Williams-Sonoma Inc (WSM) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Williams-Sonoma Inc.

first quarter 2012 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'd now like to turn the call over to 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 one and elsewhere in the earnings 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, trends, guidance, growth plans, and prospects of the Company in 2012 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press release and SEC filings including our most recent Form 10-K for more information on these risks and uncertainties.

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

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our first quarter 2012 results and our outlook for fiscal year 2012.

Good morning, and thank you for joining us.

With me today are Pat Connolly, our Chief Marketing Officer, and Julie Whalen, our Acting Chief Financial Officer.

Today we want to share with you our first quarter 2012 results and our outlook for the second quarter and fiscal year.

In the first quarter we delivered non-GAAP earnings per share of $0.34, our best first quarter earnings ever.

This is a 13% increase over a year ago, on revenue growth of 6%.

Pottery Barn and West Elm performed exceptionally well during the quarter and drove our overall profit increase.

These results demonstrate three fundamental and differentiating strengths of our Company -- our portfolio of brands, the flexibility of our multi-channel strategy, and our commitment to strong financial discipline.

We know that each of our businesses will not always trend in the same direction in every quarter, as was the case in this first quarter.

Pottery Barn and West Elm exhibited excellent growth during the quarter and drove our overall increase.

Williams-Sonoma, Pottery Barn Kids, and Pottery Barn Teen, however, experienced negative comparable brand revenue growth.

During the quarter, comparable brand revenues in total increased 5% and e-commerce net revenues increased in total 12%.

We are very pleased with the results we are seeing in Pottery Barn and West Elm, and believe that these brands will deliver strong results throughout the year.

While the Williams-Sonoma, Pottery Barn Kids, and Pottery Barn Teen brands did not perform as well as Pottery Barn and West Elm in terms of comparable brand revenue, we did see significant improvement in their merchandise margin performance relative to Q4.

This planned year over year improvement on a sequential basis was most pronounced in Williams-Sonoma.

This is an encouraging sign that our strategies are working.

During the quarter, we executed against key elements of our long-term mission to be the leading multichannel retailer of home furnishings and housewares in the world.

In addition to driving record earnings in Q1, we invested in three key areas -- e-commerce, global expansion, and new business development.

I would now like to talk about each of our brands, beginning with Williams-Sonoma.

I'm going to start with Q1 results and then move on to update you on the status of our strategic growth initiatives in Williams-Sonoma.

In Williams-Sonoma, which represents approximately 27% of our business on an annual basis, Q1 comparable brand revenues declined 3.2%.

This excludes 110 basis point impact from the planned SKU reduction in the Williams-Sonoma Home assortment.

A significant factor in the 3.2% decline was our decision not to anniversary a major cookware promotion that we offered in Q1 of last year.

However, we did see positive comp increases in electrics, tabletop, entertaining, and better than expected results in our newly launched Agrarian assortment.

On our last call, I shared our plan for Williams-Sonoma to reverse the decline that we saw over the last few quarters and achieve sustained profitable growth.

We expect to see gradual improvement in this brand during the year as we execute our strategies and we are making progress towards that plan across a number of initiatives.

We are committed to being the leader in cooking and entertaining.

Our focus is on transformational change in proprietary products, in marketing, and in customer engagement.

Within our product assortment, we are increasing the percentage of exclusives and innovative products.

In the first quarter, we saw once again that where we had exclusivity and/or innovative products, our categories and our results were stronger.

We saw particular strength in electrics, tabletop, and from the April 5 launch of our Agrarian assortment.

As we discussed in our April press release, Agrarian is a new category for the brand and extends our authority in the kitchen by advancing the healthy living and farm-to-table trends which appeal to those customers interested in cultivating an awareness of where their food comes from.

The initial response has been strong and we expect to further differentiate our brand in the market with future innovative offerings in this category.

We also increased our assortment of exclusive products in tabletop, entertaining, and food, and we have seen a strong response to these proprietary, innovative products, which gives us confidence that our product strategy is working.

Marketing is the next critical area of our focus.

Our strategy is to market our products more powerfully across all channels.

The ability to communicate the stories behind our products consistently across multiple channels is a competitive advantage and we are improving our marketing on all fronts.

To lead this effort, we recently hired Anna Last, formerly Vice President and Editor in Chief for Martha Stewart's Everyday Food, as Executive Creative Director.

She will begin leading our talented and tenured team later in Q2.

Retail stores represent another significant competitive opportunity to enhance customer engagement and the overall customer experience.

We are increasing our localized product and marketing efforts and in-store community events including cooking classes and cookbook signings to drive customer engagement beyond the sale.

We also believe associate product knowledge is critical to differentiating Williams-Sonoma from others.

In the first quarter, we focused on two key training initiatives in our stores.

First, we expanded our associate product training program to elevate product and culinary expertise for all store associates.

Second, we launched our in-store clienteling initiatives which strengthens the associate-customer relationship by offering one-on-one service.

Clienteling allows the associate to assist the customer and anticipate their future needs through personal interaction and online tools, both in the store and in the customer's home.

