the introduction of a new co-branded Williams-Sonoma Visa card.

Our Williams-Sonoma reserve shipping program has demonstrated the power of a successful loyalty program.

And we believe this additional offering will not only introduce new customers to our brand but also increase the level of purchases from our existing customers.

Additionally, we will continue to enrich the customer experience in store and online.

Our stores will offer compelling content around food and more in store events including exciting new culinary classes, demos and cookbook signings.

Online, we will continue to expand our reach and deepen our engagement with current customers through functionality enhancements and additional content on our website such as our ever-growing recipe section.

We are also pushing our content to other websites on the Internet where people gather around food.

We believe that all of these initiatives will continue to enhance the shopping experience for our customers and advance the brand's authority as the premier destination for high-quality cooking accessories, gift giving ideas, and home entertaining essentials.

I would now like to talk about Pottery Barn.

In the Pottery Barn brand, comparable brand revenues increased 4% on top of 19% last year.

Net revenues, including store closures, increased 2%.

From a merchandising perspective, home furnishings, table top and decorative accessories were top-performing categories, driven by an innovative merchandise assortment, a strong value proposition and a strategic promotional calendar.

From an operational perspective during the quarter, operating margin reached record levels as DTC approached nearly 50% of brand revenues.

And we further optimized retail occupancy and catalog advertising costs.

As we look forward to the third quarter and the balance of the year, we are encouraged by the positive consumer response we are currently seeing to our fall merchandise assortment.

We're also confident in the strategies we have planned for the back half of the year including delivering a cohesive value-sensitive merchandising strategy around exclusive, innovate in and artisanal products.

Expanding product categories to fill white space in the marketplace.

Creating new experiences to our customers to make decorating easy, fast, fun and affordable through engaging in-store events, clienteling and complementary design services.

And making our website the broadest expression of the brand by blending commerce and content to deliver a rich and inspirational shopping experience.

We're also expanding our international reach through the opening of 2 additional franchise stores in Saudi Arabia.

All these initiatives are driving new customers to our brand, both domestically and internationally and represent a significant opportunity to gain market share.

Now I'd like to talk about Pottery Barn Kids.

Pottery Barn Kids comparable brand revenues increased a better-than-expected 8% on top of 25% last year with, particularly strong growth in e-commerce.

Net revenues also increased 8%.

From a merchandising perspective, all key categories, including textiles, decorative accessories and furniture, delivered strong growth.

This growth was fueled by a better-than-expected consumer response to our expanded baby offering and a brand-wide focus on product excellence, visual display and the customer experience, including our clienteling and complementary design services in-store and online.

From an operational perspective, planned traffic-driving events and tight inventory drove higher selling margins and improved profitability across both channels.

As we look forward to the third 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 building and marketing our expanding gifts assortment to develop a top-of-mind recognition as a gift-giving destination.

Leveraging our multi-channel and operational strength to deliver an effortless and engaging customer experience across all channels.

Driving e-commerce growth through engaging content, improved search, increased conversion and enhanced social platform.

And expanding our international reach through the opening of 3 additional franchise stores in Saudi Arabia.

I would now like to talk about the PBteen brand.

Comparable brand revenues and net revenues in PBteen increased a better-than-expected 20%, on top of 22% last year, as the brand delivered its highest ever Q2 operating margin.

From a merchandising perspective, we saw growth across all key categories including furniture, textiles and decorative accessories.

Planned promotions, expanded assortments and successful e-marketing initiatives drove these strong results.

As we look forward to the third quarter and the balance of the year, we're continuing to focus on those initiatives that will drive enhanced brand awareness and a greater level of consumer engagement including broadening the assortment and further positioning the brand as a design resource from market-leading innovation, quality, and originality.

Growing our consumer base through new customer acquisition and expanded presence in social networks.

And increasing traffic and conversion in e-commerce through highly-targeted marketing and a compelling, robust and inspiring customer experience.

