Williams-Sonoma, Inc.
Q3 2014 Earnings Call Transcript

Published: 20 Nov 2014

[Operator:]

Good day and welcome to the Williams-Sonoma Third Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gabrielle Rabinovitch. Please go ahead.

[Gabrielle Rabinovitch:]

Thank you, Kevin. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our earnings press release and this call may contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of any of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why these non-GAAP financial measures may be useful are discussed in our 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 2014 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 to discuss our third quarter fiscal 2014 results.

[Laura Alber:]

Thank you, Gabrielle. Good afternoon and thank you all for joining us today. On the call with me today are Julie Whalen, our Chief Financial Officer and Pat Connolly, our Chief Strategy and Business Development Officer. We are pleased to be discussing our third quarter with you. Solid performance across our brands allowed us to deliver these results with revenue growth of 8.7%, operating margin expansion and earnings per share growth of 17.2%. These achievements reflect our product leadership, lifestyle merchandising, iconic brands and strong execution. We also believe that this third quarter further demonstrates that our multi-channel model with more than 51% of revenue now coming from the ecommerce channel represents a distinct competitive advantage. We continue to focus on serving our customers and investing for sustainable long-term growth. This holiday season, we believe we have a strong line-up of beautiful gifts, entertaining and decorating collections across all of our brands. And most importantly, we are ready to provide the best service to our customers with the launch of the new functionality and programs that will be discussed this afternoon. Just at the beginning of the year, we have been preparing our supply chain for the holiday peak season with operations consolidation projects and the zero handling improvements in our distribution center. We have worked diligently on upgrading our distribution and delivery networks that we will be able to meet and exceed our customers' expectations. Our supply chain is a competitive differentiator and we continue to make investments to increase agility and flexibility, allow for greater throughput and reduce delivery time. Our new Dallas distribution center opened in May is allowing us to add capacity and shorten delivery times during peak. The productivity of the Dallas facility has exceeded our expectations. In addition, we are enabling next day service on all but large key orders. Sutter Street, our manufacturing division is also growing customers demand for handcrafted high-quality made-to-order upholstered furniture. We will be adding approximately 500 full-time positions for skilled craft people and distribution support personnel in our facilities in the United States. We plan to fill the new positions by early 2015. We believe we have one of the largest personalization capabilities in the country offering our customers many unique personalization techniques. To meet our increasing demand, we have increased our overall capacity with the addition of a new material handling system. We have also added some great new items to our assortments. We believe a personalized gift at the holiday is one of the best gifts you can give. In addition to investing in our supply chain infrastructure to improve service levels, our technology investments are centered on enhancing the customer experience. We believe these innovations will drive traffic and increase customer engagement and loyalty. The integration of convenient mobile functionality is important and this fall we have introduced Where Is My Order interface for customers on smartphone. Recently, we have also improved our customer order visibility online and we are extending the functionality of our onsite purchase and product recommendations features optimizing them for gift giving this holiday season. I'd now like to take a moment to discuss our community engagement this holiday season. Our corporate mission is to enhance our customers' life at home. And this mission guides not only our business decisions, but our giving and community strategy. Our commitment to making a difference comes to life through a number of initiatives that reflect the passion of our associates. And one key holiday effort has been on behalf of St. Jude's Research Hospital which is the leading – is leading the way the world understands treatment of childhood cancer and other life threatening diseases. Williams-Sonoma Inc. is celebrating its 10-year milestone of participating in the St. Jude Thanks and Giving holiday campaign. And since 2005, our customers and associates have helped raise more than $26 million to help St. Jude provide cutting-edge treatment and pursue visionary research. This year all of our branch are participating in the Thanks and Giving campaign offering products especially designed for the St. Jude's program. We donate a portion of purchase price of each of these items directly to St. Jude's Children Research Hospital. And starting this week and running as long as our supplies last, our customers can support St. Jude anywhere they shop. Now, I would like to update you on the progress, we have made across key initiatives to expand the reach of our brands globally, launch new businesses and grow our existing brands. We believe the successful execution of these strategies will deliver sustainable, profitable