Opinion on  WilliamsSonoma Inc (WSM)     Sector: Services  >  Industry: Retail (Specialty)
Williams-Sonoma Inc.

Williams-Sonoma, Inc. ( WSM ) today announced operating results for the first quarter ended May 4, 2008.

FIRST QUARTER 2008 -- RESULTS FOR THE 13 WEEKS ENDED MAY 4, 2008

Net revenues for the 13 weeks ended May 4, 2008, decreased 4.2% to $781.8 million versus $816.1 million for the 13 weeks ended April 29, 2007.

Diluted earnings per share for the first quarter of fiscal year 2008 decreased 37.5% to $0.10 per diluted share, including a $0.05 per diluted share net benefit related to an incentive payment from a landlord to compensate the company for terminating a store lease prior to its expiration, versus $0.16 per diluted share in the first quarter of fiscal year 2007. This benefit was originally expected to occur in the second quarter of 2008, and was included in our prior guidance issued in March 2008. Excluding this $0.05 per diluted share net benefit in the first quarter of fiscal year 2008, first quarter diluted earnings per share on a non-GAAP basis were $0.05 (see reconciliation below and Exhibit 1).

Howard Lester, Chairman and Chief Executive Officer, commented, “ Although the macro-environment in the first quarter of 2008 continued to be very challenging, we aggressively managed the aspects of the business we could control and delivered better than expected earnings for the quarter. ”

Mr. Lester continued, “ As we look forward to the balance of the year, we are doing so with a more cautious outlook based on a continuing deterioration in the macroeconomic environment and industry-wide sales declines in the home furnishings category overall. Accordingly, we are reducing our revenue guidance for the balance of the year. We will partially offset the diluted earnings per share impact of this shortfall with ongoing operational improvements, the sale of a corporate aircraft which was publicly disclosed on May 22, 2008, and ongoing cost reduction and containment initiatives. ”

Retail net revenues in the first quarter of fiscal year 2008 decreased 4.4% to $433.6 million versus $453.4 million in the first quarter of fiscal year 2007. This decrease was driven by a 9.0% reduction in comparable store sales, partially offset by a 6.9% year-over-year increase in retail leased square footage, including 19 net new stores. West Elm and Williams-Sonoma Home were the only brands in the retail segment generating year-over-year growth in net revenues. First quarter year-over-year comparable store sales by retail concept are shown in the table below.

(a) Comparable stores are defined as those stores in which gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Comparable stores exclude new retail concepts until such time as we believe that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. West Elm and Williams-Sonoma Home have been excluded for the first quarter of fiscal years 2008 and 2007.

Direct-to-customer net revenues (comprised of both catalog and Internet revenues) in the first quarter of fiscal year 2008 decreased 4.0% to $348.2 million versus $362.7 million in the first quarter of fiscal year 2007. This decrease was driven by declining net revenues in all brands except PBteen and West Elm. Internet revenues in the first quarter of fiscal year 2008 increased 8.7% to $251.5 million versus $231.5 million in the first quarter of fiscal year 2007. Although the amount of Internet revenues that are incremental to our direct-to-customer channel cannot be identified precisely, we estimate that approximately 40% of our company-wide non-gift registry Internet revenues are incremental to the direct-to-customer channel and approximately 60% are driven by customers who recently received a catalog.

Gross margin expressed as a percentage of net revenues in the first quarter of fiscal year 2008 was 35.3% versus 37.0% of net revenues in the first quarter of fiscal year 2007. Excluding the 20 basis point impact of accelerated depreciation related to the early lease termination (see Note 1 in Exhibit 1), non-GAAP gross margin expressed as a percentage of net revenues in the first quarter was 35.5%. This 150 basis point decrease as a percentage of net revenues was primarily driven by the deleverage of fixed occupancy expenses due to declining sales and an increase in cost of merchandise sold, partially offset by reductions in replacements and damages.

