Williams-Sonoma Inc (WSM) 2013 Q2 法說會逐字稿

Welcome to the Williams-Sonoma Inc.

second-quarter fiscal year 2013 earnings conference call.

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

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

This conference is being recorded.

I would now like to turn the call over to Gabrielle Rabinovitch, Director of Investor Relations to discuss non-GAAP measures and forward-looking statements.

Please go ahead.

Thank you, Gwen.

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 our explanations why these non-GAAP financial measures are useful are discussed in our earnings release.

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operation, 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 second-quarter 2013 results and our outlook for the remainder of fiscal year 2013.

Thank you, Gabrielle.

Good morning, or good afternoon I should say, and thank you for all joining us.

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

I want to start by addressing the early release of our Q2 2013 earnings information today.

Our press release, as many of you know, was scheduled to be issued this afternoon at 1.05 PM Pacific Time.

Unfortunately, our earnings information was unintentionally disclosed before then.

After reviewing our processes, we have determined that the information was obtained from our corporate website.

While we had not provided a link to this report on our website, the document could have been accessed if you were able to identify, and then entered the very unique web address.

As soon as we learned of the early release of our information, we asked the New York Stock Exchange to halt trading briefly until we could formally issue our press release.

Once the press release had been issued, we resumed trading.

We are very sorry for the confusion this caused.

Now let's move to our business.

Our second-quarter results demonstrate the continuing strong demand for our brands, and the profitability of our multi-channel multi-brand platform.

We generated a 12% increase in revenue, and a 14% increase in diluted earnings per share over last year.

Our home furnishings brands generated a 14% increase in revenue, with each delivering double-digit revenue growth.

We believe that our high sales growth is a result of our customer-focused strategy across all of our brands.

Particularly in our home furnishings brands, where we are benefiting from exclusive product assortments, lifestyle merchandising, relevant marketing messages, and a well-honed promotional strategy across our multiple channels.

We achieved sales and profit levels that exceeded our expectations, while continuing to invest in infrastructure, talent, and other areas to fuel our growth.

At the beginning of the year, we shared with you our strategic initiatives, to grow our existing brands, launch new businesses, and expand globally.

We have made meaningful progress against these objectives year-to-date.

Our global expansion is on track, and by the end of the year, we expect to have six company-owned retail locations outside of North America, five in Australia, and one in the United Kingdom.

Our relationship with M.H. Alshaya, our franchise partner in the Middle East, continues to expand, at the end of the second-quarter, covered 25 stores in 5 countries.

We are also excited about today's announcement of a multi-year franchise agreement with Store Specialists, Inc.

as a franchisee for our brand in the Philippines.

I would like to spend a few minutes discussing our supply chain.

We are driving further efficiencies in our supply chain, while enhancing customer service.

In the second-quarter, we made progress on the transition away from our third-party agent, by opening our own sourcing offices and quality control labs in Indonesia.

This will give us better control of costs and quality at the ground level of production.

We are also in the process of opening our own offices in Delhi, India and Shanghai, China, with the goal of making the same transition in those regions of the world over the next six months.

Our continued investment in overseas production has resulted in improved quality and reduced defects.

We also further regionalized our retail distribution network, which will increase efficiencies and speed to market.

Finally in June, we completed our reorganization of our distribution center, making improvements to optimize the efficiency of our small package fulfillment operations.

We are already seeing productivity improvements from these improved operations.

I also want to highlight our e-commerce business, which was especially strong this quarter.

With e-commerce growing in excess of 20%, the direct-to-customer channel represented 49% of total revenue in the second-quarter.

We are driving this growth in all brands of our lifestyle merchandising, the improvements in our shop path, and our e-marketing efforts.

On the talent front, over the past several months, we have announced a number of leadership changes and additions of talent to our Company.

All of us believe that these changes will deliver significant benefits.

Our decision to put all three Pottery Barn brands under one leader is revealing many opportunities for these brands to be more closely aligned.

In many cases, we are marketing to the same customer.

For example, more prominent display of the Pottery Barn Kids and teen site links on the Pottery Barn homepage is yielding increased site traffic to the brands.

We have other initiatives like this one, which we believe will yield increased sales, and leverage the power of our database to deliver even more relevant marketing messages.

We continue to strengthen our Williams-Sonoma brand team.

As we have previously announced, in addition to appointing a new brand president, this quarter we have added individuals in field leadership, inventory management, visual merchandising and store operations.

We believe this new talent will augment our existing strong team.

I would like to begin my discussion of our brands, by first talking about West Elm, our fastest-growing brand.

West Elm recorded revenue growth of 26% in the quarter, with comparable brand revenue growth of 16.5%, on top of 15.6% last year.

