per share ("EPS") in Q1 09 on a GAAP and non-GAAP basis are reconciled in the table below:
Reconciliation of GAAP to Non-GAAP Diluted EPS (See Exhibit 1 for Notes 1, 2 and 7) Q1 09 Q1 08 GAAP Diluted EPS <$0.18> $0.10 Impact of Asset Impairment and Early Lease TerminationCharges for Underperforming Retail Stores (Note 1) $0.04 - Net Benefit of Early Lease Termination Payment (Note 2) - <$0.05> Non-GAAP Diluted EPS Excluding Unusual BusinessEvents (Note 7) <$0.14> $0.05 -------------------------------------------------------------------------------
Howard Lester, Chairman and Chief Executive Officer, commented, "While the home furnishings sector continued to be under significant pressure in the first quarter, we focused on the aspects of the business we could control and delivered substantially better-than-expected earnings results. We saw our revenues stabilize within our range of guidance, and we were able to enhance profitability by reducing our advertising expense as a percentage of revenues and optimizing our promotional activity. We also successfully lowered our merchandise inventories, reduced our capital spending and once again improved our year-over-year cash position."
Mr. Lester continued, "Looking forward to the second quarter and the balance of the year, we are continuing to gain confidence in our revenue forecasts as they trend in line with the guidance we provided at the beginning of the year. We are, however, cognizant of the ongoing volatility in the economy and the potential for promotional pressure as the industry reduces inventory levels. As such, despite our better-than-expected performance in the first quarter, we are reiterating our financial guidance for the remaining quarters of the year, as we continue to focus on our five key initiatives: (1) capturing market share through innovative merchandising and a greater emphasis on opening price points; (2) delivering superior customer service; (3) continuing our catalog circulation optimization strategy; (4) driving efficiencies in our worldwide supply chain; and (5) maximizing profitability and cash flow."
Retail net revenues in Q1 09 decreased 17.6% to $358 million versus $434 million in Q1 08. This decrease was driven by a 21.0% reduction in comparable store sales, partially offset by a 7.4% year-over-year increase in retail leased square footage ("LSF"), including 27 net new stores. All brands had declining net revenues during the quarter, led by Pottery Barn, Williams-Sonoma, and Pottery Barn Kids. First quarter year-over-year comparable store sales by retail concept are shown in the table below.
First Quarter Comparable Store* Sales Change by Retail Concept Retail Concept Q1 09 Q1 08 Williams-Sonoma <15.4%> <4.8%> Pottery Barn <22.6%> <10.5%> Pottery Barn Kids <25.0%> <10.9%> Outlets <26.8%> <13.0%> Total <21.0%> <9.0%> -------------------------------------------------------------------------------
* See the company's 10-K and 10-Q public filings for the definition of comparable stores.
Direct-to-customer net revenues in Q1 09 decreased 27.0% to $254 million versus $348 million in Q1 08. All brands had declining net revenues during the quarter, led primarily by Pottery Barn and Pottery Barn Kids. Internet revenues in Q1 09 decreased 22.8% to $194 million versus $252 million in Q1 08.
Gross margin expressed as a percentage of net revenues in Q1 09 was 30.1% versus 35.3% of net revenues in Q1 08. Excluding the 20 basis point impact of accelerated depreciation related to an early lease termination in Q1 08 (see Note 2 in Exhibit 1), non-GAAP gross margin expressed as a percentage of net revenues was 35.5%. This 540 basis point decrease was primarily driven by the deleverage of fixed occupancy expenses resulting from declining sales and an increase in cost of merchandise (including the impact of increased markdowns).
