Williams-Sonoma, Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Mar 2017

[Operator:]

Ladies and gentlemen welcome to the Williams-Sonoma Inc. Fourth Quarter and Fiscal Year 2016 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 conference over to Beth Potillo-Miller, Senior Vice President, Finance and Corporate Treasurer, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

[Beth Potillo-Miller:]

Thank you, Ashley. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our discussion today will relate to results based on certain non-GAAP measures including non-GAAP SG&A, operating margin, effective tax rate and diluted EPS all of which exclude the impact of the following unusual business events. During the first and third quarters of 2016, we incurred reorganization charges related to the reduction of head count, primarily in our corporate functions totaling approximately $13 million or $0.09 per diluted share and $1 million or $0.01 per diluted share respectively. These charges were recorded as SG&A expense within the unallocated segment. During the fourth quarter of 2016 we realized the benefit of approximately $0.08 per diluted share from a one-time favorable cash adjustments which is recorded in income taxes. 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 and 10-Q 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:]

Good afternoon and thank you all for joining us today. Before we get started I wanted to talk about the important leadership change that we announced earlier. Sandra Stangl President of the Pottery Barn brand has decided to resign. Sandra has been with the company for 23 years and over that time she has been incredibly dedicated and provided strong leadership of the Pottery Barn brands. I want to thank Sandra for all of her contributions and wish her the very best. In light of her resignation, we are making the following organizational changes. Marta Benson, currently Executive Vice President has become President of the Pottery Barn brand. Martha joined Williams-Sonoma in 2011 and successfully led the acquisition growth strategies for both Rejuvenation and Mark and Graham. Prior to joining Williams-Sonoma Inc. Marta’s served as CEO Graham. Jennifer Keller, currently Executive Vice President has become President of the Pottery Barn Kids and Pottery Barn Teen brand. Jennifer has been with the Pottery Barn brand for 20 years and has proven her ability to grow business and build strong teams. Jeff Howie currently Executive Vice President of Pottery Barn brand Inventory Management and Brand Finance has become Executive Vice President, Chief Administrative Officer of the Pottery Barn brand. Jeff has been with the company for 15 years serving across several brands most recently at Williams-Sonoma. Jeff will be instrumental and helping us drive operational excellence and deliver a great customer service. Please join me in thanking Sandra and congratulating our executive on their expanded role. Now I would like to discuss our 2016 results and plans for 2017. On the call with me our Julie Whalen, our Chief Financial Officer and John Strain our Chief Digital and Technology Officer. In 2016 with net revenues stood over $5 billion, we generated revenue growth of 2.2% including another year of double-digit growth across West Elm our newer business Rejuvenation, and Mark and Graham and our company-owned global operations. We also delivered record earnings per share of 343, which was at the hiring of our guidance and reflects the strong operational performance, we drove across the supply chain all year. In the fourth quarter from the operational perspective, we executed one of our best holiday season and delivered and improved customer experience, which is at the center of everything we do. As we said on our last call, we expected customers to shop later in the season, which they did, and we are well prepared to meet their needs. At the beginning of the year, we said that in 2016 in addition to our growth strategies we’d focus on driving improvement across the organization. Our strategies included reasserting our product leadership with innovative products with the best value, revolution arising our inventory through supply chain and inventory improvements, transforming our marketing with strategies initiatives that increase new customer acquisitions, and changing our approach to real estate by enhancing the retail experience. During the year, we successfully executed against all these long-term strategies. First in product leadership, our multi-brand multi-aesthetic strategy allows our customers to create a home that is reflection of their personal style with a wide range of choices presented in an organized and intuitive way. And our direct sourcing advantage over 1,000 associates around the world overseeing the manufacturing of our products allows us to ensure consistently high-level of quality at a great value. In 2016, our product initiatives were focused on offering more differentiated products with a superior price quality relationship design aesthetic and functionality. In Pottery Barn, the results of the extensive brand diagnostic work we conducted in 2016 provided the foundation of the brands repositioning and a clear roadmap forward. We have begun to execute on this plan and we're already beginning to see positive consumer response to our new offerings, including sales increases in such categories as decorating and in value price points these areas which that are key to long-term growth as they drive new customer acquisitions. In PB Kids, we launched our Healthy Home strategy with expand GREENGUARD certified furniture in organic setting options. And we were to first children home furnishing company to launch Fair Trade products. In our furniture category, customers are responding to our high-quality and new elevated furniture's which are key points of differentiation to the market. In our gear business we innovative prints and pattern and personalization offering a broader assortment in the ages of childhood. In PB Teens, we have suggested our expanded Dorm offering driven by quality textiles and easy decorating in-store solutions. In furniture, our customers responding to our new more complex furniture finishes and furniture with great teen functions such as storage lounge and platform beds. And in collaborations will continue to be important strategy to offer differentiated products and broaden the reach of the brand. In Williams-Sonoma, we continue the expansion of our Williams-Sonoma branded products introductions included our exclusive ceramic cookware, professional copper cookware, high-quality of glassware and electrics. In our open kitchen line which appeals to broader demographic, we have also increased our offerings with affordable electrics and bakeware and we increased the number of new exclusive products from our strategic vendor