Williams-Sonoma Inc (WSM) 2014 Q1 法說會逐字稿

Welcome to the Williams-Sonoma Incorporated First Quarter 2014 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 call is being recorded.

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

Please go ahead.

Thank you, Doris.

Good afternoon.

This call should be considered in conjunction with the press release 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 explanation of 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 operation, business initiatives, trends, guidance, growth plans, and prospects of the Company in 2014 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-K for more information on these risks and uncertainties.

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

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our first-quarter FY14 results.

Thank you, Gabrielle.

Welcome everyone, and thank you for joining us this afternoon.

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

I'm excited to discuss with you today our strong performance.

In the first quarter we delivered record net revenues of $974 million, with comparable brand revenue growth of 10%, driven by broad-based strength across each of our brands.

This resulted in a 17% increase in operating income, and a 20% increase in diluted earnings per share.

This double-digit revenue increase was accompanied by solid operating profitability.

Innovative high-quality product, personalized service, relevant marketing, and strong execution across all brands drove these better-than-expected results.

With 50% of our revenue in the direct channel this quarter, we believe our multi-brand, multi-channel platform is driving consistent market share gains, and providing us with a competitive advantage.

We are pleased that we are able to deliver these strong earnings against a challenging backdrop.

The term multi-channel has become ubiquitous.

We feel that our model is different, and this difference is what is driving our performance.

I thought it would be worth discussing these differences as we see them, including the following attributes.

First is scale.

Our direct business is 50% of total revenue.

This gives us significant flexibility and leverage in our marketing spend.

Second, we have more than three decades of experience in leveraging synergies between the channels.

We know that our digital spend drives customers to our stores.

We also know that retail's a major source of new customers, and that many of them become direct customers, as well.

Third we have the catalog, which is an important component of our model.

Nothing can match the productivity of an inspiring catalog delivered to the right customer.

Fourth, advanced marketing techniques applied to our very large and well-developed house file.

This invaluable asset allows us to market relevantly and efficiently across all three channels and across all of our brands.

Fifth is lifestyle merchandising.

We learned a long time ago that the best way to sell home furnishings is to show them in a home, a home that our customer aspires to live in.

We have perfected this technique over decades.

Our first-quarter results demonstrate how the investments we began making years ago to establish a best-in-class multi-channel model are paying off.

We are deepening connections with our customers.

We are bringing innovation to the market in each of our brands through our products and service offerings, increasing our relevance in every market in which we operate.

We are further distinguishing our brands from the competition.

We're also making progress against the initiatives we recently outlined for you in March.

Our global expansion continues.

Customer demand is building in both Australia and the UK as brand awareness grows.

We are focused on optimizing our inventory position to reflect local taste and seasonality in these markets, and we are looking forward to expanding the reach of our global business initiatives.

We continue to make improvements to our websites in Australia, and we are planning to fill out our Australian footprint, with eight new stores this year.

We believe this additional scale will drive brand awareness, and help us leverage our in-country infrastructure.

In the United Kingdom we'll be expanding our reach.

We are looking for additional retail locations for West Elm, and plan to launch Pottery Barn and Pottery Barn Kids fully integrated websites later this year.

In the Middle East, our business is growing, and we are particularly excited about the strong customer response to West Elm.

In addition, our franchise partner in the Philippines anticipates opening a Pottery Barn and a Pottery Barn Kids store this summer, our first franchise location outside of the Middle East.

We're also seeing progress in our new businesses.

Mark and Graham is growing quickly, and acquiring new customers with an expanded spring assortment and deeper catalog mailings.

In Rejuvenation, we recently launched a collection of kitchen LED lighting.

Rejuvenation has blended past and present, reproducing classic fixtures, including designs that are more than 100 years old, while using the latest LED technology to maximize energy efficiency.

We're also seeing a strong response to Rejuvenation's new bath collection.

Approximately 1,000 new SKUs in bath hardware, lighting, and furniture have been introduced, and we have seen a pick-up in demand across channels.

We know that our supply chain is key to superior customer service, and we continue to invest in ours.

Our Dallas distribution center went live earlier this month.

We will incur some additional expense in this quarter bringing this DC on line and implementing the supporting technology.

However, in addition to reducing transportation cost over time, we expect the cycle times for home furnishing deliveries in the central region, as well as nationally, to materially improve.

On the e-commerce front we continue to make investments.

We launched enhanced capabilities on our sites relating to search and personalization to improve the user experience.

We have also transitioned to rolling out new releases to our sites every four weeks instead of every six weeks.

Agile release cycles allow us to continuously deliver improved site functionality and stay ahead.

