Williams-Sonoma, Inc.
Q1 2017 Earnings Call Transcript

Published: 25 May 2017

[Operator:]

Welcome to the Williams-Sonoma Incorporated First Quarter 2017 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 call is being recorded. I would now like to turn the call over to Beth Potillo-Miller, Senior Vice President, Finance, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

[Beth Potillo-Miller:]

Thank you, Melissa. Good afternoon everyone. This call should be considered in conjunction with the press releases that we issued earlier today. Our discussion today will relate to results and guidance based on certain non-GAAP measures including non-GAAP SG&A, operating margin, effective tax rate and diluted EPS which exclude certain impacts effecting comparability. During the first and first quarter of 2017, we incurred severance related charges of approximately $6 million or $0.04 per diluted share. These charges were recorded as SG&A expense within the unallocated segment. Also during the quarter, we incurred tax expense of approximately $1 million or $0.02 per diluted share associated with the adoption of new accounting rules related to stock-based compensation. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans, and prospects of the Company in 2017 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, including the most recent 10-K 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.

[Laura Alber:]

Thank you. Good afternoon and thank you all for joining us today. On the call with me are Julie Whalen, our Chief Financial Officer, and John Strain, our Chief Digital and Technology Officer. In the first quarter we delivered total revenue growth of 1.2% and earnings per share of $0.51. In the quarter we saw improvement in Pottery Barn demonstrating the effectiveness of the brand strategies that we are executing again. Williams-Sonoma delivered another strong quarter with 3.2% comparable revenue growth and we also delivered another quarter of double-digit of revenue growth across West Elm our newer businesses Rejuvenation, and Mark and Graham and our company-owned global operation. And while the negative revenue comps in Pottery Barn Kids and Teen were disappointing. We did see sequential demand comp improvement in both brands. Strong execution against our strategic initiative drove our Q1 results. We remain focused on delivering a superior customer experience and executing against our brand strategies, which we believe will drive growth acceleration and shareholder value. We are building upon our supply chain successes from last year and continue to invest in the customer experience. Our initiatives in the supply chain will significantly improve customer service and the delivery experience. With strategies and teams concentrating on key customer touch points including order visibility, back order management, furniture home delivery, and quality and damages. We continued to improve our customer metrics during the first quarter. Our customers are receiving their orders more quickly and returns and replacements declined in the quarter largely driven by supply chain efficiencies resulting from our initiative. Key performance indicators like customer satisfaction service metrics and net promoter score all improved significantly in the first quarter. We also continued to invest in e-commerce innovation. During Q1, we introduced the first in a suite of new digital product and site enhancements that will transform the way customers design and furnish their homes with a highly interactive digital experience. These agreements are supported by our talented store design professional. And rolling out over the next year, these initiatives range from virtual reality applications to style finder tools on Facebook to tools on our websites 3D room design and product visualization. In Q1, we launched our augmented reality application 3D room view by Pottery Barn, which is available Tango platform. This app allows customers to add product to an existing room and see how new products look with their current furniture. Customers will also have access to 3D room views through the expertise and assistance of in-store design specialist at select Pottery Barn stores beginning with pilots in the San Francisco Bay area with plans to roll out across the country. We also have over 100,000 3D skews available on our website and with tools like our 360 degree spin feature which is launched for also sofas in the Pottery Barn and Williams-Sonoma home brand. Our customers can better explore, research, and buy our products with confidence and insight. These features increase conversion and help our customers with their purchase decision. In Q1, we also stepped up our digital advertising spend. As a result all brands experienced strong growth in key channels of paid search display and social advertising resulting in strong customer growth in those channels. We believe we will see payoff throughout the year as we ensure our brands are top of mind when customers are looking for inspiration and great products for the home. We see two clear trends in digital advertising platforms that play perfectly to our heritage, which along with the success we've had to-date give us confidence in our investment strategy. First; there's a focus on platforms to better target customers based on advanced data analytics. For example, because of our deep customer pool with robust data and history, we are uniquely able to profile our customers and work with our digital partners to find lookalike audiences that may be new to our file at very cost effective rate. In this way, our 50 plus years of honing our customer relationship management skills along with our performance marketing disciplines can now be combined with new targeting technologies to ensure our increased investment in digital advertising is efficient and sustainable. Second; we are capitalizing on the news storytelling and content rich capabilities across many apps platforms as we believe they provide a powerful stage to richly showcase our brands online. Our catalog heritage provides us with the expertise to create inspirational imagery for our customers resulting in beautiful crated assets such as video that we leverage to reach customers in new forums and add units. We are often a leader in partnering with digital companies and as their platforms and offerings continue to evolve, we will capitalize on these opportunities and inspire our customers if they decorate the home. Registry continues to be a key strategy for us and a very successful customer acquisition tool. In Q1, we re-launched the Pottery Barn and Pottery Barn Kids registry platform. We've been enhancements to our registry program including the Store is Yours at Williams-Sonoma, a monthly event where couples can come to the store and work directly with our registry experts to build their ideal wedding registry. We've also made significant improvement to registry