Williams-Sonoma Inc (WSM) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Williams-Sonoma Incorporated fourth-quarter and fiscal-year 2012 earnings conference call.

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

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

This conference is being recorded.

I would now like to turn the call over to Steve Nelson, Vice President of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

Please go ahead.

Good afternoon.

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

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

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 the earnings release.

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which addresses the financial condition, results of operations, business initiatives, trends, guidance, growth plans, and prospects of the Company in 2013 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press releases and SEC filings, including the most recent 10-Q for more information on these risks and uncertainties.

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

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our fourth-quarter and fiscal-year 2012 results and our outlook for Q1 and fiscal year 2013.

Thanks, Steve.

Good afternoon and thank you for joining us.

On the call with me today are Julie Whalen, our Chief Financial Officer, and Pat Connolly, our Chief Marketing Officer.

Before we begin, I'd like to discuss the leadership change that we announced earlier this afternoon.

Richard Harvey, President of the Williams-Sonoma brand, has resigned and will be leaving the Company.

Over the 18 years that we have worked together, Richard has been an exceptional business partner as well as a great friend to me.

Richard has worked at our Company for 30 years and leaves an enduring legacy.

We thank him for his service and commitment and we will miss him.

Janet Hayes, currently the President of Pottery Barn Kids and Pottery Barn Teen, will become the President of the Williams-Sonoma brand, and through the end of our fiscal first quarter, Richard will work with Janet to ensure a smooth transition.

Sandra Stangl, President of Pottery Barn, will now lead Pottery Barn, Pottery Barn Kids, and Pottery Barn Teen.

We congratulate Janet and Sandra on their new roles at our Company and look forward to their continued success.

Now, I will begin discussing our fiscal-year results followed by the highlights of our strategies for 2013 and beyond.

Our results during fiscal 2012 demonstrate the power of our multi-channel, multi-brand operating model.

For the year, net revenues exceeded $4 billion for the first time in our history with comparable brand revenues increasing 6%.

Non-GAAP operating margin matched our 2011 fiscal-year high of 10.3%, and non-GAAP diluted earnings per share grew to a record $2.58.

Our top and bottom line performance exceeded not only our outlook from the beginning of the year, but also our expectations as we entered Q4.

E-commerce, with top line growth of 15% for the year on a comparable week basis, continued to drive our direct to customer channel revenue and operating margin, which expanded by 40 basis points to 22.4%.

Our direct to customer channel now represents 46% of our total Company net revenue.

And we believe the increasing penetration of our direct to customer channel will drive further improvements in our operating margin over time.

We continue to be laser focused on our customers.

They are at the center of everything we do, all of our initiatives revolve around our customer.

This singular focus has allowed us to deliver increased revenue and profit while simultaneously investing in our future growth.

Our continued expense discipline throughout our organization enables this operational flexibility.

At the beginning of 2012, we outlined for you our long-term initiatives to drive sustainable, profitable growth and increase shareholder value.

I am pleased to report that we made progress against each of the longer-term initiatives that we communicated to you last year, and that they will be the focus of our efforts over the next several years.

These initiatives are -- to successfully execute our brand strategies and launch new businesses, to lay the foundation for the expansion of our brands' global presence, to invest in our supply chain to reduce cost and improve service, and to invest in the technologies and infrastructure underlying all of these initiatives to enhance our leading multi-channel business.

The heritage of our Company is one of internally generated growth.

While the Williams-Sonoma brand has grown in size to almost $1 billion, 75% of our revenues now come from our other brands that our current team has developed.

In 2012, we broadened the reach and relevance of each of our brands and invested in new businesses.

Through 2013 and beyond, we will continue to drive strategies that strengthen our current brands while identifying new business opportunities.

In the Williams-Sonoma brand, we are executing an exciting vision of innovation that allows us to be less reliant on branded goods.

In all of the Pottery Barn brands we continue to deliver impressive growth over industry averages.

In West Elm, our largest growth vehicle is now approaching 11% of our business at $430 million in revenues with a clear growth path to become a $1 billion business.

With this backdrop of a successful entrepreneurial track record we incubated and launched new businesses this year, including Mark and Graham, West Elm Market, and Agrarian.

Mark and Graham, which launched in November specializes in high-quality personalized products and gifts.

West Elm Market, a brand extension of West Elm, expands the brand to new categories in new settings.

Agrarian, a new category extension of the Williams-Sonoma brand, celebrates homemade and home grown.

And 2012 also marked Rejuvenation's first full year as part of our portfolio of brands.

We plan to expand on each of these businesses in 2013.

Global expansion is one of our most important growth prospects for the next 10 years.

As we shop the world, we continue to see a significant opportunity.

Our global vision is to serve our customers with the same high service model that we do in the United States, with a multi-channel strategy focused on e-commerce.

In 2013, we will enter into the Australian market with Company-owned retail stores and fully enabled e-commerce and distribution.