partners throughout the year. In West Elm, we continue to expand and evolve in our furniture business introducing a new vision of modern design and increasing our outdoor offerings. We've also successfully introduced our partnerships with Casper and Sonos both of which enhance our position as an experiential retailer. And our approach to supply chain and inventory improvements, we've been focused on service as a key differentiator in our strategy and the investments we’ve made all year long in supply chain paid off in the fourth quarter. Our DC teams process reengineering drove significant productivity and customer service improvements resulting in faster order fulfillment and a sizable year-over-year decrease in service calls and escalations. We continue to make progress in our home delivery service as better positioning of inventory and the focus on multi-initiatives shipments resulted in an improved customer experience and a measurable improvement in pieces for delivery. Our new Southeast distribution center in Georgia is now running at capacity, shipping approximately 80% of our southeastern volume. Average delivery times for customers in this region have improved by three to five days, and we have realized freight settings. Our focus on inventory and few reductions also drove efficiency throughout the supply chain. In our marketing, we are focused on driving an improved customer experience and further E-commerce growth. As you know, we've always had a high percentage of E-commerce sales due to our catalog heritage. This year we reached almost 52% and catalog channel continues to be the highest growth area for us. Our digital marketing investments in 2016 included a focus on improving the online shopping experience particularly in mobile and increasing online advertising spend across all of our brands. We understand the increasing role that mobile plays in consumer shopping behavior and our investments focused on creating a more friction free experience have resulted in stronger conversion metrics. On the advertising front, we have increased top of funnel programs designed to reach new audiences and drive brand awareness. With a rich history of inspiring inventory and editorial and catalogs, we are capitalizing on the enhancement across the industry and digital storytelling. We are reaching our customers in new ways in putting video, how-to articles and with other inspiring content vehicles. While we increased our top of funnel efforts, we still believe one of our key competitive advantages is our health style. We continue to find ways to identify and target custom audiences that are most responsive to the various campaigns our brand sense. These efforts allow us to better deliver more relevant messaging across all of our communication channels including email, mobile, social platforms, direct mail and on our site. Also as we mentioned on our last call during the fourth quarter, we introduced our first cross brand royalty program the key, leveraging our competitive advantage to a strong diverse brand portfolio. The key is designed to showcase our brands in the world of customers for shopping. The key initiative is driving new to brand customers acquisitions at a very effective cost profile. In Q4 alone, we saw the customers who joined the key, shopped more of our brands and shopped more often with a higher average spend. Over the next 24 months, we will continue to expand upon the key program with improved technology and differentiated experiences and services. The other area of focus is our approach to retail. Throughout 2016, we have been taking aggressive approach in our retail and real estate strategies to improve the experience in our stores. We have selectively invested in remodels and refreshers to make our stores more of a destination. We have identified stores that we may close upon natural lease exploration or potentially reposition to a more desirable location. In Pottery Barn, in 2016, our new store model was tested and proven in multiple locations. We plan to selectively remodeled stores and other key locations. In Williams-Sonoma we opened relocated or remodeled 11 stores in 2016 and our newly designed stores have outperformed the fleet and our meeting high benchmark for profitability. We've also improved store performance by adding Williams-Sonoma home to select locations and we ended the year with 36 installations. Home is demonstrated a positive impact on e-commerce growth in those markets. And in West Elm during 2016 we successfully opened 13 new locations around the country. In each location our local shopkeepers are empowered to tailor their assortment to the customer's preferences and to build relationships with local makers and designers to present a highly localized retail experience of unique product. Now I would like to discuss, the key fourth quarter highlights within our brand portfolio, beginning with the Pottery Barn brand. Across the Pottery Barn brand comparable brand revenues declined 4.6% including Pottery Barn as a negative 4.1, Pottery Barn Kids at a negative 4.9 and Pottery Barn Teen as a negative 8.1. In Pottery Barn although we are not satisfied with the comps, we did see a sequential improvement from the prior quarter in several key categories. There was a good response to our holiday decorating and gifting strategies with high sell through on our grab and go gift assortment. In Pottery Barn Kids customers responded positively to our new product introduction and nursery flavor and furniture. Strong performance in these categories was offset by softness in textiles and decorative accessories in Pottery Barn Kids. Pottery Barn Teen had a difficult quarter, although we had some runaway hits on occasional seating collaboration and seasonal textiles, we did not have enough inventory in these items to meet customer demand and therefore we're not able to offset the softness that we experienced in the other categories. When this is beginning to soften earlier last year, we knew we had to approach growth differently. And we initiated an intensive brand diagnostic that included extensive customer feedback on our value equation. This work highlighted clear opportunities for the brand and we have developed a quarter-by-quarter roadmap of initiatives to implement across all areas of the business. Because we began some of this work in early 2016, we are already able to assess initial results in a perfectly build upon them. We are seeing some positive trends particularly in decorative accessories and we are chasing some strong furniture instructions. Our spring marketing reflects our brand work to bring inspiration home with more casual assortments lifestyle photography and storytelling. We're also investing in digital advertising strategy to drive new customer acquisition and brand reconsideration. We believe a focus on improving our value equation