growth and increased shareholder value over the long-term. I would like to start with global. We remain optimistic that global expansion will be a significant growth driver. In the third quarter, we made progress on several global expansion initiatives. We announced a franchise agreement with Distribuidora Liverpool, Mexico's leading department store chain and expect the first store to open in 2015. Liverpool's market expertise and extensive supply chain will allow us to deliver the same high-quality of service that we provide in United States and around the world. For those of you unfamiliar with Liverpool, I would like to provide a brief overview of its business so you can fully appreciate the strategic rationale. Liverpool has been in business since 1847. It has 100 department stores across 56 cities and 5 duty-free stores in Mexico. Liverpool's real estate division operates 24 shopping centers and welcomes more than 100 million shoppers every year. And Liverpool is the largest non-bank credit card issuer in Mexico. We are excited about this development and look forward to providing updates as we hit our milestone. We also opened four new company-owned stores in Australia in suburban Sydney in August. And just yesterday, we opened four new company-owned stores in Melbourne. We now have 13 stores in Australia and believe that we are developing strong brand awareness that will allow us to scale this business effectively. We are also excited about the newest brands in our portfolio. In Rejuvenation, we are seeing nice momentum. Performance has been driven by the introduction of new categories and updated aesthetic reflecting a differentiated point of view in a greater range of price points to bring new customers to the brand. We have already launched more than 3x as many SKUs in 2014 as we did in 2013. Our new collections in conjunction with refinements to our marketing strategy have resulted in higher levels of brand engagements. This fall, we are also excited about our new design collaboration that feature handcrafted lighting, ceramics and accessories. Each product combines the designers' aesthetics with Rejuvenation's high quality industrial look to serve as the perfect gift during the holidays. These artisanal partnerships extend Rejuvenation's commitment to fostering local makers, and supporting products made in United States. In addition to seeing good growth online, we are seeing strong comp store growth in our four locations. As we refine our retail model and produce sustainable results, we believe there maybe additional growth opportunities for Rejuvenation including opening more stores. We're excited to be opening our fifth store next month in Palo Alto, California. The design of this location is a new prototype and as a result, this store's productivity will be another key indicator for Rejuvenation's potential. Mark and Graham recently celebrated its two year anniversary. We continue to see strong sales growth and the brand's exclusive assortment of high-quality unique gift continues to grow. Mark and Graham incorporates great design, explicit typography and state-of-the-art technology. It truly represents next generation personalization. And for the holiday season, we've introduced luxurious and accessible gift ideas across personal accessories and housewares. Addition, a key differentiator is our complimentary gift wrap. This signature gift wrap is beautifully constructed and mirrors the modern sensibility and clean design of the brand. This fall we also piloted our Trunk Show program in Mark and Graham, a new marketing channel for us, which is driving incremental sales and building brand awareness. We are excited about the opportunities this brand continues to identify. Now I would like to discuss our larger brands in more detail. I'm going to start with the Williams-Sonoma brand. In the third quarter, comparable brand revenue increased 4.3% on top of 1.4% last year. The Williams-Sonoma brand is now posted five consecutive quarters of comparable brand revenue growth and the third quarter brand comp is the highest Q3 comp since 2005. We're pleased with the progress of the Williams-Sonoma brand year-to-date. In the third quarter, we saw solid performance across tools, cutlery entertaining and tabletop. Proprietary and exclusive product introductions also contributed to the Williams-Sonoma's brand success. The Williams-Sonoma home business also continued to deliver strong results with a broader assortment and notable performance in furniture and textiles. Also in the third quarter, we were proud to reopen our original Williams-Sonoma store in Sonoma, California on October 2nd, which is our Founder, Chuck Williams' 99th birthday. This historic store, design center and cooking school, at the site of the original Williams-Sonoma store and our founder's former residence is a landmark. The store captures the character of our location's earlier era exhibiting many of the iconic kitchenwares originally sold. The store also celebrates Chuck's earlier discoveries by offering our latest and most popular products. Williams-Sonoma is ready for the fourth quarter with inspiring and unique product and experiences and the highest level of customer service. Begin with, in the fourth quarter Williams-Sonoma is proud to be the exclusive bookseller for the Ina Garten, Make It Ahead book tour. The author of eight best-selling cookbooks and host of the Food Network's Barefoot Contessa Back to Basics show, winner of both Emmy and James Beard award is celebrating the release of her eagerly anticipated ninth book, Make It Ahead

