Williams-Sonoma, Inc. — 2023 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to the Williams-Sonoma, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions]
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.
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.
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.
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 to 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.
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 opportunities to disrupt. We have a culture of innovation and an experienced team who knows how to increase operational efficiency, control costs, deliver world-class customer service and drive new growth opportunities.
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 furnishing 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 floor.
our ability to gain market share in a 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.
[Operator Instructions] Cristina Fernández with Telsey Advisory Group.
I wanted to see if you could expand on the demand. You gave a good amount of color, but is the consumer still focused on, I mean, full price selling? And how are you conveying value to the customer in this environment?
Thanks, Cristina. It's been since Labor Day last year where we've seen choppiness in our demand across brands, channels, categories. It's no wonder because of the 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 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 as you commented, market share gains from Bed Bath that would allow you to hit the guidance range you laid -- you maintained today?
I'm going to start by letting Jeff talk about our approach to the guidance range.
Thank you, Laura. So we recognize that there's still uncertainty in the macro and the consumer is becoming increasingly cautious. As I said in my prepared remarks, if we extrapolate our 2- and 4-year trends in Q1, it lends 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 and the back order fill. But the back half is 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.
Your next question will come from the line of Max Rakhlenko with TD Cowen.
All right. Great. 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.
Max, we -- like I spoke to in the last question in my prepared remarks, when we extrapolate our 2- and 4-year trends in Q1, it lands us pretty squarely in the guidance range. And so if you think about what that range could be, very specifically, our 2-year trend in Q1 land us at the low end, but our 4-year trend, which has been very consistent over Q1, land us 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.
Got it. Okay. Fair enough. And then can you speak specifically to product margins in 1Q, how they look compared to last year in prepandemic 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?
Yes. I think if you take a look at it, we don't break out product margins 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 in 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.
Got it. And then just maybe more specifically on promos, curious how those look, both versus last year and then prepandemic levels.
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.
[Operator Instructions] Your next question will come from the line of Simeon Gutman with Morgan Stanley.
Laura, 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?
Simeon, thank you for the question. I love talking about operating margin. We are very confident in our guidance for fiscal year '23 at the 14% to 15%. 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'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. Can you help frame the year for us?
Yes. In terms of the backlog, the backlog is normalized. It's not necessarily a factor like it's been in '20, '21 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.
Your next question will come from the line of Chuck Grom with Gordon Haskett.
Clearly, on the SGA 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.
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 are 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.
Okay. Great. That's helpful. Thank, Laura. And then just for Jeff, I mean, clearly, the math on the 2- and the 4-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?
So our demand trends have remained consistent. They did on the -- 1- and 2-year they did...
It's really choppy.
Yes. But the 1- and 2-year did decelerate across Q1, but the 4-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.
Your next question will come from the line of Anthony Chukumba with Loop Capital Markets.
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 an 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.
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 a -- 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.
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?
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.
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.
Your next question will come from the line of Oliver Wintermantel with Evercore ISI.
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%.
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...
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 [ Related ], 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.
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?
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 the [ year ]. Yes, throughout the [ year ].
Yes, thank you. Thank you, Laura. And it's all contemplated in our annual guidance.
Your next question will come from the line of Seth Sigman with Barclays.
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.
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 2- and 4- years, Jeff, when we get to our guidance range.
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?
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.
Your next question will come from the line of Anna Andreeva with Needham.
Great. 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.
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 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 3 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.
At this time, I will hand the call back over to management for closing remarks.
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.
That will conclude today's meeting. Thank you all for joining. You may now disconnect.