Williams-Sonoma, Inc. — 2023 Q4
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to the Williams-Sonoma, Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.
Good morning, and thank you for joining our fourth quarter earnings call. Before we get started, 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 '24 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that these statements will materialize and actual results may differ significantly from our expectations.
Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q4 results, I'd like to acknowledge the accomplishments of the entire team at Williams-Sonoma, Inc. The results we are about to share with you today reflect their collaboration, innovation and dedication, and I want to give everybody on this team a huge shout-out and a huge thank you.
First, returning to growth; second, elevating our world-class customer service; and three, driving margins. Our growth will be driven by our business strategies in each of our core businesses, our B2B program, our emerging brands and our global business.
Thank you, Laura, and good morning, everyone. As Laura said, we're pleased to deliver a strong finish to fiscal year '23 with Q4 and full year '23 earnings significantly exceeding expectations. We delivered these earnings despite a challenging backdrop for home furnishings, pressuring our top line. Our strong profitability in this environment demonstrates the durability of our operating margin. Our results once again reinforced the themes we consistently communicated in 2023.
[Operator Instructions] Our first question will come from the line of Steven Zaccone with Citi.
Congrats on the strong margin execution here in a tough environment. So Jeff, first question for you. Can you talk a bit more about the margin assumptions in the 2024 guide in more detail. You gave the commentary about operating margin in the back half. Can you talk about gross margin in particular? How does that look on the cadence of the year?
Steve. Yes, on our gross margin outlook and our EBIT margin outlook, as you know, we don't guide the individual line items. We provide top line guidance and bottom line operating margin guidance. And the reason why it gives us the flexibility to react as we see trends evolve in the business and the different levers we can pull along the way. And as you've seen, as we did in '23, we know the levers to pull to deliver results. We see continued strength in our operating margin.
Okay. Great. Then second question for you, Laura. I was hoping to get more detail on the West Elm turnaround. You talked about some newness, and that's doing well. But how long do you expect the turnaround to take? And if we think about the performance of that brand relative to the overall guidance for the company, would you expect West Elm to still underperform?
Yes. I'm so excited about West Elm. I've had a chance to see all of the product that's coming in this year and their strategies. And I think it's a very clear, exciting growth story again for us. I think in terms of timing, it's always hard to predict exactly when things will go. But we are seeing, as I said, really strong results, not just in the holiday seasonal decor but the new product offer that's core. And the new design language that we've brought out, the new modern forms, we are building back our nonfurniture business, which drives customer engagement and also new customer acquisition and is very relevant and important for UPTs and repeat purchases. So that is on its way.
Your next question comes from the line of Seth Basham with Wedbush Securities.
Congrats on another strong quarter. My first question is just thinking about the 2024 outlook. Obviously, a lot of uncertainty with the environment and your revenue growth guidance reflects that. But you guys have been very good at managing costs. And if we were to see revenue come in a bit below your guidance, would you still be able to hit that 16.5% operating margin target?
Yes. So simply to answer your question, even if revenues were to come a little bit lower, we're confident in our operating margin guidance. There's additional levers that we can pull within the business if that were to be the case. But our outlook is a little bit more positive. We think we're closer to the end of the down cycle in home furnishings rather than the beginning. And we're focused on delivering results in our business. And I really think that we have opportunities to continue to improve what we're doing, and there's more things that we can do to drive earnings throughout the year.
That's helpful. And then secondly, it seems like there's been a little bit of a change in how you're approaching advertising. You're finding good opportunities to invest there. Can you give some more color there? And also, is that one of the levers you can pull if this top line doesn't play out the way you expect?
It's not a difference in approach. It's that when we see more opportunity, we invest more. And so we want to invest in advertising if we're going to get paid back. So we are looking at this every day, every week, every brand, and we're so lucky to have a test-and-learn methodology where we can try something in one brand. And if it works, roll it. And if it doesn't work, shut it down.
Your next question comes from the line of Jonathan Matuszewski with Jefferies.
Nice results. The first one is on B2B. Just curious how you're thinking about B2B in the context of your 2024 guide in terms of sales or comp? And relatedly, maybe if you could just update us on what you're doing to make that channel more profitable. It seems like you're doing a lot of good things on the consumer side to take costs out of the business in terms of less accommodations and damages, but curious, anything to make B2B more profitable? That's my first question.
Jonathan, we see B2B contributing about 100 basis points to our comp in '24, which is embedded in our guidance. Here's what's exciting. We're really optimistic about B2B growth as we look forward to '24. The business was up 1% overall in '23 with contract up 31%. And while the trade business has been more impacted by the slowed housing market, we've seen some recent improvement in that trend. However, we remain focused on accelerating our contract business, and we're really pleased with the momentum we're seeing. And here for us, it's really a growth story. Overall, B2B is slightly accretive to our operating margins. And we just see continued growth as we disrupt this $80 billion piece of our TAM.
That's really helpful. And then just a quick follow-up on your store fleet. Just maybe update us on the mindset regarding store closures. What's embedded in the 2024 guide? Obviously, a lot of leases up for renewal.
Yes. So really exciting story in our retail stores because we're very successfully leaving certain stores in certain areas and moving to vibrant centers. A great example is Annapolis. I don't know if you've been there, but we moved our WS right next to Whole Foods which is a really different strategy than your traditional retail placement.
Your next question comes from the line of Max Rakhlenko with TD Cowen.
Great. So first, Laura, can you just provide any more color on your comment that 1Q reads are strong. What brands are you seeing that in? And then just how are you thinking about what brands will lead the return back to growth over the coming quarters?
Sure, Max. We really do have a strong lineup of opportunities in our portfolio of brands, and we're really confident in our outlook. Some examples of things that are working -- we're in a color trend phase, and we're seeing print and pattern and color sell across the brands actually. Easter is strong. That's good. It's early. So Jeff is telling me to be careful with this comment because when it's early, sometimes it ends a little differently than you expect but so far so good and even shifted.
