Williams-Sonoma, Inc. — 2024 Q1

Kate, it's Laura. In terms of big ticket, Q4 is not a big furniture time of the year. Of course, the comps are comparable. We don't bring in a lot of newness in Q4. But we are seeing improvements in our furniture business, and high ticket has always been one of those things -- you have to remember, we have electrics in high ticket, we have a lot of other types of products in high ticket that aren't furniture. But we haven't seen a trend in high softness, we've seen more of a furniture softness trend that appears to be better.

All right, Kate, I'll take the second question on the accounting. So you asked why it's only '21 through '23 and not '24. I think for some context, what really drove the out-of-period adjustment was the supply chain volatility that happened during the pandemic, which really hit years '21 through '23. And just to remind everyone, the pandemic put tremendous pressure on international supply chains. We faced disruption, delays, material cost swings, contract renegotiations, changes in terms by vendors, balance renegotiations, and all these pressures added a layer of complexity to the already imprecise process we use to estimate freight expense. So it was really pandemic-driven and it would not have impacted Q1 '24, because as we cleaned up our balance sheet and reconciled our approval, it would just cancel itself out in Q1.

Chris, it's Laura. The outdoor category gets consistent -- is consistent with the performance of our furniture categories, okay? It's not -- it's about the same. And the curve, if you're referring to the curve of sales, it's more like before the pandemic than when the pandemic happened, immediately after when it was an early rush to get the home furniture -- to get the outdoor furniture. Now it's a more normalized curve, and we have a really pretty good handle on where we think this is going to end up, and it's embedded in our guidance.

I would also just add, Chris, that I know there's been a lot of talk out there in the industry about the impact of weather. We're not really seeing that impact. I think because we are predominantly online, the weather doesn't impact us the same way. So we don't see that as an impact on a shift between quarters, as you alluded to.

Yes, Chris. I think you hit the nail on the head in that, there were some unique things in Q1, and it really comes down to what we're up against from a last year compare basis. Let's remember that in Q1 last year, Q1 '22 was the high point of our supply chain headwinds, which really benefited us the most in Q1, and we're quickly coming to the end of that benefit. And we're lapping starting in Q2 and even stronger in Q3 and Q4, more benefits that we had last year from those headwinds.

Congratulations on the good results. I wanted to ask also a big picture question around demand. You call out trade in B2B up 6%. I think that hasn't been up in a few quarters. And the bigger -- sort of the furniture trends getting slightly better, do you feel it's a function of your consumer that's more fluent, feeling better about spending on the home or just more company-specific initiatives that are driving those results?

No, I think that we -- I know that we've been focused on what we can control. And as we've said in the beginning of the year and last year, we're not planning and we are not dependent what's going to happen in the macro. I mean, who knows what's going to happen in the macro. We're paying attention to what we can control, which is innovation. And innovation -- the right product, the right price, shown beautifully. We've improved the photography in our brands. We've improved the website functionality, and we're looking very closely at how we improve what happens in our stores.

And then as a follow-up, you called out some of the growth initiatives accelerating through the year, given your confidence to hit the full year guide. Can you talk about which initiatives are more impactful as we move through the year?

Sure. I think the first one, our brands are amazing, high-quality. We design our own products and we have our own proprietary website, West Elm, and the return to growth in West Elm is a big part of our focus. And I could not be more excited about what we're seeing in terms of West Elm reads on newness and where the team is going, the high-quality collaborations that we have in the back year -- half of the year. And also just building on what's working now and getting back in stock and being more confident with this new modern aesthetic that we are giving to our customers.

This is Dan Silverstein on for Michael.

We're always investing in demand-driving initiatives. We're very aggressive about that. And the key is where it really drives incremental sales versus trading sales or just spending more money. So we're very disciplined in how we look at our investments. That's why we have industry-leading ROIC. And the obvious places you invest, as you saw us do was in ad costs. That's the biggest thing.

We're fighting over your question. Yes. So in terms of ad costs, I wish we knew. It's so dynamic and we're so lucky to have this amazing team that's so sophisticated at looking at the different ad cost streams and reading the results. And it's a lot about the bids from others and where the demand is going and where it's not because what is true today might not be true in a month. So we have a monthly long full-day meeting where we review every brand and every stream. And we put our investments down where we're seeing returns. We test in one brand and roll it out to others.

