Williams-Sonoma Inc (WSM) 2015 Q1 法說會逐字稿

Good day everyone, and welcome to the Williams-Sonoma Incorporated First Quarter 2015 Earnings Conference Call.

(Operator Instructions)

The call is being recorded, and now I would 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, Tulari.

Good afternoon.

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

This call contains 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 conditions, results of operations, business initiatives, trends, guidance, growth plans, and prospects of the Company in 2015 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 FY15 results.

Thank you, Gabrielle.

Good afternoon everyone, and thank you for joining us today.

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

We're pleased to be discussing our first quarter 2015 results with you.

In the first quarter, we delivered comp brand revenue growth of 4.6% and EPS of $0.48.

Our first quarter earnings results were better than we expected, driven by West Elm and our new businesses, as well as strong operational and financial execution across all of our brands.

Our supply chain and inventory teams did an excellent job managing through the logistical complexity created by the West Coast port disruption.

That said, we did incur additional costs, largely in shipping and fulfillment, as well as lost demand, especially in our Pottery Barn brands, due to lower-than-normal inventory levels.

This short-term issue will continue to impact us to a lesser extent in the second quarter as Julie will explain in a few minutes, but we are pleased to see sales trends improving as stock levels rebound.

Our growth strategies, consistent execution, and operational discipline put us on track to deliver another record year.

We believe we have a strong lineup for the back half with product introductions and innovative collaborations in all of our brands.

We believe that our recently completed supply chain initiatives will give us greater flexibility to be more competitive on price and deliver greater value to our customers, that our technology initiatives will improve customer order visibility and further differentiate our service levels, and that we have significant opportunity to improve our peak season execution this year.

Our strong brands and profitable multi-channel strategy create a competitive advantage and we remain focused on executing our long-term growth initiatives.

Our mission is to enhance the quality of our customers' lives at home.

Our customers are at the center of everything we do, and all of our initiatives are developed with this service mindset.

One of our key initiatives is inventory optimization.

The West Coast port slowdown has further validated the importance of being in stock.

We are focused not only on improving our inventory stock levels to be well-positioned for the back half of the year, but also for the long term.

We also remain focused on driving growth through business development initiatives.

In 2015 we'll extend the reach of our brands globally with more stores in Australia and the launch of our Mexico franchise operations.

And, we continue to be excited about opportunities for our emerging brands, Rejuvenation and Mark and Graham.

I would now like to discuss key developments in each of our brands, starting with Pottery Barn.

In the first quarter of 2015, Pottery Barn delivered 2.4% comparable brand revenue growth.

While it's hard to quantify exactly, the West Coast port disruption materially impacted Pottery Barn.

The good news is that toward the end of the quarter, sales and customer service levels improved as delayed shipments were received.

Performance in the quarter was driven by the success of our outdoor furniture and textile collections.

Our proprietary print and pattern designs in both outdoor and indoor pillows were well received.

We're also seeing strength in our furniture collections.

We are continuing to enhance our interior design services, as we believe they represent a significant competitive advantage as our customers look for design assistance.

We are serving more customers with trained design studio specialists and we are adding new services that we believe are game changing.

We are building on our foundation of multi-channel marketing, and featuring and distributing more content to drive customer acquisition, connect with our community, and increase engagement with Pottery Barn.

Additionally, we are excited to launch a new product collaboration strategy in Q2, and we will provide more details to you on our next call.

We feel strongly that collaborating with other influential brands and innovative design leaders will expand the reach of the brand.

Lastly, I want to tell you about an important organizational change in Pottery Barn.

We recently promoted Marta Benson to Executive Vice President GMM Pottery Barn Merchandising.

Marta is a proven leader who has a passion for product, and brings deep retail and e-commerce experience with her to this role.

She has more than 25 years of retail experience and joined Williams-Sonoma, Inc.

in 2011 as Senior Vice President, Strategy and Business Development.

Marta will have responsibility over the e-commerce and retail merchandising organizations, and will report directly to the President of the Pottery Barn brands, Sandra Stangl.

We're excited about the year ahead for Pottery Barn.

We have innovative product introductions and our scale allows us to offer our customers exceptional quality at a great price.

Next I would like to discuss Pottery Barn Kids.

