Williams-Sonoma's fiscal Q1 earnings climb 28.5% from a year ago to US$39.5M as sales grow 8.6% to US$888M; results were best Q1 in company's history, exceeding expectations for operating margin, diluted EPS, says CEO

Cindy Allen

SAN FRANCISCO , May 24, 2013 (press release) – Williams-Sonoma, Inc. (NYSE: WSM) today announced operating results for the 13 weeks ended May 5, 2013 (“Q1 13”) versus the 13 weeks ended April 29, 2012 (“Q1 12”). Q1 13 Results

Net revenues grew 8.6% to $888 million versus $818 million in Q1 12 with comparable brand revenue growth of 7.2%.
Operating margin increased to 7.2% from 6.0% in Q1 12. Excluding unusual business events, non-GAAP operating margin increased to 7.5% from 6.9% in Q1 12 (see Exhibit 1).
Diluted earnings per share (“EPS”) grew 33% to $0.40. Excluding unusual business events, non-GAAP EPS increased 21% to $0.41 (see Exhibit 1).
Cash returned to stockholders totaled $63 million comprising $41 million in stock repurchases and $22 million in dividends.

Laura Alber, President and Chief Executive Officer commented, “Our first quarter 2013 financial results represent our best first quarter in the company’s history, exceeding our expectations for both operating margin and diluted EPS, on revenue growth of 9%. We delivered these results while simultaneously investing in our future growth strategies.”

Alber continued, “Based on our results to date and our continued confidence in the full year, we are raising our FY 2013 revenues to a range of $4.22 billion to $4.30 billion and our non-GAAP EPS to a range of $2.67 to $2.77.”

Alber remarked, “In the first quarter, we reached an important new milestone with the launch of our first company-owned stores and e-commerce sites in Australia. We also announced today our further global expansion into the United Kingdom later this year, and we are excited about the opportunities we see to grow our brands globally.”

Comparable brand revenue growth in Q1 13 increased 7.2% on top of 5.4% in Q1 12 as shown in the table below:

First Quarter Comparable Brand Revenue Growth by Concept*

	Q1 13		Q1 12
Pottery Barn	7.6	%	9.1	%
Williams-Sonoma	1.9	%	(4.3	%)
Pottery Barn Kids	6.9	%	(0.8	%)
West Elm	11.8	%	22.1	%
PBteen	16.1	%	(6.0	%)
Total	7.2	%	5.4	%

*			See the company’s 10-K and 10-Q filings for the definition of comparable brand revenue growth.

Direct-to-customer (“DTC”) net revenues in Q1 13 increased 11.9% to $419 million from $374 million in Q1 12 with increases across all brands. This growth was primarily led by Pottery Barn, West Elm, Williams-Sonoma and Pottery Barn Kids. DTC net revenues generated 47% of total company net revenues in Q1 13 versus 46% in Q1 12.

Retail net revenues in Q1 13 increased 5.8% to $469 million from $443 million in Q1 12, driven primarily by our international franchise operations, Pottery Barn and West Elm, partially offset by a decrease in Williams-Sonoma. Including six net new stores within Q1 13, retail leased square footage increased 2.0% from the end of Q1 12.

Operating margin, including unusual business events, in Q1 13 was 7.2% versus 6.0% in Q1 12. Excluding unusual business events, non-GAAP operating margin in Q1 13 was 7.5% versus 6.9% last year:

Gross margin decreased 20 basis points to 37.6% from 37.8% in Q1 12.
Selling, general and administrative (“SG&A”) expenses were $270 million or 30.5% of net revenues versus $260 million or 31.8% in Q1 12. Excluding the 40 basis point impact related to unusual business events in Q1 13 and the 90 basis point impact related to unusual business events in Q1 12, non-GAAP SG&A expenses were $267 million or 30.1% in Q1 13 versus $253 million or 30.9% in Q1 12.

EPS in Q1 13 increased 33% to $0.40 from $0.30 in Q1 12. Excluding unusual business events, non-GAAP EPS in Q1 13 increased 21% to $0.41 from $0.34 in Q1 12.

Merchandise inventories at the end of Q1 13 increased 12.8% to $662 million versus $586 million at the end of Q1 12.

STOCK REPURCHASE PROGRAM

During Q1 13, we repurchased 800,882 shares of common stock at an average cost of $51.41 per share and a total cost of approximately $41 million. As of May 5, 2013, there was $709 million remaining under the three-year $750 million stock repurchase program announced in March 2013.

