Williams-Sonoma Inc (WSM) 2017 Q1 法說會逐字稿

Welcome to the Williams-Sonoma, Inc.

First Quarter 2017 Earnings Conference Call.

(Operator Instructions) This call is being recorded.

I would now like to turn the call over to Beth Potillo-Miller, Senior Vice President, Finance, to discuss non-GAAP financial measures and forward-looking statements.

Please go ahead.

Thank you, Melissa.

Good afternoon, everyone.

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

Our discussion today will relate to results and guidance based on certain non-GAAP measures, including non-GAAP SG&A, operating margin, effective tax rate and diluted EPS, which exclude certain items affecting comparability.

During the first quarter of 2017, we incurred severance-related charges of approximately $6 million or $0.04 per diluted share.

These charges were recorded as SG&A expense within the unallocated segment.

Also during the quarter, we incurred tax expense of approximately $1 million or $0.02 per diluted share associated with the adoption of new accounting rules related to stock-based compensation.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press 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 2017 and beyond, and are subject to risk and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company's current press release and SEC filings, including the most recent 10-K for more information on these risk 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.

Thank you.

Good morning, and thank you all for joining us today.

On the call with me are Julie Whalen, our Chief Financial Officer; and John Strain, our Chief Digital and Technology Officer.

In the first quarter, we delivered total revenue growth of 1.2% and earnings per share of $0.51.

In the quarter, we saw improvement in Pottery Barn, demonstrating the effectiveness of the brand strategies that we are executing against.

Williams-Sonoma delivered another strong quarter with 3.2% comparable revenue growth, and we also delivered another quarter of double-digit revenue growth across West Elm; our newer businesses, Rejuvenation and Mark and Graham; and our company-owned global operations.

And while the negative revenue comps in Pottery Barn Kids and Teen were disappointing, we did see sequential demand comp improvement in both brands.

Strong execution against our strategic initiatives drove our Q1 results.

We remain focused on delivering a superior customer experience and executing against our brand strategies, which we believe will drive growth acceleration and shareholder value.

We are building upon our supply chain successes from last year and continue to invest in the customer experience.

Our initiatives in the supply chain will significantly improve customer service and the delivery experience.

With strategies and teams concentrating on key customer touch points, including order visibility, back order management, virtual home delivery and quality and damages, we continued to improve our customer metrics during the first quarter.

Our customers are receiving their orders more quickly, and returns and replacements declined in the quarter, largely driven by supply chain efficiencies resulting from our initiatives.

Key performance indicators like customer satisfaction, service metrics and Net Promoter Scores all improved significantly in the first quarter.

We also continue to invest in e-commerce innovation.

During Q1, we introduced the first in a suite of new digital products and site enhancements that will transform the way customers design and furnish their homes with a highly interactive digital experience.

These improvements are supported by our talented store design professionals.

And rolling out over the next year, these initiatives range from virtual reality applications to style finder tools on Facebook to tools on our website for 3D room design and product visualization.

In Q1, we launched our augmented reality application, 3D Room View by Pottery Barn, which is available on the Tango platform.

This app allows customers to add products to an existing room and see how new products look with their current furniture.

Customers will also have access to 3D Room View through the expertise and assistance of in-store design specialists at select Pottery Barn stores, beginning with pilots in the San Francisco Bay Area, with plans to roll out across the country.

We also have over 100,000 3D SKUs available on our website, and with tools like our 360-degree spin feature, which launched for all sofas in the Pottery Barn and Williams-Sonoma Home brands, our customers can better explore, research and buy our products with confidence and insight.

These features increase conversion and help our customers with their purchase decisions.

In Q1, we also stepped up our digital advertising spend.

As a result, all brands experienced strong growth in key channels of paid search, display and social advertising, resulting in strong customer growth in those channels.

We believe we will see payoff throughout the year as we ensure our brands are top of mind when customers are looking for inspiration and great products for their home.

We see 2 clear trends in digital advertising platforms that play perfectly to our heritage, which, along with the success we have had to date, give us confidence in our investment strategy.

First, there's a focus on platforms to better target customers based on advanced data analytics.

For example, because of our deep customer pool with robust data and history, we are uniquely able to profile our customers and work with our digital partners to find look-alike audiences that may be new to our file at very cost-effective rates.

In this way, our 50-plus years of honing our customer relationship management skills, along with our performance marketing disciplines, can now be combined with new targeting technologies to ensure our increased investment in digital advertising is efficient and sustainable.

Second, we are capitalizing on the new storytelling and content-rich capabilities across many ad platforms as we believe they provide a powerful stage to richly showcase our brands online.

Our catalog heritage provides us with the expertise to create inspirational imagery for our customers, resulting in beautiful creative assets such as video that we leverage to reach customers in new forums and ad units.

We are often a leader in partnering with digital companies, and as their platforms and offerings continue to evolve, we will capitalize on these opportunities and inspire our customers as they decorate their homes.