Our first four stores will open in May and will set the stage for further expansion within Australia, as well as other geographies, possibly later this year.

Our franchise business continues to grow, and in 2012 we saw the opening of an additional 10 stores in the Middle East.

There are now 23 stores open across all of our core brands.

Our supply chain is a competitive advantage; focused on our customer, our mission is to reduce cost and improve service.

This year, we continued our network redesign and we in-sourced additional foreign agent operations, with the biggest improvement realized by bringing Vietnam and South China furniture sourcing fully into our system.

Our return rate was the lowest in the history of our Company, a key metric in measuring customer satisfaction.

Our technology investments support our initiatives and allow us to elevate our service levels.

In 2012, our investments enabled us to make our IT throughput significantly more scalable and focused on e-commerce capabilities, global expansion, supply chain, and our stores.

We continue to scale our IT capabilities as we know they are critical to our growth.

We are pleased that in a recent survey of highest performing websites, our brands were the top performers.

We also know that our customers shop all of our channels and we are further connecting the in-store and e-commerce experience.

Technology will allow us to continue to differentiate our experience and leverage our assets to expand into new markets.

One of my personal objectives is to have the strongest team in retail.

In 2012, we continued to attract top talent across the organization and strengthen our culture.

We are confident we can achieve our goals because of our people, our commitment to execution, and continued investment in these growth areas.

We also know that we have some differentiating attributes that afford us competitive advantages.

We are one of the nation's leading e-commerce retailers.

Not just in sales volume but also profitability.

We know of few traditional retailers or e-commerce companies that are able to deliver the profitability metrics that we consistently achieve in our direct business.

Our catalog heritage has created a culture of analytics that has propelled our online growth and contributed to our disciplined history of retail expansion.

We have an excellent balance between physical and online store fronts, and we utilize our industry leading customer intelligence gathered over the past 35 years to drive merchandise decisions.

While we are not immune to the effects of the retail disruption we all see around us, our brands are at the forefront of specialty retailing with our merchandise categories and each continues to further differentiate itself from its competition.

Creativity and innovation is a key component of our strategy.

And for all these reasons, we see a clear path to more than doubling our business over the next decade.

Finally, we remain committed to our shareholders and returning excess cash.

In 2012, we returned $243 million in the form of share buybacks and dividends.

As we announced today, we demonstrated this commitment by announcing a 41% increase in our dividend to $0.31 quarterly, and a $750 million three-year stock repurchase authorization, which combined provided the largest return of excess cash to our shareholders in the history of our Company.

Now, I will turn the call over to Julie Whalen to discuss our financial results and outlook before I provide more details regarding each brand's performance.

Thank you, Laura and good afternoon.

We are very pleased with the fiscal 2012 results we are sharing with you today and the out-performance we saw on both the top and bottom line for fourth quarter and fiscal year 2012.

Before I provide more details on our 2012 results, as well as our guidance for fiscal year 2013, I want to remind everyone that 2012 was a 53 week year as compared to 52 week years in both 2011 and 2013.

The financial impact of this additional week was approximately $70 million of revenues and $0.07 of diluted earnings per share.

We will provide our growth rates both with and without the extra week.

Let me begin with our fourth-quarter results.

For fourth quarter, net revenues increased 11%.

Excluding the additional week, net revenues grew 5% with comparable brand revenues increasing 4%; e-commerce led this growth at 16%.

Diluted earnings per share increased 15% to $1.34 per share.

Excluding the additional week, diluted earnings per share grew 9%.

Gross margin during the quarter was equal to last year at 41.3% with occupancy leverage offset by lower selling margins.

Occupancy leveraged 30 basis points with occupancy costs at $137 million in the fourth quarter of 2012, versus $127 million in the fourth quarter of 2011.

SG&A increased to 26.3% from 25.7% in the fourth quarter of 2011.

Of this 60 basis point increase, asset impairments, primarily in our stores, accounted for 40 basis points of this increase.

The remaining increase was from higher employment and other general expenses, partially offset by greater advertising efficiency.

As a reminder, included in this increase were the planned ongoing incremental investments to support our e-commerce, global expansion, and business development growth strategies that Laura mentioned earlier.

This resulted in a fourth-quarter operating margin of 15%.

I would now like to comment briefly on our fiscal-year results.

For the fiscal year, net revenues increased 9% to $4.04 billion.

Excluding the additional week, net revenues grew 7%, including 12% growth in the direct to customer channel and 2.5% growth in the retail channel.

Comparable brand revenues increased 6%, led by our home furnishings brands, Pottery Barn, West Elm, and Pottery Barn Kids.

Non-GAAP diluted earnings per share increased 15% to $2.58 per share.

Excluding the additional week, non-GAAP diluted earnings per share grew 12%.

Fiscal-year gross margin increased 20 basis points to 39.4% from 39.2%.

