Williams-Sonoma, Inc. announces strong fourth quarter and fiscal year 2020 results

Williams-Sonoma, Inc. (NYSE: WSM), the world’s largest digital-first, design-led and sustainable home retailer, today announced operating results for the fourth fiscal quarter (“Q4 20”) and fiscal year 2020 (“FY 20”) ended January 31, 2021 versus the fourth fiscal quarter (“Q4 19”) and fiscal year 2019 (“FY 19”) ended February 2, 2020.

“2020 was a year of challenges and dramatic changes in the way we live. It was also a year where we were pushed to adapt and clarify what is important to us. I could not be prouder of the accomplishments of the team here at Williams-Sonoma. Their dedication was a vital part of our ability to substantially outperform the industry and gain market share. In Q4, despite shipping constraints and low retail traffic, we delivered another quarter of accelerating revenue and profitability with 26% comp growth and over 85% EPS growth. This strong end to the year, combined with our outperformance throughout 2020, drove record fiscal year revenue growth, substantial operating margin expansion and EPS that was almost double that of last year,” said Laura Alber, President and Chief Executive Officer.

“These record results reflect the power of our three key differentiators, which set us apart and have become increasingly relevant. They are:

1. Our in‐house design;
2. Our digital-first channel strategy; and
3. Our values.

We will continue to invest in these differentiators to drive growth and gain market share,” Alber continued.

Alber concluded, “Looking ahead, we are very optimistic about our runway for growth and profitability. All of our brands are starting the year strong, and we expect this strength to continue through 2021 and beyond based on a number of factors. First, it is the ongoing momentum of our growth initiatives and the increasing relevance of our three key differentiators. Second, it is the recovery in our retail traffic and our inventory levels as we move throughout the year. And third, it is the favorable macro trends that are expected to continue to benefit our business for the long-term, including high consumer confidence, a strong housing market, an accelerating shift to e-commerce, the expected continuation of working from home in some capacity post pandemic, and the importance of sustainability and values to the consumer. Against this backdrop, we are confident that we will deliver mid-to-high single digit revenue growth and operating margin expansion in 2021. Longer-term, we have accelerated our path to $10 billion in net revenues and see us hitting this milestone in the next five years, with operating margins at 15%.”

FOURTH QUARTER 2020

• Comparable brand revenue growth accelerates to 25.7%, with all brands driving comparable revenue growth of over 20%, including Williams Sonoma at 26.2%, Pottery Barn at 25.7%, Pottery Barn Kids and Teen at 25.7% and West Elm at 25.2%
• Demand comparable brand revenue growth of nearly 30%, which includes orders placed but not yet filled or charged to the customer in the quarter (See Exhibit 1)
• E-commerce comparable brand revenue growth of 47.9% with e-commerce penetration holding at almost 70% of total net revenues
• Gross margin of 42.1%, expanding 450bps and driven by higher year-over-year merchandise margins and occupancy leverage of approximately 190bps; occupancy costs were $181 million, flat to last year
• GAAP SG&A rate of 24.6%; non-GAAP SG&A rate of 24.2%, leveraging approximately 190bps and reflecting the strength of our topline performance and ongoing financial discipline
• GAAP operating margin of 17.5%; non-GAAP operating margin of 17.9%, leveraging approximately 630bps to the highest ever quarterly operating margin performance
• GAAP diluted EPS of $3.92; non-GAAP diluted EPS of $3.95, or 85% higher than last year

FISCAL YEAR 2020

• Comparable brand revenue growth accelerates to 17.0%, with double-digit comparable revenue growth in all brands, including Williams Sonoma at 23.8%, Pottery Barn Kids and Teen at 16.6%, Pottery Barn at 15.2% and West Elm at 15.2%
• GAAP operating margin of 13.4%; non-GAAP operating margin of 14.2%, leveraging approximately 560bps to an all-time high
• GAAP diluted EPS of $8.61; non-GAAP diluted EPS of $9.04, or almost double that of last year
• Robust liquidity position with over $1.2 billion in cash, reflecting approximately $1.3 billion in operating cash flow resulting from a year of record performance, enabling a quarterly dividend increase for the second time in six months and a new stock repurchase authorization of $1 billion, as announced in a separate press release today
• Strong returns to shareholders of over $307 million, evenly split between dividends and share repurchases
• GAAP ROIC of 35.6%; non-GAAP ROIC of 38.1%, compared to 22.4% last year, driven by record earnings and inventory optimization (See Exhibit 1)

GUIDANCE

Fiscal Year 2021

Given the ongoing strength of our business as we enter fiscal year 2021, the expected recovery in our retail traffic and inventory levels as we move throughout the year, as well as the macro trends that we believe will continue to benefit our business, we are planning for fiscal year 2021 financial performance to be in line with our long-term financial guidance of mid-to-high single digit net revenue growth and year-over-year non-GAAP operating margin expansion.

Long-Term Financial Guidance

For the long-term, we are planning for continued net revenue growth of mid-to-high single digits and non-GAAP operating margin expansion. Our strong results, combined with our three key differentiators of in-house design, digital-first channel strategy and values, and the macro trends that should benefit our business over the long-term, give us confidence in these future growth projections and an accelerated path to $10 billion in net revenues and 15% non-GAAP operating margins in the next five years.