[Julie Whalen:]

Thank you, Laura and good afternoon everyone. We are pleased with results we are reporting today with top line revenue growth of 9% and bottom line EPS growth of 17% including 40 basis points of operating margin expansion. We believe this result demonstrates the power of our multi-channel business and our ability to successfully execute against our initiatives. Our performance year-to-date gives us confidence in our ability to deliver sustained long-term growth. In the third quarter, net revenue exceeded our expectations increasing 8.7% to $1.143 billion with comparable brand revenues increasing 8.7% on top of 8.2% in the third quarter of 2013. Net revenues in our ecommerce channel have once again generated double-digit growth growing 14.7% to $587 million and represented 51.3% of total company net revenues for the quarter, a 250 basis point increase over last year. And in the retail channel, net revenues grew 3.1% to $556 million. Gross margin for the third quarter was 37.7% versus 38.6% last year, with occupancy cost as a percentage of net revenues flat year-over-year at 13.5% of net revenues for $154 million, the 90 basis point decrease was primarily driven by lower selling margins in the ecommerce channel. Selling margins in the retail channel were essentially flat year-over-year and sequentially total company merchandise margins improved. Our disciplined approach to marketing effectiveness continues to result in productivity gains. We are relentless about acquiring new customers profitably and increasing the lifetime value of our customers. Our strategic levers again provided us with the flexibility to offer more value to our customers and at the same time drive operating margin expansion. In the third quarter, we offset our reduced selling margins within gross margin with greater advertising efficiency within SG&A. SG&A in the third quarter improved 120 basis points to 28.6% versus 29.8% in 2013. The improvement in SG&A was primarily driven by advertising efficiency as well as lower general expenses and the leverage of employment cost. Strong operational execution and financial discipline drove these improvements. This resulted in operating margin for the third quarter of 2014 that was 9.2%, 40 basis points higher than the operating margin of third quarter of 2013. Higher revenues in the ecommerce channel which consistently operates at a much higher margin drove this operating margin expansion. By channel, the operating margin in the ecommerce channel in the third quarter of 2014 was 23.3% versus 22.9% in the third quarter of 2013. In the retail channel, the operating margin was 9% versus 9.1% in 2013 and corporate and allocated operating expense as a rate represented 7.2% of net revenues versus 7% of net revenues in 2013. In the ecommerce channel, the 40 basis points of operating margin expansion was driven by advertising efficiency and the leverage of both employment cost and general expenses. In the retail channel, the 10 basis points of operating margin deleverage was primarily driven by occupancy and employment cost deleverage related to our global initiatives and 17 new store openings in the quarter. This was partially offset by lower general expenses resulting from strong financial and operational discipline. In corporate and allocated, the 20 basis point to deleverage was primarily related to higher occupancy cost associated with incremental investments in our IT infrastructure to support our strategic long-term growth initiative. This was also partially offset by lower general expenses from strong expense control. This top line revenue and bottom line operating margin outperformance drove a 17.2% increase in our third quarter 2014 diluted earnings per share resulting in earnings that were $0.68 per share versus $0.58 per share last year. Moving to the balance sheet, cash at the end of the quarter was $108 million given the seasonality of our business our cash levels reached their lowest point at this time of the year as we fund our business ahead of the holiday selling season. In addition, year-to-date, we have returned $290 million in cash to our shareholders consisting of $195 million in share repurchases and $95 million in dividends. Merchandise inventories at the end of the third quarter of 2014 increased 9% to $980 million from $899 million at the end of the third quarter of 2013. Strong inventory execution as resulted in inventory levels that are now back in line for the revenue growth. Inventory optimization is strategic. We are always focused on both improving our in-stock position ad reducing our over stocks. And we continue to make progress against these initiatives. We believe, we are well-positioned as we enter this holiday season. I would now like to discuss our fourth quarter and fiscal year 2014 guidance. We expect to deliver another year of record results for our shareholders and remain on track to deliver our three year outlook. For the fourth quarter of 2014, we expect to grow net revenues to range of $1.525 billion to $1.575 billion with comparable brand revenue growth in the range of 4% to 6%. We expect our fourth quarter operating margin to be relatively in line with last year and we are guiding dilutive earnings per share to be in the range of $1.42 to $1.50. For the full year, as a result of our Q3 outperformance, we are raising our guidance. We now expect to grow net revenues to a range of $4.680 billion to $4.730 billion with comparable brand revenue growth in the range of 5% to 7%. We expect our operating margin to be in the range of 10.2% to 10.4% and we are increasing our fiscal year 2014 diluted earnings per share to now be in the range of $3.11 to $3.19, all other financial guidance within the press release remain unchanged from the previous guidance. Our capital allocation guidance also remains unchanged. In order to support our long-term strategic growth initiatives, we are on track to make annual capital investments in the business in the range of $200 million to $220 million this year. And we remain committed to returning cash to our shareholders by paying dividends and repurchasing shares under our existing share repurchase authorization. In support of this ongoing commitment, we are also pleased to announce these successful amendment of our unsecured revolving line of credit which increases the facility to $500 million and extended the maturity date to November 2019, in light of the growth of our business our efficient use of cash and our long-term commitment we believe increase and extending our line of credit stay is appropriate. In closing, we are very pleased with our strong results and operational execution. We believe, we are well-positioned for this holiday season and beyond. With the customer as a center of everything we do, we are confident in our competitive advantages including our great brands with their innovative products and outstanding service as well as our multi-channel platform with more 50% of our business coming from ecommerce. These advantages plus our many opportunities for growth and our commitment to financial discipline continue to allows to remain confident in our ability to deliver sustainable long-term profitable growth. I would now like to open the call for questions. But before that, I would like to wish all of you a very happy holidays and we look forward to helping you and your family shop this holiday season. Thank you.

