Williams-Sonoma - Q1 2025

Transcript

Operator (participant)

Welcome to the Williams-Sonoma, Inc. First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Jeremy Brooks (Chief Accounting Officer and Head of Investor Relations)

Good morning, and thank you for joining our first 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 our updated guidance for fiscal 2024 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, for the first quarter of last year, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results.

A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning. Also, for the first quarter of this year, we will refer to our GAAP results both with and without the benefit of an out-of-period adjustment that we recorded during the first quarter. We believe providing these disclosures is useful to understanding our quarterly financial results. Jeff will share the details of this adjustment later in his prepared remarks. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our investor relations website. Now, I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Laura Alber (President and CEO)

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we review our Q1 results, I want to take a moment to thank all of our teams around the globe for their consistent contributions to our company. We could not continue to produce strong earnings without their cross-functional collaboration and dedication. We are pleased to deliver strong results in the first quarter of 2024, driven by an improving top-line trend and continued strength in our profitability. In Q1, our comp came in above expectations at -4.9%, and we exceeded profitability estimates with an operating margin of 19.5% and earnings per share of $4.07.

It is important to note that the results of the first quarter include a benefit of $49 million, resulting from the reversal of freight-related accruals that we determined were not required, which contributed 290 basis points to our operating margin and $0.59 to our EPS. Jeff will walk you through this in more detail, but it is worth noting that even without the impact of this benefit, we significantly exceeded profitability expectations. As a result of our outperformance, we are raising our outlook on operating margin to now be in the range of 17.6%-18%, or 17%-17.4% when excluding the impact of the freight accrual reversal.

The strong results of the quarter are a result of our focus on our three key priorities in 2024: returning to growth, elevating our world-class customer service, and driving margin. I'll start first with returning to growth. We are pleased with the improvement in our top-line trends and our market share gains in Q1. We are keenly focused on innovation in our product line across brands, and our unique in-house design capabilities and vertically integrated sourcing organization allows us to offer this high-quality design innovation at compelling price points. Another key component of our return to growth strategy is our marketing capabilities. Our in-house digital marketing optimization, backed by our world-class customer analytics and our first-party data collection, serves as a competitive advantage for our company. In the quarter, we increased our ad spend and invested in both our paid marketing and our proven social strategy.

This investment allowed us to drive sales improvement, to acquire new customers, and to gain market share. Additionally, we are continuing to improve our online experience through our investment in a proprietary e-commerce technology. From product discovery and selection, to personalization, to concept, to customer care, and to the final mile, our team is constantly thinking about how we can improve our best-in-class e-commerce experience, and one way we do this is through AI. We believe our leadership in AI will be yet another competitive advantage. It's important to not forget that as focused as we are on our digital capabilities, we are passionate about our service and our best-in-class retail business. We've improved our in-store experience with inspirational products, improved in-stock inventory levels, and next-level in-store services.

Our teams are the best in retail, and our retail optimization efforts are transforming our fleet to be positioned in the most profitable, inspiring, and strategic locations. Moving to our second and third key priorities in 2024, which are inextricably intertwined, we continue to make progress improving our world-class customer service and driving margin. The customer is at the center of everything we do, and their satisfaction is key to our operating performance. We are pleased with our high net promoter scores, both in-store and in-home, but we see more opportunity to improve... We know that providing our associates with new tools and training has a direct impact on our customer experience, and we are thrilled to bring back our annual store manager conference in Q2 of this year. This multi-day off-site meeting is an opportunity for all of our store managers to participate in strategic training.

The improvement in customer service also comes from supply chain efficiencies. We are reducing costs by limiting out-of-market and multiple shipments, fewer customer accommodations, lower returns and damages, and reduced replacements. These improvements will continue to contribute meaningfully to our profitability in 2024 and beyond. Our ongoing commitment to not running site-wide promotions and the reduction of our promotional offerings have also improved margins. We are focused on delivering a compelling value equation to our customers, which in turn maximizes our full price selling. Now, I'd like to update you on the performance of our brands. Pottery Barn ran a negative 10.8% comp in Q1. We continue to see softness in higher-ticket furniture sales in Pottery Barn, but we've seen quarter-over-quarter improvements. We're having success in our proprietary print and pattern across textiles, and easy decorating updates continue to drive sales.

Highlights include newness in our Bloom Shop, frames, and decor. Our strength in seasonal celebrations also continues to resonate with our customers. In March, we launched our first-ever global collaboration with international icon, Deepika Padukone. Her popularity drove 1 billion impressions for the Pottery Barn brand. Customers also embraced the launch of our Coastal Lookbook, and they positively engaged with our newly developed app. In the back half of this year, we're excited to introduce new innovation, both in store with compelling new floor sets and online with improved digital shopping experience. The Pottery Barn children's business ran a positive 2.8% comp in Q1. Across these life stage businesses, we drove widespread comp trend improvement in the business. We've seen excellent customer response to our new product introductions, with collaborations being a particular highlight.

