Williams-Sonoma, Inc. — 2023 Q3
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions]
Good morning, and thank you for joining our third quarter earnings call. I'm here this morning with Laura Alber, our President and Chief Executive Officer; Jeff Howie, our Chief Financial Officer; Yasir Anwar, our Chief Digital and Technology Officer; and Felix Carbullido, our President of the Williams-Sonoma brand.
Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q3 results, I would like to take a minute to thank the incredible team at Williams-Sonoma, Inc. for another quarter of great results. Without their hard work, dedication and focus, none of the results we are reporting today would have been achievable.
Thank you, Laura, and good morning, everyone. As Laura said, we're proud that, once again, we've delivered earnings substantially exceeding expectations.
first, our steadfast commitment to maintain price integrity and not run site-wide promotions; second, how our earlier supply chain cost pressures will become tailwinds in the second half and beyond and third, our ability to control costs and manage inventory levels. Our strong profitability this quarter, despite softer top line revenues, demonstrates the durability of our operating margin.
First, we are well positioned to maintain our price integrity as we proactively manage our inventory levels in line with our demand trends; second, going into the holiday season, our in-stock levels are near historical highs, and our regional inventory balance and composition is well positioned; third, our Q3 ending inventory levels are up only 11% versus same period in 2019, and that's with revenue comps of 34.8% over the same time frame. This discipline highlights how we've improved both our inventory efficiency and turnover.
our ability to gain market share in the fragmented 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] Our first question will come from the line of Chuck Grom with Gordon Haskett.
The compression in your top line in the third quarter and the implied slowdown in the fourth quarter really isn't all that surprising given the backdrop today. But at what point do you run the risk of losing market share or mind share by not engaging? And then as a follow-up, gross margin control was actually more impressive. Can you talk about the drivers there and the sustainability into 2024, particularly on the supply chain front?
Chuck, why don't we start with the last one, and I'll talk about gross margin, and then I'll turn it over to Laura to talk about our promotional posture.
first, our lower ocean freight from rate normalization flowing into our income statement; second, supply chain efficiencies, including lower out-of-market shipping, fewer multiple deliveries per order and decreased returns, accommodations, damages and replacements; and third, reduced promotional activity as we focused on full-price selling and maintained our price integrity.
Chuck, so I don't think we should think about gross margin as a trade for share. The two are not necessarily as correlated as one might think. In fact, it's not clear that people who are running more promotions are going to gain more share, especially long term. And for our target customer, we are confident that we are gaining share. And at the high-quality, regular price customer is the one that we best serve given what we do with brands.
Okay. Great. And then can we just talk a little bit about like-for-like SKU pricing today relative to 2019? I know there's been a lot of improvements, but if you finance that are actually like-for-like, where do we stand today relative to back then?
That's a good question, Chuck. I didn't expect that one. So 2019, well, it was a long time ago, it's hard to remember. We took some price increases during the pandemic, as you know. And a lot of them have stuck and some we've backed off. And we've also gotten a lot of vendor price reductions, which is a great thing to see. And we've used some of those to reduce prices to our consumers so that we are very competitive with our value quality relationship.
Your next question will come from the line of Cristina Fernández with Telsey Advisory Group.
Congratulations on the profitability. I wanted to ask on promotions, Laura, your comment that you were less promotional than a year ago. I know you've pulled back from the site-wide promotions a while back. So where -- I guess, where are you lowering promotions? Is it clearance? Is it other items like rewards, et cetera? It would be helpful to understand that trend.
Yes. Thank you for the question. We've, in fact, pulled back promotions both sequentially this year and versus last year. And we've pulled back in -- we took away all up-down pricing that was site-wide. The site-wide promotions have been gone. We also did remove e-mail overlay, all those hidden promo tactics that other people use, coupon matches, double points, we don't offer any of those. But the level of clearance and promotions during our sale periods, which we call warehouse sales, is also lower.
Our next question will come from the line of Peter Benedict with Baird.
I guess just maybe can you expand a little more on retail optimization, where you stand in that process, what's still to come. Jeff, you mentioned the occupancy cost down slightly year-over-year in the third quarter. Is flat to down something that's sustainable in that line as you think into 4Q and then into '24? That's my first question.
Peter, we continue to operate a world-class retail business, and our stores serve as billboards for the brand and operate as profit centers. They're beautifully designed and curated with aspirational assortments, and we believe we will continue to serve as a competitive advantage.
Well, good. Nice to see my recent visit to the Westport store showing up in the numbers there, I guess.
Thank you for your business, Peter.
Yes. Not exactly. So next question just would be around the cash balance, obviously, it continues to rise. You've slowed the buyback here of late. Just curious, is this just prudent caution given all the macro pressures, the risks that are out there? Or is there something more strategic that's maybe at play here in terms of building the cash balance?
Yes. Peter, as you know, we don't commit to a consistent cadence of share repurchases. We do remain committed to driving long-term shareholder returns, and will opportunistically buy back stock and drive shareholder returns.
Your next question comes from the line of Max Rakhlenko with TD Cowen.
Congrats on the nice quarter. So first, Laura, how are the brands performing against your own internal expectations? And which brands do you view to have the bigger opportunities to take market share from some of your struggling or closing peers?
It's a great question. We are disappointed in the top line performance. As you know, in most of our brands this year, except for our emerging brands, we've seen slower-than-expected furniture performance. That said, we've seen really strong seasonal performance, and these life stage businesses in certain categories are better than expected. So it's a big change for us that we've really focused on and made the shift into quickly with our marketing and our inventory purchases.
