Williams-Sonoma, Inc.
Q3 2015 Earnings Call Transcript

Published: 20 Nov 2015

[Operator:]

Welcome to the Williams-Sonoma Incorporated Third Quarter 2015 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’d now like to turn the call over to Ms. Gabrielle Rabinovitch, Vice President of Investor Relations to discuss non-GAAP financial measures and forward looking statements. Please go ahead.

[Gabrielle Rabinovitch:]

Thank you, Shannon. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. This call may contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why these non-GAAP financial measures are 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 2015 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 2015 results.

[Laura Alber:]

Thank you, Gabrielle. Good afternoon and thank you all for joining us today. On the call today are with me are Julie Whalen, our Chief Financial Officer and Pat Connolly, our Chief Strategy and Business Officer. We’re pleased to be discussing our third quarter results today. These results speak to the power of our brands and our ability to execute our customer focus strategy. We delivered total net revenue growth of 8% and EPS growth of 13%. Looking ahead, while the retail landscape and consumer demand has been more volatile, we believe our balanced portfolio of differentiated brands and strong multi-channel platform positions us for ongoing market share gains and we are confident we will deliver strong performance by focusing on what we do best, bringing innovative, functional and beautiful products to market, delivering exceptional customer service, developing our brands and managing our business to ensure we create sustainable value for our shareholders. Over the past few years, we’ve articulated our vision to double the revenue of our business by growing domestically and through global expansion. We have very deliberate approach to building brands and we are always investing for the long term. Over the past several years, we have incubated new concepts and entered new markets and these initiatives are now contributing to our results. Our portfolio approach gives us a competitive advantage. We are not limited to a single look and our range of tasteful aesthetics allows us to address a broad market. In our home furnishings brands from Williams-Sonoma Homes to Pottery Barn, West Elm and our developing Rejuvenation brands, we present a carefully edited range of aesthetics. This stand for quality, good taste and product innovation that addresses the life fit styles and life stages of today's consumer. We are pursuing distinct strategies to grow each of our brands and we are relentlessly focused on our customers and on improving our execution. Everything we do is through this lens. It determines our strategy and it guides our priority. In-house, at our San Francisco and Brooklyn studio, we design innovative inspiring high quality product at a great value that reflects the way our customers live and entertain. Our products are developed with design, quality and consciousness of our focus and we deeply believe that supply chain integrity and transparency is good business. Our customers continue to want a more engaging shopping experience and a deeper and more authentic connection with the brand to which they are loyal. Our customers also want a more integrated and frictionless shopping experience since at the purchase path is easy and intuitive whether they are shopping in store, online via mobile, tablet or desktop or at home with one our design associate by their side. As a result, all of the investments we have been making are with this customer objective in mind. On our last call, we told you about two major technology enhancements we had identified to improve customer service. In the third quarter, we made significant progress as it relates to these initiatives. We’ve started the roll-out of our next generation customer order visibility tool which allows us to have improved visibility as products move to our supply chain from the manufacturer to the regional distribution hubs. The roll-out on this project will continue through 2016. We also recently launched improvements to our demand planning systems. We believe that this is a critical component for us to improve our in-stock levels, decrease transportation cost and improve customer service by improving local market and stock position. We are excited to update you on the result of this program and future quarters. In e-commerce, we have advanced our ability to serve targeted content to customers on our websites. We have more relevant, timely and engaging as a result. When we personalize content, we see measurable and material conversion lift. Our custom built platform provides us unique advantages that we will continue to leverage with new and more robust campaigns in the quarters to come. We believe we are in early stages and will continue to build on this foundation to drive incremental results. In onsite search, we are deploying a big data solution that leverages machine learning to better tune our search results. The initial results are very encouraging and we look forward to updating you as we roll out the technology to all of our brands. We are also continuously finding ways to make our sites quicker, more functional, more easily navigated and more intuitive, especially, as it relates to mobile. Providing a richer and more integrated shopping experience is a long term priority and we believe technology is essential to enabling an outstanding customer experience. Heading into the holidays, we believe we are well positioned with exciting new product launches and gift collections. Across all of our brands, we believe we have a strong holiday line up and we have refined our peak season execution plans from our store operations to our marketing cadence to our supply chain. In store, we are focused on executing the fundamentals flawlessly and delivering outstanding customer service to make holiday shopping easy and efficient. In supply chain, we have implemented new processes and organized high volume areas in our distribution complex to efficiently facile peak e-commerce volumes. And this will be our 11th year partnering with Saint Jude Children's Research Hospital on the Thanks and Giving campaign. Over the past 10 years, we have raised more than $30 million to help Saint Jude continue leading the way the world treats and deceive childhood cancer and other life threatening diseases. All of our brands are involved in this important cause. In summary, we are ready for the holidays. I’d now like to update you on the global expansion of our brands, another significant long term growth driver. During the third quarter, our international operations grew 46.5% and were meaningful contributors to our success. In our franchise operations, 8 stores were opened in Mexico City in the third quarter by our partner Liverpool, a world class retail operator in Mexico. The initial response has been outstanding and by year end, we expect at least 14 stores open and we are excited about the total control in the region. We are also continuing to see exceptional results with our partner M.H. Alshaya. Our company owned retail and e-commerce operations are also delivering strong growth in Australia and in the United Kingdom. We are gaining experience in these markets and we are doing a better job assorting to local taste and preferences, relative beginning to leverage our cost structure. In addition, I’d like to update you