Williams-Sonoma, Inc.
Q4 2015 Earnings Call Transcript

Published: 17 Mar 2016

[Operator:]

Welcome to the Williams-Sonoma Incorporated Fourth Quarter and Fiscal Year 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 would now like to turn the call over to Gabrielle Rabinovitch, Vice President of Investor Relations to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

[Gabrielle Rabinovitch:]

Thank you, Mellissa. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our discussion will relate to results and guidance excluding non-GAAP items. 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 releases. 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 2016 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 results.

[Laura J. Alber:]

Thank you. Good afternoon and thank you all for joining us today. On the call with me are Julie Whalen, our Chief Financial Officer and Pat Connolly, our Chief Strategy and Business Development Officer. Today we are reporting record revenue and earnings per share for the year as a result of the strength of our portfolio of outstanding brands, our balanced multichannel model, and solid execution. We delivered top and bottom line performance within our guidance range despite a challenging end to the year. Disciplined management led us to meet our expectations as we adjusted to an evolving consumer and competitive landscape. Our brands are highly aspirational and relatable at the same time, and create a platform for growth. As we look forward in all of our brands, we have targeted strategies and opportunities that we believe will allow us to profitably grow market share. We will improve our competitive positioning across product, service, and value for our customers. We are expanding our brands into new products and market segments through the expansion of proprietary products. We are developing cross brand initiatives to more fully engage with our customers and to leverage innovative marketing channel. And we are also investing in our high growth newer brands particularly West Elm. The brand's current growth trajectory, entry into the commercial furniture market with West Elm workspace and international growth potential position it to become a $2 billion brand. And we are rapidly expanding our global reach through existing and new franchise relationships and other opportunities such as the John Lewis shop-in-shop model. In addition to executing against our growth initiatives we see the opportunities to do business differently. We have identified four key strategies that will drive improvements across the organization. We are confident that between our growth opportunities and these strategies we will double our revenues over the next 10 years. First, we’ll reserve our product leadership. Going back to the first phase of Chuck Williams' store in Sonoma, we have been a leader and innovator in building differentiated and market leading product assortments. Our goal is to ensure our product serve a distinct purpose by being differentiated from our competitors through our price quality relationship, design aesthetic, and functionality. We have developed a best in class vertically integrated sourcing network, to remind you our direct sourcing advantage separates us from conventional retailers, and online market places in our category. We employ more than a 1000 associates located in offices around the world to directly oversee the contract manufacturing of our products. This allows us to ensure a consistent high level of quality from construction to engineered packaging. We can also monitor every aspect of social compliance from fair wages and working conditions and factories to the use of toxin-free raw materials. And we eliminate layers of cost from agent commissions to vendor and distributor markups. This allows us to deliver outstanding quality to great value while advancing social consciousness in the communities in which we operate. From artisan education to sustainability, free trade to hand-crafted, we believe that doing business the right way creates the greatest long-term enterprise value. In addition we are now focusing our efforts on developing and buying fewer more differentiated products that better leverage this network across all of our brands. We believe that our long-term sustainable success on both the top and bottom lines will be built on a foundation of product quality, innovation, and value. Second, we are revolutionizing our approach to inventory. We have a significant opportunity to improve customer service and reduce cost by advancing our inventory management practices. In 2015, we experienced supply chain challenges related to the West Coast port disruptions that resulted in increased cost and lower service levels. As we worked through resolutions it became clear to us that we have an opportunity to reduce cost through more aggressive inventory management. Our goal is to lead the market in the delivery of furniture and home furnishing. In 2016 we are planning inventory growth lower than our sales growth for the year, there are two key components to this plan. First, we have begun implementation of a new inventory optimization system that advances our slew level demand forecasting and gives our teams more sophisticated tools to replenish our regionalizing distribution network and stores. And second, we are eliminating less productive skews which allows us to have better in stocks and improve order fulfillment. We see this as a significant opportunity and our entire team is aligned around this initiative. In addition to inventory optimization we are further regionalizing our supply chain. We know that being closer to our customers is the key to faster and lower cost delivery. As part of these plans we are opening a new distribution center in Braselton, Georgia approximately 50 miles Northeast of Atlanta. Delivery times to Southeast customers will improve and we expect to see a reduction in outbound freight cost as this DC will be used for both home deliveries and retail fulfillment. We will have four distribution centers strategically located on the West Coast, in the Midwest, the Southeast, and on the East Coast. The key to lowest cost damage free delivery of large furniture items is to reduce the number of touches or movement to the furniture. Our network is designed to minimize the number of times the furniture is moved and will provide a significant competitive advantage. Importantly as a result of our inventory initiative we do not anticipate adding incremental distribution centers for the next three years. Collectively these efforts will remove cost from our supply chain and materially improve our service levels. Third, we are transforming our marketing. We are strengthening our marketing around the value propositions of each of our brands and what makes our products and services unique in the marketplace. We know that our products are differentiated from our competitors in safety, material, construction, design, and social consciousness and that we are best in class services. We are going to be more aggressive about marketing our key differentiators and why customers should buy from us. We will better leverage our content to emphasize these messages across all of our marketing channels. Finally we are continuously advancing our marketing strategy which is identifying ways to officially drive revenue increases through our portfolio of