pages on our site to make the experience of registering easier and more efficient. And we've revamped our entire email series to our registrants and are now serving them more personalized contact triggered messaging and tools to ensure that they have everything they really need. Another important component of our customer acquisition strategy is our cross brand loyalty program The Key, which allows us to reward customers for shopping across our portfolio of distinct brand. Still in its early implementation, enrollment numbers of The Key are strong with members shopping more often, spending more per transaction and purchasing from more brands across the portfolio as they enjoy the benefits and rewards. Later this quarter, we are launching another initiative enabled by The Key program, which we believe will be an industry game changer and leverages our brand offerings across the entire portfolio. With our new cross brand design initiative, we'll offer in home design services, which will allow our design teams to assist our customers in building their dream homes by leveraging all 7 of our brands in one easy interaction. We've discussed the importance of our retail stores in providing value-added services. Being a source of inspiration and instilling brand loyalty. And we know there are stores are competitive advantage over pure-play digital retailers and we are maximizing this advantage. We want to reiterate our commitment to optimizing our fleet across all brands as we open relocate stores in important markets, invest in store remodels and close the stores that are underperforming. During the first quarter, we opened four new stores, we repositioned one, we converted one to a Williams-Sonoma home store and we permanently closed 3 stores. Specifically in Pottery Barn our store remodels and refreshing continue to outperform the brand suite. In the first quarter we closed one store and relocated it to an outdoor center. We have remodeled stores scheduled to open in the second quarter and we are very excited about our new flagship store in Manhattan, which is also scheduled to open in late Q2. In Williams-Sonoma our new store design continues to perform well. In Q1, we opened 2 new stores in Alpharetta, Georgia and Fairfax, Virginia both of which are off to a strong start. The stores are in a new format contain Williams-Sonoma home products and are in vibrant outdoor lifestyle centers. We added Williams-Sonoma home assortments to 5 additional existing locations for a total of 43. And we recently successfully converted a kitchen store in Calabasas, California to a standalone Williams-Sonoma home store. During the quarter, we also permanently closed 3 stores upon lease expiration. In Westbound we continued to build highly localized immersive retail environment in key target market. In March, we opened a new store in Plano, Texas in the new Legacy West development and we have 9 new store openings throughout the remainder of the year to help support West Elm's growth. And in Rejuvenation we opened our eighth store on West 20th Street New York which is performing well and has driven an increase of over 60% in total customer counts in the New York market. Now I'd like to discuss the performance of our brands and their progress on product innovation. The Pottery Barn Q1 short of meeting full improvement in trend for the brand revenue comp of negative 1.4%. Our new merchandise strategy is working. Specifically, we experienced strong demand in furniture driven by upholstery and our new introductions in bedroom and home office. We also saw strong demand for small space solutions, which launched in February particularly with our younger customers. We're seeing growth in our non-furniture businesses including accessible categories that drive customer acquisition such as decorating and entertaining. Our opening price-point strategy is attracting new customers and our new fashion stories are checking. Our early indicators and product introductions marketing and the retail experience lead us to believe that we will see further acceleration of growth in Q2 in the remainder of the year. If Pottery Barn Kids, comp end revenues declined 5.7% in the quarter. Eventually outages across key categories impacted revenue as in-stock inventory went down almost 11% versus last year. We expect our inventory levels to recover throughout Q2 and Q3. In Q1, our furniture business continued to grow with strength in the core bedroom business driven by new collection. Our upholstered seating business also performed well with double-digit growth and we further expanded a healthy home assortment launching an industry leading offering of GREENGUARD certified organic seating. We are seeing softer results [indiscernible] in our textiles and accessory divisions and while we do have initiatives to increase our aesthetic variety and improve our value composition, we are also developing new avenues of growth. In Q1, we launched baby gear featuring a curated assortment of best in class strollers, car seats and more and we are pleased with the consumer response. We will continue to increase Pottery Barn Kids offerings in the second quarter including our extended Back to School assortment with diverse collections of personalized gear, earth-friendly waste free lunch storage and new study solution. We also have new aesthetics arriving in late summer and early fall, and we'll introduce a new jump Junk Gypsies collection for both kids and babies. PB Teen posted a significant sales demand improvement from negative 10 to negative 3.7 in the quarter. We are encouraged by these metrics and customer response to our new product introduction. Based on PB Teens soft performance over the last year, we've been cautious in our inventory purchases. And while we are excited about the improved demand exceeding our conservative supply, it did result in a compatible revenue decline of 14.3% as inventory levels were down 13% from Q1 last year. We began to invest in our bestsellers when we saw the trend improve, and expect to see material recovery in are inside position in Q2. This should allow us to realize stronger demand and better service our customers. In the first quarter, our furniture category showed improved trend driven by bedroom and occasional seating. In Q1, we saw softer response to our textile and accessory. However, we have a clear roadmap to improve these businesses and are seeing some initial strong leads in our new summer collection. Collaboration, continue to drive growth delivering next level exclusivity of products and compelling digital content. We recently announced our partnership with Ivivva a division of Lululemon specializing in teen and teen active wear. This collection which fuses Ivivva Prince with home decor will launch in July and be available at PB Teen as well as Ivivva stores and online. Additionally, we have a robust lineup of new collaborations and licenses that will be