UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 5, 2013.
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-14077
WILLIAMS-SONOMA, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 94-2203880 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 3250 Van Ness Avenue, San Francisco, CA | 94109 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (415) 421-7900
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ü | Accelerated filer | |
| Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü
As of June 2, 2013, 97,183,889 shares of the registrant’s Common Stock were outstanding.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 5, 2013
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
| PAGE | ||||||
| Item 1. | Financial Statements | 2 | ||||
| 2 | ||||||
| 2 | ||||||
| Condensed Consolidated Balance Sheets as of May 5, 2013, February 3, 2013 and April 29, 2012 |
3 | |||||
| 4 | ||||||
| 5 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | ||||
| Item 3. |
18 | |||||
| Item 4. |
19 | |||||
| PART II. OTHER INFORMATION | ||||||
| Item 1. |
19 | |||||
| Item 1A. |
19 | |||||
| Item 2. |
19 | |||||
| Item 3. |
20 | |||||
| Item 4. |
20 | |||||
| Item 5. |
20 | |||||
| Item 6. |
20 | |||||
1
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| Dollars and shares in thousands, except per share amounts | May 5, 2013 |
April 29, 2012 |
||||||
| Net revenues |
$ | 887,808 | $ | 817,614 | ||||
| Cost of goods sold |
553,623 | 508,348 | ||||||
| Gross margin |
334,185 | 309,266 | ||||||
| Selling, general and administrative expenses |
270,402 | 259,943 | ||||||
| Operating income |
63,783 | 49,323 | ||||||
| Interest (income) expense, net |
(189 | ) | (191 | ) | ||||
| Earnings before income taxes |
63,972 | 49,514 | ||||||
| Income taxes |
24,506 | 18,798 | ||||||
| Net earnings |
$ | 39,466 | $ | 30,716 | ||||
| Basic earnings per share |
$ | 0.40 | $ | 0.31 | ||||
| Diluted earnings per share |
$ | 0.40 | $ | 0.30 | ||||
| Shares used in calculation of earnings per share: |
||||||||
| Basic |
97,704 | 100,172 | ||||||
| Diluted |
99,515 | 101,956 | ||||||
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| Dollars in thousands | May 5, 2013 |
April 29, 2012 |
||||||
| Net earnings |
$ | 39,466 | $ | 30,716 | ||||
| Other comprehensive income (loss), net of tax: |
||||||||
| Foreign currency translation adjustment |
(1,348 | ) | 1,073 | |||||
| Change in fair value of derivative financial instruments |
(169 | ) | 0 | |||||
| Comprehensive income |
$ | 37,949 | $ | 31,789 | ||||
See Notes to Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| Dollars and shares in thousands, except per share amounts | May 5, 2013 |
February 3, 2013 |
April 29, 2012 |
|||||||||
| ASSETS |
||||||||||||
| Current assets |
||||||||||||
| Cash and cash equivalents |
$ | 252,536 | $ | 424,555 | $ | 376,464 | ||||||
| Restricted cash |
16,061 | 16,055 | 14,737 | |||||||||
| Accounts receivable, net |
60,667 | 62,985 | 47,688 | |||||||||
| Merchandise inventories, net |
661,541 | 640,024 | 586,270 | |||||||||
| Prepaid catalog expenses |
36,407 | 37,231 | 34,308 | |||||||||
| Prepaid expenses |
52,695 | 26,339 | 32,975 | |||||||||
| Deferred income taxes, net |
99,739 | 99,764 | 91,774 | |||||||||
| Other assets |
9,434 | 9,819 | 8,606 | |||||||||
| Total current assets |
1,189,080 | 1,316,772 | 1,192,822 | |||||||||
| Property and equipment, net |
817,249 | 812,037 | 726,133 | |||||||||
| Non-current deferred income taxes, net |
10,738 | 12,398 | 11,764 | |||||||||
| Other assets, net |
46,152 | 46,472 | 38,847 | |||||||||
| Total assets |
$ | 2,063,219 | $ | 2,187,679 | $ | 1,969,566 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
| Current liabilities |
||||||||||||
| Accounts payable |
$ | 211,086 | $ | 259,162 | $ | 189,660 | ||||||
| Accrued salaries, benefits and other |
84,886 | 120,632 | 77,732 | |||||||||
| Customer deposits |
222,018 | 207,415 | 197,347 | |||||||||
| Income taxes payable |
13,377 | 41,849 | 30,805 | |||||||||
| Current portion of long-term debt |
1,696 | 1,724 | 1,652 | |||||||||
| Other liabilities |
27,207 | 26,345 | 23,510 | |||||||||
| Total current liabilities |
560,270 | 657,127 | 520,706 | |||||||||
| Deferred rent and lease incentives |
172,312 | 171,198 | 179,064 | |||||||||
| Long-term debt |
3,753 | 3,753 | 5,450 | |||||||||
| Other long-term obligations |
44,666 | 46,463 | 48,112 | |||||||||
| Total liabilities |
781,001 | 878,541 | 753,332 | |||||||||
| Commitments and contingencies |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Preferred stock: $.01 par value; 7,500 shares authorized; none issued |
0 | 0 | 0 | |||||||||
| Common stock: $.01 par value; 253,125 shares authorized; 97,309, 97,734 and 99,370 shares issued and outstanding at May 5, 2013, February 3, 2013 and April 29, 2012, respectively |
973 | 977 | 994 | |||||||||
| Additional paid-in capital |
507,793 | 503,616 | 485,893 | |||||||||
| Retained earnings |
761,336 | 790,912 | 715,684 | |||||||||
| Accumulated other comprehensive income |
