This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: supply chain challenges; backorder levels and inventory constraints; the continuing impact of the COVID-19 pandemic on our business, results of operations and financial condition; our revenue growth; expanding our sales and operating margin; the impact of inflation and measures to control inflation on consumer spending; our strategic initiatives; our beliefs regarding customer behavior and industry trends; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash, including our commitment to continue or increase quarterly dividend payments; our future compliance with the financial covenants contained in our credit facility; our belief that our cash on-hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in this document and our Annual Report on Form 10-K for the year ended
January 30, 2022, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.
Williams-Sonoma, Inc.("Company, "we", or "us") is a specialty retailer of high-quality sustainable products for the home. Our products in our portfolio of eight brands - Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery BarnTeen, West Elm, Williams Sonoma Home, Rejuvenation, and Mark and Graham - are marketed through e-commerce websites, at our retail stores and through our direct-mail catalogs. These brands are also part of The Key Rewards, our loyalty and credit card program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australiaand the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico, South Korea, and Indiaas well as e-commerce websites in certain locations. We are also proud to be a leader in our industry with our Environmental, Social and Governance ("ESG") efforts. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended May 1, 2022("first quarter of fiscal 2022"), as compared to the thirteen weeks ended May 2, 2021("first quarter of fiscal 2021"), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude. During fiscal 2021 and continuing into the first quarter of fiscal 2022, global supply chain disruptions, including COVID-19 related factory closures and increased port congestion, caused delays in inventory receipts, increased raw material costs, and higher shipping-related charges. We expect these supply chain challenges to continue into the remainder of fiscal 2022, which could negatively impact our business.
Financial results for the first quarter of fiscal 2022
Net revenues in the first quarter of fiscal 2022 increased by
$142.2 millionor 8.1%, compared to the first quarter of fiscal 2021, with comparable brand revenue growth of 9.5%. This was driven by strength in both retail and e-commerce, particularly in our Pottery Barnand West Elm brands, primarily due to an increase in furniture sales. Net revenue growth was partially offset by comparable brand revenue declines in our Williams Sonoma and Pottery Barn Kidsand Teen brands, and a decrease in international net revenues of 5.0%. 12 -------------------------------------------------------------------------------- Table of Contents For the first quarter of fiscal 2022, we delivered comparable brand revenue growth of 9.5%. Pottery Barn, our largest brand, delivered 14.6% comparable brand revenue growth during the quarter. All channels and product categories contributed, with growth primarily driven by our high-quality proprietary furniture business. In addition, we saw strength across the Pottery Barnbusiness - in core product, new offerings and our seasonal inventories. In West Elm, comparable brand revenue growth was 12.8%, driven by strong performance in furniture. Customers responded to new collections and line extensions in incremental sizes and aesthetics. New categories such as kids and bath contributed to incremental growth. The Williams Sonoma brand saw a comparable brand revenue decline of 2.2% during the quarter, following a 35.3% increase in comparable brand revenues in the first quarter of fiscal 2021. Comparable brand revenues in the first quarter of fiscal 2022 were affected by out-of-stock inventories, including constraints on our exclusive products. In our Pottery Barn Kidsand Teen brands, we saw comparable brand revenue decline 3.1% during the quarter, driven by supply chain pressure out of Vietnam. Despite some current recoveries in inventory, our backorders remain at significant levels, and we have seen further push-outs of delivery. Finally, our emerging brands, Rejuvenation and Mark and Graham, delivered a combined comparable brand revenue growth of 31.0% during the first quarter of fiscal 2022. For the first quarter of fiscal 2022, diluted earnings per share was $3.50, compared to $2.90in the first quarter of fiscal 2021 (which included a $0.03impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.). As of May 1, 2022, we had $324.8 millionin cash and generated positive operating cash flow of $184.5 millionyear-to-date. In addition to our strong cash balance, we also ended the quarter with no outstanding borrowings under our revolving line of credit. This strong liquidity position allowed us to fund the operations of the business by investing $71.2 millionin capital expenditures year-to-date, and to provide stockholder returns of $559.2 millionyear-to-date through stock repurchases and dividends.
