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Williams-Sonoma Scores Another Big Quarter of Revenue Growth

Home goods company Williams-Sonoma reported another quarter of robust growth on its earnings call last week. The parent company of brands such as Pottery Barn, West Elm and Williams-Sonoma reported net revenues grew 16 percent to $2.048 billion, with comparable brand revenue growth of 16.9 percent, with comps accelerating to 41.3 percent on a two-year basis.

Chief financial officer Julie Whalen said the company’s e-commerce business grew to over 67 percent of the company’s total revenues from the second quarter and was the highest two-year comp ever at 64 percent.

By brand, West Elm delivered a 22.5 percent comp, taking year-to-date revenues for the brand to over $1.5 billion. Pottery Barn, the company’s largest brand, drove its fifth consecutive quarter of double-digit comps with a 15.9 percent comp. Pottery Barn Kids and Teen grew at a comp of 16.9 percent and had its highest two-year comp ever. Williams-Sonoma drove a 7.6 percent comp, accelerating from the second quarter and on top of 30.4 percent last year.

The company’s emerging brands—Rejuvenation and Mark and Graham—combined to drive significant growth at a 26.5 percent comp, and all brands grew nearly 40 percent or higher on a two-year basis.

Gross margin expanded 370 basis points to 43.7 percent, and the company’s selling margins drove 280 basis points of that growth.

The gains come in a marketplace still significantly impacted by supply chain disruptions, material shortages, and logistical logjams. Williams-Sonoma was particularly impacted by COVID-19 shutdowns in Vietnam, which halted production for three months. Alber said that disruption coupled with increased demand will impact inventory, and the company doesn’t expect full inventory recovery until mid-2022.

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“This country has since reopened but is experiencing significant backlog across factories as they ramp up,” Alber said. “As a result, we are experiencing some inventory delays, particularly in our children’s home furnishings businesses.”

But Alber said Williams-Sonoma’s domestic upholstery operations have improved lead times on upholstered furnishings. And the company has worked with its long-term vendors to minimize production and delivery delays.

“And as a result, approximately 85 percent of our holiday receipts have already been received,” she said. “And finally, when we have delays, customer service is our priority, which has resulted in declines in escalations, cancellations, and calls into the care center.”

Whalen also credited the company’s dedication to sustainability—including its recent announcement to double investments in Fair Trade U.S.A. programs by 2025 and increase purchasing of product from Nest Ethical Handicraft—for some of the quarterly growth.

“Our customers continue to place importance on and in many instances, demands the prioritization of sustainability. In fact, almost 70 percent of consumers today want to support brands that are purpose-driven and doing good in the world we share,” Whalen said. “Our company is committed to being a value-led, sustainable company and is proud to be a leader in the home furnishing industry.”

Occupancy costs were approximately $183 million, up 5.1 percent year-over-year and relatively in line with the company’s second quarter growth. The year-over-year increase includes a one-time impact from rent true-ups and rent abatements last year, as well as the incremental impact from Williams-Sonoma’s new East Coast distribution center.

SG&A in the third quarter was in line with the prior quarters at 27.5 percent of net revenue. Year over year, SG&A deleveraged 320 basis points, driven by higher advertising spend coming off the company’s substantially reduced costs in 2020 and decision to incrementally invest in advertising.

And despite expected deleverage, Williams-Sonoma still delivered SG&A rates near historically low pre-pandemic levels and another quarter of record profitability. Operating income grew to a record $333 million, resulting in an operating margin of 16.3 percent, expanding 60 basis points over last year. This resulted in diluted earnings per share of $3.32, up 30 percent from last year’s record third quarter of $2.56 per diluted share.

“Put these results in context, we have not seen our performance weighing all year despite any shifts in the consumer wallet as the world reopens and being up against accelerating tougher year-over-year comparison,” Whalen said.

Whalen said the company is tracking to a 28 percent comp or 41 percent on a two-year basis, with 400 basis points of operating margin expansion at a 16.3 percent operating margin and more than 85 percent growth in earnings.

Williams-Sonoma ended the quarter with strong liquidity levels and a cash balance of almost $660 million. The business generated operating cash flow of almost $790 million year-to-date, which is approximately $60 million over last year’s elevated cash flow levels.

Cash flow strength allowed Williams-Sonoma to invest more than $140 million in capital expenditures and to return almost $790 million to shareholders in the form of over $135 million in dividends and over $650 million in share repurchases.

Merchandise inventories, which includes inventory and transit, were $1.272 billion, representing an increase of 13 percent over last year. Inventory on hand and available for sale was up 3 percent year over year.

CEO’s Take: Alber said while the home industry remains fragmented, Williams-Sonoma’s omnichannel approach has served the company well, and she expects this quarter’s growth to propel the home retailer to a stronger year than forecast.

“These results are a function of both the advantages of our distinctive positioning in the market and our successful execution against our long-term growth strategy,” she said. “Furthermore, our performance demonstrates that we continue to take share in a fractured market and deliver high-quality, sustainable earnings. As a result, we are raising our full-year outlook to reflect revenue growth of 22 percent to 23 percent and operating margins of 16.9 percent to 17.1 percent.”