12,116 | 13,633 | 13,663 | |||||||||
| Total stockholders’ equity |
1,282,218 | 1,309,138 | 1,216,234 | |||||||||
| Total liabilities and stockholders’ equity |
$ | 2,063,219 | $ | 2,187,679 | $ | 1,969,566 | ||||||
See Notes to Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| Dollars in thousands | May 5, 2013 |
April 29, 2012 |
||||||
| Cash flows from operating activities: |
||||||||
| Net earnings |
$ | 39,466 | $ | 30,716 | ||||
| Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
36,609 | 32,794 | ||||||
| Loss on sale/disposal of assets |
360 | 362 | ||||||
| Amortization of deferred lease incentives |
(6,353 | ) | (6,563 | ) | ||||
| Deferred income taxes |
(3,431 | ) | (3,172 | ) | ||||
| Tax benefit from exercise of stock-based awards |
9,186 | 7,668 | ||||||
| Excess tax benefit from exercise of stock-based awards |
(4,047 | ) | (4,152 | ) | ||||
| Stock-based compensation expense |
8,991 | 7,993 | ||||||
| Changes in: |
||||||||
| Accounts receivable |
1,512 | (1,627 | ) | |||||
| Merchandise inventories |
(21,537 | ) | (32,571 | ) | ||||
| Prepaid catalog expenses |
824 | (14 | ) | |||||
| Prepaid expenses and other assets |
(25,863 | ) | (9,695 | ) | ||||
| Accounts payable |
(52,345 | ) | (25,317 | ) | ||||
| Accrued salaries, benefits and other current and long-term liabilities |
(37,028 | ) | (36,135 | ) | ||||
| Customer deposits |
14,691 | 6,827 | ||||||
| Deferred rent and lease incentives |
7,613 | 3,783 | ||||||
| Income taxes payable |
(28,470 | ) | 8,366 | |||||
| Net cash used in operating activities |
(59,822 | ) | (20,737 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(47,444 | ) | (27,819 | ) | ||||
| Proceeds from insurance reimbursement |
760 | 0 | ||||||
| Other |
26 | 34 | ||||||
| Net cash used in investing activities |
(46,658 | ) | (27,785 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Repurchase of common stock |
(41,174 | ) | (61,733 | ) | ||||
| Payment of dividends |
(21,985 | ) | (22,136 | ) | ||||
| Repayments of long-term obligations |
(28 | ) | (171 | ) | ||||
| Proceeds from exercise of stock-based awards |
3,767 | 8,275 | ||||||
| Tax withholdings related to stock-based awards |
(9,384 | ) | (6,866 | ) | ||||
| Excess tax benefit from exercise of stock-based awards |
4,047 | 4,152 | ||||||
| Net cash used in financing activities |
(64,757 | ) | (78,479 | ) | ||||
| Effect of exchange rates on cash and cash equivalents |
(782 | ) | 708 | |||||
| Net decrease in cash and cash equivalents |
(172,019 | ) | (126,293 | ) | ||||
| Cash and cash equivalents at beginning of period |
424,555 | 502,757 | ||||||
| Cash and cash equivalents at end of period |
$ | 252,536 | $ | 376,464 | ||||
See Notes to Condensed Consolidated Financial Statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended May 5, 2013 and April 29, 2012
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of May 5, 2013 and April 29, 2012, the Condensed Consolidated Statements of Earnings for the thirteen weeks then ended, the Condensed Consolidated Statements of Comprehensive Income for the thirteen weeks then ended, and the Condensed Consolidated Statements of Cash Flows for the thirteen weeks then ended have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen weeks then ended. Significant intercompany transactions and accounts have been eliminated. The balance sheet as of February 3, 2013, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2013.
The results of operations for the thirteen weeks ended May 5, 2013 are not necessarily indicative of the operating results of the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2013.
NOTE B. STOCK-BASED COMPENSATION
Equity Award Programs
Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units, deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 25,759,903 shares. As of May 5, 2013, there were 6,128,246 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee Board members of the company or any parent or subsidiary. Annual grants are limited to 1,000,000 shares covered by option awards and 400,000 shares covered by stock awards on a per person basis. All grants of option awards made under the Plan have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards and stock awards granted to employees generally vest over a period of four years. Certain option awards, stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Option and stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member).
Stock-Based Compensation Expense
We measure and record stock-based compensation expense in our Consolidated Financial Statements for all employee stock-based awards using a fair value method. During the thirteen weeks ended May 5, 2013 and April 29, 2012, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $8,991,000 (including $1,341,000 related to
5
the retirement of one of our former brand presidents) and $7,993,000 (including stock-based compensation expense of $3,019,000 related to the retirement of our former Executive Vice President, Chief Operating and Chief Financial Officer), respectively.
