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  • Cecile Corral

Soft Accessories a Ray of Hope at Williams-Sonoma

Textiles offered a mixed bag of results for home furnishings retailer Williams-Sonoma Inc. during its first quarter. The category fared well in West Elm and PBteen but performed less successfully in others like Pottery Barn Kids, the company said during its earnings call.

Net profit for the quarter ended May 4 was steeply down 42.5% to $10.4 million from $18.1 million in the same period one year ago. Revenues fell 4.2% to $781.8 million, from $816.1 million.

Pottery Barn itself is finding a comfort zone in "easy update" categories like decorative accessories, pillows, linens and lighting, said Laura Alber, president. "Those happen to be our strongest categories and we've been strategically marketing them and buying into a broader and better designed line there," she said. "That is the highlight of our business … We've been really focused on areas in our business where customer can easily update their home."

A bright spot was PBteen, where "all key merchandising categories saw better-than-expected growth during the quarter, including furniture, textiles and decorative accessories," Alber noted.

Not so at Pottery Barn Kids, which "has been more impacted by the macro economic environment than any of our other brands due to its significant dependence on discretionary categories like textiles and decorative accessories," she said.

Sharon McCollum, evp, coo and cfo, said the company is taking "aggressive action" on inventories at Pottery Barn, resulting in "virtually flat" year-over-year comparisons.

The Pottery Barn division is trying to hold the line on pricing, even as global pressures mount. "What we're doing to combat these hurdles is to really leverage improvements we are making as a result of quality initiatives so that we do not have to increase our price to our customer," Alber said.

The West Elm unit is doing its part by "looking at having strategic vendor partners with our growth of stores and our growth on volumes," said group president Dave DeMattei, who oversees Williams-Sonoma, Williams Sonoma Home and West Elm. "We're able to offset some of those cost pressures with increased quantities, which help in negotiations with our vendors."

Still, DeMattei offered, "Where we can't, we pass on strategically if we think we can absorb it as a brand. In Williams-Sonoma, with Euro pressures, we are passing some of those costs onto our customers, which have affected our inventories." He added, "Of our increase in our inventory, about 60% is coming from price increases and about 40% is coming from mix shifts."

DeMattei noted that sales at West Elm are sustaining "continued momentum" in the furniture and textiles categories.

Direct-to-customer net revenues companywide fell 4.0% to $348.2 million, driven by declining sales in all brands except PBteen and West Elm, the company said. The internet portion increased by 8.7% to $251.5 million — and revealing how print and online work in tandem, the company estimated that, excluding gift-registry sales, 60% of online sales "are driven by customers who recently received a catalog."

On the brick-and-mortar front, corporate retail net revenues were down 4.4% to $433.6 million, reflecting a 9.0% decrease in comp sales. West Elm and Williams-Sonoma Home were the only brands in the retail segment generating year-over-year growth in net revenues. All divisions posted comp decreases — with Pottery Barn down 10.5% and Pottery Barn Kids off 10.9%.

Williams-Sonoma Inc.

Qtr. 5/4 ($millions) 2008 2007 % change
a. Diluted earnings per share in 1Q08 include a $0.05 net benefit related to an incentive payment from a landlord to compensate the company for terminating a store lease prior to its expiration. Excluding this benefit, 1Q08 diluted earnings per share on a non-GAAP basis were $0.05, for a 68.8% decrease year-to-year.
b. Excluding the 20-basis point impact of accelerated depreciation related to the early lease termination (see note a), non-GAAP gross margin expressed as a percentage of net revenues in 1Q08 was 35.5%.
c. Excluding the 120-basis point benefit related to the incentive payment (see notes a, b), non-GAAP SG&A expenses in 1Q08 were 34.4% of net revenues.
Sales $781.8 $816.1 (4.2)%
Oper. Income (EBIT) 16.9 28.4 (40.5)
Net income 10.4 18.1 (42.5)
Per share (diluted) 0.10a 0.16a (37.5)
Average gross margin 35.3%b 37.0%b
SG&A expenses 33.2%c 33.5%c

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