Williams-Sonoma, Inc. (NYSE:WSM) Q1 2023 Earnings Call Transcript May 23, 2023

Williams-Sonoma, Inc. beats earnings expectations. Reported EPS is $3.5, expectations were $2.37.

Operator: Welcome to the Williams-Sonoma, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Jeremy Brooks: Good morning. And thank you for joining our first quarter earnings call. I’d like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including guidance for fiscal ‘23 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The Company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today’s call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results.

A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now I’d like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I want to begin by thanking our strong team at Williams-Sonoma, Inc. for their talent and hard work in delivering another solid quarter of earnings, despite a challenging macro backdrop. With our focus on compelling products, customer service, and profitability, we achieved our financial expectations. We continue to distinguish ourselves as the world’s largest digital first design led sustainable home retailer. What are the things that distinguish us? No other home furnishings company offers our in-house design capabilities and vertically integrated sourcing organization. This allows us to deliver high quality, sustainable products at the best value to market, that cannot be found anywhere else.

Most importantly, it allows us to lead with innovation, distinguishing us from our competition. We are always looking for new opportunities to inspire our customer through our in-house design. From the new summer block prints and exclusive heritage quilts in Pottery Barn to the Viv swivel chair in West Elm, to the compelling new dorm assortment in Pottery Barn team, and the exclusive electronics and ergonomic tools in the Williams-Sonoma brand. Our company leads with innovation. And just last week, we launched the newest brand in the Williams-Sonoma, Inc. portfolio, GreenRow. This new brand has been internally designed and developed utilizing sustainable materials and manufacturing practices to create colorful, vintage inspired, airline quality products.

GreenRow addresses white space within our portfolio and in the market. It is this type of innovation that distinguishes us within the home furnishings industry, and most importantly resonates with our customers. But not only are we innovators, we are operators. As you know, no other home furnishings company offers our digital first, but not digital only channel strategy that’s transforming the customer experience. With our proprietary e-commerce platform, we are one of the largest e-commerce players in the United States, and our in-house CRM and data analytic teams optimize our digital spend and customer connections. And we operate a world-class retail business with our stores serving as billboards for our brands. They are beautifully designed and curated with aspirational assortments.

Our retail optimization efforts have refocused our fleet on the most profitable, most inspiring, and most strategic locations. And our omni capabilities are competitive advantage in the market. In Q1, examples of our operational excellence continued, we re-platform rejuvenation’s website, capturing new demand and driving higher conversion through enhanced imagery and an elevated customer experience. We managed our SG&A expense, leveraging our ad cost, by limiting our spend to more proven, efficient channels, where customers show a higher level of intent to purchase. We made tough decisions to right size our organization to control cost and to drive focus and efficiency. We manage our receipts to control inventory levels, and we are making substantial progress on our customer service, which was affected by the pandemic.

We have successfully improved customer metrics including on time delivery. We are working hard to rebalance inventories to reduce multiple and out of market shipments, both of which will improve service levels further and reduce costs. We are here to serve our customers without them, nothing else matters. Lastly, we lead the home furnishings industry with our sustainability efforts and values based culture. In Q1, we are recognized as one of the top 10 companies on Forbes list of America’s best employers for diversity in 2023. We were the highest ranking home furnishings retailer on the list. Turning to the quarter. While our top line comp ran down 6%, our two-year comp was 3.5%, our four-year comp to 2019 was plus 46.5% and we delivered an operating margin of 12.9% with earnings per share of $2.64 significantly above our pre-pandemic results.

In terms of demand, our trends softened from negative mid-single-digits in Q4 to down 10% in Q1. The softness in demand was most notable in our high ticket furniture offerings, but we didn’t see that same trend in our high ticket electronics and kitchen offerings. These disparate trends tell us that the customer is still spending. The diversification and durability within our portfolio of brands and product offerings positions us better than our competition with this shift in spending. Now let’s turn to more details in the brands. Pottery Barn ran down slightly with a negative 0.4% net comp in Q1, but ran 14% on a two-year basis and 54.4% on a four-year basis. We are seeing subdued demand in our furniture business with customers demonstrating more caution on high ticket considered purchases.

And in our outdoor business, we are seeing delayed purchasing till later in the summer season versus early spring. However, we are seeing strength in our exclusive decorating and textiles categories as customers choose to postpone bigger redesigned projects to focus on easy updates. Leveraging our beautiful print and patterned pillows, table linen, bedding and bath textiles, frames, and decorative lighting. In PB, summer seasonal newness is off to a good start with strong demand for block print quilts and heritage patchwork quilts. The customer response to our Americana and Coastal decorating across tabletop, text out and decor has been strong ahead of the Memorial Day weekend and should extend into the summer season. As we look to the year ahead, the brand has a strong lineup of textiles, decorating, and entertaining products at a great value and we are increasing our marketing of these categories to drive performance.