Our goal is to provide an unparalleled customer experience that ultimately results in a higher average order size and higher number of transactions per customer, per year.

These programs have been tested and proven in our home furnishing concepts and are driving strong growth in those brands.

Fundamental to the success of our product, marketing, and customer engagement strategies is the talent in the Williams-Sonoma brand, and we have made some high impact changes to the organization.

Late last year we reorganized our field organization, placing the Williams-Sonoma stores under seasoned leader who has been driving significant growth in our home furnishing brands.

During this quarter, we placed product development under the leadership of a very talented product development executive who has had a significant role in establishing a strong growth trajectory for the Pottery Barn brand, and earlier I mentioned our recent addition of a new and highly experienced creative director.

All of these efforts are aimed at further differentiating the Williams-Sonoma brand and taking its assortment and the customer experience to a new level in 2012 and beyond.

I would now like to talk about Pottery Barn, our largest brand, which represents approximately 43% of our business on an annual basis.

In Pottery Barn, comparable brand revenues increased 9% on top of 8% last year, with strong results across all channels -- another excellent quarter.

From a merchandising perspective, all key categories including furniture, textiles, accessories, and tabletops delivered growth during the quarter.

As we enter into the second quarter, we are seeing positive customer response to our core and seasonal merchandise assortments and expect these trends to continue.

We are confident in the strategies we have planned for the year which include growing our product categories by consistently delivering exclusive, innovative, and artisanal products; leveraging our technology capabilities to allow our customers to interact with our brand any time, anywhere; enhancing our marketing to make decorating and entertaining at home easier and more fun; and delivering a superior customer experience, elevating our service levels at every touch point.

We believe that these strategies are what make Pottery Barn the premier specialty retailer in our segment.

Now I would like to talk about Pottery Barn Kids, which represents approximately 14% of our business on an annual basis.

In Q1, Pottery Barn Kids comparable brand revenues decreased 0.8%, following a 10.9% increase last year.

Although in total we experienced a slight decrease in comparable brand revenue growth, our year over year trend grew substantially stronger as the quarter progressed.

Revenue was primarily impacted by two inventory related factors.

Stronger than planned sales of furniture at the end of Q4, which depleted our inventories going into Q1, and greater than expected response to our new bedding introductions, our baby business, and key furniture collections.

We expect to fill these back orders, and are confident that our strategies will drive positive revenue growth for the balance of the year.

As we enter the second quarter, we are encouraged by the positive consumer response we are seeing in our core and seasonal assortments.

I would now like to talk about the PBteen brand which represents approximately 6% of our business on an annual basis.

In the first quarter, PBteen comparable brand revenues declined 6%, following last year's 7.5% increase.

This decline was driven by softer than expected furniture sales, partially due to inventory that was out of stock during the quarter and softer demand across the furniture category.

In contrast, the textile categories delivered double-digit growth in the first quarter, as we experienced positive customer response to our spring and summer collections.

In addition, as we saw in Pottery Barn Kids, business trends improved sequentially during the quarter in key categories.

Lastly, I would like to discuss West Elm which represents approximately 9% of our business on an annual basis.

West Elm comparable brand revenues increased 22% on top of 31% last year, and first quarter earnings and profitability reached new highs.

Brand growth was driven across all key categories, led by furniture, textiles, and decorative accessories.

In addition to increased offerings across these categories, we expanded our assortment into new areas including the kitchen.

Highly effective multichannel marketing propelled strong results across all channels, and emphasis on in-store activities and social media accelerated customer acquisitions and engagement.

As we look forward to the balance of the year and beyond, we will continue to execute on our product and customer engagement strategies.

And with retail profitability hitting new milestones, we are aggressively looking for additional stores.

In fact, in addition to the Riverhead, New York store which we opened in Q1 of this year, we are on track to open six new West Elm stores during fiscal 2012; in Durham, North Carolina; Princeton, New Jersey; Scarsdale, New York; Vancouver, British Columbia; and two additional location that we are unable to disclose at this time.

We believe that West Elm is uniquely positioned to capture additional market share and drive profitable growth for the balance of the year, and we are tracking to our plans to build it into a $1 billion brand.

Now, I will turn the conference call over to Julie for additional details on our Q1 financial performance and our Q2 and full year 2012 financial guidance.

Thank you, Laura, and good morning.

For the quarter, net revenues increased 6% to $818 million, with 9% growth in the direct-to-customer channel and 5% comparable store sales growth in the retail chain.

Non-GAAP diluted earnings per share increased 13% to $0.34 per share, and non-GAAP operating margin equaled last year at 6.9%.

Revenues, non-GAAP operating income, and non-GAAP diluted earnings per share were the highest of any first quarter in the history of our Company.

We ended the first quarter with $376 million in cash after returning $84 million to shareholders in the quarter through share repurchases and dividends.

Comparable brand revenues increased 5%, led by strong performance in Pottery Barn and West Elm, which more than offset the negative comparable revenue growth in Williams-Sonoma, Pottery Barn Kids, and PBteen.

E-commerce revenues for the quarter increased 12%, driving direct-to-customer revenues to 46% of total Company revenues versus 45% last year.