This improvement was driven by occupancy leverage, which was partially offset by lower selling margins.

Occupancy leveraged 60 basis points with occupancy costs at $517 million in 2012, versus $500 million in 2011.

Fiscal-year non-GAAP SG&A increased 20 basis points to 29.1% from 28.9% in 2011.

Asset impairments, primarily in our stores, accounted for this increase as higher employment combined with our planned incremental investments was offset by greater advertising efficiency.

The fiscal 2012 non-GAAP operating margin of 10.3% matched last year's record operating margin.

A 40 basis point improvement in the direct to customer channel operating margin to 22.4% was offset by a 70 basis point decrease in the retail channel operating margin to 12.1%, and a 10 basis point increase in corporate unallocated expenses.

The 40 basis point improvement in the direct to customer channel operating margin to an annual record of 22.4% was primarily driven by greater advertising efficiency and sales leverage of occupancy costs, partially offset by lower selling margins.

This speaks again to the power of our operating model, allowing us to use advertising efficiencies as well as our supply chain cost reduction initiatives to give value back to the customer, while driving sales and operating margin growth.

The 70 basis point decrease in the retail channel operating margin was primarily driven by increased employment costs to support our service and growth initiatives and asset impairments, which were partially offset by occupancy leverage.

The 10 basis point increases in corporate unallocated expenses was primarily driven by higher employment costs.

From a balance sheet perspective, merchandise inventories increased $87 million or 15.6% to $640 million.

This inventory level reflects our goal to improve our in-stock inventory positions to drive sales and to support our growth initiatives within our global business and our new brands, particularly in West Elm.

Cash at the end of the year was $425 million versus $503 million last year.

Over the past year, while generating $364 million in operating cash flow, we returned $243 million to shareholders through share repurchases and dividends.

And as Laura mentioned, our commitment is to return excess cash to our shareholders.

To advance that goal today we are happy to have announced our largest share repurchase authorization, totaling $750 million, and our largest dividend increase of 41%.

I would now like to discuss our first-quarter and fiscal-year 2013 guidance.

2013 is expected to be another year of record revenues and earnings, while at the same time investing in our future growth.

For the first quarter of 2013, we expect to grow net revenues to a range of $850 million to $870 million, with comparable brand revenue growth in the range of 4% to 6%.

We expect our operating margin to be slightly below last year's rate, driven by the financial impact on the quarter of our capital investments in 2012, and our SG&A investments in our global expansion, including the opening of four stores in Australia at the end of the quarter.

Diluted earnings per share are expected to be in the range of $0.33 to $0.36 per share.

In 2013, we expect to grow net revenues to a range of $4.2 billion to $4.28 billion, with comparable brand revenue growth in the range of 4% to 6%.

Operating margin is expected to be in the range of 10% to 10.3%.

And diluted earnings per share are expected to be in the range of $2.65 to $2.75 per share, which, excluding the additional week of earnings in 2012, amounts to 10% diluted earnings per share growth, at the high end of the range.

As you can see, our disciplined approach to SG&A has allowed us to tightly manage our ongoing expenses, so we can invest in our growth opportunities and still deliver this level of earnings growth.

From a capital allocation perspective, consistent with 2012, we plan to maintain a minimum cash reserve balance of at least $300 million, and return excess cash to our shareholders after investing in our business.

In 2013, in addition to the increased levels of share buybacks and dividends previously mentioned, we expect our capital investments to be in the range of $200 million to $220 million, as we continue investing in our long-term initiatives we laid out in the beginning of 2012 and as Laura mentioned earlier on the call.

In addition to our required annual investments in our retail fleet and general IT infrastructure, we will be investing in our global expansion, the construction of new stores for existing and new brands, including West Elm, in e-commerce, and investing capital to support our supply chain initiatives, in that order.

We expect the continued investment in these initiatives will provide the best returns for our shareholders.

For all other fiscal-year 2013 guidance items, please see today's press release.

You will notice in this release that we have continued to shift to more strategic and directional guidance.

We will no longer be reporting comparable store sales growth rates, as these sales are already included within our comparable brand revenue growth metric.

As our customers shop across all channels, we believe comparable brand revenue growth is a more comprehensive reflection of the performance of our business today.

Finally, we will no longer be reporting holiday sales, as we believe reporting sales, excluding our January results, is not an accurate reflection of our true holiday results.

That said, as part of this move towards a more strategic view, we are now providing a three-year outlook.

As such, over the next three years we expect revenue growth to be in the mid- to high-single digits with EPS growth in the low-double digits to mid-teens.

We expect our capital expenditures to remain within the range of $200 million to $220 million of over the next three years.

We also expect to target our dividend levels at approximately 35% to 40% of net income and we expect share buybacks to be approximately $250 million per year over the next three years.

We are confident that the strength of our brands combined with our strategic long-term growth initiatives will allow us to meet our three-year outlook and allow us to be well poised for future growth and shareholder returns.

