Oliver Wintermantel: You mentioned the soft January, but now we are already 1.5-month into the first quarter. So you — pretty good outlook for the quarter. How did the first quarter performed so far? You said it’s — the first half is meaningfully lower than the second half, but maybe some details on how the quarter started would be helpful.
Jeff Howie: Good morning, Oli. So, our recent performance continues to be choppy and inconsistent, much like it was in Q4, and the macro environment is not helping, especially with the events in the past week. All of this is reflected in our guidance, which contemplates a wide range of outcomes. Here’s the thing we know. Our three key differentiators uniquely position us to capitalize on opportunities to take market share in any environment. So, for us, it’s not so much about the macro. It’s about what we can do to take market share and drive profitable growth in our business.
Oliver Wintermantel: Got it. Thank you. And as a follow-up, you’ve done a really good job in the cost-cutting areas. How sustainable is that longer term? And what comp would you have to achieve to leverage SG&A?
Jeff Howie: Thank you. Yes, we’ve been very successful in managing our SG&A. I think it speaks to our operating model and our commitment to financial discipline and cost controls. We believe we can sustain our SG&A and continue to perform and manage those costs effectively. And our leverage comes from a mix of employment and ad costs. The majority of our employment is in our stores, distribution centers and call centers. So, we have the ability to flex the sales. And our advertising leverage reflects the agile performance-driven proficiency of our in-house capabilities, which, again, as I mentioned in my prepared remarks, I think is an underappreciated competitive advantage. So, our SG&A leverage shows the flexibility of our operating model, our commitment to financial discipline, and our ability to control costs in any environment, which we’re confident we can continue to do so in the future.
Laura Alber: I’d just add to that, we’ve been here for a while, Jeff and I, and through the pandemic and also the 2008 recession — and we have many levers we can pull, as you said. We certainly don’t want to be in this situation, but we’re one of the best positioned companies to weather any storm and come out stronger, and we’ve proven this time and time again. First and foremost, we have a tenured management team who’s been through it before. They know how to navigate this better than most. You know about our strong balance sheet that puts us in a much better situation than most. And then, we are not waiting to see a full blown recession. We are cost-cutting aggressively as we speak and pulling the levers that we have to set us up for more efficient operations, which, by the way, drives better service.
So, as Jeff mentioned, our supply chain costs have been under tremendous pressure and will continue to be because of the higher inbound and transportation costs of last year. And we do continue to incur additional costs resulting from servicing our customers. But these costs will come down, and they will serve as large tailwinds. Our service has improved. We’ve normalized service. We’ve normalized back orders, but it is not where we want it to be. Our standard is much higher. It’s a level we’ve never seen before. And we’ve been investing in our supply chain so we can reach that level, and that will yield a lot of improvements in margin for us. Also, remember, inflation affects vendor costs. And we have been seeing higher costs across the board from our vendors and suppliers from higher raw material costs, higher labor costs, higher fuel.
But the reality is it’s changing. And we are starting to mitigate these expenses and seeing the costs come down from our vendors. And then also, we mentioned our channels and how — what our competitive advantage is. I mean you see people with large e-commerce businesses, but no stores. You see people who have enormous stores, but they really don’t invest much in e-commerce. And we know that the multichannel shopper shops more and it’s experience they’re looking for, they can research online and go sit in the sofa in the store. And as I said earlier, we’re expanding what we do in these stores and using them differently. And this is a big advantage for us. We’re actually able to better turn our inventory because we can ship it from the stores and people can pick it up in store.
And we’ve also been, as we said, looking at our ad costs and looking at how we can ramp down with immediacy. And we’re able to do this because, as Jeff said, we have first-party data, we have hands on keyboards, and we are constantly investing in tech that helps us improve our ad costs. On labor, it’s important to note that we, unlike others, have been extremely cautious on backfilling positions when people leave. We did this in Q3 and Q4, and that has positioned us well in regard to labor cuts. However, we have restructured and rationalized some of our organizations to drive more efficiency because of the uncertain macro environment. And we know that this gives us a little head space as we go through the year and see — if we see continued choppiness through the first half.
Operator: Your next question is from the line of Cristina Fernández with the Telsey Advisory Group.
Cristina Fernández: I had a question on demand. I wanted to see if you could provide some color what — I guess, what is the consumer responding to what is doing better and what is worth? And I was particularly interested in categories like furniture, décor. I know furniture has been very strong over the past couple of years, but how does that typically perform in an environment of lower existing home sales and home price depreciation?
Laura Alber: Sure. It’s so early in the year to make any conclusions, and high ticket is very mixed from espresso machines to high end selling really well and then some softness in furniture. So, I don’t want to go too far into reading into this for the year because we see these things move around all the time. I mean, the good news is that with our portfolio of brands that serve both life stage and price points and aesthetics and scale, we have more durability than others who may not have that exciting Easter assortment that brings people into their stores or a baby assortment and gear. The trends on registry continue to be very strong. And as I said, seasonal, people are still going to celebrate the holidays and they’re still going to give gifts.
And I think there’s really not a lot of people set up better from a gift-giving perspective than Williams-Sonoma brands. On the — I know housing’s top of mind for all of us and especially the people on this call know that home sales have decreased 37%, but home values have increased 40%. And for most of our customers, home is their greatest asset. People love their homes. They learned how to cook in the pandemic. And now as they continue to cut back spending elsewhere, they realize that going out to dinner is really expensive. So, the dinner party is back in full force, and it’s an area that we’re really focusing on. The other dynamic just to remind everybody is, if you can’t move, what do you do? Eventually, you remodel. When you remodel, you buy new furniture.
So, those are some of the things that we are able to because of our portfolio of brands, think about, market to and build as we look at what we think is another inflection point with our consumer.
Cristina Fernández: That’s helpful. And then, the second question I had, more probably for Jeff, But in the 2023 outlook, just thinking about the gross margin versus SG&A, how to get to the decline for the year. It looks like you’re controlling costs. So, should we expect most of the decline to be due to the gross margin and those headwinds you mentioned in the first half, or would it be a combination of deleverage in both?
Jeff Howie: Thank you, Cristina. I’m glad you brought that up. So, we don’t guide to specific line items, as I think everyone knows. But I will say, as I said in my prepared remarks, our pressure will be on the gross margin line. And especially in the first half, as the capitalized cost of all the higher ocean freight and product cost detention and demurrage continue to amortize into our P&L. Those will become a tailwind in the back half of ’23 and into ’24. So that’s where we’ll see the pressure from a P&L standpoint in ’23. From an SG&A standpoint, as we’ve said, we continue to believe that we — our financial discipline and cost control will allow us to continue to manage that line effectively. So, we’re not going to guide the specifics, but I think that will give you a flavor of how we’re thinking about it.
Operator: Your next question comes from the line of Marni Shapiro with Retail Tracker.
Jeff Howie: Marni, are you there? Do we have Marni? Hello, Marni. Good morning.
Marni Shapiro: I’m here. I’m here. Hello? Hello? Hello?
Jeff Howie: Yes. We can hear you.