Gross margin decreased 60 basis points versus last year to 37.8%.

This decrease was driven by lower selling margins including increased shipping offers, partially offset by the leverage of fixed occupancy costs.

Non-GAAP SG&A improved 60 basis points versus last year to 30.9%, primarily driven by reductions in general expenses, demonstrating our continued commitment to maintaining strong financial discipline and expense management throughout the organization.

I would now like to comment on our first quarter non-GAAP operating margin in each of our business segments.

As mentioned earlier, total Company non-GAAP operating margin remained flat versus last year at 6.9%, a 30 basis points increase in the retail segment to 7.8%, and a 20 basis point improvement in corporate unallocated expenses to 6.8% was offset by 100 basis point decrease in the direct-to-customer segment to 20.8%.

The 30 basis point increase in the retail segment was driven by fixed occupancy cost leverage and lower general expenses.

The 20 basis point improvement in the corporate unallocated segment was primarily driven by a reduction in general expenses.

The 100 basis point decline in the direct-to-customer segment was driven by lower selling margins partially offset by sales leverage of fixed occupancy costs, higher advertising productivity, and lower general expenses.

From a balance sheet perspective, the first quarter highlights were as follows.

Cash and cash equivalents decreased $95 million to $376 million after returning more than $300 million to shareholders through share repurchases and dividends over the past 12 months as part of our balanced capital allocation strategy.

Merchandise inventories increased $54 million or 10% to $586 million.

As you may recall, we significantly beat our Q4 2010 and Q1 2011 sales plans, and as a result our ending Q1 2011 inventory levels were low.

The increase in Q1 2012 over Q1 2011 reflects that low base.

I would now like to discuss our second quarter and fiscal year 2012 guidance.

Our second quarter guidance for net revenues is estimated to be in the range of $850 million to $870 million, and our non-GAAP EPS is estimated to be in the range of $0.38 to $0.41 per share.

This assumes revenue growth of 4% to 7%, comparable brand revenue growth of 4% to 6%, and non-GAAP operating margin of 7.5% to 8.1%.

We are increasing our full year guidance to reflect the out performance we saw in the first quarter.

Therefore, for the year, non-GAAP diluted earnings per share are now expected to be in the range of $2.42 to $2.49 per share, which would be the highest diluted earnings per share in the history of the Company.

Net revenues are expected to be in the range of $3.9 billion to $4 billion, and non-GAAP operating margin is expected to be in the range of 10.1% to 10.4%.

For all other fiscal year 2012 guidance, please refer to our press release.

In summary, our first quarter financial results represent the best first quarter in the Company's history, and we drove these results while simultaneously investing in our future growth.

As we said in our last conference call, we believe that Williams-Sonoma Inc.

is entering a new and exciting phase -- growing our existing brands, extending and developing new ones, and expanding globally.

We believe this will allow us to deliver sustained, profitable growth well into the future, and provide predictable returns to our shareholders.

I would now like to open the call for questions.

Thank you.

(Operator Instructions) Peter Benedict, Robert Baird.

Thanks for taking the question -- couple questions.

First, just on the strong retail comp, can you give us a sense for traffic versus average ticket?

Then when we look at the PBteen slowdown and you explained some of that.

What's the outlook there?

You said you thought PBkids would swing back to positive going forward.

How about PBteen?

Is there a view as to when that could swing back positive?

Thanks.

Thanks, Peter.

Our retail comp was strong and we know that the initiatives that we have in place in our brands drive traffic but also that our digital marketing really drives traffic to our retail stores.

We have an incredible store team out there and this clienteling initiative is key to customer engagement and bringing them back, and knowing also what they're looking for.

We don't disclose traffic, average ticket.

So apologies for not commenting on that.

In fact, we don't measure traffic in most of our brands.

We do have traffic counters in West Elm but we don't have them in other -- in our other brands.

For PBteen.

The PBteen brand inventory issue is one that we're extremely focused on and getting back in stock in the furniture.

We've learned a lot by the impact of back orders in PBteen.

You can imagine that when you -- when the customer shops PBteen, there are two customers, it's the mother and the teenager, and making the decision together about what to buy for their bedroom is often difficult.

Imagine if by the time you've made the decision, you go online to place it and you see that the item is delayed -- very disappointing.

So it not only affects the furniture that you were going to order, but also the bedding and the other pieces in the room.

We do have some stock outages that we believe that we will fill by the end of Q2.

But given how important the quality of the furniture -- how important the quality is to us, we don't want to rush that delivery because that's key to long-term customer satisfaction.

So, everybody is focused on delivering high quality furniture on time and the big initiative in place, but I would say that does affect, and we are seeing it affect PBteen more than some of our other brands.

Okay, that's helpful.

Thanks, Laura.

Just one other follow-up.

On the promotional tone, in the business versus plan, I know your EBIT margins came in better than your plan, basically flat year-over-year.

Can you talk about the promotional tone throughout the quarter, how did that flow versus your plan?

Were your selling and merchandising margins in line with your plan -- better, worse?

How should we think about that?

Thank you.

Sure.