[Operator:]

[Operator Instructions] And we will take our first question from Daniel Hofkin with William Blair & Company.

[Daniel Hofkin:]

Good afternoon. Can you hear me?

[Julie Whalen:]

Yes. We can. Hi, Dan.

[Pat Connolly:]

Hi, Dan.

[Daniel Hofkin:]

Hi. Nice results. Just quick question, first on the guidance for the fourth quarter, if my math is right, it looks like pretty similar revenue guidance as what was implied before but maybe a little bit moderated on the EPS side. Just wondering is that correct and if so what are the factors behind that. And then I just had a follow-up question on kind of the Williams-Sonoma brand itself and where you think you are in the nine inning game both in terms of merchandising and in terms of kind of upping your service level game?

[Julie Whalen:]

Great. I will take the first part Dan. We feel great about our Q3 in year-to-date results and obviously the guidance we now have provided for Q4 fiscal year which will put us at another record year of revenue and earnings but still early in the quarter. And this is one of our biggest quarters. So you have to remember that. For Q4, another thing to remember is that our guidance is up against the tough year-over-year compare. And yet at the high-end of our range for comp brand revenue, we are guiding a 6 comp on top of the 10 last year. And for EPS we are guiding 9% growth after absorbing all of our investments. And on a year, we are guiding comp brand revenue growth at the high end to be almost 7 on top of 9 last year and we raised our EPS guidance. So we think this guidance is strong and really we are focused on the long-term growth of our company on our way to doubling our revenues over time and this guidance is consistent with our three-year outlook.