on our first shopping shop partnership with John Lewis in London. In September, we opened a West Elm boutique in the John Lewis store in Oxford Street. Sales have exceeded expectations and have also driven increased traffic and sales to our West Elm London store and website. We have more than 9 million media and social impressions on our first week. We'll be expanding this relationship with John Lewis in 2016 and we believe that there is significant potential for this type of partnership model across Europe and other areas of world. We are aggressively pursuing franchise and shopping shop opportunities around the world and expect to announce more of these partnerships in various formats in the future. Now, I’d like to discuss our Pottery Barn brand. In the third quarter, Pottery Barn comparable brand revenues increased 2% on top of 7% in 2014. We had strong growth where we offered newness and we saw strength across our living room, upholstery and home furnishing offerings. However, we did see some softness in other categories. We recognize that the Pottery Barn brand could be more impacted by the current retail environment and we are relentless and our focus on these things in our control and it is clear to us that we win when we deliver product category dominant and innovation. Pottery Barn has a unique positioning in the marketplace as the premier specialty, casual home furnishing retailer. We deliver quality products, exceptional value and outstanding service. But like any successful brand, innovation and continuous improvement is key and there are three areas where we are hyper focused. First, product innovation. We have identified specific product initiatives to drive innovation. Second, marketing. We also believe that there is a greater potential to market the authentic store of our products and why they are higher quality and a better value than our competition. Lastly, customer experience. All of the work that we have been doing in our supply chain will benefit Pottery Barn. We know that we deliver the best experience in home delivery, this will further set us apart from the competition. As we head into the holidays, we believe our compelling seasonal product lineup in conjunction with a more strategic marketing calendar will enable us to drive performance in the fourth quarter in Pottery Barn. We also have the opportunity to deliver better service because we have better in-stock position. Now I’d like to discuss Pottery Barn Kids. In the third quarter, Pottery Barn Kids delivered 4.7% comparable brand revenue growth. Strength in our furniture business and an outstanding back-to-school season drove this performance. And we executed a successful Halloween strategy that contributed to our results in the quarter. Our focus on product innovation and newness in addition to our competitive marketing calendar helped to fuel our Q3 business. In the quarter we launched our holiday assortments and we believe we have a strong lineup for the holiday season. We are featuring dream rooms of whimsical beds like our new Millennium Falcon Star Wars bed complete with bedding and décor and we have delivered new and innovative gifts for babies, toddlers and kids as well as an expanded playroom offering. Our gifts represent the unique design and lasting quality for which Pottery Barn Kids stand and we will be the destination for kid's friendly, holiday decorating from stockings to ornaments, tabletop trimmings and decor. As we turn our focus to 2016 we’re excited about the momentum building with our collaboration strategy. In January, our exclusive nursery collaboration with celebrity stylists and fashion designers, Emily Current and Meritt Elliott launches to the fresh look for the brand that speaks for millennial mom. And earlier this week we’re also thrilled to announce our collaborations with Monique Lhuillier, one of the fashion industry’s preeminent designers. Launched in the first quarter, the collaboration includes furniture, decorative accessories and textiles. It captures through sophisticated and glamorous designers that are – that is inspired by her experience as a mother and a designer. Moving to Pottery Barn Teen, in the third quarter comparable brand revenue for Pottery Barn Teen declined 0.9% strengthen our furniture business and decorative accessory categories was offset by weakness in our textile business. Our high quality furniture offering delivered solid results for the brand. Softer trends and bedding which we discussed in our second quarter earnings call persisted throughout the quarter. The movement we saw this weakness we moved quickly to strengthen our product pipelines and improved our marketing. As we move into the holiday season, we shift into gift giving and we are excited about our proprietary and innovative gifting assortment including our fourth quarter product collaborations. We are launching online in December and in store in January and exclusive collection of decorative accessories and textiles with lifestyle blogger Meg DeAngelis known as MayBaby on YouTube. Meg DeAngelis is one of YouTube’s rising star across the 4 million YouTube subscribers and more than 500,000 followers on Twitter. Each piece in the collection embodies Meg's mission through a power and built confidence which is brought to life to vibrant colors and playful prints. Our limited edition Peanuts inspired collection Charles M Schultz the 65 anniversary of the Peanuts common strips and the release of the Peanuts movie on November 6 is also a highlight of our seasonal offerings. In addition, our standout gift this year include media chairs that are compactable with gaining counsel and incorporate rooted audio system as well as to protect bedroom seating options for teens. In addition to product innovation and quality, we are evolving PBteen to reflect the ways to live and interact recognizing them for who they are and supporting them and their uniqueness. We’ll speak to teens in a smart and empowering way that is authentic and inspire them with fresh decorating ideas and aspirational environments. We look forward to sharing our progress with you in the coming quarters. Next I would like to discuss Williams-Sonoma. For the third quarter, the Williams-Sonoma brand delivered 1.2% comparable brand revenue growth with outperformance in cookware, electrics cutlery and our growing Williams-Sonoma Home business. Proprietary and exclusive launches, as well as key vendor product introductions drove success in the quarter. Strong introductions in electrics more than offset weaker than expected performance in our early on our food assortment. We also saw great results in our proprietary entertaining and tabletop collections which continue to become a more significant percentage of our mix. In Q3 we continue to see strong results both online and in-store in Williams-Sonoma Home. A key initiative was to broaden the assortment in our best performing looks and its working. We’re also pleased with the ongoing rollout of Williams-Sonoma Home at retail. Williams-Sonoma Home offer chic entitlement designs with highest quality. It’s causing out unique position in the market sites with luxurious materials, sleek silhouettes and a fearless use of prints, patterns and color. Our success is indicative that this brand has a lot of room for growth both online, at retail and with the trade community. In addition on October 2, we celebrated Chuck Williams's 100 birthday. To celebrate this milestone Williams-Sonoma unveiled a limited