A key factor in West Elm's success has been its use of social media.

We believe that West Elm is at the forefront of a transformational change in retail, where consumer preferences are influenced by the opinions of other like-minded consumers and enthusiasts.

West Elm continues to receive high marks for its ability to build awareness, authenticity and credibility, with a highly-engaged customer base through the effective use of a variety of social media.

From its award-winning blogs, Front & Main, to its pioneering use of Pinterest, to collaborations with Esse, West Elm is building its brand and driving profitable sales with a carefully orchestrated infusion of social media into its marketing mix.

Brand growth is being driven by all categories, including furniture, textiles, decorative accessories and lighting.

West Elm is appealing to the brand's broad customer base, through the development of an extensive assortment of products, with a mix of design aesthetics and price points.

The West Elm Market assortment, attracts and inspires customers with products for everyday living.

Exciting collaborations with artists from around the world contribute to the global aesthetic and broad appeal of the West Elm brand.

And we are focused on growing our assortment of handmade products, which is a key differentiator in the marketplace.

Customers love knowing how and where their products are made.

West Elm expanded into three new geographies in the second-quarter, opening stores in St.

Louis, King of Prussia and Montreal, our first West Elm store in French-speaking Canada, which brings the total number of West Elm stores to 51.

In all markets, we are focused on a seamless customer experience, aligning promotional activity, seasonal introductions and key marketing statements through e-commerce, catalog, in-store and social activities.

West Elm is driving messaging and community engagement at the local level.

As we look forward to the rest of the fiscal year 2013 and beyond, our strategy is to continually profitably grow the West Elm brand by engaging with and attracting a broad base of customers, by maintaining a compelling product line and value proposition.

We are aggressively seek retail expansion opportunities worldwide, and are planing to open seven new stores before the end of the year, including one store each in Melbourne and London.

West Elm continues to differentiate itself in the marketplace, and capture additional wallet share.

With revenues expected to approach $0.5 billion this year, we are very confident in its ability to be a $1 billion-plus brand in our portfolio.

I would now like to discuss the Williams-Sonoma brand.

We ended the second-quarter with a slight decrease in quarterly comp brand revenue of 0.4% negative.

While we were relevant to our customer in the second-quarter, we experienced success.

Our brand extensions, Williams-Sonoma, Home and Agrarian fueled incremental growth.

Williams-Sonoma branded cookware continues to gain traction.

Our differentiated strategy to expand our exclusives, and proprietary introductions is relevant and working.

Our outdoor assortment, including seasonal textiles, however, was soft.

And across the brand, we have been deliberately more competitive on price, and are taking an aggressive stance on moving through the seasonal inventory.

As we look to the future, our primary focus is on product strategy.

We know that our customers come to us for the best quality, differentiated product, and great value.

This strategy has not changed.

And we are optimistic about the lineup of new product introductions into next year.

Our fall floor set is inspired by the California wine country, and the Artisans foods, tableware and tools that bring home these iconic flavors and styles.

We have strong exclusives from our key vendors, and are excited about our lineup for the third quarter including our assortments for Halloween and Thanksgiving.

We continue to see a significant variance in performance between the direct and retail channels.

The relative strength in the direct channel has been driven by increased traffic, in conjunction with strategic promotions.

We also increased new customer acquisitions, a key metric that indicates future strength.

The retail channel, however, has underperformed.

The new leadership team has already identified several opportunities that we are aggressively pursuing.

First, field leadership.

We have placed a seasoned and proven leader over the Williams-Sonoma brand field organization, which is already yielding improvement.

Two, store level inventory.

We see significant opportunity to ensure that individual stores have the right quantities of goods.

Marketing.

We are aligning our marketing across channels, and increasing the effectiveness of marketing to our customers who buy primarily in our store.

Fourth, clear communication of a robust calendar of tastings and demonstrations in our stores.

And last, optimize store scheduling, staffing and training.

We believe these retail improvements will drive execution and performance in the Williams-Sonoma brand.

Next I would like to discuss the performance of our Pottery Barn brands.

Collectively, as of the end of last year, these brands represented more than 60% of our overall revenues on an annual basis.

The Pottery Barn vision is to be the destination for decorating and entertaining, and to enhance our customers' lives at home, through every life stage, and across every lifestyle and room in the home.

The opportunity is to strengthen our relationships, and increase our relevance with our customers across the Pottery Barn brand.

We are focused on aligning our team, and integrating the operational elements to create elevated and exceptional customer experiences.

In the second-quarter, Pottery Barn comparable brand revenues increased 9.9%, on top of 11% last year.

A strong outdoor business fueled the brand, as our customers came to us to decorate outdoor spaces at a great value.

