Williams-Sonoma Inc (WSM) 2014 Q3 法說會逐字稿

Good day and welcome to the Williams-Sonoma third-quarter earnings release conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Gabrielle Rabinovitch.

Please go ahead.

Thank you, Kevin.

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 may contain non-GAAP financial measures that exclude the impact of unusual business events.

A reconciliation of any of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and our explanation of why these non-GAAP financial measures may be 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 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 and 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 FY14 results.

Thank you, Gabrielle.

Good afternoon and thank you all for joining us today.

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

We are pleased to be discussing our third-quarter review.

Solid performance across our brands allowed us to deliver these results, with revenue growth of 8.7%, operating margin expansion, and earnings per share growth of 17.2%.

These achievements reflect our product leadership, lifestyle merchandising, iconic brands, and strong execution.

We also believe that this third quarter further demonstrates that our multichannel model, with more than 51% of revenue now coming from the e-commerce channel, represents a distinct competitive advantage.

We continue to focus on serving our customers and investing for sustainable long-term growth.

This holiday season we believe we have a strong lineup of beautiful gifts, entertaining and decorating collections across all of our brands.

And most importantly we are ready to provide the best service to our customers with the launch of some new functionality and programs we will be discussing this afternoon.

Since the beginning of the year we have been preparing our supply chain for the holiday peak season, with operations consolidation projects and material handling improvements in our distribution centers.

We have worked diligently on upgrading our distribution and delivery networks to be able to meet and exceed our customers' expectations.

Our supply chain is a competitive differentiator and we continue to make investments to increase agility and flexibility, allow for greater throughput, and reduce delivery times.

Our new Dallas distribution center opened in May, allowing us to add capacity and shorten delivery times during peak.

The productivity of the Dallas facility has exceeded our expectations.

In addition, we are enabling next day service on all but large orders.

Sutter Street, our manufacturing division, is also growing to support our customers' demand for handcrafted, high-quality made-to-order upholstered furniture.

We will be adding approximately 500 full-time positions for skilled craftspeople and distribution support personnel in our facilities in the United States.

We plan to fill the new positions by early 2015.

We believe we have one of the largest personalization capabilities in the country, offering our customers many unique personalization techniques.

To meet our increasing demand we've increased our overall capacity with the addition of a new material handling system.

We've also added some great new items to our assortment.

We believe a personalized gift at the holidays is one of the best gifts you can give.

In addition to investing in our supply chain infrastructure to improve service levels, our technology investments are centered on enhancing the customer experience.

We believe these innovations will drive traffic and increase customer engagement and loyalty.

The integration of convenient mobile functionality is important.

And this fall we introduced a Where is My Order interface for customers on smart phones.

Recently we also improved our customer order visibility online.

And we are extending the functionality of our on-site search and product recommendation features, optimizing them for gift-giving this holiday season.

I'd now like to take a moment to discuss our community engagement this holiday season.

Our corporate mission is to enhance our customers' lives at home and this mission guides not only our business decisions but our giving and community strategy.

Our commitment to making a difference comes to life through a number of initiatives that reflect the passion of our associates.

One key holiday effort has been on behalf of St.

Jude's Research Hospital, which is leading the way the world understands, treats and defeats childhood cancer and other life-threatening diseases.

Williams-Sonoma, Inc.

is celebrating its 10-year milestone of participating in the St.

Jude Thanks and Giving holiday campaign.

And since 2005 our customers and associates have helped raise more than $26 million to help St.

Jude provide cutting-edge treatment and pursue visionary research.

This year all of our brands are participating in the Thanks and Giving campaign, offering products especially designed for the St.

Jude program.

We donate a portion of the purchase price of each of these items directly to St.

Jude's Children's Research Hospital.

And starting this week, and running as long as our supplies last, our customers can support St.

Jude's anywhere they shop.

Now I would like to update you on the progress we have made across key initiatives to expand the reach of our brands globally, launch new businesses, and grow our existing brands.

We believe that successful execution of these strategies will deliver sustainable profitable growth and increase shareholder value over the long term.

I'd like to start with global.

We remain optimistic that global expansion will be a significant growth driver.

In the third quarter we make progress on several global expansion initiatives.

We now have franchise agreements with Distribuidora Liverpool, Mexico's leading department store chain, and expect the first stores to open in 2015.

Liverpool's market, expertise and extensive supply chain will allow us to deliver the same high quality of service that we provide in the United States and around the world.

For those of you unfamiliar with Liverpool, I would like to provide a brief overview of the business so that you can fully appreciate the strategic rationale.

Liverpool has been in business since 1847, has 100 department stores across 56 cities, and 5 duty-free stores in Mexico.

Liverpool's real estate division operates 24 shopping centers and welcomes more than 100 million shoppers every year.

And Liverpool is the largest non-bank credit card issuer in Mexico.