In e-marketing we have uncovered some breakthrough programs to increase new customer acquisition.

We will continue to build on these opportunities that we believe will set us up for the back half.

We also will implement several important IT projects this quarter to strengthen our infrastructure, and prepare us for peak season.

In summary, we are investing in and executing against all of our growth strategies while simultaneously improving our profitability and returning capital to our stockholders.

As we look ahead, we are excited by the many opportunities that we see.

Our brands are distinctively positioned in the housewares, furniture, and home furnishings markets.

I would now like to share a few key developments in each of our brands.

I would like to begin with Williams-Sonoma.

We are extremely pleased that comp brand revenue increased up 6%, on top of an increase of 1.9% in 2013.

Comparable brand strength resulted from innovative product offerings, improved execution, strong cross-channel marketing, and improved field training and development.

This strong performance was delivered despite the continued promotional marketplace.

We believe our strategies are on innovative and exclusive products, and our focus on delivering the best service are working.

In the first quarter, we saw a strong performance across key categories, including electrics, cookware, and cutlery.

We also saw a great response to our Easter collection, and our Williams-Sonoma Home business also exceeded expectations.

We believe Williams-Sonoma Home is establishing a unique market position, offering customers a truly differentiated, high-quality, global chic style.

All of these growth categories led to new customer acquisition trends that are very strong, and we believe we have a great product lineup for the second quarter.

As we welcome the summer entertaining and cooking season, we are celebrating grilling and outdoor living.

We are focused on delivering inspirational summer marketing, coupled with continuing new customer acquisition strategies that we believe position us well for continued growth.

I would now like to update you on Pottery Barn, our largest brand.

In the first quarter, Pottery Barn comparable brand revenues increased 9.7%, on top of the increase of 7.6% in 2013.

From inspiration to installation, Pottery Barn helps its customers make their dream homes a reality.

We are passionate about making decorating effortless, accessible, and affordable.

Performance in the first quarter was driven by our furniture categories, as well as improved in-stock positions.

We continue to expand our best-selling furniture collection to include smaller and larger sizes, as well as additional finishes.

Our extended range of bath consoles and bath furniture, with customizable options, is capitalizing on the renovation and remodeling trends in the market.

In conjunction with Earth Day, we launched an online eco-shop that gathers environmentally and socially responsible products in one place.

Increasingly we are using organic cotton in our textiles, recycled and reclaimed materials, as well as wood certified by the Forest Stewardship Council.

As we enter the second quarter, we are getting ready for summer living and entertaining.

We have expanded our outdoor furniture and entertaining collections.

We will also introduce our early fall assortment.

We are focused on providing our customers a personalized and relevant experience across all channels.

Next, Pottery Barn Kids.

In the first quarter, Pottery Barn Kids comparable brand revenues increased 8.1%, on top of an increase of 6.9%.

Pottery Barn Kids believes that creating personal, inspirational, and functional spaces for kids should be easy and fun, The brand brings quality, safety, comfort, and style into every family home.

Strength in our furniture, nursery, and seasonal businesses contributed to first-quarter results.

The customer response to our new furniture collections, as well as our core programs, is strong.

We will be launching a robust schedule of new furniture collections throughout the balance of the year.

In nursery, our extended offerings, coupled with personalized marketing, are driving this business.

In PB Kids, our customers love to celebrate the holidays.

While Easter came later this year, it was a success.

In the first quarter, we also introduced our new beach and outdoor assortments.

As we transition to our summer season, we are excited about the new aesthetics we are featuring in our furniture collection, our beautiful new prints and fresh-color palette in our textiles assortment, and the launch our high-quality back-to-school collection.

Moving to PBteen.

Comparable brand revenues increased 12% in PBteen in the first quarter, on top of the increase of 16.1% in 2013.

PBteen brings quality, style, and value to teens' bedrooms, study areas, and lounge spaces.

First-quarter strength in furniture and textiles was driven by strong demand and improved in-stock position.

PBteen has broadened its appeal by featuring a wider range of influences and designs.

PBteen is focused on furnishing the whole room, extending the depth and breadth of its assortment.

Our new blog, Style House, helps teens gather fresh ideas for their space, their style, and their lives.

In the coming weeks, we expect to launch our collaboration with Zio Ziegler, an internationally recognized artist known for his oversized murals and bold graphic lines.

The Zio Ziegler for PBteen exclusive collection designed by Zio takes the best of his signature style, and re-imagines it in bedding, wall decor, backpacks and more, so teens can bring his larger-than-life street style right to their space.

Our new PB Dorm collection, which builds on last year's success, launched earlier this month.

