Title

Presentation

Williams-Sonoma, Inc. beats earnings expectations. Reported EPS is $3.66, expectations were $3.35.

Operator: Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Jeremy Brooks: Good morning and thank you for joining our third quarter earnings call. I’m here this morning with Laura Alber, our President and Chief Executive Officer; Jeff Howie, our Chief Financial Officer; Yasir Anwar, our Chief Digital and Technology Officer; and Felix Carbullido, our President of the Williams Sonoma brand. Before we get started, I’d like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, included updated guidance for fiscal ‘23 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations.

The Company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today’s call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call is available on our Investor Relations website. Now, I’d like to turn the call over to Laura.

Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q3 results, I would like to take a minute to thank the incredible team at Williams-Sonoma, Inc. for another quarter of great results. Without their hard work, dedication and focus, none of the results we are reporting today would have been achievable. We are proud to deliver another quarter of strong earnings, significantly exceeding expectations, despite a challenging economic backdrop for our industry. We beat profitability estimates with a record third quarter operating margin of 17% with earnings per share of $3.66. Our comp sales, which reflect the larger macroeconomic backdrop, ran negative 14.6% in Q3 and our two-year comp was negative 6.5% and our four-year comp to 2019 was positive 34.8%.

These results were achieved in an environment, both with ongoing consumer hesitancy on high ticket discretionary furniture and elevated levels of promotional activity. Despite this environment, we continue to drive results because of our unique proposition in the marketplace and our relentless focus on customer service. Our advantage is our portfolio of brands, serving a wide range of categories, aesthetics, and life stages. While people are currently buying fewer large ticket furniture pieces than last year, our portfolio of brands and product offerings has us positioned well for this shift into kitchen purchases, fashion textiles, dorm, baby, and seasonal holiday offerings. Our in-house design capabilities and vertically integrated supply chain are also key in producing proprietary products at the best quality value relationship in the market.

We remain firmly committed to reducing promotions, despite elevated levels of discounting in the industry. In fact, our third quarter promotional levels were meaningfully lower than last year. Instead, we are meeting our customers’ needs for value by introducing a larger offering of new products at mid-tier and lower price points. Not only is this strategy good for profits, but we have also reduced friction with our customers as we give them better value without confusing them with short-term discounts. We strongly believe that this is the right way to run our business as it preserves the design value price equation that we offer and our customers appreciate. Moving on to customer service and the supply chain. We are seeing the year-over-year benefit of selling through inventories with lower supply chain costs.

And we continue to increase selling margins by reducing out of market and multiple shipments. We have improved our customer service, returning to pre-pandemic and best-in-class levels. Investments in the final mile delivery experience have resulted in fewer customer accommodations, lower returns, lower damages, and lower replacements. And customer metrics like on-time delivery are at record highs and back order fill [ph] rates have substantially improved. The total benefit from these supply chain and customer service improvements is significant and you can see it in our results today. Regarding marketing, we increased our spend from Q2, but still leveraged in the quarter. We continue to ensure that our marketing investment gives us the ability to test new formats, to connect with new customers, and to showcase our offerings to our existing customer base and our highly engaged brand loyalists.

We’ve seen increasing success with our marketing and product collaborations and we will continue to build upon them. Our ongoing investment in building our proprietary e-commerce technology continues to improve our online experience. We’re focused on offering customers inspiring content and dynamic tools to assist with their design projects, and AI is accelerating these efforts. We see many opportunities for our business from developments from AI. And as early adopters of integrating AI, we look forward to leading the retail industry in this area, and we will focus on quality, authenticity, and responsiveness of this new technology. And as focused as we are on our e-commerce capabilities, we are also continuing to focus on delivering a best in class retail business.

Our stores are beautifully designed and curated with inspirational assortments, and our continued retail optimization efforts have refocused our fleet on the most profitable, inspiring, and strategic locations. On the sustainability front, we are proud to report that in Q3, we were named the top scorer on a Sustainable Furnishings Council Wood Furniture Scorecard, for the 6th consecutive year. Using sustainable wood has been a key focus of our strategy and a differentiator of our business. Now, I’d like to spend a few minutes talking about our brands. Pottery Barn ran a negative 16.6% comp in Q3, but ran a positive 3% on a two-year basis and a positive 43% on a four-year basis. We have substantially reduced the promotional offerings in the brand and have successfully introduced new low and mid-tier programs at great value.

And while furniture demand has been most impacted, we are seeing strength in textiles and seasonal decorating. We’re excited for the holiday season, given strong early reads on our innovative proprietary collections. Earlier this week, we announced the launch of a new mobile shopping and design app for Pottery Barn, following the success of our Pottery Barn Kids and Pottery Barn Teen apps. The Pottery Barn mobile app delivers a convenient customer shopping experience and makes it easy to create and manage a registry on the go. Now, customers can explore and shop full rooms, easily share their favorite products, and connect with the design experts all through the convenience of their phone or tablet. The Pottery Barn children’s business ran a negative 6.9% comp in Q3, and was negative 11.7% on a two-year basis, and positive 29% on a four-year basis.