Now I will turn the call back over to Laura to talk about the performance of our brands.

Thank you, Julie.

Now let's talk about our brands starting with Pottery Barn, our largest brand.

In Pottery Barn, net revenues for 2012 were $1.75 billion, driven by comparable brand revenue growth of 8.5%.

For the fourth quarter, textiles, furniture, and decorative accessories were important categories for the brand.

In addition, our gift strategies drove traffic, transactions, and sales.

Our big bets for the season were successful.

As we look forward to this year we are confident in our product lineup.

We have great launches scheduled throughout the year.

We are focused on selling artisanal innovative products at a great value presented in an aspirational way across all of our channels.

Our mantra is to make decorating and entertaining fun, easy, and affordable, and to turn houses into homes.

Our customers love our print and pattern and textiles; furniture is the foundation of our brand, and we continue to offer an increased assortment of high-quality, exclusive well-priced items.

We also see opportunities in the hard working rooms -- the entryway, the bathroom, and the laundry room.

We are building deep relationships with our customers through the exceptional complementary services that we provide.

These services both in-store and in-home are a competitive advantage.

We train our associates as design studio experts and we are expanding the design studio centers within our stores and our design studio offerings.

We have also developed a team of stylists and entertaining consultants that can help with everything from setting the perfect table to decorating your home for Easter.

We're also leveraging technology to make it easier for our customers to imagine their dream homes and for our associates to convert sales.

Our recent store remodels and website enhancements are producing returns that we will build on in the coming years.

In the Pottery Barn Kids brand, net revenues for 2012 were $558 million, with an increase in comparable brand revenue of 5.6%.

The combination of textiles and furniture, especially in nursery, drove our business as our customers came to us to put together rooms for their children.

We were successful in growing our baby business and our seasonal holidays.

We'll be expanding both of these areas in the coming years.

For example, we just celebrated our first Lunar New Year, and we are focused on gifting and birthdays.

In baby we have additional SKUs and new differentiated aesthetics.

We continue to refine our marketing strategy to appeal to life stages, lifestyles, and genders.

We're also committed to further developing the relationships our customers have with our brand through service offerings.

We are enriching the design expertise of our associates and equipping them with better technology and tools.

We believe that Pottery Barn Kids' differentiated offering will have wide international appeal, leading to growth through global expansion.

We've been extremely pleased with the performance of our stores in the Middle East, where Pottery Barn Kids has more stores than any of our other brands, and we are opening our first store in Quebec later this month, and in Australia in May.

In the PBteen brand, net revenues for 2012 were $220 million, representing an increase in comparable brand revenue of 1.7% for the year, and 6.4% in the fourth quarter.

Momentum accelerated in our business throughout the year as our in-stock inventory position improved.

Being in-stock is especially critical, as this is a brand where both the parent and their teen are involved in the purchase decision.

Our in-stock position in furniture hampered our growth in 2012 and is an opportunity in 2013.

When we deliver the basics in the top of bed our customer comes back to us for gifting, seasonal assortments, and for room accessories.

Textiles drove performance in our business all year.

Burton has been a fantastic launch for us and we are happy and proud to continue this partnership, as well as introduce new exciting partnerships in 2013.

In 2013, we are offering great values in our new furniture and textile introductions featuring clean, bright, and fun assortments.

We will continue to go after the dorm customer with an expanded lifestyle offering, delivering innovative decorating ideas.

Gifting year round for birthdays and graduations will also be a focus in 2013.

Our teen retail formats are highly productive.

Parents and teens are able to engage with our products, which are then shipped to their homes from our distribution centers.

Our small store base allows us to get closer to our customer and serves as a laboratory for concept development.

We get terrific feedback on our stores as we engage with our customers and our customers engage with our products.

Our franchise partner opened our first PBteen store in the Middle East at the end of 2012, and it is really exceeding our expectations.

It seems that decorating teen rooms is a universal challenge and we are excited to serve this market.

In the Williams-Sonoma brand, net revenues for 2012 were $981 million, with comparable brand revenues decreasing 1.1%.

Although the promotional environment intensified during the holiday season, we made progress on our initiatives to introduce proprietary, innovative products that set new standards in the marketplace.

As we expected our strongest performance was in those categories where we have the highest proportion of new, exclusive and innovative products, specifically, electrics, entertaining, and food.

We anticipated a promotional environment and responded appropriately to protect our brand and our customers.

The story of the Williams-Sonoma brand is really two stories.

We enjoy excellent success in the direct channel, where the Williams-Sonoma brand had the third highest growth rate of any of our brands with a direct channel contribution that ranked second amongst our brands for the year.

This performance tells us that the strength of our brand, our marketing, and our strategy have increased product exclusivity, allows us to compete successfully with anyone online, and to do so at operating margins that are a multiple of our competitors.