In addition, graduate giving is an opportunity this quarter, and we have further developed the gift category.

We're also excited by the new collaborations we'll be introducing in the brands throughout the second quarter.

Finally, I would like to discuss West Elm.

The West Elm brand continues to post outstanding results.

Comparable brand revenues increased 18.8%, on top of 11.8% last year, a two-year comp of over 30%.

Growth continued to be broad-based across categories, with success in furniture, textiles, decorative accessories, and lighting.

In the first quarter, we saw strong response to our color palette, and to our core and seasonal assortment across all channels.

In the second quarter, we're excited to launch our new opening price-point assortment.

This special collection is designed in a modern, whimsical, and youthful style that stands alone, or mixes well with the core West Elm assortment, offering our customers high designs at compelling value prices, and attracting new customers.

While this modern aesthetic can live in any type of home, we have also designed a number of pieces for smaller spaces that will appeal to our urban, apartment-dwelling customers.

The collection includes a wide array of bedding, rugs and pillows, as well as upholstered and bedroom furniture.

This new assortment will be available through our catalog and our websites, as well as in direct retail stores, and will be supported with an impactful marketing campaign.

With a focus on consciousness in everything the brand does, West Elm continues to differentiate itself from its competitors through commitments to hand-crafted and local products, supply-chain transparency, and sustainability.

West Elm is on plan to exceed its 2013 Clinton Global Initiative commitment to action, with more than $35 million invested in hand-crafted and artisan products.

The brand is now working with more than 30 artisan groups in 16 countries to bring unique products to its customers, including sourcing partnerships in emerging markets such as Central and South America.

In an effort to improve the lives of artisans they are doing business with, West Elm recently launched an adult literacy program in Haiti in partnership with the Clinton Foundation.

West Elm is also focused on supporting artists, makers, and the growing micro-entrepreneur economy in the United States through West Elm Local, an initiative that will bring regional assortments to more than half of West Elm stores in 2014.

Giving stores a stronger sense of place in connection to their community, West Elm Local strengthens the ties that have already been built through in-store events and partnerships.

West Elm will continue to offer 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.

We will build community through connection with like-minded strangers, our crafters, collaborators, customers, and associates, and promote consciousness in everything we do.

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

Based on West Elm's current growth trend and early acceptance of the brand in global markets, we remain confident in this brand's ability to be a $1 billion-plus business.

In summary, our strong results this quarter reflect our multiple engines of growth, supported by distinctive products presented across our portfolio of brands, a superior multi-channel platform, with analytic marketing that captures the synergies and the advantages of each channel, and a sophisticated supply chain engineered to address the complexity of our merchandise category.

We are confident in our ability to meet our fiscal 2014 and longer-term growth targets.

I will now turn the call over to Julie to review our financial results in detail.

Thank you Laura, and good afternoon, everyone.

We are very pleased with our strong start to 2014.

For the first quarter, net revenues increased 9.7% to $974 million, with comparable brand revenues increasing 10%, on top of 7.2% in Q1 2013.

All of our brands experienced strong year-over-year growth in comparable brand revenue, with Williams-Sonoma up 6%, Pottery Barn up 9.7%, Pottery Barn Kids up 8.1%, Pottery Barn Teen up 12%, and West Elm up 18.8%.

Net revenues in our direct-to-customer channel grew 17.2%, including e-commerce growth of almost 20%.

The direct-to-customer channel generated 50.4% of total Company net revenues for the quarter, crossing the 50% threshold for the first time in the Company's history, a 320-basis-point increase over last year.

Our retail channel revenues also increased 3.1% to $483 million, with West Elm and Pottery Barn the most significant contributors to the growth.

Gross margin for the first quarter was 37.8%, versus 37.6% last year.

This 20-basis-point increase resulted primarily from higher selling margins, as occupancy costs in the first quarter of 2014 as a rate were essentially flat, at 15% of net revenues, or $146 million, in comparison to 15% of net revenues, or $133 million in the first quarter of 2013.

On a GAAP basis, SG&A in the first quarter improved 30 basis points to 30.2%, versus 30.5% in 2013.

On a non-GAAP basis, excluding the 40-basis-point impact in 2013, SG&A increased 10 basis points to 30.2%, versus 30.1% in 2013, primarily driven by higher employment costs related to the vesting of long-term incentive compensation, partially offset by advertising leverage.

GAAP operating income in the first quarter increased 16.5% to $74 million, resulting in an operating margin of 7.6%, compared to 7.2% last year.

On a non-GAAP basis, last year's operating margin was 7.5%.