Across these life stage brands, we are focused on delivering compelling innovation and elevating the customer experience. One key area of focus in the quarter has been the evolution of our back-to-school offerings. Here, we saw standout growth in our dorm business as customers gravitated to higher design and quality. We offer a compelling, complete solution that is easy to shop on our Pottery Barn Teen app, and given the size of the dorm market, we believe this represents a significant opportunity for us for years to come. We also continue to focus on another key life stage offering, which is baby, the entry point to the children’s home furnishings brand. Here, we are winning with our innovative nursery seating and a curated selection of high quality baby gear.

In our stores and across our mobile app, customers can register with Pottery Barn Kids and receive help from our nursery experts. Also, we’re really encouraged by the strength of our innovative product introductions and fresh product collaborations. With strong response to our recent Super Mario and LoveShackFancy launches. And as we look to the quarter ahead, we believe we have a compelling pipeline of collaborations that our customer will love. Moving on to West Elm. West Elm is the brand that has been most impacted by the customer pullback in furniture. In Q3, West Elm ran a negative 22.4% and was negative 18.2% on a two-year basis and ran a positive 26.1% on a four-year basis. West Elm has the highest percentage of its assortment in furniture, the most underdeveloped in other categories and a customer base that’s the most impacted by the current macro environment.

Despite current challenging dynamics, West Elm saw very strong reception to their new fall products which marked a real evolution in the brand’s modern design voice. Sales from this year’s fall assortment are up to last year with positive customer response to fresh, furniture forms, mixed materials and new textures and innovations in textile. Early holiday reads have also been positive in seasonal trim and tabletop, as well as hosting and entertaining categories. Given these sort of reads, we see sizable opportunity in West Elm as it rebalances more into textiles, decorative accessories, entertainment and seasonal offerings. We continue to be very optimistic about the long-term growth trajectory of West Elm with its industry-leading design and value.

The Williams Sonoma brand, which includes Williams Sonoma Home, ran a negative 1.9% comp in Q3. On a two-year basis, the brand ran negative 3.4% and was positive 34.6% on a four-year basis. The Williams Sonoma Kitchen business ran a positive comp for the second consecutive quarter this year, primarily driven by retail. Earlier this quarter, we launched a successful line in cookware with Stanley Tucci, who designed an exclusive collection with GreenPan for Williams Sonoma. Collaborations like Tucci’s have been an excellent vehicle for growth and new customer acquisition. Kitchen continues to see strength in high-end electrics, particularly in coffee and espresso. And the Williams Sonoma Home business, while still negative, is beginning to see improved trends with a refreshed more editorial point of view that showcases updated textiles and decorative accessories.

Looking to Q4, Williams Sonoma becomes a bigger part of our business, and early reads on holiday are positive indicating a strong season of entertaining and gifting ahead. We have impressive pipeline of new launches with engaging content and corresponding events for our customers to experience both in-store and online. Now I’d like to update you on our other initiatives. We are pleased to report business-to-business delivered a positive quarter, running positive 1.5% in Q3, driven by 30% growth in the contract business. Exciting wins in the quarter included a brand standard program for Pottery Barn with Pendry Hotels for custom outdoor furniture and a new partnership with a premier developer partner, Jamestown, for two new properties, including a senior living tower and a new residential development.

We’re also excited by the success of specific B2B product developments like the expansion of our restaurant furniture program that has been key to gaining momentum in the food and beverage space with clients like Dave & Buster’s, along with clients in the sports and entertainment space. The future remains bright for this business. Now I’d like to talk about our global business. Our global strategy has not changed, and we continue to focus on our Franchise First model. This business has, of course, was affected by the uncertain macro environment, particularly in the Middle East. We are excited to see our brands exceed expectations in other markets like India. We opened our third West Elm retail location in Pune and expanded our Pottery Barn brands into the world famous Jio World Plaza now open in Mumbai.

The Mexico market is also showing strength driven by improved in-stocks in furniture and strong back-to-school and seasonal assortments. And we continue to see momentum in our Canada business, fueled by our commitment to enhancing the customer experience both online and in retail. We have also grown the brand and service offerings available to Canadian customers by launching Rejuvenation and Mark and Graham Online, and relaunching Gift Registry in Canada. Lastly, I’d like to update you on our emerging brands. Rejuvenation delivered a positive quarter, driven by our remodel and refresh categories as well as new growth initiatives. Customers continue to update their homes, specifically in the spaces of kitchen and bath. We are continuing to grow the brand in new markets by opening a new store in the San Diego market and another new store opening this weekend in North Carolina.

