Williams-Sonoma: Q2 Better than Expected
Cecile Corral -- Home Textiles Today, September 13, 2009
While the second quarter at Williams-Sonoma Inc. generated just a whisper of profi — as well as double-digit declines in revenue and comp store sales — the results were better than expected, especially in merchandise inventories.
"Substantially better-than-expected earnings in the second quarter were primarily driven by stronger-than-anticipated merchandise margins and ongoing cost containment initiatives," said Howard Lester, chairman and ceo. "These results, in addition to a 21% year-over-year decline in merchandise inventories, contributed to a $127 million increase in our cash balance to $165 million. Revenue during the quarter continued to rend at the high end of our expectations — and we continued to focus on the aspects of the business we could control."
Such efforts include the elimination of 1.2 million square feet of distribution capacity and 80,000 square feet of leased office space — both of which are set to be completed by the end of the third quarter.
"These initiatives will reduce future infrastructure pre-tax costs by approximately $13 million annually," Lester said.
The company has also increased its projected permanent store closings by yearend to 16 from nine.
In the second quarter, which ended Aug. 2, earnings fell 98% to $399,000, or 0 cents per share, from $18.4 million, or 17 cents per share in the year-ago period.
Consolidated revenues fell 18% to $672 million. Retail sales decreased 13.6% to $400 million, driven by a 15.3% reduction in comparable store sales and partially offset by a 4.6% year-over-year increase in retail leased square footage, including 16 net new stores. All brands had declining sales during the quarter, with consolidated comps down 15.3%.
Second-quarter comps by retail concept were:
Williams-Sonoma, down 11.0%;Pottery Barn, down 15.9%;Pottery Barn Kids, down 22.3%;Outlets, down 18.2%.
Direct-to-customer sales tumbled 23.7% to $272 million.
Merchandise inventories decreased a better-than-expected $140 million, or 21%, to $517 million. This decrease was across all brands and all categories.
For the first half of the year, total revenues dropped 19.8% to $1.28 billion, with consolidated comps off 18.1%.
Comparable store sales for the 26 weeks by nameplate were:
Williams-Sonoma, down 13.1%;Pottery Barn, down 19.1%;Pottery Barn Kids, down 23.7%;Outlets, down 22.3%.
Among the six nameplates that comprise Williams-Sonoma Inc., PB Teen remained the company's best performer on a two-year trend basis, president Laura Alber told analysts during the company's quarterly conference call. Sales at PB Teen declined at a better-than-expected rate of 22% during second quarter versus a 25% increase last year.
Customers have responded well so far to "new products at great values," she said, and are initially "strongly" accepting the new fall assortment.
To build momentum for both PB Teen and weaker sibling Pottery Barn Kids, the company plans this year to continue testing PB Teen merchandise within two Pottery Barn Kids stores and at a showroom in New York "with the objective of establishing a boutique retail presence for PB Teen and enhancing retail productivity for Pottery Barn Kids," Alber said.
Additionally, the company is expanding PB Teen's assortment to include a wider range of price points "to address consumer sensitivity to value," she added, and is increasing its investment in ecommerce to attract new customers and increase customer interaction.
Pottery Barn Kids' assortment is also being enhanced with more opening price point offerings.
At Pottery Barn, sales during the second quarter were better than expected, down 19% — including a 16% decline in comp store sales.
"We are very encouraged by these results because not only do they demonstrate a sustaining trend of gradual top-line improvement but also an affirmation that our strategies to reinvigorate the business are resonating with our customers," said Alber.
The brand also saw "renewed momentum" in all key categories, including furniture.
Turning to third and fourth quarter outlook, the company is "very encouraged" by the consumer response it is receiving to the new fall merchandise mix as well as to the overall strategies being implemented to help drive business.
A shift in the "value proposition" through more opening price points, category promotions and private label credit card offerings;Differentiated services like interior design, clienteling, and in-store events;A shift in marketing spend away from catalogs and toward e-commerce.
Though the numbers are bracing, Williams-Sonoma was encouraged by recent sales trends to raise its guidance for the year. The company now expects full-year earnings of 19 cents to 31 cents per share compared to previous guidance of a loss of 7 cents to share to earnings of 11 cents per share. Total revenue is expected to range between $2.84 billion and $2.94 billion, with comp declines between 12% to 15%.
"Our revenue projections assume the continuation of the improved sales trend that we have seen thus far this year, and our merchandise margin projections assume substantial improvements over last year's second half performance due to the selling margin benefit associated with lower inventory levels," Lester said.
Looking ahead, Williams-Sonoma Inc. will also be working with M.H. Alshaya Co., its new franchisee in the Middle East, to open the company's first four stores in this market — two in Dubai, United Arab Emirates, and two in Kuwait — in the first half of 2010. The initial units will open under the Pottery Barn and Pottery Barn Kids nameplates.
|Qtr. 8/2 (millions)||2009||2008||%CHANGE|
|Operating Income (EBIT)||0.4||25.4||(98.4)|
|Per share (diluted)||0.0||17.0||(100.0)|
|Average gross margin||32.0%||34.0%||—|
|Operating Income (EBIT)||(28.8)||42.3||—|
|Per share (diluted)||(0.17)||0.27||—|
|Average gross margin||31.1%||34.7%||—|
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