All these initiatives will allow us to further engage teens in new ways and continue to drive strong profitable growth.

Lastly, I would like to talk about West Elm.

West Elm delivered another record quarter as net revenues and operating profitability reached new highs.

During the second quarter, comparable brand revenues increased 29% and net revenues increased 26%.

From a merchandising perspective, we continue to make progress on our strategy to drive a higher frequency of purchases through the rebalancing of our product mix, as evidenced by our strong growth in textiles, decorative accessories and table top during the quarter.

New product introductions, a significantly enhanced value proposition, and new highly impactful multi-channel marketing strategies drove these better-than-expected results.

We were particularly pleased with the strength of e-commerce which drove more than half of the brand's dollar growth during the quarter as natural search, increased e-marketing and improvements in the on-site experience drove record traffic and conversion.

Retail traffic also reached new levels as we continue to rollout new, in-store events and increase our collaborations with emerging artists.

As we look forward to the third quarter and the balance of the year we're encouraged by the momentum we're seeing in our business today.

And are focused on those new initiatives that we believe can take this business to the next level.

These initiatives include expanding the breadth of our product assortment.

Enhancing our gift giving business at a compelling value.

Creating a seamless and inspirational multi-channel experience.

And introducing a new store design for the opening of 2 new stores this fall, one in LA, and one in Seattle.

We also will take advantage of opportunities that arise to expand our retail footprint, including additional pop-up stores as premier locations become available.

I would now like to open the call for questions.

(Operator Instructions) Budd Bugatch of Raymond James.

Just quickly, I think that gross margin guidance for the year is down 20 basis points from the previous guidance.

And I think the SG&A guidance is down 40 basis points.

Can you walk through the puts and takes for the year on SG&A guidance and gross margin guidance and the changes of that 20 and 40 basis points?

Sure, Bud.

This is Laura.

Good morning.

I'm going to let Sharon answer it more specifically.

But I want to reiterate what I said earlier which is that we are so fortunate with our operating model to have different levers.

Particularly in this environment, where promotions are very competitive.

And as you saw us in Q2, we were able to optimize ad costs and reduce advertising expense to allow us to stay very competitive in this environment.

And we have that same opportunity in Q3.

We believe this is very strategic as it will help us gain profitable market share as others don't have the same percentage of sales in their DTC business.

Sharon, do you want to add to that?

No, it's a direct offset, Budd.

What we moved out of gross margin we have a direct offset in SG&A.

Joe Feldman of Telsey Advisory Group.

You made a comment about the inventory actually having some back orders.

And I was curious if you could go a little deeper into that, where you are seeing inventories light.

Because overall, inventory was up a little faster than sales.

I know it was in line with guidance but can you talk about where it's heavy, where it's light and where the back orders are coming from?

Sure.

Good morning, Joe.

Last year, if you look back at Q2, we had 15% sales growth and only about a 1% inventory growth.

And we said at that time that we were chasing inventory last year.

And we actually have been chasing it ever since because of the outperformance that we saw last year.

And some of our product categories have very long lead times as we make artisanal products.

The area that we do have higher than we would like back orders in is upholstered furniture, as we see increased demand in that area.

And we're doing very well with our new production line, Sutter Street.

But we made the transition this quarter and it took some time to do that, of course.

And so we have some items that we have a little bit longer lead times on than we would like.

And the whole team is working very hard to get those items back in stock.

We also have replenishment in other categories in each and every one of the brands where we had faster sales than the inventory that was bought.

And so we're working to both replenish core inventories in some categories but also just best sellers.

Colin McGranahan of Sanford Bernstein.

A longer term strategic question, if I could.

Sharon, you mentioned, as you think about growth opportunities of the future, that there could be some opportunities with what you call white space, new brand, or small acquisition.

Maybe you could talk a little bit more about that because I think about your business and where there is white space.

You cover a local of categories and historically you've tried others like gardening and storage.