We continue to be excited by the opportunity we have for growth from the Rejuvenation brand. We are also pleased with our results in Mark and Graham, our gifting and personalization brand. We are optimistic for Q4 as we head into the key gift-giving holiday season. Customers will benefit from the brand’s inspiring content and curated monogram gift guides organized by both recipients and price point. And at GreenRow, we continue to gain momentum in this new brand, which utilizes sustainable materials and manufacturing practices to create colorful heirloom quality products. While it’s early, we remain optimistic about the potential of this brand and its aesthetic. These successful and exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio of brands and address white space in our product offerings, all with minimal investment and low cost of entry, leveraging our knowledge and infrastructure.

In summary, our outperformance this quarter drove a record Q3 operating margin of 17%. Although customers are shifting their spending temporarily away from high-ticket furniture purchases, we have a powerful portfolio of brands serving a range of categories, aesthetics and life stages to meet the demands of customers. And despite our sales running down this year, our execution and the strength of our operating model produced strong earnings again this quarter, driven by our full-price selling, supply chain efficiencies and best-in-class customer service. Our early seasonal reads are strong, and we are optimistic about the holiday season. As we put this all together, we are raising our guidance for the year. We now expect full year revenues to come in at a range of down 10% to down 12%, and we are raising our outlook on operating margin to a range of 16% to 16.5%.

It is important to note that the reduction in our revenues outlook is more than offset by our raised operating margin outlook. And with that, I will turn the call over to Jeff to walk you through the numbers in detail.

Jeff Howie: Thank you, Laura, and good morning, everyone. As Laura said, we’re proud that once again we’ve delivered earnings substantially exceeding expectations. Our Q3 results reinforce the themes we’ve consistently communicated over the past several quarters: first, our steadfast commitment to maintain price integrity and not run site-wide promotions; second, how our earlier supply chain cost pressures will become tailwinds in the second half and beyond; and third, our ability to control costs and manage inventory levels. Our strong profitability this quarter, despite softer top line revenues demonstrates the durability of our operating margin. Now, let’s dive into our Q3 results, followed by an update on our fiscal year guidance.

In addition to year-over-year results, I’ll reference 2019 as it’s helpful to compare our performance with pre-pandemic levels. Net revenues came in at $1.854 billion. While below our expectations, our revenues reflect the larger home furnishings backdrop and our commitment to maintain price integrity, even if it means forgoing some revenues in the short term. Our revenue growth in Q3 came in at negative 14.6% comp. Our two-year stack was negative 6.5% and our four-year stack against 2019 grew 34.8%. Our Q3 demand comp at negative 11.8% was materially unchanged from our Q2 trend. Our two-year demand stack was negative 13.8%, and our four-year demand stack was a positive 33.2%. Our revenue comps this quarter reflect a normalized spread between demand and net comps.

Our improvement across returns and appeasements offsets the majority of last year’s outsized back order fill. From a cadence perspective, our demand trends continue to be inconsistent and choppy, especially after Labor Day. Moving down the income statement. Gross margin at 44.4% exceeded our expectations. The 290 basis-point improvement over last year reflects the supply chain tailwinds we’ve been guiding for several quarters. Merchandise margins increased materially over last year, driven by lower ocean freight costs flowing into our income statement and our focus on full price selling and price integrity. In fact, merchandise margins were substantially higher than Q3 2019. Selling margin also improved materially over last year, driven by supply chain efficiency.

Through our improved execution and investment in supply chain, we substantially improved our customer experience. Key metrics, including out-of-market shipping, multiple deliveries per order, returns, accommodations, damages and replacements are all performing at pre-pandemic levels, if not better. I’d like to congratulate and thank our supply chain organization for delivering these results. Altogether, our selling margins were 450 basis points higher than last year, reflecting the full impact to our profitability of the supply chain tailwinds. Occupancy costs of $200 million were 1% lower than last year and decreased 2% quarter-over-quarter. Coming in at 10.8% of net revenues, occupancy deleveraged 160 basis points to last year, driven by the softer top line.

Our Q3 gross margin at 44.4% is 840 basis points higher than 2019’s 36%. Our SG&A expenses of $507 million were down 11% to last year, once again reflecting our ability to control costs. Our 27.4% rate deleveraged 140 basis points to last year, driven by general expenses, offsetting variable expense savings. Employment expense decreased double digits versus last year, but deleveraged primarily driven by favorability in last year’s stock-based compensation. We continue to manage variable employment costs in accordance with top line trends. Our advertising expense slightly leveraged in Q3, despite increased funding quarter-over-quarter as we continue to test into higher levels of advertising spend. Our rate leverage reflects the competitive advantage of our agile performance-driven marketing organization.