In the first quarter, Pottery Barn Kids comparable brand revenue increased 0.8%.

Unfortunately, the West Coast port slowdown had a larger effect on Pottery Barn Kids because of the mix of goods that were held up by this disruption.

During the quarter, inventory in our textiles department was negative to last year.

We also had lower-than-anticipated inventory levels in bedroom furniture.

And because we didn't receive our normal flow of fashion in the beginning of the season, we oversold our core inventory.

Now, while summer fashion is in and is selling, we're out of stock on key core assortments.

In addition, customer purchases in Pottery Barn Kids are highly interrelated, and when bedding or cribs are out of stock, entire orders are more affected and we may lose that demand entirely.

As a result, we expect Pottery Barn Kids to be the most impacted brand in the short term, until we are able to get back in stock, which we expect will occur by the end of the second quarter.

Looking to the second half of the year, we are focused on our product strategies, including aesthetic diversification, customization, and collaborations.

We are innovating and expanding our product lines to address our customers' needs, as well as introducing more accessible opening price points to attract new customers.

Also, we have further developed our back-to-school lineup with a more extensive assortment of desks and desk chairs, and we are building on the success of our proprietary prints and patterns with our expanded high-quality gear collections.

Finally, Pottery Barn Kids recently announced its first product collaboration with Jenni Kayne, a fashion designer, blogger, and mother of two.

The collection will debut in June and includes more than 50 pieces, offering a beautiful mix of modern and antique inspired looks, reflecting Kayne's relaxed and timeless California-influenced sensibility.

In PBteen, comparable brand revenues increased 3% in the first quarter.

High back orders impacted the brand early in the quarter, but we saw an improved flow of inventory in April and began to realize better net sales recovery.

Collaborations continue to be an important product and marketing strategy for PBteen.

A highlight in the first quarter was the successful launch of PBteen's exclusive collaboration with 11-time world surfing champion, Kelly Slater.

This capsule collection is the most eco-conscious assortment that PBteen has ever offered and marks Kelly's introduction into the world of home furnishings.

To date, media coverage has generated over 88 articles with 265 million impressions, and our top syndicated Kelly Slater video has generated more than 435,000 views on YouTube.

In the second quarter, we have more new product introductions in PBteen from our collaborations, and we are launching our new dorm assortment.

We are focused on providing inspirational decorating solutions across our tween, teen, and dorm life stages.

We are supporting our new product collections with social media strategies to align with influencers and content creators, and provide an authentic voice to our tween and teen customers.

Now I'd like to discuss Williams-Sonoma.

In the first quarter the Williams-Sonoma brand delivered 2.7% comparable brand revenue growth.

We saw growth across many of our core categories, including cookware and cutlery.

Also, tabletop, glassware, and dinnerware continued to outperform.

In addition, we saw an acceleration in the Williams-Sonoma Home business.

Williams-Sonoma branded product growth is a major area of development and innovation.

Proprietary product introductions include non-stick cookware, stoneware, wood utensils, seafood tools, and an expanded silicone line.

And, we are growing our assortment of exclusive product as a result of collaborations with our key partners.

Another area of growth in the Williams-Sonoma brand is Williams-Sonoma Home.

We are seeing momentum across core categories including outdoor furniture programs, and this year we're featuring a broader assortment of furniture, textiles, and decorative accessories.

In addition, we are highlighting and integrating more of the Williams-Sonoma Home collection in our retail stores.

Lastly, we are extending the reach of the Williams-Sonoma brand by providing new ways for customers to experience it across all channels.

We continue to be more involved in the food community.

For example, this spring we sponsored the SouthBites dinner at South by Southwest in Austin, and later this month we are a sponsor of BottleRock, a three-day food and music festival in Napa, where we will be hosting the Williams-Sonoma Culinary Stage.

This month we are also launching our Chefs' Collective, a culinary advisory board of nine strategically selected chefs to advise on product development and industry trends, and to help develop rich content.

Now I'd like to discuss our West Elm brand, which saw an increase in comparable brand revenue of 15.3% in Q1, another quarter of double-digit comparable brand revenue growth.

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

The diversity of aesthetic and range of prices we offer in the West Elm assortment continues to appeal to a broad range of customers, helping the brand to appeal to people of all ages and income levels.

West Elm engages its customers across all channels.

