Williams-Sonoma Inc (WSM) 2013 Q3 法說會逐字稿

Welcome to the Williams-Sonoma Incorporated third-quarter fiscal year 2013 earnings conference call.

(Operator Instructions)

This call is being recorded.

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

Please go ahead.

Thank you, Ann.

Good afternoon.

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

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

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and our explanation why these non-GAAP financial measures are useful, are discussed in our 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 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 third-quarter 2013 results, and our outlook for the remainder of fiscal 2013.

Thank you, Gabrielle.

Good afternoon, and thank you all for joining us.

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

Our strong third quarter and our performance year-to-date illustrates the power of our business model and the relevancy of our brands.

We delivered an 11% increase in revenue and EPS growth in excess of 18%.

Importantly, we delivered this revenue growth and accompanying operating margin expansion, while simultaneously investing in our multi-faceted growth initiative.

We believe we are well-positioned headed into the holiday season, and will continue to execute our key strategies to deliver an exceptional experience for our customers.

We are focused on generating topline results, in conjunction with operational and capital discipline to deliver long-term shareholder value.

In the beginning of the year, we outlined for you our key strategic initiatives for delivering sustainable, profitable growth and increasing shareholder value.

They are -- growing our existing brands, launching new businesses and expanding the reach of our brands globally.

We believe that the results we reported today demonstrate disciplined execution across each of these initiatives.

Our existing brands grew, and we made progress in our new businesses, and in our global expansion.

At the same time, we returned $115 million to our shareholders in the form of stock repurchases and dividends.

All year, we have been making investments in our business to drive long-term, sustainable growth, as well as to prepare us for the fourth quarter.

We believe we are well-positioned as the destination for cooking, entertaining, decorating and furnishing your home this holiday season.

We have a strong holiday product lineup, and the widest assortment of personalized goods that we have ever offered.

We have also made substantial investments in our supply chain and our information technology infrastructure, two of our core competencies to deliver an elevated experience to our customers in whichever channel they choose to shop.

In our supply chain, we have made upgrades to better serve our customers.

We opened a new distribution center in New Jersey that is dedicated to retail store fulfillment in the Northeast.

This facility has increased our flexibility in how we service these stores, while reducing our inventory replenishment cycle times.

In the past two weeks, we have completed the in-sourcing of two major furniture hubs, as we continue to increase our control over, and improve the customer experience, of furniture home delivery.

In addition, the regionalization of our Sutter Street upholstered furniture manufacturing capacity allows us to handle more volume, while reducing transportation costs, and delivery times.

An other supply chain enhancement we have made is in personalization.

We have invested in additional personalization equipment, including a new material handling system that improves throughput, and we have trained seasonal associates in personalization techniques.

Personalization helps make gifts more meaningful, and we are leveraging our state-of-the-art monogramming, etching and embossing capabilities this holiday to grow the gift businesses in all of our brands.

Also, we have upgraded our information technology infrastructure in advance of our peak selling season.

Finally, our multi-year e-commerce investments are also yielding returns.

This year, we have launched more than 50 products -- projects with over 400 customer-facing enhancements across all of our websites.

The combination of our open platform, agile development processes, and an aligned organizational structure is a competitive advantage that allow us to deliver new functionality every six weeks.

Here are some examples of key improvements we have made.

We have improved our on-site personalization, as we believe relevancy is crucial to driving engagement.

We have substantially enhanced order tracking visibility for our customers.

Our new AV testing platform is allowing us to optimize the customer experience across virtually every section of our site, through our robust test versus control and rollout strategy.

Mobile devices are becoming a very important tool for connected customers at every stage of the purchase decision, and we are testing enhancements to our mobile sites to be more user-friendly, more image-driven, easier to search and shop, and more useful for finding a local store.

The first site where we have deployed upgrades is Pottery Barn, and the changes are being met with great response.

Also, our e-marketing strategies encompass many different programs which continue to evolve and become more sophisticated, with the result that we are driving more revenue from existing customers and acquiring new ones at lower cost.

I would now like to update you on our new business initiatives.

We continue to see opportunity both domestically and internationally to help our customers decorate, furnish, cook and entertain at home across demographics and life stages.

Our global footprint is expanding, and in the third quarter our revenue from foreign operations increased 31% to $51 million.

In addition to the stores in Bondi Junction, we opened a West Elm store in Melbourne in September.

In Australia, the response to our fully-integrated direct-to-customer business has exceeded our expectations.

We are excited to be opening our first store, a West Elm, in the United Kingdom next month, and we are looking forward to scaling our operations in both Australia and the United Kingdom.