Our in-house capabilities, first-party data and multi-brand platform continue to drive efficient advertising spend. General expenses drove the majority of the deleverage on the quarter, resulting from timing of asset disposals and legal settlements. Overall, our year-to-date SG&A through 39 weeks is down 12% to last year and flat on a rate basis. And, it’s 100 basis points lower than 2019’s SG&A rate of 28.4%. Regarding the bottom line, our results speak for themselves. Q3 operating income came in at $315 million and operating margin at 17%, a record operating margin for our third quarter. 17% is 150 basis points above last year and 940 basis points above 2019’s 7.6%. Our diluted earnings per share of $3.66 was slightly below last year’s third quarter earnings per share of $3.72, but significantly above 2019 earnings per share of $1.02.

On the balance sheet, we ended the quarter with a cash balance of $699 million with no debt outstanding. This was after we invested $42 million in capital expenditures supporting our long-term growth, and we returned over $61 million to our shareholders through quarterly dividends and share repurchases. Merchandise inventories at $1.4 billion were down 17.2% to last year. Three important points I’d like to emphasize once again. First, we are well positioned to maintain our price integrity as we proactively manage our inventory levels in line with our demand trends. Second, going into the holiday season, our in-stock levels are near historical highs, and our regional inventory balance and composition is well positioned. Third, our Q3 ending inventory levels are up only 11% versus same period in 2019.

And that’s with revenue comps of 34.8% over the same time frame. This discipline highlights how we’ve improved both our inventory efficiency and turnover. Summing up our Q3 results, we’re proud to have delivered earnings substantially exceeding expectations. I’d like to thank all our associates for delivering these outstanding results. Now, let’s turn to our outlook. Based on our Q3 results, we are updating our full year outlook. Our new guidance reflects both the ongoing top line uncertainty and the strength in our operating margin. We now expect full year ‘23 net revenues to be in a range of down 10% comp to down 12% comp, and we are raising our operating margin outlook to a range of 16% to 16.5%. It’s important to note that our lower sales outlook is more than offset by our increased operating margin, producing higher implied EPS guidance.

On the top line, our updated guidance is based upon the facts and trends we know today from our Q3 results. Specifically, a conservative view of our one-, two- and four-year trends in Q3 connects with the implicit Q4 guide and our updated full year ‘23 net revenue guidance. Given the macroeconomic environment, we believe this outlook is prudent. On the bottom line, our supply chain tailwinds will continue to bolster our profitability, producing full year operating margin within our updated range of 16% to 16.5%, with implied Q4 operating margins in line with historical bills from Q3. We continue to expect our full year income tax rate to be approximately 26%. Our 2023 capital expenditures are now anticipated to be $225 million due to timing of project spend.

As we have communicated quarterly, we are committed to returning excess cash to our shareholders, through dividends and opportunistic stock repurchases. We will continue to pay our quarterly dividend of $0.90 per share, and we have almost $700 million remaining under our current $1 billion share repurchase authorization to repurchase our stock, opportunistically. As we look forward to 2024, we will balance the macroeconomic uncertainty with our long-term growth potential, and we’ll provide guidance in March. As we look further into the future beyond ‘24, we are reiterating our long-term guidance of mid- to high-single-digit top line growth, with operating margins exceeding 15%. We’re confident we’ll continue to outperform our peers and deliver shareholder growth for these reasons: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet.

With that, I’ll open the call for questions.

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Operator: [Operator Instructions] Our first question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom: Hey. Thanks. Good morning, everybody. The compression in your top line in the third quarter and the implied slowdown in the fourth quarter really isn’t all that surprising given the backdrop today. But at what point do you run the risk of losing market share or mind share by not engaging? And then as a follow-up, gross margin control was actually more impressive. Can you talk about the drivers there and the sustainability into 2024, particularly on the supply chain front?

Jeff Howie: Good morning, Chuck. Why don’t we start with the last one, and I’ll talk about gross margin, and then I’ll turn it over to Laura to talk about our promotional posture. Gross margin exceeded our expectations this quarter, really driven by the tailwinds I’ve been guiding for the past several quarters. There were three main drivers in order of magnitude: first, our lower ocean freight from rate normalization flowing into our income statement; second, supply chain efficiencies, including lower out-of-market shipping, fewer multiple deliveries per order and decreased returns, accommodations, damages and replacements; and third, reduced promotional activity as we focused on full-price selling and maintained our price integrity.

Overall, the majority of the improvement came from ocean freight and supply chain efficiencies. We’ve made significant improvements in our customer service and you can see it in our results. I want to once again thank our supply chain organization for really knocking the cover off the ball. Going to your question about how these will continue, here’s what you need to remember. Our Q3 margins represent the start of the tailwinds we will see from supply chain efficiencies. And while we don’t guide specific lines, we anticipate similar tailwinds in Q4 and even into 2024.