announced in the months ahead. Also launched our extended Dorm offering in late Q1 with complete room solutions an inspiration for small space living and we are off to a strong start. As we enter Q2, we'll have significant product marketing and content expansion across both Dorm hand gear category. We're also aggressively growing our Back to School offering for tween's and teen's with our largest ever collection of new ergonomic study set up gear and accessories to complete every space. The Williams-Sonoma brand has started strong in 2017, posting a 3.2% compound revenue growth on top of 3.5% comp growth in Q1 of 2016. Williams-Sonoma remains focused on delivering high quality merchandise at great value, transforming the customer experience across all channels and acquiring new customers. We had very successful product launches and collaborations in Q1 and we've seen particular strength across our tabletop, electric and cutlery businesses. Our Easter performance was a particular standout this quarter, driven by table top entertaining and sweet food category. This spring we partnered with Kate Spade, New York on an exclusive line of dinnerware glassware and flatware to which our customers are responding well. Also in the quarter, we launched exclusive products with some of our strategic vendors. Williams-Sonoma home was also a significant driver of growth in the quarter across both channels. A highlight was the launch of the Aaron collection, our collaboration with lifestyle expert Aerin Lauder. The collection which featured dinnerware entertaining and home pieces is resonating with our customers. We believe that Williams-Sonoma's continued strong performance in Q1 indicates the strategies we have in place are working and that the brand is well positioned for further growth. Now I'd like to discuss West Elm. West Elm delivered double-digit growth in Q1 of 10.4% with comp brand revenues of 6%. The branch continued to experience strong consumer response to its new vision of modern design initiative in January. Furniture remains a key driver for West Elm led by new casual seating and dining introduction. Outdoor is also off to a strong start to the year with extended choice in key collection. West Elm will also be launching two new collections during the second quarter building upon its innovative approach to design collaboration. The first, Art for Good is 17-piece collaboration with the foundation of American artist Robert Rauschenberg, 10% of the sales price will go to foundation grants for Art education and social and environmental reform. The second, a collaboration with Brooklyn-based design studio Bauer features pieces and seating lighting and decorative object category. West Elm continues to gain traction in the commercial furniture market with West Elm workspace. During the quarter, we opened dealer showrooms in several major markets including San Francisco, Washington DC, and Minneapolis. This June, the brand will participate in its third NeoCon in Chicago since launching this business in 2015. West Elm workspace will introduce several new exciting collections in benching, seating and lounge including two design collaboration. We remain very optimistic about West Elm's potential to be a leader in the office furniture industry. Now I'd like to discuss our newer brands Rejuvenation, and Mark and Graham and our global business. Rejuvenation delivered a 12th consecutive quarter of double-digit growth in both e-commerce and retail channel. We celebrated our 40th anniversary at the start of the year by focusing on our manufacturing roots in Portland as well as our commitment to domestically produced products with the launch of our modern heritage collection and O&G Studio collaborations in February. Our expansion into new aesthetics and product categories is driving increased spend with our existing customers and accelerating the acquisition of new customers. We're especially excited about our new store in New York that opened at the end of March. The store is performing above expectation. It's a great expression of Rejuvenation's new brand identity and breadth and allows us to connect directly with both customer and trade clients in this key market. Mark and Graham continued its profitable double-digit growth in the first quarter driven by its focus gift giving strategy and new product introduction. New categories such as luggage, tech and travel accessories were successful in driving Q1 sales. In Q2 Mark and Graham will be launching a new creative look and feel that emphasizes our lifestyle merchandising and adding new categories and cross brand collaboration to broaden our gifting assortment. We're excited about Mark and Graham's continued evolution as a premium gifting destination with high growth potential for the remainder of the year and beyond. In the first quarter, our global businesses delivered strong performance with double-digit revenue growth in our company-owned businesses in Australia and the UK. Additionally, our key growth and operational improvement strategies have resulted in improved profitability in these businesses. And as we further improve our operations to support our existing businesses and partnerships, we are exploring opportunities for franchise expansion into new markets and to build our e-commerce business around the globe both company owned and with our franchise partners. Our global partners continued their expansion with the opening of 7 new locations in the quarter. Alshaya opened 3 new stores in Qatar bringing our total store count in the Middle East to 33. In addition John Lewis added 4 western West Elm shopping shops within its department stores in the UK for a total of 13. We ended the first quarter with 82 franchise and wholesale points of sale and are excited about the opportunities to further build our businesses in the Middle East, Mexico and Europe. We look forward to expanding into a new franchise market launching our brands in South Korea this June. South Korea is a dynamic invisible retail market for our brand and will support our growth to a projected 145 plus global non-US stores by the end of the year. In summary, the first quarter reflects strong progress in our strategic initiative of operational excellence, digital leadership, design innovation and retail optimization. All centered upon our key strategic focus of delivering a superior customer experience. We believe that our iconic brands and profitable multichannel model together with our inspiring lifestyle merchandising approach and high touch service model create a sustainable competitive advantage in this highly fragmented home furnishings market. As we continue to execute against our key strategic initiatives, we believe we are well positioned to deliver on both our near term objective and our longer term goal of reaching $10 billion in revenue. I will now pass the call over to Julie to discuss our financial results and guidance.