edition collection of Chuck’s favorite product featuring his signature as well as a new cookbook Cooking at Home that honors his legacy. The third quarter also marks Williams-Sonoma’s fourth fund raising campaign benefiting share strength, no kid hungry program. Williams-Sonoma raised more than $650,000 during the campaign, fund raising efforts included customer donation both in store and online, store events, limited edition products such as the incredibly popular celebrity design spatulas incorporate fund raising. Heading into the holiday season, we believe we are well positioned to deliver in the fourth quarter. In addition, we have new marketing strategies we believe will be effective and we have a strong seasonal line-up of gifts and we are ready to execute. Today, I wanted to take a little more time talking about West Elm. The West Elm brand continues to deliver exceptional results. Comparable brand revenue increased by 15.7% on top of 17.4% last year marking 23 consecutive quarters of double-digit comparable brand revenue growth. In the third quarter, we successfully opened 6 Company on West Elm stores, two franchise stores were opened in Mexico and we opened the West Elm Shoppers Stop store in London. By the end of the year, West Elm have opened 18 new company stores in four new franchise locations across the globe bringing our total global company store count to 87 and our total franchise count to nine. West Elm's success is firmly rooted in a deep understanding of what millennial and millennial minded customers feel is important in their purchasing decisions. West Elm is connecting with its customer like no other home furnishing brand and at the same time West Elm continues to appeal to a broad demographic and psychographic customer base. The brand is also uniquely positioned with customers who are attracted to West Elm’s aesthetic, relationship driven community initiatives and authentic commitment to conscious business practices. Human connection still matter in the digital age and at West Elm we are successfully laying our world class customer insights with our innovative high touch shopkeeper program, balancing the science and art of retail. Data science will continue to provide invaluable insights on customer behavior and buying trends but by empowering our store managers to run their stores like small businesses and forge deep community connections through our West Elm local program, we’re essentially running the brand in the collection of unique small retailers linked with the powerful data and technology of a global enterprise. We’ve successfully reengineered our allocation strategy with tools to allow our store managers to hand pick and create assortments that are reflective of their community and the customers where the stores are located. We are one of the first major brands to host in retail hop-up shops starting with FT back in 2010. We continue to host a regular cadence of events workshops, classes, meet-ups and community driven activities in all of our stores. And as other retailers announced the introduction of local assortments into their stores, we are celebrating our network of more than 500 makers and building a pipeline for supporting our partners who will expand collaborations and manufacturing relationships. Our stores are running community based Facebook pages and Instagram accounts and part of the reason West Elm has had such a strong and authentic social media presence is that we done all along Social Media is not a data driven platform. By definition social is characteristic of living things not machine so well our stores, social accounts allow for segmented and local marketing and communication, we remain focused on building our social communities as a platform for human interaction to connect our customers. In social many of our customers choose to talk about West Elm because we reflect their value. Building on our commitments to content business practices and impact sourcing. In the third quarter we announced a new click and global initiative commitment to action in partnership with Fair Trade USA taking Fair Trade from farm to factory. As an early adopter of a Fair Trade Factory program, West Elm joined Fair Trade USA and 20 other partners to improve working conditions and enable sustainable livelihoods for factory workers. Specifically, West Elm committed to certify as Fair Trade more than 20% of the brand assortments by 2017 and 40% by 2019. West Elm’s investments includes supporting certification of more than 10 new factories contributing over $1 million in premiums will improve the lives of over 10,000 workers during the course of the commitment. These are big goals but we’re confident we can reach them and our hope is our leadership in the market will compel other retailers to improve working conditions and wages for artisans, and factory workers around the world. Overall, we remain highly confident that unique relationship that West Elm with its customers will propel the brand’s growth in our core business and into new areas of business around the world. I would now like to discuss the results of our two developing brands Rejuvenation and Mark and Graham. Both of these brands are delivering strong performance and contributed to our third quarter results. Rejuvenation delivered a very strong and profitable third quarter, as Rejuvenation transformation into a life style brand building craftsmanship and functional design continues. We have seen solid performance across both our emerging categories and in addition to our core letting and hardware businesses. In the third quarter, we saw great response to the comprehensive introduction of our Northwest modern assortment and aesthetic inspired by modern design and the lushness of the Pacific Northwest. And throughout the balance of the year, we are learning new product launches on top of this successful foundation. Our marketing continues to be effective and profitable and we've seen new customer growth accelerated across our consumer trade and contract segments. We opened our sixth store in October at Ponce City Market in Atlanta and in addition to expanding our trade presence in the region and see this location as the hub of our large and expanding base of sales in the Southeast. We believe that Rejuvenation has a very exciting road ahead and we look forward to keeping you updated in the progress in this brand. Rejuvenation has the potential to be a significant multichannel lifestyle brand and a meaningful contributor to future growth. Finally, I would like to discuss Mark and Graham. We’re pleased with the development of Mark and Graham which continues to see great sales momentum and profitability resulting from successful new product introductions and improved operations. In the third quarter, our personal accessories and home décor categories drove brand performance. We have also introduced new personalization techniques and expanded marketing options across our assortments. In addition, our refined marketing approach has led to more productive email in catalog marketing. This holiday season, we’re excited about our preppy chic assortment of thoughtful gifts. Our collection is inspired by rustic cabin style with beds, blankets and pillows, ferret nets, accessories and travel gear. In January we will kick off New Year celebrations with new table top and personal accessories introduction in fresh color palettes. I would now like to turn the call over to Julie to review our financial results in detail.