FY 13 FINANCIAL GUIDANCE

Second Quarter 2013 Guidance (13 weeks)

Net revenues in the second quarter of fiscal 2013 (“Q2 13”) are expected to be in the range of $920 million to $940 million.
Comparable brand revenue growth in Q2 13 is expected to be in the range of 4% to 6%.
Diluted EPS in Q2 13 is expected to be in the range of $0.43 to $0.46.

Fiscal Year 2013 Guidance (52 weeks)


		FY 13 GUID
Total Net Revenues (millions)		$4,220 - $4,300
Comparable Brand Revenue Growth (52-week vs. 52-week)		4 - 6 %
Operating Margin		10.0 - 10.3 %
Diluted EPS		$2.67 - $2.77
Income Tax Rate		38.2 - 38.6 %
Capital Spending (millions)		$200 - $220
Depreciation and Amortization (millions)		$150 - $160

Fiscal Year 2013 Store Opening and Closing Guidance by Retail Concept


	FY 12 ACT	FY 13 GUID
	FY 12 ACT	FY 13 GUID
Retail Concept	Total	New	Close		End
Williams-Sonoma	253	7	(15	)	245
Pottery Barn	192	6	(4	)	194
Pottery Barn Kids	84	4	(5	)	83
West Elm	48	11	(1	)	58
Rejuvenation	4	-	-		4
Total	581	28	(25	)	584

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, May 23, 2013, at 2:00 P.M. (PT). The call, hosted by Laura Alber, President and Chief Executive Officer, will be open to the general public via live webcast and can be accessed at www.williams-sonomainc.com/webcast. A replay of the webcast will be available at www.williams-sonomainc.com/webcast.

SEC REGULATION G -- NON-GAAP INFORMATION

This press release includes non-GAAP SG&A, operating margin and diluted EPS. These non-GAAP financial measures exclude the impact of employee separation charges. We have reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in the text of this release and in Exhibit 1. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our quarterly diluted EPS actual results and FY 13 guidance on a comparable basis with our quarterly and FY 12 results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements relating to: our growth potential; our growth strategies; our global expansion; our future financial guidance, including Q2 13 and fiscal year 2013 guidance; our three year stock repurchase program; our proposed store openings and closures; and our beliefs regarding non-GAAP financial measures.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include: accounting adjustments as we close our books for Q1 13; recent changes in general economic conditions, and the impact on consumer confidence and consumer spending; new interpretations of or changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; changes in consumer spending based on weather, political, competitive and other conditions beyond our control; delays in store openings; competition from companies with concepts or products similar to ours; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; effective inventory management; our ability to manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in e-marketing, infrastructure and regulation; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; dependence on external funding sources for operating capital; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; and other risks and uncertainties described more fully in our public announcements, reports to stockholders and other documents filed with or furnished to the SEC, including our Annual Report on Form 10-K for the fiscal year ended February 3, 2013 and all subsequent current reports on Form 8-K. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

ABOUT WILLIAMS-SONOMA, INC.

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing eight distinct merchandise strategies – Williams-Sonoma (cookware and wedding registry), Pottery Barn (furniture and wedding registry), Pottery Barn Kids (kids’ furniture and baby registry), PBteen (girls’ bedding and boys’ bedding), West Elm (modern furniture and room decor), Williams-Sonoma Home (luxury furniture and decorative accessories), Rejuvenation (lighting and hardware) and Mark and Graham (personalized gifts and gifts for the home) – are marketed through e-commerce websites, direct mail catalogs and 587 stores. Williams-Sonoma, Inc. currently operates in the United States, Canada and Australia, offers international shipping to customers worldwide, and has an unaffiliated franchisee that operates 24 stores in the Middle East.


WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) THIRTEEN WEEKS ENDED MAY 5, 2013 AND APRIL 29, 2012 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	FIRST QUARTER
	2013					2012
	(13 Weeks)					(13 Weeks)
	$			% of Revenues		$			% of Revenues

Direct-to-customer net revenues	$	419,084		47.2	%	$	374,407		45.8	%
Retail net revenues		468,724		52.8			443,207		54.2
Net revenues		887,808		100.0			817,614		100.0

Cost of goods sold		553,623		62.4			508,348		62.2

Gross margin		334,185		37.6			309,266		37.8

Selling, general and administrative expenses		270,402		30.5			259,943		31.8

Operating income		63,783		7.2			49,323		6.0
Interest (income), net		(189	)	-			(191	)	-