And you cover a pretty wide range of age spectrum, from infants through kids through core families all the way to Williams-Sonoma home goods.

So where are you thinking about white space?

And as a follow-up to that, with the stock where it is today and nearly $500 million of cash on the balance sheet, why wouldn't that cash be better put to use buying back the owned stock rather than pursuing acquisitions?

Hi, Colin.

It's Laura.

We have successfully grown our business within our Company by identifying the needs that our customers have that aren't being served by other retailers.

And we see the same opportunity as we go forward.

Specifically the white space we see is competitive, obviously.

So I'm not ready today to talk about specifics on what we're going to try.

But we continue to find areas in each one of our brands.

And we also are identifying areas outside of our brands where we think the customer is still really struggling to find what they're looking for in the home space.

So more to come on that subject.

We're also investing in our e-commerce future.

We know that, because of our long experience in e-commerce, we're further ahead than a lot of people and we need to keep that gap as wide as we can.

So we continue to invest in both talent but also in functionality in e-commerce.

So we'll be continuing to make those investments along within in-store, store-of-the-future investments to make sure that our retail stores stay vibrant and up-to-date with the newest technology.

As far as buyback I'm going to let Sharon address that.

Colin, we'll continue to address uses of cash.

We have been returning cash to shareholders.

You know that, through our dividend share repurchase each quarter.

We want to, first, prioritize growth opportunities.

And we really believe there are significant growth opportunities out there.

So we'll continue to prioritize it, look at it and continue to assess what we believe is a reasonable amount of cash to hold on the balance sheet, and what is reasonable to return to the shareholders.

But rest assured, we're looking at it constantly.

Matt Nemer of Wells Fargo Securities.

I've got 1 question with 2 completely unrelated parts.

The first is, could you talk about your decision to lower circ in the third quarter?

And does that pose any risk to DTC growth?

And then secondly, just to follow-up on Colin's question, you've talked about not wanting to use the credit facility for your seasonal borrowing needs if you don't need to, but I'm wondering if you might reconsider that this year given you can borrow at L plus 1 and buy the stock back at 5 times EBITDA.

Thanks.

Matt, I'll take the question.

This is Pat.

I'll take the question on circulation.

Our circulation is down a little bit in Q3.

200 basis points of that is due to a mailing shift.

We moved 1 of our catalog mailings from the first week in August to the last week in July.

And that was worth about 200 basis points.

We also saw an opportunity, based on results from last year, to trim some marginal circulation in one of our brands.

And as you can see, we're continuing to find new opportunities in e-marketing across a wide variety of programs where we're investing.

And Matt, the question about share repurchase, the answer is the same that I gave to Colin.

Matthew Fassler of Goldman Sachs.

Given that your DTC business came in ahead of plan and your retail sales came in a tad below plan, presumably you're seeing ongoing channel shift and sales trends to your direct channel.

Can you talk about to what degree you think you are retaining the customers who are moving off of retail?

And also how that might be differing by brand as this evolution continues?

Good morning, Matt.

It's Laura.

We know that our customers, when they make a purchase decision, particularly some of the very considered purchase decisions you make when you decorate a home or a room of your home, we know that they go to all of the channels.

And they look at the product online.

They go sit in the sofas in our stores.

And where they actually make that final purchase decision is less important to us.

What is important to us is the seamless experience that they have across all of our brands.

We are using our marketing history and information to send very targeted e-mails and targeted marketing mailings to our customers based on purchase history and their preferences.

And we are also really enriching our store experience with in-store events, clienteling.

And it's interesting, even our in-store clienteling initiative is driving online sales because, unlike other retailers, we book those sales, actually, to direct even if someone in the store is helping them.

Because they are actually transacting online.

In many cases, a lot of the products are not even offered in our stores.

They are only offered online, so online is the biggest channel.

The beginning of this year we started really talking about comparable brand revenues, instead of being hyper focused on comp store sales.

Because we believe that you could make the wrong decision for the customer, if you overly focus on comp store sales.