Registry continues to be a key strategy for us and a very successful customer acquisition tool.

In Q1, we relaunched the Pottery Barn and Pottery Barn Kids registry platform.

We've made enhancements to our registry programs, including The Store is Yours at Williams-Sonoma, a monthly event where couples can come to the store and work directly with our registry experts to build their ideal wedding registry.

We've also made significant improvements to registry pages on our site to make the experience of registering easier and more efficient.

And we've revamped our entire e-mail series to our registrants and are now serving them more personalized content, triggered messaging and tools to ensure that they have everything they really need.

Another important component of our customer acquisition strategy is our cross-brand loyalty program, The Key, which allows us to reward customers for shopping across our portfolio of distinct brands.

Still in its early implementation, enrollment numbers of The Key are strong with members shopping more often, spending more per transaction and purchasing from more brands across the portfolio as they enjoy the benefits and rewards.

Later this quarter, we are launching another initiative enabled by The Key program, which we believe will be an industry game changer and leverages our brand offerings across the entire portfolio.

With our new cross-brand design initiative, we'll offer in-home design services, which will allow our design teams to assist our customers in building their dream homes by leveraging all 7 of our brands in 1 easy interaction.

We've discussed the importance of our retail stores in providing value-added services, being a source of inspiration and instilling brand loyalty.

And we know that our stores are competitive advantage of our pure-play digital retailers, and we are maximizing this advantage.

We want to reiterate our commitment to optimizing our fleet across all brands as we open, relocate stores in important markets, invest in store remodels and close the stores that are underperforming.

During the first quarter, we opened 4 new stores.

We repositioned 1. We converted 1 to a Williams-Sonoma Home store, and we permanently closed 3 stores.

Specifically, in Pottery Barn, our store remodels and refreshes continue to outperform the brand slate.

In the first quarter, we closed 1 store and relocated it to an outdoor center.

We have remodeled stores scheduled to open in the second quarter, and we are very excited about our new flagship store in Manhattan, which is also scheduled to open in late Q2.

In Williams-Sonoma, our new store design continues to perform well.

In Q1, we opened 2 new stores in Alpharetta, Georgia and Fairfax, Virginia, both of which are off to a strong start.

The stores are on our new format, contain Williams-Sonoma Home products and are in vibrant, outdoor lifestyle centers.

We added Williams-Sonoma Home assortments to 5 additional existing locations for a total of 43.

And we recently successfully converted a kitchen store in Calabasas, California to a stand-alone Williams-Sonoma Home store.

During the quarter, we also permanently closed 3 stores upon lease expiration.

In West Elm, we continue to build highly localized immersive retail environments in key target markets.

In March, we opened a store in Plano, Texas in the new Legacy West development, and we have 9 new store openings throughout the remainder of the year to help support West Elm's growth.

And in Rejuvenation, we opened our eighth store on West 20th Street, New York, which is performing well and has driven an increase of over 60% in total customer counts in the New York market.

Now I'd like to discuss the performance of our brands and their progress on product innovation.

In Pottery Barn, Q1 showed a meaningful improvement in trend with a brand revenue comp of negative 1.4%.

Our new merchandise strategy is working.

Specifically, we experienced strong demand in furniture driven by upholstery and our new introductions in bedroom and home office.

We also saw strong demand for our small space solutions, which launched in February, particularly with our younger customers.

We're seeing growth in our non-furniture businesses, including accessible categories that drive customer acquisition such as decorating and entertaining.

Our opening price point strategy is attracting new customers, and our new fashion stories are checking.

Our early indicators and product introductions, marketing and the retail experience lead us to believe that we will see further acceleration of growth in Q2 and the remainder of the year.

In Pottery Barn Kids, comp brand revenues declined 5.7% in the quarter.

Inventory outages across key categories impacted revenue as in-stock inventory was down almost 11% versus last year.

We expect our inventory level to recover throughout Q2 and Q3.

In Q1, our furniture business continued to grow with strength in the core bedroom business driven by new collections.

Upholstered seating business also performed well with double-digit growth, and we further expanded our Healthy Home assortment, launching an industry-leading offering of GREENGUARD-certified nursery seating.

We are seeing softer results in our textiles and accessory divisions, and while we do have initiatives to increase our aesthetic variety and improve our value proposition, we are also developing new avenues of growth.

In Q1, we launched Baby Gear, featuring a curated assortment of best-in-class strollers, car seats and more, and we are pleased with the consumer response.

We will continue to increase Pottery Barn Kids offerings in the second quarter, including our expanded back-to-school assortment with diverse collections of personalized gear, earth-friendly, waste-free lunch storage and new study solutions.

We also have new aesthetics arriving in late summer and early fall, and we'll introduce a new Junk Gypsy collection for both kids and babies.

PBteen posted a significant sales demand improvement from negative 10 to negative 3.7 in the quarter.

We are encouraged by these metrics and customer response to our new product introductions.