We are very excited about this development and look forward to providing updates as we hit our milestones.

We also opened four new company-owned stores in Australia, in suburban Sydney, in August.

And just yesterday we opened four new company-owned stores in Melbourne.

We now have 13 stores in Australia and believe that we are developing strong brand awareness that will allow us to scale this business effectively.

We're also excited about the newest brands in our portfolio.

In Rejuvenation we are seeing nice momentum.

Performance has been driven by the introduction of new categories, an updated aesthetic reflecting a differentiated point of view, and a greater range of price points to bring new customers to the brand.

We've already launched more than three times as many SKUs in 2014 as we did in 2013.

Our new collections in conjunction with refinements to our marketing strategy have resulted in higher levels of brand engagement.

This fall we're also excited about our new design collaborations that feature handcrafted lighting, ceramics and accessories.

Each product combines the designers' aesthetics with Rejuvenation's high-quality industrial look to serve as a perfect gift during the holidays.

These artisanal partnerships extend Rejuvenation's commitment to fostering local makers and supporting products made in the United States.

In addition to seeing good growth online we are seeing strong comp store growth in our four locations.

As we refine our retail model and produce sustainable results, we believe there may be additional growth opportunities for Rejuvenation, including opening more stores.

We're excited to be opening our fifth store next month in Palo Alto, California.

The design of this location is a new prototype and, as a result, this store's productivity will be another key indicator for Rejuvenation's potential.

Mark and Graham recently celebrated its two-year anniversary.

We continue to see strong sales growth.

And the brand's exclusive assortment of high-quality unique gifts continues to grow.

Mark and Graham incorporates great design, exclusive typography, and state-of-the-art technology.

It truly represents next-generation personalization.

And for the holiday season we've introduced luxurious and accessible gift ideas across personal accessories and housewares.

In addition, a key differentiator is our complimentary gift wrap.

This signature gift wrap is beautifully constructed and mirrors the modern sensibility and clean design of the brand.

This fall we also piloted our trunk show program in Mark and Graham, a new marketing channel for us, which is driving incremental sales and building brand awareness.

We are excited about the opportunities this brand continues to identify.

Now I would like to discuss our larger brands in more detail.

I'm going to start with the Williams-Sonoma brand.

In the third quarter comparable brand revenue increased 4.3% on top of 1.4% last year.

The Williams-Sonoma brand has now posted five consecutive quarters of comparable brand revenue growth.

And the third quarter brand comp is the highest Q3 comp since 2005.

We are pleased with the progress of the Williams-Sonoma brand year to date.

In the third quarter we saw solid performance across tools, cutlery, entertaining and tabletop.

Proprietary and exclusive product introductions also contributed to the Williams-Sonoma brand success.

The Williams-Sonoma home business also continued to deliver strong results with a broader assortment and notable performance in furniture and textiles.

Also in the third quarter we were proud to reopen our original Williams-Sonoma store in Sonoma, California on October 2, which was our founder Chuck Williams' 99th birthday.

This historic store, design center and cooking school, at the site of the original Williams-Sonoma store, and our founder's former residence, is a landmark.

The store captures the character of the location's earlier era, exhibiting many of the iconic kitchen wares originally sold.

The store also celebrates Chuck's spirit of discovery by offering our latest and most popular products.

Williams-Sonoma is ready for the fourth quarter, with inspiring and unique products and experiences, and the highest level of customer service.

To begin with, in the fourth quarter Williams-Sonoma is proud to be the exclusive bookseller for the Ina Garten Make It Ahead book tour.

The author of eight best-selling cookbooks and host of the Food Network's Barefoot Contessa Back to Basics show, winner of both Emmy and James Beard awards, is celebrating the release of her eagerly anticipated ninth book, Make It Ahead, a Barefoot Contessa Cookbook.

We couldn't be more pleased to be exposing these exclusive events with her, and offering our customers the chance to purchase a much coveted signed copy of this cookbook.

Copies of the book, Make It Ahead, are also available for purchase in all Williams-Sonoma stores and online at williams-sonoma.com.

Williams-Sonoma continues to make great chef partnerships and celebrate their success across the industry.

This holiday season we are offering our customers high-quality innovative products for entertaining and decorating.

We're also featuring stunning seasonal gift ideas at great values.

We are introducing layers of newness across electric, cookware and tools.

And I'm most excited about our holiday foods, in particular our new Williams-Sonoma sweet tins and our expanded peppermint bark collection.

We also have broadened our savory offerings to include time-saving seasonings, starters and mixes that make preparing a holiday meal easy.

Finally, we believe that a great customer experience will be key to success this holiday season.

We've invested in training and online customer order visibility so that this holiday season we will reach the highest level of service in the industry.

We are thrilled to be offering Williams-Sonoma Express in all Williams-Sonoma stores this holiday after piloting a successful program last year.