Selling, general and administrative expenses in the first quarter of fiscal year 2008 were $259.3 million or 33.2% of net revenues versus $273.5 million or 33.5% of net revenues in the first quarter of fiscal year 2007. Excluding the 120 basis point benefit related to an incentive payment received from a landlord to compensate the company for terminating a store lease prior to its expiration (see Note 1 in Exhibit 1), non-GAAP selling, general and administrative expenses in the first quarter of fiscal year 2008 were 34.4% of net revenues. This 90 basis point increase as a percentage of net revenues was primarily driven by deleverage of our employment and advertising costs due to declining sales. The early lease termination payment occurred one quarter earlier than anticipated in the guidance we issued in March.

The effective income tax rate in the first quarter of fiscal year 2008 was 38.8% versus 40.3% in the first quarter of fiscal year 2007. This decrease in the effective quarterly income tax rate was primarily driven by certain favorable income tax resolutions during the first quarter of fiscal year 2008.

SECOND QUARTER 2008 FINANCIAL GUIDANCE

Net Revenues

• Net revenues in the second quarter of 2008 are projected to be in the range of $828.0 million to $846.0 million, versus previous guidance in the range of $850.0 million to $868.0 million. This represents a projected decrease in net revenues in the range of < 3.7% > to < 1.6% > versus $859.4 million in the second quarter of fiscal year 2007.

• Retail net revenues in the second quarter of 2008 are projected to be in the range of $478.0 million to $488.0 million, versus previous guidance in the range of $493.0 million to $503.0 million. This represents a projected change in retail net revenues in the range of < 1.8% > to 0.2% versus $487.0 million in the second quarter of fiscal year 2007.
• Change in comparable store sales in the second quarter of 2008 is projected to be in the range of < 10.0% > to < 8.0% > , versus previous guidance in the range of < 6.0% > to < 3.5% > . This compares to comparable store sales growth in the second quarter of fiscal year 2007 of 1.2%. Comparable stores exclude new retail concepts until such time as we believe that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. For fiscal year 2008, we expect to exclude West Elm and Williams-Sonoma Home.
• Retail leased and selling square footage in the second quarter of 2008 are projected to increase in the range of 10.0% to 11.0%, unchanged from previous guidance. This compares to retail leased and selling square footage growth in the second quarter of fiscal year 2007 of 4.1% and 4.3%, respectively.
• Direct-to-customer net revenues (comprised of both catalog and Internet revenues) in the second quarter of 2008 are projected to be in the range of $350.0 million to $358.0 million, versus previous guidance in the range of $357.0 million to $365.0 million. This represents a projected decrease in direct-to-customer net revenues in the range of < 6.0% > to < 3.9% > versus $372.4 million in the second quarter of fiscal year 2007.

Gross Margin

• Gross margin as a percentage of net revenues in the second quarter of fiscal year 2008 is expected to be in the range of 34.0% to 34.4%, versus previous guidance in the range of 35.0% to 35.4%. This represents a projected decrease in the gross margin rate in the range of 280 to 320 basis points versus 37.2% in the second quarter of fiscal year 2007.

Selling, General and Administrative Expenses (SG&A)

• Selling, general and administrative expenses as a percentage of net revenues in the second quarter of fiscal year 2008, including the gain on our sale of a corporate aircraft, are expected to be in the range of 30.8% to 31.2%, versus previous guidance in the range of 31.5% to 31.9%. This represents a projected decrease in the SG&A expense rate of 110 to 150 basis points versus 32.3% in the second quarter of fiscal year 2007.
• Selling, general and administrative expenses on a non-GAAP basis as a percentage of net revenues in the second quarter of fiscal year 2008, excluding the gain on our sale of a corporate aircraft (see Note 2 in Exhibit 1), are expected to be in the range of 32.7% to 33.1%. This represents a projected increase in the SG&A expense rate of 40 to 80 basis points, versus 32.3% in the second quarter of fiscal year 2007.