[Laura Alber:]

Dan, its Laura. To your question on Williams-Sonoma, we are very pleased with the performance that the Williams-Sonoma has posted year-to-date. Couple of years ago we outlined the plan for you to reimagine the brand bringing more proprietary exclusive and innovative products and making the retail stores more exciting. And we've made a lot of progress across both of those. We have also continued to invest in our online capabilities in Williams-Sonoma brand. We spent a lot of time on the onsite search and reorganizing the site so that it is easily shoppable both on a desktop and also mobily. And we are seeing great results from all that. In terms of innings, we continue to see a lot of opportunity honestly. We are pleased with what we have seen, but we have a lot more work to do and we see this is one of the pre-eminent iconic brand out there. And we believe they can have a much bigger presence globally than it has today. And then also there is new categories that we can expand into in the future.

[Daniel Hofkin:]

Great. Nice results again best of luck.

[Julie Whalen:]

Thanks Daniel.

[Operator:]

We will go next to Chris Horvers with JPMorgan. Please go ahead.

[Chris Horvers:]

Thanks. Good evening.

[Julie Whalen:]

Good evening.

[Pat Connolly:]

Hi, Chris.

[Chris Horvers:]

Can you talk about the – I think there is a lot of debate out there about the promotional environment. Can you talk about what you are seeing online and in the mall and how that's evolving as we head into the holidays? And also, we are getting closer to the Thanksgiving, so any thoughts you could share on what you are seeing around the Williams-Sonoma brand will do really great? Thanks.

[Julie Whalen:]

Sure. There is no question the holiday season will be even more competitive than last year. But I also believe ecommerce will set new sales record and with over 50% of our revenue in ecommerce, I believe we have a competitive advantage. Our marketing drives traffic to all of our channels and our in-store experiences and services give our customers the confidence to order online. Another competitive advantage that we have is our innovative proprietary product and the holidays are time when a customer wants to give a gift from a great brand and we believe, we are really well-positioned with all of our brands this holiday season.

[Chris Horvers:]

Okay. So it doesn't sound like you are naturally worried -- directionally about how the promotional environment setting up in November and into Thanksgiving and Christmas?

[Julie Whalen:]

When we say, we are going to be competitive this holiday it's far more than just price. We believe that our in-store and our online services will continue to lead the industry –our proprietary product line is outstanding. We've also worked all year and you've heard me say this to ensure that our offers are compelling. And we believe that combination continues to allow us to gain market share.

[Chris Horvers:]

Understood. And then just one quick last one, can you talk about the in-stock levels at Pottery Barn and Pottery Barn Teen and how that's improved over the quarter and how much you think, it would still catch upon? Thanks.

[Julie Whalen:]

So we feel really good about our inventory levels. As we said on the call, strong inventory execution resulted in inventory levels that now are back in line with revenue growth. We are focused on inventory optimization and on both improving our in-stock position as well as reducing our over stocks. And we continue to make progress against these initiatives. We feel very good about the level of inventory, if you are referencing a particular Pottery Barn Teen from last time, obviously, we have that but outage back in Q2 and we are predominantly back in with that inventory as of at this point.

[Operator:]

Thank you. And as a reminder, we would like to ask everyone to please limit your questions to one initial question. Again, please limit yourselves to one question. [Operator Instructions] We will take our next question from Greg Melich with Evercore ISI.

[Greg Melich:]

Hi. I wanted to talk a little bit more about the inventory particularly the gross margin dynamic and customer service. It sounds like we are normal now, how do you guys think about inventory turns or days on hand is at a more normal level? Have you made the adjustments for the port slowdown? And when we will start to see the benefit of the inventory changes showing up in gross margin?