Laura Alber: Hi Chuck. So, I don’t think we should think about gross margin as a trade per share. The two are not necessarily as correlated as one might think. In fact, it’s not clear that people who are running more promotions are going to gain more share, especially long term. And for our target customer, we are confident that we are gaining share. And at the high-quality, regular price customer is the one that we best serve given what we do as brands. And trust me, we are very focused on returning to growth. In fact, we’re very confident about our strategies and our ability to execute. It’s the environment that is really the question mark for us as we look at the balance of the year in the short term. And so, we continue to test different things to see what makes sense, whether it’s pricing up, down, more marketing, less marketing.

And trust me, as we see things that do not just benefit short term, we are definitely focused on pushing them and building upon them for the long term.

Chuck Grom: And then can we just talk a little bit about like-for-like SKU pricing today relative to 2019. I know there’s been a lot of improvements, but if you find items that are actually like-for-like, where do we stand today relative to back then? Thanks.

Laura Alber: That’s a good question, Chuck. I didn’t expect that one. So 2019, well, that’s a long time ago, it’s hard to remember. We took some price increases during the pandemic, as you know, and a lot of them have stuck and some we backed off. And we’ve also gotten a lot of vendor price reductions, which is a great thing to see. And we’ve used some of those to reduce prices to our consumers so that we are very competitive with our value, quality relationship. The thing to remember also is that it’s not just about reducing prices on existing products. We bring in a fair amount of exclusive, exciting newness, and we’ve been building into both our mid-tier and low price points, and those things are full margins. And so, it’s a very good way to continue to build value into the business. But vis-à-vis 2019, I actually don’t have that number on how we exactly stand with the entire assortment versus 2019 in pricing.

Operator: Your next question will come from the line of Cristina Fernández with Telsey Advisory Group. Please go ahead.

Cristina Fernández: Congratulations on the profitability. I wanted to ask on promotions, Laura, your comment that you were less promotional than a year ago. I know you’ve pulled back from the site-wide promotions a while back. So, where — I guess, where are you lowering promotions? Is it clearance? Is it other items like rewards, et cetera? It would be helpful to understand that trend. Thanks.

Laura Alber: Yes. Thank you for the question. We’ve, in fact, pulled back promotions both sequentially this year and versus last year. And we’ve pulled back in — we took away all up down pricing that was site-wide. The site-wide promotions have been gone. We also did remove e-mail overlay, all those hidden promo tactics that other people use, coupon matches, double points, we don’t offer any of those. But the level of clearance and promotions during our sale periods, which we call warehouse sales, is also lower.

Operator: Our next question will come from the line of Peter Benedict with Baird. Please go ahead.

Peter Benedict: I guess just maybe can you expand a little more on retail optimization, where you stand in that process, what’s still to come? Jeff, you mentioned the occupancy cost down slightly year-over-year in the third quarter. Is flat to down something that’s sustainable in that line as you think in the 4Q and then into ‘24? That’s my first question.

Jeff Howie: We continue to operate a world-class retail business and our stores serve as billboards for the brand and operate as profit centers. They’re beautifully designed and curated with aspirational assortments, and we believe we will continue to serve as a competitive advantage. We continue on our journey of retail optimization. Since 2019, we closed about 15% of our store count. And over the next 3 to 5 years, about 50% of our leases come due, and we’ll continue to guide that we anticipate about 20% of those will close over time. Now, there’s multiple aspects to our retail optimization strategy. First, obviously, we’ll close any of the least-performing stores from a profitability standpoint or a brand denigrating, that’s the low-hanging fruit.

The second point, which is really the exciting one is the repositioning of our retail fleet. And this is where we’re taking a look at some of our older stores that in our older malls that the customer is not shopping as frequently in or moving in more vibrant lifestyle centers. And here, we’re seeing not only a better customer engagement, better top line, but better economics as well. And we’ll continue to look to reposition our fleet to right locations as leases come due. And of course, it all comes down to negotiations. It’s part of the real estate business, as we all know. We’re probably — and from an innings standpoint, we’re probably in inning 6, I think, inning 5 or 6. And on our journey here, there’s more work to do. We have — like I said, we have a lot of lease coming due.

But the key point here is we continue to improve our retail profitability. And I’ll give one example of where this is continuing to resonate. And I know used in the last call, but it continues to be an outstanding example of where the strategy of retail positioning — retail optimization really works, and that’s our Pottery Barn store in Westport, Connecticut, which we moved from downtown Westport, not the best location for us, to a location on the Post Road that is more vibrant, more customer-friendly. And I said in Q3 that the results were 30% better than the prior store — I mean, in Q2, that the results were 3% better than prior store. They’re now up 45% to the prior store. So, this strategy continues to gain traction. The key for us is that our world-class stores, coupled with our best-in-class e-commerce tools, demonstrates our digital first but not digital-only channel strategy as a key differentiator in the home furnishings industry.

Peter Benedict: Well, good. Nice to see my recent visit to the Westport store showing up in the numbers there, I guess.

