Williams-Sonoma, Inc. — 2022 Q4

[Indiscernible] hear me?

Yes, sorry, I'm answering it. Can you hear me?

Okay. No problem. I was saying that the stack on the 2 compares. Actually, West Elm stack is a little greater than the Pottery Barn stack. That being said, Pottery Barn has a wider range of products than West Elm does, and they had a very, very successful seasonal assortment. So that was one area of variation. But also, there are some nuances in the psychographic and demographic of the West Elm customer. And we keep looking at all of this customer data to understand it because any change creates opportunity for us. And we keep looking at how do we better position ourselves for this inflection point where consumers are more uncertain.

Good morning, Anthony. B2B is one of our most exciting growth initiatives, as you know, and we finished this year just shy of $1 billion, growing 27% in the 1 year and 166% on a 2-year. In terms of where we see next year, it should continue to be accretive to our comps, probably in the neighborhood of about 100 basis points to our comps in '23. There's some really exciting things going on in B2B.

Maks, well, here's what we're seeing as we anticipate continued choppiness in demand and ongoing macroeconomic uncertainty. Certainly, the events of the past week don't help. And all of this is reflected in our guidance, which contemplates a wide range of outcomes. As we said in our prepared remarks, the first half of the year will be materially tougher. On the top line, our year-over-year demand comps and last year's high back order fill, coupled with the declining macro, is likely going to yield negative comps, as we will see our toughest headwinds on the top line. And we'll also see headwinds on the bottom line as we continue to see gross margin pressure as we did in Q4 from the higher input costs, we've all talked about sitting on our balance sheet and as they amortize in our P&L as well as our ongoing incremental shipping costs to service our customer.

Sure. Look, we've expanded our op margin by almost 900 basis points since 2019 as a result of our growth initiatives, our channel strategy and our cost discipline. In the near term, as we've guided and I just talked about, we have some short-term cost pressures that will be a headwind through the first half of '23, but then become a significant tailwind in the back half of '23 and into '24 that gives us confidence in the sustainability of our margins.

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 3 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.

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.

Let me just add to that. We've been here for a while, Jeff and I, and through the pandemic and also the 2008 recession and with many levers we can pull, as he 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.

I had a question on demand. I wanted to see if you could provide some color on what -- I guess, what is the consumer responding to what is doing better and what is worse? And I was particularly interested in categories like furniture which is just the core. 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?

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 on gear.

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 deleveraging both?

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.

Hello, Marni, good morning.

Yes, we can hear you.

Thank you, Marni. So let's begin with collaboration. It's interesting. As much as we have our own in-house design team, we know that there are so many incredible designers out in the world doing adjacent things, sometimes in different categories. And our Kids -- our Children's business actually taught us the importance of collaborations as we recognize that children love Star Wars and Harry Potter and all those things and to not give them that when they're young seems like a little miss. So we had for years been working on all of those kids collaborations and then started to bring in other collaborations in our adult brands.

Fortunately, what B2B does is it leverages all of the resources we have as a company, our in-house design team, our global sourcing organization, our supply chain team as well as our merchandising and inventory team. So we're able to keep this team pretty tight. There is a dedicated team that works with the contract space and customer service to make sure the larger orders are taken care of.

Yes. Thank you all for joining us and look forward to talking to you next time. Goodbye.