The Pottery Barn Children’s business ran a negative 3.3% comp in Q1 and was negative 6.4% on a two-year basis, but ran positive 29.6% on a four-year basis. We see pressure in some of our children’s furniture categories, but we continue to see strength in many parts of the baby business and we are focused on elevating the customer experience in these life stage businesses. For example, in our baby business we saw strength, in our Greenguard Gold Nursing Seating, personalized baby gifts, and our curated selection of baby gear, which positions us well as a destination for the registry business. And in our stores and across our mobile app, customers can register with Pottery Barn Kids and receive help from our nursery experts. In our team brand, we are excited to have launched a compelling new dorm assortment covering the needs of college bound students with extra-long twin bedding and storage.

Customers can shop online and ship product to any of our company stores near their college campus, included in our dorm offer, we are excited to showcase our partnership with LoveShackFancy, which has resonated with customers. Also, we are pleased with our first full quarter of results for our Pottery Barn Kids and Teen shopping apps. We are seeing customers respond to the easy to shop, thoughtfully designed experience, and both apps are outperforming the mobile web across all KPIs. The West Elm brand continued to be the most affected by the tough macro environment. In Q1, West Elm ran a negative 15.8% and was negative 3% on a two-year basis, but 51.1% positive on a four-year basis. We’re excited that Day Kornbluth started with the team as the new brand president on April 3rd.

She’ll lead West Elm through its next chapter of growth most immediately with a focus on four areas: one, industry leading design and value; two, increasing brand awareness and customer acquisition; three, expanding into product white space; and four, leveraging channel growth opportunities. West Elm is our brand with the highest percentage of its assortment in furniture. We see opportunity in West Elm expands into textile, decorating, accessories, entertaining, and seasonal offerings. We continue to be very excited about the long-term growth trajectory of West Elm. The Williams-Sonoma brand ran a negative 4.4% comp in Q1. On a two-year basis, the brand ran negative 6.7$, but positive 33.9$ on a four-year basis. The Williams-Sonoma team remains focused on increasing product exclusivity, innovation, relevant content, and full price selling.

We have a pipeline of innovative product launches and collaborations planned throughout the year, and we see new opportunities from the integration of the Williams-Sonoma Home furnishings assortment into our kitchen business. We remain confident in our ability to gain market share and the housewares industry. Now, I’d like to update you on our growth initiatives beginning with business-to-business. This business has two formats, trade and contract. The trade side of the business has been more impacted by the macro environment. But we continue to remain focused on the growth opportunity on the contract side. Contract grew mid-double-digits in the quarter despite B2B running down 7% in total. We continue win B2B accounts due to our design capabilities, and a wide range of products offered in our multi brand portfolio.

And in fact, we have a stronger pipeline of projects currently out for bid, compared to last year. Another growth initiative is our expansion into global markets. Our brand momentum continues to exceed expectations in the India market, and we are driving growth to retail expansion with the opening of our third West Elm store our second Pottery Barn store and our first Pottery Barn Kids store in Q3 2023. India is a strategic market as we expand globally, and we plan to open additional locations in 2024. Additionally, we are seeing strength across all of our brands in the Middle East, led by strong design services. We’ll be expanding in the region with the opening of an additional Pottery Barn and West Elm store in Saudi Arabia in Q2. Canada is also a highlight with digital representing our biggest growth opportunity for the market.

We launched B2B in Q1, in Canada, and we look forward to introducing the Canadian customer to rejuvenation, Mark and Graham and Williams-Sonoma Home with the launch of their website later this year. In summary, we recognize that there is continued uncertainty with the environment and the consumer. But we operate in a highly fragmented market, and we will continue to gain share by inspiring customers with our portfolio of strong brands and by building trust with a return to world-class customer service, and we will continue to generate strong profits. On the guidance front, we are only one quarter into the fiscal year with a lot more volume to come. We have a lineup of opportunities in our brands, which considered with our two-year and four-year trends supports our 2023 guidance.

As we indicated in Q4, the first-half of the year will be tougher with the strong comps we are up against and the declining macro. But in the back half, our compares get easier, and our supply chain cost pressures start to roll off. Looking past the short-term, we remain confident in our long-term guidance and our opportunity to furnish our customers everywhere. We have built a company of love brands with a shared platform of competitive differentiators that lead the industry. In-house design, a digital first, but not digital only platform, and our values. We have identified opportunities for growth through strategic initiatives like B2B, emerging brands and global, where we have the opportunity to disrupt. We have a culture of innovation and an experienced team who knows how to increase operational efficiency, control cost, deliver world-class customer service and drive new growth opportunities.

And finally, with our focus on compelling products, and restoring world-class customer service along with our financial discipline and our great team, we are confident that we will continue to deliver on our commitment to our customers, our employees, and our shareholders. All of whom I’d like to thank for their support. Now I will turn it over to Jeff.