Jeff Howie: Thank you for your business, Peter.

Peter Benedict: Yes. Not exactly. So, next question just would be around the cash balance, obviously it continues to rise. You’ve slowed the buyback here of late. Just curious, is this just prudent caution given all the macro pressures, the risks that are out there, or is there something more strategic that’s maybe at play here in terms of building the cash balance? Thank you.

Jeff Howie: Yes. Peter, as you know, we don’t commit to a consistent cadence of repurchases. We do remain committed to driving long-term shareholder returns, and will opportunistically buy back stock and drive shareholder returns. In Q3, we had extremely strong performance in our stock price relative to the broader market. We exceeded all three major indexes, a collection of hardlines retail and softlines retail. So, we outperformed. So, it’s not what we consider opportunistic.

Operator: Your next question comes from the line of Max Rakhlenko with TD Cowen. Please go ahead.

Max Rakhlenko: Congrats on the nice quarter. So first, Laura, how are the brands performing against your own internal expectations? And, which brands do you view to have the bigger opportunities to take market share from some of your struggling or closing peers?

Laura Alber: It’s a great question. We are disappointed in the top line performance. As you know, in most of our brands this year, except for our emerging brands, we’ve seen slower-than-expected furniture performance. That said, we’ve seen really strong seasonal performance, and these life stage businesses and certain categories are better than expected. So it’s a big change for us that we’ve really focused on and made the shift into quickly with our marketing and our inventory purchases. But, as I think about the long term and we think about where we sit vis-à-vis the market, market, as you know it’s very large and very-fractured. And so, there’s huge opportunity for us to gain share with all of our brands. I think that the names of our brands are stronger than the volumes that they produce.

When you think about the Williams Sonoma name, the brand, Williams Sonoma, you think about how small it is, and the consolidation of the industry and with Bed Bath & Beyond closing its retail footprint and others going out of business, and not seeing anyone deliver on exclusive proprietary products for high-end kitchen, you can see what a tremendous opportunity we have. And with that also, we have Williams Sonoma Home, which sits in that higher-end space where there’s not many, particularly in the aesthetics that we’re serving. I actually have Felix sitting right next to me. And I — we invited him today because we’re upon the very large holiday season that we’re looking forward to. And as you know, Williams Sonoma really spikes during the holiday season.

And so, Felix, do you want to make a few comments about how you see your brand gaining market share in the future?

Felix Carbullido: Sure. I don’t want to give away too much of our winning formula. But, it includes curating the best products out there, right, inspiring customers how to use it, offering it in their channel of choice, whether it be online or in-store. I think some houseware brands offer products that don’t inspire, and some inspire but don’t have 150-plus stores and a great website to purchase from. As Jeff said, our beautiful stores, our well trained and passionate store associates, our inspiring catalog and our multidimensional website are competitive advantages, I don’t think anyone really has. And as we head into the fourth quarter, this is the time that we celebrate the most. We have Thanksgiving, Hanukkah, Christmas, New Year’s Eve, these are reasons for people to come visit our stores.

And I think we’ve pulled together the best assortment of gifts and holiday décor that we have had. So, we’re excited, and we want to continue to gain market share, and all indicators are that in the kitchen business, it appears we are.

Laura Alber: And then as you look at our other brands, both the big ones, both West Elm and Pottery Barn, we have shown this year that there’s areas within each brand that are very underdeveloped and where there’s sizable opportunity from accessible furniture for Pottery Barn and dorm to — in West Elm, filling out the modern accessory textile piece, which we haven’t addressed and also more modern seasonal assortments. That is a big opportunity and one that has never been built. So we see us being able to pick up share in those two brands in specific categories. And of course, the temporary furniture pullback is just that. This, too, shall reverse. And the great news is that we won’t have built our business or held it up with promotions like others are at this time.

That is getting out of our base. And it’s going to continue to allow us to focus on delivering proprietary products and not just thinking about markdowns all the time, but thinking about how to build better collaborations and more relevant product lines that the customer loves. The last thing I’ll just say is, we’ve talked about B2B, it’s across all brands. It’s a big driver of market share for us because nobody is doing what we’re doing. And so, it’s a very, very large industry and we’re still scratching the surface. And we are still — as Josie, who runs it, likes to say, we are still doing more gathering than hunting. And we have a lot more that we can do as we continue to build this muscle. So, we’re excited about the growth algorithm for the future.

And we do recognize that it’s been softer than expected this year, particularly in furniture, but we’re completely focused on that growth posture looking out into the future.

Max Rakhlenko: That’s great. Super helpful. And Jeff, I have to ask you a margin question. But when we think about the updated margin guidance, is there anything in it that makes you think that you can at least hold it as we think ahead, especially once you start to leverage fixed expenses on top line growth?