However, the initiatives that we have been working on in the Williams-Sonoma brand are more easily and quickly implemented in the direct channel than at retail, so we have work to do in our stores.

We acknowledge that.

New creative direction has made progress with our marketing efforts.

After our initial focus on our website and catalogs, we are now turning our energies to our retail stores.

We believe that there are significant opportunities to present our products in a more inspiring and compelling way, and to make it easier for our customers to find what they want to buy.

Another key part of our Williams-Sonoma strategy is to optimize our retail fleet.

In 2013, we will opportunistically close 15 stores, and open an additional 8 stores to drive retail profitability.

We have been successful in closing underperforming stores and relocating stores to higher return locations, and we expect this to continue over the next three years.

We also have a robust schedule of new product introductions, the most in our history, that will benefit both channels, which includes the expansion of our Williams-Sonoma branded cookware and tools.

We are also excited about our marketing partnership with ABC, and new hit series The Taste, which features our exclusive collection of Williams-Sonoma branded products.

Our Agrarian assortment is expanding and we mailed our first standalone catalog this week.

This concept is bringing new customers to our brand and has enjoyed significant national media attention.

We're also delighted to announce that Williams-Sonoma Home will be mailing a catalog with new collections early next month.

We believe that this segment of the market is underserved and that we can grow a sizable and profitable business in higher-end home goods, predominantly in the direct to consumer channel.

In summary, we are committed to profitable growth in Williams-Sonoma, and will serve our customer through product innovation, marketing, and channel excellence.

I look forward to updating you on the progress we are making against these strategies.

Finally, I would like to discuss West Elm.

In the West Elm, brand net revenues for 2012 were $430 million, representing almost 11% of our total Company sales.

Comparable brand revenues grew 17.4% on top of 30.3% in 2011.

Growth continues to be driven by all categories including furniture, textiles, and decorative accessories.

Key holiday brands and category promotions drove strong incremental sales and margins.

Expanded assortments in new areas, including kitchen and seasonal trim contributed to growth.

We have accelerated sales, customer acquisition, and engagement through integrated multi-channel marketing.

Utilizing e-commerce, catalog, in-store activities, and social media platforms has allowed us to effectively connect with customers.

As we look forward to 2013 and beyond, our strategy is to profitably grow the West Elm brand by engaging with a broader base of customers, while maintaining a compelling value proposition.

We are executing on an expanded product assortment and customer engagement strategies, and as retail profitability hits new milestones, we are aggressively seeking retail expansion opportunities.

At the start of 2012 we announced plans to open 9 new West Elm stores, and we are pleased that we ended the year with 12, bringing the total fleet size to 48.

e will continue to expand our retail in 2013 with current plans to end the year with 57 locations, including our first Australian store.

We believe that West Elm will be a significant driver of our global expansion.

Our two stores in Canada are among the highest performing in the entire Company.

Our West Elm store in the Middle East, operated by our franchise partner, is consistently exceeding expectations and we are actively looking for additional global locations.

In late October we are pleased to launch the West Elm Market brand extension.

Focused on tools for everyday living, Market represents a significant expansion into the kitchen and housewares category.

This expanded assortment is currently offered in two standalone stores, shop-in-shops in many of our existing stores, and robust online and catalog assortment.

We believe all of these initiatives differentiate West Elm in the marketplace and drive growth in this brand.

We're excited about our plans for 2013 and our progress on the path towards building this into another $1 billion brand.

In summary, we're very proud of our results this year.

While the economic backdrop was more difficult than anticipated, we beat our financial metrics and made tremendous progress against our long-term growth strategies.

We have clear strategies for all of our brands, and West Elm has moved efficiently from a turnaround to a clear growth vehicle.

Through our strategic work we identified and prioritized areas for new business development and are under way in our execution.

Our global strategy is out of the planning phase and into production, and the Company is rallied around its success.

We continue to strengthen our team and our culture and are confident in our future.

I would now like to open up the call for questions.

Thank you.

(Operator Instructions)

Peter Benedict, Robert W Baird.

Laura, you said early in your prepared remarks that you expect further improvement in operating margins over time.

And your three-year view looks like it suggests that that expansion could start to emerge in 2014.

So my question is how visible are the key drivers of kind of operating margin as you look out over the next three years?

And then also kind of on the top line, I think it also implies kind of an acceleration in the top line beyond this year, so just interested in your thoughts on that.

Thank you.

I'm going to let Julie answer that question.

Thanks, Peter.

It's Julie.

We're always focused on expanding our operating margin.

We've told you guys over time that each year excluding our investments in our future growth strategies we expect to drive continuous improvement in our business and expand that operating margin.

But it's going to be gradual and incremental over time, and it seems that when you look at our three-year outlook, in the guidance that we've given, that would imply that our initiatives in years two and three will beginning to generate the kind of returns that will create operating margin expansion.

Great.