brands. And fourth, we are changing our approach to real estate and the retail experience. Our stores are one of the most powerful marketing tools we have and one of our biggest competitive advantages. We have built the trust customers have in our brands by giving them the ability to physically experience our products across more than 600 locations. This is incredibly powerful, however, as retail traffic has declined and customer shopping patterns have shifted, we know there are stores that need to be in relevant locations and provide our customers with a great shopping experience. To continue to lead and retail we are changing our approach. We are making technology investments to improve our cross channel experience. Our new strategic sales platform will lead to a more inspiring and effortless customer experience. We are customizing assortments by store size and volume and simplifying non-selling tasks so our stores can focus on the customer. We are actively looking at store locations that are undesirable due to mall deterioration, excessive rent escalations, or other market conditions and repositioning in exciting new locations. And we are defining the store of the future for each of our brands. Across our brand portfolio, we have developed and tested innovative store concepts from architectures to design to experience. This year you will see us selectively introduce these transformative changes across our retail fleet. Our retail store future includes an exciting and convenient in store experience, a more strategic view of real estate, and a sustainable and profitable model. Together we believe that these strategies will extend our leadership position across our brands and in our supply chain providing us with a greater competitive advantage. However, these strategies that I have just outlined require additional resources and focus. We have carefully assessed our business needs and as a result we are reducing costs in areas of our organization to fund these priorities. We have had to make difficult decisions including the reduction of headcount in our corporate functions by approximately 5%. These decisions are very tough knowing that they will affect a number of our valued employees. But we believe they are necessary to achieve our long-term objectives and deliver on our commitments for all of our stakeholders. I would now like to update you on the performance of our brands, beginning with the Pottery Barn brands. Pottery Barn comparable brand revenues decreased 2% in the fourth quarter falling short of our expectations. For the full year, 2015 Pottery Barn grew comparable revenues 1.9%. During the fourth quarter from a product perspective we saw growth in our core furniture and textile businesses. Strong product categories for upholstered furniture, seasonal lightings, and seasonal textiles, however, we experienced softer sales trends in our gifting categories where there was greater promotional fatigue across our competitive set. As we move into the new year and away from the gifting holiday, we are seeing improved trends. We attribute this trend reversal to the launch of our spring and summer collections, improved marketing, messaging, and better in stocks versus last year. As we look to 2016 and beyond we are committed to accelerating our growth. First, we have continued to introduce relevant and authoritative product assortments with a focus on innovation, function, and value. To achieve this we will strategically expand our mix of opening price points across key areas of the business and highlight these price points to attract a broader customer base. We have also placed renewed attention and emphasis on product categories that sell particularly well in our cross [ph] channel and we are increasing our percentage of environmentally responsible products. Our commitment to these healthy home assortments is consistent with our core value of corporate responsibility and differentiates us from our competitive set. Second, to support these product strategies we are more clearly communicating our category dominance and our appointed differentiation including our aesthetic, our quality, and value, our initiatives related to responsible source materials, and our exceptional services. In e-commerce we are intensifying our efforts to drive traffic and conversion. And third, operational excellence, you may remember that at this time one year ago, Pottery Barn's inventory flow was affected by the port disruption and in stock level through low. Entering 2016 we are significantly better positioned with higher in stocks. We believe starting the year from this position of strength will allow us to grow our top line, accelerate new customer growth, and deliver high level of customer satisfaction. In Pottery Barn Kids fourth quarter comparable brand revenues were flat to last year. For the full year Pottery Barn Kids comparable brand revenues grew 2.2%. Playroom and bedroom furniture introductions contributed to growth in furniture. We’re also pleased with the strong response to our new Star Wars program and our other high quality differentiated gifts. And we saw strength in our bedding categories specifically as well. We had tougher businesses in our textiles and decorative accessories categories. Pottery Barn Kids stands for timeless design and superior quality at a compelling value. Looking ahead in 2016 we are evolving our brand to connect with a broader customer base and we’ll be extending our product collections to address the ages and stages of childhood such as our recent launch of our toddler bedroom assortment and we are committed to products that are good for kids and good for the planet and our expanding our offering of organic cotton bedding and GREENGUARD certified furniture. Pottery Barn Kids collaboration strategy is also gaining momentum. Late in January we introduced our Emily & Meritt nursery collection and early reads of this program have been quite strong. Tomorrow we’ll be launching our most expensive collaboration today with Monique Lhuillier. Monique has beautifully translated her fashionable runway designs and lugs details into a collection of home furnishing and gifts for our youngest customers. Now I will discuss our PBteen business. In the fourth quarter PBteen comparable brand revenues declined 12.2% with disappointing performance across key categories. On the year, comparable brand revenues in 2015 declined 2.7%. Similar to Pottery Barn we saw declines in our gifting collections. We believe we relied too heavily on bestsellers from previous seasons. From a product standpoint to address these challenges we have been developing differentiated and innovative products to refresh our core assortments. We’re also expanding our offering across the distinct teen life stages to address different needs of tweens, teens and college customer. And we are continuing to institute new collaborations and partnerships to drive engagement, aesthetic diversification, and new customer acquisitions. In marketing we are evolving our approach to emphasize and reflect our brand values of social consciousness, acceptance, and empowerment. As you may remember on our August earnings call we discussed initial softening that we are seeing in PBteens business. Over the past six months we have made significant changes to the brands leadership, product strategy, and marketing and while we have more to do we are already