It's clear to us that value is still incredibly important to our customers and it's not going away.

Our customer's looking for value matched with quality and we deliver on both of these attributes.

We have a prepared promotional cadence throughout the year.

We'll continue to be very competitive in the market with the non-exclusive branded goods.

In the Williams-Sonoma brand, where our competitors are breaking [map], we will respond.

The Williams-Sonoma brand is most impacted because of its exposure, as you know, to non-exclusive branded product.

We intend to be strategic on this front but never at the expense of profitability.

Do you want to comment, Julie, also on the promotional environment and margins?

Sure.

Hi, Peter.

I think one of the most positive things that we saw in Q1 is that, when you look at the Q1 year-over-year margins relative to Q4 year-over-year.

We saw significant improvement in our margins, specifically or especially in Williams-Sonoma, but across all brands.

So I think that's one of the -- I think there was some concern about the promotional environment.

We wanted to make sure that you understand that there is some good improvement coming quarter by quarter.

Okay, great.

Thanks so much.

Joe Feldman, Telsey Advisory Group.

I had a couple of quick questions.

One was if you could give us an update on the -- your supply chain initiatives in the DTC?

I don't recall getting too much detail on the prepared remarks today.

Just wanted to see how things are progressing there.

Sure, great.

We continue to make progress against our quality and damage initiative, and we are, as you know, running our own offices in furniture overseas which is really contributing to lower damages and quality issues than we had a year ago.

That's very important to our customers and we're also very focused on, on-time delivery.

While I just talked about furniture that is on back order, I feel very confident because our teams are there, working on the ground, to give us a clear sense of when things are coming and also to ensure that, as I said earlier, it wasn't rushed.

As it relates to our initiatives across the supply chain domestically, we are continuing to drive productivity across all areas in the supply chain and to prepare for the next step of real modernization of our CMO facilities which will yield great benefit into the future.

Did you also, ask, Joe, about DTC initiatives?

I think you mentioned that at the end of your question.

I'm going to let Pat talk about the progress we're making against our DTC investments.

Thanks, Laura, and good morning, Joe.

I think in e-commerce in particular in the first quarter, we made some very strong progress in three areas -- in relevance, and in service, and in usability.

I think as you go on the site, you will see that we are personalizing the site experience to deliver product content that's relevant to the individual site visitor.

What we've found is that these personalized product placements are highly effective, like four times greater response than a non-personalized placement.

So we see significant opportunity here.

We're really just getting started.

We're also expanding our programs of highly personalized e-mails which are generating up to 10 times the average of our regular e-mails.

So we think there's a lot of opportunity in this area.

In the service area, we added a feature called click to chat which allows our customers to interact with our service associates online.

Our customers are really responding to this very well.

I think additionally what it's allowing us to do is to analyze these conversations and to look for patterns so that we can quickly react to potential issues and continually improve on service.

The last thing we did on the e-commerce front was really to our continued mission to improve usability, particularly around the area of monogramming, where now it's much easier to order a monogrammed item.

Of course the checkout path, making it easier for customers to complete the purchase with less clicks.

Thanks, Pat.

Matthew Fassler, Goldman Sachs.

This is Halley Goodman on behalf of Matt Fassler today.

Our question relates to the impact of shipping deals on gross margin.

We were wondering if you could quantify this impact in Q1?

We were also wondering when does Williams-Sonoma cycle the biggest increases or is this going to increase in importance in perpetuity?

Let me take the first question around the shipping deals in Williams-Sonoma.

Shipping is part of our value equation, and we continue to test a variety of shipping promotions in all of our brands.

Generally they drive more sales response than an equivalent merchandise discount.

I know that there's always been the question of what would this do to your long-term operating margin if shipping becomes even more promotional in the future.

I just -- I want to spend a minute on this because we believe it would have much less impact than some people have written because the vast majority of our DTC volume is in home furnishings and the customer does not expect that furniture and rugs will be shipped to them for free.

Over the past several years we've been able to reduce the fees we charge on these items, continuing to pass on the savings we accrue through optimization in our supply chain.

Since we are larger than our next four competitors combined in the home furnishings category, the scale we've achieved, particularly in large item logistics, gives us a real competitive advantage.

Our goal is to provide the finest shipping experience for these items and to do so at a cost for the consumer that they consider reasonable.

Budd Bugatch, Raymond James.

Good morning, and thank you for taking my question as well.

I guess I want to come at that same issue or a part of that same issue.

I think, Julie, you said that DTC margins were down 100 basis points, and you pointed to lower sales margin offset by a number of factors.

I wonder if you could go over that again, and perhaps quantify the magnitude of the sales margin and how that impacts?

Then secondly, if you could address the SG&A initiatives?

I think you told us that it would be $15 million to $20 million on an annual basis.

I wonder if we could know what was spent in the first quarter on that issue -- on those issues?

Okay, great.

Hi, Budd.

So from an operating margin perspective, especially in the DTC business, I think a couple things to call out here.

First, let's remember that the operating margin overall is at and is projected to be at the high end of our guidance, at the highest level in the history of the Company.