[Julie Whalen:]

Thank you, Laura and good afternoon everyone. We are pleased we were able to deliver on all of our first quarter financial commitment and exceed the high end of our EPS guidance range while also investing in our long term initiatives. Our first quarter results demonstrate our ability to execute against our growth and operational initiatives, while at the same time maintain strong financial discipline. For the first quarter, net revenues increased 1.2% to $1.11 billion with comparable brand revenues increasing 0.1% on top of 4.5% last year. These results were primarily driven by double-digit growth across West Elm our newer businesses and our company owned international operations as well as strong year-over-year growth in Williams-Sonoma. This growth was partially offset by the Pottery Barn brands. In the Pottery Barn brand however, we were pleased to see 270 basis points of sequential improvement in comp brand revenue from Q1 highlighting the effectiveness of the initiatives we're working on in that brand. In Pottery Barn Kids and PB Teen although their net revenue comps declined due to inventory outages across several key categories, they both saw sequential improvement in their demand comps. In our e-commerce channel net revenues grew 0.7% to $581 million and represented 52.2% of total company net revenues for the quarter, relatively in line with last year's channel mix. This growth was driven by West Elm, Williams-Sonoma, our newer businesses and our company-owned international operations all of which generated double-digit economic growth. This growth was partially offset by the Pottery Barn brands. Our retail channels net revenues increased 1.8% to $531 million in the first quarter, primarily driven by West Elm and Pottery Barn. The improvement we saw across the Pottery Barn brand reflects the success we are seeing across our various retail initiatives including increased density of decorative accessories and cash and carry items, a favorable customer response to our decorating and entertaining items. Our in home design services and our store remodels and refreshes. Gross margin for the first quarter was 35.6% versus 35.8% last year and included occupancy cost of $167 million in the first quarter of 2017 compared to $162 million in the first quarter of 2016. The gross margin de-leverage was due to occupancy which de-leveraged 30 basis points, 50 leverage primarily resulted from increased occupancy costs support our growth and operational initiatives and includes the year-over-year expenses associated with our new southeast distribution center that was not fully operational until the second quarter of 2016. We continue to see benefits from these operational investments including improvement across our customer service and shipping related metrics as well as various efficiencies throughout our supply chain. As a result, excluding this occupancy deleverage selling margin actually improved to 10 basis points versus last year and represent the highest selling margin rate we have seen in 2 years. SG&A for the first quarter was 29.5% of net revenues in 2017 versus 28.8% in 2016. The 70 basis point deleverage was primarily driven by higher digital advertising costs from our decision to invest in new customer acquisition and was partially offset by strong financial discipline across our general expenses. Operating margin for the first quarter was 6.1% versus 7% in the first quarter of 2016. By channel, the operating margin in the e-commerce channel was 22.7% versus 22.8% in 2016. The 10 basis point decline in operating margin was driven by our investments in digital advertising and reduced shipping income, which was almost entirely offset by continued supply chain and fulfillment related efficiencies. The operating margin in the retail channel was 4.1% versus 5.8% in 2016. The decline in operating margin predominantly resulted from higher occupancy and employment costs primarily associated with our growth initiatives which include additional West Elm stores and our new southeast distribution center. In corporate unallocated expenses as a percentage of net revenues were 7.7% in the first quarter flat 2016. The effective income tax rate in the first quarter was 34.5% versus 37.7% in 2016. The year-over-year tax rate improvement was driven by the incremental benefits we are seeing from improved profitability across our international operations which are taxed at a lower tax rate. As a result, first quarter 2017 diluted earnings per share were $0.51. On the balance sheet, we ended the quarter with a cash balance of $94 million versus $99 million last year. We had $45 million outstanding under our revolving credit facility versus $100 million last year. And in the first quarter, we returned $72 million to stockholders through share repurchases and dividends comprising $38 million in share repurchases and $34 million in dividends. Merchandised inventories at $1.037 billion were up 9.8% versus Q1 2016. A substantial portion of this inventory growth however is associated with inventory that is still in transit to our distribution centers. Our own handed available for sale inventory grew 3.5% driven by a higher growth brands. The Pottery Barn brand on hand available for sale inventory decreased 0.4%. For the full year, we expect our inventory levels to be relatively in line with our sales growth. I would now like to discuss our second quarter and fiscal year 2017 guidance. For the second quarter of 2017, we expect to grow net revenues 3% to 6% to a range of $1.195 billion to $1.230 billion with comp brand revenue growth in the range of 2% to 5%. We expect our second quarter operating margin to be below last year, and we expect the diluted earnings per share to be in the range of $0.55 to $0.61. For the full year, we are reiterating all of our guidance ranges. We expect to grow net revenues 2% to 4% to a range of $5.165 billion to $5.265 billion with comparable brand revenue growth in the range of 1% to 3%. We expect operating margin to be 9.4% to 9.6% and our diluted earnings per share are expected to be in the range of $3.45 to $3.65. All other financial guidance within the press release remains unchanged from the previous guidance. As a reminder this guidance reflects the investments we're making across our business to strengthen our competitive advantages and to position us for long term market share gains. We are investing in e-commerce to support this continued profitable growth including further investment in digital advertising to drive new customer acquisitions as well capture and convert awareness into purchase. We are also investing in reduced shipping fees with a tiered flat rate in home furniture delivery fee model across all of the Pottery Barn brands. We believe this model will allow us to remain competitive with emerging industry standards and will move the needle on undecided customers during comparison shopping improving top-line performance. From a capital allocation perspective, we remain committed to a balanced capital allocation strategy. We plan to utilize our operating cash flow to invest in the business in support of our ongoing initiatives to improve the customer experience and drive further operational efficiencies. Capital expenditures are expected to remain within the range of $200 million to $220 million and we intend to return capital to our shareholders in the form of share repurchases and dividends. At the end of the first quarter, we had approximately $372 million remaining under our current share repurchase authorization which we intend to utilize for the next 2 years. In summary, we were pleased that we were not only able to deliver on our first quarter financial commitment but that we were also able to make substantial progress on our strategic and operational initiatives. In the Pottery Barn brand, we saw a significant sequential improvement highlighting the effectiveness of our initiatives. West Elm our newer businesses Rejuvenation and Mark and Graham along with our company owned global operations all delivered another quarter of double-digit growth. Williams-Sonoma generated another quarter of solid growth including double-digit ecommerce growth. Our continued focus on our supply chain initiatives generate another quarter of efficiencies which resulted in higher year-over-year selling margins. In our global business, we saw improved profitability which also drove a lower tax rate. All of this allowed us to outperform our earnings expectations while absorbing investments in our future growth. These results along with our longer term competitive advantages, a multi brand portfolio with an edited assortment, a profitable multichannel model, our high quality proprietary products, and a strong cash flow generation along with the ongoing success of our growth and operational initiatives give us confidence in our ability to deliver long term profitable growth. I would now like to open up the call for questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Christopher Horvers with JP Morgan.