[Julie Whalen:]

Thank you, Laura and good afternoon everyone. We are pleased with the results we’re reporting today. During the quarter, we delivered revenue growth of 8% and earnings growth of 13% further demonstrating the power of our portfolio of high performing brands and our multichannel approach and as well as the continued success of our long-term growth initiatives. In the third quarter, net revenues exceeded our expectations increasing 7.8% to $1.232 billion with comparable brand revenues increasing 4.5% on top of 8.7% last year. Revenue growth in the quarter once again far exceeded growth in the furniture and home furnishing industry; net revenues in our ecommerce channel grew 7% or 22.7% on a two year basis to $628 million and represented 51% of net revenues with growth primarily resulting from the continued strength we’re seeing in the West Elm brand. Net revenues in our retail channel grew 8.6% to $604 million which reflects the momentum we are seeing from our long-term growth initiatives particularly in our international operations and West Elm; excluding the growth of our international operations our retail channel grew 4.3%. During the quarter across both channels, our international operations saw revenue growth of 46.5% reaching $80 million and West Elm drove revenue growth of over 22.8% including comparable brand revenue growth of 15.7%. Gross margin for the third quarter was 36.6% versus 37.7% last year with pure merchandize margins only slightly down to last year and remaining essentially flat year-to-date. The year-over-year gross margin decline reflects lower selling margins particularly associated with higher franchise revenues which are dilutive to gross margins but accretive to operating margins as well as higher shipping and fulfillment related costs partially offset by occupancy cost which leveraged 60 basis points to 12.9% of net revenues or $159 million. As mentioned on our last call, this quarter we expected to incur higher shipping and fulfillment related cost associated with out of market shipping and multiple deliveries on a single order to improve our customer service levels while we rebounced our inventory between our regional distribution centers, SG&A improved 100 basis points in the third quarter to 27.6% versus 28.6% in 2014. The improvement in SG&A was primarily driven by advertising efficiencies, the leverage of employment primarily related to higher franchise revenues as well as the leverage of general expenses. In the third quarter, total company operating margins was 9% versus 9.2% in 2014. By channel the operating margin in the ecommerce channel was 21.9% versus 23.3% in 2014 primarily driven by higher shipping and fulfillment related cost partially offset by advertising efficiencies. And in the retail channel, the operating margins was 8.1% versus 9% ,last year primarily driven by lower selling margins from higher franchise revenues and higher shipping and fulfillment related cost partially offset by occupancy and employment leverage. Corporate and allocated expenses leveraged 100 basis points primarily due to lower general expenses and the leverage of employment and occupancy cost. Our third quarter tax rate decreased from 37.9% to 36.1% reflecting the favorable resolution of certain income tax matters within the quarter and our higher year-over-year earnings from international operations. These results drove a 13% increase in third quarter earnings per share to $0.77. Moving to the balance sheet, cash at the end of the quarter was $72 million even the seasonality of our business our cash levels reached at the lowest point at this time of the year as we fund our business ahead at the holiday selling season. In addition year-to-date we have returned nearly $300 million in cash to our shareholders of which $103 million was in the third quarter consisting of $71 million in stock repurchases and $32 million in dividends. Merchandised inventories increased 12.5% to $1.1 billion at the end of the third quarter which includes a year-over-year increase of inventory on hand and available for sale of 10.7%. Entering our peak selling season we believe our inventory levels position us well to execute our holiday plans. I would now like to discuss our fourth quarter and fiscal 2015 guidance. We expect to deliver another year of strong results for our shareholders. For the fourth quarter we expect to grow net revenues to a range of $1.575 million to $1.630 million with comparable brand revenue growth in the range of 2% to 5%. We expect our fourth quarter operating margin to be relatively in line with last year and we are guiding our earnings per share to be in the range of a $1.53 to a $1.62. For the full year we have raised the low end of our revenue and earnings guidance all of the guidance remains the same. As such we now expect to grow net revenues to a range of $4.965 million to $5.20 million. And we now expect to grow diluted earnings per share to a range of $3.36 to $3.45. The guidance we are providing today does not contemplate any material changes in the retail landscape for the broader economy. In summary as we head into the holiday selling season we believe we are well positioned to deliver for our customers and our shareholders. Our competitive advantage is including our portfolio brands and our multichannel business model position us for success. In addition, the continued momentum in our strategic growth initiatives gives us further confidence and our longer term ability to more than double our revenues and deliver sustainable profitable growth. I would now like to open the call for questions. Before that I would like to wish all of you a very happy holiday.