[Julie Whalen:]

Hi. Greg, its Julie. I will take that. So as I was just saying before we feel really good about our inventory levels, obviously, there is always a delicate relationship between service levels and inventory especially the more that our sales are coming from the ecommerce sale. The more important it is to be in stock. We feel really good that we are back now in line with revenue growth. So we have strong inventory discipline in place across the company. And we believe we are well-positioned as we enter the holiday season with the right level of inventory to support the business and guidance we are providing today. The bigger concern is obviously, if this West Coast port slowdown continues or deteriorates, we do have strategies in place to help mitigate the potential impact and of course, our teams have been watching the slowdown and planning for it, since the labor contract actually even expired. And although we are 100% confident and our teams ability to navigate this to help minimize its impact on our inventory, we are hopeful that there will be a solution soon because given the volume of goods that pass through the West Coast port longer term which isn't good for anybody. From a margin perspective and some of our long-term initiatives, the growth margin you'll start to see some of those benefits as we enter 2015 and some of those benefits I think you are referring to is the insourcing of our foreign agents that was completed mid of second quarter and all of that gets costed into the inventory and sold through starting really in 2015, so you'll start to see some benefit there. And then the regionalization of our distribution centers, you'll start to see the full benefit of that as we enter 2015. But with that said, obviously, being a competitive from a promotion standpoint is important and if that's what the customer wants then the difference between us and other retailers is we're able to offset that with advertising efficiency with an SG&A like we did in this quarter and still have 40 basis points of operating margin expansion.

[Operator:]

We'll go next to Matthew Fassler with Goldman Sachs.

[Matthew Fassler:]

Thanks so much and good afternoon.

[Laura Alber:]

Hi, Matt.

[Pat Connolly:]

Hi, Matt.

[Matthew Fassler:]

I want to focus if I could on the selling margin in ecommerce, can you talk about to the degree to which that related to merchandising pricing and promotions and how much of it related to shipping?

[Julie Whalen:]

Sure. As we said in our prepared remarks that it was – the decrease in gross margin was primarily driven by lower selling margin ecommerce channel and not in the retail channel was essentially flat. But we did say that it's sequentially as the merchandise margins improved. So there are a lot of things that are going in gross margin as you guys know I try to make it as least complicated as possible and probably in the end make it more complicated. But this quarter particular we incurred some incremental cost to support our increased to poultry volumes, the ramping up of our Dallas distribution center as well as other cost ahead of the holiday selling season. For example, to support our growing personalization business all of which put additional pressure on the Q3 selling margins, but bottom-line even though these margins were down year-over-year we were able to still deliver the 40 basis points of operating margin expansion.

[Matthew Fassler:]

So that was more of some of those one-off factors than any change in the backdrop shipping or pricing-wise?

[Julie Whalen:]

Yes.

[Matthew Fassler:]

Thank you.

[Operator:]

We'll go next to Jessica Mace with Nomura Securities. Please go ahead.

[Jessica Mace:]

Hi, good afternoon and congrats on the nice quarter.

[Julie Whalen:]

Thank you.

[Pat Connolly:]

Thank you.

[Jessica Mace:]

It seems like it's another example of you've been able to flex the gross margin SG&A that delivered operating margin as you said. And my question is on kind of going forward where we can expect to see further SG&A savings especially in light of some of the investments and ramped up services that you talked about?

[Julie Whalen:]

From an SG&A standpoint, I think you'd probably seen every quarter that we have been able to leverage year-over-year and we don't expect that to change anytime soon. Obviously, the biggest factor that allows us to leverage is the advertising efficiency. And so what we consistently say is that every quarter we make the call whether to spend that next dollar in advertising or to spend it from a promotion standpoint and unfortunately that has different lines. And so depending on where the promotional activity is and what is happening in the market from a competitive standpoint, you will continue to see that SG&A leverage. Also, the more that we drive our revenues, which is consistently happening to the ecommerce channel, you will see a lot of our costs continue to leverage, I don't expect that to change anytime soon.

[Operator:]

We'll go next to Neely Tamminga with Piper Jaffray.

[Neely Tamminga:]

Oh, great. Good afternoon. Congrats on the quarter and congrats to Laura on the Fortune Businessperson of the Year list, that was fantastic.

[Laura Alber:]

Thank you, Neely.