[Christopher Horvers:]

Thank you. Good evening. Just want to think about the advertising effort and the new merchandising introductions that you've done particularly in the core Pottery Barn brand and just to understand where we are in that effort. So for advertising, do you expect the response to advertising to build momentum from here based on when you started and maybe John could you share some metrics around new customer acquisition as that's been such big focus? And then on the merchandising side, how far are we into resetting the PB brand based on the customer research effort you did last year. I know you did a lot around get the [indiscernible] in decorative but how far are we into getting to touch the rest of the assortment?

[Laura Alber:]

I'm going to let John start on the marketing.

[John Strain:]

Great. Thanks Chris. We've seen positive improvements in our visits and revenue derived from digital marketing really as a result of our Q1 investments. Overall, we're seeing our penetration of demand drive for marketing programs increased both sequentially and year-over-year. And we're going to continue to optimize catalog expenses and shift that spend into highly productive digital channels. I mean in particular, we're strengthening our non-brand search terms, affiliates, remarketing of social programs. And at the same time on the email front, we're really excited about some of the continued positive results from our triggered email programs and initiatives around new email personalization models. So at this point we're seeing nearly 40% of our emails driven from sales, email during the sales coming from triggered programs despite representing less than 10% of our total email sent. These results reinforce the point, relevance matters. Hence, our obsession with continuing to expand our personalization capabilities still remains relevant and targeted in terms of missing our customers.