Jeff Howie: Thank you, Laura, and good morning, everyone. As Laura said, we’re proud that we’ve delivered solid quarter of earnings in a challenging environment. On the top line, we continue to distinguish ourselves from the home furnishings industry through the strength of our proprietary in-house design, our family of strong and stable brands and our culture of innovation. On the bottom line, our operating margin demonstrates the resiliency of our profitability, despite softer top line results and illustrates how the structural changes in our operating model support our long-term 15% operating margin for. Before I walk through our Q1 results, and our fiscal year ‘23 guidance, I’ll first touch on our non-GAAP adjustments.

As Laura said, we continue to distinguish ourselves through innovation and good operations. Laura touched on the innovation across our brands that will continue to propel our market share gains. And the newest member of our family of brands, GreenRow. On the operation side, we are committed to driving efficiency across all our operations. As part of this commitment, we undertook three key initiatives to drive efficiency in Q1 that resulted in our recording $26 million in non-GAAP expenses. First, we completed a company-wide reduction in force, rightsizing our team domestically and internationally, primarily focused on corporate non-customer facing positions. Second, we closed our Sutter West Coast upholstery manufacturing facility, moving our production from California, to our lower cost Southeastern U.S. facilities.

Third, we exit our non-core aperture SaaS business. Combined, these changes will result not only in an estimated annualized savings $40 million, but also increased focus and efficiency across our corporate, supply chain and technology teams. For more details, please refer to the GAAP to non-GAAP schedule in our press release. Now let’s dive into our Q1 results. As I do so, in addition to year-over-year results, I’ll reference 2019, as it’s helpful to compare our performance with pre-pandemic levels. Net revenues came in at $1.755 billion, slightly below our expectations. While comparable brand revenue growth on the one-year stack came in at negative 6% our two-year stack grew 3.5% and our full-year stack against 2019 grew 46.5%. In demand, we’re up against our toughest one-year compares to the year, leading Q1 demand to come in at negative 10% on a one-year stack.

However, our demand was negative 1% on the two-year stack and positive 46.7% on a four-year stack. Our net revenues were driven by strong order fulfillment and timing of revenue recognition as we had less undelivered orders in Q1 than in Q4. For context, in a normalized environment, typically there is a spread between demand and net comps. Moving down the income statement, gross margin at 38.6% was in line with our expectations. Coming in 520 basis points below last year reflects the impact of the short-term supply chain costs and inefficiencies flowing through our income statement that we’ve been discussing the past several quarters. Merchandise margins decreased from last year as we experienced the full effect of the capitalized cost from higher product costs, ocean freight, detention, and emerge into our income statement.

This was partially offset by the higher pricing power our proprietary products command and by our ongoing commitment to forego site wide promotions. Selling margin continue to be impacted by higher outbound customer shipping costs as well. We continue to incur these higher costs to best serve our customers by shipping from out of market distribution centers. And in some cases, shipping multiple times for multiunit orders, which typically would have been fulfilled in a single shipment. We’re working hard to rebalance our inventory composition and regional inventory location to improve our customer service. As Laura touched on, we are pleased with the improvements in customer service we are already seeing and we expect customer service will continue to improve over the course of 2023.

Altogether, our selling margins were 350 basis points lower than last year. We estimate more than 300 of the 350 basis points are attributable to these short-term supply chain costs and inefficiencies I just discussed. At 38.6% our Q1 gross margin remains 270 basis points higher than 2019 35.9% and that’s inclusive of absorbing these more than 300 basis points in supply chain related costs and inefficiencies. Occupancy costs at 11.5% of net revenues were 170 basis points above last year. With occupancy dollars increasing 8.6% to approximately $202 million. Our ongoing retail store optimization initiative partially offset incremental costs from our new distribution centers on both the East and West Coast. These new distribution centers will support our long-term growth, improve service time for our customers, and drive cost efficiencies over time.

Our 250 basis points leverage versus 2019s 14% occupancy rate demonstrates the impact our higher e-com mix, and retail optimization has had on our gross margin. Our SG&A rate continues to be at a historic low for Q1 at 25.7% leveraging 100 basis points over last year. This reflects our financial discipline and ability to control costs in a challenging environment. We held employment expenses as a rate of revenues flat to last year as we manage variable employment costs in accordance with our top line trends. Our advertising leverage continues to reflect the agile performance driven proficiency of our marketing team. Our in-house capabilities, first-party data and multi-brand platform are an underappreciated competitive advantage that allow us to drive efficient advertising spend in near real time as we see trends evolve in the business.

Overall, SG&A came in 320 basis points lower than 2019s SG&A rate of 28.9%. This once again highlights the impact of a higher e-com mix and retail optimization on our profitability. With regard to the bottom line, we are pleased with our results, despite the quarter’s declining macroeconomic backdrop. Q1 operating income came in at $226 million and operating margin at 12.9% well down 420 basis points below last year, 12.9% stands 590 basis points above 2019s 7%. These results reflect the durability of our profitability and underpinned our 15% operating margin long-term guidance. An estimate quarter marked by significant macroeconomic headwinds, softer top line results, and over 300 basis points in short-term supply chain related cost pressures.