Sure. I don't want to give away too much of our winning formula, but it includes curating the best products out there, right, inspiring customers how to use it, offering it in their channel of choice, whether it be online or in-store. I think some houseware brands offer products that don't inspire, and some inspire but don't have 150-plus stores and a great website to purchase from. As Jeff said, our beautiful stores, our well-trained and passionate store associates, our inspiring catalog and our multidimensional website are competitive advantages I don't think anyone really has.
And then as you look at our other brands, both the big ones, both West Elm and Pottery Barn, we have shown this year that there's areas within each brand that are very underdeveloped and where there's sizable opportunity from accessible furniture for Pottery Barn and dorm to -- in West Elm, filling out the modern accessory textile piece, which we haven't addressed and also more modern seasonal assortments. That's a big opportunity and one that has never been built. So we see us being able to pick up share in those two brands in specific categories.
That's great. Super helpful. And Jeff, I have to ask you a margin question. But when we think about the updated margin guidance, is there anything in it that makes you think that you can at least hold it as we think ahead, especially once you start to leverage fixed expenses on top line growth?
As I said in the answer to Chuck's question on gross margin, we anticipate that the results we saw in Q4, the tailwinds I've been talking about will continue -- I'm sorry, the results from Q3, the tailwinds I've been talking about will continue into Q4. These are pretty strong tailwinds. I talked about the impact of ocean freight, our supply chain efficiencies and our full price selling.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
This is Zach on for Simeon. On your view for top line, do you think this year will be the bottom? Your updated guidance implies an underlying deceleration in the fourth quarter across stacks. So do you think that the trends could inflect in '24?
We'll talk more about next year after we get through the really important holiday season. Right now, that's where our focus is. And as Laura just touched on, our primary objective in '24 will be to drive both growth and margin, and we'll balance the macroeconomic certainty with our long-term growth potential. But we'll talk more about that in March.
Our next question will come from the line of Anthony Chukumba with Loop Capital Markets.
Let me add my congratulations as well on the strong profitability. So you talked about introducing a larger ordering of new products at mid-tier and lower price points. And then you talked specifically about Pottery Barn introducing some of those products.
Thanks, Anthony. The margin profile is the same as the rest of our products. So it's not that they're lower at all, in fact, they're great margins. And we've done the same thing also in West Elm. And you're going to see us West Elm, which I'm really excited about, continue to have more and more newness sequentially. So for fall, you might have heard in my prepared remarks that we had some just superb winners in the furniture assortment.
Your next question comes from the line of Jason Haas with Bank of America.
So I wanted to also ask about how you're thinking about the trade-off between comps and margins. I'm curious if you think that you could have driven gross profit dollars higher this year if you had used more promotions. Or do you think that, that wouldn't have actually driven the gross profit dollars higher?
Yes. Jeff and I are fighting over your question. I would say it's both short term and long term. It's not clear as reducing prices drives more. If you have less people buying furniture, you just reduce the price 20%, you get 20% more people buy it just to be even, right? So you may think you're doing something, it's what retailers do, they mark stuff down when they want more sales, and it's not necessarily the case. In fact, we've done a lot of testing up and down to see where that sensitivity is. So that's one.
That makes sense. And then as a follow-up, I was curious to ask about the West Elm performance in particular. It's good to see Pottery Barn and Williams-Sonoma performing well, both on a year-over-year basis and then also versus 2019. That used to not be the case, where previously, you'd see West Elm as the stronger performer.
Sure. There's no doubt that the metrics -- the makeup of the West Elm business makes it more vulnerable to the external, right? You mentioned it. The younger customer, the less-affluent customer, the higher furniture, the less-developed seasonal business or less-developed decorative and textile business, those are all factors in the West Elm underperformance.
Your next question comes from the line of Brian Nagel with Oppenheimer.
So first off, I too, would like to add my congratulations on your continued profitability beats. So the question I want to ask, and I know it's a bit of a follow-up here, but just with respect to just the overall promotional environment. So I'll ask maybe a couple of questions within this question. I mean, one, as you're monitoring the environment and the actions of your competitors, is it -- if you look at the promotions that have accelerated, do you believe this is more temporary, either backdrop-driven, clearance-driven? Or is this the kind of the return to levels we saw pre-pandemic?
And there's still plenty of things on sale because we clear products. So you can find -- if you're a promotional shopper, you can find sale prices on our websites for sure. So let's not pretend we don't have any. It's just that the quantity of those is so much lower than it's been, it's so much lower than our competitors. I don't like to name people by name, but we have scrubbed everybody's websites. And look at them, and they're littered with -- I mean, in some cases, it's 80% red lines, 100% red lines of some really good names out there.
No, that's very helpful. If I could ask just a follow-up, unrelated. But with regard to -- again, gross margins, I mean, now we're seeing the benefit of moderating shipping costs. And recognizing that there's a lot of accounting noise in how these costs are capitalized but -- I guess, Jeff, maybe this is more for you, but I mean, how long will this dynamic prove a tailwind for gross margins for Williams-Sonoma?
Look, we've certainly said in the call that it will continue into Q4. And previously, I've said it will continue to be a tailwind into 2024. But we're starting to hinge on 2024 guidance, which we'll address in March. But meanwhile, we're really laser-focused on delivering our Q4 results with the all-important holiday season ahead of us.
I will now turn the call back over to Laura Alber for any closing remarks.
Well, thank you all. We really appreciate your time, and I want to wish you all a wonderful Thanksgiving, and a great beginning to the exciting and beautiful holiday season with your family and friends. We look forward to talking to you again after the New Year, and take care.
That will conclude. We thank you all for joining and you may now disconnect.