[Laura Alber:]

And just to take the question in a broader sense. Last year, early in the year, we realized that we needed to listen more carefully to our customers and what they're looking for. And as I think, as I mentioned in the last call, we did extensive customer research on what the customers were saying. And as a result of our brand work, we put together a quarter-by-quarter very aggressive execution plan, covering both product innovation, digital operations, store remerchandising, and value. And we've been executing against it successfully. I'd say that some of the really strong good reads include small faces, although it wasn't a big bite as we received a really good response and gives us confidence that we'll be a meaningful contributor to the future. So that's one that we haven't even begun to maximize. Store merchandise, we've changed the merchandize strategy in our stores. Restoring our table top and decorative accessories categories that people come to us for and that drives actually new customer acquisition. The spring decorating and entertaining was success. We saw substantial increase in our table top business and our decorating businesses and understanding for Easter. And then as John said, we continue to improve the online experience we've always had a ton of content and we have a chance to leverage that even more than we are online. So while we're pleased that our initiatives are checking we're not by any means satisfied with the comp performance and we will continue to drive hard with our team to improve it and to build upon what's working and then of course when it's not working to pull back.

[Operator:]

Thank you. We'll take our next question. We'll go to David Magee with SunTrust Robinson Humphrey.

[David Magee:]

Yes. Hi everybody. Just a question of the supply chain, you guys have done a great job squeezing efficiencies out of that and keeping your prices sharp. How much more do you have to do there over the next say 18 months?

[Laura Alber:]

Thanks for the question. Again we've made a lot of progress and improvement across our customer metrics as well as the cost, but we see a ton more opportunity. We've been relentlessly focused on it and we believe that service reliability quality and speed are keys to our long term advantage and as a result of the investment we were making our back orders are down, our on-time shipping is up, out of market shipping is down, which drive cost down too. We've also visualized our inventory which is complicated to do, but because of that we're seeing fewer out of market shipments, reducing our freight expense decreasing our -- I mean the big opportunity for the future is further inventory optimization. So that we're both in better stock and then have lower over stock and that I think you'll continue to see improvements there on both side and at the same time we can better communicate to our customer about where their order is through the delivery cycle. So yes, we have done well again we have a lot more to do and we are building a much more responsive agile supply chain. We are investing in the processes and technology to achieve the absolute best service at the lowest cost.

[Operator:]

Thank you. We'll next go to Matt Fassler with Goldman Sachs.

[Matt Fassler:]

Thanks a lot. Good afternoon. My primary question relates to e-commerce line item and Pottery Barn in particular. So Pottery Barn accelerated or improved from where you were in Q4. I don't think you isolated the different brands in terms of e-com performance in Q4, but it seems like its e-commerce business was a notable lag rate relative to the rest here in Q1. So how should we think about what's going on in the core furniture business online is this a competitive factor as the business recovers and it sounds like PB has continued to gain momentum, would you expect its performance in the ecommerce channel to recover as well?

[Julie Whalen:]

Hi Matt, this is Julie. I'll take that, so a couple of things to answer that question. First; yes, we had lower e-commerce growth at 0.7 but we still held our mix relative to last year 52.2 and we still held her profitability at 22.7. The key take away is that all businesses, so West Helm, Williams-Sonoma, our newer businesses, our company owned international operations everybody had double-digit e-commerce growth except for the Pottery Barn brands which obviously we've been working on and we saw the sequential improvement from Q4 to Q1 of 270 basis points. If you look at it on a two year basis sequentially from Q4 to Q1, Q4 e-commerce growth was 5.1 and Q1 was 8.9. So we did see 380 basis points improvements really. So with that said, obviously the Pottery Barn brand negative 1.4% total growth given their size impacts the total company e-commerce growth. So certainly that is a big factor that we're continuing to work on. We certainly don't believe this is where economic growth will study and as we continue to see Pottery Barn improve you'll see this number change dramatically.

[Operator:]

Thank you. We'll next go to Michael Lasser with UBS.

[Michael Lasser:]

Good evening. Thanks a lot for taking my question. I want to talk about the guidance a little bit. For the second quarter, you're expecting an acceleration across your comparable brand revenue growth. The comparison will ease a little bit in the second quarter. So are you expecting the acceleration to occur across all the different concepts and as part of that, think you are still implying a 1% to 3% type growth rate for the back half of the year? Is there any reason why it should flow after an acceleration in the quarter? Thank you so much.

[Julie Whalen:]

So our guidance reflects obviously our best estimate is the possible range of outcomes. Yes, at the high end it assumes approximately on from a revenue growth perspective about 500 basis points of sequential improvement and obviously given the sequential improvement that we saw on the Pottery Barn brand and the continuous double-digit growth on our growth initiatives, it gives us confidence on our ability to drive that improved growth but of course it depends on the overall environment and the things that are out of control. We are also aware that retailers are being aggressive with their liquidations and promotional stands, so we believe the range of possible outcomes we have provided are appropriate at this time.

[Operator:]

Thank you. We'll take our next question from Kate McShane with Citi.

[Kate McShane:]

Good evening, thanks for taking my question. My question is centered around what -- I think you noted on the last quarter comps that there was some distraction in November that was cited for the slowdown in the comp last quarter, why do we see more of an uptick in that business in Q1 and what can we expect for the rest of the year?