Selling, general and administrative ("SG&A") expenses in Q1 09 on a GAAP and non-GAAP basis are reconciled in the table below:
Reconciliation of GAAP to Non-GAAP SG&A Expenses (See Exhibit 1 for Notes 1 through 3) Q1 09 Q1 08 $ (millions) % of rev $ (millions) % of rev GAAP SG&A Expenses $213 34.9% $259 33.2% Impact of Asset Impairment and Early Lease TerminationCharges for Underperforming Retail Stores (Note 1) <$6> <1.0%> - - Net Benefit of Early Lease Termination Payment (Note 2) - - $9 1.2% Impact of Asset Impairment Charge for UnderperformingRetail Stores (Note 3) - - <$1> <0.1%> Non-GAAP SG&A Expenses Excluding UnusualBusiness Events* $207 33.9% $268 34.3% -------------------------------------------------------------------------------
* Due to rounding to the nearest million, totals may not equal the sum of the line items in the table above.
This 40 basis point decrease in non-GAAP SG&A expenses was primarily driven by reductions in total advertising costs resulting from the continuation of our catalog circulation optimization strategy, partially offset by the deleverage of employment costs due to declining sales.
Merchandise inventories at the end of Q1 09 decreased 23.2% to $548 million versus $714 million at the end of Q1 08 as a result of our continued inventory reduction strategies.
FY 09 FINANCIAL GUIDANCE
Net Revenue
Net Revenue Guidance by Quarter (all amounts in millions, except percentages) Q1 09ACT Q2 09GUID Q3 09GUID Q4 09GUID FY 09GUID Retail Revenues $358 $400 - $415 $385 - $405 $580 - $610 $1,723 - $1,788 Direct-to-Customer Revenues $254 $250 - $260 $265 - $285 $320 - $350 $1,089 - $1,149 Total Net Revenues $612 $650 - $675 $650 - $690 $900 - $960 $2,812 - $2,937 % Variance vs. FY 08 <21.8%> <18> - <21> % <8> - <14> % <5> - <11> % <13> - <16> % Comparable Store Sales* <21.0%> <16> - <19> % <8> - <13> % <6> - <11> % <12> - <16> % LSF Growth % Increase 7.4 % 4.0 - 5.0 % 1.5 - 2.5 % 0.5 - 1.5 % 0.5 - 1.5 % Catalog Circulation % Decline <17.1%> <23> - <25> % <27> - <29> % <16> - <18> % <19> - <21> % -------------------------------------------------------------------------------
* See the company's 10-K and 10-Q public filings for the definition of comparable stores.
Store Opening and Closing Guidance by Retail Concept Q4 08ACT Q1 09ACT Q2 09GUID FY 09GUID Concept Total Open Close End Open Close End Open Close End Williams-Sonoma 264 1 <2> 263 2 <1> 264 3 <4> * 263 Pottery Barn 204 2 <2> 204 0 0 204 5 <7> * 202 Pottery Barn Kids 95 2 <2> 95 0 <2> 93 2 <4> * 93 West Elm 36 3 0 39 0 0 39 4 <1> 39 Williams-Sonoma Home 10 1 0 11 0 0 11 1 0 11 Outlets 18 0 0 18 0 0 18 0 0 18 Total 627 9 <6> 630 2 <3> 629 15 <16> 626 -------------------------------------------------------------------------------
* FY 09 total store opening and closing numbers for Williams-Sonoma, Pottery Barn and Pottery Barn Kids include 2 stores, 4 stores and 1 store, 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.
Gross Margin
Gross Margin as a Percentage of Net Revenues for Q2 and Fiscal Year Q2 FY 09 GUID 08 ACT 09 GUID 08 ACT GAAP 29.4% - 30.2% 34.0% 31.6% - 32.3% 33.8% Non-GAAP* 29.4% - 30.2% 34.0% 31.6% - 32.3% 33.9% -------------------------------------------------------------------------------
* The non-GAAP gross margin percentages above exclude the impact of unusual business events of 10 basis points in FY 08. See Notes 2 and 6 in Exhibit 1.