The improvement in non-GAAP operating margin was driven by a 180-basis-point increase in the direct-to-customer channel operating margin, from 22.9% last year to 24.7% this year, and was partially offset by a 100-basis-point decrease in the retail channel to 6.3%, as well as an 80-basis-point increase as a percentage of net revenues in corporate and allocated expenses.

The improvement in the direct-to-customer channel operating margin was primarily driven by greater advertising leverage, and the leverage of employment costs, partially offset by lower selling margins.

The decrease in the retail channel operating margin was primarily due to the de-leverage of occupancy and employment cost, and was partially offset by improved selling margins.

This retail operating margin also includes the impact of our investments in our global business.

On a non-GAAP basis, corporate and allocated expenses as a percentage of net revenues increased 80 basis points to 7.9%, primarily due to increased employment costs related to the vesting of long-term incentive compensation.

As a result, first-quarter 2014 GAAP diluted earnings per share grew 20% to $0.48, from $0.40 last year.

On a non-GAAP basis, diluted earnings per share grew 17.1%.

Overall, we are very pleased with the strength in the top line, and our ability to grow operating income and earnings per share while absorbing the financial impact of our future growth initiatives.

Moving to the balance sheet, cash at the end of the quarter was $113 million, versus $253 million last year.

Over the past year, while generating $443 million in operating cash flow, we returned $374 million to the stockholders through share repurchases and dividends, including $86 million in cash to our stockholders this quarter alone, through $53 million in share repurchases and $33 million in dividends.

Merchandise inventories were $850 million at the end of the first quarter.

Excluding the impact of additional inventory and transit due to taking ownership of our inventory earlier in the supply chain, merchandise inventories increased 17.2% on a comparable basis.

This increase in inventory was predominantly to support our fastest-growing brands and global growth initiatives.

I would now like to discuss our Q2 and FY14 guidance.

We are confident in our strategies, and look forward to delivering another record year for our stockholders.

For the second quarter of 2014, 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%.

We expect our second-quarter operating margin to be in line with last year.

We are guiding diluted earnings per share to be in the range of $0.49 to $0.52.

Our guidance includes the impact of a number of investments we are making to position us for the back half of the year and for future growth.

For the full year, as a result of our performance in the first quarter and our outlook for the remainder of the year, we are raising our guidance ranges.

We now expect to grow net revenues to a range of $4.645 billion to $4.725 billion, with comparable brand revenue growth in the range of 5% to 7%.

We now expect FY14 diluted earnings per share to be in the range of $3.07 to $3.17.

From a cash-allocation perspective there are no changes to our plan.

We plan to make capital investments in the range of $200 million to $220 million, as we continue to invest in our strategic growth initiatives.

We also plan to continue to return capital to our stockholders by paying dividends and repurchasing shares under our existing share repurchase authorization.

Given the strength of our brand and our superior e-commerce capabilities, combined with our long-term growth initiatives, a commitment to financial discipline, and a commitment to returning capital to our stockholders, we remain confident in our ability to deliver sustainable, long-term, profitable growth.

I would now like to open the call for questions.

Thank you.

Thank you.

(Operator Instructions)

Kate McShane, Citi.

Thanks.

Good afternoon and congratulations.

Thanks Kate.

Julie, I know you don't give guidance around gross margins, but I can't help but get a little excited about what we saw in Q1.

I was wondering if you could help us understand how you are viewing gross margin for the year?

If you could, maybe give a little bit more detail on how the promotional environment shaped up in Q1 and what you expect for the rest of the year?

Sure.

We're actually really excited about the gross margin.

To your point, it's been a little while since we've seen the gross margins are up.

Really, the reason is boldly due to higher selling margins.

As we mentioned, occupancy is essentially flat year over year.

What we're seeing -- I think what's important for everyone to hear is that the true, the pure MMU product margin is what is up, and it's across both channels and across many of the brands.

We think that's a really good sign.

There's various factors for that, one of which we believe is our supply-chain initiatives that we're focused on, we've been talking about for a while, such as the in-sourcing of our foreign agents and the regionalization of our distribution centers, as well as the manufacturing of our own upholstered goods.

All of that is starting to slowly but surely come to fruition within the margins.

We think that is a great opportunity to see those margins continue to rise.

However, with a continued promotional environment, especially during Q2 for example with the summer sale, and an increase in occupancy costs, including depreciation from our ongoing capital investments in the business, there's going to be continued pressure on the gross margin.

As we always like to tell you guys, we have to remember that with a 50-50 business, 50% e-commerce and 50% retail, that we tend to manage to the operating margin line, because we have different levers that we can pull throughout P&L.