Our diluted earnings per share of $2.64 was $0.86 or 25% below last year’s record first quarter earnings per share of $3.50, but significantly above 2019s earnings per share of $0.81. On the balance sheet, we ended the quarter with a cash balance of $297 million with no debt outstanding. This is inclusive of investing $50 million in capital expenditures supporting our long-term growth, paying $58 million in quarterly dividends, and opportunistically repurchasing $300 million or 3.8% of shares outstanding congruent with our commitment to maximizing shareholder value. Merchandise inventories, which include in transit inventory, at $1.402 billion were essentially flat year-over-year, while inventory on hand increased 28% over last year. Two important points to emphasize here once again: first, our inventory on hand increase continues to be skewed by last year’s pandemic related to supply chain disruption, creating an artificially low base and apples-to-apples comparison versus 2019 highlights how we’ve improved our inventory turnover, as our on hand inventory levels have increased only 19% against revenue growth of over 41% during that time.

Second, our lower balance sheet inventory growth reflected 46% reduction in merchandising transit. As we’ve aligned our future on order with cautious forward-looking demand given our Q1 trends and the macroeconomic outlook. Summing up our Q1, we are pleased to have delivered results in line with our expectations. We continue to distinguish ourselves within the fragmented home furnishings industry. Our operating margin demonstrates the resiliency of our profitability, and our ability to maintain at least a 15% operating margin over the long-term. I want to thank all our associates for their hard work and dedication in delivering these results in a challenging environment. Now let’s turn to our guidance for 2023. As we look to the balance of the year, we are reiterating our fiscal ‘23 guidance.

We recognize there is uncertainty in the macro and the consumer is becoming increasingly cautious, but this is our best estimate based on the facts and trends we know today. On the top line, extrapolating our two and four-year trends in Q1 to full-year ‘23 revenues lands us within our guidance range. Specifically, our Q1 two-year trend yields full-year revenues at the low-end of guidance. While our Q1 full-year trend yields full-year revenues between the midpoint and high-end of guidance. On the bottom line, our Q1 results project our operating margin landing within our guidance, especially with the cost reductions we undertook this quarter. We continue to anticipate the first-half of the year will be materially tougher. On the top line, our year-over-year demand comparisons and last year’s high back order fill, coupled with the declining macro will yield negative comps.

On the bottom line, we continue to foresee gross margin pressures as the supply chain costs sitting on our balance sheet continue to amortize into our income statement, as well as ongoing incremental shipping costs to service our customers. In the back half of the year, these headwinds should turn into tailwinds. As our top line year-over-year comparisons get easier and our gross margin pressures become tailwinds that support our profitability. As we look beyond 2023, we remain confident in the long-term fundamentals of our business. We believe our long-term growth algorithm will continue to drive mid to high-single-digit top line growth with operating margins exceeding a 4% or 15%. As the world’s largest digital first, design led, sustainable home retailer, we’re committed to finishing our customers everywhere, and we’re confident that we’ll continue to outperform our peers and deliver profitable growth for these reasons.

Our ability to gain market share in the fractured home furnishings industry. The strength of our in-house proprietary design, the competitive advantage of our digital first, but not digital only channel strategy. The ongoing strength of our growth initiatives and the resiliency of our fortress balance sheet. With that, I’ll open the call for questions.

Operator: [Operator Instructions] And of Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Q&A Session

Cristina Fernandez: Hi. Good morning. I wanted to see if you could expand on the demand you gave a good amount of color, but it’s the consumer still focused on, I mean, full price selling and how are you conveying value to the customer in this environment?

Laura Alber: Thanks, Christina. You know, it’s been since Labor Day last year where we’ve seen choppiness in our demand across, you know, brands, channels, categories. You know, it’s no wonder because of the [Technical Difficulty] housing higher rates, job loss, it does make the customer more cautious. However, it is clear that the customer is still spending and our portfolio of brands, our omni platform, and our positioning allows us to compete better than our competition. We can serve our customers across a wide range of price points, product categories, and aesthetics. And while we are seeing softness in our furniture business, we are also seeing quite a lot of strength in our high-end electrics and kitchen business. And so there’s areas where we are shifting our focus, particularly in our marketing.

Customers are interested in easy updates for their health. They are entertaining at home. They are cooking at home, and they are buying gifts. The recent news about some of the large scale retailers like Bed Bath and Beyond, you know, going out of business gives us a wonderful opportunity to pick up even more market share. There’s a lot out there that they serve, whether it be dorm or baby and wedding registry that are areas of focus for us, but are really going to be exaggerated now that we see the opportunity. So we are seeing some subdued areas. We also see that they are buying at full price the things that they are really looking for that are unique. And that gives them the ability to update their home, which is so important to them, without making that very large scale purchase.