Earnings before income taxes		63,972		7.2			49,514		6.1
Income taxes		24,506		2.8			18,798		2.3

Net earnings	$	39,466		4.4	%	$	30,716		3.8	%

Earnings per share:
Basic	$	0.40				$	0.31
Diluted	$	0.40				$	0.30

Shares used in calculation of earnings per share:
Basic		97,704					100,172
Diluted		99,515					101,956

WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)

	May 5, 2013		February 3, 2013		April 29, 2012
Assets
Current assets
Cash and cash equivalents	$	252,536	$	424,555	$	376,464
Restricted cash		16,061		16,055		14,737
Accounts receivable, net		60,667		62,985		47,688
Merchandise inventories, net		661,541		640,024		586,270
Prepaid catalog expenses		36,407		37,231		34,308
Prepaid expenses		52,695		26,339		32,975
Deferred income taxes, net		99,739		99,764		91,774
Other assets		9,434		9,819		8,606
Total current assets		1,189,080		1,316,772		1,192,822

Property and equipment, net		817,249		812,037		726,133
Non-current deferred income taxes, net		10,738		12,398		11,764
Other assets, net		46,152		46,472		38,847
Total assets	$	2,063,219	$	2,187,679	$	1,969,566

Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	211,086	$	259,162	$	189,660
Accrued salaries, benefits and other		84,886		120,632		77,732
Customer deposits		222,018		207,415		197,347
Income taxes payable		13,377		41,849		30,805
Current portion of long-term debt		1,696		1,724		1,652
Other liabilities		27,207		26,345		23,510
Total current liabilities		560,270		657,127		520,706

Deferred rent and lease incentives		172,312		171,198		179,064
Long-term debt		3,753		3,753		5,450
Other long-term obligations		44,666		46,463		48,112
Total liabilities		781,001		878,541		753,332

Stockholders' equity		1,282,218		1,309,138		1,216,234
Total liabilities and stockholders' equity	$	2,063,219	$	2,187,679	$	1,969,566

ADDITIONAL INFORMATION
	Store Count					Average Leased Square Footage Per Store
Retail Concept	February 3, 2013	Openings	Closings	May 5, 2013	April 29, 2012	May 5, 2013	April 29, 2012
Williams-Sonoma	253	4	(3)	254	259	6,600	6,500
Pottery Barn	192	4	(1)	195	193	13,800	13,900
Pottery Barn Kids	84	2	(1)	85	82	8,100	8,200
West Elm	48	1	-	49	38	14,800	16,600
Rejuvenation	4	-	-	4	3	13,200	17,200
Total	581	11	(5)	587	575	9,900	10,000

	Total Store Square Footage
	February 3, 2013			May 5, 2013	April 29, 2012
Total store selling square footage	3,548,000			3,586,000	3,522,000
Total store leased square footage	5,778,000			5,840,000	5,725,000

WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THIRTEEN WEEKS ENDED MAY 5, 2013 AND APRIL 29, 2012 (DOLLARS IN THOUSANDS)

	YEAR-TO-DATE
	2013			2012
	(13 Weeks)			(13 Weeks)
Cash flows from operating activities
Net earnings	$	39,466		$	30,716

Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization		36,609			32,794
Loss on sale/disposal of assets		360			362
Amortization of deferred lease incentives		(6,353	)		(6,563	)
Deferred income taxes		(3,431	)		(3,172	)
Tax benefit from exercise of stock-based awards		9,186			7,668
Excess tax benefit from exercise of stock-based awards		(4,047	)		(4,152	)
Stock-based compensation expense		8,991			7,993
Changes in:
Accounts receivable		1,512			(1,627	)
Merchandise inventories		(21,537	)		(32,571	)
Prepaid catalog expenses		824			(14	)
Prepaid expenses and other assets		(25,863	)		(9,695	)
Accounts payable		(52,345	)		(25,317	)
Accrued salaries, benefits and other current and long-term liabilities		(37,028	)		(36,135	)
Customer deposits		14,691			6,827
Deferred rent and lease incentives		7,613			3,783
Income taxes payable		(28,470	)		8,366
Net cash used in operating activities		(59,822	)		(20,737	)

Cash flows from investing activities:
Purchases of property and equipment		(47,444	)		(27,819	)
Proceeds from insurance reimbursement		760			-
Other		26			34
Net cash used in investing activities		(46,658	)		(27,785	)