But we're really happy with our results on the gross margin line.

Then promotional environment, Laura, would you want to take --?

Sure, yes.

We continue to see that the market is promotional, which is why we're working so hard, as Julie said, to take costs out of our supply chain and to develop inspiring and appealing products for our customer.

We think one of the reasons we continue to win is that we have exclusive and innovative products, and we also have aesthetic diversification across all of our brands, which allows our customers to develop their own unique individual style, but also gives them confidence to come back.

It's a tremendous advantage, because if you think about it, a customer's previous purchase really weighs heavily on their future purchases.

This further isolates us from competitors, we believe, that are using heavier promotions.

You are simply not going to buy something for your house that does not go with the rest of it, just because it's cheap.

Thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good afternoon.

I hate to use my one question on what might be a banal topic, but if you could talk a little bit more Julie to the investments that both you and Laura cited -- talk about their cadence as they work their way through the year -- only because in the context of the numbers you just put up and an easier comparison, the guidance for the second-quarter margins seems a bit on the conservative side.

I'm sure you have some drivers there, also.

Any color would be great?

Sure.

We're really excited that we're seeing opportunities, particularly in e-commerce, that we're going to build on.

The customer trends are strong as driven by our marketing strategies.

Through testing over the past few quarters, we have uncovered several breakthrough developments.

This Q2 earnings guidance reflects the fact that we see opportunities to invest more in the second quarter in these initiatives, which will set us up for the back half.

Also in Q2 we are investing in our supply chain with our new Dallas distribution center, as well as the IT infrastructure to support the supply chain.

We're putting several major IT projects into service in Q2.

Of course we always have our continuing investments in global.

I think the disconnect is obviously didn't guide to Q2.

Those have always been our numbers for Q2.

It's just a delta between what you're seeing, but that has always been an investment in Q2.

The reality is when you look to the year, we actually raised the year and added $0.02 on the year, which is exactly in line with our three-year outlook.

Great.

Think you so much.

John Marrin, Jefferies.

Hi, guys.

Congrats on a great quarter.

Thank you, John.

First, I would like to hear about how sales trends were through the quarter, and maybe a comment on current sales trends if you can?

Also, just what you're looking at over the remainder of the year relative to what you were seeing a few months ago?

We don't provide the cadence of our sales trends throughout the quarter.

Obviously at the end of the day Q1 was a strong quarter, and we mentioned that Easter was strong for us.

We're only three weeks into this quarter, so it's really too early to call the card on that.

Okay.

Just this incredible performance in direct -- I understand you just instituted some changes there that probably drove performance.

I was wondering if you could talk about how that looked across the brand portfolio and what the growth outlook is for the rest of the year?

Thanks.

John, I think if you know me, you know that I'd love to get under the hood and tell you exactly what we are doing in terms of these breakthroughs in e-marketing, but clearly it's very competitive for us.

E-commerce is so foundational to our ongoing success and our ability to harness the information we have and utilize it effectively, it's just core to the way we do business.

These capabilities, which we are most excited about, relate to our e-mail and our e-marketing programs.

They span a number of areas, including technology, new ways to utilize our data, our processes, and the way we manage our programs.

They will build over time, but remember we are starting from a base of over $2 billion in e-commerce.

That said, we laid out our plan in March, and this has been in our plan.

We are very excited about what we see coming down the road here.

Thanks, guys.

(Operator Instructions)

Chris Horvers, JPMorgan.

I also want to follow up on the 2Q guide, obviously a fantastic quarter against a fantastic quarter in the fourth quarter, and really differentiated versus what is going on so much of retail at this point.

Your comparison on the brand comp's not really harder, but you're maybe 100 basis points -- your guiding to a pretty sharp deceleration.

I would love to get your thoughts on that?

The reality is we're off to a great start, but it's still early in the year.

One quarter doesn't really give us enough certainty about the trend for the rest of the year.

You have to remember in particular with the revenue, we're up against tough compares in Q2, with an 8.4% comp last year.

Obviously we just mentioned the investments from an earnings perspective.

Again, those were in our numbers, so obviously you guys didn't have visibility to that.

I think with all that said, the fact that we raised guidance on the full year, and that is exactly in line with our three-year outlook, we're feeling very good about this guidance.

Okay.

On the inventory growth is also -- going back to let's say 4Q 2012 it started to pick up a lot of that seemed to be on the global growth side.

But you mentioned for a couple of the brands the in-stocks have improved and they've really contributed to sales.

Is there a way to think about how much of that inventory growth has contributed to sales, or how much of that relates to domestic, and how do think about inventory growth through the balance of the year?