Thank you very much.

Daniel Hopkin, William Blair & Company.

A follow-up a little bit on that on specifically the revenues.

Could you maybe just frame up a little bit specifically going from let's say 4% to 6% expected this year to mid- to high-single digit over the next couple years, what do you think is going to be the one or two key things that should contribute to that?

Hi Dan, it's Julie.

I think there's a couple things I want to make sure that everyone remembers on the call.

First of all, 2012 was a 53rd week.

So in order to get an appropriate growth rate from 2012 to 2013, you've got to back out the $70 million in revenues that we spoke to, and the $0.07 in the bottom line.

So if you do that at the high end of our range for revenue growth for 2013 is at 8%, and our three-year outlook gives guidance that mid- to high-single digits for revenue growth in particular, and then obviously low-double-digit to mid-teens for EPS growth.

So 2013 is in line with our three-year outlook.

As far as the future years and where we might push for the higher end of that outlook is exactly right, when the initiatives start to come into play, for example, global expansion, this year we're launching in May four stores.

Our expectation is every year we'll have additional locations, whether it's Australia or otherwise that will continue to advance on top of that, generate more revenues and more earnings.

Thank you.

Matthew Fassler, Goldman Sachs.

Can you talk about some of the changes that you made in the Williams-Sonoma catalog and online in the direct business that delivered results for you in the second half of 2012 that you think you could bring to the store?

Just a little more color on what you think will rejuvenate that retail business.

Sure.

This is Laura, Matt.

First of all, online affords us the ability to have additional SKUs.

So you can try a wider range of products and understand where the customer is responding and we are -- we just launched a great new program in our stores, called Williams-Sonoma Delivered where we're allowing our store associates to place orders for our customers online, and so that's a real positive for retail this year.

We know that so many times our customers don't want to carry it out.

They want to go to the store and look at it but they want it shipped to their home, and so we've enabled that with our customers in our stores with this Williams-Sonoma Delivered program.

So that's one of a couple key initiatives for this year.

Also, online the shopping experience is something that we really focused on, particularly in the latter half of the year, in highlighting key products and cleaning up the shopping path, making it more aspirational, giving content where it makes sense, simple things like putting videos in line, and we had great accolades for our Williams-Sonoma site which was rated top website.

So people are noticing and the customer service equation on that has been really good.

So those -- it's really more products, visual merchandising, and we need to bring that vibrancy into our stores.

We're testing some new store formats.

We're so excited about our Australian store because we're launching it with a cooking school that represents a whole another leg of opportunity for us.

Just to be clear when you talk about more products, obviously you have Williams-Sonoma Delivered, so you'll have the ability to I guess order online in store.

But are you talking about broadening the assortment that's actually on the sales floor as we speak, or is it more about changing out product?

There's only so much physical room in the stores, but it's about what do you display more prominently, where is the customer shifting to, and we can understand that better online.

Got it.

Thank you so much.

Laura Champine, Canaccord.

Could you just comment on your year-end inventory levels and how comfortable you are with those?

And Julie, how you expect inventory to trend relative to sales this year.

Sure, would love to.

It's Laura.

We feel very good about the health of our inventory.

Remember, last year we ended at unsustainably low inventory levels and we needed to invest in our inventory to drive our sales.

The year-over-year increase was primarily driven by the home furnishings brands to support this better in-stock versus last year.

And we expect inventory to be at this level, we expected it to be at this level.

And we also increased the inventory to drive sales, particularly in the West Elm brand and because we are opening in Australia and are holding the inventory here at this point.

Long-term we'll be shifting the inventory and having it shipped directly into Australia.

But it is currently in our inventory today.

Also remember the 53rd week pushed us back one week later and shipments were rushed out for the Lunar New Year.

Got it.

Thank you.

David Gober, Morgan Stanley.

Just wanted to touch on gross margins for a second.

I guess in the fourth quarter, gross margins were about flat year over year.

Just wondering if you could give any further color on gross margins by concept, or maybe where you're seeing pressure versus expansion.

Is it maybe a little more pressure in the Williams-Sonoma brand?

And also just curious if you're seeing any pressure to move towards free shipping in the home furnishings brands?

David, this is Julie.

I'll the take that.

I think from a gross margin perspective we're actually very, very proud of that.

The fact that we came in flat for the quarter, we actually were up 20 basis points versus last year.

I think as we've been telling you guys every quarter as we've gone through the year, what we've seen is that sequentially there's been improvements in both product and selling margins, and what we saw towards the end of the year was actually substantial improvement in both the retail channel and the Williams-Sonoma brand.

So we've seen this continued sort of right size as we've moved through the year, and I think that's one thing that we're really proud of that we're able to get these sales while still maintaining a strong gross margin.

Laura, do you want to take the free ship?

I'll just say that free ship is one of many promotions that we run.

We're able to study when it's effective and when not to do it, and we use it carefully like we do all of our promotions.