Jeff Howie: As I said in the answer to Chuck’s question on gross margin, we anticipate that the results we saw in Q4, the tailwinds I’ve been talking about, will continue — I’m sorry, the results we saw in Q3, the tailwinds I’ve been talking about will continue into Q4. These are pretty strong tailwinds. I talked about the impact of ocean freight, our supply chain efficiencies and our full price selling. While we’re talking about guidance, I also want to just point out that while we don’t guide specific lines, in last year’s Q4, our SG&A materially benefited from some large favorable items we recorded that we don’t anticipate reoccurring this year. But, here is the key takeaway, it’s all contemplated in our guidance, which we’ve raised our full year outlook for implied EPS.

Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Unidentified Analyst: Hi. This is Zach on for Simeon. Thanks for taking our questions. On your view for top line, do you think this year will be the bottom? Your updated guidance implies an underlying deceleration in the fourth quarter across stacks. So, do you think that the trends could inflect in ‘24? Thanks.

Jeff Howie: We’ll talk more about next year after we get through the really important holiday season. Right now, that’s where our focus is. And as Laura just touched on, our primary objective in ‘24 will be to drive both growth and margin, and we’ll balance the macroeconomic certainty with our long-term growth potential. But we’ll talk more about that in March.

Operator: Our next question will come from the line of Anthony Chukumba with Loop Capital Markets. Please go ahead.

Anthony Chukumba: Let me add my congratulations as well on the strong profitability. So, you talked about introducing a larger offering of new products at mid-tier and lower price points. And then, you talked specifically about Pottery Barn introducing some of those products. I guess, just two questions related. Are there any other brands that have — where you’ve introduced those mid- and lower-tier products? And then, how do the merchandise, the selling margins on those products compare to some of your higher price point offerings? Thank you.

Laura Alber: Thanks, Anthony. The margin profile is the same as the rest of our products. So, it’s not that they’re lower at all. In fact, they’re great margins. And we’ve done the same thing also in West Elm. And you’re going to see us West Elm, which I’m really excited about, continue to have more and more newness sequentially. So for fall, you might have heard in my prepared remarks that we had some just superb winners in the furniture assortment. And in some cases, they were also at the higher price points. So, we’re building upon those. Many of them are sold out right now. And we’re thrilled, but we are also chasing those products, and we’ll be getting back in stock in Q1 in those. And that gives us confidence about where we want to take the brand aesthetically, not just from a price point, but where we think the modern customer wants to be now and where that evolution is going.

And so, as we go into Q1 and Q2, I’m just really excited about the product line that you’re going to see in West Elm. And based on the wins that we have currently, I think it’s going to be a big change and the next really big step in the evolution, the next chapter, if you will, for West Elm’s winning strategy.

Operator: Your next question comes from the line of Jason Haas with Bank of America. Please go ahead.

Jason Haas: So, I wanted to also ask about how you’re thinking about the trade-off between comps and margins. I’m curious if you think that you could have driven gross profit dollars higher this year if you had used more promotions, or do you think that that would have actually driven the gross profit dollars higher? My question is, obviously, if you — you could, but didn’t. The reason would be because you don’t want to destroy the pricing power over the long term. You don’t want to harm the brand image. So, I’m curious if you feel like that’s the dynamic where you’re basically sacrificing in the short term to hopefully have better results once the industry turns in your favor?

Laura Alber: Yes. Jeff and I are fighting over your question. I would say it’s both, short term and long term. It’s not clear that reducing prices drives more. If you have less people buying furniture, you just reduce the price 20%, you get a 20% more people buy it, just to be even, right? So you may think you’re doing something, it’s what retailers do. They mark stuff down when they want more sales, and it’s not necessarily the case. In fact, we’ve done a lot of testing up and down to see where that sensitivity is. So that’s one. Secondly, for sure, it’s not good for the long term. And you can see the race to the bottom with promotions, if you look at the history of retailers who’ve done that. It’s bad idea.

And we are not a low-price provider. We are quality, high-service, high-design retailer. And so pricing is not usually why you come to us. You want the price to be great for the value and the design. But our quality is so much higher, we’re not willing to sacrifice in the short term or long term to sustain a promotional strategy?

Jason Haas: Thank you. That makes sense. And then as a follow-up, I was curious to ask about the West Elm performance in particular. It’s good to see Pottery Barn and Williams Sonoma performing well, both on a year-over-year basis and then also versus 2019. That used to not be the case, where previously you’ve seen West Elm was the stronger performer. I’m curious to know how much you think of that is external, given West Elm, I believe, tends to serve a younger, maybe less-affluent customer than those other brands versus how much of it is internal. You’ve talked about some of them. Can you talk about what changes are being made at West Elm and when we should expect to see improvement from those?