Thanks.

Sure.

We are really excited about the inventory levels, given the fact that it certainly has been one of the main drivers for driving the out-performance that we've seen.

Obviously everything else factors into that as well.

You have to have the right product and the right marketing and all of that.

But the reality is having an in-stock position has been strategic for us.

I think everyone needs to know that, even though the inventory levels seem high, they're in the brands that are fueling our growth.

It's in Pottery Barn, it's in West Elm with a 10% and 19% comp in just this quarter alone.

We do have that additional inventory that you mentioned comping.

But the reality is for global, for example, we're adding eight new stores this year, so we have to build inventory for those that aren't comparable.

There's a lot of things -- the new businesses, brand extensions that are growing.

You've got more inventory this year than you had as a base last year, so it looks skewed from a growth perspective, but all investments in good things.

We think this inventory level is somewhat sustainable for a period of time.

We think it's strategic.

With that said, we obviously see opportunity to reduce slow movers.

We have very strong disciplines across the Company, and we're always focused on slow movers, and also getting back in stock.

We are aggressively going after the slow movers, while at the same time aggressively going after the best sellers.

As you know, there is a delicate relationship between service levels and inventory, and all of this inventory is what's supporting our 2014 guidance.

We think it's very strategic.

Gary Balter, Credit Suisse.

This is actually Andrew on for Gary.

Congrats on a very strong Q1.

Got a quick question on Williams-Sonoma.

Was just wondering if you would delve into a little more details on what is happening at the brand.

Is it all internally driven, or do you think it's -- you're seeing some more industry tail winds?

Finally, where do you think the ceiling is on this improvement?

For example, do think you could out-comp the core business in the second half against easy compare?

Thank you for the question.

We have been talking about our strategies in the Williams-Sonoma brand for some time.

We've been working very hard to bring back more exclusive products, and also to improve our execution, and to have more relevancy to the customers.

We have made some nice progress.

We still have a lot more work to do, but we are happy with the consumer response -- clearly a six comp is a strong number.

We have a lot of new product in the pipeline for the second quarter that builds on what we're seeing.

I don't know if you've been in lately, but we have a great collaboration with Tacolicious right now.

It's really innovative and uses market-fresh, sustainable ingredients in every product.

Together we have developed a line of salsas and braising bases that are inspired by world-class restaurants in Mexico City.

As an example of new product, that's something I am excited about.

We're also seeing that some of our new categories like open kitchen are bringing new customers to the brand.

New customer growth is an exciting trend, and integral to the long-term health of the brand.

It really has been another piece of what we're doing is to bring accessible price points back in.

Lastly, the work we have done to give our great field teams better tools and training to support these great product launches is paying off.

I guess I'd summarize by saying teams have been working very hard to get where we are, and we still have a lot more opportunity ahead of us.

Daniel Hofkin, William Blair and Company.

Hi.

Good afternoon.

I apologize if this issue was addressed.

I wanted to get a little more color on what you feel at the Williams-Sonoma brand itself, what are the main things that are contributing to firming of trends in that business?

Is it more on the merchandise side, or is it highlighting some of the -- what you feel are differentiated services like cooking classes?

If you could shed some additional light on that in particular, I would appreciate it.

Thank you.

Daniel, I can't resist.

I just answered that question, but I'm happy to do it again, because I am so excited about it.

We have really been focused on our innovative product pipeline.

We have brought in some key lines that are working well and we are building on them.

We are focused on execution at the retail level.

Really, we've given our great field team better tools and better training, which is really helping them to service our customers more effectively than we have before.

We have better in-stock position than we had before, and we are really focused on relevant food trends.

We are not just selling the tool, but we're selling the whole idea.

If you go into the stores you will see us doing more tastings and more events to really provide that education to our customers.

Matt Nemer, Wells Fargo Securities.

I've got a question on the merchandising side.

You all have introduced a number of design collaborations with outside brands like, Burton and Etsy and others.

I'm wondering what are the broader aspirations for that in some of the brands that we haven't seen that in yet?

Is that something that could expand significantly from here?

Yes, thank you.

We are always looking for great designs.

There are incredibly talented artists and designers out there, and we love working with them to bring new things to market.

These collaborations have really extended the aesthetic diversification in each brand.

I can't wait for you to see what we have done with Zio Ziegler that's upcoming.

I think it is a great example of what can be done together.

It really also inspires our teams here to see a new way to approach the home product.

If I could sneak in one more, which is any early thought FedEx going to dim-weight shipping?

If we see some general shipping inflation, how do you think that could impact your business?