Stock Options
The following table summarizes our stock option activity during the thirteen weeks ended May 5, 2013:
| Shares | ||||
| Balance at February 3, 2013 |
428,930 | |||
| Granted |
0 | |||
| Exercised |
(124,102 | ) | ||
| Cancelled |
0 | |||
| Balance at May 5, 2013 (100% vested) |
304,828 | |||
Stock-Settled Stock Appreciation Rights
The following table summarizes our stock-settled stock appreciation right activity during the thirteen weeks ended May 5, 2013:
| Shares | ||||
| Balance at February 3, 2013 |
2,527,784 | |||
| Granted |
0 | |||
| Converted into common stock |
(318,775 | ) | ||
| Cancelled |
(28,775 | ) | ||
| Balance at May 5, 2013 |
2,180,234 | |||
| Vested at May 5, 2013 |
1,488,989 | |||
| Vested plus expected to vest at May 5, 2013 |
1,940,722 | |||
Restricted Stock Units
The following table summarizes our restricted stock unit activity during the thirteen weeks ended May 5, 2013:
| Shares | ||||
| Balance at February 3, 2013 |
2,772,426 | |||
| Granted |
815,705 | |||
| Released |
(260,913 | ) | ||
| Cancelled |
(45,261 | ) | ||
| Balance at May 5, 2013 |
3,281,957 | |||
| Vested plus expected to vest at May 5, 2013 |
2,239,606 | |||
NOTE C. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consist of shares subject to option awards with exercise prices less than or equal to the average market price of our common stock for the period, as well as restricted stock units, to the extent their inclusion would be dilutive.
6
The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:
| Dollars and amounts in thousands, except per share amounts | Net Earnings | Weighted Average Shares |
Earnings Per Share |
|||||||||
| Thirteen weeks ended May 5, 2013 |
||||||||||||
| Basic |
$ | 39,466 | 97,704 | $ | 0.40 | |||||||
| Effect of dilutive stock-based awards |
1,811 | |||||||||||
| Diluted |
$ | 39,466 | 99,515 | $ | 0.40 | |||||||
| Thirteen weeks ended April 29, 2012 |
||||||||||||
| Basic |
$ | 30,716 | 100,172 | $ | 0.31 | |||||||
| Effect of dilutive stock-based awards |
1,784 | |||||||||||
| Diluted |
$ | 30,716 | 101,956 | $ | 0.30 | |||||||
Stock-based awards of 918,000 and 1,664,000 for the thirteen weeks ended May 5, 2013 and April 29, 2012, respectively, were not included in the computation of diluted earnings per share, as their inclusion would be anti-dilutive.
NOTE D. SEGMENT REPORTING
We have two reportable segments, direct-to-customer and retail. The direct-to-customer segment has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Rejuvenation and Mark and Graham) which sell our products through our e-commerce websites and direct-mail catalogs. Our direct-to-customer merchandising concepts are operating segments, which have been aggregated into one reportable segment, direct-to-customer. The retail segment has five merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation) which sell our products through our retail stores. Our retail merchandising concepts are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.
These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.
We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income or expense and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third party service costs, primarily in our corporate systems, corporate facilities and other administrative departments. Unallocated assets include corporate cash and cash equivalents, deferred income taxes, the net book value of corporate facilities and related information systems, and other corporate long-lived assets.
Income tax information by reportable segment has not been included as income taxes are calculated at a company-wide level and are not allocated to each reportable segment.
7
Segment Information
| Dollars in thousands | Direct-to- Customer |
Retail | Unallocated | Total | ||||||||||||
| Thirteen weeks ended May 5, 2013 |
||||||||||||||||
| Net revenues1 |
$ | 419,084 | $ | 468,724 | $ | 0 | $ | 887,808 | ||||||||
| Depreciation and amortization expense |
6,826 | 19,217 | 10,566 | 36,609 | ||||||||||||
| Operating income |
95,941 | 34,016 | (66,174 | ) | 63,783 | |||||||||||
| Assets2 |
417,409 | 905,378 | 740,432 | 2,063,219 | ||||||||||||
| Capital expenditures |
9,706 | 20,722 | 17,016 | 47,444 | ||||||||||||
| Thirteen weeks ended April 29, 2012 |
||||||||||||||||
| Net revenues1 |
$ | 374,407 | $ | 443,207 | $ | 0 | $ | 817,614 | ||||||||
| Depreciation and amortization expense |
5,617 | 18,059 | 9,118 | 32,794 | ||||||||||||
| Operating income |
77,955 | 34,353 | (62,985 | ) | 49,323 | |||||||||||
| Assets2 |
354,624 | 863,558 | 751,384 | 1,969,566 | ||||||||||||
| Capital expenditures |
5,276 | 9,272 | 13,271 | 27,819 | ||||||||||||
| 1 | Includes net revenues of approximately $48.1 million and $30.6 million for the thirteen weeks ended May 5, 2013 and April 29, 2012, respectively, related to our foreign operations. |
| 2 | Includes approximately $54.5 million and $23.9 million of long-term assets as of May 5, 2013 and April 29, 2012, respectively, related to our foreign operations. |
NOTE E. COMMITMENTS AND CONTINGENCIES
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.