Laura Alber: Sure. There’s no doubt that the metrics, the makeup of the West Elm business makes it more vulnerable to the external, right? You mentioned it. The younger customer, the less affluent customer, the higher furniture, the less developed seasonal business or less developed decorative and textile business, those are all factors in the West Elm underperformance. That said, we do not think about not being able to do anything about anything. We are focused on what we can do being served this set of circumstances. So, we have been working very diligently to give the customer other options other than just furniture, and to make sure our stores have those things ready to go versus having them only online. It’s a big change for us to push that business into the stores to drive repeat traffic, not just when you come to buy furniture.

So, we’ve talked about not just the development of those things, but I want to make sure you understand, too, the way we’re using the channel strategy is to push things that are lower ticket and that are more for easy updates for the home versus the whole home. Also, we’ve been pushing collaborations. We’ve had some really great success lately with Colin King and Joseph Altuzarra. Those things sold out, and we’ve got some really exciting ones in that pipeline and we have more confidence now to buy into those. And collaborations very exciting for brands because they bring in new customer groups. And so, that’s a nice incremental change for us as well. And then in terms of the product design, and without going into too competitively, you always want to lead, right?

You always want to lead with design. And we are making, as I just said previously, some pretty significant improvements in what we’re bringing in, in terms of newness quantity and also the relevancy, in my opinion. And so, that’s very exciting. And it’s in the hopper, on order. We’re filling in where we’re out of stock currently on some winners, and we’re excited to see that come to fruition next year. So, it’s not to me the — that’s what all of our brands do with their designs. It’s not that there’s a problem, it’s more that you want to stay on top and you want to lead. And this new leadership at West Elm and the focus on product and focus on design is really exciting.

Operator: Your next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: So first off, I too would like to add my congratulations on your continued profitability beats. So, the question I want to ask, and I know it’s a bit of a follow-up here, but just with respect to just the overall promotional environment. So I’ll ask maybe a couple of questions within this question. I mean, one, as you’re monitoring the environment and the actions of your competitors, is it — if you look at the other promotions that have accelerated, do you believe this is more temporary, either backdrop-driven, clearance-driven, or is this the kind of the return to levels we saw pre-pandemic? And then, the second question I have — and look, you’ve done a great job holding the line on your pricing. We clearly see that in the margins.

I guess, the question I’m asking is as you’re communicating with your customers, and has there been a shift in marketing shifts otherwise that you are saying your customers, look, we have great brands, these are high quality and you should not expect promotions from us?

Laura Alber: There’s still plenty of things on sale because we clear products. So, you can find — if you’re a promotional shopper, you can find sale prices on our websites for sure. So let’s not pretend we don’t have any. It’s just that the quantity of those is so much lower than it’s been. It’s so much lower than our competitors. I don’t like to name people by name, but we have scrubbed everybody’s website and look at them, and they’re littered with. I mean, in some cases, it’s 80% red line, 100% red line of some really good names out there. And I don’t know what they’re doing, but I can tell you what the customer sees. And I don’t know when they’re going to go back to regular price or if this is the new strategy, but this is what’s going on in the marketplace.

And it’s very important to us that the customer can count on the price. Because if you buy a piece of furniture, it’s likely not delivered for 4 to 5 weeks, that price changes and it hasn’t even been delivered, you’re never going to — you’re going to always wait until you get the sale and you just create this up and down curve of customers waiting for sale. It’s not a good cycle. And what I said before about the new selling, when you bring out an incredible product, and this is today, even with this depressed furniture environment, I’m talking about furniture, it sells out. Because when you have a product that good, customers want to buy it. But the key thing is the first time you price it, that price value relationship needs to be great.

So, that is where we’re focused. What is the first price, is that a great value, is it the best value in the marketplace? And now we’re looking at the competition and assuming they’re going to be 20% off, assuming they’re going to be 30% off. So we’re not just saying is it the best versus the regular price, we’re saying is it the best versus their sale price? And that’s the key driver here on creating value for the consumer and having them trust us. And when they trust us, they furnish their whole house with us.

Brian Nagel: That’s very helpful. If I could ask a follow-up unrelated. But with regard to again, gross margins, but now we’re seeing the benefit of moderating shipping costs. And recognizing that there’s a lot of accounting noise now these costs are capitalized But, I guess, Jeff, maybe this is more for you, but I mean, how long will this dynamic prove a tailwind for gross margins for Williams-Sonoma?

Jeff Howie: Look, we’ve certainly said in the call that it will continue into Q4. And previously, I’ve said it will continue to be a tailwind into 2024. But we’re starting to hinge on 2024 guidance, which we’ll address in March. But meanwhile, we’re really laser-focused on delivering our Q4 results with the all-important holiday season ahead of us.

Operator: I will now turn the call back over to Laura Alber for any closing remarks.

Laura Alber: Well, thank you all. We really appreciate your time. And I want to wish you all a wonderful Thanksgiving, and a great beginning to the exciting and beautiful holiday season with your family and friends. We look forward to talking to you again after the New Year, and take care.