All key categories performed, and our in-home design services assisted our customers in new and innovative ways that differentiated us in a very competitive landscape.

As we move into the third-quarter, we are featuring a transitional late-summer color palette, and expanded bedding and textiles offerings.

In addition, this is the first season that we are beginning to offer an expanded size assortment in our Poultry collection.

Dimensional expansion of these collections is a critical part of our product strategy, and the early returns of this effort are strong.

By offering a wide range of sizes, our customer can pick the style they want, and the optimal size for their particular room.

When you combine this, with our ability to produce custom orders in three weeks or fewer, from a selection of more than 75 fabric choices, and our dedicated Sutter Street furniture facility, we are presenting a very compelling story to our customers.

We have launched our Sutter Street West facility in Southern California, and further reduced the shipping time for West Coast customers.

We are now manufacturing more than half of our upholstered furniture ourselves, and delivering an unparalleled value proposition to consumers, and they are responding.

In the Pottery Barn Kids brand, comparable brand revenue grew 8.2% in the second-quarter.

Strong results across textiles, decorative accessories and furniture contributed to this performance.

An enhanced nursery assortment, supported by targeted marketing is bringing new customers to Pottery Barn Kids.

In the third quarter, we are focused on going back to school with our kids, and we are offering an expanded gear collection, and a broadened desk, chair and task lighting assortment.

We are also celebrating Halloween in the third quarter, and are featuring whimsical costumes and accessories at great prices.

Early response to these collections has been excellent.

At PBteen, comparable brand revenue increased 16.3%, led by strength in furniture and textiles.

The second-quarter also featured new launches from our brand extension, PBdorm, that expanded our relevance on campus.

Moving into the third quarter, our PBteen customer is responding to the preppy, transitional aesthetic that we are featuring.

PBteen is continuing to explore collaborations with fantastic partners.

We will be expanding our Burton collection this fall, which features exclusive product designed in partnership with the world's leading snowboard company.

And we will also be introducing our newest collaborations with Emily and Merritt, the influential Hollywood power stylist duo, who have worked with our design teams to develop a home furnishings collection launching in September.

These partnerships are exciting, and enhance the PBteen experience.

Online and in-store, we are focused on helping our teams create unique spaces that reflect their personalities.

Across all the Pottery Barn brands, we see an opportunity at every life stage, and in every room of the house to capture more market share.

This focus is informing our product development and channel strategies.

Finally, I would like to update you on our new businesses.

A rich heritage of entrepreneurship underlies everything we do.

And this is reflected in our newest businesses and brand extensions.

We believe the high-end renovation trend is increasing, and Rejuvenation is perfectly poised to capitalize on this opportunity in quality lighting and hardware.

Mark and Graham is redefining the gifting experience, and customer expectations for quality, and innovation in personalized merchandise.

We are using our database and marketing expertise to expand the reach of these businesses, and acquire new customers.

We see an opportunity to drive further growth across these businesses and our brand extensions.

Now I will turn the call over to Julie Whalen for additional details on our second-quarter financial performance, and our third-quarter and full-year 2013 financial guidance.

Thanks, Laura, and good afternoon.

We are once again pleased with our results and the outperformance we saw, on both top and bottom line compared to our expectations for the quarter.

For the second-quarter, net revenues increased 12.3% to a second-quarter record of $982 million, with comparable brand revenues increasing 8.4%.

Net revenues in our direct-to-customer channel grew 15.3%, driven by e-commerce which had growth in excess of 20%, and represents more than 90% of our total direct-to-customer revenues.

Direct-to-customer net revenues generated 49% of total company net revenues in the second-quarter this year, compared to 47% last year.

The growth in the direct-to-customer channel was primarily driven by Pottery Barn, West Elm, PBteen, and Pottery Barn Kids.

Net revenues in our retail channel grew 9.7%, driven predominantly by Pottery Barn, West Elm, and our international franchise operations.

This growth was partially offset by a decrease in the Williams-Sonoma brand.

Gross margin during the second-quarter was 37.6%, versus 38.3% last year.

This 70 basis point decrease resulted from lower selling margins, primarily in the retail channel, partially offset by occupancy leverage.

Occupancy leveraged 20 basis points, with occupancy costs at $138 million in Q2 2013, versus $124 million in Q2 2012.

While our gross margin decreased versus last year, SG&A improved to 29.6% in Q2 2013, versus 30.2% in Q2 2012, primarily driven by the leverage of employment and advertising costs, resulting in a second-quarter operating margin of 8.0%, which was equal to last year.

As we have said before, different from other retailers, our operating model with close to 50% of revenue coming from the direct-to-customer channel, allows us to flex between margin and advertising costs to drive revenue growth, while maintaining an overall operating margin.