across all categories making decorating and entertaining easy and offering a diversity of looks to attract new customers will drive growth. Now I'd like to discuss Williams-Sonoma. In the fourth quarter, Williams-Sonoma continue to build momentum. With comparable brand revenues of 1.4% primarily driven by the food and gifting categories as well as double-digit growth in Williams-Sonoma home. This year we focused on delivering high-quality products, acquiring new customers and transforming our retail and customer experience. And we believe the brand performance throughout 2016 demonstrates that our strategies are working and sets of the foundation for future growth. Now I'd like to discuss West Elm. In the fourth quarter, West Elm delivered revenue growth of almost 11%, and comp growth of 6.5%. For the year, West Elm had total revenue growth of 18.3% and comp growth of 12.8% including - and including the revenue from our franchise partners West Elm reached the $1 billion milestone in 2016. We also successfully launched West Elm workspace and are underway with our West Elm hotel launch. We continue to be very optimistic about the growth prospects of this brand and are very aggressive in our expansion plans. Now I'd like to discuss our newer brands, Rejuvenation, Mark and Graham, which combined through 25% in the fourth quarter and demonstrate our ability to successfully grow new businesses internally. Our Rejuvenation brand delivered another strong quarter with double-digit comp growth in both our E-commerce and Retail channels. We continue to drive increased spend with our existing customers and accelerate the acquisition of new customers with expansion into new aesthetics and product categories like chandeliers, furniture, and functional accessories as well as a focus on domestic manufacturing including the support of emerging American designer. We opened our Chicago store in November driving results well above our plan. And we'll be opening our next store in New York later this month and store performance continues to exceed expectation. We look forward to sharing results of our continued growth strategy with you. Now I’d like to talk about Mark and Graham. Mark and Graham’s double-digit growth in the fourth quarter was driven by their offering of customizable gifts and a premium gifting experience. We particularly saw success in innovative tech gifts, small leather goods and key item accessories, especially in items under $50. Mark and Graham will continue to focus on classics, unique, innovative and affordable gifts as well as being a definitive store for quality online gift-giving. And finally, our global business. This business continues to succeed our expectations and the fourth quarter with no exceptions. Our focus on improved operations and sustainable profitability continue to drive momentum in our company owned businesses. Our relationship with our partner in England, John Lewis, also continues to gain momentum with the opening of eight additional shop in shop locations during 2016. Additionally during the fourth quarter, 10 new global franchise locations were open. Liverpool, opened seven new stores throughout Mexico, while Alshaya opened our first new stores in Qatar and additional store in Saudi Arabia. We ended the year with 75 franchises and wholesale points of sale. And we recently announced a very exciting new partnership to bring our brands to the dynamic retail market in South Korea. We've partnered with Hyundai Livart Furniture, an affiliate with the Hyundai Department Store Group to open 30 plus stores over the next five years along with e-commerce. And we're actively pursuing other franchise opportunities around the world. As we look to 2017, we will continue to improve performance with a focus on our higher strategic priorities of innovation, and operational excellence. We will continue to strengthen our competitive advantages through innovation in e-commerce, our products and services as well as the retail experience. We are focused on continues e-commerce innovation. We were early to understand the importance of e-commerce and we now generate almost 52% of our revenues online and we do so profitably. We know how and why our customers shop in every channel across our brands and we will continue to aggressively invest to expand our additional leadership. In 2017, we will continue to invest heavily in digital technology in a fragmented and evolving retail environment where customers are targeted by multiple retailers, we are investing in powerful ways to increase brand level awareness and convert awareness to purchase. We'll be implementing digital tools such as next-generation product information pages, 3D product visualization, and increase side personalization to deepen online engagement of both new and loyal shoppers and to further expand loyalty across our strong and diverse portfolio brands. Based on the 2016 successes, we are investing more than ever in advertising specifically our e-commerce spend, online advertising initiatives will target top of the funnel vehicles to drive brand awareness and new customers, increased spend for purchases and higher participation in programs like registry in new movers. We will advertise aggressively to meet strategic goals like increasing unaided brand awareness. We’re also building a digital campaigns across various social media platforms to inspire our existing customers. And importantly, we are increasing advertising investments in cross -brand initiatives like the key loyalty programs to increase shoppers engagement frequency and to drive awareness of our emerging brands and services. We're also focused on delivering further products and service innovation. Some competitors are attempting to attract customers with low-quality product at lower prices. We know that our customers come to us for inspiration, service, and high-quality products at competitive prices. In Pottery Barn Kids and Teens, we’re driving innovation and product offering across all stages from baby to toddler, twin teen and décor, we are focusing on opening price points products by increasing our gear business and providing opportunities for easy decorating refreshers. And in Williams-Sonoma, we will continue to introduce high-quality products under the Williams-Sonoma brand and to develop innovative exclusives with our third-party vendors. This spring we will launch our Williams-Sonoma home collaboration with Aerin Lauder featuring home furniture, lighting, decorative accessories and tabletops. We’re also refining our product offerings to meet evolving consumer lifestyle to aesthetic variations and high-quality products that meet their specific needs. For example, Pottery Barn launched its small spaces collection in February which is already showing positive results. The collection is focused on opening price point in smaller scale