Cristina Fernandez: And then as a follow-up on the revenue guidance for the year, if the environment stays the same, I guess, how are you thinking about specific either brand merchandising initiatives or she commented market share gains from Bed Bath that would allow you to, you know, to hit the guidance range you [Technical Difficulty] you maintain today.

Laura Alber: I’m going to start by letting Jeff talk about our approach to the guidance range.

Jeff Howie: Thank you, Laura. So we recognize that there’s still uncertainty in the macro and the consumers becoming increasingly cautious. As I said in my prepared remarks, if we extrapolate our two and four-year trends in Q1, it lands us within our guidance range. And we’ve talked a lot about how the first-half of the year is going to be materially tougher, especially on the top line, we’re up against last year’s more higher demand comps in the back order fill. But the back half, it’s a different story. Where our demand really started to decelerate last year after Labor Day. And that’s where some of our headwinds right now should become tailwinds. On the respect to things like Bed Bath and Beyond, that’s an area where we continue to believe we gain market share.

It’s clear to us we’re gaining our share of the Bed Bath and Beyond volume progress. For example, and the Williams-Sonoma brand were picking up share in kitchen electrics and registry, and kids were picking up share from buybuy Baby, those customers want certainty when decorating their nurseries and know that the store they’re buying from will still be there in a few months. And in teen, we’re seeing an early benefit in dorm that we anticipate will ramp as we hit the back to school season. Bottom line is we think we’re positioned to — well position to gain market share in this fractured home furnishings industry with our in-house design, our digital first, but not digital only channel strategy, and our strong and stable portfolio of brands.

Cristina Fernandez: Thank you.

Laura Alber: Thanks, Christina.

Operator: Your next question will come from the line of Max Rakhlenko with TD Cowen. Please go ahead.

Max Rakhlenko: All right. Great. Thanks a lot. So first, just staying on the reiterated guidance for top line, how much breathing room do you think that you’re giving yourself for second-half of the year especially, I think you said demand comps was down 10% in 1Q and then B2B is also softening?

Jeff Howie: Good morning, Max. We — like I spoke to in the last question in my prepared remarks, when we extrapolate our two and four-year trends in Q1, that lands us pretty squarely in the guidance range. And so if you think about what that range could be, very specifically, our two-year trend in Q1 land is at the low end, but our four-year trend, which has been very consistent over Q1, landed between the midpoint and high-end of guidance, so looking at that, combined with opportunities we have in the brand, what’s happening in the market with people exiting like Bed Bath & Beyond, Some of the smaller players who don’t have the balance sheet to withstand some of the current pressures, we see there’s opportunity for us to gain market share.

Max Rakhlenko: Got it. Okay. Fair enough. And then can you speak specifically to product margins in 1Q how they look compared to last year in pre-pandemic and the key drivers there? And then just how should we think about gross margin cadence for the remainder of the year. And how much of the pressure from second-half of last year, do you think that you can get back this year versus some of that continuing into next year?

Jeff Howie: Yes. I think if you take a look at it, we don’t break out product margin separate from our selling margins. But if we look at it all together, selling margins were down 350 basis points driven by lower merch margins and higher shipping costs. As we’ve been talking about for several quarters, our merch margins reflect the full impact of the capitalized cost on our balance sheet from higher product costs, ocean freight, the tension and demerge that are now flowing through our income statement. And on the selling margins, it continues to reflect the additional costs we’ve incurred shipping multiple items to customers as I’ve enumerated. When we think about it in terms of the back half, it’s really what we keep talking about in terms of headwinds and tailwinds.

We quantified in the call that altogether, these incremental short-term costs accounted for over 300 basis points of the 350 basis points decline in our gross margin, as well as our selling margin. So, we see that in the back half — the main point is we’ve been guiding that we have near-term cost pressures that are a headwind. But in the back half, this will become a tailwind as we look to the back half of ‘23 and into ‘24.

Max Rakhlenko: Got it. And then just maybe more specifically on promos, curious how those look, both versus last year and then pre-pandemic levels?

Laura Alber: We are maintaining our stance on not running site-wide promos and only marking down things where we have a little bit too much inventory. And we are comped in our current Memorial Day promotion that we’re running this year. We do that, I’d say, quarterly to reduce our overstocks and keep our inventory as clean as possible. and you’re going to just continue to see us take markdowns where we need to.

Max Rakhlenko: Okay, great. Thanks a lot. Best regards.

Laura Alber: Thanks.

Operator: [Operator Instructions] Your next question will come from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Good morning, everyone. Hi, Laura. Hi, Jeff. I wanted to ask first about the 14% to 15%. I know it said above 15% in the long-term guidance. Can you talk about the path and how much you’ll protect that especially if we see a weaker consumer continue through the back half of the year? Are you intent on protecting this number through cost efficiency, et cetera? Or could we see that dip below and then a return back to some of the longer-term ranges?