seeing better results. This week we announced an organizational change placing the Pottery Barn Teen brand under the leadership of Jennifer Keller who is also running Pottery Barn Kids. Jennifer previously ran the Teen brand during the years of its highest and most profitable growth. Consolidating both brands under a single leader will further align our life staging strategy as our Pottery Barn Kids customer’s transition into their tween and teen years. Now I would like to discuss the Williams-Sonoma brand. In the fourth quarter the Williams-Sonoma brand had a 0.9% comparable brand revenue growth. We saw strength in cutlery, food, and tabletop departments. At retail, our store level execution improved over last year. We hired and trained our seasonal associates earlier and delivered an aspirational, engaging, and easy shopping experience. In e-commerce we had growth in new customers and improved conversions. In the fourth quarter we are pleased with the continued growth in Williams-Sonoma Home which is driving incremental sales online and at retail. In the Williams-Sonoma brand we see additional opportunity to capture mind share and market share and will execute strategies to engage every demographic from millennial to baby boomer with exciting products supported by elevated marketing and branding and improvements in our retail strategy. Great product is the foundation of our strategy in Williams-Sonoma. For 60 years cooking enthusiasts have relied on us for innovation and inspiration. In 2016, we plan to grow our Williams-Sonoma branded products, which allows us to deliver superior quality at higher margins than the industry standard and gives us more control over the promotional environment. We will expand our open kitchen line to appeal to a broader demographic while satisfying basic needs of our core customer. And we’ll increase the number of new and exclusive products from our branded vendor partners. In addition we’ll expand Williams-Sonoma Home. We will selectively add home product to stores, broaden the breadth of our assortments, invest in marketing, grow our trade business, and look at other ways to extend our reach. At retail we see real opportunity to improve our store operating contribution including foresight, visual display, and allocation strategies that are better matched to store size and volume. Refining store assortment and inventory to reduce skews in clearance and providing tools to aid in store scheduling and drive key metrics to conversion in sales per hour. As mentioned in our overview, we are also looking at store locations that are undesirable due to mall deterioration, excessive brand escalations, or other market conditions. At the same time we are encouraged by the new store models we are developing and as a part of our retail repositioning we have identified attractive new real estate near popular dining and entertainment centers. In e-commerce we see opportunities to accelerate new customer acquisitions, strengthen our content and messaging, and improve onsite conversions. Now I would like to discuss West Elm. Comparable brand growth in West Elm was 12.8% in the fourth quarter. From a product perspective West Elm's strong fourth quarter results were driven by growth across all categories. Customer response to seasonal assortments delivered significant sales and market share gains. Throughout the quarter, West Elm balanced new product introductions with an effective promotional cadence and highly targeted and relevant marketing. West Elm delivered another outstanding year and is strategically positioned to continue its growth well into the future. Working from core strategies of choice, community, and consciousness we strive to exceed our customer's expectations from sourcing locally made products in their own communities to delivering innovative product with great craftsmanship and value. And we are just getting started. As our customers grow and change so do we, maintaining our brand momentum through more targeted product and content as well as new business opportunities that bolster our brand equity. West Elm's new store strategy is driving incremental profitable growth. In 2015 we opened 18 new stores ending the year with 87 total company owned stores. And in 2016 we plan to open 13 new stores. We will expand our international reach and believe both our franchise and wholesale businesses will continue to be successful models to grow our footprint. We saw tremendous increase in brand awareness for West Elm in the UK market following the launch of our first shop-in-shop in John Lewis in London and we are working there with a team to finalize the details of additional roll outs in 2016. In addition West Elm workspace is a compelling growth opportunity. Last spring the concept was introduced into 25 billion plus commercial furniture market, NeoCon, the industry's premier trade show earning multiple awards. West Elm has formed relationships with 18 leading dealers across the country in the contract and hospitality phases. We will share additional key commercial alliances in the coming quarters as our team builds to support new business. In summary we believe West Elm continues to be well positioned to deliver 2 billion in annual revenues over the long-term. Now I would like to discuss our global expansion plans in our emerging brands. The significant growth and improving profitability of our global businesses give us further confidence in the meaningful opportunity that international expansion represents. Our focus is on growth, operational excellence, and infrastructure. Currently our retail side of North America spans nine countries and includes 69 stores. Over the next 10 years we expect that we will have a presence in more than 35 countries. We have strong partners in the Middle East, Mexico, the UK, and the Philippines and we are actively engaging with new partners. In 2016 we expect our franchise partners in Mexico to open approximately 15 new stores. We are also very excited about our newest franchise partner, Graham Brown [ph], a leader in South America and expect the first store to open there in mid-2017. We are growing our company owned business in Australia and the United Kingdom and we are looking forward to update you on our progress throughout the year. We are also seeing strong results from our emerging brands, Rejuvenation and Mark and Graham. These brands grew close to 40% in 2015 and importantly in each of these brands we are growing profitably with a disciplined investment approach. Rejuvenation had a strong 2015 and we believe brand growth will accelerate driven by the success and expansion of the North West modern lifestyle assortment, further category expansion, our broadening demographic base of customers and further development of the Atlanta in Chicago market. Also in 2015 Mark and Graham completed its third full year as a brand. We’re seeing order and traffic growth which is driving revenue growth. Mark and Graham's classic preppy collection interest added an assortment of high quality personalized gifts. In 2016 we’ll continue to introduce new categories and build brand awareness through efficient catalog prospecting in digital marketing. The ability to organically create and build brands to drive sustainable growth is a core competency of our company. Now I’d like to pass the call over to Julie to discuss our financial results in more detail.