Our new stores fuel market share growth.

When we enter a market, we don't just pick up the new retail volume; we also drive our online business.

In Q1, we opened two stores in Palm Beach, Florida and Virginia Beach, Virginia, as well as one outlet store in Lancaster, Pennsylvania.

Our plan is to open a total of 19 stores this year, including expanding our international footprint with two stores in Australia and one in Calgary.

In stores, West Elm remains focused on its localization strategy, creating diverse assortments that reflect the local consumer and layering on West Elm LOCAL collections, featuring artists and makers from the store areas.

Our stores continue to embrace their role as community centers, creating environments and relationships that foster creativity and empower customers.

In the first quarter, we hosted a number of successful Etsy and blogger events at our stores, and we believe the unique relationships that our stores are developing with our communities are a further point of differentiation for the brand.

Finally, West Elm is excited to announce the expansion of the brand's impact sourcing programs and Fair Trade Certified product offerings.

Fair Trade at West Elm launched with six rug collections made in India for holiday 2014.

We have now expanded Fair Trade into Nepal, Pakistan, and Vietnam, as well as our first furniture factory in India.

This fall the brand will launch 30 collections of Fair Trade Certified rugs and 13 textile collections, including our most popular bedding collection.

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

Now I'd like to discuss our emerging businesses.

In 2015, we are continuing to extend the reach of our brands globally.

In Australia we plan to open six additional stores this year.

As we build scale in country, we are making operational improvements, reducing costs, and we're starting to see better margins.

Another key component of our global expansion is our franchise development.

We are very pleased with our current partnerships in the Middle East and the Philippines, and we see great opportunity with our new partner in Mexico.

We also plan to expand in additional geographies with other high-quality partners around the world.

I'm now going to talk about Rejuvenation.

We're excited about the growth and new opportunities in our Rejuvenation brand.

Current results indicate the long-term potential for Rejuvenation to be a significant multi-channel lifestyle brand.

We are developing an aesthetic that is unique in the marketplace and differentiated from our other brands, that we're calling, internally, Northwest Modern.

The brand tenets are quality, timeless design, craftsmanship, customization, and functionality.

In the first quarter we introduced significantly more lighting and hardware collections, and have increased our core functional categories, such as mailboxes, address numbers, and ceiling fans.

We're also expanding our marketing strategy and investing in catalog circulation and e-marketing.

Additionally, we recently launched our new contract and hospitality business with a booth at the Boutique Design West Trade Show in San Diego.

Participation in this event provided us with an opportunity to connect with high-value clients, and we were pleased to win the distinction of Best Exhibit at the show.

Lastly, performance in our Rejuvenation stores is exceeding our expectations.

We plan to open our sixth store in several months at Ponce City Market in downtown Atlanta.

Successful retail expansion in key markets is an important step in developing this brand and we look forward to sharing the results with you.

Our other emerging business is Mark and Graham.

Mark and Graham had a better-than-expected first quarter.

Our Q1 business was driven by our successful Mother's Day assortment and improved marketing.

We've seen a strong response to our newness, and in 2015 we'll have product releases each month.

Mark and Graham's classic, high-quality aesthetic is relevant and is working.

We are offering our customer a great experience in personalized gifts, and in the second quarter we'll be celebrating summer holidays and milestones, and we recently introduced our Dads & Grads gift assortments.

In closing, I would like to reiterate that across our brand portfolio and our channels, we see significant runway for growth.

We see opportunities to strengthen our brands, further differentiate our product offering, access new markets, drive continuous improvement in our operations, and improve our service levels.

And we look forward to updating you next quarter on the progress of our brands and strategies.

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 pleased with our first quarter results.

Strong operational execution and financial discipline allowed us to deliver these better-than-expected results as we absorbed the reduction in revenue and additional costs attributable to the West Coast port slowdown.

Before I review our financial details, I would like to give you an update on what we experienced in the first quarter and what we're seeing early in the second quarter as it relates to our inventory positions and the financial effect of the West Coast port slowdown.

As expected, in the first quarter, we lost sales demand and saw higher backorder creation as a result of the port disruption.

We also incurred incremental shipping and fulfillment-related costs.