The operating margin was driven by 100 basis point improvement in the direct-to-customer segment to 24%, and a 10 basis point improvement in the corporate unallocated segment to 7.2%, offset by a 150 basis point decrease in the retail segment to 6.9%.

The improvement in the direct-to-customer segment was primarily driven by greater advertising leverage.

The improvement in the corporate unallocated segment was driven by overall expense leverage and ongoing expense discipline.

The decrease in the retail channel operating margin was primarily due to lower selling margins, and the upfront investment costs associated with our global expansion, partially offset by the leverage of employment-related costs.

Second-quarter 2013 diluted earnings per share grew 14% to $0.49 from $0.43 last year.

This is the sixth consecutive quarter, where we have delivered better than expected earnings.

We are pleased to be delivering this level of record profitability, while continuing to invest in our long-term growth.

Merchandise inventories grew 13.4% on a comparable basis, which was relatively in line with our revenue growth, as well as our stated goals to improve in-stock inventory positions to drive sales and to support our growth initiatives.

From a balance sheet perspective, merchandise inventories increased 19.6% to $737 million versus $616 million at the end of Q2 2012.

As part of our expanded Asian sourcing initiatives, which include directly procuring our inventory for our global operations through our Asian entity, we are taking ownership of our in-transit inventory earlier in the supply chain.

Excluding the impact of this additional in-transit inventory, merchandise inventories increased 13.4%.

Cash at the end of the quarter was $205 million, versus $337 million last year.

Over the past year, while generating $389 million in operating cash flow, we returned $289 million to shareholders through share repurchases and dividends, including $120 million in cash to our shareholders this quarter alone, through $90 million in share repurchases and $30 million in dividends.

As a reminder, consistent with prior years, our cash balance will decrease throughout the year and reach its lowest levels in the third-quarter, as we use our significant free cash flow to fund our investment in working capital, in advance of the holiday selling season.

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

We are on track for 2013 to be another year of record revenues and earnings, while at the same time investing in our future growth.

For the third-quarter of 2013, we expect to grow net revenues to a range of $1.02 billion to $1.04 billion, with comparable brand revenue growth in the range of 4% to 6%.

Diluted earnings per share are expected to be in the range of $0.51 to $0.54, and we expect our operating margin to be slightly below last year's rate.

For the full year, as a result of this outperformance in the second-quarter, we are raising our guidance for revenue by $40 million.

And we are raising our guidance for diluted earnings per share by $0.02.

As a result, we now expect to grow net revenues to a range of $4.26 billion to $4.34 billion, with comparable brand revenue growth in the range of 4% to 6%.

And we now expect fiscal 2013 non-GAAP diluted earnings per share in the range of $2.69 to $2.79, representing growth of 11% at the high end of the range after adjusting for the 53rd week in 2012.

This guidance for the back half of the year contemplates several factors that I would like to discuss in more detail.

First as a reminder, the fourth quarter of 2012 included an incremental 53rd week worth approximately $70 million in revenue and $0.07 of earnings per share.

On a comparable basis, due to the 53rd week in 2012, there is a one-week calendar shift this year between the third and fourth quarter.

This shift results in a high-volume holiday selling week, moving from Q4 to Q3.

Second, the holiday shopping season during the fourth quarter will be a week shorter, due to the date on which Thanksgiving falls.

Third, our fiscal year guidance contemplates the closure of significantly more Williams-Sonoma stores in the fourth-quarter, than in the fourth-quarter last year.

We plan to close approximately 15 stores this year versus 8 last year.

These closures represent stores that are underperforming, and predominantly at the end of their lease lives.

Fourth, we expect upfront costs to accelerate the buildout of our global infrastructure in Australia and the United Kingdom will be higher than originally anticipated, and will therefore put pressure on our earnings in the back half of year.

Fifth, as you saw in the second-quarter, we expect occupancy expenses which include depreciation to increase approximately 10% for the rest of the year, as a result of our 2012 capital investments and our investment in our accelerated global expansion.

Finally, our capital allocation strategy remains unchanged.

We plan to make capital investments in our business as we continue to invest in our long-term initiatives, and we also plan to continue to return capital to shareholders through share repurchases and dividends.

In summary, we are pleased with both our top and bottom line performance in the second-quarter, and with the progress we have made year-to-date against our strategic growth initiatives.

We are confident that the strength of our brands, combined with our continued execution against our long-term strategic initiatives, and our balanced capital allocation plan has us well-positioned to deliver, on both our near- and longer-term financial goals.

I would now like to open the call for questions.

Thank you.

Thank you.

(Operator Instructions)

We will take our first question from Daniel Hofkin with William Blair & Company.

Good afternoon.

Nice quarter.

Thank you.

Just had a question -- going back to Williams-Sonoma specifically, the brand.