Williams-Sonoma Express allows the customer to call ahead to our stores.

We'll ring it, wrap it, and have it ready for you for pickup.

This service enables an exceptionally convenient customer experience and will direct customer loyalty.

And we're so excited to be offering this value-added service.

Now I would like to discuss the Pottery Barn brand.

In the third quarter Pottery Barn comparable brand revenues increased 7% on top of 8.4% last year.

Performance was driven by strength across our proprietary upholstery collections made in our Sutter Street facility and unique bedroom furniture collections.

Our seasonal tabletop and decorative accessories businesses improved sequentially relative to the second quarter as our customers responded to our new color palette and in-house design patterns and prints we featured this fall.

This fall we also launched our curiosities collection with unique and innovative decorative accessories for every room of the house.

In the third quarter we saw our online business, which is the broadest expression of our brand, accelerate by delivering our product expansion strategy across numerous categories, aesthetics, and price points.

And we continue to perfect and expand our store customer services, including our free interior design and installation services in the comfort of our customers' homes, which we believe are a competitive advantage.

As we enter the fourth quarter we are committed to helping our customers get ready for the holidays.

Our mission is to help make our customers' houses into their dream homes.

From setting the table to stocking the bar to decorating the mantle, we will help our customers get ready for guests, parties and special occasions.

And we're particularly excited about our nostalgic and coastal holiday story.

We're also featuring a broader assortment of gifts and gift services, with gifts ranging from cozy robes to glitter and mercury and unique ornaments.

We are ready for our customers this holiday season.

Our gift concierge program will help our customers find perfect presents for everyone on their list.

In their homes and in our stores our teams will help every detail to make shopping and decorating for the holidays personal, easy and fun.

And this holiday for the fifth year in a row, Pottery Barn will offer products through our Give a Little campaign that will give back to 24 homeless shelters operating across North America.

Our campaign helps provide the critical funding needed to keep those homeless shelters operating on a daily basis.

Now I would like to discuss Pottery Barn Kids.

For the third quarter Pottery Barn Kids comparable brand revenues increased 8.6% on top of 3.9% last year.

Our nursery and furniture businesses were especially strong in the third quarter.

The nursery has been a key area of strategic growth in Kids, and we have expanded our offering to reach a broader audience through aesthetics, diversification and increased custom upholstery options.

Our free interior design services have also fueled the growth of our nursery business as we help expecting and new parents decorate that very special room for the very first time.

We had an excellent back-to-school season featuring printed and personalized backpacks and waste-free lunch solutions, plus an expanded assortment of desks and accessories for toddlers to school-aged kids.

Our seasonal businesses continue to be a key area of growth and innovation, starting with Halloween and continuing into our holiday offering in the fourth quarter.

This holiday season our assortment celebrates things kids love.

From decorating to gift giving, we are helping our customers share traditions and celebrations with family and friends.

We're bring the season to life by creating a festive home that delights with beautifully crafted gifts, handmade ornaments and personalized stockings.

Were also focused on making the holiday gift-giving season easy with enhanced store services and inspired gift vignettes.

In PBteen comparable brand revenues increased 11.7% on top of last year's 16.7% growth.

The PBteen business delivered solid results across furniture, textiles and decorative accessories.

Our collaboration strategy for PBteen continues to pay dividends by opening doors and attracting new customers to the brand.

Our newest collaboration is with the Junk Gypsy, a two-sister design team from Round Top, Texas, who have a one-hour show on the Great American Country channel.

Junk Gypsy has dedicated an entire episode in their season to the collaboration with PBteen.

Also, in the third quarter we are pleased to see significant improvements in our inventory position relative to the supply outage we experienced earlier in the year.

This holiday season PBteen will be offering teens an expanded selection of innovative gifts, as well as new furniture, textiles and decorative accessories to create the ultimate teen lounge and sleepover space.

We have broadened our gift collections across decorative and personal accessories, with a focus on beauty, jewelry, fur and sleepover.

And we're also introducing new lounge and game chair seating.

Technology-enabled gifts continue to be an important theme, as well.

We're featuring gifting options with accessible opening price points, in addition to a selection of wow gifts that include pool and foosball tables.

We're also excited that we opened a new store in our backyard, Mill Valley, California.

It opened a few weeks ago.

And the store is allowing us to refine our retail model in PBteen and accelerate our mission to be local, relevant and social.

Finally, this past quarter across all Pottery Barn brands, including Pottery Barn Kids and PBteen, we launched a strategy to engage not only with our customers in a more relevant way but also with media and influences around key seasons such as back-to-school and Halloween.

Our goal is to be the destination for decorating, entertaining and gift giving for all seasonal holidays, and in turn create a groundswell of social sharing.

We focused our efforts in three places -- first, high touch events with media influencers and celebrities; second, product seeding through our influencer programs; and, third, two-way social sharing, compelling our customers to further share our content.