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, March 17, 2021, 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 http://ir.williams-sonomainc.com/events. A replay of the webcast will be available at http://ir.williams-sonomainc.com/events.

SEC REGULATION G — NON-GAAP INFORMATION

This press release includes non-GAAP financial measures. Exhibit 1 provides reconciliations of these non-GAAP financial measures to the most comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We have not provided a reconciliation of non-GAAP guidance measures to the corresponding GAAP measures on a forward-looking basis due to the potential variability and limited visibility of excluded items; these excluded items may include expenses related to the acquisition and operations of Outward, Inc., employment-related expense, tax legislation, a deferred tax asset and liability adjustment, impact of inventory write-offs, and impairment and early termination charges. We believe that these non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods. 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. In addition, certain other items may be excluded from non-GAAP financial measures when the company believes this provides greater clarity to management and investors. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for or superior to the GAAP financial measures presented in this press release and our financial statements and other publicly filed reports. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

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 are proven 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 ability to capture significant opportunities in the home furnishings industry; increase our market share; our ability to continue to improve performance; our focus on operational excellence; our ability to improve customers’ experience; our optimism about the future; our ability to maximize growth and maintain high profitability; our fiscal year 2021 guidance and long-term financial targets, including projected net revenue growth and operating margin expansion; our stock repurchase program and dividend expectations; our planned capital investments, and our proposed store openings and closures.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include: continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending; the impact of the coronavirus on our global supply chain, retail store operations and customer demand, 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; challenges associated with our increasing global presence; 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; the impact of current and potential future tariffs and our ability to mitigate impacts; 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 2, 2020 and all subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. We have not filed our Form 10-K for the fiscal year ended January 31, 2021. As a result all financial results described here should be considered preliminary, and are subject to change to reflect any necessary adjustments or changes in accounting estimates that are identified prior to the time we file the Form 10-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 the world’s largest digital-first, design-led and sustainable home retailer. The company’s products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed through e-commerce websites, direct-mail catalogs and retail stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and 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 India, as well as e-commerce websites in certain locations. We are also proud to lead the industry with our Environmental, Social and Governance (“ESG”) efforts. Our company is Good By Design — we’ve deeply engrained sustainability into our business. From our factories to your home, we’re united in a shared purpose to care for our people and our planet.

For more information on our ESG efforts, please visit: https://sustainability.williams-sonomainc.com/

WSM-IR

*See the Company’s 10-K and 10-Q filings for the definition of comparable brand revenue, which is calculated on a 13-week to 13-week basis for Q4 2020 and Q4 2019.
**Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.

*See the Company’s 10-K and 10-Q filings for the definition of comparable brand revenue, which is calculated on a 52-week to 52-week basis for fiscal 2020 and fiscal 2019.
**Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.

SEC Regulation G – Non-GAAP Information

These tables include non-GAAP gross profit, gross margin, selling, general and administrative expense, operating income, operating margin, income taxes, effective tax rate and diluted EPS. 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 actual results on a comparable basis with prior periods. 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.

Notes to Exhibit 1:

1. During Q4 2020 and FY2020, we incurred approximately $3.2 million and $12.1 million, respectively, associated with acquisition-related compensation expense and the amortization of acquired intangibles for Outward, Inc. During Q4 2019 and FY2019, we incurred approximately $9.1 million and $30.1 million, respectively, associated with acquisition-related compensation expense and the amortization of acquired intangibles, as well as the operations of Outward, Inc.
2. During FY2020, we incurred approximately $11.4 million of inventory write-offs for inventory with minor damage that we could not liquidate through our outlets due to store closures resulting from COVID-19.
3. During Q4 2019 and FY2019, we incurred approximately $0.6 million and $8.4 million, respectively, of employment-related expense that was primarily associated with severance-related reorganization expenses.
4. During Q4 2020 and FY2020, we incurred approximately $5.1 million and $27.1 million, respectively, of expense associated with store asset impairments due to the impact that COVID-19 had on our retail stores.
5. During Q4 2020 and FY2020, we recorded approximately $4.4 million and $5.0 million, respectively, of tax benefit resulting from a non-recurring adjustment to certain deferred tax assets and liabilities. During Q4 2019, we recorded an approximate $6.0 million tax benefit resulting from a non-recurring adjustment to a deferred tax liability.

6. During Q4 2019 and FY2019, we recorded a net income tax expense of approximately $0.1 million and $0.2 million, respectively, associated with tax legislation changes.

Return on Invested Capital (“ROIC”)

We believe ROIC is a useful financial measure for investors in evaluating the efficient and effective use of capital, and is an important component of long-term shareholder return. We define ROIC as non-GAAP net operating profit after tax (NOPAT), divided by our average invested capital. NOPAT is defined as non-GAAP operating income, plus rent expense, less estimated taxes at the company’s effective tax rate. Average invested capital is defined as the two-year average of total assets less current liabilities, plus capitalized leases, less cash in excess of $200 million.

ROIC is not a measure of financial performance under GAAP, and should be considered in addition to, and not as a substitute for other financial measures prepared in accordance with GAAP. Our method of determining ROIC may differ from other companies’ methods and therefore may not be comparable.

Demand Comparable Revenue

Demand comparable revenue is a metric we use to reference the total value of merchandise orders placed on a comparable period over period basis. These transactions reflect the demand for an order, and may not be indicative of when an order is fulfilled, shipped, or charged to the customer.

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