Our recent launches with partners such as LoveShackFancy and Lilly Pulitzer have driven sales and attracted new customers by tapping into relevant fashion and home decor trends. In baby, we're seeing double-digit registry growth and excellent customer response to our expanded essentials and gifting. In dorm, we recently launched our biggest collection to date, with expanded XL twin bedding options, new No-Nails wall decor, and innovative storage solutions. In addition to the expanded assortment, we are excited to roll out improved dorm product selection functionality, and customers can also ship dorm products to any one of our company-owned stores near their college campus. Moving to West Elm. In Q1, West Elm drove sequential improvement in its top-line trend, running a -4.1% comp in the quarter. We're encouraged to see improvement in West Elm's demand trend, even as we materially pull back on promotions.

We are seeing strength in our new product sales, with our spring newness driving positive comp to last year, with particularly strong performance out of furniture, kids, and decorative accessories. Summer newness is also off to a great start, with double and triple-digit newness comps. Given the positive trends in newness, we have a sizable opportunity in West Elm as it rebalances more inventory into these new products. The Williams Sonoma brand ran a positive 0.9% comp in Q1. This is the second consecutive quarter the Williams Sonoma brand ran a positive comp, with the Williams Sonoma kitchen business running a positive comp for the fourth consecutive quarter. During Q1, we inspired customers with exclusive and innovative products. We benefited from new introductions of Williams Sonoma branded products in categories like bakeware, cutlery, and food.

The favorable customer response to these items continues to reinforce the opportunity we have for the Williams Sonoma branded business. In March, our co-branded collaborations drove media attention and results. Our popular collaboration with Aerin Lauder was expanded to include new items for both Williams Sonoma and Williams Sonoma Home. We also partnered with Trisha Yearwood to make our best-selling cocktail collaboration the official drink of her new 55,000 sq ft bar and restaurant in Nashville that she built with her husband, Garth Brooks. Now, I'd like to update you on our other initiatives. Business to business grew 10% in Q1, driving record-breaking demand in the quarter. We saw improvement in our trade business, running a positive 6% on the quarter, along with continued momentum in our contract business, which represents about a third of the B2B business, up 18%.

We're encouraged by our diverse book of businesses, ranging from sofas for UC San Diego dorms to corporate gifting for Pebble Beach Company. We also saw continued growth for our existing large project customers, such as Marriott, Dave & Buster's, and Jamestown Properties. Now, I'd like to talk about our global business. Despite ongoing macroeconomic pressures impacting our global business, we're pleased with the performance in key markets, including India, Canada, and Mexico. In India, we are continuing to see strong growth from increased marketing and brand awareness campaigns across the brands. In Canada, our business is thriving in both the retail and direct-to-consumer channels, driven by enhanced omni-channel strategies, wider product selection, and the expansion of our business-to-business program across all brands in the market. And in Mexico, the market shows strength, driven by a focus on the design business and expanded assortment, fueled by our improved stock position.

We will continue to leverage the knowledge gained from these markets to enhance the global customer experience in our new and emerging markets. Lastly, I'd like to update you on emerging brands. Rejuvenation delivered another double-digit quarter. We saw all categories drive growth and continue to see success with both consumer and trade customers. The brand remains focused on delivering high-quality products that support your home remodel and refresh projects. The strongest performance comes from bath, hardware, and lighting, while we also see strength in several of our new growth categories like textiles, organization, window hardware, and outdoor. Customers continue to update their homes, specifically in the kitchen and bath spaces, and add the finishing touches with Rejuvenation. We are excited by the momentum in this brand and the growth potential this year and beyond. Mark and Graham, our monogram gifting business, also drove a double-digit comp growth in Q1.

The brand is increasingly recognized as an inspirational lifestyle brand, experiencing continued growth as a go-to destination for gifts, including graduations and weddings. Q2 has started strong, with a positive reception to the brand's Mother's Day and Father's Day gift selections. And finally, Green Row, our newest brand, continues to grow and expand its assortment of vintage-inspired, colorful furnishings that are sustainably sourced and designed to last. The second catalog dropped this month with a focus on print and pattern. We are seeing a very positive response to its unique offerings in the market and look forward to seeing additional assortment expansions and partnerships in the coming months. These successful and exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio and address white space in the market. In summary, we are extremely proud of our results.