Selling, General & Administrative Expenses
SG&A Expenses as a Percentage of Net Revenues for Q2 and Fiscal Year Q2 FY 09 GUID 08 ACT 09 GUID 08 ACT GAAP 32.3% - 32.9% 30.9% 31.8% - 32.2% 32.5% Non-GAAP* 32.3% - 32.9% 32.7% 31.6% - 32.0% 32.3% -------------------------------------------------------------------------------
* The FY 09 non-GAAP SG&A percentages above exclude the projected 20 basis point fiscal year impact of Q1 09 unusual business events. See Note 1 in Exhibit 1. Also excluded are the 180 basis point net benefit of unusual business events in Q2 08 and the 20 basis point net impact of unusual business events in FY 08. See Notes 2 through 6 in Exhibit 1.
Interest /Expense
Interest /Expense for Q2 and Fiscal Year (in millions) Q2 FY 09 GUID 08 ACT 09 GUID 08 ACT Interest /Expense $0.0 - $0.5 $0.2 $1.0 - $2.0 $0.2 -------------------------------------------------------------------------------
Income Taxes
The income tax rate in FY 09 is projected to be in the range of 35% to 41%. This compares to an income tax rate in FY 08 of 28.4%. Throughout the year, we expect that there could be ongoing variability in our quarterly tax rates due to volatility in earnings or losses in addition to taxable events that occur and exposures that are re-evaluated.
Diluted Earnings/ Per Share See Exhibit 1 for quarterly and fiscal year diluted EPS guidance and a reconciliation of GAAP to non-GAAP diluted EPS, which includes and excludes the impact of unusual business events.
Working Capital and Cash Flow
Working Capital and Cash Flow Drivers for Q2 and Fiscal Year (in millions) Q2 FY 09 GUID 08 ACT 09 GUID 08 ACT Merchandise Inventories $530 - $570 $657 $480 - $510 $573 Depreciation and Amortization $36 - $37 $37 $144 - $147 $148 Amortization of DLI $7 - $8 $8 $30 - $31 $31 -------------------------------------------------------------------------------
Capital spending in FY 09 is projected to be in the range of $90 to $100 million, compared to capital spending of $192 million in FY 08.
CONFERENCE CALL AND WEBCAST INFORMATION
Williams-Sonoma, Inc. will host a live conference call today, June 3, 2009, 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 SG&A and non-GAAP SG&A percentages, and non-GAAP diluted EPS. These non-GAAP financial measures exclude the impacts and benefits of early lease termination payments; the gain on our sale of a corporate aircraft; the reversal of performance-based stock compensation expense; the impacts of asset impairment charges for underperforming retail stores and severance and lease termination costs associated with our FY 08 infrastructure cost reduction program. 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 FY 09 diluted earnings per share actual results and guidance on a comparable basis with our quarterly and FY 08 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 five key initiatives in FY 09.
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 Q1 09; recent changes in general economic conditions, and the impact on consumer confidence and consumer spending; new interpretations of or changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; delays in store openings; competition from companies with concepts or products similar to ours; 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; our ability to 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, political, competitive and other conditions beyond our control; 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; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve 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 SEC, including our Annual Report on Form 10-K for the fiscal year ended February 1, 2009. 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 630 stores, seven direct mail catalogs and six e-commerce websites.
WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS) May 3, February 1, May 4, 2009 2009 2008 Assets Current assets Cash and cash equivalents $ 95,704 $ 148,822 $ 26,838 Accounts receivable - net 42,464 37,405 60,413 Merchandise inventories - net 548,137 572,899 713,691 Prepaid catalog expenses 37,214 36,424 54,268 Prepaid expenses 61,596 45,354 42,720 Deferred income taxes 90,390 90,349 91,816 Other assets - net 8,516 9,420 8,404 Total current assets 884,021 940,673 998,150 Property and equipment - net 917,273 942,219 995,734 Non-current deferred income taxes 38,173 36,555 47,032 Other assets 15,002 16,017 18,626 Total assets $ 1,854,469 $ 1,935,464 $ 2,059,542 Liabilities and shareholders' equity Current liabilities Accounts payable $ 130,226 $ 162,362 $ 177,341 Accrued salaries, benefits and other 63,002 75,732 82,505 Customer deposits 186,229 192,209 192,403 Income taxes payable 48 112 16,648 Current portion of long-term debt 14,702 14,702 14,734 Borrowings under line of credit - - 61,000 Other liabilities 19,249 15,620 16,642 Total current liabilities 413,456 460,737 561,273 Deferred rent and lease incentives 258,327 264,672 259,874 Long-term debt 10,231 10,259 11,238 Other long-term obligations 50,040 51,812 56,436 Total liabilities 732,054 787,480 888,821 Shareholders' equity 1,122,415 1,147,984 1,170,721 Total liabilities and shareholders' equity $ 1,854,469 $ 1,935,464 $ 2,059,542 -------------------------------------------------------------------------------
Average Leased Square Store Count Footage Per Store February 1, May 3, May 4, May 3, May 4, Retail Concept 2009 Openings Closings 2009 2008 2009 2008 Williams-Sonoma 264 1 (2) 263 256 6,300 6,200 Pottery Barn 204 2 (2) 204 198 12,900 12,600 Pottery Barn Kids 95 2 (2) 95 94 8,000 7,900 West Elm 36 3 - 39 29 17,300 17,800 Williams-Sonoma Home 10 1 - 11 9 13,200 14,300 Outlets 18 - - 18 17 20,300 20,900 Total 627 9 (6) 630 603 9,900 9,600 Total Store Square Footage February 1, May 3, May 4, 2009 2009 2008 Total store selling square footage 3,828,000 3,876,000 3,624,000 Total store leased square footage 6,148,000 6,237,000 5,808,000 -------------------------------------------------------------------------------
WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THIRTEEN WEEKS ENDED MAY 3, 2009 AND MAY 4, 2008 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST QUARTER 2009 2008 (13 Weeks) (13 Weeks) % of % of $ Revenues $ Revenues Retail revenues $ 357,379 58.4 % $ 433,551 55.5 % Direct-to-customer revenues 254,236 41.6 348,233 44.5 Net revenues 611,615 100.0 781,784 100.0 Total cost of goods sold 427,652 69.9 505,565 64.7 Gross margin 183,963 30.1 276,219 35.3 Selling, general and administrative expenses 213,204 34.9 259,336 33.2 Earnings (loss) from operations (29,241 ) 4.8 16,883 2.2 Interest (income) expense - net 270 - (179 ) - Earnings (loss) before income taxes (29,511 ) 4.8 17,062 2.2 Income tax expense (benefit) (10,806 ) 1.8 6,615 0.8 Net earnings (loss) $ (18,705 ) 3.1 % $ 10,447 1.3 % Earnings (loss) per share: Basic $ (0.18 ) $ 0.10 Diluted $ (0.18 ) $ 0.10 Shares used in calculation of earnings (loss) per share: Basic 105,669 105,400 Diluted 105,669 107,114 -------------------------------------------------------------------------------