Laura Alber: Good morning, Simeon, thank you for the question. You know, I love talking about operating margin. We are very confident in our guidance for fiscal year ‘23 at 14% to 15%. And — if you take a look at where it’s coming from in terms of our SG&A leverage, we are very focused on our cost control, managing our employment expenses, which we can flex with sales and managing our advertising costs, which you can see in Q1, we leveraged to drive the SG&A leverage there. And if I think about the back half of the year and where we’re headed, we’ve quantified that of the 350 basis points decline in selling margin year-over-year, 300 basis points of that we attribute to the short-term supply chain costs and efficiencies we’ve been talking to.

That gives us a lot of room and a lot of confidence to be able to hit the 14% to 15% guidance. And then we throw on top of that, the restructuring charges we took in Q1, which should add $40 million annualized to fiscal year ‘23, which only a small portion of which actually hit in Q1, that adds another, say, 45 basis points, 50 basis points to our opportunity to hit the 14% to 15%. So bottom line is we feel confident in our 14% to 15% guidance for fiscal year ’23. And we think longer term to the 15% operating margin floor, we think that our Q1 results provide the building blocks, so everyone can see how we get there, especially when you take a look at the occupancy and SG&A leverage, versus 2019, and that’s evidence of our structural change because of our higher e-com mix and our retail optimization strategy.

Simeon Gutman: And if I’m allowed to sneak in a follow-up, did you — can you quantify backlog at all? I think you helped us talk about it last quarter, I think, and you help frame the year for us.

Jeff Howie: Yes. In terms of the backlog, the backlog is normalized. It’s not necessarily a factor like it’s been in 2021 or ’22, so we — as we said on our Q4 call, the backlog is pretty much normalized. At this point, it’s not a factor in terms of our results.

Operator: Your next question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom: Hey, thanks. Good morning. Clearly, on the SG&A side, you’re doing a great job controlling what you can control. But the home category in itself is really rebased much higher than 2019? And I guess I’m just curious what gives you the confidence that the category doesn’t continue to mean reverts. So when we get into, say, ‘24 or maybe even ‘25, some of these sales issues persist?

Laura Alber: Thanks, Chuck. I think the first thing to remember is that the category is very fractured and very large and no one company owns much share. And so companies like ours that are positioned to take share will continue to win. Customers still spending. They love their homes. When I talked to you last, the housing was down 37% last year, it’s now down 22%. It’s gotten a little bit better, but we’re certainly not counting on that. The reality is that the cycle of how they purchase is in phases. Some people are in their home for a lot of our customers, mostly in their home for a year, but a lot of them have been in their home for over three years, right? And there’s a large group that’s been in their home for more than 10-years.

And these are all opportunities for remodel update decorate. You don’t have to just redo the whole house to come shop with us, because we sell so many other things. We sell pillows. We have frames for those brad gifts that you’re all looking for. We are showing you beautiful table scapes, the gift giving, the babies, all those life stages are embedded and they’re real pieces of our business. And so it’s not just about that movement to buy a new house and buy everything in it. And people love their homes. There’s no question that it’s on everyone’s mind still. And I think they’re just very cautious right now to buy the big ticket. And — they are still shopping, as I said to you before, we can see it in so many of our categories where they’re coming to us — we have newness, whether it’s LoveShackFancy or some of the new bedding products in Pottery Barn.

We have that high fashion newness that we’re so good at, that’s exclusive. They definitely purchase and they’re purchasing at regular price.

Chuck Grom: Okay. Great, that’s helpful. Thanks, Laura. And then just for Jeff, I mean, clearly, the math on the two and the four-year stacks are correct, and you would be within your guidance. But I guess I’m curious on the demand comp. Your comments about the consumer becoming increasingly cautious. If the trend line in that demand comp changed at all as we progressed throughout the past couple of months and into May?

Jeff Howie: So our demand trends have remained consistent. They did on the — one and two-year they did.

Laura Alber: It’s really choppy.

Jeff Howie: Yes. But the one and two-year did decelerate across Q1, but the full-year was remarkably consistent. So when we look at these trends and we extrapolate them forward, both on the demand side and the net side, we feel it supports our guidance that we’ve given, as I outlined in the call.

Operator: Your next question will come from the line of Anthony Chukumba with Loop Capital Markets. Please go ahead.