solutions primarily upholstery, furniture, and functional accessories. Also in January, West Elm successfully introduced it's the vision of modern design that has been received well by both customers and the design community. We’re also addressing our customers changing shopping needs and preferences with innovation of the retail experience. The role of retail stores continues to evolve. As an established multi-channel retailer, we offer shoppers integrated experience across channels, all of which positively contribute their perception of our brands and products. Our retail stores are single best source of new customer acquisitions and are meaningful advantage over digital pure-play composition. To enhance the customer expense in all of our stores, we're investing in point-of-sale technology and scheduling tools which will provide operational efficiencies and elevated service levels. Given the declining mall traffic and shifting consumer behavior, we continue to evaluate the role our retail stores can and should play. We believe that our retail store must be a sort of inspiration and value added services that translate not just to in-store sales, but also to establishing brand loyalty and increasing multi-channel purchase behavior. For example, Pottery Barn store remodels in key markets like South Coast Plaza, in Puerto Madero, not only improved in-store sales, but also increase online sales in nearby ZIP Codes. As we said earlier, adding Williams-Sonoma home at select Williams-Sonoma stores has also resulted in both in-store online sales increases. These examples demonstrate how retail stores can contribute to both enhanced customer expense and top line revenue growth. Recognizing the role of retail stores in our overall brand experiences we will add new stores where appropriate. In West Elm, we continue to see great opportunities in localized and experiential retail and have plans to open 10 new stores this year. In Williams-Sonoma, we will open two new stores in the first quarter, located in outdoor lifestyle centers include grocery stores, restaurants and exercise facilities. We will continue to investment in optimizing top performance stores and refreshes and added services while closing underperforming stores. We will continue market-by-market analysis by brand in order to best position our retail fleet for the future. As stores continue to come up for lease expiration, we will have the opportunity to close or reposition those that don't meet our standards. Beyond these retail improvements, we are pursuing alternative channels for customers to experience our brand in rich and inspiring context. For example, our initiatives in hospitality with Marriott and the development of West Elm hotels as well as West Elm workspace will give customers entirely new ways to experience the brand as they travel and work. We're exploring similar ideas across all of our brands. In 2017, we will also continue to focus on operational excellence driving strategy that directly improve our customer experiences and value perception. Our relentless focus on optimizing our supply chain will continue and result in 2016 proved that these customer base initiatives translate to both improved customer satisfaction and operational efficiencies. We intend to be the market leader in customer satisfaction and we will measure it at every possible interaction. We have strategies and teams focusing on key customer touch points including order visibility, back order management, furniture home delivery, and quality and damages. Inventory optimization will also continue to be a key initiative for us. In 2016, we began implementation of a robust inventory planning tool focused on demand forecasting and replenishment. In Q2 and Q3 of this year we will continue to rollout replenishment model. We believe this solution will improve in stock levels and customer satisfaction by reducing local markets out of stock. The underlying foundation of all these initiatives is our company's culture and values. We believe our values differentiate us and that our customers care about how their products are made, the working conditions under which they are made and the safety of the materials that are used. Our customers care about the environment and materials they bring into their homes and share with their families. And across all of our brands, we are committed to honoring the shared values. With initiatives like healthy home in the Pottery Barn brand, we offer a range of products that are good for families and the environment and are expanding our offering to GREENGUARD certified furniture, organic setting and Fair Trade goods. In West Elm, we have targeted 20% of our assortment to the Fair Trade Certified to the end of 2017 with a goal of 40% by 2019. And in Williams-Sonoma, we offer the best quality food made with the purest ingredients possible, whether stores around the world or developed in our own test kitchen. And we continue to celebrate local food artisans in our communities. Supporting these efforts is our direct sourcing infrastructure with our own associate directly overseeing the manufacturing of our products. This means we can monitor both social compliance from fair wages to working conditions as well as the quality and safety of materials used in the construction of our product. It is important to be a positive influence in the communities where we operate. We invest in the people in our supply chain to make our products increasing economic opportunities for workers through programs enhanced benefits and education such as the HER project and the Nest Artisan Advancement project. And closer to Home, we and our brands partner with organizations such as St. Jude's Children's Research Hospital, No Kid Hungry, the Whole Planet Foundation, Kenneth Children’s Hospital and AIDS Walk in San Francisco and New York. Since 2012, we helped to raise over $17 million for these kinds of organizations and we have donated merchandising and given grants totaling over $20 million to organizations that align with our areas of focus. Doing business the right way is who we are is important to us and important to our customers. We are deeply committed to offering innovative, high-quality products that enhanced the lives of our customers and enrich our communities. Looking ahead, we have specific plans in place to drive innovation across our brands, creating differentiated experiences and using digital technology in new ways for deeper engagement with consumers. We will continue to drive operational excellence across the organization and we will increase shareholder value by keeping the customers at the center of everything we do. We have the infrastructure, strategies and talent in place and we are confident in the long-term prospects for our company. I will now pass the call over to Julie to discuss our financial results and guidance.

