Williams-Sonoma (WSM)

Q2 2011 Earnings Call

August 23, 2011 10:00 am ET


Stephen Nelson - Director of Investor Relations

Laura Alber - Chief Executive Officer, President, Director and Member of Incentive Award Committee

Pat Connolly - Chief Marketing Officer, Executive Vice President and Director

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Ladies and gentlemen, thank you for standing by. Welcome to the Williams-Sonoma, Inc. Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded. I would now like to turn the call over to Mr. Steve Nelson, Vice President of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

Stephen 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 and this call contain 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 Exhibit 1 of 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 2011 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases 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 the date of this call.

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our second quarter 2011 results and our fiscal year 2011 outlook.

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.

The second quarter was another strong quarter for the company as we continue to leverage our multichannel marketing and operational strengths to gain profitable market share. During the quarter, net revenues increased 5%, and non-GAAP diluted earnings per share increased 19% to a second quarter record of $0.37 per share. Comparable brand revenues increased 6.5% as innovative merchandising, targeted marketing and a quality customer experience continue to attract customers to our brands. Non-GAAP operating margin climbed 80 basis points to 8% as strategically planned promotions drove

higher productivity and advertising costs. And we say increased benefits from our ongoing cost containment initiatives.

Throughout the quarter, we continued to invest in our key growth initiatives, including increasing our penetration in e-commerce, expanding the reach of the West Elm brand and extending our international presence. In e-commerce, net revenues increased 18% to 39% of total company revenues. Several key initiatives drove these strong results, including the ongoing optimization of natural search, increased paid search and improved relevance of event-triggered marketing.

In West Elm, comparable brand revenues increased 29% on top of 19% last year. And in international DTC, we completed the launch of our new international shipping websites across all brands, which now allows us to ship from the United States to customers in over 75 countries around the world.

We also launched a new corporate-wide customer service initiative. The goal of this initiative is to provide our customers with a seamless service experience that is personalized to their needs. To do so, we are removing the obstacles to yes [ph], and, through this initiative, see great opportunity to further delight our customers. The organizational response to this program has been very powerful, and every one of our leaders is committed to taking it to the next level as we strive to consistently exceed our customers' expectations.

In our core brands, comparable brand revenues increased 3.5% on top of 16% last year. In our emerging brands, including West Elm and PBteen, comparable brand revenues increased 25% on top of 20% last year. In international, we continue to aggressively explore profitable opportunities for retail expansion in other regions of the world as our 8 franchise stores in Dubai, Kuwait and Saudi Arabia continue to introduce new customers to our brands. In the back half of the year, we expect to add 5 additional franchise locations in Saudi Arabia, including 2 Pottery Barn and 3 Pottery Barn Kids stores.

In our supply chain, we continue to see ongoing customer service and cost reduction benefits from our distribution, transportation and packaging initiatives. These initiatives include optimizing our inbound and outbound packaging costs, further in-sourcing our home furniture delivery operations and expanding our company-managed Asian sourcing operations. We also significantly expanded our North Carolina upholstered furniture operations as the demand for our exclusive assortments continue to grow. This new facility, opened in July, is state-of-the-art. And while we are still filling back orders from the initial move, we are already producing record volumes.

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