NOTE F. STOCK REPURCHASE PROGRAM AND DIVIDEND
Stock Repurchase Program
In March 2013, we announced that our Board of Directors had authorized a new three-year stock repurchase program to purchase up to $750,000,000 of our common stock. During the thirteen weeks ended May 5, 2013, we repurchased 800,882 shares of our common stock at an average cost of $51.41 per share and a total cost of approximately $41,174,000. During the thirteen weeks ended April 29, 2012, we repurchased 1,644,508 shares of our common stock at an average cost of $37.54 per share and a total cost of approximately $61,733,000.
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. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.
Dividend
Our quarterly cash dividend was $0.31 and $0.22 per common share for the thirteen weeks ended May 5, 2013 and April 29, 2012, respectively.
8
NOTE G. DERIVATIVE FINANCIAL INSTRUMENTS
Substantially all of our purchases and sales are denominated in U.S. Dollars, which limits our exposure to foreign currency exchange rate fluctuations. However, we are exposed to market risk from foreign currency exchange risk related to the transactions of our foreign subsidiaries. To mitigate this risk, beginning in April 2013, we began utilizing foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for trading or speculative purposes.
The assets or liabilities associated with the derivative instruments are recorded at fair value in either other current assets or other current liabilities, respectively, within our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as and qualifies for hedge accounting. The foreign currency forward contracts entered into as of May 5, 2013 were designated as cash flow hedges and, therefore, protect us against the variability of forecasted foreign currency cash flows resulting from purchases in non-functional currencies.
Cash Flow Hedges
We enter into forward contracts designated as cash flow hedges for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to twelve months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We recognize derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheet and measure them at fair value. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) in our Condensed Consolidated Statement of Comprehensive Income until the forecasted inventory purchase occurs. Subsequently, as the inventory is sold to the customer, we reclassify the amounts recorded in OCI to cost of goods sold. Changes in fair value of the forward contract related to interest charges or “forward points” are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in other income (expense), net in our Condensed Consolidated Statements of Earnings. As of May 5, 2013, we had foreign currency contracts of this type in place to sell Canadian dollars and buy U.S. dollars totaling $16,100,000. Based on the rates in effect on May 5, 2013, we would expect to reclassify a net loss of approximately $169,000 from OCI to cost of goods sold over the next 12 months. However, we do not expect variability in these rates. There were no hedges outstanding as of April 29, 2012.
Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net in our Condensed Consolidated Statements of Earnings. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and no hedges were designated as ineffective for the thirteen weeks ended May 5, 2013.
The effect of derivative instruments designated as cash flow hedges in our Condensed Consolidated Financial Statements, pre-tax, was as follows:
| Dollars in thousands | Thirteen Weeks Ended May 5, 2013 |
|||
| Net gain (loss) recognized in OCI (a) |
$ | (169 | ) | |
| Net gain (loss) reclassified from OCI into cost of goods sold (a) |
0 | |||
| Net Foreign exchange gain (loss) recognized in other income (expense) (b) |
(13 | ) | ||
| (a) | Effective portion |
| (b) | Amount excluded from assessment of hedge effectiveness |
The fair values of our derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 inputs as defined by the fair value hierarchy described in Note H:
9
Dollars in thousands
| Derivative Assets/(Liabilities) | Balance sheet location | May 5, 2013 | ||||
| Derivatives designated as hedging instruments: |
||||||
| Cash flow foreign currency forward contracts |
Other current assets | $ | 0 | |||
| Cash flow foreign currency forward contracts |
Other current liabilities | (182 | ) | |||
| Total derivatives designated as hedging instruments |
$ | (182 | ) | |||
We did not have any derivative assets or liabilities as of April 29, 2012.
We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.
Amounts recorded within accumulated other comprehensive income (“AOCI”) associated with our derivative instruments were as follows.
| Dollars in thousands | Thirteen Weeks Ended May 5, 2013 |
|||
| AOCI beginning balance amount of gain (loss) |
$ | 0 | ||
| Amounts recognized in OCI before reclassifications |
(169 | ) | ||
| Amounts reclassified from OCI into cost of goods sold |
0 | |||
| AOCI ending balance amount of gain (loss) |
$ | (169 | ) | |
NOTE H. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by the Financial Accounting Standards Board Accounting Standard Codification 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:
| • | Level 1 inputs which include quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and |
| • | Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. |
The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.
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Foreign Currency Derivatives and Hedging Instruments
We use the income approach to value the derivatives using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates, and credit derivative market rates.
The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements. Our policy is to present the fair value of our foreign currency derivatives gross in our Condensed Consolidated Balance Sheet and these instruments are not subject to legal right of offset or other netting arrangements with our counterparties.