[Julie Whalen:]

Thank you, Laura. Good afternoon, everyone. Before I walk you through the fourth quarter financial results in more detail, I would like to begin with a few fiscal year 2016 financial and operational highlights. Fiscal year 2016 was another year of solid accomplishment. For the full-year, we delivered net revenue growth of 2.2% taking our total revenues to over 5 billion and earnings per share grew to $3.43. Our e-commerce revenues grew to almost 52% of total revenues. West Elm delivered another year of outstanding growth, with revenue increasing more than 150 million or 18.3% and comparable brand revenue growth increasing 12.8%, a double-digit increase for the seventh consecutive year. Our emerging brand Rejuvenation and Mark and Graham together grew 27%. And in our company owned international operations we saw another year of double-digit growth at 32.5%. Our gross margins at 37% were relatively flat from last year. Occupancy deleveraged approximately 40 basis points was offset by improved selling margins primarily resulting from the progress we’ve made in our supply chain initiatives as well as the direct sourcing advantage we have over other retailers. Operating income was down only 20 basis points to 9.6% due to SG&A deleverage from our decision to invest in digital advertising to drive new customer acquisition. On the balance sheet, merchandise inventories were flat year-over-year demonstrating our commitment to hold inventory growth below sales growth. And we generated 525 million in operating cash flow allowing us to invest in the business in our long-term initiatives with almost 200 million in capital expenditures and to return 285 million stockholders in the form of share buybacks and dividends. Now I would like to discuss our fourth quarter financial results. In the fourth quarter, net revenues were relatively flat to last year at 1,582,000,000 with comparable brand revenues decreasing 0.9%. Revenue growth was driven by West Elm, our newer businesses Rejuvenation and Mark and Graham, Williams-Sonoma and our company owned international operations. This revenue growth was offset by the top line softness we saw across the Pottery Barn brand. Gross margins for the fourth quarter at 39.3% expanded 100 basis points over last year including occupancy cost deleverage of 30 basis points in the fourth quarter. Occupancy costs were 169 million in the fourth quarter of 2016 versus 165 million in the fourth quarter of 2015. Merchandise margins were 20 basis points higher than last year, the remaining gross margin leverage primarily related to our supply chain and inventory initiatives. SG&A increased to 25.7% of net revenues from 24.3% in the fourth quarter of 2015. This 140 basis point deleverage was primarily associated with higher employment expenses due to the timing of incentive compensation cost, including the impact from reporting incremental stock compensation expense in order to reflect lower-than-expected quarter ship. Additionally, we had higher digital advertising expenses from our decision to invest in new customer acquisitions. Operating margins for the fourth quarter was 13.6% versus 14% in the fourth quarter of 2015. By channel, the operating margin in the E-commerce channel in the fourth quarter was 23.7% versus 22% last year. 170 basis points improvement was primarily related to higher selling margins, reflecting the ongoing benefits we are seeing from our supply chain and sourcing initiatives, partially offset by the investment in digital advertising expenses. In the retail channels, the operating margin was 15.7% versus 15.3% in 2015. Leverage in the retail channels resulted primarily from higher selling margins. Corporate unallocated operating expenses represented 6.2% of net revenues versus 4.6% of net revenues in 2015. The 160 basis points of deleverage was primarily due to the higher employment costs resulting from the timing of incentive compensation expense as well as incremental occupancy costs due to various technology investment in the business. The effective income tax rate in the fourth quarter excluding the one-time favorable tax adjustment was relatively flat to last year at 36.5% versus 36.6% last year. These overall results generated $216 million in operating income and $1.55 and diluted earnings per share in the fourth quarter. On the balance sheet, we ended the quarter with a cash balance of $214 million and no debt. And merchandise inventory were essentially flat to $978 million. Merchandise inventories across the Pottery Barn brands however were down almost 3%. So we were disappointed in our fourth quarter topline performance in the Pottery Barn brand, Williams-Sonoma, West Elm and the continued success of our other growth initiatives combined with our strong operational execution allowed us to drive significant growth margin expansion and to meet the high end of our earnings guidance. Now I’d like to discuss our 2017 guidance. For the first quarter of 2017, we expect revenue growth and comparable brand revenue growth in the range of negative 1% to negative 2% with net revenues in the range of $1.85 million to $1.120 million. We expect operating margins to be below last year's operating margin rate and we expect diluted earnings per share to be in the range of $0.45 to $0.50. For the year, we expect to grow net revenue 2% to 4% to a range of $5.165 million to $5.265 million, with comparable brand revenue growth in the range of 1% to 3%. We expect operating margins to be 9.4% to 9.6%. Diluted earnings per share are expected to be in the range of $3.45 to $3.65. This guidance reflects the investments we're making across our business to strengthen our competitive advantages and position us for long-term market share gain. Including a significant investment in e-commerce to support continued profitable growth with further investment in digital advertising to drive new customer acquisitions as well as capture and confirm awareness in the purchase. And specific to the first quarter, we're also incurring incremental year-over-year costs associated with our new southeast distribution center that was not fully up and running until the second quarter of 2016. We believe these investments will improve the customer experience and top line performance as well as drive further operational efficiencies. As far as our capital allocation strategies, we remain committed to a balance capital allocation strategy utilizing our operating cash flow to first invest in the business to support our ongoing growth initiatives with capital expenditures expected to remain within the range of $200 million to $220 million and to returning to cash holders. Our capital investments for fiscal year 2017 are focused on those areas that support our strategic priorities of innovation and operational excellence that Laura spoke to earlier and where we see sustainable long-term returns for our shareholders. These investments are centered on yielding top line growth, improving the customer experience and driving operational efficiencies, all of which will strengthen our competitive positioning. We are investing in e-commerce and digital leadership in supply chain and inventory management in our retail transformation, and in West Elm. We also expect to return cash to shareholders in the form of share repurchases and dividend payments. We expect to repurchase shares annually at a level to least offset equity dilution. We have approximately $411 million remaining on our multi-year $500 million share repurchase program that we entered into last year. We also expect to continue to target our dividend levels at approximately 35% to 40% of net income and in line with the S&P 500 dividend yield. Today we announced a 5% increase in our quarterly dividend to $0.39. This is the 11th dividend increase we've had before we start paying dividends in 2006. This will help us returning almost $1.6 billion to our shareholders between both dividend payments and share repurchases over the past five years. As far as our three-year outlook given the evolving retail landscape and the investments we are making today to support our future long-term growth our guidance in the shorter-term will not match our three year outlook previously provided to you last year of mid to high single digit revenue growth and low double-digit to mid teens earnings growth. Longer-term however, we are confident that we can return to these higher growth rates. Our competitive advantages, well-known brands, a multi-channel business, superior customer service, a continued focus and operational improvement and experience leadership teams, a solid balance sheet and a culture of strong financial disciplined combined with our opportunities for growth give us the confident that we will be able to drive sustainable long-term profitable growth. I would now like to open up the call for questions.