Thanks so much.

A great deal of our products that we ship would not be impacted, as we have a lot of heavy-weight products.

The reality is UPS has not followed suit with FedEx at this point.

We have long-term agreements in place with UPS.

We don't expect this to impact us.

Michael Lasser, UBS Investment Bank.

Good afternoon.

Thanks a lot for taking my question.

I have two quick ones.

Number one, can you discuss the connection between Williams-Sonoma's performance and the Company's overall profitability?

It seems like this is the best brand comp from that segment in quite some time.

Maybe it was coincidental that the overall entity also had its stellar profitability performance, but it seems like perhaps there is some connection there?

The second quick question is on the level of in-stocks.

Perhaps you can give us some sense of where in-stock levels are now versus where they were a year ago, and where do you see that leveling out over time?

Thank you so much.

I appreciate it.

It's Laura.

The Williams-Sonoma brand represents about 25% of our total business.

Q1 is not a big quarter for Williams-Sonoma, and we're thrilled with the trends we're seeing, but really it would impact profitability much more in the latter half of the year.

As it relates to in-stocks, we haven't given our fill rate, but I will tell you that they are materially higher than they were last year.

Not only does that drive better customer satisfaction, it also reduces our costs if we can ship it once versus shipping a back order.

Julie, do you want to add anything to what I said about Williams-Sonoma?

No, other than I would say we did see a lot of -- whether it's Williams-Sonoma or not, the total Company out-performance did drop down to the bottom line, if that's where you're headed with that question.

Obviously we had guided from an operating-margin perspective to be below last year and we came in above last year, with 17% income growth and 4% above the high end of our guidance from an EPS perspective.

That's while and stem absorbing all of our investments, and also some incremental expense in Q1 related to the vesting of some long-term incentive compensation.

We feel really great about how much of the earnings dropped to the bottom.

Peter Benedict, Robert W Baird.

Hey guys.

I have core question, unrelated, but I'll sneak them in.

First, is Williams-Sonoma Home big enough to have any impact on what you just did in Williams-Sonoma in total with CBR?

Trying to understand if that brand is starting to show up in the broader numbers.

Secondly, just on the rent and occupancy trends, it looks like they accelerated here in the first quarter.

Does that have to do with the Dallas DC, or is there something else that we should be thinking about as we try to model that out forward?

Thank you.

Williams-Sonoma Home is obviously a part of the Williams-Sonoma brand in total.

It does have a piece of obviously the growth on it, but it's still so small that it's not meaningful relative to the total 6% comp that we saw in the Williams-Sonoma brand.

I wouldn't read too much into that.

From an occupancy perspective, there is -- we've got investments that we're making from a capital perspective.

As those continue, the last couple years we've had stepped-up capital investments.

Those layer on top of each other from a depreciation perspective.

That rolls into occupancy.

That's a lot of the reason why you're seeing higher occupancy.

But you do see it obviously of course due to rent from the Dallas distribution center is one key player of that, but it's also all of our store leases and all of that put together.

I would say the biggest piece is from the continual investments in our business.

I'd like to share one more thing on Williams-Sonoma Home.

While it is not material now, we have set some very ambitious goals for our self, and we believe that this could be a very large brand in the future.

Matt McGinley, ISI Group.

Thanks.

My question is on the allocated expense and how that trended in the quarter.

Last year you had a lot of investment in talents, and I think it was some higher employment expense.

This year you called out longer-term comp, or long-term comp vesting as being the increase.

Is that $12-million step-up you experienced in the quarter the new run rate, or is this a one-off thing where it would be that high?

My second question is on the international revenues or the franchise revenues.

What drove that decrease in the revenues?

Sure.

This is Julie, I will take that.

From the corporate operating margin perspective, that is something that is relatively unusual.

As we've said in our prepared remarks that we basically de-leveraged 80 basis points, and it's primarily due to the vesting of long-term incentive compensation.

Really, what that is, is that we incurred some additional compensation expense from the vesting of more equity awards from lower employee departures and higher payroll taxes on the compensation amount associated with those equity that's vesting due to higher stock price.

We had a large four-year cliff that came in that was granted back in 2010 and hit in this quarter, and so it had a disproportionate impact, given this is our smallest quarter of the year.

I would not assume that trend going forward at all.

From an international franchise perspective, assuming that's what you are alluding to, basically I wouldn't read much into that either.

Last year the franchise partner somewhat accelerated more of their purchases into Q1, which then evened out throughout the rest of the year, so it's more of a year-over-year timing that makes it not comparable for this quarter.

We actually have plans to open four more stores with our franchise partner, and our relationship is very strong.