While our inventory flow improved throughout the first quarter, we did not see meaningful improvement in our in-stock and available-for-sale inventory positions until April, and we have seen our sales trends get better as we improve our in-stock positions, particularly in the Pottery Barn brand.

That said, lingering effects exist from the port slowdown that are continuing to impact our business in the second quarter, particularly due to higher shipping costs from fulfilling out-of-market demand as we rebalance inventory levels across our distribution centers.

Our view of the financial impact of the West Coast port slowdown has not changed.

In March, we estimated the impact of the ports to be a reduction in net revenues of approximately $30 million to $40 million and a reduction in EPS of approximately $0.10 to $0.12 in FY15, predominantly impacting the first quarter.

The vast majority of the sales and earnings impact was sustained in the first quarter, with some residual impact to be realized in the second quarter.

Though it is difficult to estimate the actual impact, we believe the West Coast port slowdown negatively impacted our first quarter revenues by $25 million to $30 million and our earnings by $0.08 to $0.10 per share.

Now I would like to comment further on our first quarter performance.

For the first quarter, net revenues increased 5.8% to $1.031 billion, with comparable brand revenues increasing 4.6% on top of 10% last year.

In our e-commerce channel, net revenues grew 8.4% to $533 million with growth across all brands, and represented 52% of total Company net revenues for the quarter, versus 50% in the first quarter of 2014.

Our retail channel net revenues increased 3.1% to $498 million in the first quarter, primarily driven by West Elm, and our international franchise operations.

Gross margin for the quarter was 36.8%, versus 37.8% last year.

The decline in gross margin resulted from lower selling margins, primarily from the increased shipping- and fulfillment-related costs associated with the West Coast port disruption.

Occupancy costs in the first quarter of 2015 were $151 million or 14.7% of net revenues, leveraging 30 basis points.

In the first quarter, we generated 40 basis points of SG&A leverage.

SG&A improved to 29.8% of net revenues in 2015, versus 30.2% in 2014, resulting from advertising efficiencies and employment leverage.

Strong expense control and productivity gains from our disciplined approach to marketing effectiveness allowed us to help mitigate the lower selling margins within the gross margin.

This resulted in a remaining net 60 basis point decline in operating margin to 7%, which was due to financial impact of the West Coast port slowdown.

By channel, the operating margin in the e-commerce channel was 24% versus 24.7% in 2014.

The operating margin in the retail channel was 5.6% versus 6.3% in 2014.

And, corporate unallocated expenses, as a rate, represented 8.1% of net revenues versus 7.9% in 2014.

In the e-commerce channel, the 70 basis point decline in operating margin was driven by lower selling margins from higher shipping costs, partially offset by advertising efficiencies as well as the leverage of employment and occupancy costs.

In the retail channel, the 70 basis point decline in operating margin resulted from lower selling margins, partially offset by the leverage of occupancy expenses.

Corporate unallocated expenses as a percentage of net revenues increased 20 basis points, primarily from higher year-over-year employment and employment-related costs, as well as higher occupancy costs associated with incremental investments in our IT infrastructure to support our strategic, long-term, growth initiatives.

Excluding the estimated impact from the West Coast port disruption, corporate unallocated expenses as a percentage of net revenues, would be essentially flat to last year.

First quarter 2015 diluted earnings per share, including the financial impact of the West Coast port disruption, were $0.48.

Moving to the balance sheet, cash at the end of the quarter was $79 million versus $113 million last year.

In the first quarter, we returned $85 million to stockholders through share repurchases and dividends, comprising $53 million in share repurchases and $32 million in dividends.

Merchandise inventories increased 10.9% to $943 million at the end of the first quarter.

A substantial portion of this inventory, however, was in transit and not available for sale as of the end of the quarter.

Excluding our newer businesses and the inventory associated with our global expansion, inventory on hand and available for sale was up 1%, which includes a year-over-year decrease in both the Pottery Barn and Pottery Barn Kids brands of 3.2% and 0.1%, respectively.

Substantial progress has been made since year end, and by the end of the second quarter, we expect our in-stock inventory to not only be replenished, but to grow faster than our revenue growth as we are investing in inventory to set us up for the back half of the year.

I would now like to discuss our second quarter and FY15 guidance.

As previously mentioned, we do expect there to be some residual impact from the West Coast port disruption throughout the second quarter of approximately $5 million to $10 million in reduced revenues, and $0.02 to $0.04 in reduced earnings per share, which is reflected in our guidance.