Anthony Chukumba: Good morning. Thanks for taking my question. Just had a question about GreenRow. Obviously, it’s super, super early, just launched the brand next week, but I would love to just get some perspectives in terms of the way you think about positioning GreenRow. It looks like it’s a lot of furniture. It looks like it’s Heirloom like more traditional furniture. But how are you sort of thinking about that? And obviously, once again, super early, but dream the dream in terms of the long-term opportunity there? Thanks

Laura Alber: Thank you for bringing that up, Anthony. We’re very excited and proud of what we’ve done on GreenRow. We are very focused on sustainability across all of our brands, but we thought it was time that we really approached a brand from the beginning with that as one of the primary things that we’re doing. And so we are able to use all that we know to build an assortment that is both completely sustainable, but also really beautiful and differentiated in the market. Many times, when you think about sustainable products, you think about neutral, very basic products. You don’t think about fashion, and GreenRow has both, it’s colorful, it’s optimistic. It’s — I would say, Vintage-inspired, European inspired, and we are giving a range of products from table in to furniture, very carefully selected built to last.

It should be the last table that you buy. It’s — the product is high quality, durable and beautiful. And I’d say in terms of white space, the aesthetic is definitely more feminine than our other brands. And just like there are so many different types of music and new songs that come out as best sellers we knew that there was — there’s always opportunities for new brands, and we’ve been good at starting them. Most of our business today. We’re internally started brands. And so while it’s going to be very small, it is significant for a while, we’re optimistic, and it’s an example of innovation at Williams-Sonoma, Inc.

Anthony Chukumba: Got it. That’s helpful. And then a quick related follow-up. So you’ve talked in the past about the fact that as access to easy money has dried up a lot of these smaller DTC brands, these ankle biters, I believe is the term that you’ve used, you’re seeing more like inbounds where they’re trying to sell to you or maybe they’re going away. I guess any change that you’ve seen over the last few months in terms of what’s going on with the ankle biters?

Laura Alber: Yes. I mean they’re certainly having a tougher time. And we’re seeing it in all the ways you mentioned, whether it’s people looking for an exit or site-wide promotions. We can see that some of them are buying less ad terms than they were previously, and not enough innovation. I mean, this innovation piece is really key to the future. And so they may have had a product or an idea that was very good a couple of years ago, but they can’t keep up. They’re falling behind. So it’s a real opportunity for us. None of them — put them all together and it’s a part of the market and I think some of them will make it, but most of them will not.

Jeff Howie: Yes. I would just jump in and say I think this is a competitive advantage for us in the marketplace that is going to come — potentially come under some pressure, where our fortress balance sheet will enable us to withstand these pressures that many of these small competitors were not. And so we’ll just continue to pick up market share as they run into trouble.

Operator: Your next question will come from the line of Oliver Wintermantel with Evercore ISI. Please go ahead.

Oliver Wintermantel: Yes, thanks guys. I had a question regarding B2B. I think, Laura, you said it was down 7% in the quarter, but then contract was up mid-double-digits. Can you explain the difference there? What drove that up mid-double digits? And then trading must have been down, obviously, a lot worse than the 7%.

Laura Alber: Yes. Thank you. This continues to be an area that we’re very excited about, and we’ve seen continued success in driving large project growth including it was our largest quarter history to-date for our brand standard and annuity programs. Our contract business has maintained an accelerated growth trajectory, most notably this quarter in hospitality, multi-residential mixed use, along with increased engagement from the commercial sector. Although the trade business has softened over the last few months, we are starting to see signs of volume building back in our designer business, and we are confident in our ability to compete for this business, and we continue to take share while maintaining a very, very strong focus on growing our contract project pipeline, which is really where we want to increase the penetration over the future. Jeff, do you want to add anything to what I…

Jeff Howie: Yes. I think it’s always helpful to dimensionalize with some of our notable wins in the last quarter. So with Marriott and Starbucks, both names everyone knows, we saw our best quarter ever. They both logged triple-digit growth. In our residential developer business, we continue to expand our portfolio with key industry names, such as [Indiscernible] Pulte and Lennar. We completed office projects with Salesforce, Dan’s Corporation, Republic Airways. In the stadium space, we helped Auburn University update their Gameday suites. And we’re getting traction in some of our newer industry segments like cruise, where we partnered with Celebrity Cruises to furnish some of the departure lounges and continue to build out our book of business in the space. The key point here is B2B continues to be a winning strategy for us, and we continue to capture market share in this $80 billion fragmented market.

Oliver Wintermantel: Got it. And then just as a follow-up, when I hear your commentary there, the — on contract, that mid-double-digit, it sounds like it should continue to grow nicely, but the trade should recover. So should we — for the rest of the year, in other words, should we see that negative 7% to improve throughout the year?

Jeff Howie: We don’t guide B2B specifically across the quarters, but we do continue to expect B2B will aid our comps throughout the quarter. And it’s all baked in to throughout. Thank you, thank you, Laura. And it’s all contemplated in our annual guidance.

Operator: Your next question will come from the line of Seth Sigman with Barclays. Please go ahead.