[Julie P. 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 2015 financial and operational highlights. Despite a challenging environment, 2015 was a year of solid accomplishments with record revenue and earnings. For the full year we delivered net revenue growth of 5.9% taking our total revenues to nearly 5 billion and we delivered EPS growth of 5.3% to $3.37 consistent with our guidance. Our revenue growth on the year once again exceeded the home furnishings market and allowed us to capture additional market share. Our e-commerce revenues grew to be 51% of the total and retail revenue growth accelerated 300 basis points growing 5.4% to almost 2.5 billion. West Elm delivered another year of outstanding growth with revenue increasing more than 152 million or 22.7% and comparable brand revenue growth increasing 14.8%, a double-digit increase for the sixth consecutive year. We also experienced close to 40% growth for the year in both our emerging brands Rejuvenation and Mark and Graham. And in our international operations we saw more than 25% growth. Our pure merchandized margins were flat on the year, demonstrating the direct sourcing advantage we have over other retailers. Our SG&A leveraged 60 basis points, highlighting our strong financial discipline. And we generated 544 million in operating cash flow, returned 353 million to stockholders, and invested in our long-term initiatives with 203 million in capital expenditures. Now I would like to discuss our fourth quarter financial results. In the fourth quarter net revenues grew to 1.586 billion, a year-over-year increase of 2.9% with comparable brand revenues increasing 0.8%. Growth was balanced between channels, with net revenues in both our e-commerce and retail channels growing 2.9% and representing 50% of total revenues. Strong growth in West Elm's new stores and in our franchise operations drove total company revenue growth ahead of comparable brand revenue growth. Gross margin for the fourth quarter was 38.3% versus 40.1% last year including occupancy cost of 165 million in the fourth quarter of 2015 versus a 155 million in the fourth quarter of 2014. Merchandize margins were only slightly down to last year with gross margin to leverage primarily related to shipping and fulfillment related cost, occupancy deleverage from our supply chain operations, and lower margins associated with higher franchise sales which are dilutive to gross margin but accretive to the operating margin. In the fourth quarter while continuing to absorb higher shipping and fulfillment related costs as a work to improve service levels and efficiencies in our supply chain we also faced a more challenging retail and macro environment resulting in a more tentative consumer and aggressive discounting. Unlike other retailers however, we were able to substantially hold our merchandize margins as a result of our direct sourcing advantage that has allowed to bring higher quality product to market at a lower cost, and to pass that along to the consumer. And while we incurred higher supply chain cost, we are confident that the steps we have taken were the right ones. We are better balanced from an inventory standpoint and have seen improvement in our order fulfillment rates and shipping cost. SG&A decreased to 24.3% of revenues from 25.2% in the fourth quarter of 2014. This 90 basis point improvement resulted from overall expense disciplines reflecting lower employment cost despite absorbing higher labor costs associated with our fulfillment operations, reduced general expenses, and advertising leverage. Operating margin for the fourth quarter was 14% versus 14.9% in the fourth quarter of 2014. By channel the operating margin in the e-commerce channel and the fourth quarter was 22% versus 23.6% last year. The 160 basis point decline was primarily related to lower gross margins resulting from the increased shipping and fulfillment related costs and higher supply chain occupancy cost as well as the increased employment cost in our distribution centers. In the retail channel, the operating margin was 15.3% versus 17% in 2014. Deleverage in the retail channel resulted primarily from the higher shipping and fulfillment related cost. Corporate and allocated operating expenses represented 4.6% of net revenues versus 5.4% of net revenues in 2014. The 80 basis points of leverage resulted from expense discipline including lower employment costs as well as lower general and administrative cost. The effective income tax rate in the fourth quarter was 36.6% versus 38.2% last year reflecting fluctuations in the level and mix of earnings as well as the favorable growth resolution of certain income tax matters. These overall results generated 223 million in operating income and $1.55 in diluted earnings per share in the fourth quarter. So, we were disappointed in our fourth quarter top line performance. Our strong financial discipline across the company allowed us to meet our financial guidance. On the balance sheet we ended the quarter with a cash balance of 194 million and no debt. And merchandise inventories increased 10.2% to 978 million. However, excluding inventory associated with the areas that are currently demonstrating double-digit revenue growth, West Elm, our emerging businesses and our international operations year-over-year inventory growth was 4.3%. Now I would like to discuss our 2016 guidance. For the first quarter of 2016 we expect to grow net revenues 4% to 6% to a range of $1,070 million to $1,090 million with comparable brand revenue growth of 3% to 6%. We expect operating margin to be relatively in line with last year's operating margin rate. We expect diluted earnings per share to be in the range of $0.48 to $0.52. For the year we expect to grow net revenues 4% to 6% to a range of $5,150 million to $5,250 million with comparable brand revenue growth in the range of 3% to 6%. We expect operating margin to be 9.8% to 10%. Diluted earnings per share are expected to be in the range of $3.50 to $3.65. In fiscal 2016 we are also planning capital spending in the range of 200 million to 220 million. This guidance reflects the investments we are making across our business to strengthen our competitive advantages and position us for long-term market share gains. The investments we will be making are in those areas where we see sustainable, long-term returns for our shareholders. First, we are investing in our supply chain. As Laura mentioned we are opening a new distribution center in the Southeast to allow us to further regionalize our network to drive superior customer service and supply chain efficiencies by improving customer delivery times, labor productivity, and reducing freight cost. While we expect to see a reduction in outbound freight cost overtime as well as a reduction in offsite facility cost we will seek cost ahead of savings in the initial months of operation until we are up and running. We are implementing a new inventory system that will support our regionalization and efficiency efforts allowing us to better optimize our inventory levels and to enhance the visibility to our inventory throughout our supply chain network. We are also investing in supply chain labor in the form of higher hourly wages to attract and retain the best talent in our distribution centers in an increasingly competitive environment for such labor. Our supply chain is foundational to our competitive advantage and we see a clear path to extend our leadership position in the fulfillment of furniture and home furnishings. We are building a more responsive, flexible, and efficient network that will scale with our growth and allow us to drive a long-term competitive advantage and sustainable efficiencies. Second, we are investing in e-commerce to support its continued profitable growth and to maintain our leadership position. We are focused on continuous improvement and customer experience from site functionality to the tools that we give our customer service representatives. We also plan to increase our marketing investment, focusing on new customer acquisition via strong content marketing and personalization. Third, we will be making investments in our retail fleet, one of our most powerful marketing tools and competitive advantages. We will be adding 27 new stores predominantly in the West Elm brand, our fastest growing brand as well as remodeling and relocating certain stores across our fleet to ensure a great shopping experience. We will also be investing in new point of sale technology across all of our stores. Additionally as Laura mentioned we are reorganizing our corporate headquarters along with some other areas of the company reducing employment cost that can be reinvested into our long-term strategic initiatives, our supply chain operations and e-commerce. This reorganization is estimated to result in a onetime charge during the first quarter of approximately $10 million to $12 million. This will be treated as a non-GAAP charge and therefore it’s not included within our Q1 and fiscal year EPS guidance ranges. I would now like to turn to our three year outlook. Our outlook remains unchanged with mid to high single-digit revenue growth in low double-digit to mid-teens EPS growth. While we anticipate our 2016 earnings growth to be lower than its outlook due to the investments that I have outlined, we are confident that our business will deliver these results over the next three years by leveraging our strong foundation and core competencies. We expect to drive profitable growth with West Elm path to 2 billion in revenues, the scaling of our global expansion initiatives, and emerging businesses Rejuvenation and Mark and Graham as well as continued market share gains across our brand portfolio. Additionally we expect to realize further supply chain efficiencies including reduced freight and offsite distribution center cost as well as improved labor productivity as a result of our investments. Further we do not anticipate opening any additional distribution centers over the next three years allowing us to better leverage our supply chain cost in 2017 and beyond. With all of these opportunities for growth and efficiencies we are confident we can deliver this longer term outlook. We also remain committed to a balanced capital allocation strategy utilizing our operating cash flow to invest in the business, to support our ongoing growth initiatives, and to return cash to shareholders. We expect our capital expenditures to remain within the range of 200 million to 220 million. We 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 6% increase in our quarterly dividend0 to $0.37. This is the tenth dividend increase we have had since we first started paying dividends in 2006. We also expect to repurchase shares annually at a level to at least offset equity dilution. Today we also announced a new $500 million share repurchase programs that we intend to execute over the next three years. Over the past five years between both dividend payments and share repurchases we have returned more than 1.5 billion to our shareholders. In summary we know our competitive advantages combined with our strategic growth initiatives will allow us to maintain our leadership position, our well known brands with compelling product at a great value. Our multichannel business, our superior customer service, our opportunities for growth, our strong balance sheet, and our experienced leadership team give us the confidence in our longer term ability to deliver sustainable profitable growth. I would now like to open up the call for questions.