For the second quarter of 2015 we expect to grow net revenues to a range of $1.085 billion to $1.105 billion, with comparable brand revenue growth in the range of 4% to 6%.

We expect our second quarter operating margin to be below last year and we expect diluted earnings per share to be in the range of $0.53 to $0.57.

For the full year, we expect to deliver another record year for our shareholders.

We are reiterating all of our guidance ranges.

We expect to grow net revenues to a range of $4.95 billion to $5.02 billion with comparable brand revenue growth of 4% to 6%.

We expect our operating margin to be in the range of 10.2% to 10.5%, and our diluted earnings per share to be in the range of $3.35 to $3.45.

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

This guidance on the year, excluding the short-term impact from the West Coast port disruption, reflects revenue and earnings guidance that is in line with our three-year outlook of mid to high single-digit revenue growth and low double-digit to mid-teens EPS growth, with revenues growing 8%, including comparable brand revenue growth of 5% to 7%, and earnings growth of 12% at the high end of the range.

The underlying health of our brands and channels remains strong and we believe our long-term growth initiatives remain on track to allow us to more than double our business.

We are also reiterating our commitment to maintaining a balanced capital allocation strategy in FY15.

We plan to utilize our operating cash flow to invest in the business in support of our ongoing growth initiatives in the range of $200 million to $220 million, and we remain committed to returning cash to our shareholders in the form of share repurchases and dividends.

We now have $234 million remaining and available for share repurchases on our $750 million multi-year share repurchase authorization, and expect to buy back $200 million to $250 million of our shares in FY15.

We're also committed to continuing to pay dividends targeted at 35% to 40% of net income, and in line with the S&P 500 dividend yield.

In summary, we are confident in the year ahead and in the underlying health of our business.

Our competitive advantages have not changed.

We have strong brands that are delivering innovative products and outstanding service, a multi-channel platform with superior e-commerce capabilities resulting in more than 50% of our business already coming from e-commerce and profitably, and many opportunities for continued growth and market share gains, as well as a commitment to financial discipline and returning capital to shareholders.

These 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.

Thank you.

(Operator Instructions)

Daniel Hofkin, William Blair & Company.

Good afternoon.

Hey, Dan.

Hi, just wanted to talk a little bit about some of the expanded clienteling/service offerings in your furniture businesses, and then just hear a little bit more about that, and then find out how some of the similar initiatives that you have been rolling out over the last year in the Williams-Sonoma brand, how that is progressing and what you are learning there.

Thank you.

Hi, this is Laura.

We really believe that relevant offers are the most effective.

And so we are so lucky that we have such a robust history of our customers' purchase behavior, and the portfolio of brands that we have allow us to understand what the customers are looking for.

And we use this information to not only target and personalize our offers online, but also to better connect with our customers in the stores, and so actually our store associates will understand more clearly what the different customers have already previously purchased and what they are looking for.

And we really believe in building that one-on-one connection in our stores and using our stores for that really high-touch service, and then of course they go online and they often -- they go to the store, they visit it in the store and then they go online and make the purchase and so it's a very effective way to target and give our customers offers that are relevant in a sea of, I think, a lot of offers out there that are less relevant.

As it relates to our initiatives in Williams-Sonoma, we�ve been working hard over the last several years to really develop much more proprietary products, both within our own Williams-Sonoma branded product line but also with our vendor partners who have been amazing with us in developing those lines, and we've made very good progress as you see by the positive comps we've been running consecutively, and we also recognize that there is a lot more that we can do and we're testing a lot of new things.

We talked last call about our wonderful South Coast Plaza store and the integration of Williams-Sonoma Home into that store, and we see that as an interesting opportunity, we're testing a few different things in that space, it's competitive so I don't want to go too much into it but we think there's something very exciting there about that interaction.

Okay, thank you very much.

Peter Benedict, Robert Baird.

Hey guys, so one question, how are you planning the advertising expense, Julie, within your full-year outlook?

If you look back, the last five or six years it's been a nice source of leverage; I think it's gone from 10% of sales to about 7% last year.

I know that's part of the strategy and how you guys play, but how much further can you go on that and is that something that you think will continue to be a source of leverage over the next couple of years?