Seth Sigman: Hey, everybody. Good morning. I wanted to follow-up on the shape of demand. So there was clearly a step down in Q1, maybe even within Q1. But I wanted to confirm, based on an earlier comment that it sounds like you’re seeing some stabilization. I don’t know if that was late Q1 or a Q2 comment, but maybe you could just clarify that? And then the second part of the question, it’s more about visibility into some of the specific operational drivers that you have that I think you’ve embedded in the sales outlook for the year. Maybe you could just elaborate on where you are with respect to some of those, thinking about rebalancing inventory, improving delivery accuracy, maybe reducing some of the concessions. I think you’ve built some of those into the sales outlook. So where are we with those today? And how important are those for the outlook?

Laura Alber: Sure. It’s Laura, and then I’ll let Jeff add some more detail. So as I said, we’ve seen choppiness since Labor Day. So the consistency is the choppiness. And when we look at the balance of the year and we take into consideration our opportunities by brand and the fact that Williams-Sonoma becomes a bigger part of the mix in Q4. And then we run our two and four- years, Jeff, when we get to our guidance range. But there’s a lot of other things other than just sales that are extremely important. And there’s a lot of opportunities even in the short-term. And the biggest one of all is customer service. The pandemic was a time where supply chain was very disrupted. Products were late — very late. We had to repeatedly tell customers that they weren’t getting things and that cost us a lot of money and a lot of credibility with our customers.

And during this time, we have been working so hard to improve our service levels and return to world-class service, which has always been a key tenet of who we are and why our customers come to us. And I’m pleased to tell you that we are already seeing significant improvements in on-time delivery, which is a key part of customer satisfaction. Customer service is also a profit driver, so Jeff went through some of the areas where we’re going to see natural improvement just because we’re lapping high cost from last year. But what we haven’t quantified is the — all the costs that are embedded that were wastes, that will improve our operating margin. So while, yes, the top line is subdued, we have opportunity to build for the long-term and ensure that we deliver a very profitable business while others really suffer.

And over time, you’re going to see us be one of the strongest players, I believe, in the industry.

Seth Sigman: So then — that’s really helpful. So I guess, one follow-up would be just around the sensitivity in the financial model, right? Obviously, top line is under pressure, but that’s not the only thing that matters, right? And so how much have you built in here? How much can sales potentially flex lower while still achieving the margins and EPS that you laid out here based on some of those drivers?

Laura Alber: I think Jeff has already answered that question. I think you saw us — I know you saw us deliver a higher operating margin than expected in Q1. And with, I think, lower sales than most people’s model showed, and that is because we’ve always been very disciplined. We are aggressive about finding efficiencies and cutting costs but also our platform and our omni positioning allows us to flex more than others. We’ve been doing this for a while. We went through the downturn and we came out stronger. And so I would tell you that our track record versus me just saying I’m confident, our track record shows you that we are able to produce even if the top line is more subdued.

Operator: Your next question will come from the line of Anna Andreeva with Needham. Please go ahead.

Anna Andreeva: Great. Thank you, so much and good morning, guys. Two quick ones from us, keeping in mind that it’s volatile out there, like you’ve said. Just curious on what are you seeing with demand so far in the second quarter? I think you mentioned the Memorial Day promos are being planned similar to last year’s levels. Can you talk if you’re still seeing the consumer come out for events? And then secondly, on the $40 million in cost reduction I think you said some of it affected the P&L already in the first quarter. Just any color on how we should think about those savings as we go through the year?

Laura Alber: Yes. Thank you. We’re really early in the quarter, couple of weeks in here versus when we talked about after Q4, we were more — we’re further along in the quarter. So I wouldn’t read anything into — I wouldn’t make any comment about at least a couple of weeks into the quarter. I did mention we’re seeing softer sales in furniture and outdoor seems to be following a later curve than it did obviously in the pandemic where people bought it earlier. We are seeing strength in our textile decorating business, gift giving, kitchen business. And so all those were covered in my prepared remarks. And when we think about the back half of the year, we’re going to continue to build on those strengths, both in marketing, but also as we think about West Elm, the opportunity to add more assortment in gift giving and also in entertaining for the more modern customer, you will see us do that this fall and holiday season with some more newness in those categories, which I think was a really good strategy to do that because we’re seeing that that’s where the strength is in the business.

Jeff Howie: And Anna, in respect to your question on the $40 million in savings, our cost-cutting measures happened in phases across the quarter, both domestically and internationally. And because of that timing, only a very small portion of the $40 million actually booked into Q1. So the majority of that savings will be recognized over the next three quarters. So that is factored into our guidance, but it gives us additional confidence in the op margin guidance range we gave of 14% to 15% for 2023.

Operator: At this time, I will hand the call back over to management for closing remarks.

Laura Alber: Well, thank you all for joining us. I really appreciate all the great questions, and I wish you all the best over the summer. Looking forward to talking to you soon.

Operator: That will conclude today’s meeting. Thank you all for joining. You may now disconnect.