[Operator:]

[Operator Instructions]. We’ll take the first question from Daniel Hofkin with William Blair & Company.

[Daniel Hofkin:]

Good afternoon. Just wanted to follow-up a little bit on the near-term guidance and then kind of square that a little bit, just abridge a little bit to the longer term view which sounds like its inline with what it has been. For 2016 I know you’ll have the absence of certain let's say drags related to the port. I guess, can you help us think about how much of a drag that was last year and then how much the incremental investments are in total this year? And then again maybe help us -- just if there is one or two most important things whether its supply chain rolling off over the next few years or something, some other aspects of it that can I bridge to that higher rate of longer term growth that would be helpful? Thanks very much.

[Julie P. Whalen:]

Sure and I think as we said in our prepared remarks we anticipate our 2016 earnings growth to be lower than our three year outlook because of the investments that I just highlighted particularly in our supply chain. And short-term though those offset the port "benefit" that may have been expected this year, longer term those are strategic initiatives for us. As far as abridging to the three year outlook, we believe that after we anniversary the investment in this additional Southeast DC particularly this year and as we move through the year as we have seen in a lot of our shipping performance metrics improve and we get out offsite DCs, etc. all of that will allow us to leverage our supply chain operations. And that plus the additional opportunities for growth that I highlighted obviously across West Elm with their 2 billion in rev -- growing to 2 billion in revenues scaling of our global initiatives, our emerging brands who have had 40% growth just this past year alone, all of that happening at the same time. And not investing in additional DCs over the next three years should allow us to take a step up in 2017 and 2018 to where our longer term career outlook implies on the earnings line.