Looking forward to the balance of the year, we believe our operating model, which includes our key differentiators - our in-house design, our digital-first channel strategy, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. However, we continue to experience delays and increased costs across our global supply chain, including higher product costs, elevated backorders, higher freight and incremental distribution center costs for additional space to support our overall growth and our ongoing mix shift to furniture. It is hard to predict with certainty when these supply chain challenges will be fully resolved and we currently expect these supply chain challenges, combined with our strong demand, to negatively impact our inventory levels until the second half of fiscal year 2022. Despite these challenges, we believe the demand for our proprietary and sustainably-sourced products, our growth strategies and the efficiencies of our operating model leave us well-positioned to mitigate these costs in both the short- and long-term. For more information on risks, please see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
January 30, 2022. NET REVENUES Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, at our retail stores and through our direct mail catalogs, and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, incentives received from credit card issuers in connection with our private label and co-branded credit cards, and breakage income related to our stored-value cards. Revenue from the sale of merchandise is reported net of sales returns. Net revenues in the first quarter of fiscal 2022 increased by $142.2 millionor 8.1%, compared to the first quarter of fiscal 2021, with comparable brand revenue growth of 9.5%. This was driven by strength in both retail and e-commerce, particularly in our Pottery Barnand West Elm brands, primarily due to an increase in furniture sales. Net revenue growth was partially offset by comparable brand revenue declines in our Williams Sonoma and Pottery Barn Kidsand Teen brands, and a decrease in international net revenues of 5.0%. 13 -------------------------------------------------------------------------------- Table of Contents Comparable Brand Revenue Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months, and which have been open for at least 12 consecutive months without closure for seven or more consecutive days within the same fiscal month. Comparable stores that were temporarily closed due to COVID-19 were not excluded from the comparable brand revenue calculation. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand. For the Thirteen Weeks Ended Comparable brand revenue growth (decline) May 1, 2022 May 2, 2021 Pottery Barn 14.6 % 41.3 % West Elm 12.8 50.9 Williams Sonoma (2.2) 35.3 Pottery Barn Kids and Teen (3.1) 27.6 Total1 9.5 % 40.4 %
1 Total brand comparable store sales growth includes the results of Rejuvenation and Mark and Graham.
STORE DATA Average Leased Square Store Count Footage Per Store January 30, May 1, May 1, 2022 Openings Closings 2022 May 2, 20211 2022 May 2, 20211 Pottery Barn 188 1 (1) 188 195 14,500 14,600 Williams Sonoma 174 2 (1) 175 195 6,900 6,800 West Elm 121 - - 121 121 13,200 13,100 Pottery Barn Kids 52 - - 52 57 7,700 7,800 Rejuvenation 9 - - 9 10 9,400 8,500 Total 544 3 (2) 545 578 11,000 10,900 Store selling square footage at period-end 3,823,000 3,972,000 Store leased square footage at period-end 6,006,000 6,289,000
1Fiscal 2021 retail store data includes stores temporarily closed due to COVID-19. All stores reopened at the end of fiscal 2021.
COST OF GOODS SOLD For the Thirteen Weeks Ended % Net % Net (In thousands) May 1, 2022 Revenues May 2, 2021 Revenues Cost of goods sold 1
$ 1,062,67956.2 % $ 996,17657.0 %
1Includes total occupancy expenditures of
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as replacements, damages, obsolescence and shrinkage. Occupancy expenses consist of rent, other occupancy costs (including property taxes, common area maintenance and utilities) and depreciation. Shipping costs consist of third-party delivery services and shipping materials. Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution related administrative expenses, are recorded in selling, general and administrative expenses. 14 -------------------------------------------------------------------------------- Table of Contents First Quarter of Fiscal 2022 vs. First Quarter of Fiscal 2021 Cost of goods sold increased
$66.5 million, or 6.7%, in the first quarter of fiscal 2022, compared to the first quarter of fiscal 2021. Cost of goods sold as a percentage of net revenues decreased to 56.2% in the first quarter of fiscal 2022 from 57.0% in the first quarter of fiscal 2021. This decrease in rate was primarily driven by higher merchandise margins from reduced promotional activity.
SELLING, GENERAL AND ADMINISTRATIVE FEES
For the Thirteen Weeks Ended (In thousands) May 1, 2022 % Net Revenues May 2, 2021 % Net Revenues
Selling, general and administrative expenses
$ 477,67627.3 % Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.