Based on PBteen's soft performance over the last year, we've been cautious in our inventory purchases, and while we are excited about the improved demand exceeding our conservative supply, it did result in a comparable revenue decline of 14.3% as inventory levels were down 13% from Q1 last year.

We began to invest in our bestsellers when we saw the trend improve and expect to see material recovery in our in-stock position in Q2.

This should allow us to realize stronger demand and better service our customers.

In the first quarter, our furniture category showed improved trends, driven by bedroom and occasional seating.

In Q1, we saw softer response to our textiles and accessories.

However, we have a clear road map to improve these businesses and are seeing some initial strong reads in our new summer collection.

Collaborations continue to drive growth, delivering next-level exclusivity of product and compelling digital content.

We recently announced our partnership with ivivva, a division of lululemon, specializing in tween and teen active wear.

This collection, which fuses ivivva prints with home decor, will launch in July and be available at PBteen as well as ivivva stores and online.

Additionally, we have a robust lineup of new collaborations and licenses that will be announced in the months ahead.

Also, we launched our expanded dorm offering in late Q1 with complete room solutions and inspiration for small space living, and we are off to a strong start.

As we enter Q2, we will have significant product marketing and content expansion across both dorm and gear categories.

We're also aggressively growing our back-to-school offering for tweens and teens with our largest ever collection of new ergonomic study setups, gear and accessories to complete every space.

The Williams-Sonoma brand has started strong in 2017, posting a 3.2% comp brand revenue growth on top of 3.5% comp growth in Q1 of 2016.

Williams-Sonoma remains focused on delivering high-quality merchandise at great value, transforming the customer experience off -- across all channels and acquiring new customers.

We had very successful product launches and collaborations in Q1, and we've seen particular strength across our tabletop, electrics and cutlery businesses.

Our Easter performance was a particular standout this quarter, driven by tabletop, entertaining and sweet food categories.

This spring, we partnered with kate spade new york on an exclusive line of dinnerware, glassware and flatware to which our customers are responding well.

Also, in the quarter, we launched exclusive products with some of our strategic vendors.

Williams-Sonoma Home was also a significant driver of growth in the quarter across both channels.

A highlight was the launch of the AERIN Collection, a collaboration with lifestyle expert, Aerin Lauder.

The collection, which features dinnerware, entertaining and home pieces, is resonating with our customers.

We believe that Williams-Sonoma's continued strong performance in Q1 indicates the strategies we have in place are working and that the brand is well positioned for further growth.

Now I'd like to discuss West Elm.

West Elm delivered double-digit growth in Q1 of 10.4%, with comp brand revenues of 6%.

The brand continued to experience strong consumer response to its new vision of modern design introduced in January.

Furniture remains a key driver for West Elm led by new casual seating and dining introductions.

Outdoor is also off to a strong start to the year with expanded choice in key collections.

West Elm will also be launching 2 new collections during the second quarter, building upon its innovative approach to design collaborations.

The first, Art for Good, is a 17-piece collaboration with the foundation of American artist Robert Rauschenberg.

10% of the sales price will go to foundation grants for art, education and social and environmental reform.

The second, a collaboration with Brooklyn-based design studio Bower features pieces in seating, lighting and decorative object categories.

West Elm continues to gain traction in the commercial furniture market with West Elm Workspace.

During the quarter, we opened dealer showrooms in several major markets, including San Francisco, Washington, D.C. and Minneapolis.

This June, the brand will participate in its third NeoCon in Chicago since launching this business in 2015.

West Elm Workspace will introduce several new exciting collections in benching, seating and lounge, including 2 design collaborations.

We remain very optimistic about West Elm's potential to be a leader in the office furniture industry.

Now I'd like to discuss our newer brands, Rejuvenation and Mark and Graham and our global business.

Rejuvenation delivered its 12th consecutive quarter of double-digit growth in both e-commerce and retail channels.

We celebrated our 40th anniversary at the start of the year by focusing on our manufacturing roots in Portland as well as our commitment to domestically produce products with the launch of our modern heritage collection and O&G Studio collaborations in February.

Our expansion into new aesthetics and product categories is driving increased spend with our existing customers and accelerating the acquisition of new customers.

We're especially excited about our new store in New York that opened at the end of March.

The store is performing above expectations.

It's a great expression of Rejuvenation's new brand identity and breadth and allows us to connect directly with both customer and trade clients in this key market.

Mark and Graham continued its profitable double-digit growth in the first quarter, driven by its focused gift giving strategy and new product introductions.

New categories such as luggage, tech and travel accessories were successful in driving Q1 sales.

In Q2, Mark and Graham will be launching a new creative look and feel that emphasizes our lifestyle merchandising and adding new categories and cross-brand collaborations to broaden our gifting assortment.

We're excited about Mark and Graham's continued evolution as a premium gifting destination with high growth potential for the remainder of the year and beyond.

In the first quarter, our global businesses delivered strong performance with double-digit revenue growth in our company-owned businesses in Australia and the U.K. Additionally, our key growth and operational improvement strategies have resulted in improved profitability in these businesses.