Brian Nagel, Oppenheimer.

Hi, good afternoon.

Congratulations on a nice quarter.

Thank you

I wanted to ask a question on gross margins as well, even more from a bigger-picture, philosophical standpoint.

We saw for the first time in a while the positive gross margin.

In the response to one of the other questions you talked about some of the dynamics there.

The question I have is, given the focus of the Company, which has been driving market share, to the extent that now some of the investments are paying off and helping to drive margins.

As you look at the margin going forward, would you be more inclined to reinvest that in -- to drive more market share, or what should we expect as investments continue to pay off, margins are actually stay higher?

It's really nice to have the flexibility, as you can imagine.

What we're doing is really working hard to be very efficient.

We have a culture of high performance and continuous improvement.

We believe we still have some things we can do to take more cost out of the product life cycle.

That will give us the opportunity if we want to invest more, or if the market demands it to be more promotional.

It is hard to predict.

But what I want to talk about again is the power of our operating model that allows us to be flexible, which I think is key in this retail environment.

Aram Rubinson, Wolfe Research.

This is actually Carol on for Aram.

You guys just have an enormous amount of data on all of your customers that you have used quite well to extend your brand across customer segments.

Have you guys considered any category extensions beyond the furnishings realm?

We are very focused on the home.

It's our area of expertise.

With that said, our Mark and Graham business has introduced us to some new categories.

We have in that business a disproportionate amount of accessories and jewelry -- very well selected under the heading of gift and -- monogrammed personalized gifts.

That has been our first foray into anything other than home, and we're very pleased with the early results and how it complements what we do in the home.

Laura Champine, Canaccord.

Good afternoon.

My question, Julie, is for you.

With the full-year guidance not raised as much as you beat by on sales and earnings in Q1, does that indicate a shift in timing of store launches, or any shift in your investments internationally, or is there anything more than just targeting your three-year plan in that guidance?

No, I would not read anything more into that.

It's really that we're just -- it's early in the year.

We had a great Q1, but that doesn't necessarily assume that we're going to have that kind of out-performance every single quarter.

We're going to continue to read our trends and we will adjust as necessary.

But with that said, we did raise $15 million on the top in revenue and $0.02 on the bottom, and that puts us right where we want to be with our three-year outlook.

Neely Tamminga, Piper Jaffray.

Great.

Good afternoon.

Fantastic job, you guys.

Thank you.

I want to drill in a little bit on West Elm.

I appreciate the focus on Williams-Sonoma, but it is potentially going to be a $1-billion business over here at West Elm, too.

Could you remind me, Laura, in terms of how you're thinking about the $1-billion mark?

Is it just the US-North America, or is that your whole global vision?

Do you think you're still testing the waters globally?

The other more strategic question I have is, it just seems like West Elm can really do no wrong right now.

The question is what can't they do?

I'm wondering at what point do you guys just re-evaluate the footprint around what you can offer and explore within store, especially looking at community.

You guys do a really good job social media community -- do you expand it into in-store community?

Thank you for the question.

We have used the $1-billion mark to represent both domestic and global, but you could make a case that that's maybe modest at this point, given how large our Pottery Barn brand is and the appeal of West Elm, and in particular, globally.

Trust me, as I said earlier, we have very big plans for this brand.

We are testing so many things and learning from them.

We are careful to open the right amount of stores and to keep measuring the ROI of our store investments.

We are also very focused on building our direct business in West Elm that is growing very quickly.

We are trying some really -- some new marketing techniques in West Elm that we have learned a lot from, and are now rolling to other brands.

We are continuing to push the diversification of product and to work hard to make sure that, as we get bigger, it stays very relevant to the customer and it's different, as you can imagine, from Miami to Denver in how they would expect to see their West Elm.

We're being very careful as we grow to stay very relevant and personalized in our expression.

We have time for one last question.

We'll go to Anthony Chukumba with BB&T Capital Markets.

Thank you, and let me also add my congratulations on a great quarter.

A real quick question.

You touched on the franchisees internationally, and what drove the revenue decline there.

I was wondering if you could give us a little bit of color -- maybe it didn't move the needle?

I'm sorry, did we lose you?

Anthony, we have lost you.

I'm sorry, Anthony, we seem to have lost you.

We can't hear you, bad connection.

We're going to move to one final question from someone else.

Currently there are no questions remaining in the queue.

That does conclude the Q&A session for today.

Miss Alber, I will turn the call back to you.

Thank you all for joining us.

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

Thank you.

That does conclude our conference call for today.

We thank you for your participation.

You may now disconnect.