There were no transfers between Level 1 and Level 2 categories during the thirteen weeks ended May 5, 2013.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: our expectations regarding the overall economic characteristics and trends of each of our major concepts within each reportable segment; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our expectations regarding our stock repurchase program and dividends; our expectations regarding our cash flow hedges; our expectations regarding our brands as we execute our strategies; the execution of our strategies; our investment in our key long-term initiatives; our focus on product innovation; our expectations regarding investing in our supply chain and in the technologies supporting our key long-term initiatives; the expansion of our global business, including expectations regarding the opening of additional franchised locations, our global e-commerce shipping capabilities, the opening of our stores and e-commerce sites in Australia and expectations regarding the opening of additional stores in Australia and in the United Kingdom; our expectations regarding in-sourcing of our foreign agents and consolidation of our distribution centers; our expectations regarding launching of new businesses and investing in our brand extensions; our focus on enhancing customer service and driving increases in revenue; our beliefs regarding our brands, strategic long-term growth initiatives and future growth and stockholder returns; statements related to cost of goods sold; statements related to selling, general and administrative expenses; our compliance with our financial covenants; our plans to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, purchases of property and equipment, stock repurchases and dividend payments; our belief that our cash on-hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months; our expectations regarding our cash flow; our estimates and assumptions in preparing our condensed consolidated financial statements; our beliefs regarding seasonal patterns associated with the retail and direct-to-customer industries; our expectations regarding demand for our products; and our beliefs regarding guidance, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology.
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The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended February 3, 2013, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.
OVERVIEW
Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Williams-Sonoma Home, Rejuvenation and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 587 stores. We currently operate in the U.S., Canada, and Australia and offer international shipping to customers worldwide. Our catalogs reach customers throughout the U.S. and Australia. Our unaffiliated franchisee operates 24 stores in the Middle East.
The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended May 5, 2013 (“first quarter of fiscal 2013”), as compared to the thirteen weeks ended April 29, 2012 (“first quarter of fiscal 2012”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.
All explanations of changes in operational results are discussed in order of their magnitude.
First Quarter of Fiscal 2013 Financial Results
In the first quarter of fiscal 2013, our net revenues increased 8.6% to $887,808,000, compared to $817,614,000 in the first quarter of fiscal 2012, including a comparable brand revenue increase of 7.2%. Diluted earnings per share in the first quarter of fiscal 2013 increased to $0.40, versus $0.30 in the first quarter of fiscal 2012. During the quarter, we also returned $63,159,000 to our stockholders through stock repurchases and dividends.
Direct-to-customer net revenues in the first quarter of fiscal 2013 increased $44,677,000, or 11.9%, compared to the first quarter of fiscal 2012, with increases across all brands. This growth was primarily led by Pottery Barn, West Elm, Williams-Sonoma, and Pottery Barn Kids. Direct-to-customer net revenues generated 47.2% of our total company net revenues in the first quarter of fiscal 2013 versus 45.8% in the first quarter of fiscal 2012.
Retail net revenues in the first quarter of fiscal 2013 increased $25,517,000, or 5.8%, compared to the first quarter of fiscal 2012, driven primarily by our international franchise operations, Pottery Barn and West Elm, partially offset by a decrease in Williams-Sonoma. Including six net new stores within the first quarter of fiscal 2013, retail leased square footage increased 2.0% from the end of the first quarter of fiscal 2012.
In Pottery Barn, our largest brand (representing approximately 43% of our total company net revenues on an annual basis), comparable brand revenues increased 7.6% in the first quarter compared to the first quarter of fiscal 2012, and we saw particular strength in furniture, textiles and tabletop products. In the Williams-Sonoma brand (which represents approximately 24% of our total company net revenues on an annual basis), comparable brand revenues increased 1.9% compared to the first quarter of fiscal 2012. Product innovation, marketing and customer engagement drove the results in cookware, electrics and tabletop in the first quarter of fiscal 2013. The first of a series of new product introductions also contributed to these results. In Pottery Barn Kids, comparable brand revenues grew by 6.9% in the first quarter compared to the first quarter of fiscal 2012, driven by a positive merchandise response and a stronger in-stock position. In West Elm, comparable brand revenues increased 11.8% on top of 22.1% last year. Brand growth continues to be driven by all categories including furniture, textiles,
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decorative accessories and lighting. In PBteen, comparable brand revenues increased 16.1% in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012, driven by strength in our furniture business and textiles.
First Quarter of Fiscal 2013 Operational Results
During the first quarter of fiscal 2013, we made progress against all of our key long-term initiatives: to grow our existing brands, launch new businesses, and expand globally, all supported by investing in our supply chain and in the technologies supporting these initiatives to further enhance our multi-channel business.
In our global business, we opened our first company-operated retail stores and launched our first fully transactional e-commerce sites in Australia. We also continued the expansion of our franchise operations in the Middle East. We will further expand our retail operations in Australia with an additional West Elm location in Melbourne later this year, and, we are planning to extend our global business into the United Kingdom with the opening of our first West Elm store in London.
In our supply chain, we further in-sourced our foreign agents throughout Asia, and made progress on our planned consolidation of our distribution centers.