And as we further improve our operations to support our existing businesses and partnerships, we are exploring opportunities for franchise expansion into new markets and to build our e-commerce business around the globe, both company owned and with our franchise partners.

Our global partners continued their expansion with the opening of 7 new locations in the quarter.

Alshaya opened 3 new stores in Qatar, bringing our total store count in the Middle East to 33.

In addition, John Lewis added 4 West Elm shop in shops within its department stores in the U.K. for a total of 13.

We ended the first quarter with 82 franchise and wholesale points of sale and are excited about the opportunities to further build our businesses in the Middle East, Mexico and Europe.

We look forward to expanding into a new franchise market launching our brands in South Korea this June.

South Korea is a dynamic and visible retail market for our brands and will support our growth to a projected 145-plus global non-U.

S. store -- stores by the end of the year.

In summary, the first quarter reflects strong progress in our strategic initiatives of operational excellence, digital leadership, design innovation and retail optimization, all centered upon our key strategic focus of delivering a superior customer experience.

We believe that our iconic brands and profitable multi-channel model, together with our inspiring lifestyle merchandising approach and high-touch service model, create a sustainable competitive advantage in this highly fragmented home furnishings market.

As we continue to execute against our key strategic initiatives, we believe we are well positioned to deliver on both our near-term objectives and our longer-term goal of reaching $10 billion in revenue.

I will now pass the call over to Julie to discuss our financial results and guidance.

Thank you, Laura, and good afternoon, everyone.

We are pleased we were able to deliver on all of our first quarter financial commitments and exceed the high end of our EPS guidance range while also investing in our long-term initiatives.

Our first quarter results demonstrate our ability to execute against our growth and operational initiatives while, at the same time, maintain strong financial discipline.

For the first quarter, net revenues increased 1.2% to $1,112,000,000 with comparable brand revenues increasing 0.1% on top of 4.5% last year.

These results were primarily driven by double-digit growth across West Elm, our newer businesses and our company-owned international operations as well as strong year-over-year growth in Williams-Sonoma.

This growth was partially offset by the Pottery Barn brands.

In the Pottery Barn brand, however, we were pleased to see 270 basis points of sequential improvement in comp brand revenue from Q4, highlighting the effectiveness of the initiatives we are working on in that brand.

In Pottery Barn Kids and PBteen, although their net revenue comps declined due to inventory outages across several key categories, they both saw sequential improvement in their demand comps.

In our e-commerce channel, net revenues grew 0.7% to $581 million and represented 52.2% of total company net revenues for the quarter, relatively in line with last year's channel mix.

This growth was driven by West Elm, Williams-Sonoma, our newer businesses and our company-owned international operations, all of which generated double-digit e-commerce growth.

This growth was partially offset by the Pottery Barn brands.

Our retail channels net revenues increased 1.8% to $531 million in the first quarter, primarily driven by West Elm and Pottery Barn.

The improvement we saw across the Pottery Barn brand reflects the success we are seeing across our various retail initiatives, including increased density of decorative accessories and cash and carry items, a favorable customer response to our decorating and entertaining items, our in-home design services, and our store remodels and refreshes.

Gross margin for the first quarter was 35.6% versus 35.8% last year and includes occupancy costs of $167 million in the first quarter of 2017 compared to $162 million in the first quarter 2016.

The gross margin deleverage was due to occupancy, which deleveraged 30 basis points.

This deleverage primarily resulted from increased occupancy cost to support our growth and operational initiatives and includes the year-over-year expenses associated with our new Southeast distribution center that was not fully operational until the second quarter of 2016.

We continue to see benefits from these operational investments, including improvement across our customer service and shipping-related metrics as well as various efficiencies throughout our supply chain.

As a result, excluding this occupancy deleverage, selling margins actually improved 10 basis points versus last year and represent the highest selling margin rate we have seen in 2 years.

SG&A for the first quarter was 29.5% of net revenues in 2017 versus 28.8% in 2016.

The 70 basis point deleverage was primarily driven by higher digital advertising costs from our decision to invest in new customer acquisition and was partially offset by strong financial discipline across our general expenses.

Operating margin for the first quarter was 6.1% versus 7% in the first quarter of 2016.

By channel, the operating margin in the e-commerce channel was 22.7% versus 22.8% in 2016.

The 10 basis point decline in operating margin was driven by our investments in digital advertising and reduced shipping income, which was almost entirely offset by continued supply chain and fulfillment-related efficiencies.

The operating margin in the retail channel was 4.1% versus 5.8% in 2016.

The decline in operating margin predominantly resulted from higher occupancy and employment costs primarily associated with our growth initiatives, which include additional West Elm stores and our new Southeast distribution center.

And corporate unallocated expenses, as a percentage of net revenues, were 7.7% in the first quarter, flat to 2016.

The effective income tax rate in the first quarter was 34.5% versus 37.7% in 2016.