Second, our DTC operating margin is significantly higher than our retail operating margin, it came in at 20.8% and retail's at 7.8%.

We have an expectation that our business is going to grow to 50% in DTC in the next three years.

That said, as you pointed out and as I said in my prepared remarks, that the DTC margin this quarter was less than last year.

That was by lower selling margins and the fact that we made a decision to be more competitive on shipping.

The other thing is that in Q1, we drove higher demand than we filled.

So we didn't get the total benefit from those sales to leverage the ad costs.

Lastly, as Laura said earlier, we know that our digital marketing efforts drive our retail channel business which is also where we saw some improvement.

As far as your SG&A question, yes, it is $15 million to $20 million for the year.

We're not providing quarterly guidance or results on what we've spent, but I think Laura, would you like to update him on the initiatives and where we are with that?

Sure.

We did, as I mentioned earlier, make the investments that we planned to make across e-commerce, global expansion, and business development.

Pat talked about the progress on the e-commerce front, focusing on relevance, service, and usability.

As we look at the quarter two for e-commerce, there's a significant amount of functional enhancements and new features through the balance of this year and in Q2, but instead of singling out a few of those, I prefer to talk about the capabilities that we built.

We went through a pretty rigorous e-commerce strategy effort almost two years ago, and since then we've ramped our e-commerce teams and their capabilities according to that plan.

We've become very efficient at delivering improved website features and functionality on a regular cadence.

We have planned releases every six to eight weeks where we launch new capabilities.

For those of you who have been following the progression of our websites you will notice the steady progression.

While some releases are bigger than others, all of them help us get closer to our ultimate vision of seamlessly serving our customers across channels.

As it relates to global expansion, we are continuing to increase our global shipping business.

We've already expanded our international shipping capability from 75 countries to 99.

Our results are exceeding our internal plans for this business.

Last week we began shipping the Williams-Sonoma brand to Canada.

On the franchise front, Alshaya is going well.

This summer we're opening our first Williams-Sonoma, West Elm, and PBteen stores in Kuwait.

Alshaya is very committed to our brands, and we will have 18 stores in the region at the end of the year.

In terms of Company-owned global expansion, we're continuing to make progress against our multi channel fully integrated IT platform which is scheduled to be completed by 2014, and we will update you when we are in a position to make an announcement.

In new business development, as we've talked about, West Elm is performing ahead of our expectations and this is the bulk of our business development investment.

We are also on track with the integration of Rejuve, and we've seen real growth in this business year-over-year.

It's a real bright spot for us, and we're pleased with our marketing strategy to date and we are getting the response we expected from leveraging our house file.

We are excited, we're opening a new store for the brand in Berkeley over the summer.

So in total, as we look at everything we talked about and the progress in Q1 and our ability to fund these investments and also deliver record earnings, we are very optimistic about the balance of the year and our ability to deliver.

Matt McGinley, ISI Group.

Laura, you made a comment I think it was during the PBteen comments that you saw or experienced softer furniture demand.

Was that comment specific to PBteen or was that across all segments that you saw furniture demand soften?

As you had

I was referring just to PBteen when I mentioned softer furniture, although in PBK we also saw softer furniture sales related to the inventory outages.

We saw very strong furniture sales in West Elm and Pottery Barn.

If I could, just one more on that.

On the increase in deposits that you had on the balance sheet, it was only up about $7 million or $8 million.

How much of that was related to those inventory backorders that you would have on PBteen and PBkids versus just normal increases in customer deposits?

So that pertains to the delivery of furniture.

So basically there is some revenue at the end of the quarter that we were not able to deliver by year end, so it basically raised the balance.

David Magee, SunTrust Robinson Humphrey.

Just a couple questions.

One, it sounds like you guys are making good headway with the proprietary product push.

Can you just give a little more color on how that process works.

Are you near where you want to be with that or do you still have a long runway to go as far as securing proprietary merchandise in the stores?

You're referring to Williams-Sonoma, I assume?

Yes, thanks.

We are making good progress.

We've been at this for a while, so you're going to see us just like we launched Agrarian in Q1, at the end of Q1.

That's something that's been in the works for over a year, something we identified as white space in the market, and also a food trend and a lifestyle trend.

Williams-Sonoma has always been first to bring in new food trends.

Chicken coups and beehives are something that people are very interested in doing, as they want to know where their food comes from and have a part of growing and harvesting and experiencing the making of products versus just cooking them.

So Agrarian represents a launch that was in the works.

We have other launches throughout the balance of this year -- very proprietary information, so I'm sorry not to give you a full outline of what is to come.

But what we have said, is that the areas that we can affect the soonest are tabletop and entertaining and linens because those have shorter lead times.

So that's been under work, and we're seeing very strong increases in those categories.

In terms of durables, it can take up to two years to develop durables and electrics can take even longer.

Where we have very innovative electrics right now, we're seeing double-digit increases.

So we know that both innovation and exclusivity are what our customers are looking for from us, and that's where we really win.

You will see us launch more branded products in Williams-Sonoma throughout the balance of this year, increasing in percentage.

Mark Becks, JPMorgan.