[Operator:]

[Operator Instructions] And our first question comes from Daniel Hofkin with William Blair.

[Daniel Hofkin:]

Hi, good afternoon. Just a couple of questions regarding the environment maybe to the degree that you’re able to kind of parsing out - the overall consumer spending pattern versus competitive factors either Brick-N-Motor online versus areas where you feel like may be the execution could have been a little bit better. You talked about some areas within Pottery Barn, I’ll be interested as it relates to Pottery Barn and the Williams-Sonoma brands and particular kind of how you would divide up the performance again around just the overall consumer landscape competition and your own performance and opportunities to improve that. And then I just had one quick follow up. Thanks.

[Laura Alber:]

Sure, thanks Daniel. And I’d just tell you I’m optimistic about the holiday season. Yes we have seen some retrenching this fall and retailers and even some really good retailers have given some mix reports out there but there is not a lot of good news out there too. We know that our customers love their homes and the holiday season is the time to decorate and obtain and also to be generous with gifts to your family and friends. And I believe that consumers will shop the retailers that they trust and who have compelling product and in store experiences, I think as you go to the stores whether you got to a mall or great street going to be a top lift in terms of destination. It's really hard I think to resist going into our stores during the holiday season there. In my opinion, holiday wonderlands. Our Williams-Sonoma stores - I think part of people holiday shopping tradition with their amazing taste and role of wonderful gifting assortments this year and Pottery Barn has incredible decorating and beautiful trees on display in their stores right now and inspiring table space. For Pottery Barn kids and teens, I can’t help us think that those great nostalgic gift assortments will give our customers a great alternative to electronics and West Elm has a distinctive and chic entertaining and giving options at a great value. The other thing that makes us different is that, small things are across all of our brands yes, we gift wrap and store. And we’re ready to offer that high touch one-on-one service that people are looking for. I believe our online experience and service offer there is equally compelling. We spent so much time looking at our gift assortments and the gift experience online and also personalizing that digital experience based on our consumer preferences. So in summary, we’re always looking for things we can do better, we have been preparing all the year for this holiday season and we’re excited and ready to serve our customers.