During the last few years, we, as a company, have navigated, learned, optimized, and built, all in preparation for our next chapter of growth. We have a strong omni-channel platform with an exclusive lifestyle offering and a sophisticated distribution network with additional capacity. We recognize that there is continued uncertainty with the environment and the consumer, but because we operate in a highly fragmented market, we will continue to gain share by inspiring and servicing our customers. We remain committed to driving our three key priorities in 2024: one, returning to growth, two, elevating our world-class customer service, and three, driving margin. With that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Jeff Howie (CFO)

Thank you, Laura, and good morning, everyone. We are pleased to deliver these strong Q1 results. We've seen sequential improvement in our top-line trend, and we continue to exceed expectations on the bottom line. As Laura said, our results this quarter reflect three key we've laid out for fiscal year 2024. First, returning to growth, fueled by our brand strategies, emerging brand opportunities, business-to-business expansion, and global footprint. Second, elevating our world-class service, which drives both customer retention and expense savings. And finally, third, driving earnings as we continue to deliver strong profitability. These three themes resonate across our earnings today, and given our strong Q1 results, we're confident we can deliver long-term growth and even stronger earnings as the customer shifts back to home. Now, let's dive into the numbers. I'll start with our Q1 results and then provide an update on guidance for 2024.

Net revenues finished at $1.66 billion, in line with our expectations. Our comp of -4.9% sequentially improved quarter-over-quarter. We saw better performance across both furniture and non-furniture categories, even as we reduced our overall level of promotions from last year. From a cadence perspective, our trends were relatively consistent across the quarter. Moving down the income statement, gross margin came in at 48.3%, which includes a $49 million or 290 basis point benefit from an out-of-period adjustment. Subsequent to filing our 10-K, we identified that we overaccrued freight expense across fiscal years 2021, 2022, and 2023 by $49 million. Following the prescribed accounting rules, we determined the overaccrual was not material to any prior period and not material to our projected full year 2024 results.

Therefore, we recorded the correction in Q1 as an out-of-period adjustment that benefited our results this quarter. Without the out-of-period adjustment, gross margin came in at 45.4%, 680 basis points higher than last year and substantially exceeding expectations. There were three drivers to the 680 basis point improvement. First, merchandise margins improved 470 basis points, driven by lower ocean freight, as we benefited from lapping last year's pandemic-related ocean freight runoff and our ongoing commitment to full price selling. Second, supply chain efficiencies contributed 240 basis points, driven by lower than pre-pandemic returns, accommodations, damages, replacements, out-of-market shipping, and multiple deliveries per order. These supply chain efficiencies are yielding a notable improvement in customer service and cost savings. Third, occupancy costs, although down 3% from last year, deleveraged 30 basis points.

We continue to optimize our retail fleet while we invest in our world-class technology stack and our supply chain. Wrapping up gross margin, we delivered substantially higher gross margin this quarter, driven by better merchandise margins, supply chain efficiencies, and lower occupancy costs. Turning now to SG&A. SG&A expense came in at 28.8% of revenues, or 310 basis points higher than last year, driven by higher advertising spend and incentive compensation. Advertising expense deleveraged 170 basis points as we continued to invest in the higher levels of advertising spend to drive sales at an efficient return. Our multi-brand portfolio allows us to test the return of this incremental spend. Our own hands-on-keyboard approach allows our investment to go further, keeps our learnings in-house, and gives us a competitive advantage in the home furnishings industry.

Employment expense was 100 basis points higher year-over-year, driven entirely by higher performance-based incentive compensation. Without incentive compensation, employment was flat year-over-year on a rate basis. In Q1, we continued to manage variable employment costs across our stores, distribution centers, and customer care centers in accordance with top-line trends. On the bottom line, our earnings significantly exceeded expectations, including the benefit from the out-of-period adjustment. Operating income came in at $323.8 million. Operating margin was 19.5%, and diluted earnings per share was $4.07. The out-of-period adjustment increased operating income by $49 million, operating margin by 290 basis points, and earnings per share by $0.59. Without the out-of-period adjustment, our earnings still significantly exceeded expectations. Operating income came in at $274.8 million.

Operating margin was 16.6%, 370 basis points above last year, and diluted earnings per share was $3.48, up $0.84 or 32% year-over-year. On the balance sheet, we ended the quarter with a cash balance of $1.3 billion, with no debt outstanding. This was after we invested $40 million in capital expenditures supporting our long-term growth, and we returned $170 million to our shareholders through quarterly dividends and share repurchases. Merchandise inventories ended the quarter at $1.2 billion, down 13% to last year. Overall, our inventories are well-positioned to support our business. Summing up our Q1 results, we're proud to have delivered another quarter of earnings substantially exceeding expectations. I'd like to thank our talented, dedicated team at Williams-Sonoma, Inc. for delivering these outstanding results.