Our franchise operations also continue to grow.

Our partner in the Middle East opened two stores in Saudi Arabia this quarter, bringing the total number of franchise stores to 27.

I would like to spend a few minutes discussing our newest brands, Mark and Graham and Rejuvenation.

Mark and Graham recently celebrated its one-year anniversary.

Demand is increasing as brand awareness grows.

As an example, Mark and Graham's classic leather gloves are being featured this holiday season as one of Oprah's Favorite Things for 2013, and the Typographer's napkins were on the O-list in the November issue as the lead-in to the entertaining section.

In addition, the brand will also have editorial placement in several other national publications in the coming weeks.

The brand's assortment now encompasses 10 discrete categories including personal accessories, jewelry, apparel, tabletop, linens and seasonal products.

Mark and Graham has a social media presence that is an excellent expression of the brand, and is taking the gift-giving experience to a new level with innovative personalization techniques, sophisticated merchandise and beautiful gift packaging.

We acquired Rejuvenation two years ago, and while the business is still small, we continue to see an opportunity to materially grow this brand.

This year, we introduced portable lighting, which extends the brand's relevance beyond on hard-wired product.

We have been working on our product strategy to broaden the aesthetic.

The next wave of product introductions will occur in 2014, and will offer more SKU depth to bath and kitchen.

In addition, Rejuvenation is leveraging our sourcing and supply chain for a new product development, and utilizing our database marketing expertise for targeting and customer acquisition efforts.

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

In all three businesses, we will drive growth by delivering a synergistic cross-brand experience for our customers.

We are leveraging our channels and extensive customer data to better serve our customers' needs in all of the rooms of their homes.

The e-commerce improvements I mentioned earlier, are improving the shopping experience across channels and devices, helping our customers shop with ease, anywhere, at any time.

A comprehensive suite of services complements our innovative and well-priced product offerings.

Our in-home services are differentiating us in the marketplace.

Our team of designers meet with our customers in their homes, and make the decorating process fun, fast and affordable.

And our design services are offered free of charge.

From decorating your tree for the holidays, to helping you set up a breathtaking bar for the holiday party, we'll do it for you.

And we will also be there to offer concierge gift service to help our customers tackle their gift list with ease.

In the third quarter, Pottery Barn comparable brand revenues increased 8%, on top of 11% last year with strong results across channels in all key categories.

From a merchandising perspective, performance was led by the dining and leather furniture collections and bedding assortments.

The strength of our outdoor collections continued through the third quarter.

Entering fall, our dining chair and upholstery businesses gained momentum.

As our upholstery business grows, we are leveraging Sutter Street, our in-house manufacturing facility, to produce our merchandise faster and at better prices.

And we are returning this value to our customers.

As we enter the fourth quarter, we are focused on extending the reach of clienteling, to decorate both outside and inside the house for the holidays.

We have broadened our seasonal decorating collections, and are featuring both an elevated lodge and a classic nostalgic aesthetic.

We have also expanded our dining and entertaining assortments to help our customers host parties at home.

This holiday, we are most excited about our faux fur collection, which is the biggest and broadest offering we have ever featured in this plush and luxurious material.

The collection includes throws, pillows, bean bags, neck rolls, duffel bags and more.

Our exclusive ornament assortment features whimsical and nostalgic themes, and this year we have extended our gift collections across price points and categories.

From jewelry boxes and frames to stocking stuffers, we are offering personalized gifts for every price point and every gift recipient.

For the third quarter Pottery Barn Kids comparable brand revenues increased 4% on top of 10% last year.

In the quarter, our seasonal business drove strength in the brand.

Our baby business brought new customers to Pottery Barn Kids, and we saw growth across decorative accessories, furniture and textiles.

We have expanded our crib offering across aesthetics, functions and finishes, and we have introduced additional nursery chair and bedding options.

We are well-positioned for holiday with our expanded seasonal decor, quilted stockings, nursery rockers and irresistible gift collections.

In addition, this year our enhanced personalization capabilities continue to expand customization options.

As Pottery Barn Kids has the highest penetration of mobile shoppers among our businesses, the improvements we discussed relating to simplification and optimization of our mobile user experience are particularly significant for this brand.

We are helping our customers celebrate with the families and delight their children.

Creating memories and traditions, our holiday assortment is inspirational and authentic, and we are pleased with the initial reception of these holiday collections.

In PBteen, comparable brand revenue increased 17%.

Performance this year has been driven by strength in furniture and textiles.