Okay.

Thanks.

David Magee, SunTrust Robinson Humphrey.

How would you characterize the competitive environment since the holidays?

Has it eased somewhat sequentially?

We said all year that the environment has been very competitive.

We expected it to be extremely promotional.

We came out and said that a couple times.

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

The customer is clearly looking for value, matched with quality, and this is what we deliver upon.

So we had a promotional cadence throughout the year.

We're very competitive on nonexclusive branded goods.

We responded as people broke [nat] pricing in the Williams-Sonoma brand, and we will continue to do so.

Okay.

Thank you.

Gary Balter, Credit Suisse.

It's Simeon Gutman for Gary.

A two-part question on West Elm.

Long-term can you speak to -- give us an idea of how many stores you think you can get to?

And then second part is given West Elm accelerated in terms of their brand revenue this quarter and Pottery Barn decelerated, you mentioned that there's this constant seeking of value, but do you think there was anything that accelerated in terms of the consumer being more value oriented, or are those two events disconnected?

We've studied that and are always making sure that that's not happening.

We actually see that when we mail both catalogs at the same time we get a better response to both of them than if we mail them separately, which is really interesting.

So no, we don't -- if you're asking about cannibalization, we don't have any evidence of cannibalization.

You have to look at these brands on a multiyear basis.

Pottery Barn has great growth over several years.

West Elm has really been escalating its growth recently, and we in terms of stores versus DTC, we're still very small, very low market awareness around West Elm, which is very exciting for us, and clearly we can have more stores.

Now, we haven't given a specific number because the horizon is changing so rapidly in terms of DTC versus stores and we're testing new formats.

We're testing West Elm Market stores, whether they should be in a store, separate, online only.

And so there's a lot of unknowns about how many stores exactly, but we do know that we can put them in suburban areas.

We know that we can put several in market.

We've learned a lot this year.

We were cautious at first and we've measured against it, and so the opening plans that we have this year we feel very confident in.

Okay.

Thank you.

Janet Kloppenburg, JJK Research.

Congratulations on a great year, great fourth quarter.

Just a couple of questions.

On the selling margin, I think you said that it improved at Williams-Sonoma and the Williams-Sonoma brand, and it was up in the retail segment.

I believe that's for the year.

And I'm wondering if that was because of the influx of proprietary product or what were the contributors to that improvement?

And in thinking about your operating margin guidance for fiscal '13, I'm wondering how I should be thinking about gross margins.

I think you'll be making some investments.

I think that will be pressuring the SG&A line, and I'm wondering if we should be thinking that you'll have an overall improvement or you have an objective of improving gross margins in fiscal '13.

Okay.

So this is Julie.

The one thing I want to make sure we're clear on is the gross margins sequentially improved year over year.

Obviously in my prepared remarks I did talk about how we had occupancy leverage that was offset by lower selling margins, so within the year they were still down, but they had substantially improved versus last year same time.

And that was in the retail channel and within Williams-Sonoma.

As far as giving outlook, obviously you know we don't provide any guidance on the gross margin or SG&A line, but we did provide guidance at the operating margin line, where we're at the high end; we're still at 10.3%, which is matching our record, all while investing.

So there has to be some assumption there that product margins will improve over the year.

Just one more thing, Janet to remember, that because of our high DTC to total, we are able to shift our operating model to be more promotional if the environment requires it.

You've seen us do that before where we leverage ad costs.

We're constantly looking for ways to reduce our catalog costs and more -- and to optimize our e-marketing, and that has allowed us to give value back to our customers and reduce -- for example, when we give -- when we run a promotion, oftentimes we can reduce our ad cost spend and offset the hit to margins.

And we do this on a very dynamic basis.

We have a series of meetings and processes in place to always be looking at the total picture and not looking at an individual line alone.

Okay.

Thank you.

Brad Thomas, KeyBanc Markets.

When you reported the third quarter you talked a little bit about concerns at the start of this fourth quarter about how the consumer was behaving.

Can you just give us a little more color about how things played out over the course of the quarter and what you're seeing today?

Sure.

It was a challenging quarter because remember we started off with a hurricane, uncertainty around the election, and a calendar that pushed Christmas really late.

And so the customer continues to shop later and later and you just watch people wonder about when it's coming and what to do.

We knew how promotional it would be, and yet we were very prepared.

We had gone through a bunch of scenario plans, and we had a full team effort to make sure that we were going to deliver great customer service to our customers and we had worked on the product lineup in advance.

So January came in strong.

That's an important month for us, I think versus other businesses that are just gift businesses.

The beginning of the year is always a time when you think about refreshing your home, and with our large home furnishings brands it's a really nice end to the quarter that we have January, and this year like last, it was very strong.

If I could squeeze in a quick point of clarification.

With respect to the share repurchase, are you including that in your 2013 and three-year guidance for earnings?