[Operator:]

[Operator Instructions] And we will take our first question from Jessica Mace, Nomura. Please go ahead.

[Jessica Mace:]

Hi. Good afternoon. My question is about the supply chain efficiency. That seems like a very significant part of the gross margin expansion in the fourth quarter. I was just wondering if you could give us a sense of how much of the benefit from those supply chain initiatives is still remaining? Thanks very much.

[Laura Alber:]

Yes. So we’re really confident in our ability to continue to generate supply chain efficiencies. It's quite obviously one of the things inside our company that we're most passionate about. We have a team that is dedicated to this and we have a ton of opportunities in order to drive supply chain efficiencies. First off, this past year a lot of it has been lacking what occurred in the prior year, but as part of that process we've seen the ability to be able to generate even more next year. So I think the important piece to take away from that though is not necessarily assume that we’re going to have a 100 basis points of gross expansion every quarter throughout the rest of the year but we’re going to continue to see a lot of these supply chain initiatives move forward throughout the year and help mitigate some of the commercial environment.

[Operator:]

And we’ll take our next question from Christopher Horvers, JPMorgan. Please go ahead.

[Christopher Horvers:]

Thanks. Good evening. I wanted to focus on Pottery Barn a little bit. How much do you think of the issue is an advertising issue versus a generational issue, where Baby Boomers where Pottery Barn was the quintessential brand for them and perhaps the Millennial is not picking up that. And so is that the idea with the increased advertising and the shift to lower price points? And as a follow-up to that, as you think about PB comps, I know you don't guide by quarter or, excuse me by brand, but do PB comps recover in the near term, especially considering that tough compare overall, or is this something that stages over the year and you expect a much bigger back half? Thanks.

[Laura Alber:]

Thanks Chris. The research that we did showed us that our brand will is love us and Pottery Barn is top of the list, there isn't any big complaints from them that it's a problem to solve. It's more the opportunity to reach more new customers and also to reconsideration of customers who may say I know Pottery Barn, but it's not my style. And so it was very good for us to work because it became very clear what a powerful brand we have and what we need to do is to give them more entry points to the brand. And we talked earlier about the focus on what we're calling the candy, the things that you buy impulsively because you love them and when brands have those kinds of products, they attract new customers and often after that life stages is they buy furniture. We didn't see a big change across different age groups, you know, there's a lot of millennia’s who love more traditional furniture. We know that the opportunities are often size because if people move to smaller living arrangements and the urbanization happens the large-scale furniture is difficult and we have done a small space before, but we actually haven't gone small enough and we haven't altered our value creation which was really important to us. So again, we reach those customers who may be moving into their first apartment. And we're seeing that these couples of strategies are really working to drive the new customer acquisition. In terms of advertising, we continue to make the shift from catalog to digital advertising and we are focused on digital storytelling. We know that one of the key differentiators in our Pottery Barn product is our quality. And the way things are made and the importance of toxic is pretty materials. We know the customers care about these things and so we're focusing on our marketing to tell these stories and also to give them more content because we know that decorating is hard and they have always seen us as the source of inspiration. So you'll see us continue to push on that kind of marketing and to invest more there than we have previously.

[Operator:]

And we will take our next question from David with Centris. Please go ahead.

[Unidentified Analyst:]

Hi. Good afternoon, everybody. Just a two-part question, as well. One bigger picture, with the environment being difficult and/or in flux, what do you think it's going to take for the tailwind to improve for your business? And then secondly, more specifically, what is your current furniture delivery times versus what your industry averages are right now?

[Laura Alber:]

Sure. Thanks David. We are seeing the sales react short-term to various news events. We saw it during the election. We see it whenever there is anything big in the media. However, we're focused on the longer-term trends versus the selling or weekly choppiness and housing metrics are solid. Employee numbers have been improving and these strong housing fundamentals are supportive of the home improvement industry and we typically see the customer spent on furnishing after these home improvement projects. So the customer appears to be getting healthier and I believe all of these fundamentals are favorable and should support industry growth and we believe that if we continue to provide differentiated products at a great value and a superior customer service, we will be able to continue to take share. Now in terms of our furniture delivery, we have a lot of different types of furniture. We have furniture that's in stock and we can deliver that faster than most. We've done this measurement. We have furniture that's custom and we are continually working those numbers and our Sutter Street manufacturing in North Carolina allows us to do that because we’re running it ourselves, and we're continually making improvements. And we measure every week how much is on time, so there is also the idea of how long it takes but also how do you deliver on your promise. And this is an area that we’re very focused on and we continue although we’ve made improvements, cannot be satisfied with where we are and realize that our competitive advantage will continues to be to outperform particularly in large few furniture’s.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

And we’ll take our next question from Peter Benedict with Robert Baird. Please go ahead. Peter, your line is open, if you can unmute yourself. And we'll move next to Matt Fassler with Goldman Sachs. Please go ahead.

[Matt Fassler:]

Thanks a lot. Good afternoon. At the risk of asking a benign question about the first quarter, if we look at the comp mix among comp sets in Q4, obviously Sonoma tends to be more important in Q4. If you just roll that mix forward, or rather just for the mix in the first quarter, maintaining those trends would probably drive a brand comp below the low end of your range. Obviously, you're guiding here at the outset of Q1, three or four weeks deeper into the quarter than you usually do, so you probably have some pretty good visibility. So is there implied in here some intrinsic improvement implied in some of the brands outside Sonoma?