Do you feel like -- was the outdoor isolated to weather, or was it the content of the product in your opinion?

And I guess just interested in what you think the timeline is for sort of getting the brand to where you want it to be, from a merchandising and service standpoint?

And then I just had a quick housekeeping follow-up.

Sure.

We saw strength as I said in the areas that we are most differentiated.

And so it is a combination of both newness, and newness is very different from what the competition offers.

And those areas were in home, agrarian and cookware.

Outdoor, which was a key marketing message, spanned several categories, both the tools.

But also the rubs and sauces, and a combination of factors that made it softer than we would have liked.

And the reality is that, we needed new flow of outdoor too, because we told the same story throughout the entire summer season.

And the outdoor business is really a cooking trend that is around year-round.

And so we need to have more flows of it next year, and possibly also less as -- less of it as a marketing statement.

There were other great trends that we saw, the ice cream trend, for example, and some of the sweet foods, and sweets stories were strong.

And as I have said, as we move into Q3, we really are optimistic about our product line-up.

We have right now, as you know, if you have been to our store we have our wine country story which spans both food, and but also how you entertain.

And it is really back to our heritage in Chuck's [fine], and we are seeing some nice response on that so far.

As we go into the ever-important holiday season, we will --you will see us launch Halloween here in stores.

We have some of it online now.

And we have I think a much stronger and broader assortment in Halloween, and then also in Thanksgiving and Christmas.

The entertaining at home theme is one that we are very focused on.

And you are going to see us introduce a lot of exciting things in the home bar.

We know that custom cocktails are something that everyone really enjoys, and we think we can help our customer throw those great parties through the holiday season.

In the back half, strong holiday execution is key.

At the same time, we have talked to you about testing new ideas.

And our approach is to test and roll ideas, versus making precipitous far-reaching changes.

Because the customer has told us through numbers of focus groups, how much they love the brand.

So we are being very careful and thoughtful about changes we make.

And we are going to keep you posted along the way, as we see different things work or not work well.

And in summary, I would say that Williams-Sonoma story is really a story of innovation and execution, and we are making good progress against the initiatives that we outlined.

And we will go next to Kate McShane with Citi.

Thanks, good afternoon.

Hi, Kate.

Hi, Julie.

In drilling down on the guidance of some of your second-half commentary that we just heard, can you help us reconcile the guidance of keeping operating margins at 10% to 10.3%, yet having to spend more on your International expansion?

You didn't change the comparable brand revenue outlook.

So do you expect something different from gross margins in the back half?

Yes, thanks, Kate.

So a couple things.

First, it is important to remember that we plan to drive continued long-term profitable growth by investing in our business, both domestically and globally.

It is essential to acknowledge that we are maintaining significant earnings growth, while investing in the future to fill our vision to double the size of our revenues.

And these investments will position us for the next phase of growth.

They will strengthen our position as the leader in multi-channel lifestyle brand building in the home furnishings space.

And it is the power of our multichannel operating model that allows us to do this.

As far as the factors that I spoke to regarding the guidance.

I think the one thing you have to remember is that we did roll through the $40 million on revenue on the top end.

And so, obviously not all of that beat, we believe is going to be going down to the bottom, because of the four factors that we outlined in the conference call script.

Specifically, we did mention that we do have more upfront costs than originally anticipated for the acceleration of our buildout of our global infrastructure.

And that is going to continue to put pressure on our earnings in the back half.

Also you mentioned gross margin.

We do see that we are going to have approximately 10% higher gross margin for the rest of the year.

Which remember, that with the occupancy -- 10% higher occupancy -- sorry -- with occupancy includes depreciation.

So within that number, we are absorbing if you will our 2012 capital investments.

And again, our investments in our accelerated global expansion.

From a gross margin perspective in particular, obviously we don't guide specifically gross margin.

But with a continued promotional environment, and an increase in these occupancy costs, we do believe there will continue to be pressure on the gross margin.

But as we have said before, different from other retailers, our operating model with close to 50% of revenue coming from the direct-to-customer channel, allows us to flex between margin and advertising costs to drive revenue growth, while maintaining our overall operating margin.

And our operating margin, remember at the high-end is equal to the -- to our record operating levels that we have had in the past.

And our operating income will be highest it has ever been.

Pat, maybe you want to explain further, how we are able to do this with our operating model, with ad costs?

Kate, I think it is so critical that we understand how we are able to flex this between the ad costs and product promotions.

And the reason we are able to do that, is really because our increased marketing effectiveness which is a key component of the profitability.

And just this year, we have applied a new layer of sophisticated statistical modeling, and a new automated process that is yielding further improvements in our catalog targeting, really identifying those people who are most likely to buy, and curtailing the mailings to unproductive segments.