Interest < Income > Expense - Net

• Interest < Income > Expense - Net in the second quarter of fiscal year 2008 is projected to be interest expense in the range of $0.0 million to $0.5 million, versus previous guidance of interest expense in the range of $0.2 million to $0.6 million. This compares to interest income in the second quarter of fiscal year 2007 of $0.5 million.

Income Taxes

• The income tax rate in the second quarter of fiscal year 2008 is projected to be in the range of 31.0% to 32.0%, versus previous guidance in the range of 38.9% to 39.2%. This compares to an income tax rate in the second quarter of fiscal year 2007 of 40.2%. Throughout the year, we expect that there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are reevaluated.

Diluted Earnings Per Share

• Diluted earnings per share on a GAAP basis in the second quarter of fiscal year 2008 are expected to be in the range of $0.15 to $0.19, unchanged from previous guidance. This represents a projected decrease in diluted earnings per share in the range of < 34.8% > to < 17.4% > versus $0.23 in the second quarter of fiscal year 2007. Quarterly diluted earnings per share projections on a GAAP and non-GAAP basis are shown in Exhibit 1. While our second quarter guidance is unchanged from previous guidance, the components have changed as follows:

Merchandise Inventories

• Merchandise inventories at the end of the second quarter of fiscal year 2008 are projected to be in the range of $665.0 million to $695.0 million, unchanged from previous guidance. This represents a projected increase in merchandise inventories in the range of 2.1% to 6.7% versus $651.3 million at the end of the second quarter of fiscal year 2007.

Depreciation and Amortization

• Depreciation and amortization expense in the second quarter of fiscal year 2008 is projected to be in the range of $37.0 million to $38.0 million, versus previous guidance in the range of $38.0 million to $39.0 million. Depreciation and amortization was $34.3 million in the second quarter of fiscal year 2007.

Amortization of Deferred Lease Incentives

• Amortization of deferred lease incentives in the second quarter of fiscal year 2008 is projected to be approximately $8.0 million, unchanged from previous guidance . Amortization of deferred lease incentives was $7.1 million in the second quarter of fiscal year 2007.

FISCAL YEAR 2008 FINANCIAL GUIDANCE (52 WEEKS in 2008 versus 53 WEEKS in 2007)

Net Revenues

• Net revenues in fiscal year 2008, a 52-week year, are projected to be in the range of $3.738 billion to $3.804 billion, versus previous guidance in the range of $3.793 billion to $3.877 billion. This represents a projected decrease in net revenues in the range of < 5.2% > to < 3.6% > versus $3.945 billion during the 53 weeks of fiscal year 2007. On a comparable 52-week to 52-week basis, this represents a projected decrease in the range of < 3.4% > to < 1.7% > .
• Retail net revenues in fiscal year 2008, a 52-week year, are projected to be in the range of $2.207 billion to $2.245 billion, versus previous guidance in the range of $2.250 billion to $2.298 billion. This represents a projected decrease in retail net revenues in the range of < 3.2% > to < 1.6% > versus $2.281 billion during the 53 weeks of fiscal year 2007. On a comparable 52-week to 52-week basis, this represents a projected decrease in the range of < 1.8% > to < 0.1% > .
• Change in comparable store sales in fiscal year 2008 is projected to be in the range of < 8.3% > to < 6.3% > , versus previous guidance in the range of < 5.5% > to < 3.0% > . This compares to comparable store sales growth in fiscal year 2007 of 0.3%. Comparable stores exclude new retail concepts until such time as we believe that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. For fiscal year 2008, we expect to exclude West Elm and Williams-Sonoma Home.
• Retail leased and selling square footage in fiscal year 2008 are projected to increase in the range of 7.0% to 7.5%, versus previous guidance in the range of 7.5% to 8.5%. This compares to retail leased and selling square footage growth in fiscal year 2007 of 5.3% and 5.5%, respectively.