Our strategy is to have incredible stores in the best malls with highly engaged associates serving our customers, with quality product and inspiring display.

And very targeted online marketing to communicate to them when new things come.

In both channels, we have our decorating resources on our home furnishings brand, particularly in Pottery Barn and Kids where you can go online and actually have a very robust experience in choosing items for your home and deciding how to decorate it.

You see the same sort of concept being built for Williams-Sonoma where it's not just that we're selling the pan, but also giving recipes to the customer that inspire them to buy the pan.

And you're going to see us do even more of that kind of marketing as we go forward.

So each brand does have its nuance but the overall strategy is the same, which is to provide the customer with a seamless shopping experience and to really help them make their purchase decision anywhere, any time they want to shop.

Brian Nagel of Oppenheimer.

I want to focus my question on just sales.

The commentary you made in your prepared remarks is quite positive about what you're seeing as we shift into the fall season or so.

But if you look, the sales did slightly fall below plan, if you look at it on a brand sales basis for Q2.

So maybe if you could help us understand what the trended business was for the quarter.

And then the second question on that, given all of the financial market turbulence lately, if you will, any type of impact to your business more recently?

To run through the quarter, the quarter actually got -- Q2, if you look at it sequentially, there was some choppiness but it got stronger in July which may be surprising.

And that's about as much as I think we should talk about in terms of sequential trend.

As we look at August, as I said, it's early but we're confident about what we're seeing right now from our customer.

And we have been building our strategies for the back half of the year with the economic uncertainty in mind.

So we have very relevant marketing themes that are going to be relevant to how people are feeling.

We have exciting new product offers.

And our operating model allows us flexibility in a more promotional environment.

Janet Kloppenburg of JJK Research.

I wondered if, Laura, you could talk a little bit more about the comp trends, the inner store trends.

I think that maybe your investment in the direct side of the business has maybe boosted that channel's reach a little bit more than expected.

And I'm wondering if you think the tradeoff is ahead of plan.

That is, from stores to that channel.

And how we should be thinking about store growth, particularly in the Williams-Sonoma brand going forward.

And also, Sharon, if you could talk a little bit about the outdoor and dinnerware categories that you said there may have been some problems with that in the second quarter.

And lastly, if you thought the back order rates at all affected your top line trends in the second quarter.

Thank you.

Hi, Janet.

Back orders definitely affected some of our trends.

And clearly, if a customer has to wait, you also can see demand fall off.

So that is why we're working hard to remedy that in some categories, but also keep the inventory tight in total.

In terms of the comp, I was talking about that earlier in that our customers shop multi-channel.

And we have made a tremendous investment in our e-commerce channel.

We've also made investments in retail.

And we believe very strongly in the combination of the 2 to help our customers make their purchase decisions.

We have chosen not to favor comp store sales even though they've been historically what people look at because we're focused on driving highly profitable sales and letting the customer make that decision.

There's not a surprise to us that the highly targeted marketing is working.

And that, given that we have our largest store online, we're seeing more rapid growth there.

In terms of our real estate portfolio in the United States, we have been very focused on market by market where we should have our stores, where we should remodel stores.

And keeping our fleet fresh and highly profitable.

And so you see us in markets, remodel entire stores, and in some cases close a store where we have too many stores in the market.

And this is going to be a continuing strategy as we go forward, and one that we believe will really strengthen our brands and continue to deliver more profit to our shareholders.

You mentioned the Williams-Sonoma outdoor and dinnerware categories as being slightly softer.

And we did see with the seasonal shift that outdoor, it started earlier but then the sales actually we brought outdoor in a little bit earlier than we had last year.

And we saw some nice response early in.

But then we didn't see the ramp that we would have liked in our outdoor cookware category.

And it was highly promotional.

And, frankly, we believe that it was more that we were treating it more of a durable when it was really a consumable.

And it was something that we probably shouldn't have planned as aggressively.

So that is the comment on outdoor.