[Daniel Hofkin:]

Okay, great. And then thinking about, looking out, I know you haven’t given guidance for next year but I’m you hearing you guys talk about some of the additional investments on a number of fronts. If you think about next year does it make sense to think about sort of, may be a less rate of operating margin expansion relative to what may be a typical year might be at this early stage?

[Julie Whalen:]

Yes, Dan this is Julie and obviously you’re right. We have not given guidance for 2016. We’re not prepared to do that today but what we are excited about is investing in the future and our future growth and I think today’s result is a great demonstration of some of the things we've been investing in that have actually come to life like our international growth.

[Daniel Hofkin:]

Okay, thanks. Best of luck in the holiday quarter.

[Julie Whalen:]

Thanks Dan.

[Operator:]

Next question comes from the Peter Benedict with Robert Baird.

[Peter Benedict:]

Hi guys, thanks for taking the question. I guess first Julie, how you're thinking about capital allocation these days specifically I’m curious kind of your view of buybacks and how opportunistic you’re willing to get when the stock is down?

[Julie Whalen:]

Our approach for capital allocation have not changed, we’re going to continue to be balanced and first and foremost invest in the business because that’s clearly where we get the biggest returns and then with excess cash share between buybacks and dividends and so our approach there has not changed regardless.

[Peter Benedict:]

Okay. And then quick follow up, just on the fourth quarter tax rate, it looks like it implied north of 40% year-to-date you’ve been more like 36, 37 is that international playing a bigger role there or there other factors that we should be thinking about in terms of taxes for the fourth quarter. Thank you.

[Julie Whalen:]

Sure. Look our quarterly tax rate, it’s always subject to variation in the prior quarter including we did have some favorable tax resolutions and we also had which is fantastic some higher than expected earnings from our international operations which has a double benefit of lowering our taxes. But going forward given the size of our Q4 business and our expected mix of earnings in Q4, we look at the sensitive’s and believe that this time our tax guidance is appropriate. Of course it's possible on the year we could end up with the lower tax rate but it’s really still early in our margins quarter to make that call. But the good news as we do expect have seen overtime our tax rate will decrease as our international business becomes larger and more profitable.

[Peter Benedict:]

Sure, thanks so much.

[Operator:]

Next question comes from David Magee with SunTrust.

[David Magee:]

Hi, good afternoon. Can you just talk a little bit more about the inventories and did they meet your plan at quarter end and what your expectation would be at year end?

[Julie Whalen:]

Yes, so our inventories as we said in the call grew about 12.5%, we feel good about the in stock position at 10.7% of course it's always pockets of under and over stocks but we believe this level of inventory on hand leaves us well positioned for the holiday selling season. I think we have to remember that from a guidance perspective, we don’t necessarily guide inventory levels except to say that we’re focused on maintaining in stock inventory levels, we share great customer service and we think we’re well positioned for the holiday season as we enter the New Year. So we feel good about the inventory.

[David Magee:]

Okay. And then just a quick follow-up, in the overseas sales international business, are you seeing gross margins that are comparable to domestic above or below just sort of curious there?

[Julie Whalen:]

We haven’t provided or disclosed that if you’re referencing what I was alluding to in the script that’s associated with our franchise revenues and our franchise revenues obviously the details of our deals are confidential and competitive but what I can say is that franchise sales have a different revenue model than a regular customer sale and depending on the deal structure these transactions can be dilutive to gross margins but accretive to operating margins. So the higher the franchise revenues in any given quarter they put more pressure on the gross margin but I would not make that conclusion per se with company owned stores but we haven’t disclosed that.

[David Magee:]

Okay, great. Thank you, Julie.

[Operator:]

Next question comes from Chris Horvers with JPMorgan.

[Chris Horvers:]

Thanks good evening. So following up on the first question and things about the wider comp guide for the fourth quarter, two to five historically more like three to five, four to six kind of range. Have you seen change in the momentum in the business, what’s behind the wider guide for the fourth quarter, was there a change in trend that you’re seeing at the end of the quarter that you’re trying to put into the guidance and basically any thoughts there?