Thank you.

We're going to let Pat Connolly actually answer that question.

Great.

Peter, I think we've made improvements, as you say, over the last couple of years, actually over a pretty sustained period of time, and I think we've made fairly significant investments here over the last 12 months in improving the functionality in our websites, which has really helped improve conversion.

Our mobile site, sales are almost up 80% year over year and a big part of that has been improving our mobile site experience.

We're continuing to make strides in personalization and improving in the post-purchase experience for our customers, it will focus on order tracking and visibility.

We're in the market and specifically we've made strategic decisions to drive customer acquisition across the entire conversion funnel.

We're spending more on digital, particularly in acquiring new customers, and we've increased our content syndication and grown our blogger outreach to support the brands, but I think it really begs the bigger question is how are you able to do that and still be so profitable?

That's what's probably the most unique thing about us.

Growing to this size, we're the 21st largest e-commerce retailer, over 50%, and yet very, very profitable.

I think we have a 20-year head start, we have a 50 million-household customer base that have bought from us, but I think fundamentally across the Company we understand that e-commerce first and foremost is a retail business, and it just happens to be conducted online.

And lastly, brands matter and the strength of your brand is really measured by the trust, and customers trust us, they have built that trust over many years and many cases through experiences in our stores and through buying through the catalog, so I think all of those together are going to allow us to continue to drive further efficiencies in our advertising.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good afternoon.

Good afternoon, Matt.

The question that I want to ask relates to the impact of the port strike and measuring it financially, particularly on the margin side.

If you do the math on the numbers that you gave us with the sales hit and the EPS hit, you get essentially implied 50% marginal flow-through which I would imagine is pretty close to your merchandise margin, your pure merch margin on the sales that you lost.

Is there a way for us to understand the impact to gross margin rate from the extra shipping costs and other additional expenses associated with the port strike?

Sure Matt, this is Julie, I will take that.

I think the way to think about it, obviously, we hadn't quantified it necessarily or disclosed it by line item, but the reality is the biggest impact is to gross margin and so when I said in my prepared remarks that our gross margin is effectively down due to lower selling margins, primarily from the increased shipping and fulfillment related costs due to the West Coast port disruption, it's primarily due to that.

So that's one way to quantify it; I think the other way to think about it is that though the pure merchandise margin was down year over year, this was also due to the fact that we had to fill a promotional holiday product that was held up at the port at the end of the year, and so we basically didn't get to recognize that for Q1 which also impacted the margin.

So really the story is that the gross margin was almost entirely impacted by the West Coast port.

And then how do you feel about the pure merch margin trajectory which I know started to make headway in Q4?

And I know you have some initiatives that are directed at shoring that up.

Do you feel like those initiatives are still on track and that number could ultimately start to flatten out?

Absolutely, so we expect that there will be short-term shipping pressure, of course, as we go into Q2 given that there's still the residual impact from the port that will happen in Q2, but as we move longer-term throughout the balance of the year and obviously post this year, all of the initiatives that we have been working on, in particular the insourcing of our foreign agents and the regionalization of our distribution centers, lower costs for us.

So the insourcing, as you know, was completed last year in June, so this is our first full year of that, and just alone by the fact that we don't have the overhead structure with a third party has reduced costs on that line so we do expect longer-term to see margin expansion.

Thank you.

Greg Melich, Evercore

Hi, thanks, I think my question really followed on, I think, from the last one.

When you think about that insourcing and how the inventory is growing even though we've had the port problems and not been in stock, what should we expect a normal merchandise inventory number to be now once we get the port thing cleared out?

Should we still be growing at say, 10% to 12% but that the in-stock or available inventory is now 10% or 12%, or how should we think about that?

So obviously we don't guide, per se, inventory levels other than to say, which I mentioned on the call, that to be in stock this whole West Coast port slowdown has really validated for us the criticality of being in stock.

And so we're going to be focused on improving our in-stock inventory levels, obviously, throughout Q2, but to set us up really for the back half of the year.

And so we expect that our inventory will not only be replenished by the end of the second quarter but that will grow at faster than our revenue growth as we are investing in inventory to set us up for the back half of the year and longer-term.

So if inventory's up 11% year over year we should expect it to still be up 11% at the end of the second or third quarter, and just that the in-stock availability is better.