Cash flows from financing activities:
Repurchase of common stock		(41,174	)		(61,733	)
Payment of dividends		(21,985	)		(22,136	)
Repayments of long-term obligations		(28	)		(171	)
Proceeds from exercise of stock-based awards		3,767			8,275
Tax withholdings related to stock-based awards		(9,384	)		(6,866	)
Excess tax benefit from exercise of stock-based awards		4,047			4,152
Net cash used in financing activities		(64,757	)		(78,479	)

Effect of exchange rates on cash and cash equivalents		(782	)		708
Net decrease in cash and cash equivalents		(172,019	)		(126,293	)
Cash and cash equivalents at beginning of period		424,555			502,757
Cash and cash equivalents at end of period	$	252,536		$	376,464

Exhibit 1 Reconciliation of Q1 13 and Q1 12 Actual GAAP to Non-GAAP Operating Margin By Segment*
(Dollars in thousands)

	DTC				RETAIL				UNALLOCATED				TOTAL
	Q1 13		Q1 12		Q1 13		Q1 12		Q1 13		Q1 12		Q1 13		Q1 12
Net Revenues	$	419,084	$	374,407	$	468,724	$	443,207	$	-	$	-	$	887,808	$	817,614
GAAP Operating Income/(Expense)		95,941		77,955		34,016		34,353		(66,174)		(62,985)		63,783		49,323
GAAP Operating Margin		22.9%		20.8%		7.3%		7.8%		(7.5%)		(7.7%)		7.2%		6.0%
Unusual Business Events (Notes 1 and 2)		-		-		-		-		2,936		6,990		2,936		6,990
Non-GAAP Operating Income/(Expense) Excluding Unusual Business Events	$	95,941	$	77,955	$	34,016	$	34,353	$	(63,238)	$	(55,995)	$	66,719	$	56,313
Non-GAAP Operating Margin (Note 3)		22.9%		20.8%		7.3%		7.8%		(7.1%)		(6.8%)		7.5%		6.9%

*			See the company’s 10-K and 10-Q filings for additional information on segment reporting and for the definition of Operating Income/(Expense) and Operating Margin.

Reconciliation of FY 13 Guidance and FY 12 Actual GAAP to Non-GAAP Diluted Earnings Per Share* (Totals rounded to the nearest cent per diluted share)

	Q1 13 ACT	Q2 13 GUID	FY 13 GUID
	(13 Weeks)	(13 Weeks)	(52 Weeks)
2013 GAAP Diluted EPS	$0.40	$0.43 - $0.46	$2.66 - $2.76
Impact of Employee Separation Charges (Note 1)	$0.02	-	$0.02
2013 Non-GAAP Diluted EPS Excluding Unusual Business Events (Note 3)**	$0.41	$0.43 - $0.46	$2.67 - $2.77

	Q1 12 ACT	Q2 12 ACT	FY 12 ACT
	(13 Weeks)	(13 Weeks)	(53 Weeks)
2012 GAAP Diluted EPS	$0.30	$0.43	$2.54
Impact of Employee Separation Charges (Note 2)	$0.04	-	$0.04
2012 Non-GAAP Diluted EPS Excluding Unusual Business Events (Note 3)	$0.34	$0.43	$2.58

*			Due to the differences between quarterly share counts and the effect of quarterly rounding to the nearest cent per diluted share, the year-to-date calculation of GAAP and non-GAAP diluted EPS may not equal the sum of the quarters.

**			Due to rounding to the nearest cent per diluted share, totals may not equal the sum of the line items in the table above.

Note 1:			Impact of Employee Separation Charges – During Q1 13, we incurred charges of approximately $0.02 per diluted share associated with the previously announced retirement of the former President of the Williams-Sonoma brand. These charges were recorded within the unallocated segment.

Note 2:			Impact of Employee Separation Charges – During Q1 12 and FY 12, we incurred charges of approximately $0.04 per diluted share primarily associated with the previously announced retirement of our former Executive Vice President, Chief Operating and Chief Financial Officer. These charges were recorded within the unallocated segment.

Note 3:			SEC Regulation G – Non-GAAP Information – These tables include non-GAAP financial measures, Non-GAAP Operating Margin and Diluted EPS Excluding Unusual Business Events. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our quarterly and FY 13 operating margin and diluted EPS actual results and guidance on a comparable basis with our quarterly and FY 12 actual results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.