[Daniel Hofkin:]

Thank you.

[Operator:]

And we will next go to Peter Benedict with Robert W. Baird.

[Peter Benedict:]

Well, hey guys, thanks. A couple of times Laura you mentioned kind of potential [ph] or broader base, customer base and I was just curious, are you speaking about age demographics or you are talking more income demographics?

[Laura J. Alber:]

You know one of the I think the greatest advantages of our multi brand company is that we have differing aesthetics to appeal to different types of customers at different life stages. And said that I think it is a really good place to be. You would like to see a mall go up at the same time but the reality is it gives us like, I am sure, in your portfolio a hedge if there is one certain area that is trending or not trending. And so, what we are always looking for is the wide space both areas where none of the brands are covering or within a brand where we may not be performing to our -- to the level we think we should be. And so, specifically there is -- I think there is no brand that better understands the millennial customer than West Elm and we have learned a lot through studying what they are buying and how they are buying it and when they are buying it and what is appealing to them. And so, that allows us to think I think really specifically about how to appeal to that customer and the other brands. And so, we see a lot of opportunity without losing our core customer to appeal to wider range of customers. And to be very accessible to people and as I said earlier, accessibility is I think key and it is also important that you are providing inspiration but you don’t want to be so, inspirational that people don’t relate to you. And so that is a really key attribute of the way we are approaching our brand aesthetics and thinking about the future and thinking about stores that are extremely welcoming and energetic and new and fresh in great markets and then how that translates to the websites.

[Operator:]

Thank you. We will next go to Matthew Fassler with Goldman Sachs.

[Matthew Fassler:]

Thanks a lot, good afternoon. Could you both size this investment in the Southeast DC in particular, it seems like it is a pretty big item for this year? And then just to the extent that 2015 and 2016 are going to be below the algorithm and the world is changing, what will get easier to enable you to get back on that track, it feels like the competitive environment probably has been somewhat dynamic. Do you expect that to abate or have you incorporated those ongoing challenges to your thought process?

[Julie P. Whalen:]

Matt I will start, basically we haven’t per say quantified it except to say that clearly you can see that it is more than offsetting the related core benefit. I think everyone expected us to get back. We are investing in some very long-term strategic areas for us to continue to drive our leadership position. So, we are investing in supply chain which is the new Southeast regional DC, which is going to allow us to get out of offsite, which allows us to reduce occupancy, allows us to reduce labor, and allows us to reduce labor on productivity. We are also investing in new systems to be able to get our inventory balance correctly which obviously drives efficiencies. And we are also investing in higher labor cost, which I think we can't underestimate and we are not alone here. I don’t know if other retailers have talked about it but everybody is facing this. As the world is moving more to e-commerce, the getting distribution center talent, good talent is getting more and more competitive. So, that is a reality that all retailers are facing right now and so we are investing in that as well. With that said, as we sort of move throughout this year, I think some of the key things to know is that as we entered the end of the fourth quarter and as we entered into 2016 we saw out of markets improve, we saw better fulfilled rates, we saw a better back order positioning, and we saw a reduced shipping cost. So all the things we have been working on the back half of the year are starting to pan out. Unfortunately we have this offset with the -- short-term offset with the incremental cost of this DC but as we moved throughout the year that also will start to leverage and so when we entered back half splash definitely when we get into 2017 we will have supply chain efficiencies that will begin to leverage in a big way plus when you add in these other areas that we been investing in. So West Elm again great trajectory. I mean we can’t underestimate how strong that brand is and what that does to our bottom line. You can't underestimate the fact that our international is growing 25%. It's growing to 300 million this year and we talked about how when that starts to leverage that’s a big influence on our op margin. We talked about our smaller businesses Rejuvenation and Mark and Graham, same thing they grew 40%. And when those start to grow that leverage is the bottom line. And so you put all of that together. By 2017 and 2018 we think we are back to the races with our three year outlook.

[Laura J. Alber:]

And the second part of your question about what is going on in the world and clearly there is a lot of external factors and many people have pointed to them and frankly we would prefer to be self critical. We’d rather look at every area of our company that we can improve so that we can outperform no matter what the environment is, hence the four areas of focus that I reviewed in my prepared remarks. And also we believe the promotional environment will not recede and that no matter how you package a discount, a discount is a discount and so we continue to go through a systematic category review so that we can be sure that we are well positioned versus the competition and offer price on like items that we have superior quality. And so in summary we have -- the changes we are making and we have several structural advantages that we will continue to flex including the excusive design capabilities, our direct sourcing advantage, our sophisticated marketing capability, and we believe we’ll see margin upside overtime as we reduce less productive skews and fully rollout our new sophisticated inventory management system.

[Matthew Fassler:]

Well, got you.

[Laura J. Alber:]

Thank you.

[Operator:]

Thank you. We’ll next go to Chris Horvers with J.P. Morgan.

[Chris Horvers:]

Thanks, good evening. So you are guiding to a much better trend in the first quarter than what you just put up in the fourth quarter, can you talk about what's changing -- what happened in the fourth quarter, was it the screening promotional level on the mall, was it the traffic on the mall, was it the consumer reacting to the stock market as improved in stock, so just give us some perspective on what seems to be a big difference between last quarter and the current quarter?