And dinnerware, we actually have been really working to freshen up our table top category.

And if you go into our Williams-Sonoma stores now, you'll see the results of that, which is a more elevated table top, higher quality, more artisanal.

And we're very excited about that transition.

Alan Rifkin of Barclays Capital.

Hi, this is Sam Reed filling in for Alan Rifkin.

I just was noting that you guys said there was now more uncertainty than in Q2.

Applying what you learned in the last recession, if the current environment should continue to slow down, what steps what you be able to take to further rein in expenses?

We remember well what happened before.

And when that happened we retooled every single part of our Company.

And those initiatives continue to give us cost savings today.

And we have said earlier that our supply chain initiatives continue to perform and we have additional initiatives in the future to save money and also to deliver better customer service to our consumers.

Those specifics are competitive but we have still a lot of runway in improving the quality and the service to our customers in our supply chain.

And also updating our network to do so, that will provide us lower costs.

Throughout the Company there are other areas where we continue to find leverage points.

We've talked about our ad costs and the increasing understanding of how to use e-marketing programs to optimize profitability.

And our direct-to-consumer percentage to total really gives us flexibility that others don't have in their operating models.

I just want to add, though, that even though we see all of this uncertainty, and we of course read the news and watch the stock market, we are also really committed to investing in our longer term growth.

We said this year that we are going to make an investment in e-commerce and in global and in new business acquisition.

And we believe that even these uncertain times give us an opportunity to get further ahead because of our strong financial position.

Matt McGinley of International Strategy and Investment.

I have a question on your increase in selling margins.

Presumably you are having cost increases that are cycling through the gross margins but you're offsetting those by price.

Are you still receiving price request increases from your vendors at the same rate/ And when does that begin to level out?

And when do you think that those cost headwinds will no longer be a headwind where you can still get through the price but maybe not have the expense?

I'd like to say that the worst is behind us, with commodities going down.

But the reality is that labor will continue to go up in Asian markets and you're going to see vendors, they are going to ask for cost increases.

We have been successful in offsetting them through some unique strategies that we have.

And we will continue to focus on them.

But we do have in our margins now, I hope, the worst of it with the cotton price spike from last year.

Those goods are now in our pipeline, as we speak.

Chris Horvers of JPMorgan.

Sharon, question for you.

Given the slowdown in the core Williams-Sonoma comps in the second quarter, and the importance of that brand to 4Q sales, is the 20 basis point gross margin reduction in the back half particularly related to this brand as you see an ability to trade off selling margins versus advertising productivity?

And just really bigger picture, we're all trying to figure out what's going on with the high-end consumer, that's your core customer.

Maybe you could talk about how you're thinking about the high-end consumer today versus maybe a month or 3 months ago.

Certainly.

In the back half when we look at the margin, we actually have been more conservative in every brand, with the exception of West Elm, which is absolutely positively seeing probably the best year in its history.

So when we look at it, what's interesting about this time is that the high-end consumer, when you listen to the categories that Laura just spoke to, that are actually working in our business, the high-end consumer is staying strong.

And our higher-end assortments are performing well.

So as we think about it, there's the mix of our brands, the mix within our brands that will affect the margin, but there's also the strength that we see behind the business coming into Q3.

We both said that coming into Q3, the consumer response to our fall merchandising strategies and our product is strong.

So as we look forward, while the economy is doing what it's doing here, we are seeing the consumer engaged.

So we'll look at that.

We've softened it 20 basis points on the year when you consider the fact that Q3 and Q4 are bigger than the first 2 quarters of the year.

It's a significant cushion and we feel good about it.

Also, if we had to go further, we also, as Laura said, with the operating model, I expect to see the benefit on the advertising side, on the SG&A side, because if we're more promotional, we see that we can use less advertising in order to drive the sales.

Brad Thomas of KeyBanc Capital Markets.

Wanted to follow up on some of the commentary around your promotional activity.