Yes. I think it's also just important to remember, as you know, we guide the top line revenues and bottom line operating margin because it gives us flexibility to respond to changes in the business. And as everyone's seen, we know the levers to pull to deliver results. So while we'll go through the year, it's a very uncertain environment, who knows how the year shapes out, but we can adjust our levers as we see the trends develop to deliver results for our shareholders.

And then in terms of full price selling -- did you want me to...

Thank you. That is a number we haven't given, but it's significant over last year.

I have no idea. I think that everyone believes that the interest rates are never going to change, they're going to be more likely to buy than if they believe they're going to go down, they're going to wait. That's one theory I have. But that's just a theory. You can't prove anything.

Well, as you know, as I said before, we don't guide to specific lines and our overall operating margin guidance for the balance of the year is essentially to be flat year-over-year. There is more opportunity potentially in gross margin, particularly from supply chain efficiencies and higher full-price selling. But we are starting to lap the benefit we had last year from coming up against the headwinds I talked so much about.

Yes, absolutely. Our goal is perfect order, damage-free, on time. And although we have really improved things from the pandemic and, in some cases, hit customer service records, there's still a lot of room to go. And that is the focus of our supply chain team. We did have, as you know, last year, a lot of increases in inbound freight detention demurrage. We're no longer incurring those dramatically high costs.

Great question, Seth. So the incentive compensation did not include any benefit from the out-of-period adjustment. It was simply our beat in Q1 versus our budget, so we had to take up the accrual. And any additional results from incentive compensation are essentially embedded in our guidance.

No, Max, as you know, this is such a fractured market. And there's not really anybody who owns very much share that hasn't moved that much. But the thing that I'm very confident about is the amount that's still done in retail stores, mom-and-pops versus online. And it's going to be very hard for people to scale online like we have already. And so that is the big key competitive moat that we have as we look to the future, because I know that it won't be such a low number that is transacted online in the future. When that happens, it's coming to us. So I worry less about some of these other things that people bring up.

I would also just add in that we compete not just on price, we compete on quality as well. But even more importantly, we compete on service. And these investments we're making in service really resonate with the customer and help with customer retention and are as strong a driver of our customers' purchase decisions as price is.

Yes. So quarter-to-date, difference than last quarter, we're only like 3 weeks in. So when we gave Q4, we had 6 weeks, and we were more confident talking about it. And our big weeks are ahead of us. So we're still very confident in our guidance, but I wouldn't read too much into the first 3 weeks, which is why I don't want to comment on it.

I understand the question, Brian. Thanks for asking it. I wish it was easy to say that for every 100 basis points of comp, x basis points would drop to the bottom line. Certainly, my Monday morning meetings would go a lot easier. But it's just not that way, there's a lot of different levers in the business. And time will tell, which is why our long-term guidance is mid- to high-teens operating margins, and we still feel comfortable in that range.

Yes, it's very aggressive. I looked -- when we look across the board, you can see that a lot of the specialty smaller brands are 20% off the whole site, just take a browse through the names. And I'm talking everything. And then some of the bigger specialties have 20% off the whole category, not just things that are still moving, but the whole category.

Yes. When we think about our current operating margin guidance, our long term operating margin guidance, I think the key point is our operating margin is sustainable. That's been one of the questions if we think back over the past 18, 24 months, is where is the operating margin going? In 2023, we established a 15% operating margin floor. We delivered 16.4%. And this year, we started the guide at 16.5% to 16.8%. Now we're guiding 17% to 17.4% without the operating margin -- sorry, without the out-of-period adjustment.

Well, we report in dollars, in cost dollars. So it was a dollar metric. And overall, our message is our inventories are well positioned to support our business trends.

Simeon. So let's think about this. In Q1 of this year, we lapped 300 basis points of supply chain headwinds from last year. So there's about 380 basis points between that and the 680 that we reported, excluding the out-of-period adjustment. So it was not just merchandise margins, there were some that were merchandise margins and there were some that were supply chain efficiency.

It's probably about the same. And there's puts and takes between gross margin and SG&A. But it goes back to how we give our guidance. We guide the top and the bottom line. We're guiding that the next 3 quarters will be essentially flat year-over-year and that there are levers we can pull within there to drive results.

And the newness doesn't come in higher margins than something we've been running. Actually, when we rebuy a new product, we're able to often renegotiate their costs because we're buying more on those efficiencies in the supply chain when we buy more. So that would come a little bit later as we increase the orders.