[Julie P. Whalen:]

I’m going to start and then I’m going to let Pat finish. Q4 was tough across retail and our top line came in later then we had planned. We had gotten off to a stronger start and it was the toughest part of our quarter was the high gifting time period was December and Pottery Barn brands were the most affected. But frankly we expected to see stronger performance in all of our brands as well. And so there was a lot of pressures on price points, there is the nature of gift giving, and what I am very pleased to see is that as we get past that gift giving period and people start to purchase for themselves and for their homes we’re seeing better results and Pat do you want to talk about some of the marketing.

[Patrick J. Connolly:]

Yes sure. Chris specifically on the direct side of the business we did see a decline over the high single-digit performance we’d all year. And although we’re only about half way through Q1 we are seeing a significant positive change compared to Q4 and I think we are confident in our ability to take market share especially and direct and all of our channels. We are focusing on improved product marketing to better communicate our product quality and differentiation. We are introducing more products and categories that performed particularly well online. We’re accelerating in particular in our marketing, our personalized marketing efforts at personalization where we have had excellent results so far and we are advancing these programs. And we are reallocating more of our marketing mix with an increased focus on digital and new customer acquisition marketing programs where we’re seeing good performance across the range of programs. So I think we can -- the combination of all those activities are driving positive results and I think we’re going to continue to expand on them in the coming quarters.

[Chris Horvers:]

Thanks very much and just one follow up to that, I mean do you think there were some questions about the high end consumer obviously you saw [indiscernible] and Nordstrom had made some commentary last summer. So would any of this element maybe a solidification of the -- your core customer maybe the stock market is back in a better spot?

[Laura J. Alber:]

As I said earlier we believe if we stay focused on the areas where we know we win we will continue to be able to grow across multiple customer areas. Because every customer is looking for value and great quality and there is a lot of work that we can do to improve those areas for us. So we prefer to be self critical as I said earlier than to look at these external factors.

[Chris Horvers:]

Thanks very much.

[Operator:]

We’ll next go to Jessica Mace with Nomura.

[Jessica Mace:]

Hi, good afternoon. My question is on the real estate strategy that you talked about. I was wondering if you could quantify the opportunity on some of the lower traffic models. I think you said 27 openings for 2016, if there any guidance you can give us on reposition or closings as well that will be helpful?

[Julie P. Whalen:]

The closures that are in our historic guidance that we provided you guys there are not associated with any early terminations and at this point it is really too early to comment on specific leases and landlords. But I think the key is that we want to make clear our approach is changing. Our customers are driven by the experience they want to engage and feel a sense of community so its need to be local and it must be relevant. So we are looking carefully at our portfolio of leases and we have very strong partnerships with our landlords and that is leading to opportunities. But as far as the change to what has been provided to you on the guidance is our standard process of shutting those stores down at the end of their natural lease terminations because they don’t need our profitability hurdles for whatever reasons plus the additions which are 27 which are particularly in the West Elm brand, our fastest growing brand.

[Jessica Mace:]

Understood, thank you.

[Operator:]

We’ll take a question from Samian Dudman [ph] with Morgan Stanley.

[Unidentified Analyst:]

Thanks, I want to go back to the top line for a second, I know the comp was about one and we know the industry grew a little bit faster than that. And I appreciate you being very self critical but curious again to just try to focus on if it was a high end customer that slowed. I mean there was clearly some share shift. Are you seeing anything changed from a consumer behavior perspective, were they more item focused or are they not buying the full rooms as they once were, just trying to diagnose and I guess it may be moved if it’s improving already this quarter but it was relative anomaly from a share perspective and I am just trying to understand it a little better?

[Julie P. Whalen:]

I guess another way to maybe answer your question is that we continue to see very strong furniture growth. Where we saw weakness was in some of the gifting categories. West Elm is predominantly a furniture brand. And we have, our top customers are doing really well with us. We do look at the whole file and it’s really important to us that we have retention and that we have new customer growth as well. And we’re always focused on both all the way down the customer curve. But there isn't one standout piece other than we want more customers and we want them to shop more frequently with us and buy more and have great experiences.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

We’ll next go to Brad Thomas with KeyBanc Capital Markets.

[Brad Thomas:]

Yes, thank you and good afternoon. I wanted to ask about West Elm and sort of the bigger topic of revenues, you cleared it very well in growing the West Elm business. And it is something that you just answered it with your references still seeing strong furniture growth in Pottery Barn. I guess could you just give us your latest thoughts on what you’re seeing in terms of overlap of customers between West Elm and some of your other brands namely Pottery Barn and how you are thinking about that dynamic evolving as you continue to grow the West Elm business?

[Laura J. Alber:]

It’s a great question. We love to study those things and we are very always concerned about any cannibalization. In fact we haven't seen it. We have seen that when we do cross brands work whether its catalog mailings or emails or digital marketing we are seeing less because it's related and we do not see cannibalization. In terms of the cross over its highly competitive so I’d rather not give you that information right now. But its additive and its incremental is what I would answer the question as.

[Brad Thomas:]

Great and if I could squeeze in a housekeeping item for Julie, could you quantify for us perhaps how the growth of international may affect margins or operating income in 2016 relative to 2015?