So obviously I'm not going to be able to give you a number.

But your expectation should be higher than that if I'm referencing in-stock inventory's going to be growing higher than revenue growth because the 10.9% relates to the balance sheet inventory level.

Got it.

And the payables that haven't been growing, I guess, should we expect payables to start to grow as that inventory normalizes so that the working capital cost isn't as great?

Absolutely.

Thanks.

Jessica Mace, Nomura Securities

Hi, good afternoon.

Good afternoon.

My question is on West Elm.

I was wondering if you could talk about in the strong results you saw this quarter, what initiatives have gone into place that are beginning to impact that?

And maybe some of the timing on some of the other initiatives such as contract or the partnership with Inscape that we should expect that the rest of the year.

Thanks for the question.

You know, we've talked about choice, consciousness, community, what does that mean?

Choices in the product offer and we have great aesthetic choices for our customer, mid-century and industrial aesthetics continue to work well, and we're seeing growth across all categories, honestly, with outsized growth coming from furniture.

We continue to bring in new flows of product and in fact in Q2, we're really excited, we have a pre-fall assortment that we've never had before.

It helps us break the monotony of the end-of-season sale and buoy the margin up when a lot of other people are on sale.

We also, as you think about the other two initiatives, we realize that customers don't just want to buy things, they want to know where they are from, they want people to source products sustainably, and West Elm has really embraced this idea and has such a big footprint in the area of consciousness because of all the wonderful things that they are doing.

Jim Brett and his team actually were the number one people to raise money for the AIDS Walk last week in New York, which we were very, very proud of.

It's just one small example of how involved West Elm is in every single local community.

And as far as it goes to new initiatives in West Elm, Workspace is a big one, right around the corner, we're going to launch at NeoCon on June 15 in Chicago.

For those who don't know, NeoCon is the largest commercial interior show in North America, takes place in Chicago, and it's the premier platform for connecting, learning, and doing business in the industry, and we're going to be opening in conjunction with our permanent 2,500 square foot showroom at the Merchandise Mart and we're on track to have dealer representation in all key metropolitan areas.

So West Elm Workspace is more than on track and it includes more than 75 furniture pieces for offices, across desks, benching systems, private office, and common lounge spaces, and we see this area as one that is really underserved in the market.

All right, thanks very much.

Simeon Gutman, Morgan Stanley.

Thanks, good afternoon.

One follow-up to Matt's question and then a separate one.

If we look at the financial impact, maybe a slightly different way just in terms of what the EBIT margin would have expanded, our math is getting to us about 20 basis points, Julie, and I don't know if there's anything wrong with that math.

And then if that is right, is that largely, is that mostly gross margin-driven?

I think it would be higher.

I'm obviously not going to give you that number exactly, but it would be higher margin expansion on the bottom, and it is largely, predominately gross margin.

Okay, that's helpful, and then just one maybe for Laura: can you remind us if you comment on this how big the outdoor furniture category is for you, the timeframe that the bulk of sales get done, and then any early read on how that business is performing?

It is so competitive, I'm sorry, that I'm not going to give you the number.

I will tell you that it is off to a great start.

Okay, thanks.

Seth Sigman, Credit Suisse.

Great, thank you.

Can you guys update us on the international business?

I think you mentioned improving margins there this quarter.

Can you elaborate what's driving that?

And I realize you're probably still somewhat in an investment mode there, but how do you think about the potential to close the margin gap at that business and your US business?

Okay, I'll take that.

It's Julie.

We're very excited about this opportunity.

As you know, we believe this could be a huge growth opportunity for us long-term, and I think we said it to many of you, that this is a long-term model to get it to be the level we want it to be, anywhere from three to five years from when we enter the country and so we're just starting to get to a level of scale that we can start to see some of these benefits.

But it's still in the beginning stages and one of the biggest things we did as an example, that's improving the margins, is we renegotiated our distribution center deal there, and that generates some substantial savings.

And so it's little things like that, one after another, that we're looking at and pulling apart and just becoming more operationally efficient, and so as we move through and get more scale we're going to see more of those opportunities.

Great, thank you.

Michael Lasser, UBS.

Good evening, thanks for taking my question.

I'm wondering about the competitive landscape.