In addition, our PBdorm business grew significantly as the result of a broader assortment and improved marketing.

In the third quarter, we debuted our Emily & Meritt collaborations, which has been met with a strong response.

And we also launched our second collection with Burton, and introduced our licensed Manchester United textiles and wall accessories.

Successful collaborations and exclusive designs continue to drive newness and innovation in PBteen.

We are excited about our more comprehensive gift offerings this holiday season for PBteen, and we are discovering additional synergies of our Pottery Barn Kids businesses, as we focus on lifestage marketing across the Pottery Barn family of brands.

Next, I would like to discuss the Williams-Sonoma brand.

In the third quarter, comparable brand revenue grew 1.4%, which is accelerated sequentially from the second quarter and year-over-year.

Our Autumnal and Halloween assortments contributed to this growth.

In addition, exclusive products from key vendors and our branded products drove positive results.

All year, we have been preparing for the fourth quarter, and we believe there are five areas that will give us a competitive advantage.

First, our stores.

Our stores are a competitive advantage, an essential part of connecting with our customers.

As a result, we have invested in and increased improved training in key categories, and our field teams are better-trained and more engaged than ever.

Second, we have increased levels of newness in our stores and online.

We have more exclusive and branded product introductions this quarter.

New product introductions include hard anodized copper core cookware, Williams-Sonoma stemware, prep and serve tools, roasters, and a high-performance rapid boil pot.

We have also increased innovation in our food and perishables business.

This year, we are celebrating the 15th anniversary of our nostalgic peppermint bark with an expanded collection.

And our gifting assortment is stronger and more relevant to a broader customer demographic than in past years.

We have an increased selection of high-quality gifts, including relevant gift sets, and a new hamper collection that helps make gifting effortless.

And we will inspire our customers and help them prepare for the holidays with our new entertaining and table top collection.

Third, we have improved in-stock positions on our key holiday items and core assortments, to ensure better service levels for our customers.

In fact, in the last few weeks, our out-of-stock levels at retail on top items have decreased by double-digits year-over-year.

Fourth, we have made high-impact changes to our visual presentation.

In our catalogs, we are featuring strong narratives, complete with recipes.

The content, imagery, and value equation are more compelling.

In our stores, we have new visual displays, boutique shops and an increased interactive experience, and online, easy to find gift shops.

Supporting all of this, is the Williams-Sonoma Inc.

foundation of e-commerce and supply chain excellence.

And last, Williams-Sonoma Home continues to be an opportunity.

Our sales and assortment continue to grow, and we continue to identify more highly-responsive segments in our database, and are seeing success in the stores offering the Williams-Sonoma Home collection.

Given the fragmented high-end home market, we believe Williams-Sonoma Home represents a material opportunity for us, particularly online.

Finally, I would like to discuss West Elm.

West Elm continues to post record revenue growth, with an increase of more than 30% in the quarter.

The brand delivered comparable brand revenue growth of 22%, on top of 13% last year.

West Elm opened four stores in the third quarter, including locations in Melbourne, Australia, Tampa, Florida, Oakbrook, Illinois and Birmingham, Alabama.

We will open additional three stores in Q4, including our Company's first location in Europe on Tottenham Court Road in London.

West Elm brand growth was broad-based across categories, including furniture, textiles, decorative accessories and lighting.

Handcrafted products and limited edition collections created in collaboration with independent artists continue to be a key differentiator among competitors.

This quarter, in support of our artisanal communities in the United States and around the world, West Elm made a Clinton Global Initiative Commitment to Action, a two-year, $35 million handcrafted purchasing plan, and a transparency pledge around the making and sourcing of those products.

The brand's commitment highlights our Company's efforts overall to achieve our business goals, while improving our social and environmental performance.

West Elm continued its positive partnership with ETSY, and announced it would be rolling out local assortments in many of its 50-plus stores, investing in craft in the communities where we do business and abroad.

Test assortments were celebrated in our Brooklyn and Atlanta stores in October.

West Elm continues to be a leader in social media, growing awareness and credibility through global and store area communities.

Each West Elm store manages its own Facebook and Instagram pages, connecting our customers with our associates in authentic and highly visible ways.

All stores are hosting a regular schedule of classes and events, many in partnership with local artists, bloggers and influencers.

In-store activities add another dimension to the brand's cross-channel customer experience, bringing promotional activity to life.

As we look forward to the fourth quarter and beyond, West Elm has an exciting future ahead.

Our strategy remains to profitably grow the brand, and attract a broad base of customers by offering choice in our products and services that will help customers express their own individual style, and create a home that will connect with their story.