Next I'd like to discuss West Elm.

We are pleased with our West Elm results, which continue to demonstrate that West Elm has significant growth ahead.

We believe our strong performance relates directly to our key differentiating initiatives of choice, community and consciousness.

In the third quarter, comparable brand revenue increased by 17.4% on top of 22.2% last year.

Growth continued to be broad-based across categories.

And in the third quarter West Elm successfully opened nine new stores in Oklahoma City, Kansas City, Tulsa, Pittsburgh, Birmingham, Michigan, El Paso, Washington, DC, Alpharetta, Georgia, and at Chatswood Chase in Sydney, Australia.

Targeted public relations outreach and social activation resulted in more than 100 million media and social impressions around the new stores.

In October the brand launched the Best of Local assortment, bringing some of the most popular products and makers from regionally specific store assortments to a national customer on WestElm.com.

And yesterday West Elm announced and celebrated the winner of the West Elm local small business grant, Tennessee-based Little Seed Farm, which makes organic soaps and skincare from goats milk and herbs.

And won the public voting with support from the campaign that invited their social fans to vote for goats.

West Elm currently offers local assortments in 24 stores with plans to roll assortments out to all stores next year.

This holiday season West Elm is offering a strong assortment of decor, entertaining and gifts for the home.

Much of the brand's assortment of trim and decor is handcrafted, including felt and knit ornaments from Nepal.

And in tabletop, West Elm introduced a collection of dinnerware and accessories with feed projects that benefit Americans in need.

We continue to build on what is working, and this can be seen in our popular Mid-Century collection, which has grown beyond the bedroom to include dining, office and storage.

And in late December West Elm introduced a collaboration with Kate Spade Saturday.

Designed to embody the playful easy-going style and spontaneous weekend spirit Kate Spade Saturday is known for, this collection includes furniture, bedding, rugs, and home accessories to brighten up every room of the house.

And it will be available in all of our US and Canadian stores and supported with cross-channel marketing events and social activation.

West Elm is also focused on expanding choices for customers beyond residential homes.

The brand recently launched West Elm Contract.

It's a boutique design New York trade show.

West Elm Contract is a capsule collection of contract-grade furniture and accessories created with hotels, co-working spaces, offices and cafes in mind.

The collection includes West Elm's most popular designs reengineered with style, strength and soul for high-traffic use and commercial grade requirements.

And finally, in the consciousness focused area, West Elm celebrated the graduation of the first class of students in the West Elm-sponsored literacy programs at Caribbean Craft in Haiti.

This six-month program taught basic reading and writing skills to 35 artisans who make West Elm's popular papier-mache products.

West Elm is looking into opportunities for additional literacy programs in Haiti and the Philippines.

West Elm's commitment to choice, community and consciousness continue to differentiate the brand from its competition.

And we remain confident in this brand's ability to be a $1 billion-plus business.

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

Thank you, Laura.

And good afternoon, everyone.

We are pleased with the results we are reporting today, with top-line revenue growth of 9%, and bottom line EPS growth of 17%, including 40 basis points of operating margin expansion.

We believe these results demonstrate the power of our multi-channel business and our ability to successfully execute against our initiatives.

Our performance year to date gives us confidence in our ability to deliver sustained long-term growth.

In the third quarter net revenues exceeded our expectations, increasing 8.7% to $1.143 billion, with comparable brand revenues increasing 8.7% on top of 8.2% in the third quarter of 2013.

Net revenues in our e-commerce channel have once again generated double-digit growth, growing 14.7% to $587 million, and represented 51.3% of total Company net revenues for the quarter, a 260 basis point increase over last year.

And in the retail channel net revenues grew 3.1% to $556 million.

Gross margin for the third quarter was 37.7% versus 38.6% last year.

With occupancy costs as a percentage of net revenues flat year over year at 13.5% of net revenues, or $154 million, the 90 basis point decrease was primarily driven by lower selling margins in the e-commerce channel.

Selling margins in the retail channel were essentially flat year over year.

And, sequentially, total Company merchandise margins improved.

Our disciplined approach to marketing effectiveness continues to result in productivity gains.

We are relentless about acquiring new customers profitably and increasing the lifetime value of our customers.

Our strategic levers again provided us with the flexibility to offer more value to our customers and at the same time drive operating margin expansion.

In the third quarter we offset our reduced selling margins within gross margin with greater advertising efficiency within SG&A.

SG&A in the third quarter improved 120 basis points to 28.6% versus 29.8% in 2013.

The improvement in SG&A was primarily driven by advertising efficiency as well as lower general expenses and the leverage of employment costs.

Strong operational execution and financial discipline drove these improvements.

This resulted in an operating margin for the third quarter of 2014 that was 9.2%, 40 basis points higher than the operating margin in the third quarter of 2013.

Higher revenues in the e-commerce channel, which consistently operates at a much higher margin, drove this operating margin expansion.