Got it. That's very helpful. And so the big update, I think, is the new long-term EBIT margin outlook. So I'm just curious, what are you seeing now that gives you confidence to raise it? And then as we think about post 2024, is that going to be more on gross margin or SG&A? Just curious where you see the big opportunities ahead to continue to march forward.
I think the way we think about it is at the start of '23, we established a 15% operating margin floor. And then year-end results, we delivered a 16.4% operating margin. And this year, we're guiding 16.5% to 16.8%. So we remain confident in our operating margin durability especially as we start to see our growth algorithm of mid- to high single-digit growth over the long term. So we're pretty confident in that. And we think that as we get beyond '24, we certainly have the upside to sustain these operating margins longer. In terms of the pieces of margin versus SG&A, we don't -- as you know, we don't guide those particular in the line items, especially over the long term. But on the bottom line, we've established that we can deliver these results, and we remain confident in both for '24 as well as the long term beyond that.
Your next question will come from the line of Peter Benedict with Baird.
So first one is just on kind of the supply chain environment. You guys have obviously been doing a great job on what you can control. I'm curious about the things that are maybe out of your control, some of the events going on, some of the costs on ocean freight. Just kind of remind us maybe where you sit there, how you may be baked some of that into the outlook here for '24? That's my first question.
Sure. Our team, our supply chain team, I'd say, is just phenomenal, and they continue to show that through the results. Although things have normalized from the pandemic, we still have a lot of areas for improvement, which will result in margin upside. We want to continue to drive down returns and replacements and any issue that affects the customer. We want a perfect delivery. We want to take all the friction out of that delivery. And so we're seeing incredible numbers across the board, on all those metrics I mentioned in my script.
Yes. No, very true. And then I guess my next question was around kind of the real estate, I guess, optimization process that's been going on for a while here couple of years now, maybe 10 to 15 stores lower year-over-year. Is that the cadence we should be expecting kind of going forward? And I'm just curious maybe how the occupancy cost growth is assumed for 2024, another year, maybe mid-single-digit increases, Jeff? Is that the way to think about it? Just trying to understand where you sit from that standpoint.
Yes. I mean in terms of where we are in our journey of retail optimization, we're probably in the middle innings. As I've discussed in the past, we have -- about 50% of our leases come due in the next 5 years. So we look to continue to optimize the real estate. And usually, we target a higher number of store closures, but they just tend to net out through the way the process works to about where we've been in the past few years.
Your next question comes from the line of Christopher Horvers with JPMorgan.
So I guess my first question is, as you talk about the optimism about the bottom of the market and the improvement quarter-to-date, I was just curious what you're seeing on the furniture side of the business. You mentioned some newness in West Elm resonating but it does sound like a lot of the decor categories are what's been driving the strength. On the other hand, the mix does shift back towards the furniture brands away from Williams-Sonoma into the first quarter.
Yes, Chris. So furniture trends in Q4 were down, but sequentially improved over Q3. And yes, we do see a benefit by the higher penetration of Sonoma in Q4. But overall, to Laura's comments before, we're very pleased with our quarter-to-date performance. but it's early. And as Laura mentioned, there's the Easter shift, the turnover at Easter, which sometimes has impacts on the curves. But I think the important thing is we're not just a furniture company.
For sure. And then in terms of the follow-up, I know you're not -- Jeff, you are not guiding to individual line items. But could you maybe help us think about like on the SG&A line, you've done an incredible job, really managing around incentives and the advertising, flexing it with demand and you had some headcount reductions as well a year ago. Should we think about that being more variable into a recovery like should you see rate leverage, should we think about it modeling it from a dollar growth perspective and focus less on rates. So any color there in terms of just how variable SG&A is into a recovery as you start to reinvest back into the business as the top line improves.
Yes, Chris. It's Laura. I just wanted to comment, I think it's important to remember that our focus this year is threefold. It's delivering growth, elevating customer service and driving margin. And we believe we can do all 3 things. We have that many opportunities in our model with our platform, with our world-class brands to achieve those things. I really -- as we look to the year, believe that the natural investments that we need to make will drive the top line.
Your next question comes from the line of Kate McShane with Goldman Sachs.
Question on pricing. We wondered where you were on an average price versus last year. I know you talked about adding more opening price points last quarter. I just wondered if we could get an update on how that trended in Q4 and what you expect to see in 2024.
It's interesting, Kate. We try to glean every piece of information from sales and then they change. So I don't think it's fair to say right now that there's a specific price point that's the magic price point. We're seeing success across all prices. The customer wants a value. So we have some really expensive stuff that's really selling. And then we have some value price points that are really selling. And so there's not a pattern there that I'd hang a strategy on for now.
And I just wanted to ask a follow-up question with regards to tariffs that if there were to be, [ I noticed ] is a risk profile for your guidance, the election. But how are you thinking about managing through a scenario where there could be more tariffs?
Kate. Well, first, we're in an election year. A lot's get said on the campaign trail and who knows where this conversation really goes in the end. Second, we've transformed our sourcing base since the last time the subject was top of mind 6 years ago. Today, only 25% of our goods are sourced from China, which is about half of what it was back then. And here is the most important thing. We have some real key competitive advantages that serve us well into these situations. First, 90% of our products are proprietary, designed and exclusively made for our brands. And then we operate our own in-house best-in-class global sourcing operation.
I'll now hand the call back to Laura Alber for any closing remarks.
Well, thank you all for joining us. We really appreciate your support and look forward to seeing some of you in New York and talking to you throughout the year.
That will conclude today's call. Thank you all for joining. You may now disconnect.