Community, through local connections with like-minded strangers, our crafters, collaborators, customers and associates, and consciousness in everything we do, from handcrafted and local products to supply chain transparency and sustainability.

The successful combination of these three factors is differentiating West Elm from its competition.

With revenues expected to exceed $0.5 billion this year, we are confident in this brand's ability to be a $1 billion-plus business.

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

Thanks, Laura, and good afternoon, everyone.

Our third-quarter results exceeded our expectations, and demonstrated the advantages of our multi-channel, multi-brand platform, as well as our ability to continue to drive market share gains in profitability, while simultaneously investing in the business.

For the third quarter, net revenues increased 11.3% to $1.052 billion, with comparable brand revenues increasing 8.2%.

Net revenues in our direct-to-customer channel grew 14.5% to 49% of total Company net revenues versus 47% last year.

Net revenues in our retail channel grew 8.5%.

Pottery Barn and West Elm were the most significant contributors to revenue growth.

Total Company operating margin for the third quarter was 8.8%, a 40 basis point improvement over last year, and includes continued investments in our global expansion.

The direct-to-customer channel operating margin increased 40 basis points to 22.9%, driven by advertising leverage which was partially offset by lower selling margins.

The retail channel operating margin increased 30 basis points to 9.1%, primarily driven by the leverage of employment costs, and was partially offset by lower selling margins.

Corporate unallocated expenses increased 10 basis points to 7% of net revenues, partially due to the incremental cost to support our growth initiatives.

Gross margin during the third quarter was 38.6% versus 39% last year.

The 40 basis point decrease in gross margin resulted from lower selling margins from competitive pricing strategies across all of our brands, partially offset by occupancy leverage.

Occupancy leveraged 30 basis points, with occupancy costs at $142 million in the third quarter of 2013.

SG&A improved 80 basis points to 29.8% in the third quarter of 2013, versus 30.6% in the third quarter last year.

This improvement in SG&A was primarily driven by the leverage of advertising and employment costs.

As we have said before, the high penetration of our direct business allows us to flex between margin and advertising costs to deliver revenue and operating profit growth, while generating operating margin expansion.

This revenue growth and operating margin expansion drove an 18% increase in third-quarter 2013 diluted earnings per share to $0.58 from $0.49 last year.

These results demonstrate our continued focus on generating meaningful shareholder returns, while investing in our future growth.

Merchandise inventories grew 18.5% on a comparable basis.

The biggest drivers of the inventory increase are in those brands fueling our growth, Pottery Barn and West Elm.

We also had additional inventory this year that we didn't have last year to support our global expansion and new brands.

Across our brands, the inventory increase is in our top-selling core programs.

Additionally, inventory in-transit on a comparable basis has grown substantially, as we are improving our in-stock levels in time for the holidays.

As a reminder, as a result of the 53rd week last year, our inventory growth is also impacted by the one-week calendar shift.

Our third quarter ended on November 3, as opposed to October 28 last year, causing a higher level of holiday receipts to occur in the third quarter this year, as opposed to the fourth quarter of last year.

From a balance sheet perspective, merchandise inventories increased 30.5% to $899 million.

As we mentioned last time, as part of our expanded Asia sourcing initiatives which include directly procuring our inventory for 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, which is not in our prior year numbers, merchandise inventories increased 18.5% on a comparable basis.

Cash at the end of the third quarter was $129 million.

Over the past year, while generating $450 million in operating cash flow, we have returned $351 million to shareholders.

During the quarter, we returned $115 million to shareholders through share repurchases and dividends, and invested in the businesses with $47 million in capital expenditures.

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

For the fourth quarter of 2013, we expect to grow net revenues to a range of $1.370 billion to $1.430 billion, with comparable brand revenue growth in the range of 3% to 6%.

Diluted earnings per share are expected to be in the range of $1.30 to $1.37, and we expect our operating margin to be in line with last year's rate.

For the full year, as a result of the outperformance in the third quarter, we are raising our revenue and earnings per share guidance.

We now expect to grow net revenues to a range of $4.290 billion to $4.350 billion, with comparable brand revenue growth in the range of 5% to 7%.

And we now expect fiscal 2013 non-GAAP diluted earnings per share in the range of $2.76 to $2.83, representing a year-over-year growth rate in the range of 10% to 13% after adjusting for the 53rd week in 2012.

It is important to note that fiscal year EPS guidance also reflects the estimated $0.02 negative weighted share impact on the sum of the quarters.

Additionally, our fourth-quarter and full-year guidance contemplates several factors.