By channel, the operating margin in the e-commerce channel in the third quarter of 2014 was 23.3% versus 22.9% in the third quarter of 2013.

In the retail channel, the operating margin was 9% versus 9.1% in 2013.

And in corporate and unallocated, operating expenses as a rate represented 7.2% of net revenues versus 7% of net revenues in 2013.

In the e-commerce channel, the 40 basis points of operating margin expansion was driven by advertising efficiency and the leverage of both employment costs and general expenses.

In the retail channel, the 10 basis points of operating margin deleverage was primarily driven by occupancy and employment cost deleverage related to our global initiatives and 17 new store openings in the quarter.

This was partially offset by lower general expenses resulting from strong financial and operational discipline.

In corporate and unallocated, the 20 basis point of deleverage was primarily related to higher occupancy costs associated with incremental investments in our IT infrastructure to support our strategic long-term growth initiatives.

This was also partially offset by lower general expenses from strong expense control.

This top-line revenue and bottom-line operating margin outperformance drove a 17.2% increase in our third quarter 2014 diluted earnings per share, resulting in earnings that were $0.68 per share versus $0.58 per share last year.

Moving to the balance sheet.

Cash at the end of the quarter was $108 million.

Given the seasonality of our business our cash levels reach their lowest point at this time of the year as we fund our business ahead of the holiday selling season.

In addition, year to date we have returned $290 million in cash to our shareholders, consisting of $195 million in share repurchases and $95 million in dividends.

Merchandise inventories at the end of the third quarter of 2014 increased 9% to $980 million from $899 million at the end of the third quarter of 2013.

Strong inventory execution has resulted in inventory levels that are now back in line with revenue growth.

Inventory optimization is strategic.

We are always focused on both improving our in-stock position and reducing our overstock, and we continue to make progress against these initiatives.

We believe we are well-positioned as we enter this holiday season.

I would now like to discuss our fourth-quarter and fiscal-year 2014 guidance.

We expect to deliver another year of record results for our shareholders and remain on track to deliver our three-year outlook.

For the fourth quarter of 2014 we expect to grow net revenues to a range of $1.525 billion to $1.575 billion, with comparable brand revenue growth in the range of 4% to 6%.

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

And we are guiding diluted earnings per share to be in the range of $1.42 to $1.50.

For the full year, as a result of our Q3 outperformance, we are raising our guidance.

We now expect to grow net revenues to a range of $4.68 billion to $4.73 billion, with comparable brand revenue growth in the range of 5% to 7%.

We expect our operating margin to be in the range of 10.2% to 10.4%.

And we are increasing our FY14 diluted earnings per share to now be in the range of $3.11 to $3.19.

All other financial guidance within the press release remains unchanged from the previous guidance.

Our capital allocation guidance also remains unchanged.

In order to support our long-term strategic growth initiatives we are on track to make annual capital investments in the business in the range of $200 million and $220 million this year.

And we remain committed to returning cash to our shareholders by paying dividends and repurchasing shares under our existing share repurchase authorization.

In support of this ongoing commitment we are also pleased to announce the successful amendment of our unsecured revolving line of credit, which increases the facility to $500 million and extends the maturity date to November 2019.

In light of the growth of our business, our efficient use of cash, and our long-term commitment, we believe increasing and extending our line of credit today is appropriate.

In closing, we are very pleased with our strong results and operational execution.

We believe we are well-positioned for the holiday season and beyond.

With the customer at the center of everything we do, we are confident in our competitive advantages, including our great brands with our innovative products and outstanding service, as well as our multichannel platform, with more than 50% of our business coming from e-commerce.

These advantages, plus our many opportunities for growth and our commitment to financial discipline, continue to allow us to remain confident in our ability to deliver sustainable, long-term profitable growth.

I would now like to open the call for questions.

But before that, I would like to wish all of you a very happy holidays.

And we look forward to helping you and your family shop this holiday season.

Thank you.

(Operator Instructions)

Daniel Hofkin, William Blair & Company.

Hi, nice results.

Just quick question, first on the guidance for the fourth quarter.

If my math is right, it looks like pretty similar revenue guidance as what was implied before, but maybe a little bit moderated on the EPS side.

Just wondering, is that correct?

And if so, what are the factors behind that?

And then I just had a follow-up question on the Williams-Sonoma brand itself and where you think you are in the nine-inning game, both in terms of merchandising and in terms of upping your service level game.

I will take the first part, Dan.

We feel great about our Q3 and year-to-date results, and obviously the guidance we have now provided for Q4 and fiscal year, which will put us at another record year of revenue and earnings, but it's still early in the quarter and this is one of our biggest quarters, so you have to remember that.

And for Q4, another thing to remember is that our guidance is up against a tough year-over-year compare.

And, yet, at the high end of our range for comp brand revenue we're guiding a 6 comp on top of a 10 last year.