[Julie Whalen:]

Hi Chris, I’ll take this, it’s Julie. I think what’s important to remember is that this quarter is always so difficult to read. Our revenue guidance reflects our best estimate two and half weeks into largest quarter that we have and it reflects our possible range of outcomes across all of our brands. It’s also important to remember that the Williams-Sonoma brand becomes a larger piece of the mix this quarter than in other quarters and historically had lower comps than our peer home furnishing brand. So the other thing is that we had great revenue contribution from our international businesses and as we head into our peak season, our international business is expected to take on less importance relative to our domestic business. So that plus the customer always assuming to shop later and later each time for the holiday, the business is hard to read two and half weeks into the quarter. So we felt that it was prudent to hold our guidance on the year and this is how the comps played out.

[Chris Horvers:]

So holding the guidance for the year it was 2 to 5 fell out of that equation based on what you did year-to-date?

[Julie Whalen:]

Absolutely.

[Chris Horvers:]

Okay. And then was the gross margin performance relative to your own expectations for the quarter in line with where you thought it was going to be and was there any hangover from the returns and damages side that you saw in the second quarter. Thanks.

[Julie Whalen:]

Yes, from the shipping and fulfillment related cost side it is where we thought it would be the parts that’s a little bit of a surprise is the higher franchise revenues which is a great surprise to have which as I mentioned puts unfortunately dilutive to the gross margin but it’s accretive to the op margins, so optically it looks “worse” on the gross margin lines but everything else was within our expectations.

[Operator:]

And we’ll go ahead and move to our next question from Matthew Fassler with Goldman Sachs.

[Matthew Fassler:]

Thanks a lot and good afternoon. My first question relates to the impact of the international business for Q4, Julie you alluded to the notion that it would be smaller in the fourth quarter than any other quarters, but it was three percentage points in Q, the delta between total and comp store sales which I presume is or total and comp brand sales which I presume is largely international was over three percentage points in Q3, was over two percentage points in Q2 is very, very small less than 1% in the guidance when you look at the difference between your guided total sales growth and the 2 to 5 comp brand growth. So is it really going to be that small during the fourth quarter, is there room for that number to move around a bit?

[Julie Whalen:]

Well I mean that’s what our expectations are today also in Q3 the new West Elm stores contributed to that delta between the comp and the revenue growth but obviously we would love to see that not be the case but given the size of Q4 it’s likely that the outperformance on the international revenue side will not be as pronounced relative to the comp.

[Matthew Fassler:]

And then if you think about the impact of the international business getting bigger within the mix on the gross margin rate and on the SG&A dollars, can you give us a sense of how much of that dynamic - I understand that’s accretive to earnings, but how much the dynamics would have impacted margin rate within the various factors that move around in Q3?

[Julie Whalen:]

Yes I mean we haven’t quantified the exact basis points of how much of the gross margin would associate with high franchise revenues, I however did list it first and so we do put things in order, so you could tell us very material also when you look at the SG&A there has been occupancy and employment leverage and a leverage across the board and specifically even on the retail channel you see it materially from the other side of the franchise equation because basically you have hit to gross margin you have essentially no SG&A. So the profit drops to the op margin.

[Matthew Fassler:]

So presumably the reason - so presumably if international revenues are smaller in Q4 that could be a reason for gross margin to be down less?

[Julie Whalen:]

Presumably yes.

[Matthew Fassler:]

Got it. Thank you so much.

[Operator:]

Next question comes from Greg Melich with Evercore ISI.

[Greg Melich:]

Hi thanks. I want to follow-up on gross margin as well but understand the shipping cost a little bit more and sort of where we are in that transition, I know that it was a pressure last quarter was greater this quarter and if you look at it, I imagine that's showing up in the ecommerce business with the continued decline in margin there. So just talking through just maybe is that still a profit center for you shipping and where are we now in that curve as the market changes?

[Laura Alber:]

We are not disclosing the incremental shipping and fulfillment related cost except to say what I said it is one of the main drivers of our lower gross margins, the second thing I listed. And we did indicate on this call last time that we would expect this would continue into the back half of the year, it did continue as we expected and we expect that it will continue into Q4. It’s important that we’re incurring these marketing shipping in multiple deliveries on a single order to ensure high customer service levels and especially from holidays we think it’s important to continue to do that. Longer term once we have completed the regionalization of our distribution centers and we have implemented the necessary technology which includes inventory tools that would allow us to better forecast our inventory flow and space capacity requirements by DC, brand and channel, as well as future system enhancements that will give us better customer order visibility, we will see a reduction in our supply chain cost. But even more importantly on this point, we believe further developing our supply chain today to be more agile and adaptable will enhance our sustainable competitive advantage. So it’s going to put even greater distance between us and our competition and enable us to provide the best customer service experience in our industry and we’re excited about the future.

[Greg Melich:]

And you mentioned I think repositioning inventory as part of the cost of that. Is that unusually elevated right now because of what you’re doing or is that sort of we expect that to be an ongoing thing while we build this out?