Thanks for taking the question.

Just focusing on the Williams-Sonoma brand, can you speak to what you're seeing there?

Is it more distinct pressure on retail or DTC?

Also is the emphasis really on driving greater profitability?

Then as a follow-up, a lot of retailers have spoken of pull-forward in demand in the quarter.

It doesn't look like you saw that given comments on Pottery Barn, but wanted to confirm?

Then perhaps any updates on current trends in May as it compares to your current guidance?

Thanks.

Sure, Mark.

Williams-Sonoma, there's really not a comment that I'd make about the channels.

It's very interesting.

There's some categories that are so strong, double-digit across several categories where we're having -- where we had, I should say, the biggest issue in Q1 was cookware, which is a big percentage of our business.

In addition to not having anything branded, there hasn't been a lot of new technology that's been introduced in cookware.

That is what the customer is looking for across the board, and that is what we're focused on for the future is to bring in durables that change the way you cook that no one has seen before.

So I'm very encouraged to see that we have real bright spots versus a unilateral softness across the brand, and profitability is key to us.

We've always focused on the highest level of quality across our stores and with the way we treat our customers and our employees, and at the same time incredible financial discipline in the brand.

We were able to change the trend of gross margin versus last year relative to Q4, which was important for us to see and we did choose not to do a cookware promotion that we had last year that cost us some revenue comp.

Did you call out the -- or did you quantify the impact of the cookware, not anniversarying the promo?

No, we didn't.

Then just on the pull-forward of demand?

Could you ask that question again?

I want to make sure I understand what you're getting at.

Yes, a lot of retailers have spoken of pull-forward in demand.

It didn't look like you saw that given the comments on Pottery Barn, but just wanted to confirm -- some instance monthly cadence.

Then just your current trends as it pertains to your guidance.

We're confident in our guidance.

They reflect the current trends and if you're asking whether -- we said we saw sequential improvement in similar brands and then we saw consistent improvement -- consistent performance.

I think what you're asking is was it all in the beginning of the quarter -- actually, I said the opposite in some of our brands.

Great, thanks.

Does that answer your question?

Yes, sure does.

Brad Thomas, KeyBanc Capital Markets.

This is actually Jason Campbell standing in for Brad.

When we look at your retail comps, it seems like over the past five quarters or so it's been pretty volatile, up close to 7% and then down to 1% a couple quarters.

There isn't really a distinguishable trend there.

I was wondering what's really behind the volatility that you're seeing in your retail segment, and what you're doing to maybe drive some more sustained improvement in that?

We've said this before, and part of our unique -- what makes us unique is that we're multi channel, big portion online.

We're serious when we say we don't care where they shop.

So at any given point we drive retail sales, we drive DTC sales, and we're looking at the total.

Of course you look at individual parts to see specific profitability improvements.

But from a customer facing perspective it's really all those channels working together to both, inspire the customer to shop and then to service them and complete the sale.

Is it anything that you've -- does it correlate with anything you've done as a Company, that maybe in those higher quarters you've just focused more on retail or in the lower quarters you've done more digital marketing or is it just the macro how the consumer is reacting right now?

I think if we all think about how we shop, there's so many variables that go into play about where you actually purchase something.

Do you have time to go to the store?

Would you rather have it online?

I don't think it relates to anything other than consumer preferences at the time, and I expect the channels to have some lumpiness.

Laura Champine, Canaccord Genuity.

My question is a strategic question for you, Laura.

With Williams-Sonoma brand seeing a lot of change in Management and a few execution issues with the Kids brand.

How are you thinking about managing the risk that expanding globally becomes a distraction?

Along those lines, have you pulled back on plans for Company-owned stores because of the macroeconomic environment in Europe?

Sure.

We actually -- we hired a separate group to lead our global expansion efforts last year.

We brought in two seasoned executives to take that on for exactly the reason you mentioned.

Which is that the brand presidents, we want them to stay very focused on the domestic business.

Also to be able to train some new executives, bring them into the Company as we have with other people in the past.

We had a great success in bringing people in but also keeping our tenured associates.

Of course the brand presidents will be very involved with our global expansion to ensure that the DNA of the brands is there.

We are not pulling back on our plans for global expansion.

We have not given indication yet of where we're going and when.

We will update you as soon as we are ready to make that announcement.

But I will say that we're very cognizant of what's happening around the world and the global environment and our focus, when we go global, is to both have stores and websites that are of the same quality as our stores here, but also to run them profitably.

This is a very key part of our strategy.

We have a plan to open stores and launch the websites and to make money because our plan is not to open a multitude of stores and large stores in high rent districts, but stores as marketing for international e-commerce.

So we'll be giving you more updates on that as we have information to share.

David Gober, Morgan Stanley.

Thanks for taking the question.

I just had a question on West Elm.

For the last few quarters, clearly comps have been very strong, and one of the things you guys have pointed to has been the increasing breadth of product and category expansion.

Where would you say you are in that process?

How much longer do you think you have to go in terms of getting to where you want to be on that brand?

Great question.

We've successfully densified the stores, and online the store is infinite.