In addition, during the first quarter, we continued our investments across a number of initiatives that leverage the Internet and our e-commerce platform. For example, we re-launched our Williams-Sonoma registry, which we believe features significantly improved usability and integration with the e-commerce site. We also implemented several enhancements to improve the customer experience and drive increases in revenue per visitor across all of our brands.
In new business development, we are investing in our brand extensions, West Elm Market, Williams-Sonoma Home, Agrarian, and PBdorm. Additionally, we are making improvements in product lines and marketing in Rejuvenation and our newest brand, Mark and Graham. While these businesses are small, we continue to see growth in all of them.
Results of Operations
NET REVENUES
Net revenues consist of direct-to-customer net revenues and retail net revenues. Direct-to-customer net revenues include sales of merchandise to customers through our e-commerce websites and our catalogs, as well as shipping fees. Retail net revenues include sales of merchandise to customers at our retail stores, as well as shipping fees on any products shipped to our customers’ homes. Shipping fees consist of revenue received from customers for delivery of merchandise to their homes. Revenues are presented net of sales returns and other discounts.
The following table summarizes our net revenues for the first quarter of fiscal 2013 and the first quarter of fiscal 2012:
| Thirteen Weeks Ended | ||||||||||||||||
| Dollars in thousands | May 5, 2013 |
% Total | April 29, 2012 |
% Total | ||||||||||||
| Direct-to-customer net revenues |
$ | 419,084 | 47.2 | % | $ | 374,407 | 45.8 | % | ||||||||
| Retail net revenues |
468,724 | 52.8 | % | 443,207 | 54.2 | % | ||||||||||
| Net revenues |
$ | 887,808 | 100.0 | % | $ | 817,614 | 100.0 | % | ||||||||
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Net revenues in the first quarter of fiscal 2013 increased $70,194,000, or 8.6%, compared to the first quarter of fiscal 2012, with comparable brand revenue growth of 7.2%. These increased net revenues during the first quarter of fiscal 2013 were driven primarily by the Pottery Barn and West Elm brands.
Comparable Brand Revenue Growth
Comparable brand revenue includes retail comparable store sales and direct-to-customer sales, as well as shipping fees, sales returns and other discounts associated with current period sales. Outlet comparable store net revenues are included in their respective brands. Sales related to our international franchised stores have been excluded as these stores are not operated by us. Comparable stores are defined as permanent 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.
Percentages represent changes in comparable brand revenue compared to the same period in the prior year.
| Thirteen Weeks Ended | ||||||||
| Comparable brand revenue growth (decline) | May 5, 2013 |
April 29, 2012 |
||||||
| Pottery Barn |
7.6 | % | 9.1 | % | ||||
| Williams-Sonoma |
1.9 | % | (4.3 | %) | ||||
| Pottery Barn Kids |
6.9 | % | (0.8 | %) | ||||
| West Elm |
11.8 | % | 22.1 | % | ||||
| PBteen |
16.1 | % | (6.0 | %) | ||||
| Total |
7.2 | % | 5.4 | % | ||||
|
DIRECT-TO-CUSTOMER NET REVENUES |
||||||||
| Thirteen Weeks Ended | ||||||||
| Dollars in thousands | May 5, 2013 |
April 29, 2012 |
||||||
| Direct-to-customer net revenues |
$ | 419,084 | $ | 374,407 | ||||
| Direct-to-customer net revenue growth |
11.9 | % | 8.8 | % | ||||
| Direct-to-customer net revenues in the first quarter of fiscal 2013 increased $44,677,000, or 11.9%, compared to the first quarter of fiscal 2012 with increases across all brands. This growth was primarily led by Pottery Barn, West Elm, Williams-Sonoma, and Pottery Barn Kids. Direct-to-customer net revenues generated 47.2% of total Company net revenues in the first quarter of fiscal 2013 versus 45.8% in the first quarter of fiscal 2012.
RETAIL NET REVENUES AND OTHER DATA |
| |||||||
| Thirteen Weeks Ended | ||||||||
| Dollars in thousands | May 5, 2013 |
April 29, 2012 |
||||||
| Retail net revenues |
$ | 468,724 | $ | 443,207 | ||||
| Retail net revenue growth |
5.8 | % | 3.9 | % | ||||
| Number of stores - beginning of year |
581 | 576 | ||||||
| Number of new stores |
7 | 2 | ||||||
| Number of new stores due to remodeling1 |
4 | 1 | ||||||
| Number of closed stores due to remodeling1 |
(1 | ) | (2 | ) | ||||
| Number of permanently closed stores |
(4 | ) | (2 | ) | ||||
| Number of stores - end of period |
587 | 575 | ||||||
| Store selling square footage at period-end |
3,586,000 | 3,522,000 | ||||||
| Store leased square footage (“LSF”) at period-end |
5,840,000 | 5,725,000 | ||||||
1 Remodeled stores are defined as those stores temporarily closed and subsequently reopened during the year due to square footage expansion, store modification or relocation.