The year-over-year tax rate improvement was driven by the incremental benefits we are seeing from improved profitability across our international operations, which are taxed at a lower tax rate.

As a result, first quarter 2017 diluted earnings per share were $0.51.

On the balance sheet, we ended the quarter with a cash balance of $94 million versus $99 million last year.

We had $45 million outstanding under our revolving credit facility versus $100 million last year, and in the first quarter, we returned $72 million to stockholders through share repurchases and dividends, comprising $38 million in share repurchases and $34 million in dividends.

Merchandise inventories at $1,037,000,000 were up 9.8% versus Q1 2016.

A substantial portion of this inventory growth, however, is associated with inventory that is still in transit to our distribution centers.

Our on-hand and available-for-sale inventory grew 3.5%, driven by our higher growth brands.

The Pottery Barn brand on-hand and available-for-sale inventory decreased 0.4%.

For the full year, we expect our inventory levels to be relatively in line with our sales growth.

I would now like to discuss our second quarter and fiscal year 2017 guidance.

For the second quarter of 2017, we expect to grow net revenues 3% to 6% to a range of $1,195,000,000 to $1,230,000,000 with comp brand revenue growth in the range of 2% to 5%.

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 $0.55 to $0.61.

For the full year, we are reiterating all of our guidance ranges.

We expect to grow net revenues 2% to 4% to a range of $5,165,000,000 to $5,265,000,000 with comparable brand revenue growth in the range of 1% to 3%.

We expect operating margin to be 9.4% to 9.6%, and our diluted earnings per share are expected to be in the range of $3.45 to $3.65.

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

As a reminder, this guidance reflects the investments we are making across our business to strengthen our competitive advantages and to position us for long-term market share gains.

We are investing in e-commerce to support its continued profitable growth, including further investments in digital advertising to drive new customer acquisition as well as capture and convert awareness into purchase.

We are also investing in reduced shipping fees with a tiered, flat rate in-home furniture delivery fee model across all of the Pottery Barn brands.

We believe this model will allow us to remain competitive with emerging industry standards and will move the needle on undecided customers during comparison shopping, improving top line performance.

From a capital allocation perspective, we remain committed to a balanced capital allocation strategy.

We plan to utilize our operating cash flow to invest in the business in support of our ongoing initiatives to improve the customer experience and drive further operational efficiencies.

Capital expenditures are expected to remain within the range of $200 million to $220 million, and we intend to return capital to our shareholders in the form of share repurchases and dividends.

At the end of the first quarter, we had approximately $372 million remaining under our current share repurchase authorization, which we intend to utilize over the next 2 years.

In summary, we were pleased that we were not only able to deliver on our first quarter financial commitments but that we were also able to make substantial progress on our strategic and operational initiatives.

In the Pottery Barn brand, we saw significant sequential improvement, highlighting the effectiveness of our initiatives.

West Elm, our newer businesses, Rejuvenation and Mark and Graham, along with our company-owned global operations, all delivered another quarter of double-digit growth.

Williams-Sonoma generated another quarter of solid growth, including double-digit e-commerce growth.

Our continued focus on our supply chain initiatives generates another quarter of efficiencies, which resulted in higher year-over-year selling margins.

And in our global business, we saw improved profitability, which also drove a lower tax rate.

All this allowed us to outperform our earnings expectations while absorbing investments in our future growth.

These results, along with our longer-term competitive advantages, a multi-brand portfolio with an edited assortment, a profitable multi-channel model, our high-quality proprietary products and a strong cash flow generation along with the ongoing success of our growth and operational initiatives, give us confidence in our ability to deliver long-term profitable growth.

I would now like to open up the call for questions.

Thank you.

(Operator Instructions) And we'll take our first question from Christopher Horvers with JPMorgan.

So want to think about the advertising effort and the new merchandising introductions that you've done, particularly in the core Pottery Barn brand and understand where we are in that effort.

So for advertising, do you expect the response to advertising to build momentum from here based on when you started it?

And maybe, John, could you share some metrics around new customer acquisition as that's been such a big focus?

And then on the merchandising side, how far are we into resetting the PB brand based on the customer research effort you did last year?

I know you did a lot around giftables and decorative.

But how far are we into getting to touch the rest of the assortment?

I'm going to let John start on marketing.

Great.

Thanks, Chris.

We've seen positive improvements in our visits and revenue derived from digital marketing, really, as a result of our Q1 investments.

Overall, we're seeing our penetration of demand derived from marketing programs increase both sequentially and year-over-year.

We're going to continue to optimize catalog expenses and shift that spend into our highly productive digital channels.

I mean, in particular, we're seeing strength in our non-brand search terms, affiliates, remarketing and social programs.

And at the same time, on the e-mail front, we're really excited about some of the continued positive results from our triggered e-mail programs and initiatives around new e-mail personalization models.