[Julie P. Whalen:]

Well it always depends obviously in the mix of the revenues. Clearly in Q4 in particular because we had much higher mix of international and particularly franchise operations relative to domestic business given the softness we saw in Pottery Barn it has a much bigger impact then on the gross margin. But as we continue to grow it and the extent the growth becomes or comes into a franchise you’ll see a negative impact on gross margin but a positive impact on the op margin is accretive actually the op margin. And from a top level perspective the more volume we have in international regardless where it comes from it’s a positive because its starts to leverage our entire infrastructure. And so I think that’s a real key takeaway and a great question. A fact that we’ve grown it by 25%, we’re now at 300 million and we are continuing to grow and every metric we’re looking at looks for a continued improvement that could be a huge driver for us as we move into the out years.

[Brad Thomas:]

Great. Thank you.

[Operator:]

We’ll next go to Dan Binder with Jeffries.

[Daniel Binder:]

Hi, thank you. Its Dan Binder. On West Elm, just looking at the comp store sales growth still very strong, a little bit below where you had been earlier in the year but you are also slowing, it looks like you’re slowing a store growth rate and closing two stores, I am just curious as you thought about your real estate strategy what your thoughts were on West Elm specifically and the number of stores you think you ultimately can get to and whether there were some sort of significant change in their thought process?

[Laura J. Alber:]

We are very pleased with our new store performance and learning a lot about how big this brand can be by opening in a lot of different types of markets and putting additional stores in markets. And we actually are finding that probably the slightly bigger model 13,000 versus 10,000 is better. We are constantly making improvements to the design and the services in our stores and we’ll continue to look for more opportunity. But we are diligent so we don’t want to just open stores to open stores. We’re thrilled with the lineup we have for this year and the following year. There is a lot of room for growth also in our direct business. And as I said earlier in some other channels of business that we have identified because of how innovative this team is and just seeing opportunity to take categories of furniture that are out there in the world and improve them. And so workspace is a great example of a very big business that is not done through store and is not done through DC either. It is done through dealers and will be a great brand halo and another way to extend the brand in the coming years.

[Daniel Binder:]

Alright, thank you.

[Operator:]

We’ll take a question from Michael Lasser with UBS.

[Michael Lasser:]

Good evening, thanks a lot for taking my question. Have you seen an improvement in the business into the first quarter, what have you noticed from the response to your promotions by the consumer, have they become more effective, has the overall promotional level within the industry become less intense, and has the improvement been due in part to less giftable items comprising the first quarter than the fourth quarter? Thank you so much.

[Laura J. Alber:]

Thank you. Lots of things we do not see the promotional environment retreating. There is a lot of people with a lot of different types of promotions. But we know that the customer is looking for the best value. They look at the offered price, they are looking at the quality, and the experience matters. I mean delivering and receiving furniture is a really important part of the decision in the future, a purchase decision. And so we have been working on a lot of things for a while and I think the combination of all of them is causing some improvements. It means early you guys in the quarter but we did want to tell you we’re seeing some improved results and we are going to build on successes we’re seeing and where we are not getting the results we want, we are incredibly critical and we have timeframes and action plans and people accountable for the improvements in those areas.

[Michael Lasser:]

Thank you so much.

[Laura J. Alber:]

You’re welcome.

[Operator:]

And we do have time for one last question from Brian Nagel with Oppenheimer.

[Brian Nagel:]

Hi, good evening. Thanks for taking my question. If I am hearing you correctly it seemed like the sales weakness in the fourth quarter was much more tied to kind of the giftable categories and we’ve had now an improvement here at least early in the first quarter. So the question I have is if we think about particularly in the Pottery Barn concepts, how much of that product, how much of a shift in product mix is there through the holidays to giftable items, and are those items -- is the product mix then again shifted now as we head into the spring. So, I guess what I am asking was there a category or shift that occurred that sort of say fueled the sales weakness and now that category is largely gone?

[Laura J. Alber:]

And it is so hard to know, right. I mean you don’t know if someone is buying it for themselves or buying it as a gift. You just know that they are not buying it as a gift when you get out of December, that it is a self purchase. And it is a very different dynamic. I mean, I think about ourselves as customers and how we shop and I think we have to continually provide better services in the holiday season and even more convenient service next year. And then more innovative products because the truth is our success makes other people look very closely at what we are doing and we need to make sure that we are constantly moving to the next great exciting key item versus being able to rely on that past sellers. And that is an important change that we are making and we already have started working on our holiday assortments for next year and looking at which things we should change and which things we should carry over and ensuring that we have exciting new things to buy. And at the same time improving the service because it is a sea of lot of noise, it is the holiday season and we want customers to come to the mall and have a great experience with us and we are pleased with the improvements we have made this year, but we think we can do even more in the coming years in the store.

[Brian Nagel:]

Helpful, and then if I could slip one follow-up, was there any type of geographic difference in sales as we think about this weakness that occurred?

[Laura J. Alber:]

You know, Pat you studied that, do you want to answer that.

[Patrick J. Connolly:]

Yeah, I think there have been a number of questions about that and we have looked at the performance of all of our brands particularly in areas like Texas, Florida, and Canada and we are seeing no discernible difference in these markets compared to others. This is across all our brands and quite honestly it really hasn’t been a burning issue for us.

[Brian Nagel:]

Okay, thank you.

[Operator:]

Thank you and that concludes our question-and-answer session for today. I will now turn the conference call back over to Ms. Alber for any additional or closing remarks.

[Laura J. Alber:]

I would like to thank all of you for joining us this afternoon. We really appreciate your time and your continued support and we look forward to speaking with you again in May.

[Operator:]

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