So we have been increasing some categories more than others to see where the point of diminishing returns are and we haven't found that yet.

So we have a lot of runway to increase the assortment online.

Just like in our Pottery Barn brands we have the opportunity to distinguish suburban stores from more urban stores with our product assortments, and that gives you another layer of product.

As I said earlier, we're testing -- we're always testing new categories in each and every one of our brands and we brought in some great kitchen assortments and they've been very successful and you'll see us continue to build on that front.

Okay, and just one follow-up on the Williams-Sonoma brand.

I know you've touched on this at various times throughout the call, but I just wanted to clarify what you're seeing from competitors here.

Obviously you've taken a number of steps that are progressing.

But are you seeing the same type of intensity from your competitors in some of the product categories that have seen pressure over the last couple of quarters?

It's clear that it is very promotional out there still.

It's not surprising to us.

I think the consumer is forever changed.

They're looking for value.

They're looking for quality.

They're looking for innovation.

They want to be inspired.

And that's what we're focused on.

You can see a lot of people breaking map across the board on branded goods and using shipping as a really -- a promotional tool.

We study all of these things on a weekly basis and make decisions about what we're going to do, whether we're going to compete on price or whether we're going to hold.

It's highly competitive what some of those decisions look like, so I'll just say that we did make the decision in Q1 not to anniversary the cookware event that we had last year.

Through last year's promotions all the way through Q4, we were able to learn which ones really make a difference and have staying power and bring the customer back and which ones don't.

So we have a much clearer understanding of which ones actually drive profitability short-term and long-term, and we built our 2012 promotional strategy based on those 2011 results.

Michael Lasser, UBS.

This is Chris Weng calling in for Michael Lasser.

I have a couple questions.

The first is how much room would you say you have to make -- I guess the flexibility of making SG&A cuts without having an impact on sales?

I was also wondering how long do you think it will take for the Williams-Sonoma brand to really turn around?

How many quarters ahead do you think it will be?

This is Laura, Chris.

On Williams-Sonoma, it's going to be gradual.

We haven't put out quarterly guidance for Williams-Sonoma specifically, and I will tell you that every quarter we're going to give you an update, we're going to tell you what's working and if we're making any adjustments.

On SG&A, I'm going to let Julie handle that.

From an SG&A perspective, I'm not quite sure your question.

But basically where we saw improvement was in general expenses where we managed our expenses.

We did not see a decline in our advertising investment, so the types of things that we saw it benefit from would not impact sales.

I don't know, Pat, if you want to talk about the correlation with advertising costs and sales.

Well I think we -- just to answer your question a little more, Chris, we have really a great tool in terms of how we manage our ad cost.

We continue to see improving productivity there.

We have a very disciplined process by which we evaluate our marketing spend on a monthly basis.

I can just say while some of what we're doing is very competitive, that we've seen a lot of success not only in our core programs, but also new ones that we've introduced and tested that have an opportunity to scale significantly.

This is really in the digital space in terms of search, in terms of targeted display, in terms of some of the other things that we're doing.

Laura has mentioned several times in her prepared remarks that she sees us at the intersection of lifestyle merchandising analytics.

I think we're seeing every quarter here, how we're able to use the analytic ability that we've built into our DNA here over the last 20 years to really drive this business.

It's a real competitive advantage.

That's helpful.

Another question if I may.

On the decision to reduce the promotions for cookware, what was the thinking behind that?

Were you seeing certain trends going into the quarter?

Very competitive question.

I'd rather stay away from going through how we make decisions about pricing and --

Okay, understood.

As competitive as it is, everyone is looking for what will we do next.

Matt Nemer, Wells Fargo securities.

My first question is, could you just talk to how much of the improved gross margin trend at Sonoma was due to not repeating the All-Clad promotion?

Then we noticed that a 20% off cookware promotion launched in the last week or so, does that mean this promo essentially gets shifted into Q2 or are they different in nature?

Sure, thanks for the question, Matt.

We haven't broken out the gross margin related to the not anniversarying cookware, but it is a focus of ours to improve the Williams-Sonoma gross margin and profitability.

So you're going to continue to see us drive that.

We did launch a cookware promotion over the weekend in response to what's going on competitively out there as we will throughout the year as we see different factors in the marketplace.

I think it's early for me to comment on the results of that, but I will tell you that this is what we know.

The customer would rather buy high-end cooking, entertaining essentials from Williams-Sonoma than anywhere else.

So they are very responsive to promotions and we use them strategically.

We also use them offensively and defensively when we have to, to protect market share and then also to drive repeat purchases.

Marni Shapiro, Retail Tracker.

I had a couple quick questions.

On PBteen, I know you guys have had success with Pinterest with West Elm and the PBteen customers on Pinterest.

So I was curious if you were thinking about doing that interesting marketing there.

You saw amazing textile sales there.

I know you guys have been working to update the textiles at PBteen, and I was curious how far along that product was for spring because I'm assuming there's more to come for fall which is exciting.

Then if you could just -- I don't know if you guys can differentiate or track gifting versus self-purchases at Williams-Sonoma.