So at this point, we're seeing nearly 40% of our e-mails driven from sales -- e-mail-driven sales coming from trigger programs despite representing less than 10% of our total e-mails sent.

And I think these results reinforce the point.

Relevance matters, hence our obsession with continuing to expand our personalization capabilities, so we remain relevant and targeted in terms of our messaging to our customers.

And just to take the question in the broader sense.

Last year, early in the year, we realized that we needed to listen more carefully to our customers in what they're looking for.

And as I think I mentioned in the last call, we did extensive customer research on what the customers were saying.

And as a result of our brand work, we put together a quarter-by-quarter very aggressive execution plan covering both product innovation, digital operations, store remerchandising, value, and we've been executing against that successfully.

I'd say that some of the really -- the strong good reads include small spaces, although it wasn't a big buy, as we received really good response and gives us confidence that it will be a meaningful contributor to the future.

So that's one that we haven't even begun to maximize.

Store merchandise, we've changed the merchandise strategies in our stores, restoring our tabletop and decorative accessories categories that people come to us for and that drives actually new customer acquisition.

And the spring decorating and entertaining was a success.

We saw substantial increase in our tabletop business and our decorating businesses and entertaining for Easter.

And then, as John said, we continue to improve the online experience.

We've always had a ton of content, and we have a chance to leverage that even more than we are online.

So while we're pleased that our initiatives are checking, we're not by any means satisfied with the comp performance, and we will continue to drive hard with our team to improve it and to build upon what's working and then, of course, when it's not working, to pull back.

We'll take our next question.

We'll go to David Magee with SunTrust Robinson Humphrey.

Just a question on the supply chain.

You guys have done a great job squeezing efficiencies out of that and keeping your prices sharp.

How much more do you have to do there over the next, say, 18 months?

Thanks for the question.

Again, we've made a lot of progress with improvement across our customer metrics as well as lowering costs, but we see a ton more opportunity.

We've been relentlessly focused on it, and we believe that service, reliability, quality and speed are keys to our long-term advantage.

And as a result of the investments we've been making, our back orders are down.

Our on-time shipping is up.

Out-of-market shipping is down, which drives cost down, too.

We've also regionalized our inventory, which is complicated to do, but because of that, we're seeing fewer out-of-market shipments, reducing our freight expense, decreasing our in-transit.

I mean, the big opportunity for the future is further inventory optimization so that we're both in better stock and then have lower out of stock -- lower overstocks.

And that, I think, will continue -- you'll continue to see improvements there on both sides.

And at the same time, we can better communicate to our customer about where their order is through the delivery cycle.

So yes, we've done well.

Again, we have a lot more to do, and we are building a much more responsive, agile supply chain.

And we are investing in the processes and technology to achieve the absolute best service at the lowest cost.

We'll next go to Matt Fassler with Goldman Sachs.

My primary question relates to an e-commerce line item on Pottery Barn in particular.

So Pottery Barn accelerated or improved from where we were in Q4.

I don't think you isolated the different brands in terms of e-com performance in Q4, but it seems like its e-commerce business was a notable laggard relative to the rest here in Q1.

So how should we think about what's going on in the core furniture business online?

Is this a competitive factor as the business recovers?

And it sounds like PB has continued to gain momentum.

Would you expect its performance in the e-commerce channel to recover as well?

Matt, this is Julie.

I'll take that.

So a couple things to answer that question.

First, yes, we had lower e-commerce growth at 0.7%.

But we still held our mix relative to last year at 52.2%, and we still held our profitability at 22.7%.

The key takeaway is that all businesses, so West Elm, Williams-Sonoma, our newer businesses, our company-owned international operations, everybody had double-digit e-commerce growth, except for the Pottery Barn brands, which obviously, we've been working on and we saw the sequential improvement from Q4 to Q1 of 270 basis points.

If you look at it on a 2-year basis, sequentially from Q4 to Q1, Q4 e-commerce growth was 5.1 and Q1 was 8.9, so we did see 380 basis points of improvement truly.

And so with that said, obviously, the Pottery Barn brands at negative 1.4% total growth, given their size, impacts the total company e-commerce growth.

So certainly, that is a big factor that we're continuing to work on.

We certainly don't believe this is where e-commerce growth will stay, and as we continue to see Pottery Barn improve, you'll see this number change dramatically.

We'll next go to Michael Lasser with UBS.

I want to talk about the guidance a little bit.

For the second quarter, you're expecting an acceleration across your comparable brand revenue growth.

The comparisons do ease a little bit in the second quarter.

So are you expecting the acceleration to occur across all the different concepts?

And as part of that, I think you are still implying a 1% to 3% type growth rate for the back half of the year.

Is there any reason why it should slow after an acceleration in the second quarter?

So our guidance reflects, obviously, our best estimates as the possible range of outcomes.

Yes, at the high end, it assumes approximately on -- from a revenue growth perspective, about 500 basis points of sequential improvement.

