Williams-Sonoma CEO Discusses Q2 2010 Results - Earnings Call Transcript

Williams-Sonoma CEO Discusses Q2 2010 Results - Earnings Call Transcript
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Williams-Sonoma, Inc. (WSM)

Q2 2010 Earnings Call Transcript

August 19, 2010 10:00 am ET

Executives

Steve Nelson – Director, IR

Laura Alber – President and CEO

Sharon McCollam – EVP, COO and CFO

Pat Connolly – EVP and Chief Marketing Officer

Analysts

Budd Bugatch – Raymond James

Colin McGranahan – Bernstein

Trisha Dale – Wells Fargo Securities

Joe Feldman – Telsey Advisory Group

David Magee – SunTrust Robinson Humphrey

Scot Ciccarelli – RBC Capital Markets

Alan Rifkin – Bank of America Merrill Lynch

Chris Horvers – JPMorgan

Neely Tamminga – Piper Jaffray

Brad Thomas – KeyBanc Capital Markets

P.G. Vicky – Citi Investment Research

Laura Champine – Cowen & Company

Brian Nagel – Oppenheimer

Matt McGinley – ISI Group

Michael Lasser – Barclays Capital

Jennifer Milan – Sterne, Agee

Presentation

Operator

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Welcome to the Williams-Sonoma Incorporated second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the presentation. This conference is being recorded.

I would now like to turn the call over to Steve Nelson, Director of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

Steve Nelson

Good morning. This morning’s conference call should be considered in conjunction with the press release that we issued earlier today. Our press release in this call contains non-GAAP financial measures that exclude the impact of unusual business events.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and an explanation of why these non-GAAP financial measures are useful are discussed in the press release.

The forward-looking statements included in this morning’s call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, guidance, growth plans, and prospects of the company in 2010 and beyond, and are subject to certain risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company’s current press release and SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after this call.

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

Laura Alber

Good morning and thank you for joining us. With me today are Pat Connolly, our Chief Marketing Officer, and Sharon McCollam, our Chief Operating and Chief Financial Officer.

While many retailers saw a slowdown in consumer spending in the second quarter, we continue to see ongoing strength across all of our brands. Innovative merchandising at compelling price points combined with highly targeted marketing and a superior customer experience drove these better than expected results.

During the second quarter, net revenues increased 15% and we delivered the highest second quarter non-GAAP diluted EPS in our history at $0.31. Throughout the quarter, revenue trended at or above the high-end of expectations and gross margins continued to substantially improve versus last year.

Across all brands, we capitalize on the competitive strengths that are driving our business today; creativity in product and presentation, service, our best-in-class multi-channel strategy, and a world class supply chain.

In our core brands, net revenues increased 15%. Pottery Barn saw the greatest increase followed by Pottery Barn Kids and Williams-Sonoma. In our emerging brands, including West Elm, PBteen and Williams-Sonoma Home, net revenues increased 16%.

Initiatives including innovative products at a great value, e-marketing and our retail clienteling program were the key drivers of our overall better-than-expected top line performance.

In the retail channel, comparable store sales increased 13.6%. In the DTC channel, net revenues increased 20%, including a 28% increase in eCommerce. eCommerce is our fastest growing channel and we continue to identify new opportunities to build brand awareness and customer engagement through targeted email, paid search, affiliate marketing and mobile technologies.

All of these initiatives combined with our catalog circulation optimization strategy have contributed to an ongoing increase in online traffic and conversion rates while reducing the company’s overall advertising rates by 30 basis points despite a 70 basis point investment in new marketing expenses.

Our capabilities in these areas are advancing quickly and while the catalog remains a very effective marketing vehicle, our e-marketing activities are finding new customers and bringing them not only to the direct-to-customer channels but also to our stores.

In our International business, we are pleased with the performance of our first four franchise stores in Dubai and Kuwait. While this has little immediate financial upside, it is a strategic step toward a longer-term international growth plan. Five additional stores are already planned for 2011.

In supply chain, we successfully completed the first phase of our east coast distribution consolidation and continue to see ongoing benefits from our hub distribution strategies.

We also saw incremental savings from our newly introduced packaging, optimization and domestic transportation initiative. All these initiatives combined with strong inventory management drove increased gross margin dollars during the quarter. We will, however, see an increase in inventory levels in the third and fourth quarters as we replenish the better than expected sales from the first half of the year.

As we look forward to the third quarter and balance of the year, we are extremely encouraged by the sales and margin trends we are seeing in our business today, particularly in the Pottery Barn and West Elm brands.

As such, we are increasing our full year guidance for the outperformance we saw in the second quarter and the upside we are currently seeing in the third quarter. That brings our fiscal year 2010 revenue growth to a range of 9% to 11% and our non-GAAP diluted EPS to a range of $1.63 to a $1.70 versus $0.95 last year.

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