Now, let's turn to our 2024 outlook. Given our Q1 results, we are reiterating our revenue guidance and raising our operating margin guidance for fiscal year 2024. On the top line, we continue to expect full year 2024 net revenues to be in the range of down 3% to up 3%, with comps between down 4.5% to up 1.5%. We anticipate sequential improvement across the year, with the first half tougher than the second half, as our top-line comparisons get easier and our growth drivers accelerate. On the bottom line, we are raising our guidance based upon our Q1 results, but anticipate our operating margins going forward will be relatively in line with 2023 results.

We are raising our operating margin guidance to a range of 17.6%-18%, which includes a 60 basis point benefit from the full year impact of the out-of-period adjustment. Without the out-of-period adjustment, we expect our full-year operating margin will be in the range of 17%-17.4%, a raise of 50 basis points due to our strong Q1 results. Additionally, we expect our full-year interest income to be approximately $40 million, and our full-year effective tax rate to be approximately 25.5%.... As a reminder, 2024 is a 53-week year for Williams-Sonoma, Inc. So the fourth quarter will consist of 14 weeks. We anticipate the additional week will contribute 150 basis points to revenue growth and 10 basis points to operating margins, both of which are embedded in our guidance.

We will report comps on a 53-week versus 53-week comparable basis. All other year-over-year compares will be 53 weeks versus 52 weeks. Our capital allocation plans for 2024 remain unchanged. We expect to spend $225 million in capital expenditures to invest in the long-term growth of our business. 75% of this capital spend will be dedicated to drive our e-commerce leadership and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, in March, we announced an increase in our quarterly dividend payout of 26%, or $0.23 to $1.13 per share. Fiscal year 2024 will be the 15th consecutive year of increased dividend payouts, which we are both proud of and remain committed to.

For share repurchases, we have $956 million remaining under our $1 billion share repurchase authorization, through which we will opportunistically repurchase our stock to deliver returns to our shareholders. As we look further into the future, beyond 2024, we are reiterating our long-term guidance of mid- to high single-digit revenue growth, with operating margins in the mid- to high teens. We're confident we'll continue to outperform our peers and deliver shareholder growth for these 5 reasons that remain consistent. Our ability to gain market share in a 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. With that, I'll open the call for questions.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question, please ensure that your phone is not on mute when asking your question, and we do request for today's session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Kate McShane with Goldman Sachs. Your line is open.

Kate McShane (Managing Director and Senior Equity Analyst)

Hi, good morning. Thanks for taking our question. I have one kind of bigger picture question, and then one question with regards to the accounting that was stated today. So first, we wondered if you could talk a little bit more about the big ticket trends you're seeing. I know you noted better performance in furniture. What we're curious to drill down on that a little bit more in terms of what you saw in Q1 versus maybe what you were seeing in Q4. And then with regards to the accounting, we were wondering with regards to the COGS change, why it's only 2021-2023, and why there's not an impact to Q1 2024.

Laura Alber (President and CEO)

Hi, Kate. Good morning. It's Laura. In terms of big ticket, you know, Q4 is not a big furniture time of year. Of course, the comps are, you know, comparable. We don't bring in a lot of newness in Q4, but we are seeing improvement in our furniture business, and high ticket has always been one of those things. You have to remember, we have electrics and 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 as in high ticket softness. We've seen more of a furniture softness trend that appears to be better. We have some really wonderful selling on new products in the spring and summer season that are both in Pottery Barn and in West Elm.

Then also, we're seeing better performance out of our kids furniture business, where we introduced new finishes, which make a huge difference to these furniture collections. They also have categories in the children's home furnishings business that naturally have a lot of growth. For example, dorm and then also baby, and those are more life stage versus housing related, so we're seeing more firmness there.

Jeff Howie (CFO)

All right, Kate, good morning. I'll take the second question on the accounting. So you asked why it's only 2021 through 2023 and not 2024. 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 2021 through 2023. 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 used to estimate trade expense. So it was really pandemic driven, and it would not have impacted Q1 2024, because as we cleaned up our balance sheet and reconciled our pools, it would just cancel itself out in Q1.

Kate McShane (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Christopher Horvers with JP Morgan. Your line is open.

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

Thanks, and good morning. So my first question is, what your early reads are on the outdoor category? You know, obviously, that's a bigger portion of the second quarter versus Williams Sonoma, really, you know, shining around the Easter holiday. And it looks like April was pretty tough on the weather. So would you expect some of that outdoor category to shift in, shift into the second quarter? And sort of related to Kate's question, you know, as you think about, like, the sequential improvement in the business, mix will have an effect. So, you know, does the weather shift maybe to 2Q sort of offset the fact that, you know, the mix of Williams Sonoma is lower in the second quarter?

Laura Alber (President and CEO)

Hi, Chris, it's Laura. The outdoor category is 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 outdoor furniture. Now, it's a more normalized curve, and we have a really pretty good handle on where we think this is gonna end up, and it's embedded in our guidance.