(a) Fiscal year 2008 total store opening and closing numbers for Williams-Sonoma, Pottery Barn and Pottery Barn Kids include 13 stores, 5 stores and 2 stores, respectively, for temporary closures due to remodeling. Remodeled stores are defined as those stores temporarily closed and subsequently reopened due to square footage expansion, store modification, or relocation. Consistent with our definition of comparable stores, remodeled stores are removed from the comparable store base upon closure if the gross square footage changes by more than 20% or if the store is closed for seven or more consecutive days.

• Direct-to-customer net revenues (comprised of both catalog and Internet revenues) in fiscal year 2008, a 52-week year, are projected to be in the range of $1.531 billion to $1.559 billion, versus previous guidance in the range of $1.543 billion to $1.579 billion. This represents a projected decrease in direct-to-customer net revenues in the range of < 8.0% > to < 6.3% > versus $1.664 billion during the 53 weeks of fiscal year 2007. On a comparable 52-week to 52-week basis, this represents a projected decrease in the range of < 5.6% > to < 3.9% > .
• Catalog circulation in fiscal year 2008, a 52-week year, is projected to decrease in the range of < 19.0% > to < 14.0% > versus fiscal year 2007, a 53-week year, unchanged from previous guidance. This represents, on a comparable 52-week to 52-week basis, a projected catalog circulation decrease in the range of < 15.0% > to < 10.0% > , unchanged from previous guidance. Catalog circulation in the 53-week fiscal year 2007 increased 3.7% versus the 52-week fiscal year 2006.

Gross Margin

• Gross margin as a percentage of net revenues in fiscal year 2008 is expected to be in the range of 36.8% to 37.0%, versus previous guidance in the range of 37.1% to 37.3%. This represents a projected decrease in the gross margin rate in the range of 190 to 210 basis points versus 38.9% in fiscal year 2007.

Selling, General and Administrative (SG&A) Expenses

• Selling, general and administrative expenses on a GAAP basis as a percentage of net revenues in fiscal year 2008, including the benefit from the unusual business events shown in Notes 1 and 2 in Exhibit 1, are expected to be in the range of 29.7% to 30.0%, versus previous guidance in the range of 30.2% to 30.5%. This represents a projected decrease in the SG&A expense rate of 100 to 130 basis points, versus 31.0% in fiscal year 2007.
• Selling, general and administrative expenses on a non-GAAP basis as a percentage of net revenues in fiscal year 2008, excluding the benefit from the unusual business events shown in Notes 1 and 2 in Exhibit 1 are expected to be in the range of 30.4% to 30.7%. This represents a projected decrease in the SG&A expense rate of 30 to 60 basis points, versus 31.0% in fiscal year 2007.

Interest < Income > Expense - Net

• Interest < Income > Expense - Net in fiscal year 2008 is projected to be interest income in the range of $0.0 million to $1.5 million, versus previous guidance in the range of interest expense of $1.0 million to interest income of $1.0 million. This compares to net interest income in fiscal year 2007 of $2.9 million.

Income Taxes

• The income tax rate in fiscal year 2008 is projected to be in the range of 38.1% to 38.5%, versus previous guidance in the range of 38.7% to 39.0%. This compares to an income tax rate in fiscal year 2007 of 38.1%. Throughout the year, we expect that there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are reevaluated.

Diluted Earnings Per Share

• Diluted earnings per share on a GAAP basis in fiscal year 2008 are expected to be in the range of $1.45 to $1.58, versus previous guidance in the range of $1.42 to $1.56. This represents a projected decrease in diluted earnings per share of < 17.6% > to < 10.2% > versus $1.76 in fiscal year 2007. Quarterly diluted earnings per share projections on a GAAP and non-GAAP basis are shown in Exhibit 1. A quarterly reconciliation of our previous earnings per share guidance to our current earnings per share guidance is provided below.

(a) Quarterly diluted earnings per share guidance amounts will vary within the ranges above. Therefore, the respective high and low guidance estimates for the quarters should not be added together to derive an estimate for the fiscal year. Due to the effect that the timing of share repurchases can have on the quarterly and year-to-date weighted average share count calculations, the company expects the year-to-date calculations of GAAP diluted earnings per share in fiscal year 2008 may be less than the sum of the diluted earnings per share by quarter. Also, due to quarterly rounding to the nearest cent per diluted share, the sum of the quarters at the end of any quarter during the year may not equal the year-to-date total.