And obviously, given the sequential improvement that we saw on the Pottery Barn brand and the continuous double-digit growth in our growth initiatives, it gives us confidence in our ability to drive that improved growth, but, of course, it depends on the overall environment and the things that are out of our control.

We are also aware that retailers are being aggressive with their liquidations and promotional stance.

We believe the range of possible outcomes we have provided are appropriate at this time.

We'll take our next question from Kate McShane with Citi.

My question is centered around West Elm.

I think you had noted on the last quarter comp that there was some distraction in November that, that was cited for the slowdown in the comp last quarter.

Why didn't we see more of an uptick in that business in Q1?

And what can we expect for the rest of the year?

So I mean, let's first pause and say that we still believe that West Elm will grow to be our largest brand over time.

This brand has experienced, as you know, double-digit comp growth for 7 years straight, and they've reached now over $1 billion.

So you can't expect that this brand will grow double digits in perpetuity.

But with that said, this brand still had a really strong comp of 6 on top of a 19 last year, and they continued to experienced double-digit revenue growth.

They also had stronger demand comps than net.

So had we had the necessary inventory on hand to fulfill this demand, their net comp would have shown an acceleration from the fourth quarter.

So at the end of the day, we continue to be very pleased with the growth in this brand, and there still remains an incredible runway for growth.

And I wouldn't really read anything more into it.

We'll next go Dan Binder with Jefferies.

It's Dan Binder.

I just wanted to go back to your comment about the reduced flat shipping fee for the Pottery Barn business.

Can you just give us a little bit color on how that's changed, what it was before?

And I think it's $99 now based on what I saw on your website.

But just curious, is this a path to potentially even lower shipping fees if it does stimulate sales?

I'm not sure if you've ever broken it out.

But if you would eliminate shipping fees entirely, what would that do to margins?

Yes.

We have not broken that out.

Our goal is to be ideally break-even from a shipping fee perspective, and we want to make sure that we're giving value back to the customer.

So at the end of the day, we're testing different models, and the initial response to this model is very strong.

And so we're going to continue with that.

But obviously, I think the way to look at it is we started this with the Pottery Barn brand back basically in Q3, we rolled it out to the other Pottery Barn brands at the beginning of this year, but if you look back, our selling margins and our operating margin in the DTC channel have remained very strong.

In fact, we still have a selling margin that's the highest it's been in 2 years.

So the impact of it, we're obviously getting the benefit from the top to end.

We'll next go to Greg Melich with Evercore ISI.

I wanted to follow up more specifically on 2 things.

One, Pottery Barn, what are the areas, if we look of the sales, where they're not coming through, are there some things?

Like a few quarters ago, you mentioned opening price point items and trying to broaden that out.

You mentioned top of table.

So I'd just like to maybe add a little bit as to what you really think you're missing there to get that back on the path that we're used to seeing.

Yes.

I think it's always innovation, and customer recognizes value and design innovation.

There's been a lot of people, obviously, who've seen our success and copied it.

And the great news is that the team has put together, in a very quick time, a very compelling assortment that attracts a wider range of customers.

So you can look online or in a catalog or in the stores, and you're going to see some new looks for Pottery Barn that are -- they are proving to attract the new customers, whether it's because of size or aesthetic or more urban.

And it's all under the same Pottery Barn aesthetic and value proposition.

So I think when brands get [2, 1 no] or they become too expensive, they shorten their ability to grow.

And it's clear to us that Pottery Barn, as a brand that is loved by our customers, is great when it's inspiring and friendly and decorative.

And that is what you're seeing from us now and you're going to see even more improvements through fall and holiday.

We're very excited about what's to come.

We'll next go to Simeon Gutman with Morgan Stanley.

Julie, a follow-up on the second quarter guidance and then in relation maybe to longer term.

So the top line guidance, pretty solid, 2% to 5%, and I think at the high end, that translates to modest year-over-year EPS growth.

Within it, I'm getting to flattish operating profit growth even on the high single-digit comp.

So if that math is fair, what is it understating vis-à-vis the flow-through of the business?

Because I would have expected it to look a little bit better.

And just as a tie in, if you could touch on the digital advertising, if that's one of the causes of the holdback, what's the duration?

And then the shipping investments, how long should that persist?

So basically, you kind of answered your own question.

Those are the 2 reasons for why you're not seeing it necessarily flow through as you would typically.

We said, even on our last call, that we are going to be making this year investments in digital advertising and reduce shipping income.

We're in this to be #1.

And so we need to be able to make these investments in our future growth, and so you're seeing a more significant step-up with the advertising investments in the second quarter.

We'll next go to Peter Benedict with Robert Baird.

So kind of a clarification and then a question, kind of follow-up on the last one.

Just a clarification, in the first quarter, it looked like the stock-based compensation was down significantly, like 38% year-over-year.

I'm just curious what drove that.

I'm not sure if you mentioned that during the SG&A comments.

And then the question really kind of dovetails off the last question, which, as we look to the second half of the year, the guidance certainly implies improved EBIT margins year-over-year.