If you can, can you talk a little bit -- have you seen a difference in those trends where gifting is holding strong and self has fallen off or vice versa or anything to that effect?

Pat, you want to take the question on Pinterest?

Yes, sure.

Marni, thanks for the question on Pinterest.

We've had a lot of -- first of all, one of the things we do, because we have multiple brands, is we share best practices.

West Elm has had a particular success with Pinterest that we have now really started to emulate and learn from in our other brands.

We actually -- we're down visiting Ben and the team at Pinterest and learned just three weeks ago when we were there that we were the first Company that had ever met with him.

We probably won't be the last.

But it really points to the advantage we have of being right here in the Bay area and sitting right there with Ben and his coders as they're building the new features.

I think you'll see some opportunities that we have there for all of our brands.

I can't really talk about it.

Excellent.

Then to the point about textiles, as I said earlier, we're seeing nice growth in textiles in PBteen and we have widened the aesthetic.

So we're pleased with the results that we're seeing there, and you're going to see us build on some of the new aesthetics that are working into the balance of the year.

But this was just the start?

Yes, exactly.

Excellent.

As relates to gifting, self purchase versus gifting, really very difficult to know exactly because while we can track how much is shipped to another address, you don't know if I've gone in to buy it myself and then give it to someone at a birthday party myself and hand it off.

But Williams-Sonoma we know is our highest gift brand.

It's a strategy that we're very focused on, both in terms of feature functionality on the website, how we market gifts, and then also the gifts that we offer, and the in-store marketing, and the clienteling that goes with that.

Because for example, we know online if you've purchased every year a wreath for your mother and we can reach out to you and send you an e-mail reminding you to buy the wreath, but we can also call you from our stores and make that very easy for you.

So gift giving is an initiative in the Williams-Sonoma brand under our product strategy that we are excited about and that we're very focused on.

In all of our businesses you've seen us increase our monogramming business and our personalization efforts -- and both the different fonts and techniques that we offer, but also the experience on the web which is where the business is done.

As Pat mentioned earlier, we really improved that experience so that you can go through that process quite quickly now versus before, it was a little bit more cumbersome.

Janet Kloppenburg, JJK Research.

Good morning, everyone.

Congrats on a good quarter.

Thanks, Janet.

Laura, I was wondering if you could talk a little bit about your assumptions for the DTC margins for the year.

Do you think that there will be selling margin pressure there for the remainder of the year?

I know that you ship primarily furniture and that's not free shipping, but have you seen any pressure on the shipping cost.

The shipping expense that you're allowed to get away with, with the consumer.

In other words, is anyone offering a lower shipping expense that may be pressuring what you actually are charging for shipping?

Secondly, on Williams-Sonoma, from what I've gathered from the call, I think you want us to think that, that comp -- all channel comp for Williams-Sonoma could be under pressure all year, but I'm not sure?

Thank you.

Thanks, Janet.

We're all fighting to answer your question on several fronts.

I want to talk about the furniture shipping charges and then I'm going to pass it to Pat, and then Julie to follow up.

The customer is very smart.

They know what the total price is of a piece of furniture.

Some retailers in our competitive set put the price of shipping into the price of the product, others charge restocking fees, cancellation fees.

We don't do either one of those things.

What we do is we have what we believe is fair shipping for white glove delivery and it's separate from the price of the product and that is how we've always done it.

We've actually been able to reduce our shipping income on furniture while maintaining the furniture profitability because of all of the great supply chain work where we've cut costs out of the supply chain.

That's helped us improve our value equation to the customer.

So while there may be others out there that have cheaper shipping charges per se, we know based on our competitive analysis across all categories, our shipping -- I mean our furniture is the best quality and the best value in the market.

Janet, I think the customer is really seeing it.

Our ability to vertically integrate especially on the upholstered product has just been terrific.

It's just really the cumulative impact of things we've been working on, on that supply chain for 10 years to deliver value to the customer.

The other point I wanted to make to you is I think the first quarter DTC growth belies the underlying strength as it continues in our e-commerce channel.

Our demand in the quarter was actually close to 16%, but we had backorders which reduced the ship demand, and I want to make sure you understood that.

So we're very encouraged by this, and as Laura points out, we have a lot of levers.

We have the shipping lever and we have the marketing lever that we can use to maximize the opportunity we have, especially in the furniture category.

I'll turn it over to Julie.

Janet, from an operating margin perspective, I think a couple things.

Remember, we're confident in the guidance we put out today.

We are -- if you look at the high end, going to beat operating margin both in second quarter and full year in the history of the Company.

Keep in mind that the DTC margin is much higher.

So having 100 basis point impact on a 20.8% margin versus retail at 7.8% is less pronounced.

We're continually driving the operating margin in total, and keeping in mind that also we're trying to grow the DTC business to 50% over the next three years.

That concludes our question-and-answer session for today.

I'll now turn the conference back over to Ms. Alber for any additional or closing remarks.

I want to thank you all for joining us.

We appreciate your support, and we look forward to talking to you next quarter.

Have a great day.

And that does conclude our conference for today.

We thank you for your participation.

You may now disconnect.