Merchandise Inventories

• Merchandise inventories at the end of fiscal year 2008 are projected to be in the range of $685.0 million to $730.0 million, unchanged from previous guidance. This represents a projected change in merchandise inventories in the range of < 1.3% > to 5.2% versus $693.7 million at the end of fiscal year 2007.

Capital Spending

• Capital spending in fiscal year 2008 is projected to be in the range of $215.0 million to $235.0 million, unchanged from previous guidance. This compares to capital spending of $212.0 million in fiscal year 2007.

Depreciation and Amortization

• Depreciation and amortization expense in fiscal year 2008 is projected to be in the range of $150.0 million to $152.0 million, versus previous guidance in the range of $154.0 million to $156.0 million. Depreciation and amortization was $140.7 million in fiscal year 2007.

Amortization of Deferred Lease Incentives

• Amortization of deferred lease incentives in fiscal year 2008 is projected to be in the range of $31.0 million to $32.0 million, unchanged from previous guidance. Amortization of deferred lease incentives was $29.4 million in fiscal year 2007.

STOCK REPURCHASE PROGRAM

During the first quarter of fiscal year 2008, no shares of our common stock were repurchased, and $150 million remains available for repurchase of our common stock from the authorization approved by our Board in January 2008.

Stock repurchases under this program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

CONFERENCE CALL AND WEBCAST INFORMATION

Williams-Sonoma, Inc. will host a live conference call today, June 4, 2008, at 7:00 A.M. (PT). The call, hosted by Howard Lester, Chairman and Chief Executive Officer, will be open to the general public via a live webcast and can be accessed through the Internet at www.williams-sonomainc.com/webcast . A replay of the webcast will be available at www.williams-sonomainc.com/webcast .

SEC REGULATION G -- NON-GAAP INFORMATION

This press release includes non-GAAP gross margin percentages, non-GAAP selling, general and administrative percentages, and non-GAAP diluted earnings per share. These non-GAAP financial measures exclude the accelerated depreciation and the benefit of the early lease termination payment, and the gain on our sale of a corporate aircraft in fiscal year 2008. We have reconciled these non-GAAP financial measures with the most directly comparable GAAP financial measures in the text of this release and in Exhibit 1. We believe that these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of our quarterly and fiscal year 2008 diluted earnings per share actual results and guidance on a comparable basis with our 2007 quarterly and fiscal year results. Our management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements relating to our future financial guidance and results and our stock repurchase program.

The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include accounting adjustments as we close our books for the first quarter of 2008; new interpretations of current accounting rules; changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; construction and other delays in store openings; competition from companies with concepts or products similar to our concepts and products; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; effective inventory management commensurate with customer demand; our ability to anticipate and manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in Internet marketing, infrastructure and regulation; changes in consumer spending based on weather, economic, political, competitive and other conditions beyond our control; construction delays on infrastructure projects based on weather or other events; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; dependence on external funding sources for operating capital; our ability to control employment, occupancy and other operating costs; our ability to improve and control our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; and other risks and uncertainties described more fully in our public announcements, reports to shareholders and other documents filed with or furnished to the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended February 3, 2008 and all subsequent current reports on Form 8-K. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

ABOUT WILLIAMS-SONOMA

Williams-Sonoma, Inc. is a nationwide specialty retailer of high quality products for the home. These products, representing six distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home – are marketed through 603 stores, seven mail order catalogs and six e-commerce websites.

WSM:  This call was made on 06/04/08 @ $25.04

Rating:	$25.04 (06/04/08)
Closed:	06/04/2008 @ $25.04 (+0.00% in 1 minute)
Target:	$29.00 (+15.81%) in Three months
Allocation:	0.0% of portfolio