In our new brands like Mark and Graham and West Elm, rejuvenation of Williams-Sonoma Home catalog relaunch, we have developed a novel modeling strategy to identify more receptive -- the most receptive populations from our massive house file.

And that has enabled to take these brands to the next level of growth.

I think as much as we have done and are doing, we see significant future opportunity here in the near future.

Early this fall, we will launch a new personalization platform, that among other things, will allow us to identify and target almost five times the number of site visitors, and deliver personalized content based on what we know about them.

This is a big deal.

And about half of our site visitors -- and this is true for almost all eCommerce sites -- are anonymous.

We have never seen that before.

We are actively using data science techniques to characterize and understand the intent of these visitors, so that we can deliver relevant content even to people who have never been to our site before.

And we are making investments in analytics and technologies that are allowing us to identify customers across devices, and across brands.

This is very important.

So we know -- we are going to be able to know what someone did on their iPad, so that when they go to their computer we can deliver them also a very relevant experience.

And we are very excited about these, and believe that these investments are making -- are really -- are going to allow us to increase our lead in this area.

And we will go next to Budd Bugatch with Raymond James.

Good afternoon, Laura, Julie, Pat and Gabrielle.

It is actually TJ McConville filling in for Budd.

Thanks for taking the questions, and congratulations on the quarter.

Thank you.

My question, maybe to Julie, goes to the third quarter guidance.

If we take a look at the comp brand sales guidance for the quarter, even contemplating the tougher prior-year comp in the third quarter last year, still seems like you are looking for some sort of deceleration or moderation.

And so question is, what are you seeing right now, that would cause you to do that?

And what are the potential upside or downside risks to that outlook?

Okay.

I will take that.

So it's important to remember that we are maintaining significant earnings growth, while investing for the future to fulfill our vision and double the size of our revenues.

Our Q3 guidance actually implies a 10% increase, in both the top and bottom line while investing in those future growth opportunities.

And remember, for our prepared remarks, our Q3 guidance reflects both the higher than originally anticipated global upfront costs, and increased occupancy costs primarily from depreciation and our ongoing investments.

But with that said, we expect our home furnishings brands to perform at a high level.

And that we will once again deliver record top and bottom-line results.

Remember, we put out guidance that we believe we will be able to make.

There are still questions, question marks surrounding the economy today, we haven't really planned for either an economic downturn nor a housing recovery.

And as far as how the Q3 is looking to date, we don't give mid-month, mid-quarter guidance.

It is still very early in the quarter.

We are only a few weeks in.

And unfortunately, what is going to make it an even harder read all year, is that because of the 53rd week, the weeks don't actually line up.

But with that said, we are confident in our guidance, and we are confident in our strategies.

And you just have to keep in mind, that the retail environment seems to indicate there is still a lot of uncertainty out there.

That the promotional environment has not gone away, and that the retail environment in general continues to be choppy, especially with the recent earnings releases and this global unrest.

And we just don't want to get ahead of ourselves.

And we will go next to Matthew Fassler with Goldman Sachs.

Good afternoon.

Just kind of a very quick, two-parter, a really single question I think on Williams-Sonoma.

(Laughter).

Nice try.

(Multiple Speakers).

You talked about the outdoor -- the outdoor product, seasonal product and its impact on the quarter.

How significant was that, as it relates to any sales and margin issues you had at the Williams-Sonoma?

And then following through that obviously, the Williams-Sonoma business hits its stride seasonally in the fourth quarter.

So should we assume that the thought process is, that whatever it is you saw kind of broadly-speaking in those pieces of the businesses that you haven't overhauled, might persist in Sonoma through Q4?

Thank you.

Sure.

The outdoor business, we don't quantify that specifically.

It contributed.

Was it the whole thing?

No.

But what is important is that, it was the marketing message, right?

So even though you took the numbers, and I were to give them to you, you might say, well, that is not that big, or it wasn't that negative.

The point is that, if the key thing your marketing isn't as strong as you planned, you don't drive as much traffic, right?

So that was the learning there.

And the truth is, in other brands that are performing well, we vary the message more frequently than we did.

So we learned from that.

And as we look at the balance of the year, we are making sure that we have fresh statements all the time, throughout the back half.

And that we are building on what is working and reducing what's not.

As you know, it's very competitive.

So I -- to go through specific product launches, would probably not make good sense for us to do right now.

But we are optimistic about our fourth-quarter for Williams-Sonoma.

And the product that we are going to be offering, and the plans for execution that I discussed particularly at retail.

And we will go next to John Marrin with Jefferies.

Hi, thanks.

Good afternoon, everyone.

Hi, John.

So Laura, just staying with this question about being deliberately more competitive on price.