[Laura Alber:]

Yes, so I think it’s important to think about the higher level of inventory required to be sufficiently in stock regionally. This is a competitive advantage longer term and not only obviously minimizes being out of stock but it lowers our delivery cost and improves our delivery time to the customer. Our primary objective has been to be in stocked to serve the customer and so we’ve been increasing inventory levels from a position that we thought was negatively impacting sales and we also want to get our merchandize particularly our larger items to our customers more quickly and so we’re accomplishing this through regional distribution. Over the immediate term, this increases our inventory levels but longer term once we have implemented the necessary demand planning tools that I mentioned we’ll be more effective at inventory allocation between the distribution centers allowing our inventory levels to moderate over time.

[Greg Melich:]

All right. That's great, thanks a lot. Good luck.

[Operator:]

Next question comes from Neely Tamminga with Piper Jaffray.

[Kayla Wesser:]

Great, thank you. This is Kayla Wesser on for Neely today. My first question is the amount of newness in the catalog for core Williams-Sonoma appears to have really stepped up as we began getting ready for the holiday season here. Just wondering if you could speak to whether the strategy is helping you acquire new customers or reengaging lapsed customers.

[Julie Whalen:]

Thank you for the question. We have been really focused on our products pipeline and in last call I mentioned that we’re going to have the lot of new introductions in Q3 and we did and they are working. And we have what I think is a very exciting holiday assortment combination of great entertaining and also gift giving ideas and across the wide range of categories where I think our customers have grown to lot of further nostalgic candies that we sell but also always want to see the new things that we have. We’ve seen strength those in our proprietary product but also in our branded product and we developed incredible relationships with lot of these key brands and really are the place that people want to buy gifts for - in holidays. So we have equal optimism around brand as we do around proprietary products for this holiday season.

[Kayla Wesser:]

Thanks. And then a follow up on Pottery Barn Teen, you mentioned some weakness in textiles in Q2 and Q3 and I know that, it's just more towards gift giving in Q4. Just wondering though as we think about you’re bedding in textiles business have you, do you feel like you’ve identified the issues and fix them or is there still some more room for improvement in holiday and even into Q2 and Q1 and beyond.

[Laura Alber:]

I always think there is more room for improvement in everything. We’re very sub critical that assortments that we have coming I think are gorgeous and really differentiated - there is lot of people watching what we do and getting into these business and that competition make us better and make us differentiate and also our – design people have our supply chain. We're vertical so we can better cost and our scale allows us to deliver better value, cost quality relationship and so as we look at next year we see some clear opportunities highly competitive so I don’t want to go through the details of such but we see some clear opportunities quarter-to-quarter for PBteen.

[Kayla Wesser:]

Great, thanks.

[Operator:]

We have time for one last question from Cristina Fernandez, Telsey Advisory Group.

[Cristina Fernandez:]

Hi good evening. I wanted to ask about the customer satisfaction for us particularly at Pottery Barn. I know those had deteriorated little bit last quarter just given the inventory issues, have you seen that improve and also how much you think that weighted on the Pottery Barn comp this quarter?

[Laura Alber:]

It’s a great question, thank you for that. Customer services are primary objective and our goal is to build a capability that delivers the most convenient and damage-free experience in the furniture industry. And over the past three years our Pottery Barn furniture sales have growth tremendously more than deliver a ton of furniture into a customer’s home this year. We’ve always done this better than those but we see opportunity to take our capability to the next level much like we did in e-commerce five years ago. And so we’ve been investing as we talked about and advance our delivery platform beyond the current - every customer piece of feedback that we get, we not only fixed with the customer but we grew cost it learn from it make sure that we’re not - we don’t have a bigger opportunity. And customers are very demanding and they’re going to continue to expect more than that is why we’re making such a focus because we believe we have the opportunity to totally disrupt the furniture business with our world-class delivery.

[Cristina Fernandez:]

And then a follow up, as far as promotions you talked about the merchandize margins being slightly down versus last year but fulfillment costs being higher and I know a lot of this is related to the inventory issue but how much that free shipping promotions were affected this quarter?

[Laura Alber:]

It wasn't affected at all. It’s not an issue from more free ship or lower shipping income levels, it’s 100% due to higher shipping cost from our decision to provide the best level of customer service by shipping out to market and having multiple deliveries on a single order.

[Cristina Fernandez:]

Thank you and good luck this quarter.

[Operator:]

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

[Laura Alber:]

Thank you all for joining us today and we really appreciate your time and your continued support and we look forward to speaking with you again in March. Happy holidays everyone.

[Operator:]

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