[Neely Tamminga:]

Yes. So, question here on West Elm, new store growth trajectory, at what point do we start to think about maybe doubling the store growth? Admittedly, we get it that the ecommerce sales are very, very important, but obviously, store growth also grows ecommerce. And I think if we recall back to the early days of PB, it's right about now when I think PB was starting to maybe to open like 2X the amount of doors that West Elm's opening. So could you help us think through that time line? And just a real quick housekeeping question for you Julie. ecommerce the name change, totally agree with the decision where there any financial statement reclassifications or organizational changes behind that name or was it just simply renaming on the P&L? Thanks.

[Laura Alber:]

Go ahead Julie.

[Julie Whalen:]

Okay. So, I'll take that last question there. No, you should read anything more into that I mean the reality is ecommerce has been over 90% of that channel for a while now, we finally just made a decision to rename it nothing else has changed.

[Laura Alber:]

Okay. In terms of West Elm growth, we're really pleased with what we are seeing in the new stores. As you heard the list, we've opened in some different types of markets and all those stores give us confidence in our future plans for West Elm and we are looking for great stores and great centers that makes sense. And we could possibly open more, but we aren't looking to have races on this because sometimes you have to wait to get the best real estate. And we also really want to make sure that we really understand the multi-store market dynamic in every one of our brands, we've seen and learned different things when we open second, third stores in the market. So we're just hitting that part of the growth cycle now and we're really optimistic with what we are seeing about the future of this brand, our retail expansion strategy and also our ability to really build the business online. I think you also heard me talk about other legs of growth to West Elm today that we really think are exciting on including the contract furniture.

[Neely Tamminga:]

Thank you. Best wishes.

[Operator:]

We'll go next to Michael Lasser with UBS. Please go ahead.

[Michael Lasser:]

Good evening. Thanks a lot for taking my question. Are consumers responding to any different types of promotions that you're finding more successful than before – so take kind of a broadbase 20%, 25% off versus a more targeted promotion on a select item. And is that driving incremental expense?

[Laura Alber:]

It's interesting. I'd say the thing that I'm really noticing is that people have been ready for Christmas earlier this year. And we've seen really nice response to our guests already. And I think it's proprietary innovative product first, you want to give a wonderful thoughtful gift to people, it's greater if you can get a great price on it, but customers are pretty smart, they shop around, they know where the price fits and it's a very efficient market. So I don't think it's any trip per se other than high-quality innovative proprietary product priced fairly.

[Michael Lasser:]

And my follow-up question along those lines. Where do you think is the minimum level of catalog distribution and how far do you think you are from reaching that point?

[Laura Alber:]

It's different by brand and we test versions, page counts, sizes, it's very complicated and here you're always finding new opportunities. We're so lucky to have such a developed house file and a lot of different data points to draw from, that's really I think a competitive advantage of ours.

[Michael Lasser:]

Awesome. Thank you so much. Good luck with the holiday.

[Laura Alber:]

Thank you.

[Pat Connolly:]

Thank you.

[Operator:]

Our next question will come from Seth Sigman with Credit Suisse. Please go ahead.

[Seth Sigman:]

Okay. Thank very much. I was wondering if you could give a little more color on the international business and specifically some of the investments you've been making in Australia. How those stores are performing and when we should expect to see some of the leverage from those investments show up?

[Laura Alber:]

Seth, its Laura. We're really early on our journey overseas, I was in Australia and got to see our beautiful stores and you'd be so proud about how they're executing over there and of course like anything else you need to build scale. So, we're really focused on getting these stores open, well, getting the right services and getting the right inventory in line for our customers over there because there are different selling periods, selling patterns I'm sorry and selling period that we need to adjust for. We're pleased with the amount of business that's coming on line and how when we open a new store we see the online business also grow in that market.

[Seth Sigman:]

Okay, thanks. And just one quick follow-up on a separate topic, last quarter you discussed some fashion issues that may have impacted you. Can you discuss what changed and whether you feel like you're fully through that at this point or is there still a toe and head?