[Laura Alber:]

Well, obviously we don't give by brand guidance, Matt. But what I would say is obviously the low end of the guidance is sort of saying we're going to hold where the trend was in Q4 and the high-end of the guidance assumes improvement. And so we certainly believe as we move throughout the year that we are going to have Pottery Barn brands return to growth so that's the factor it, but there's anything else further step change across the other brands.

[Matt Fassler:]

Okay. Thank you so much.

[Operator:]

And we have next Peter Benedict with Robert W. Baird. Please go ahead.

[Peter Benedict:]

Recognizing you referred against both here, how are you thinking about the trade-off between margin stability and expansion with market share? Obviously, you guys are guiding to stable margins, but the growth isn't too big on the top line. So just curious at what point, you've got a lot of savings coming in supply chain, the decision points to reinvest more in that that drive market share. Just curious how you're thinking about that from a big picture perspective. Thank you.

[Laura Alber:]

Thanks Peter. We are obviously focused on both top line performance and earnings growth. And so certainly long-term we have op margin expansion potentially. But to your point what we think is the most important thing to do is drive the top line growth so we are reinvesting a lot of those savings right back into it with digital advertising investment this year. We also have the annualization of our Southeast DC which is very competitive from an advantage perspective. And so that is definitely what we're focused on. It could be penny wise and pound foolish and take all the savings over dated have that margin expansion but that's not going to driving the long term. So yes at the high end of op margin guidance were flat to last year but we have slightly leverage but we think with our investments offset by our supply chain efficiencies at the right spot to be.

[Operator:]

And we will take our next question from Michael Lasser with UBS. Please go ahead.

[Michael Lasser:]

Thanks a lot for taking my question and good evening. It's on the portfolio of brands. Historically, you've used M&A as a strategy to buy small brands and grow them organically over time. A, are you comfortable with your portfolio of brands are right now? And B, are you looking at M&A as a strategy along those lines or would you consider to use that as a tool in a different way?

[Laura Alber:]

We are always looking at M&A. I mean we are always looking at ideas to see what the right choice for the company. If we think there is a good opportunity to pursue, we will. So it's not a matter of having an opinion right now as to whether we're doing M&A or not, it's matter of what the opportunity is. We’ve obviously done a very good job of growing our own brands internally and we've had incredible success now in Rejuvenation that we think can grow to be a very large brand for us. So as you can imagine, there's lots of opportunities that come our way and we evaluate all of them, and if it's a good idea, we'll do it.

[Michael Lasser:]

Great. Thank you so much.

[Operator:]

And next we have Greg Melich with Evercore ISI. Please go ahead.

[Greg Melich:]

Thanks. I want to do one question on margins, with a follow-up. If you look at the supply chain savings now, are we back to a point where the decline in the shipping costs actually mean that recovering the costs to the end consumer, in other words, are we still losing money trying to deliver stuff to people or do we at least gotten the cost to a point that now it's a full baked in, it's covered?

[Laura Alber:]

No, we're not losing money delivering to people at this point.

[Greg Melich:]

Great. And then the follow-up, and maybe moving to SG&A a little bit. You talked a little bit about marketing and advertising and where it goes and how the shift is continuing from, I guess, catalog to more digital. Could you help us understand where that shows up in the P&L and by the segments, where we should be thinking about the bulk of the advertising budget going now at this point?

[Laura Alber:]

I mean, what you’re saying geography on the P&L is still within the advertising line within SG&A, is that what you're asking?

[Greg Melich:]

Right. But if you think about it between the e-commerce business and the retail business, how do you guys think about it?

[Laura Alber:]

Let’s let John - John, will you answer that question for us?

[John Strain:]

Yes, absolutely. I mean, the marketing environment is competitive. It always has been. And we're fortunate enough to have a heritage of being and direct response retailer with home and disciplines really associate making balance trade-offs between higher I driving conversion programs and strategic brand building top performing investment. I mean, great news for us that while the media may have change over time and from yesterday’s discussion about being catalogs are change productivity to today's digitally oriented discussion about emerging social channels, video, syndicating our content, we love this stuff. We have a passion for driving marketing effectiveness and we have the customer analytics team, the customer experience team, customer insights team, they're all part to assess that marketing mix on a multi-touch attribution model. It's really based on identifying opportunities to go broader and deeper where appropriate and also to make appropriate trade-offs. We’ve partnered with great companies like Google to assess our brand and develop strategies to really expand our brand awareness. So as part of our DNA, we've develop this through decades and its now kind of becomes naturally to pure play startups. So understanding how to do is a long-term sustainable profitable way for us a key advantage.

[Greg Melich:]

And are customer acquisition costs, are they higher or lower than they were, say, a couple years ago, as you do the transition?

[Laura Alber:]

Customer acquisition costs are up. We're finding great opportunities in the context of digital marketing. This is one where we are really driving a large percentage of our new customers, so we are excited about that.

[Greg Melich:]

That's great. Thanks. Good luck.

[Operator:]

Now we will take our next question from Dan Binder with Jefferies.

[Daniel Binder:]

Thanks. I was wondering if you could talk a little bit about the comps or sales at West Elm. They've seen some deceleration, although still healthy. I was curious, is that a function of just tough comparisons, a slowdown in the industry, or is it product driven? And how are the oldest stores comping versus the newest stores?

[Laura Alber:]

Sure, it's Laura. We are really pleased with the growth in West Elm. The growth in Q4 was almost 11% fully it was over 18%. And as I said including revenues from our franchise partners the brand has not reached $1 billion threshold. And the good news is that when we measure the brand awareness, it's really low. So that tells us there's a lot more room for growth. And the new stores have been successful. We have a lot of growth plans in place for the brand including hospitality and workspace in you're going to see those growth opportunities become even more meaningful next year as well as relentless focus on our store business and our direct channel.