This might be a finer point, but is that -- was that something you saw across both channels, both retail and direct?

I mean, given the direct margins being so good in the quarter, I am just curious if there was some pressure there relative -- within the Williams-Sonoma brand itself?

I think -- here is the most important thing -- we are focused on what the customer wants and being relevant.

So when you ask customers why they buy, they will tell you that it is the products they want, and it is the price or the value.

And people love to buy on sale, even luxury goods, be it exclusive family and friends or member-only flash sales.

I think the retailers that are going to win, are the ones who are going to embrace this.

I was very pleased that we were able to grow our new customers this quarter and gain market share.

We had, as you know, revenues of 12.3% up compared to the NICS data of 3.6%.

If you take out Williams-Sonoma, it's 11.3% versus 3.6%.

So it is clear that we are gaining market share.

And I actually think we may be getting wallet share, because people are spending money on their homes.

When you buy a new home, and have you furnish the whole new thing, if price is right and the product is right, you are going to buy from us.

And you may not buy the V-neck sweater that you bought last year.

And so the promotional environment is one that we have embraced for a long time.

When we are able to deliver record operating margins, because of our unique operating model that we have gone over -- Julie just went through again.

And we can offer these promotions highly targeted to our customers, particularly more targeted even direct-to-consumer than we can now at retail.

And so we actually believe that our promotional strategy is a key strength of ours, in bringing the customer in, and getting them to buy more from us than from anyone else with the cash register.

And to answer your question regarding gross margins in particular, John, it was product margins.

But it was predominantly in the retail channel.

So it is less of a DTC conversation.

It was actually not just Williams-Sonoma, it was across Pottery Barn as well.

So further to Laura's point, we are being competitive on promotions, and driving market share growth.

We are offering our customers value and driving operating income.

And we will go next to David Gober with Morgan Stanley.

Good afternoon.

Thanks for taking the question.

As you spend a lot of time focusing on the enormous opportunity for international, I am just wondering if you could give us some of the early takeaways from Australia?

I know it's super, super early days, but I just wanted -- I was wondering if you could maybe kind of contextualize the launch, relative to what you have seen in the US for some of those for the like-for-like concepts?

Or if there is any details you can give us, in terms of how that has gone, and building the confidence that that strategy is going to continue to work long-term?

Sure.

We believe global is our greatest opportunity for growth.

And we said we are looking for additional locations.

Next we are going to fill out Australia, fill out the United Kingdom.

We are also looking for relevant franchise partners.

And as I said, we are pleased with our relationship with Alshaya.

We are equally excited to be working with Store Specialists in the Philippines.

And while that is a smaller deal, we think it is a great way to get our foot into Asia.

The most exciting thing I think, to your question specifically, is that we are seeing a large percent of our sales online, much larger than we expected.

It is incredibly powerful for us, and plays directly into our strength as a leader in multichannel retailing.

We have also learned that our brands in Australia are revered and loved.

And we also learned the importance of a multichannel launch, the importance of experiential retail, the attraction of our cooking school, the power of in-home design services and connecting with our customers, and that our customer-centered approach is going to resonate in other countries.

And we will go next to Laura Champine with Canaccord.

Good afternoon.

Laura, I heard your comments about Williams-Sonoma's continued turnaround being about product.

But what are some of these sign posts, whether financial or otherwise that we can look to over the next 6 to 12 months to see if your strategy there is working?

As we said today, we are going to be very direct with you, about what parts of the strategy work and don't work, just like I told you about outdoor.

Our focus right now is on retail, and retail profitability, and getting the right team, and the right people in every single job.

And we have made a lot of progress on that front.

And that is the first part of any strategy execution, of course.

And we will just, on every call we will keep updating you along the lines of product, and along the lines of different direct-to-consumer and retail operational strategies that work.

And just be very direct with you.

Thank you.

And we will go next to Peter Benedict with Baird.

Good afternoon.

It is Matthew Larson on for Peter.

I just wanted to bring the conversation back to the international business.

Just given the robust sales growth there in the first quarter, can you quantify what impact that had on the top line in the second-quarter?

And then just generally speaking, what impact this business has on gross and operating margins of the business right now?

Sure.

So you will actually see this come out in the Q, but the revenue for International this quarter is going to come in at about $50 million, versus last year at about $31 million or $32 million.

So again like Q1, we have seen about a 55%-plus increase in revenue, which is really exciting for us.

We obviously, are not breaking out in detail how that translates down to the bottom line.

Obviously, we have mentioned to you today that we are incurring a little bit higher than anticipated costs.

But I think what is important to remember there, is that when we go into a country, unlike other retailers we are not just going in with a retail store.

We are actually building out an entire fulfillment center.