WILLIAMS-SONOMA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THIRTEEN WEEKS ENDED MAY 3, 2009 AND MAY 4, 2008 (DOLLARS IN THOUSANDS) 2009 2008 (13 Weeks) (13 Weeks) Cash flows from operating activities Net earnings (loss) $ (18,705 ) $ 10,447 Adjustments to reconcile net earnings (loss) to net cashprovided by (used in) operating activities: Depreciation and amortization 36,319 37,132 Loss on disposal/impairment of assets 4,821 1,413 Amortization of deferred lease incentives (7,815 ) (7,852 ) Deferred income taxes (2,085 ) (2,113 ) Tax benefit from exercise of stock options 16 875 Stock-based compensation expense 5,221 6,556 Other - (416 ) Changes in: Accounts receivable (5,037 ) (13,039 ) Merchandise inventories 25,089 (20,203 ) Prepaid catalog expenses (790 ) 639 Prepaid expenses and other assets (14,345 ) (9,180 ) Accounts payable (26,971 ) (20,546 ) Accrued salaries, benefits and other current and long term liabilities (11,092 ) (15,451 ) Customer deposits (6,079 ) (9,266 ) Deferred rent and lease incentives 1,304 19,996 Income taxes payable (64 ) (67,334 ) Net cash used in operating activities (20,213 ) (88,342 ) Cash flows from investing activities: Purchases of property and equipment (20,636 ) (53,481 ) Other 90 480 Net cash used in investing activities (20,546 ) (53,001 ) Cash flows from financing activities: Net borrowings under line of credit - 61,000 Net proceeds from exercise of stock options 298 (203 ) Excess tax benefit from exercise of stock options - 908 Payment of dividends (12,779 ) (12,210 ) Other (61 ) - Net cash (used in) provided by financing activities (12,542 ) 49,495 Effect of exchange rates on cash and cash equivalents 183 (264 ) Net decrease in cash and cash equivalents (53,118 ) (92,112 ) Cash and cash equivalents at beginning of period 148,822 118,950 Cash and cash equivalents at end of period $ 95,704 $ 26,838 -------------------------------------------------------------------------------
Exhibit 1 Reconciliation of 2009 and 2008 GAAP to Non-GAAP Diluted Earnings/ Per Share (Totals Rounded to the Nearest Cent Per Diluted Share) Q1 09ACT Q2 09GUID Q3 09GUID Q4 09GUID FY 09GUID* 2009 GAAP Diluted EPS* <$0.18> <$0.08> -<$0.14> <$0.02> -<$0.08> $0.27 - $0.36 <$0.11> - $0.07 Impact of Asset Impairment and Early Lease Termination Charges for Underperforming Retail Stores (Note 1) $0.04 - - - $0.04 2009 Non-GAAP Diluted EPS Excluding Unusual Business Events (Note 7)* <$0.14> <$0.08> -<$0.14> <$0.02> -<$0.08> $0.27 - $0.36 <$0.07> - $0.11 Q1 08ACT Q2 08ACT Q3 08ACT Q4 08ACT FY 08ACT** 2008 GAAP Diluted EPS** $0.10 $0.17 <$0.10> $0.12 $0.28 Net Benefit of Early Lease Termination Payment (Note 2) <$0.05> - - - <$0.05> Impact of Asset Impairment Charge for Underperforming Retail Stores (Note 3) $0.00 $0.01 $0.07 $0.12 $0.20 Gain on Sale of Corporate Aircraft (Note 4) - <$0.09> - - <$0.09> Benefit Associated with Reversal of Performance-Based Stock Compensation Expense (Note 5) - - <$0.06> - <$0.06> Impact of Severance and Lease Termination Costs Associated with our Infrastructure Cost Reduction Program (Note 6) - - - $0.08 $0.08 Subtotal of Unusual Business Events** <$0.05> <$0.08> $0.01 $0.19 $0.07 2008 Non-GAAP Diluted EPS Excluding Unusual Business Events (Note 7)** $0.05 $0.09 <$0.10> $0.31 $0.35 * Quarterly diluted EPS 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 rounding to the nearest cent per diluted share, totals may not equal the sum of the line items in the table above. Note 1: Asset Impairment and Early Lease Termination Charges for Underperforming Retail Stores -- During Q1 09, we incurred charges associated with asset impairment and early lease termination expenses for underperforming retail stores, which resulted in an impact to earnings of approximately $0.04 per diluted share. This resulted in a 100 basis point impact to SG&A expenses in Q1 09 and a projected 20 basis point impact to SG&A expenses in FY 09. A service of YellowBrix, Inc.