Presumably since you are bigger and have a little more muscle in the marketplace, you were less impacted, although you're still very impacted by the port issues, you're probably less impacted, maybe, by some of the smaller players out there.

And so do you think that as a result, some of those smaller players or even medium-sized players were less promotional because they didn't have the inventory to promote and so that made the environment a little less intense?

Because it seems like you were less promotional if all of the merchandise margin pressure was related to the West Coast port.

I would just say it is still promotional out there but I wouldn't read too much into the comparative number of promotions we run.

There are promotions that we didn't comp, obviously, and there's ones that we changed, and it's part of doing -- executing our strategy and I wouldn't say it's an elevated level, per se, in the marketplace.

But I think the things that really set up the part in our categories where we compete are -- first of all, we're vertical.

We create, design, and contract most of what we sell.

If you want to buy our products you have to buy them from us.

And this model not only gives us exclusivity and pricing power, it eliminates layers of cost that we can pass on to the customer in the form of outstanding quality at a great value.

The other major difference is our model, obviously.

We really do operate a different model than most of the people that are out there trying to compete with us.

And it's really, I think, beyond multi-channel or omni-channel, I think what we're creating is a three-dimensional experience.

And when you close your eyes and you think of our brands and you think of our stores and our catalogs, they bring our brands to life and in our categories, I think that's the magic.

You can visualize how your home would look, how the meal you will serve to your family and friends will look, and then you can go to one of our websites and you can quickly order it.

And I think that's what makes us different, and I think that is what is a big part of our continuing success.

That makes sense, and that's helpful.

Just a quick follow-up on the margin question.

Should we expect as we're forecasting the P&L that you should get most of the margin pressure that you saw on the first quarter back in the first quarter of next year?

In the first quarter of next year?

Well we're not providing guidance (multiple speakers)

Just as you anniversary it, there's nothing that really should be ongoing, it's all kind of one-time-ish, correct?

Well obviously we have next quarter as well with the residual impact that we're going to be experiencing with higher shipping costs that will hit the gross margin as well.

But to the extent we quantified how much it's worth to port in that range, that is what we expect is worth the port in Q1 this year.

Okay, cool, thank you so much.

You're welcome.

We have time for one last question and that will be from David Magee with SunTrust.

Hi everybody.

Hi David.

I just have a two-part question.

One is can you give us an update in terms of what you expect to do this year in reducing custom furniture delivery times?

And at the same time I'm curious what's happening with regard to your ability to recognize e-commerce visitors and how that's changing this year as well.

Thank you.

Can you repeat the second part of the question?

Sure, just your ability to recognize unique visitors to your site, and it's my understanding that that capability has been improving, which is obviously a nice competitive advantage.

Any color there would be helpful.

Thank you.

Thanks.

On the first one, when you think about our competitive advantages, certainly one is our supply chain, and we believe that speed is another really important new currency in the furniture marketplace.

As you know we've invested in our own furniture, upholstered furniture manufacturing unit, and we are making some strategic changes so that we can significantly improve wait times on our furniture, which I think is really a game-changer because so many other people who are cropping up, they don't -- it's not their product, they're in the marketplace model.

And they don't control the supply chain and we know that we can provide superior service and higher touch service by controlling the whole thing and this opportunity to reduce the wait time substantially is one that we are extremely focused on.

And Pat, I think maybe you should take the second part.

Sure.

I think, Dave, you are referring to our ability to identify customers when they come to the site and then give them personalized offers based on that, and that's really a function of new technology that we implemented last year.

And we've gone from recognizing 25% of site visitors up to now 60% or 70%, we're actually recognizing and knowing about 15% to 20% of site visitors who have never been to the site before.

And then being able to -- understanding that, give them the right kind of offer and to serve up this personalized content based on their experience with us up to yesterday, and do that in less than 20 milliseconds.

So it's a big technology enhancement and I think we're still in the early innings and you will see throughout this year and in coming years our ability to personalize virtually every page of the customer.

So we're pretty excited about not only what we've been able to do but what we think we can do in the future.

Thanks and good luck.

Thank you.

That concludes our question and answer session for today.

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

Well thank you all for joining us this afternoon.

We appreciate your time and continued support and we look forward to speaking with you again in August.

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

We thank you for your participation.

You may now disconnect.