First, the fourth quarter of 2012 included an additional 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 resulted in a pre-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 fourth-quarter and full-year guidance contemplates the closure of significantly more Williams-Sonoma stores in the fourth quarter as compared to last year.

We plan to close approximately 11 stores this fourth quarter versus 8 last year.

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

In summary, we are pleased with our results, and believe that we are well-positioned for this holiday season and beyond.

Our customer is at the center of everything we do, and the investments that we are making.

We are confident in our innovative product, great value and outstanding services.

We are looking forward to helping you and your family shop this holiday season.

I would now like to open the call for questions.

But before I do, I want to wish you and your families a happy holiday season.

(Operator Instructions)

We will take our first question from Budd Bugatch from Raymond James.

Good afternoon, and happy holidays to all of you there.

Congratulations on an impressive quarter.

I wonder, and I hope you can hear me --

We can, yes, thank you.

I wonder and this -- two questions, if I can and I will phrase them together, one, you gave us international revenues this year.

I wonder if you could give us what the comparison was against that for last year?

And maybe a little bit more color on the SG&A leverage between segments, or you said advertising?

And I think occupancy -- not occupancy, advertising and leverage and payroll, can you give us kind of the feeling of how that was between the segments?

The international, we don't have the growth over the prior year, because there wasn't really as substantial amount of growth.

If you go two years back, we really didn't have as much international operations, all we would of had was the franchise.

You can look back in the Q, or I can get that for you off-line.

But as far as the SG&A, it really was significantly driven by advertising and employment leverage.

Obviously, the more sales we have -- when we had higher sales than we expected, that leverages all of the costs.

Thank you.

We will go next to Daniel Hofkin with William Blair & Company.

Good afternoon.

Can you hear me?

Yes.

Okay.

Nice quarter.

Just, I guess, maybe follow up on the Williams-Sonoma evolution.

I would like to know kind of where you -- you talked about some of the increased exclusivity, where that is right now versus where you think it might be in a couple of years?

And then, the other question relates to operating margins.

You had a nice kind of balance between the two segments this quarter, in terms of improvement.

In the fourth quarter, it looks like the top end of your guidance assumes flattish margin, maybe some decline in margin at the lower end.

Just curious, is -- what the dynamic is?

Is it just the holiday-related competitive environment?

Or is there something sequentially that would cause the margin to potentially be down a little bit year over year in the fourth quarter?

Thank you.

Sure.

Thanks, Daniel, it is Laura.

I hate to use the sports analogy, but I guess, I would say, we are in the third inning on that.

We are just getting started.

Janet has been in her role for six months.

And while we have been evolving our strategy prior to Janet, the durables product development life cycle takes a while.

We also want to make sure that before we change any strategy, we want to make sure that we know it is going to work.

As a result, we have been very thoughtful about testing changes in the Williams-Sonoma brand.

As I told you before, our primary focus is on product, exclusives and innovation, retail execution, and exciting visual presentation.

And we believe there is still more growth to be had, in every category, and we are looking for bigger and more broad-based growth.

We know that the brand is widely loved and revered, but we want to make it more accessible to more people.

In the future, you are going to see us bring in a wider range of products, the best quality for what they are, that aren't necessarily the most expensive.

We also know we can work more closely with our key vendor partners to develop more exclusives, that will further differentiate us from the competition.

And we are also seeing emerging trends that we are building on a new categories, like the Williams-Sonoma Home business, and we are still in the very early stages of developing that.

And Dan, regarding the operating margin, a few things going on there.

Definitely, this is the first time I think all year that we have had operating margin expansion in the retail channel.

So that is really exciting.

And obviously, the higher the revenues we have, it leverages all the way through, and drops to bottom line.

And so we have the margin expansion this quarter.

For next quarter, we have guided to be in-line with last year.

And the one thing to remember there, is that we do lose some leverage from the transition to a 13 week -- we transition away from 14 week to 13 week, and so some of that does impact the bottom line.

But with that said on the year, we basically raised the year on the bottom.

It used to be at 10% to 10.3%.

It is now 10.1% to 10.3%.

And at 10.3% as you know, it is equal to the highest rate we have had, and will generate the highest level of operating income we have ever had, so all while investing in our strategies for the future.

So we feel very confident about that.

Thank you very much.

We will go next to David Magee from SunTrust Robinson Humphrey.

Yes, hi, everybody.

Good afternoon.

Hi.

We are hearing from some retailers about the promotions earlier in this season.

Just generally speaking, they seem to be more severe than expected.