And for EPS we are guiding 9% growth after absorbing all of our investments

And on the year, we are guiding comp brand revenue growth at the high end to be almost 7 on top of 9 last year.

And we raised our EPS guidance.

We think this guidance is strong.

And really we are focused on the long-term growth of our Company, on our way to doubling our revenues over time.

And this guidance is consistent with our three-year outlook.

This is Laura.

To your question on Williams-Sonoma, we are very pleased with the performance that the Williams-Sonoma brand has posted year to date.

A couple years ago we outlined a plan for you to reimagine the brand, bringing more proprietary, exclusive and innovative products, and making the retail stores more exciting.

And we've made a lot of progress across both of those.

We've also continued to invest in our online capabilities in the Williams-Sonoma brand.

We spent a lot of time on the on-site search and reorganizing the site so that it is easily shoppable, both on a desktop and also mobiley.

And we're seeing great results from all of that.

In terms of innings, we continue to see a lot of opportunity, honestly.

We are pleased with what we've seen, but we have a lot more work to do.

And we see this as one of the preeminent iconic brands out there.

We believe that it can have a much bigger presence globally than it has today, and that also there are new categories that we can expand into in the future.

Great.

Nice results, again.

Best of luck.

Chris Horvers, JPMorgan.

Thanks.

Good evening.

Can you talk about -- I think there's a lot of debate out there about the promotional environment -- can you talk about what you are seeing online and in the mall, and how that is evolving as we head into the holidays?

And also, we're getting closer to Thanksgiving, so any thoughts you could share on what you are seeing around the Williams-Sonoma brand would be really great.

Thanks.

Sure.

There's no question the holiday season will be even more competitive than last year.

But I also believe e-commerce will set new sales records.

And with over 50% of our revenue in e-commerce I believe we have a competitive advantage.

Our marketing drives traffic to all of our channels.

And our in-store experience and services give our customers the confidence to order online.

Another competitive advantage that we have is our innovative proprietary product.

And the holidays are a time when the customer wants to give a gift from a great brand.

And I believe we are really well-positioned with all of our brands this holiday season.

Okay.

So, it doesn't sound like you are necessarily worried directionally about how the promotional environment is setting up in November and into Thanksgiving and Christmas.

When we say we're going to be competitive this holiday it's far more than just price.

We believe that our in-store and our online services will continue to lead the industry, and that our proprietary product line is outstanding.

We've also worked all year -- and you've heard me say this -- to ensure that our offers are compelling.

And we believe that combination continues to allow us to gain market share.

Understood.

And then just one quick last one, can you talk about the in-stock levels at Pottery Barn and Pottery Barn Teen, and how that has improved over the quarter, and how much do you think is still to catch up on?

Thanks

We feel really good about our inventory levels.

As we said on the call, strong inventory execution resulted in inventory levels that are now back in line with revenue growth.

We are focused on inventory optimization and on both improving our in-stock positions, as well as reducing our overstocks.

And we continue to make progress against these initiatives.

We feel very good about the level of inventory.

If you're referencing a particular Pottery Barn teen from last time, obviously we had that outage back in Q2, and we are predominantly back in with that inventory at this point.

(Operator Instructions)

Greg Melich, Evercore ISI.

Hi.

I wanted to talk a little bit more about the inventory, particularly the gross margin dynamic and customer service.

It sounds like we are normal now.

How do you think about inventory turns or days on hand as a more normal level?

Have you made any adjustments for the port slowdown?

And when will we start to see the benefit of the inventory changes showing up in gross margin?

Hi, Greg.

This is Julie.

I'll take that.

As I was just saying before, we feel really good about our inventory levels.

Obviously there's always a delicate relationship between service levels and inventory, especially the more that our sales are coming from the e-commerce channel, the more important it is to be in stock.

We feel really good that we are back now in line with revenue growth.

But we have strong inventory disciplines in place across the Company, and we believe we are well-positioned as we enter the holiday season with the right level of inventory to support the Business and guidance we are providing today.

The bigger concern is obviously if this West Coast port slowdown continues or deteriorates, we do have strategies in place to help mitigate the potential impact.

And, of course, our teams have been watching the slowdown and planning for it since before the labor contract actually even expired.

And although we are 100% confident in our team's ability to navigate this to help minimize its impact on our inventory, we are hopeful that there will be a solution soon because, given the volume of goods that pass through the West Coast ports, longer term this isn't good for anybody.

From a margin perspective and some of our long-term initiatives, the gross margin, you will start to see some of those benefits as we enter 2015.

And some of those benefits I think you are referring to is the insourcing of our foreign agents.

That was completed mid of second quarter.

And all of that gets costed into the inventory and sold through starting, really, in 2015, so you will start to see some benefit there.

And then the regionalization of our distribution centers, you'll start to see the full benefit of that as we enter 2015.