We are.

Okay.

Thanks so much.

Neely Tamminga, Piper Jaffray.

I had a question for Laura and/or Pat.

Just really wanting to get a sense for how you guys are prioritizing in your digital strategy, what are the top maybe one or two key initiatives this year that you really think will drive some revenues higher this year?

Just curious about your prioritization there.

And then secondly related to your customer file.

Laura, I was just wondering if you could give us speaking specifically here about Pottery Barn brand here alone, are you seeing your core shopper, the customer who's been with you for years, just either being reactivated or shopping more from you with more categories?

Or are you seeing a real interesting trend on new to file?

Thanks.

Thank you.

One of the biggest differentiators you can have at a Company are the people working with you, and we have a long heritage of cultivating creative talent and also a heritage of having great direct channel talent.

And we have a deep analytic culture born out of our catalog business, and we marry this culture with our merchant expertise.

We were into big data before big data was such a big deal, and it's given us a nice head start.

I want to let Pat go through some of the great initiatives we have lined up for this year.

Thanks, Laura.

We made excellent progress in e-commerce this last year that produced results not just for 2012, but we think will produce them well into the future.

And I think perhaps the most important thing is how we did it.

We built it on the foundation that we had laid the year before.

We redesigned the way we work, creating what we call these capability tracks, and an actual development of technology.

So we really doubled our throughput literally in terms of what our team got done in just two years.

Let me give you a few specifics.

We introduced a feature called facetted navigation.

It's a technology that allows customers to more quickly find what they're looking for.

If a customer is say interested in rugs they can easily search by style, color, and material, and then narrow their selection by size or shape.

This is really important because we have a very large assortment with many options for the customer, and this makes it easier for them to shop for a rug or really for anything else.

We've implemented this across all of our sites.

This year we redesigned our checkout.

The reason is, that many customers don't complete an order even though they put items in their basket.

We focused on streamlining that process to eliminate any barriers to completing the order, and it's working.

We redesigned our home page with a new mega menu that simplifies navigation and allows our customers to go right to the part of the site they're interested in.

We've added personalized content.

In Pottery Barn we introduced shop by room.

It's a great example our merchants came up with working with the technology team in designing the shopping experience the way the customer likes to shop.

If I think about next year Neely, we're so excited.

We're focused on emerging technology and we're utilizing the latest data methodologies to create a data driven, personalized shopping experience that is optimized for every customer, for every device.

Our goal is that everyone of the 423 million website visits we had last year that will some day we'll have an absolutely personalized experience for that visitor.

We made a lot of progress.

I think that our team over in the e-com technology group thinks we're just getting started.

That's really helpful.

Thanks, Pat and good luck.

Thanks Laura.

Marni Shapiro, The Retail Tracker.

Congratulations on a great year and a very nice end to the year.

I was curious if you could talk a little bit about three initiatives that you brought up on the call but didn't give any real insights.

A little bit more on Rejuvenation, a little bit on your first out-of-the-box thoughts about Mark and Graham, and I'm interested about you guys jumping back into Williams-Sonoma Home, and without giving too much away I'm just curious if you can give a little bit more insights behind these three?

Absolutely.

Thank you for the question.

We're very focused on our core businesses but we always know that we are good at starting business and nurturing them, and we see opportunity in the market and we have several brands in the early stages.

We bought Rejuvenation last year.

It's a wonderful, high-quality business focused on hard wired lighting, customized hard wired lighting, and we believe that this brand can expand into other categories and build upon its rich heritage of historic lighting.

We internally developed and launched Mark and Graham, which is a high-quality personalized gift brand and it features really updated monograms that are both nostalgic and new.

And it elevates the personalized gift giving; the packaging is just gorgeous.

And so these are two examples of new businesses that we are developing.

Williams-Sonoma Home, we're so excited to share with you.

We have a very new collection that's coming out in April in the form of a catalog and then of course online, and it's really building on what we know is successful, but also bringing to market an aesthetic that isn't being served at the high end, and really helping the customer put the whole look together in their own unique way.

There are three distinct collections that we are going to be presenting and you can also see them if you're in New York in the Columbus Circle Store.

I guess what was the impetus behind relaunching the Home area?

Excuse me, I'm sorry, I couldn't hear you.

I'm sorry.

What was the impetus behind launching the Home area?

Because you guys had launched it and then you pulled back.

We pulled back on our retail assortment.

Last year was really about rationalizing the SKUs and looking at pockets that would be profitable and that made sense, and we've been building on that.

And we see a clear opportunity to bring in higher-end goods, not as high end as it was before, but to serve the market that isn't being served right now with more color and with a lot of beautiful, eclectic artisanal products.

Fantastic.

Best of luck, guys.

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.

Thank you for joining us today.

We look forward to talking to you again next quarter.

Thank you.

And that does conclude our conference for today.

We thank you for your participation.

You may now disconnect.