[Julie Whalen:]

So I mean let's first say that we still believe that West Elm will prove to be our largest brand overtime. This brand has experienced as you know, double-digit comp growth for seven year straight, and they've reached now over a $1 billion but you can't expect that this brand will grow double-digits in perpetuity. But with that said, this brand still had really strong comp of six on top of a 19 last year and it continued to experience double-digit revenue growth. They also had stronger demand comps than net; so had we had the necessary inventory on-hand to fulfill this demand, their net comp would have shown an acceleration from the fourth quarter. So at the end of the day we continue to be very pleased with the growth in this brand and there still remains an incredible runway for growth and I won't really read anything more into it.

[Operator:]

Thank you. We'll go next to Dan Binder with Jefferies.

[Daniel Binder:]

Hi, it's Dan Binder, thanks. I just wanted to go back to your comments about the reduced flat shipping fee for the Pottery Barn business. Can you just give us a little bit color on how that's changed? What it was before? I think it's $99 now based on what I saw on your website; but just curious, is this a pass to potentially even lower shipping fees if it does stimulate sales and much of you have ever broken it out but if you eliminate shipping fees entirely what would that do to margins?

[Julie Whalen:]

Yes, we have not broken that out. Our goal is to be ideally breakeven from a shipping fee perspective, and we want to make sure that we're giving value back to the customer. So at the end of the day we're testing different models and this initial response to this model is very strong and so we're going to continue with that but obviously I think that's the way to look at it. As we started this with the Pottery Barn brand back basically in Q3, we roll it up to the other Pottery Barn brands at the beginning of this year but if you look back, our selling margins and our operating margin in the DTC channel have remained very strong. In fact we still have a selling margin that's the highest it's been in two years, so the impact of it -- we're obviously getting the benefit from the Top 10.

[Operator:]

Thank you. We'll next go to Greg Melich with Evercore ISI.

[Greg Melich:]

Hi, I wanted to follow-up more specifically on two things; one, Pottery Barn, what -- what are the areas if we look at the sales where they are not coming through. Are there some things like a few quarter ago you mentioned opening price point items and trying to broaden that out and you mentioned top of the table; so just like they tune into a little bit more as to what we really think you're missing there to get that back on the path that we're used to seeing?

[Laura Alber:]

I think it's always innovation and customer recognizes value and design innovation. There has been a lot of people who obviously have seen us success and copied it, and the great news is that the team has put together in a very quick time a very compelling assortment that attracts a wider range of customer so you can book online and a catalogue or in the stores and you're going to see some new looks for Pottery Barn that are -- that are proving to attract the new customers whether it's because of size or aesthetic, more urban; and it's all under the same Pottery Barn aesthetic and value proposition. So I think when brands get to 10 [ph] or they become too expensive, they shorten their ability to grow and it's clear to us that Pottery Barn as a brand that is loved by our customers is great and it's inspiring and friendly and decorative and that is what you are seeing from us now and you're going to see even more improvements on [indiscernible] and Holiday, we're very excited about what's the comp.

[Operator:]

Thank you. We'll next go to Simoen Goven [ph] with Morgan Stanley.

[Unidentified Analyst:]

Thanks. Julie, follow-up on the second quarter guidance and then it relation maybe to longer term. So the topline guidance is pretty solid, two to five, and I think it's the high end that translates to modest year-over-year EPS growth within it; I'm getting to flattish operating profit growth even on the high single digit comp. So if that math is fair, what is it understating vis-à-vis the flow through of the business because I would have expected it to look a little bit better. And just as a tie-end if you could touch on the digital advertising, if that's one of the causes of the holdback, what's the duration? And then the shipping investments, you know, how long should that persist?

[Julie Whalen:]

So basically you kind of answered your own question. Those are the two reasons for why you're not seeing a necessary flow through as you would typically. We said even on our last call that we are going to be making this year investments in digital advertising, reduced shipping income. We're in this to be number one and so we need to be able to make these investments in our future growth and so you're seeing this, a more significant step-up with advertising investments in the second quarter.

[Operator:]

We'll next go to Peter Benedict with Robert Baird.

[Peter Benedict:]

So kind of a clarification and then a question, kind of follow-up on the last one. Just a clarification, in the first quarter it looked like the stock based compensation was down significantly, like 38% year-over-year. I'm just curious what drove that? And not sure if you mentioned that during the SG&A comments. And then the question really kind of ducktails off the last question which is, we looked at the second half of the year, the guidance certainly implies improved EBIT margins year-over-year; is that just the effectiveness of the digital advertising starting to fall-through or there are other factors we should think about with respect to driving margin, operating margins expansion in the second half of the year. Thank you.

[Julie Whalen:]

So stock based compensation every -- Q1 basically we have significant true-up to our stock based depending on who is here, who isn't here, so I wouldn't be raising more into that to normal Q1 exercise. As far as EBIT improvement throughout the rest of the year, obviously as we make the assumption that we're going to have higher growth rate on the top line that flows through to the EBIT.