But with that said, obviously being competitive from a promotion standpoint is important.

And if that's what the customer wants then the difference between us and other retailers is we are able to offset that with advertising efficiency within SG&A, like we did in this quarter, and still have 40 basis points of operating margin expansion.

Matthew Fassler, Goldman Sachs.

Thanks so much and good afternoon.

I want to focus, if I could, on the selling margin in e-commerce.

Can you talk about the degree to which that related to merchandising pricing and promotions, and how much of it related to shipping?

Sure.

As we said in our prepared remarks, the decrease in gross margin was primarily driven by lower selling margin in the e-commerce channel and not in the retail channel that was essentially flat.

But we did say that sequentially the merchandise margins improved.

There's a lot of things that are going on in gross margin.

As you know, I try to make it as least complicated as possible, and probably in the end made it more complicated.

But this quarter in particular we incurred some incremental cost to support our increased upholstery volumes, the ramping up our Dallas distribution center, as well as other costs ahead of the holiday selling season, for example, to support our growing personalization business, all of which put additional pressure on the Q3 selling margins.

But bottom line, even though these margins were down year over year, we were able to still deliver the 40 basis points of operating margin expansion.

So, it was more some of those one-off factors than any change in the back drop shipping or pricing-wise.

Yes.

Thank you.

Jessica Mace, Nomura Securities.

Hi, good afternoon, and congratulations on the nice quarter.

It seems like it's another example of you being able to flex the gross margin SG&A to deliver operating margin, as you said.

And my question is on, going forward, where we can expect to see further SG&A savings, especially in light of some of the investment and ramped up services that you've talked about.

From an SG&A standpoint I think you've probably seen every quarter that we've been able to leverage year over year, and we don't expect that to change any time soon.

Obviously the biggest factor that allows us to leverage is the advertising efficiency.

And, so, what we consistently say is that every quarter we make the call whether to spend that next dollar in advertising or to spend it from a promotion standpoint, and unfortunately that has hit different lines.

So, depending on where the promotional activity is and what is happening in the market from a competitive standpoint, you will continue to see that SG&A leverage.

Also, the more that we drive our revenues, which is consistently happening to the e-commerce channel, you will see a lot of our costs continue to leverage.

I don't expect that to change any time soon.

Neely Tamminga, Piper Jaffray.

Great.

Good afternoon.

Congratulations on the quarter.

And congrats to Laura on the Fortune Businessperson of the Year list.

That was fantastic.

Question here on West Elm.

New store growth trajectory -- at what point do we start to think about maybe doubling the store growth?

Admittedly we get it that the e-commerce sales are very important.

But obviously store growth also grows e-commerce.

And I think if we recall back to the early days of PB it's right about now when I think PB was starting to open 2X the amount of doors that West Elm's been opening.

So, could you help us think through that time line?

And just a real quick housekeeping question for you, Julie -- e-commerce, the name change -- totally agree with the decision.

Were there any financial statement reclassifications or organizational changes behind that name or was it just simply renaming it on the P&L?

Thanks

I'll take that last question there.

No, you shouldn't read anything more into that.

The reality is e-commerce has been over 90% of that channel for a while now.

We finally just made the decision to rename it.

Nothing else has changed

In terms of West Elm growth, we're really pleased with what we're seeing in the new stores.

As you heard the list, we've opened in some different types of markets and all of those stores give us confidence in our future plans for West Elm.

And we're looking for great stores in great centers that make sense.

We could possibly open more but we aren't looking to have a race on this because sometimes you have to wait to get the best real estate.

We also really want to make sure that we really understand the multi-store market dynamic.

In every one of our brands we've seen and learned different things when we open second and third stores in a market.

So, we're just getting that part of the growth cycle now.

And we're really optimistic with what we are seeing about the future of this brand, our retail expansion strategy, and also ability to build the business online.

I think you also heard me talk about other legs of growth for West Elm today that we really think are exciting, including the contract furniture.

Thank you.

Michael Lasser, UBS.

Good evening.

Thanks for taking my question.

Are consumers responding to any different types of promotions that you are finding more successful than before -- so, take a broad-based 20% to 25% off versus a more targeted promotion on a select item?

And is that driving incremental success?

It's interesting.

I'd say the thing that I'm really noticing is that people have been ready for Christmas earlier this year.

And we've seen really nice response to our gifts already.

And I think it's proprietary, innovative products first.

You want to give a wonderful, thoughtful gift to people.

It's great if you can get a great price on it.

But customers are pretty smart.

They shop around, they know where the price fits, and it's a very efficient market.

So, I don't think it's any trick per se other than high-quality innovative proprietary product priced fairly.

My follow-up question is along those lines.

Where do you think is the minimum level of catalog distribution?

And how far do you think you are from reaching that point?

It's different by brand.

We test versions, page count, sizes.