First Quarter of Fiscal 2022 vs. First Quarter of Fiscal 2021
Selling, general and administrative expenses increased
$27.4 million, or 5.7%, in the first quarter of fiscal 2022, compared to the first quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.7% in the first quarter of fiscal 2022 from 27.3% in the first quarter of fiscal 2021. This decrease in rate was primarily driven by the leverage of employment costs and advertising expenses from higher sales and overall cost discipline. INCOME TAXES The effective tax rate was 21.5% for the first quarter of fiscal 2022 compared to 16.6% for the first quarter of fiscal 2021. The increase in the effective tax rate is primarily due to less excess tax benefit from stock-based compensation in fiscal 2022 compared to fiscal 2021.
CASH AND CAPITAL RESOURCES
Material cash needs
There were no material changes during the quarter to the Company's material cash requirements, commitments and contingencies that are described in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 2022, which is incorporated herein by reference.
Share buyback program and dividends
See Note G to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividends, within Item 1 of this Quarterly Report on Form 10-Q for further information. Liquidity Outlook For the remainder of fiscal 2022, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, advertising and marketing initiatives, stock repurchases, the payment of income taxes, rental payments on our leases, property and equipment purchases, and dividend payments. We believe our cash on hand, cash flows from operations, and our available credit facilities will provide adequate liquidity for our business operations as well as stock repurchases, capital expenditures, dividends and other liquidity requirements associated with our business operations over the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.
Sources of liquidity
15 -------------------------------------------------------------------------------- Table of Contents In addition to our cash balances on hand, we have a credit facility (the "Credit Facility") which provides for a
$500 millionunsecured revolving line of credit (the "Revolver"). Our Revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders' option, to increase the Revolver by up to $250 millionto provide for a total of $750 millionof unsecured revolving credit. During the first quarter of fiscal 2022, we had no borrowings under our Revolver. Additionally, as of May 1, 2022, issued but undrawn standby letters of credit of $11.4 millionwere outstanding under our Revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers' compensation and other insurance programs. Our Credit Facility contains certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for operating lease liabilities to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of May 1, 2022, we were in compliance with our financial covenants under our Credit Facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.
Letter of credit facilities
We have three unsecured letter of credit reimbursement facilities for a total of
$35 million. Our letter of credit facilities contain covenants that are consistent with our Credit Facility. Interest on unreimbursed amounts under our letter of credit facilities accrues at a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio. As of May 1, 2022, the aggregate amount outstanding under our letter of credit facilities was $6.5 million, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration date possible for any future letters of credit issued under the facilities is January 19, 2023.
Cash flow from operating activities
For the first quarter of fiscal 2022, net cash provided by operating activities was
$184.5 millioncompared to $238.9 millionfor the first quarter of fiscal 2021. For the first quarter of fiscal 2022, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, an increase in income tax payable, and an increase in gift card and other deferred revenue (as a result of an increase in sales), partially offset by higher spending on merchandise inventories (as a result of the strong customer demand for our products) and decreases in accrued expenses and operating lease liabilities. Net cash provided by operating activities for the first quarter of fiscal 2022 decreased compared to the first quarter of fiscal 2021, primarily due to an increase in merchandise inventories and a decrease in accrued expenses and other liabilities, partially offset by an increase in net earnings adjusted for non-cash items.
Cash flow from investing activities
For the first quarter of fiscal 2022, net cash used in investing activities was
$71.1 millioncompared to $42.3 millionfor the first quarter of fiscal 2021, and was primarily attributable to purchases of property and equipment related to technology and supply chain enhancements.
Cash flow from financing activities
For the first quarter of fiscal 2022, net cash used in financing activities was
$637.7 millioncompared to $759.6 millionfor the first quarter of fiscal 2021, driven by repurchases of common stock, tax withholdings related to stock-based awards and payment of dividends. Net cash used in financing activities for the first quarter of fiscal 2022 decreased compared to the first quarter of fiscal 2021, primarily due to the repayment of debt in the first quarter of fiscal 2021 that did not recur in the first quarter of fiscal 2022, partially offset by an increase in repurchases of common stock.
Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, distribution facilities and customer care centers. 16
CRITICAL ACCOUNTING ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with
U.S.GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the first quarter of fiscal 2022, there were no significant changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.
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