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| Store Count | Avg. LSF Per Store | |||||||||||||||||||||||||||
| February 3, 2013 |
Openings | Closings | May 5, 2013 |
April 29, 2012 |
May 5, 2013 |
April 29, 2012 |
||||||||||||||||||||||
| Williams-Sonoma |
253 | 4 | (3 | ) | 254 | 259 | 6,600 | 6,500 | ||||||||||||||||||||
| Pottery Barn |
192 | 4 | (1 | ) | 195 | 193 | 13,800 | 13,900 | ||||||||||||||||||||
| Pottery Barn Kids |
84 | 2 | (1 | ) | 85 | 82 | 8,100 | 8,200 | ||||||||||||||||||||
| West Elm |
48 | 1 | - | 49 | 38 | 14,800 | 16,600 | |||||||||||||||||||||
| Rejuvenation |
4 | - | - | 4 | 3 | 13,200 | 17,200 | |||||||||||||||||||||
| Total |
581 | 11 | (5 | ) | 587 | 575 | 9,900 | 10,000 | ||||||||||||||||||||
Retail net revenues in the first quarter of fiscal 2013 increased $25,517,000, or 5.8%, compared to the first quarter of fiscal 2012, driven primarily by our international franchise operations, Pottery Barn and West Elm, partially offset by a decrease in Williams-Sonoma. Including six new stores within the first quarter of fiscal 2013, retail leased square footage increased 2.0% from the end of the first quarter of fiscal 2012.
COST OF GOODS SOLD
| Thirteen Weeks Ended | ||||||||||||||||
| Dollars in thousands | May 5, 2013 |
% Net Revenues |
April 29, 2012 |
% Net Revenues |
||||||||||||
| Cost of goods sold1 |
$ | 553,623 | 62.4 | % | $ | 508,348 | 62.2 | % | ||||||||
| 1 | Includes total occupancy expenses of $133,005,000 and $125,187,000 for the first quarter of fiscal 2013 and the first quarter of fiscal 2012, respectively. |
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services and shipping materials.
Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third party warehouse management and other distribution-related administrative expenses, are recorded in selling, general and administrative expenses.
Within our reportable segments, the direct-to-customer channel does not incur freight-to-store or store occupancy expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel. However, the direct-to-customer channel incurs higher customer shipping, damage and replacement costs than the retail channel.
First Quarter of Fiscal 2013 vs. First Quarter of Fiscal 2012
Cost of goods sold increased by $45,275,000, or 8.9%, in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. Cost of goods sold as a percentage of net revenues increased to 62.4% in the first quarter of fiscal 2013 from 62.2% in the first quarter of fiscal 2012. This increase was primarily driven by lower selling margins, partially offset by the leverage of fixed occupancy expenses due to increasing net revenues.
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In the direct-to-customer channel, cost of goods sold as a percentage of net revenues decreased 50 basis points in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. This decrease as a percentage of net revenues was primarily driven by improved selling margins, partially offset by an increase in occupancy expenses.
In the retail channel, cost of goods sold as a percentage of net revenues increased 140 basis points in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. This increase as a percentage of net revenues was primarily driven by lower selling margins, partially offset by the leverage of fixed occupancy expenses due to increasing net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| Thirteen Weeks Ended | ||||||||||||||||
| Dollars in thousands | May 5, 2013 |
% Net Revenues |
April 29, 2012 |
% Net Revenues |
||||||||||||
| Selling, general and administrative expenses |
$ | 270,402 | 30.5 | % | $ | 259,943 | 31.8 | % | ||||||||
Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.
We experience differing employment and advertising costs as a percentage of net revenues within the retail and direct-to-customer channels due to their distinct distribution and marketing strategies. Store employment costs represent a greater percentage of retail net revenues than employment costs as a percentage of net revenues within the direct-to-customer channel. However, advertising expenses are higher within the direct-to-customer channel than in the retail channel.
First Quarter of Fiscal 2013 vs. First Quarter of Fiscal 2012
Selling, general and administrative expenses increased by $10,459,000, or 4.0%, in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. Including employee separation charges of $2,932,000, selling, general and administrative expenses as a percentage of net revenues decreased to 30.5% in the first quarter of fiscal 2013 from 31.8% in the first quarter of fiscal 2012 (which included employee separation charges of $6,935,000). This decrease as a percentage of net revenues was primarily driven by lower advertising costs and a reduction in year-over-year employee separation charges.
In the direct-to-customer channel, selling, general and administrative expenses as a percentage of net revenues decreased 160 basis points in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. This decrease was primarily driven by lower advertising costs, partially offset by an increase in other general expenses.
In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreased 90 basis points in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. This decrease was primarily driven by lower employment-related costs.
INCOME TAXES
The effective rate was 38.3% for the first quarter of fiscal 2013 and 38.0% for the first quarter of fiscal 2012.
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LIQUIDITY AND CAPITAL RESOURCES
As of May 5, 2013, we held $252,536,000 in cash and cash equivalent funds, the majority of which are held in money market funds and interest-bearing demand deposit accounts. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.
Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2013, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, purchases of property and equipment, stock repurchases and dividend payments. In addition to the current cash balances on hand, we have a credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit. Prior to December 22, 2016, we may, upon notice to the lenders, request an increase in the credit facility of up to $200,000,000 to provide for a total of $500,000,000 of unsecured revolving credit. During the thirteen weeks ended May 5, 2013 and April 29, 2012, we had no borrowings under the credit facility, and no amounts were outstanding as of May 5, 2013 or April 29, 2012. However, as of May 5, 2013, $4,970,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. Additionally, as of May 5, 2013, we had three unsecured letter of credit reimbursement facilities for a total of $90,000,000, of which an aggregate of $12,137,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title. We are currently in compliance with all of our financial covenants and, based on our current projections, we expect to remain in compliance throughout fiscal 2013. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.
Cash Flows from Operating Activities
For the first quarter of fiscal 2013, net cash used in operating activities was $59,822,000 compared to $20,737,000 for the first quarter of fiscal 2012. For the first quarter of fiscal 2013, net cash used in operating activities was primarily attributable to a decrease in accounts payable, accrued salaries, benefits and other expenses, and income taxes payable due to the timing of payments, as well as an increase in prepaid expenses and merchandise inventories. This represents an increase in net cash used compared to the first quarter of fiscal 2012 primarily resulting from a decrease in income taxes payable and accounts payable due to the timing of payments.
Cash Flows from Investing Activities
For the first quarter of fiscal 2013, net cash used in investing activities was $46,658,000 compared to $27,785,000 for the first quarter of fiscal 2012. Net cash used compared to the first quarter of fiscal 2012 increased primarily due to an increase in purchases of property and equipment.
Cash Flows from Financing Activities
For the first quarter of fiscal 2013, net cash used in financing activities was $64,757,000 compared to $78,479,000 for the first quarter of fiscal 2012. For the first quarter of fiscal 2013, net cash used in financing activities was primarily attributable to the repurchase of common stock and the payment of dividends. Net cash used compared to the first quarter of fiscal 2012 decreased primarily due to a decrease in our repurchase of common stock.
Stock Repurchase Program and Dividend
See Note F to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividend, within Item 1 of this Quarterly Report on Form 10-Q for further information.
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Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ significantly from these estimates. During the first quarter of fiscal 2013, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended February 3, 2013.
Seasonality
Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In anticipation of our peak season, we hire a substantial number of additional temporary employees in our retail stores, customer care centers and distribution centers, and incur significant fixed catalog production and mailing costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rates, including the devaluation of the U.S. dollar, and the effects of uncertain economic forces which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
As of May 5, 2013, our line of credit facility was the only instrument we held with a variable interest rate which could, if drawn upon, subject us to risks associated with changes in that interest rate. As of May 5, 2013, there were no amounts outstanding under our credit facility.
In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of May 5, 2013, our investments, made primarily in money market funds and interest-bearing demand deposit accounts, are stated at cost and approximate their fair values.
Foreign Currency Risks
We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 3% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any currency risks related to these international purchase transactions were not significant to us during the first quarter of fiscal 2013 or the first quarter of fiscal 2012. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.
In addition, our retail stores in Canada and Australia, and our limited operations in Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk and, as such, these exchange rate fluctuations have not been material to us in the past. However, as we continue to expand globally, we are exposed to foreign currency exchange risk related to the transactions of our
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foreign subsidiaries. As a result, to mitigate this risk going forward, we began utilizing foreign currency forward contracts in accordance with our risk management policies beginning in April 2013 (see Note G to our Condensed Consolidated Financial Statements).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of May 5, 2013, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Information required by this Item is contained in Note E to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.
See Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 3, 2013 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information as of May 5, 2013 with respect to shares of common stock we repurchased under our repurchase programs during the first quarter of fiscal 2013. For additional information, please see Note F to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.
| Fiscal period | Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of a Publicly Announced Program |
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program |
||||||||||||
| February 4, 2013 to March 3, 2013 |
0 | $ 0.00 | 0 | $ 750,496,000 | ||||||||||||
| March 4, 2013 to March 31, 2013 |
195,317 | $ 50.78 | 195,317 | $ 740,576,984 | ||||||||||||
| April 1, 2013 to May 5, 2013 |
605,565 | $ 51.61 | 605,565 | $ 709,322,462 | ||||||||||||
| Total |
800,882 | $ 51.41 | 800,882 | $ 709,322,462 | ||||||||||||
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During the first quarter of fiscal 2013, we repurchased 10,002 shares remaining under our repurchase program announced in January 2012 at an average cost of $49.59 per share and a total cost of approximately $496,000. As of May 5, 2013, there were no amounts remaining for repurchase under this program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| (a) | Exhibits |
| Exhibit Number |
Exhibit Description | |
| 10.1+ | Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants to Non-Employee Directors | |
| 10.2+ | Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants to Employees | |
| 10.3+ | Separation Agreement and General Release with Richard Harvey, dated May 3, 2013 | |
| 31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |
| 31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | |
| 32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| + | Indicates a management contract or compensatory plan or arrangement |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WILLIAMS-SONOMA, INC. | ||
| By: | /s/ Julie P. Whalen | |
| Julie P. Whalen | ||
| Chief Financial Officer | ||
Date: June 14, 2013
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