So we are actually going in to Australia with full eCommerce capabilities and delivery.

So we have got distribution centers, and all the excitement that comes with that, including even if we entered the UK without eCommerce initially, you still have to build out the distribution center capability to do deliveries of sofas, different than jeans, for example.

So there is a lot of costs that are incurred up front with that.

But I think the most exciting opportunity, is the fact that we have got over 55% growth on the top line.

And we will go next to Greg Melich with ISI Group.

Hi, thanks.

I just want to follow up on the top line.

The gap between net revenues and comp brands revenue really expanded almost 400 bps this quarter.

Was that the calendar shift driving that, or was there something else?

And I want to follow-up on sales again, and guidance.

There is a couple things.

Yes, calendar shift is a piece of it, because obviously, comparable puts it back to the comparable week in the prior year.

But we also have West Elm, that doesn't have stores from last year in the comp base.

We have got other businesses that are new, and you have got also global.

And we will go next to Christopher Horvers with JPMorgan.

Hello.

It is actually Mark Becks on for Chris.

Just had a question on Williams-Sonoma, can you give us an update on where you are at with product innovation, and exclusive products?

I know you have been reluctant to give penetration rates in the past, but maybe you could give some year-over-year growth rates?

And then also just in terms of the context of your overall comp brands guidance, what are your expectations are for the Williams-Sonoma brand in the back half?

Thanks.

Hi, Chris.

Or, its not Chris, it is Mark.

I will tell you that the product innovation each quarter is increasing in quantity over last year, as we said it would.

But in terms of percentage, it is just so highly competitive.

And in terms of specific product launches that we haven't brought in yet, given how competitive it is, I am sorry, I can't give you that now.

I will just say that, as you look at Wine Country is a good example, you will see that there is both product innovation on the durables.

But also we are using lifestyles storytelling more in the Williams-Sonoma brand than we have before.

It is something that we have learned how to do very well, in our Pottery Barn brands, and our West Elm brand.

But really wrapping the seasonal layer around a theme that resonates with our customer.

And so that, in addition to the product innovation continues to strengthen through the back half of the year.

And we will take our final question from Neely Tamminga with Piper Jaffray.

Great.

Good afternoon.

Can we talk a little bit about West Elm?

I would love to hear from your perspective.

Clearly, this brand has been -- continue to exceed expectations.

It sounds like the social media footprint is obviously exceeding that at square footage footprint at this point in time.

Just wondering how you feel about the ultimate size of this business, especially as direct sounds like it is a significant portion of their overall sales, maybe relative to some of your other brands.

And just one little follow-up question for Pat, would love to hear from you, as you drive towards customization, are you already at the point of being able to do dynamic pricing through targeted promos on the unique user level?

Or are you still batching that out?

Thank you so much.

Thank you.

West Elm is such an exciting growth story.

And across the country, we are seeing strong response to the brand's high design, its authenticity, and the craft that it brings to the customers.

We also have seen success in expansion, particularly in our furniture collections you see this fall, the expanded sofa collection.

And there is opportunities like that in other categories throughout West Elm.

Another strength is our decorator palette, which is helping our customers refresh rooms each season, with pillows, throws, decorative accessories and flooring.

As for the ultimate size, we set $1 billion.

Could it be bigger, given the size of Pottery Barn?

You would say, yes.

I think the question remains, how many stores can you have in market, in each market?

And what is the right amount?

And that is -- we are going to continue to open these stores, and measure carefully the impact on where we have most of our market, and let that show us the way.

But nice growth in both direct and retail and in comp.

Still room for margin expansion in that brand.

And we continue to push as I said on expansion and category dimensional size and in authentic design.

Pat, do you want to answer the --?

And Neely, thanks.

We are very excited about the customization.

I think the whole area of being able to identify so many of our customers when they come to the site.

And remember, we are going to be able to identify a customer from 1 of 500 to 700 million visitors, and serve up personalized content to them on the webpage in 0.0030 of second.

So technically, that is a pretty big achievement.

Not many -- we don't know of any other retailer who, conventional retailer who has been able to do that.

We don't change the price in the moment based on the customer who happened to come to the site.

I mean, we do promotions, and we do look at prices across the web on a regular basis, and adjust ours to be competitive.

But we are not looking at them in the moment, and saying, okay, for one customer, it is going to be different price than another.

If that is what you meant by dynamic pricing.

And that concludes our question and answer session for today.

I will now turn the call back to Ms. Alber for any additional or closing remarks.

Well, thank you all for joining us this afternoon.

We really do appreciate your time and your continued support, and we will speak with you again next quarter.

Thank you, everyone.

That does conclude our conference call for today.

We thank you for your participation.

You may now disconnect.