It's very complicated.

You are always finding new opportunities.

We're so lucky to have such a developed house file and a lot of different data points to draw from.

It's really, I think, a competitive advantage of ours.

Awesome.

Thank you so much.

Good luck with the holiday.

Seth Sigman, Credit Suisse.

Okay, thanks very much.

I was wondering if you could give a little bit more color on the international business, and specifically some of the investments you've been making in Australia, how those stores are performing, and when we should expect to see some of the leverage from those investments show up.

Sure.

It's Laura.

We're really early on our journey overseas.

I was just in Australia and got to see our beautiful stores.

You'd be so proud about how they are executing over there.

And, of course, like anything else, you need to build scale.

We're really focused on getting these stores open well, getting the right services, and getting the right inventory and lines for our customers over there, because there are different selling periods -- selling patterns, I'm sorry -- and selling periods -- that we need to adjust for.

We are pleased with the amount of business that's coming online, and how, when we open a new store, we see the online business also grow in that market.

Okay, thanks.

And just one quick follow up, on a separate topic.

Last quarter you discussed some fashion issues that may have impacted you.

Can you discuss what changed and whether you feel like you are fully through that at this point, or is there still a tailwind ahead?

I think what you are referring to is in Pottery Barn.

I mentioned that I thought the color palette could have been brighter and more fun for the summer season.

Fall is a very different time period, so you move quickly out of that.

And while the pillows aren't a huge percent of our business, they are sort of the window dressing on all our sofas, we tend to be very self-critical and always looking for merchandising improvements and operational improvements.

And as you heard me say, we still have much stronger response to the fashion textiles this fall.

Thanks very much.

Simeon Gutman, Morgan Stanley.

Thanks and congratulations on the quarter, and happy holidays.

A couple questions.

I'll ask them up front so I don't get that cut off.

First, Williams-Sonoma was so strong in terms of growth.

I don't think you will answer but I'm going to ask -- can you talk to the traffic in the store versus the business online?

And then the second question, a follow-up on the expense leverage, given how solid it was, it looks like the point per comp, or the leverage per point in comp, the flow-through was even better than previous quarters.

I think you would agree.

Beyond the leverage you are getting from the comp, it actually looks like something is getting better in either how the costs are controlled, et cetera.

And, Julie, just to clarify, did you say that fourth-quarter EBIT margin, it should be in line with last year's margin?

Relatively in line, yes

Okay.

I'll take the SG&A one first.

I think, yes, we are getting better leverage than you probably have seen.

But that's a functional of several different things.

As I mentioned, it's expense control, but it's also the fact that we're very efficient with the advertising.

That will ebb and flow depending on the quarter and what our operational decisions are by quarter.

In terms of retail traffic, we don't have traffic counters in our stores.

And we have a big outreach program in each of our stores.

We're actually building that to a larger extent right now in Williams-Sonoma.

It's something we started in Pottery Barn within home design services.

And we see a similar opportunity where we can go to your house and redo your kitchen.

We're just getting going on that.

Traffic is, of course, really important to us in the mall.

And we are really encouraging the mall owners to really do things to drive traffic.

But we're also making traffic happen in our stores with all of our great smells and decorating classes.

And then, of course, reaching out to our customers and pulling them in and going into their own homes.

In terms of the interplay between e-commerce and our stores, we really believe that when you go have a great experience in one of our stores you're going to be more confident shopping online.

And that's something that people who don't have stores don't have the same advantage, particularly during the gift-giving time of year where you want to be sure that you are really buying that thoughtful gift for the people on your list.

Okay.

Thank you.

David Magee, SunTrust.

Hi, it's David Magee.

Good afternoon and congratulations on a good quarter.

I just wanted to ask about the comment that you all made earlier about the promotional environment for the holidays you think might be more intense than last year.

And it just strikes me that, given your customer demographic who has had, I would think, a pretty decent year, I'm surprised that that would be the case.

Is it just a mindset that we have to deal with this as the new new?

Or is there some sort of new competitive dynamic at play?

No, I don't think there's any change.

I think it is somewhat the new new.

There's no question this holiday season will be competitive.

We prepare for this all year long.

We're ready online and in our stores in every one of our brands.

We have an outstanding assortment of gifts.

And we're in it to win it and gain market share.

Because of our e-commerce scale and our knowledge of our retail customers, we can deliver highly relevant offers digitally or through email that are highly impactful.

So, we believe we are well-positioned for this holiday season to continue to provide our customers what they need for the gift-giving season to outperform our competition and to continue to take market share.

We don't believe anything has changed.

Thank you.

And at this time I would like to turn the conference back over to your presenters for any additional and/or closing remarks.

Thank you all for joining us today.

And we really appreciate your support.

And I want to echo what Julie said, which is thank you for shopping with us this holiday season.

We hope to provide you and your family and friends outstanding service.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.