Jeff Howie (CFO)

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 it as an impact on a shift between quarters as you alluded to.

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

Got it. And then, just on the margin, I know you don't guide by quarters, but, you know, typically, the back half of the year is a much higher, you know, operating margin period than the first half of the year. And you don't guide by quarter, but it would imply... It would seem to imply that you don't get that historical uptick in the back half, based on where you guided the year. It seemed like you, you know, in large part, just passed along the first quarter beat on the margin side. So is that a fair assessment of how you approached the year guidance? And, you know, was there anything unique in the first quarter then that is perhaps not sustainable? Thank you.

Jeff Howie (CFO)

Yeah, Chris, I think, 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 2022, 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 be stronger in Q3 and Q4, more benefits that we had last year, from those headwinds. You know, additionally, we also start to lap the benefit we saw last year from our focus on full price selling and supply chain efficiencies. And while we feel great about our results, let's remember, it's early in the year.

There's a lot of uncertainty, so that's why we're guiding our full year operating margins to be essentially flat, year-over-year, Q2 through Q4.

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

Got it. Thanks very much.

Operator (participant)

Your next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Your line is open.

Cristina Fernandez (Managing Director and Senior Research Analyst)

Hi, good morning, and congratulations on the good results. I wanted to ask also a big picture question around the margin. You call out trade in B2B of 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 the your consumer that's more affluent, feeling better about spending on the home, or just more company-specific initiatives that are driving those results?

Laura Alber (President and CEO)

You know, I think that, you know, we. Well, 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 on what's gonna happen in the macro. I mean, we don't. Who knows what's gonna happen in the macro? We're paying attention to what we can control, which is innovation. And innovation, right, you know, 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. You know, our stores are billboards for our brands, and when you go in now, you're expecting to be able to take things home, the minute you go in, not wait for things.

So we've stocked them higher, and we've made sure that there's enough newness in our stores to drive excitement again. And those are some of the things that we're really seeing improve our results. As far as B2B goes, remember, there's two parts to this business, trade and contract, and the contract business is less dependent on, you know, housing and consumer. And we have some great wins in the verticals that we're focused on, both in hospitality, you know, sports and entertainment. And you know, the key point here is that B2B is really a very important strategic initiative for us and a huge part of our growth in the future, because there's such a fractured market, and nobody has much share, and yet it's quite big.

It leverages our brands, our ability to design for individual clients, our global sourcing capabilities, and our abilities to service people with single deliveries versus having things come from a bunch of different suppliers. So we continue to be very confident about B2B, and it is less affected by what's going on with housing.

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

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

Laura Alber (President and CEO)

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

The other part of West Elm that I think is very important to note is, you know, it's been predominantly a big furniture business, and we know that for repeat purchases and excitement, you want to have things that people can buy to update their house, for a dinner party or, you know, just to, to change the way the, the living room looks with, with new pillows. And so we've been very focused on the smalls. When I say that, the things that are easier to buy, easy updates for the home, and, and we're going to continue to push that percent total, which is good for new customer acquisition. So West Elm is a key part of our growth strategy in the back half. Of course, I'm really excited about what we're, what we're seeing with our new Williams Sonoma launches.

I don't know if you've been able to go to our website, but we have a new gorgeous navy Dura collection, which is exclusive to us in the market. Another example of, you know, extremely impactful collaborations is our, our collaboration with Shondaland and Netflix on Bridgerton, which is doing very well. As you know, the Bridgerton is the most watched show right now on Netflix. So we're excited to have hit that nail on the head. Our kids and teen businesses collaborations are a big part of that comp growth, and we have more in store and building on those. Of course, the carve-out of baby and dorm, so good.

Then in Pottery Barn, we're seeing some really nice new collections selling, as I referenced earlier, that we're building on for the fall season, and very beautiful floor sets for fall, and then, of course, holiday, where we own decorating and entertaining. Not anybody else does what we do in a high-quality way for the holidays. So those are our big brands, you know, and then, of course, our emerging brands, I touched on, really nice momentum, very different aesthetically, serving, you know, a different way to entertain and decorate. We've seen double-digit comp growth in those brands and are really pushing the growth for those in the future.

Operator (participant)

Your next question comes from the line of Michael Lasser with UBS. Your line is open.

Dan Silverstein (VP and Equity Research Analyst)

Hi, this is Dan Silverstein on for Michael. Thank you so much for taking our question.

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

Oh.

Dan Silverstein (VP and Equity Research Analyst)

I'm sorry,

Christopher Horvers (Managing Director and Senior Equity Research Analyst)

Are you guys there?