[Laura Alber:]

I think we're trying to, we've been thought about I mentioned that I thought that the color pallet could have been brighter and more fun to the summer season and it follows a very different time period. So, you move quickly out of that and while the pillows are a huge percent of our business that sort of window dressing and – sofas and so we tend to be very self critical and always looking for merchandising improvements and operational improvements and as you heard me say we saw much stronger response to the fashion textiles this fall.

[Seth Sigman:]

Thanks very much.

[Laura Alber:]

Thanks.

[Operator:]

And we will take our next question from Simeon Gutman with Morgan Stanley.

[Simeon Gutman:]

Thanks. And congratulations on the quarter and happy holidays.

[Laura Alber:]

Thanks. And wish you too.

[Simeon Gutman:]

I have a couple of questions, I will ask them upfront so I don't get that cut-off. First, Williams-Sonoma was so strong in terms of growth. I don't think you will answer but I'm going to ask, can you talk to the traffic in the store versus the business online? And then the second question, follow-up on the expense leverage given how solid it was, it looks the point per comp or leverage per point in comp the flow through was even better than previous quarters. I think you would agree, so beyond the leverage that you are getting from the comp but actually looks like something is getting better and either how the cost are controlled et cetera? And Julie, just to clarify, did you say that fourth quarter EBIT margins should be inline with last year's margin?

[Julie Whalen:]

Relatively inline, yes.

[Simeon Gutman:]

Okay.

[Julie Whalen:]

I will take the SG&A one first. So I think, yes, we are getting better leverage than you probably obtained, but that's a function of several different things as I mentioned, this expense control. But its also the fact that we are very efficient with the advertising so that will ebb and flow depending on the quarter and what are operational decisions are by quarter.

[Laura Albers:]

In terms of traffic, I think we don't have traffic counters in our stores. And we have a big outreach program in each and every stores. We are actually building that to a large extent right now in Williams-Sonoma something we started in Pottery Barn within home design services and we see a similar opportunity where we can go your house and redo your kitchen. And we are just getting going on that. So traffic is of course really important to us in the mall and we are really encouraging the mall owners to really do things to drive traffic. But, we are also making traffic happen in our stores with all of our great smells and decorating classes. And of courses, reaching out to our customers employing them in and going in to their own home. In terms of the interplay between ecommerce and our stores. We really believe that when you go have a great experience in one of our stores, you are going to be more confident shopping online. And that something that people who don't have stores – don't have the same advantage particularly during the gift giving time of the year, when you want to be sure that you are really buying that that thoughtful gift for the people on your list.

[Simeon Gutman:]

Okay. Thank you.

[Operator:]

And our final question today will come from David Magee with SunTrust.

[David Magee:]

Yes. Hi. It's David Magee. Good afternoon and congrats on your quarter.

[Julie Whalen:]

Hi, David. Thanks.

[Pat Connolly:]

Thank you, David.

[David Magee:]

I just wanted to ask about the comments that you made earlier about the promotional environment for holidays, you think might more intense than last year. And it just strikes me that, given your customer demographic who has had, I'd think a pretty decent year, I'm surprised that that would be the case. Is it just sort of a mind set that we have to deal this for the new-new or is there some sort of new competitive dynamic at play?

[Julie Whalen:]

No. I don't think there is any change. I think this is somewhat sort of the new-new. There is no question for this holiday season will be competitive. We prepare for this all year along. We are ready online in our stores and everyone of our brands we have an outstanding assortment of gifts and we are in it to win it and gain market share. And because of our ecommerce scale and knowledge of our retail customers, we can deliver a highly relevant offers digitally or through email that are highly impactful. So we believe we are well-positioned for this holiday season to continue to provide our customers what they need for the gifts giving season to outperform our competition and to continue to take market share. We don't believe anything has changed.

[David Magee:]

Thank you.

[Operator:]

And at this time, I'd like to turn the conference back over to your presenters for any additional and/or closing remarks.

[Laura Alber:]

Well, thank you all for joining us today. And we really appreciate your support and I want to echo with Julie that which is thank you for shopping with us this holiday season. We hope to provide you and your family and friends outstanding service.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.