And I am just curious what you think sort of about the environment here, relative to what you might have thought a few months ago?

Yes, we continue to recognize the promotional environment.

We have been talking about it for over a year, that we embrace it, and don't think it is going to change.

We know our customers would rather buy from us than our competition.

And so, we are focused not just on price, but also on all the other things that makes you buy something from a retailer.

And we believe we have the competitive advantage in many of those areas.

But on price specifically, we have a very exciting line-up of great value for the holiday season.

We are going to vary it from last year, so that we can keep everybody on their toes, and drive excitement for the customer.

So you are going to see us have planned promotions, as we have all year.

And it is hard to get a read, the macro and consumer sentiment given the multitude of conflicting data points.

I don't know what is going to happen with the macro, but I do believe that a people are enthusiastic about decorating, cooking and entertaining.

And thankfully, that is the business that we are in.

Great.

On the Williams-Sonoma brand specifically, could you tell us sort what the proprietary product percentages this year versus last year?

It is higher.

So it is meaningfully higher year to year?

It is higher, and I think what is most important versus SKU counting is the quality of the [exclusive].

Thank you.

Last question.

The distribution changes that you are making now, is that going to be meaningful to next year's EBIT number?

Is there a chance to really leverage that [nicely] next year?

You have to remember that the most important thing about our supply chain enhancements, is that we are able to give our customer better service.

In many cases, we have passed along the savings to our customers.

Great.

Thank you, and good luck this season.

Thank you.

We will go next to Peter Benedict from Robert Baird.

Hi, thanks for taking the question.

Just curious, your business has been pretty consistent across the year here, but just the cadence across -- during the quarter, was there any choppiness that you saw, just trying to understand that?

And as it relates to Pottery Barn, the complexity in the business -- is there anything in that, in the mix there that you are seeing that starts to show you evidence that the remodeling boom is starting?

I know the business has been strong, we can see that.

But just trying to pull back the covers a little bit by -- on a category standpoint.

Are you seeing anything that has been changing over the course of this year that can speak to that?

Thanks so much.

Thanks, Peter.

Yes, from the cadence perspective, we don't comment on that, as it is laying out throughout the quarter.

But I will let Laura talk about Pottery Barn.

Sure.

It is clear to us that the customer is very focused on their home.

And that while we can't see a correlation one-for-one with housing starts or anything specifically in the macro, we do believe that people feel better about spending money on their home, because the value of their homes are no longer dropping.

And so, at the same time, it is difficult to decorate.

And we are seeing market share gains we believe, because we not only offer a wide array of well-priced products that are high-quality, but also we help the customer put it together in-home.

And I think it is probably, early innings of a housing recovery.

But we believe that because we are making it easier and offering great assortment to our customers, that we are gaining share and we will continue to do so.

And so, you will see us increase newness.

And also, we are also seeing uptick because we are offering more dimensional size options for our customers, in terms of furniture.

I mean, so many times, when you go to buy a new sofa, not only are you looking for style and the right price, but you are also looking for something that fits in your family room.

And so, we are very cognizant of where those holes are in our assortment, and where we are adding new SKUs to gain more customers in the future.

Okay.

Thank you.

Good luck in the holiday.

Thank you.

We will take our next question from Greg Melich from ISI Group.

Hi, thanks.

I want to talk about the retail margins in international, and how they link.

If I understand it right, your international revenue falls into the retail segment.

And if that is right, how much of the sales growth is really coming from international, or what was the trend in retail?

And then second is, how do we think about the retail margins, in terms of -- we had a nice improvement this quarter, but clearly, the calendar shift helps some there.

How much of the margin improvement there would be driven by that week shift international?

Okay.

So from a retail perspective, really the last time we specifically called out, that one of the biggest drivers was international.

This time, was primarily just across Pottery Barn and West Elm brands, not specific to international.

So that wasn't one of the biggest drivers.

So with that said, what the growth there was 31% and year to date it is 48%.

International is almost 100% in the retail channel.

So when I talk about it, it is because of the effective drag on earnings, by the fact that we have cost ahead of revenues.

So from a margin, from a Q3 margin perspective obviously, if we didn't have those, for example, with the UK store we are incurring costs ahead of it actually opening later in Q4, our margins in that retail operating margin would be higher.

As far as guidance to -- we don't provide guidance by channel.

But we know that the retail channel does drive sales, of course, to our direct channel.

So depending on where the customer is shopping at any particular time, you will see fluctuation in our retail operating margin.

And so, obviously, you are going to see this change.