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Hey, guys. Yeah, yeah, yeah. Sorry, we got, we got our lines crossed. This is Michael Lasser. Thank you so much for taking our question. Our question is, if, if you continue to outperform by the magnitude that you did in the first quarter, would you look to reinvest that back into demand-driving initiatives, or would you let it flow to the bottom line?

Laura Alber (President and CEO)

We're always investing in demand-driving initiatives. You know, we're very aggressive about that, and, you know, 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. It's why we have industry-leading ROIC, and, you know, the obvious places you invest, as you saw us do, was in ad cost. That's the biggest thing. In terms of, you know, big investments, we've mentioned our supply chain is built for more volume than we have. And our proprietary e-commerce platform is, you know, state-of-the-art and doesn't require the kind of step-up investment that other people's other people have had to put in because it's. We've been doing it for so long.

We have such a big percent of total in e-commerce already, so it's not a new thing for us. It's something that we can just build incremental adds to that are helpful to the customer experience. So it's you know, when you say incremental investment to drive demand, in the short term, that is ad cost. Promos are not something in our vernacular anymore. We do take markdowns, but that is a demand-driving way that other people take, and it is not one that is sustainable, in our opinion.

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Very helpful. Two follow-ups on that. Can you quantify how much you will be investing in advertising this year, either as a percentage of sales or the dollar amount? And where does full price selling stand today across the different brands versus where that same percentage was prior to the pandemic? Thank you so much.

Laura Alber (President and CEO)

We're fighting. We're fighting over your question. Yeah, so, in terms of ad cost, gosh, you know, I wish we knew. It's so dynamic. And we're so lucky to have this amazing team that is 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, what is true today might not be true in a month. So we have a monthly, you know, 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. Jeff can put this more in context, if you want, on the ad costs.

Jeff Howie (CFO)

Yeah, 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.

Laura Alber (President and CEO)

And then in terms of full price selling, if you want me to answer that?

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Yeah, yeah, for sure. Yeah, yeah. Yeah.

Laura Alber (President and CEO)

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

Michael Lasser (Managing Director and Senior Equity Research Analyst)

Okay. Thank you very much, and good luck with the rest of the season.

Jeff Howie (CFO)

Thank you, Michael.

Operator (participant)

Your next question comes from the line of Steven Zaccone with Citi. Your line is open.

Steven Zaccone (Director of Equity Research)

Great, good morning. Thanks very much for taking my question. Laura, I wanted to ask a macro question. We've seen some improved data points in the furnishing space, and you've mentioned the furniture softness appears to be getting better. So I'm curious for your assessment of, like, replacement cycles in the industry and this, concept of, like, easy wins with people purchasing on smaller ticket items. Do you think we're starting to see some glimpses of replacement cycle and spending on the home? Curious for your assessment.

Laura Alber (President and CEO)

I have no idea. I think that if everyone believes that the interest rates are never going to change, they're gonna be more likely to buy than if they believe they're gonna go down, they're gonna wait. That's one theory I have, but that's just a theory. You know, you can't prove anything. What I know is that where we have innovative products that's priced right, we're winning. You know, and that's exciting to see because that makes me feel like we're more in control than, you know, at the whim of the macro. I mean, but, you know, imagine, like, you know, right now, we produced these results in Q1 with the soft housing environment.

Imagine what it could be like when it, when it turns, but when that's gonna happen, your guess is as good as mine.

Steven Zaccone (Director of Equity Research)

Okay, fair enough. Jeff, a question for you. On gross margin, you know, you've had a lot of strength. Could we talk a little about the multi-year opportunity from here? Maybe following up on Michael's question, you know, full price selling is up relative to last year. Is there opportunity for that to still go higher from here? Thanks very much.

Jeff Howie (CFO)

Well, as you know, as I said before, we don't, you know, guide the 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 got last year from coming up against the headwinds I talked so much about. And as Laura mentioned, you know, it's—we have levers to pull, and there's a chance that if our gross margin was higher, it gives us more opportunity to reinvest back in the business to drive the top line if we see efficient returns from that investment.

Steven Zaccone (Director of Equity Research)

Okay, thanks very much.

Operator (participant)

Your next question comes from the line of Seth Basham with Wedbush. Your line is open.

Seth Basham (Managing Director of Equity Research)

Thanks a lot. Good morning. Congrats on continued strong results. My question is a follow-up on the last one. Just thinking about all the supply chain margin benefits that you've gotten over the last couple of quarters, can you give us a little bit more insight into the key drivers there, and the initiatives you have to further improve your outbound supply chain in the US?

Laura Alber (President and CEO)

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. You know, we did have, as you know, last year, a lot of increases in inbound freight retention demurrage. We're no longer incurring those dramatically high costs. In terms of service, the team is really focused on a very low return replacement rate, and we are digging into and root causing every single incident that we have to make sure that that is not happening again, and that's gonna continue to go throughout the year and beyond. And you know, getting the inventory in the right place helps us incur less out of market in multiple shipments.