[Julie Whalen:]

And West Elm in the fourth quarter like the other brands was also impacted by the retail environment specifically in the first month of the quarter like everybody spoke to. Based on all that impact probably more the comp business and the non-comp, so that's why there is a delta between the non-comp and the comp. The non-comp from the newer stores were doing phenomenally well I would read anything in that.

[Daniel Binder:]

Okay. And then just on store remodels, sounds like you're pretty pleased with them. Anything holding you back from accelerating it?

[Laura Alber:]

We continue to read them. We don't want to get ahead of ourselves. We always had a really hurdle rate for profitability in our real estate and there's lots change in there now. You do a couple, you do some more, you make sure it works in multiple markets and we have some great landlord partnerships going on and long-term relationships that are going to help us continue to evolve our stores, but also not get ourselves in a situation where our retail profitability declines because of the investment.

[Daniel Binder:]

Okay. Great. Thank you.

[Operator:]

Next we have Brian Nagel of Oppenheimer. Please go ahead.

[Brian Nagel:]

Good evening. Thanks for taking my question. I wanted to touch on, Julie you talked about, in your prepared comments, the e-commerce investments here in 2017. The question I have is, as we look at these investments that we made this year, are they more transformative or more maintenance? And then going out, I know you haven't given guidance really beyond 2017, but is there a point at which the investments, and particularly that which pertains to online, begins to tail off? Thanks.

[Laura Alber:]

Yes, there are several of the things that we’re investing in. We do think it's a transformative gear with the amount of - it is our prioritization for the year to invest in E-commerce and digital leadership. That’s why it was the first thing that I mentioned from an investment perspective. We're looking at everything to give the customer experience the best thing possible, so whether it's next generation product page, whether it's 3-D product visualization, whether it’s more investment in mobile, whether it’s better onsite search experience. We’re also looking at buy online pickup and store which has to be Williams-Sonoma brand. It's across the gamut of all the things that we are investing in and we do think this is incredibly important. Obviously, we have 52%, we have different other retailers, we’re already at the 52% from E-commerce perspective, but we do think the growth is going to continue to grow there, so it's important with our level of profitability. This past was 23.7%. The more we grow that channel, the better returns we get, and so it's going to be very strong focus for us.

[Brian Nagel:]

And regarding looking out beyond 2017, it sounds again like there's some significant investments you're making here in 2017. But as you look out beyond that, should we expect ongoing online investments?

[Laura Alber:]

Yes, absolutely.

[Brian Nagel:]

Okay, thanks.

[Operator:]

Our next question is from [indiscernible] with Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Thanks. Good afternoon. I want to ask, it's a follow-up somewhat to Matt's question earlier, maybe asked a little differently. In the fourth quarter, the comparable brand comps shrunk and then the guidance for next year is modest growth. So I wanted to get a sense of, the biggest changes you mentioned, I don't know if it's environment, l you mentioned some changes at Pottery Barn. I'm wondering, we have a couple data points we saw, not that the customer deposits are a perfect gauge, but they look flattish year-over-year, at least coming into this quarter. Can you also tie into that answer any timing on the digital customer acquisition. I would assume that that should respond rather quickly, but curious on the timing and just what gives you confidence in the forecast for next year on top line? Thanks.

[Laura Alber:]

There's a lot of questions in there. I can tackle it. I think the first and foremost thing you have to realize is that we’re giving guidance today and we’re coming out of Q4 where quite honestly we had a negative one, right. And we still see softness across the Pottery Barn brand and the environment is a little bit choppy, the current retail environment. With that said, as you move throughout the year, we have absolutely factored in the Pottery Barn brands returning to growth. We've also factored in the fact that all of our growth initiatives on the covers are still growing double digits. So whether it's West Elm, whether it is our newer businesses, whether it’s a global company owned businesses, all of that is going to continue. And so I think when you look at those growth initiatives combined with the fact that Pottery Barn returning to grow that is what gives us the confidence in our top line guidance. I think you need to remember that if you look back in time with the Pottery Barn brand from the time we've owned them, they’ve only been negative one other time during the recessionary period of 2008-2009, the first time they’ve been negative when you look back last I don’t know six years or so they had an average six comp. So it's a matter of when they turnaround but they will. And so that plus these other growth initiatives give us confidence in our guidance.

[Julie Whalen:]

I think also you asked the question about customer acquisition and we're happy to report that we saw various sales growth in DDC new to customers in Q4 with our investment in digital marketing paying-off and this is I think what you're referring to in terms of a nice positive as we go into the New Year.

[Unidentified Analyst:]

And just to clarify something, and I don't want to put words in your mouth, but did you say, you said growth initiatives and you said double digits and you mentioned West Elm, I don't know if you meant growth initiatives within West Elm or the West Elm comp should get back to double digits for the full year for next year?

[Julie Whalen:]

Well revenue growth they grew 10.8 in Q4. So there is still double digit on the year, they are still double digit. So I still count them as double-digit.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

And that is all the time we have for questions today. I'd like to turn the conference back over to Laura for any additional or closing remarks.

[Laura Alber:]

Well, thank you all for joining us. We appreciate your support and we look forward to talking to you next time.

[Operator:]

Once again, that does conclude today's presentation. We thank you for your participation. And you may now disconnect.