I was hoping you could speak a little bit more about your level of planned promotions during the second quarter versus the level of markdowns.

And secondly, when we see the retail sales come in a little bit light, the share shifting towards DTC, does that put incremental pressure on your retail margin?

And then lastly, as we think about the back half, is it fair to think you're stepping things up another level with respect to that planned promotional activity?

Brad, it's Laura.

Q2, our margins, our planned promotional activity and markdowns actually allowed us to drive higher MMU year-over-year.

So it was successful in doing, I think, even more than others thought it would do.

And at the same time, we talked a lot about promotions but our brands are very regular price brands.

In fact, the percentage at regular prices is quite high.

And so, while we've talked about it, it's a smaller shift in the numbers than you might expect, if I were to go through them.

So as we look at Q3 and Q4, we have our plans in place, they're competitive.

We also have plans if the economy were to change, good or bad, to address the change in the competitive environment.

Because it is so important to us that people can buy the best value, the best quality, the best price at our brands.

Kate McShane of Citi Investment Research.

I know it was just fully launched in Q2 with your international shipping but I wondered if you could give us a little color on what you have seen so far and how the response has differed among your brands?

Sure.

We launched with a third party and we did this for 2 reasons.

One, we have demand and our customers are asking for us to ship all the time.

Even from our American stores overseas we're constantly having that done via containers and different ways.

And we thought that this would be a much better experience for our customers with a better system to do that.

The other reason we did it was because it helps us know where the bulk of the customers are in advance of opening stores and going into stores and going into markets with fully integrated e-commerce.

And so we're very pleased to understand and verify where we have business and in what order.

We also, as we think about our international strategy, we've also been talking to all of our store associates in all of our stores about what the top 3 countries are that customers want to ship to.

And comparing those comments to what we're seeing with our international shipping demand.

And it's very interesting and congruent, and is really going to help us launch very effectively overseas.

David Magee of SunTrust Robinson Humphrey.

Just a quick question, more strategic, on the Williams-Sonoma brand.

As you look in the future, that seems to be, to me, to be the most vulnerable, perhaps, of your brands relative to online competition.

How do you plan to protect that?

Do you get exclusives from vendors increasingly in the future or how do you see that developing?

We are getting exclusives.

And we believe that our customer comes to us for not just the product but also because they trust us.

We know them, and we are going to stand behind them.

We have increased our customer service initiatives very aggressively so that people come to our stores to gather around food, learn how to cook and entertain.

And then also to go to our website to search for recipes.

We've increased the recipe section of our website and the amount of page views are staggering and continues to grow, showing the relevance and the top-of-mind awareness of the Williams-Sonoma brand.

Our vendors are very strong partners with us.

They understand the marketplace.

We are the big fish and they want to protect the exclusivity and the relationship.

And so we continue to build new innovative products with them that are not in the market.

And Pat is reminding me here that only -- why don't you give them the stats.

Dave, only 26 of our Top 100 SKUs in Williams-Sonoma are even available on Amazon.

And while we have a lot of products that are available there, the majority of our best sellers are exclusive to us.

And it really points out the differentiation we have.

We have very strong DTC business in Williams-Sonoma.

The other thing that's very different about us is our artisanal products and that emporium feeling that you get when you go into our Williams-Sonoma stores or online.

And our ability to bring to the customers things that they would not see in any other online stores or in stores, in general.

So that premium positioning will continue, focus on, as a recap, the service levels, keeping the quality very high, and innovative and exciting new products.

Peter Benedict of Robert W.

Baird.

Sharon, quick question on the occupancy expense.

You said it was $123 million in the quarter.

How do we think about that in the back half of the year?

I think the plan was for that to start going up.

Wanted to just get an update on that and how you see that--

We lost you for a second.

I did hear the question, you wanted to understand with occupancy going down $2 million in the second quarter to $123 million, how did we see that for the back half.

That was the first part I heard.

Do you want to finish?