You know, honestly, there's still room to do more of that as we further optimize our inventory buys by DC. You know, honestly, there's redundancies that we're finding and better ways to ship things with our use of AI, looking at orders and figuring out, you know, whether we want to optimize for speed or cost or what we want to do for that individual customer in an automated way. We've made investments in supply chain. You know that we opened our Arizona DC. I'm pleased to tell you that it's up and running, and that should give us an advantage of time in the back half when we hit our peak season this year and closer to our West Coast customers. We have, in previous quarters, absorbed some of those costs.

Truthfully, you know, a lot of people ship apparel and small goods well. There's not a lot of people who can ship furniture well and do it efficiently. It's not only a huge margin driver for us, and we do it well. It's also incredibly good for customer service. I've always said, you know, the person who can deliver the order will win this whole market, because it is a very frustrating experience to not receive your furniture on time and damage-free, and it's very difficult to do. So I'm thrilled with our progress, but truth is, there's still a lot more to do to hit that perfect order.

Seth Basham (Managing Director of Equity Research)

That's really helpful color. And then my follow-up question is just on the incentive compensation margin headwind this quarter. Was part of that accrual associated with the out-of-period adjustment, or is it for the underlying results? And how should we think about incentive compensation year-over-year for the balance of the year based on your guidance?

Jeff Howie (CFO)

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.

Seth Basham (Managing Director of Equity Research)

Thank you.

Operator (participant)

Your next question comes from the line of Max Rakhlenko with TD Cowen. Your line is open.

Max Rakhlenko (Managing Director and Senior Equity Research Analyst)

Great, thanks a lot, and congrats on the nice results. So first, can you speak to your level of confidence in Williams-Sonoma's ability to regain lost market share on the upswing? And if peers do remain promotional, even when demand improves, how will that impact your own strategy, as it could make regaining some of that market share tougher?

Laura Alber (President and CEO)

You know, Max, as you know, this is such a fragmented market, and there's not really anybody who owns very much share, and it 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 gonna be very hard for people to scale online like we have already. And so that is, that is a 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. And when that happens, it's coming to us. So I worry less about some of these other things that people bring up.

I also know that there's no one who's really designing their own products from soups to nuts like we do in a lifestyle format, which is the other huge advantage that we have, and that gives us pricing power. It's not that we're, you know, trying to overprice things. In fact, our value is fantastic, and in each of our brands, you can look at some of the new best sellers, and the price is so sharp because the competitive set has nothing like it, or it's only done in the highest-end designer markets. Without going through our competitive best sellers with everybody on the call, including our competition, I will tell you that the things that are really working, you cannot find a similar product in the market anywhere close to our prices.

I don't worry as much about the up/down pricing, 'cause I think our consumers, especially our consumer, is extremely smart. They shop around, and they know what they're getting, and they also know the quality differentials.

Jeff Howie (CFO)

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 prices.

Max Rakhlenko (Managing Director and Senior Equity Research Analyst)

Got it. That's super helpful. And then just quick follow-up, but, any color on, quarter to date, how has, May gone for you guys? Is it more the same with stability, or are you potentially seeing any further improvement?

Laura Alber (President and CEO)

Yeah. So quarter to date, you know, difference in 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, you know, we're still very confident in our guidance, but I, I wouldn't read too much into the first 3 weeks, which is why I don't want to comment on it.

Max Rakhlenko (Managing Director and Senior Equity Research Analyst)

Great. Thanks a lot, and good luck.

Laura Alber (President and CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Brian Nagel (Managing Director and Senior Analyst)

Hey, good morning. Congrats on another really nice quarter. Very nicely done.

Jeff Howie (CFO)

Thanks, Brian.

Brian Nagel (Managing Director and Senior Analyst)

So the question I have. Look, I think it's, I'll limit it to one question, but you know, maybe a bigger picture. But so here, we're watching the, you know, your model unfold here. I mean, sales, top-line trends are still soft, maybe getting better, but still soft, but you continue to have these operating margin increases. So I guess the question I have is, as you look out, you're recognizing you don't know for certain when, at what point, the top-line trends will renormalize, get back to the normalized growth rates for your company, your brand, your brands. But is there any reason to believe that you, if that, as that happens, you wouldn't continue to get a significant leverage through that P&L?

Jeff Howie (CFO)

You know, I understand the question. Brian, thanks for asking it. You know, I wish it was easy to say that, you know, 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, it's just not that way. There's a lot of different levers in the business, and you know, time will tell, which is why in our long-term guidance is mid- to high-teens operating margins, and we still feel comfortable in that range.