We are very pleased with the results that we have this quarter, and the fact that we did see that operating margin expansion, but that will fluctuate.

Got it.

On inventory, I just want to make sure I got that right.

The in-transit, [thinking] you were up18%.

How much did the week shift?

Is that included in that adjustment?

Or would there be another adjustment, given that the quarter ended a week later?

No, there would be another adjustment.

The adjustment from the balance sheet to the comparable basis, is simply taking out that additional inventory that wasn't in the bake last year, associated with our Asian sourcing initiatives.

And that is what takes you to the 18.5%.

And then, when we speak about all these other things that are driving the inventory increase in my prepared remarks, that is in particular to the 18.5%.

So there would be an additional adjustment if you back that out.

So how much is it, if it wasn't calendar shift?

We are -- it is hard to tell.

We are not quantifying it.

It's really hard to actually come up with the exact amount that is representative of that.

Okay, great.

Thanks a lot.

We will go next to Brian Nagel from Oppenheimer.

Hi, good afternoon.

So my question is on gross margins.

Maybe somewhat -- I guess, maybe a little bit of a follow-up to the prior question.

But the gross margins in the quarter were still down, but the trend was improving, particularly looking on a multi-year basis.

We spent a lot of time over the last several quarters talking about the Williams-Sonoma strategy of using select price promotions as an advertising vehicle, and essentially trading SG&A dollars to cost of sales.

Is there something that -- is there -- was there some shift or something that drive say, the improvement in trend in gross margins this quarter that we should expect to continue to happen as we look over the next several quarters?

I wouldn't read too much into that.

I think at the end of the day, we said in our prepared remarks, the main driver was lower selling margins, which was partially offset by occupancy leverage.

We have said, even last quarter, that occupancy costs in Q4 could be higher, which obviously impacts your gross margin.

But I think, the positive here, is a few things.

First of all, when you take the puts and takes in the gross margin, it is actually across all brands and all channels, which reflects our competitive pricing strategy across the board.

It is not particular one brand.

And, the fact to your point, that we can offset it with the SG&A improvements, and still have operating margin expansion is phenomenal.

So we say it, again and again, but our focus is on operating margin.

Okay.

And then, a follow-up, if I could.

You gave us a lot of color on some of the merchandising initiatives.

And I look at my model, and it's pretty clear that the Williams-Sonoma brand comps improved here in Q3, again on a kind of a multi-year basis.

Was there something that was shifted there, sort of a pause in the Williams-Sonoma brand, or was that maybe a just culmination of some of the efforts you have been putting forth lately?

No, as I said in the prepared remarks, we saw a great response to our wine country theme, our autumnal theme.

And that was stronger than our summer themes of outdoor entertaining.

Okay.

Very helpful.

Thank you.

We will take our next question from Mike Baker with Deutsche Bank.

Hi, thanks.

Can you hear me okay?

Yes.

Great.

So, I want to focus on the margins, as well.

Just on the merchandise margins, which looks like it is down about 70 basis points, similar to last quarter.

Is there an impact there, is that the result of pricing?

Or is there impact from more free shipping, which I think you include in that selling margin?

That is the first question.

Then the second question is related, but more longer-term, how do we think about as you just said, your focus on operating margins.

How do we think about the long-term operating margins?

Remind us what is in your three-year plan, I think it's implies about 10.3%, roughly over the last three years.

Does that start to expand, or do we expect more topline growth or flat margins, and that is how you are going to drive your earnings growth going forward?

Thanks.

Okay.

So as far as the gross margin, it is definitely lower selling margins is what we indicated, which to your point does include free shipping.

At the end of the day, we were intentionally competitive across all of our brands, all channels, and clearly it worked.

As I said earlier, we can't afford to do that, because our strategies allow us to do that and still have operating margin expansion.

So it is just a choice we make between, whether we do it free ship, a pricing promotion that hits gross margin, and we pull off from doing e-marketing, which the benefit hits SG&A to still generate the topline sales, and the bottom line growth in operating margins.

So that is going to continue.

I don't see that changing at all.

We think that is very healthy, and clearly, it is working for our brand.

As far as operating margin expansion, for the year, on the high end, we are at 10.3%.

And we have said that over our three-year outlook, that we do plan on operating margin expansion.

[EPS] (Company corrected after the conference call) goes from low double-digits to mid-teens in our three-year outlook.

And so, the margin expansion then start to [accelerate] at some point in the next couple years?

Yes.

Got it.

Thank you.

We will go next to Neely Tamminga with Piper Jaffrey.

Great, thanks.

Laura, I would love to talk a little bit more about the statement I heard over and over again.