Is that just the effectiveness of the digital advertising starting to flow through?

Or are there other factors we should think about with respect to driving margin -- operating margin expansion in the second half of the year?

So the stock-based compensation every Q1 basically, we have a significant true-up to our stock base depending on who's here, who isn't here.

So I wouldn't read anything more into that; it's a normal Q1 exercise.

As far as EBIT improvement throughout the rest of the year, obviously, as we make the assumption that we're going to have higher growth rate on the top line, that flows through to the EBIT.

We'll next go to Steven Forbes with Guggenheim Securities.

Maybe just regarding the in-home design services you mentioned within the prepared remarks.

Can you expand on what the anticipated rollout of that program is, whether it be you're testing it on a regional basis, where it's going to be a national offering?

And then how do you think about the maturation of it as far as driving new customer acquisitions or targeting your key members?

Maybe just touch on how you're thinking about the maturation of the program.

Yes, a great question.

Highly competitive, though, so I need to caution the -- myself against sharing too much here.

So it's -- what we see is the opportunity to use our brands together to better serve our customers, and while they're very independent and have different aesthetics and value propositions, we know that we all shop and the good customers shop across them.

And so we're seeing great response from The Key, and we can use our Key rewards not just in the form of dollars but in the form of services to help our customers furnish their homes because we know that different than apparel, different from other categories, furnishing your home is a more complicated decision, and we have studied and seen that customers go to store, they go online, they go back to the store.

And so design services, both online and in-store, across multiple brands with different aesthetics is a very powerful, competitive advantage because while there are others who are doing only online or others who are doing it only in stores, we're one of the few that can do it in both places in synergy across these multiple areas and into the kitchen and into the hardware that Rejuvenation sells.

So that is a very exciting initiative that we're going to be rolling in Q2.

We're in training now and you'll start to see it throughout our fleet at the end of Q2 and throughout the balance of the year.

We'll next go to Brian Nagel with Oppenheimer.

So maybe a bigger picture question.

But if you look at the sales results here and, clearly, there was some nice acceleration in a couple of core brands.

You've talked in the past about the overall environment.

So how would you frame the environment here or for your company in Q1?

I mean a number of other retailers have discussed a choppy sales environment over the past few months or so.

Some of these factors like weather and delayed tax refunds may not have had as big impact.

But -- so how would you frame the overall environment, how that may or may not have helped that -- some of that sequential improvement?

Great.

There's more competition coming in, particularly at the low end, and there's still the big-box retailers who have been offering furniture for a lot of years.

And we've just learned that Amazon is going to come into the furniture business.

We believe that actually Amazon will take more market share from the mass retailers than anyone else, and we will continue to carve out our specialty niche with our edited inspirational assortment and decorating ideas for our customers.

We know that our stores are a competitive advantage because they're experiential, and they're the fullest expression of our brands.

And as I just said earlier, we offer our shoppers an integrated experience across channels, and our retail stores help drive e-commerce sales.

Retail traffic's down 9. We all read those numbers.

Our traffic is down a lot less.

And we believe there's a huge interaction between our online and our stores obviously, and we're going to continue to maximize the opportunity.

So I'd say that, yes, it's definitely competitive.

We don't see the promotional environment going away, and as Julie said, we see a lot of people liquidating a lot of inventory.

And we believe that we are going to outperform because of our sustainable, profitable model.

There's ways to grow, and there's ways to grow profitably.

And there are a lot of people growing, but I guess the question is this growth sustainable.

I can tell you ours is.

We're disciplined.

We prioritize our initiatives, and our strong cash flow generation gives us the flexibility to invest in our future.

We have time for one last question from Charles Grom with Gordon Haskett.

Just when we think about the Q2 view of up 2% to 5%, is that a function of the compare getting easier?

Or was there inflection in the first quarter business as you guys progressed through the quarter?

And then could you also talk about your customer base today and how much of your sales are from new customers versus existing customers by banner?

So as far as the guidance, the biggest differential is the continued improvement in Pottery Barn is what our expectations are.

So we saw the sequential improvement from Q4 of 270 basis points, and we believe that Pottery Barn will continue that momentum as they move throughout the year.

So that is the biggest driver of the guidance.

And as far as those new customers, where we're at, we track that customer file very closely.

New to corp, new to brand are 2 of our key metrics in terms of being able to grow the brands and really be healthy over the long term.

And we're happy to report we saw very solid growth in our digital new-to-corp customers in Q1, and digital market remains our #1 source of new customer acquisition across all the brands.

Williams-Sonoma continued to be a large -- our large contributor in terms of new-to-corp customers, sourced from both digital and stores, which we read as a really strong sign for the health of our WS brand.

And that concludes our question-and-answer session for today.

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

Well, thank you all for joining us.

Have a great summer.

We look forward to talking to you at the end of Q2.

Thank you.

And that does conclude our conference call for today.

We thank you for your participation.

You may now disconnect.