Brian Nagel (Managing Director and Senior Analyst)

Okay. So, I appreciate that, Jeff. Maybe I will slip in one more question, just broader sector-wise. Again, you've done a nice, very nice job managing your promotions. What are you seeing promotionally out there that you're competing with, so to say? Is it still aggressive? Is it getting more aggressive? Any change in that?

Laura Alber (President and CEO)

Yeah, it's very aggressive. I looked, you know, when you 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, you know, I'm talking everything. And then some of the bigger specialties have 20% off the whole category. Not just things that are slow moving, but the whole category. People are playing with shipping. They're playing with double rewards. They have email offers in the department stores that are 25% off if you give me your email. So it is extremely aggressive out there, and particularly in certain categories where that is the only thing people know how to do. And that's... I don't, you know, that's the way it's been.

I don't remember a time in my career that it hasn't been promotional. It is, it is what it is. It doesn't appear to be getting less at all.

Brian Nagel (Managing Director and Senior Analyst)

Right. Well, thank you, Laura. Thanks, everyone. Appreciate it.

Operator (participant)

Your next question comes from the line of Oliver Wintermantel with Evercore ISI. Your line is open.

Oliver Wintermantel (Managing Director)

Yeah, thanks. I just wanna get back to the long-term guidance and then the guide for this year. On your mid- to high-teens long-term operating margin, and then this year's guide of 17-17.4, without the adjustment, that sounds very, very consistent. Is that the messaging or how can you maybe explain how you think about your longer-term margin versus today's margin guide for the year?

Jeff Howie (CFO)

Yeah, good morning. Good to talk to you. So when we think about our current, operating margin guidance and our long-term operating margin guidance, I think the key point is are operating margins 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? You know, in, in 2023, we established the 15% operating margin floor. We delivered 16.4%. Then this year, we started the guide at 16.5%-16.8%. Now we're guiding 17%-17.4% without the operating margin, sorry, without the out-of-period adjustment. But look, we are where we are at a level that is sustainable, and I think that's the key message, is we've structurally improved our margin.

Margins for Williams-Sonoma, Inc., in the mid- to high teens is sustainable over the long term, and it's what is our guidance, and it's what we've been able to achieve.

Oliver Wintermantel (Managing Director)

Got it. Thank you. And then just to follow up on inventories down 13%, was that mostly dollars or units?

Jeff Howie (CFO)

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

Oliver Wintermantel (Managing Director)

Got it. Thank you.

Operator (participant)

Your final question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Simeon Gutman (Morgan Stanley)

Hi, Laura. Hi, Jeff. My first question, it's back on gross margin. So you are lapping some supply chain savings. This quarter, you still had a significant gain in the merch margin. And just to clarify, there aren't supply chain or shipping in there, and what drove the merch margin? And if it is fewer promos, why shouldn't that level hold, and we see merch margin gains continue throughout 2024?

Jeff Howie (CFO)

Good morning, Simeon. So let's think about this. In Q1 of this year, we lapped 300 basis points 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 of those merchandise margins, and there were some that were supply chain efficiencies. Certainly, in the merchandise margins, we did benefit from lower ocean freight year over year. But there is also merchandise margins, and there is also full price selling. We did continue to reduce promotions versus last year in the quarter, and while there's still some that we can reduce later on, we're starting to lap our efforts last year.

In supply chain efficiencies, the other piece in here is we started, we over-delivered there, but we also start to lap that improvement year-over-year as we progress through the year. So there's diminishing marginal returns here. But look, we feel great about our results. We're starting to lap harder comps in the bottom line, but it's early in the year, and there's a lot of uncertainty.

Simeon Gutman (Morgan Stanley)

And then, just to follow up to that, the IMUs or the markups in some of the newness, if that over indexes, is that a good guide to gross margin or about the same?

Jeff Howie (CFO)

It's probably about the same. You know, 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 three quarters will be essentially flat year-over-year, and that there are levers we can pull within there to drive results.

Laura Alber (President and CEO)

The newness doesn't come in higher margins than something we've been running. It actually, when we rebuy a new product, we're able to often renegotiate our costs because we're buying more, and there's efficiencies in the supply chain when we buy more. So that would come a little bit later as we increase the orders. And I will just say another component that is in our numbers is the reduction in costs across the board from our vendors, our vendor partners, and really focusing in on our efforts to be more accurate on our inventory buys so they can be more efficient in their factories. So that's also been a component of what's been going on, and one that you know should be stable through the back half of the year.

Simeon Gutman (Morgan Stanley)

Thank you. Good luck.

Laura Alber (President and CEO)

Thank you. Well, thank all of you for joining us. I hope you have a wonderful summer, and we look forward to talking to you in the fall. Take care.

Operator (participant)

This concludes today's conference.

Laura Alber (President and CEO)

Goodbye.

Operator (participant)

We thank you for joining. You may now disconnect your lines.