I haven't counted exactly, how many times you said personalization, but clearly that is a theme for you this holiday.

And I was just wondering if we could get a little bit into, what personalization actually means for you?

Is it higher margin goods?

And from a financial perspective, is it margin accretive?

It would seem to me that it would be, because it is lower returns, and maybe an additional average price-point that would be a little bit higher.

But what sort of penetration are you looking at for Q4 for the holiday season?

How do you look at that last year versus this year for personalization?

Thanks.

Thanks, Neely.

I see personalization as really a key differentiator, and a great gift more than anything.

I mean, you can give someone a beautiful black paperweight from Mark and Graham for $35, and it may be the most thoughtful gift they received during the holiday season.

I think that is rare these days.

We have spent a lot of time talking about what kind of gifts we like to receive and to give, and have developed our category that way.

It is great that it happens to be high-margin, and oftentimes lower cube, and of course, we stand behind any damages we have.

We allow customers to return if there is damage, but you are right, that they don't return, if there is no damage.

So it is a very profitable business.

We have made investments to make sure that we can ship as much as we possibly can ship this year, because we expect, based on last year's results, to see very strong growth in this category.

It is not an easy thing to execute.

And so we are very fortunate, we have been working on this for many years, and making investments every year in how we do this, how we bring all this together, across multiple categories and multiple techniques.

It is not just embroidery, it is so many new techniques this year.

And we do it all ourselves.

Do you have a sense of how much of the penetration of your holiday products will be offered with personalization this year?

Of course I do.

And it is so competitive, and I would prefer not to quantify any of the growth numbers or the SKU count increase.

Understood.

Best wishes.

And we have time for one last question which will come from Marnie Schapiro with The Retail Tracker Analyst.

Congratulations.

Thank you.

So my question -- hello?

Hi.

I am sorry.

Yes, I can hear you, sorry.

I don't -- it's a new phone, and I don't know how to take it off speaker.

So my question circles around -- centers around food.

You have historically had an outstanding assortment of food at Williams-Sonoma through the year, but particularly in holiday season, and it looks great this year.

And I see -- as a market continues to do well and expand, I have seen a few food items.

So I guess, it begs the question, is there an opportunity to expand a little bit more in food there?

And, Laura, you talked over and over about whether it is getting closer to the table, farm to table or the focus around cooking and entertaining at home.

I was curious if you have looked into some of these subscription things?

I am sure you have seen them.

Most of them are coming out of your own backyards, where people receive a box to sample things.

And is that something either through West Elm Market or Williams-Sonoma, that would be interesting to you?

Yes.

Thank you.

It sure is.

So many of the food products that we carry are from local and artisanal food people.

And we have a lot more continuity programs this year, that if you go online, you will see they make excellent gifts.

We look for very high quality in our foods.

As you know, I am very excited personally to share about the expansion in our peppermint bark.

We have a lot more this year, because it's our 15th year anniversary in peppermint bark.

And when you go into the store, there is so much irresistible product in that category.

I saw that, by the way.

I thought it looked fantastic this year.

Thank you.

We also spent a lot of time on making packaging changes to our Thanksgiving product, that I think is much more appealing.

So while it is the same great quality that it has always been, updated the graphic layer, and adjusting with good response.

So, so far, so good.

We are just early here in the fourth quarter, but we are seeing a nice response to the food offering that we have.

It is a small business for market, but you are right, in that we can even be more localized and smaller there, because the scale is so much smaller.

So we just are very selective about the great products that we carry, and offer differentiated products to the customers who come into our stores.

Would it be okay if I took this all kind of one step further?

You said at Williams-Sonoma, the wine country was a very strong theme for you.

Is it out of the question to think that Williams-Sonoma could be pairing with local vineyards to do some kind of wine -- I don't know -- club or offering or something along those lines?

Or is that just something that you are not going to get involved with?

We do have a wine club already online.

Oh, I missed that.

Yes, we do have it.

And so, you can look at that -- and we carry -- and we select all the wine ourselves, and taste it here, and carry wine from small growers, and then some larger ones, too.

My apologies.

I obviously have to start drinking some time soon.

Well, thank you so much, and best of luck with the holidays.

The stores look fantastic.

Thank you.

And that concludes our question and answer session for today.

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

Well, I just want to thank all of you for joining us this afternoon.

We appreciate your time and your continued support, and we will speak with you again in the new year.

In the meantime, I hope you have a wonderful holiday season.

Thank you, and that does conclude our conference for today.

We thank you for your participation.

You may now disconnect.