Just that, and then also how the international business is impacting the gross margin in the quarter, and how you see it impacting it going forward.

Thank you.

Certainly.

Occupancy, I think we can think about occupancy for the year virtually flat.

You are going to see some increases coming into the back half.

We're putting a new building in service as part of our e-commerce and our expansion plans, so that will be coming in, in the back half.

But the real estate teams are doing an excellent job in the efforts with our landlords, not to mention you would have noticed we have some additional store closures.

So I think that we should be in a great place with occupancy this year and we're continuing to work hard to optimize it.

As it relates to how the international franchise operations affect the P&L, basically what they do is they put pressure on the margin because obviously a franchise operation is a wholesale operation.

But then on the SG&A side, it levers.

So if you take a look at today's commentary, you see that where I mentioned in gross margin that international operations have a negative impact, it had a more than positive impact coming out of SG&A.

And that's how you're going to think about it.

And as that grows we'll have to continue to call that out because we've got to divorce that from selling margins.

Michael Baker of Deutsche Bank.

So I was curious about the strategy to open up pop-up stores in the West Elm brand where you still only have 35 stores throughout the country.

What's the theory behind doing a pop-up at this point rather than filling out some more permanent locations?

Opportunity.

We are very pleased with our store model and its performance.

And we are looking for permanent locations.

But we are going to be picky about those.

And because they are longer leases, and we want premium space, in some cases there aren't locations available quite yet.

However, we have seen that there are some spaces available earlier, and particularly through the holiday season.

And we opened a store in Georgetown that we're very proud of.

It's very creative, artistic space, very small, 3,000 square feet.

Driving profit but also helping us understand that market and what that consumer wants in that market.

So that when we do put a permanent store there, we can be successful.

And also have the population there really get to know us as soon as we can.

So you're going to see us continue to look for these.

It's always a good time, particularly as you head towards the holiday season, where they make sense.

And I'd invite any of you who are in Washington DC to go visit the store downtown to see what we're talking about.

Laura Champine of Cowen and Company.

This is Tom Nikic in for Laura Champine today.

I just wanted to ask a little bit more about margins.

So you said earlier that you've been more efficient with your ad spending.

Does that mean that you can afford to be a little more promotional in the back half than you otherwise would have been, and that's what's driving the reduction in the full year gross margin guidance?

And is there something else going on, like were product costs higher than you had expected or anything along those lines?

Tom, the advertising productivity, when we talk about advertising we're talking about advertising productivity.

Meaning that for every dollar we are investing in advertising, it is more productive than the dollar that we would have spent in a prior time frame.

So we are extremely pleased with what we've done, the investments we've made in e-commerce, e-marketing, what Pat's team is doing, the circulation balance between catalog circulation and e-marketing.

All of those are playing into a higher productive ad cost.

To your question, yes.

We believe that in the back half, if things became more promotional with the competition, that we definitely would be able to move some gross margin dollars and offset them in ad costs and go further than we've already gone in the guidance.

And would do so if we saw that to be necessary.

At this point, based on the initial consumer response to our fall merchandising strategies, we're not seeing a need to do that.

But if we did, we certainly could.

Michael Lasser of UBS.

Sharon, digging deeper into your sales guidance for the second half, have you taken the uncertainties in the broader environment into account?

Or have you simply and strictly kept it to a similar method that you've used for forecasting the business in the past?

We've kept it pretty much -- there's no question that we considered it.

Obviously, we certainly did because if you take a look at the guidance, we did take it down in the back half of the year.

For the full year we're down a little bit.

We held it in the same place.

And based on the strength we're seeing right now on the fall assortment we might have potentially projected that out further.

But at this point, we have been cautious but not materially.

We see our business performing.

We see the high end performing.

So I wouldn't say it's overly conservative, no.

At this time I'll turn the conference over to Laura Alber for any final comments.

Thank you all for joining us and we look forward to talking to you next time.

That does conclude today's teleconference.

Thank you all for your participation.