[Operator:]

We'll next to Steven Forbes with Guggenheim Securities.

[Steven Forbes:]

Good afternoon. Maybe just regarding the in-home design services you mentioned within the prepared remarks; can you expand on what the anticipated roll-out of that program is; whether it be -- you know, you're testing on regional basis where it's going to be a national offering? And then how do you think about the maturation of it as far as driving new customer acquisitions or targeting your key members, or maybe just touch on how you're thinking about the maturation of the program?

[Julie Whalen:]

Yes, great question. It's highly competitive, so I need to caution myself against sharing too much here. So it's -- what we see is the opportunity to use our brands together to better serve our customers and while they are very independent and have different aesthetics and value propositions, we know that we all shop -- and the good customers shop across them and so we're seeing great response from the key and we can use our key rewards, not just in the form of dollars but in the form of services to help our customers to furnish their homes [ph] because we know that difference in apparel, difference in other categories furnishing our home is a more complicated decision and we studied and seen that customers go to the store, they go online, they go back to the store; and so design services, both online and then store across multiple brands, a different aesthetics is very powerful competitive advantage because while there are others who are doing only online or others who are doing only in stores, we're one of the few that can do it in both places and synergy across these multiple areas and into the kitchen and into the hardware that rejuvenation self. So that is a very exciting initiative that we're going to be rolling in Q2, we're in training now and you will start to see it throughout our fleet at the end of Q2 and throughout the balance of the year.

[Operator:]

Thank you. We'll next go to Brian Nagel with Oppenheimer.

[Brian Nagel:]

Good evening, thanks for taking my question. So maybe a bigger picture question, but if we look at the sales results here, included with some nice acceleration and the couple of core brands, you've talked in the past about the overall environment and so how would you frame that the environment here or if you're company in Q1 -- I mean never have other retailers have discussed it a choppy sales environment over the past few months or so; there are some of these factors like weather and the way tax refunds maybe not be had as big impact but -- so how would you frame the overall environment, how that may or may not have held that -- some of that sequential improvement? Thanks.

[Laura Alber:]

Great. There is more competition coming in, particularly at the low end and there is still the big box retailers who have been offering furniture for a lot of years and we've just learned that Amazon is going to come into the furniture business. We believe that actually Amazon will take more market share from the mass retailers than anyone else; and we will continue to carve out our specialty niche with our edited inspirational assortment and decorating ideas for our customers. We know that our stores are a competitive advantage because they are experiential and they are the first expression of our brands and as I just said it earlier, we offer our shoppers an integrated experience across channels and our retail stores help drive e-commerce sales. Retail traffic is down nine, we all read those numbers; our traffic is down a lot less and we believe there is a huge interaction between our online and our stores obviously, and we're going to continue to maximize that opportunity. So I'd say that yes, it's definitely competitive, we don't see the promotional environment going away and as Julie said, we see a lot of people liquidating a lot of inventory; and we believe that we are going to outperform because of our sustainable profitable model. You know, there is ways to grow and this way is to grow profitably; and there are a lot of people growing but I guess the question is, is there sustainable. I can tell you ours is; we're disciplined, we prioritize our initiative and our strong cash flow generation gives us the flexibility to invest in our future.

[Operator:]

Thank you. We have time for one last question from Charles [ph] with Gordon Hasket [ph].

[Unidentified Analyst:]

Thanks. Just -- we think about the 2Q view of about 2% to 5%; is that a function of compared in an easier or was there inflexion in the first quarter business as you guys progressed through the quarter? And then could you also talk about your customer base today and how much of your sales are from new customers versus existing customers by banner [ph]?

[Julie Whalen:]

So as far as the guidance, the biggest differential is to continue to improve in Pottery Barns where expectations are. So we saw the sequential improvement from Q4, 270 basis points and we believe that Pottery Barn will continue that momentum as they move throughout the year, so that is the biggest driver of the guidance.

[John Strain:]

And as far as those new customers were at, we track that customer file very closely; new to core or new to brand are few of our key metrics in terms of being able to grow the brands and really be healthy over the long-term. And we're happy we reportedly saw a very solid growth in our digital new to core customers in Q1 and our digital marketing managed our number one source of new customer acquisition across all the brands. Now [indiscernible] continued to be a large contributor -- our largest contributor in terms of new to core customers, sourced from both digital and stores which we believe is a really strong sign for the health of our WS brand.

[Operator:]

And that concludes our question-and-answer session for today. I'll now turn the conference back over to Ms. Alber for any additional or closing remarks.

[Laura Alber:]

Thank you all for joining us. Have a great summer. We look forward to talking to you at the end of Q2.

[Operator:]

Thank you. And that does conclude our conference call for today. We thank you for your participation. You may now disconnect.