Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Gabrielle Rabinovitch, Director of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, Ann. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our earnings press release and this call contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why these non-GAAP financial measures are useful are discussed in our release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2014 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases and SEC filings, including the most recent 10-Q for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our fourth quarter and fiscal 2013 results and our outlook for fiscal 2014.

Thanks, Gabrielle. Good afternoon, and thank you for joining us. On the call with me today are Julie Whalen, our Chief Financial Officer; and Pat Connolly, our Chief Marketing Officer. I am proud to announce Williams-Sonoma, Inc.'s results this afternoon. Williams-Sonoma, Inc. outperformed [indiscernible] this holiday season, gaining market share and demonstrating the structural advantage of our multibrand, multichannel business. Comparable brand revenues grew 10.4% and EPS reached $1.38 for the fourth quarter. Strength in our brands across the retail and direct channels with notable growth in our e-commerce business, in conjunction with disciplined execution, allowed our team to drive record operating results. We achieved these results against the backdrop of a shortened and challenging holiday shopping season. Our fourth quarter completed a year of strong performance for Williams-Sonoma, Inc., with record revenue of $4,388,000,000, record non-GAAP operating income of $455 million and record non-GAAP EPS of $2.84. At the beginning of last year, I outlined 4 key areas of focus. These priorities were to strengthen our brands, lay the foundation for global expansion and new business development, to invest in our supply chain to reduce costs and improve service and to invest in the technologies and infrastructure underlying all these initiatives. In 2013, we executed well against these 4 areas of our strategic plan. Our investments resulted in profitable growth and increased market leadership. We've kept our focus on our customers, the products and services that we offer and the way that we interact with our customers across multiple channels. As such, we have created a differentiated and highly relevant experience. Highlights of our 2013 achievements include: first, the growth in our brands. Comparable brand revenue growth across our businesses in 2013 was 8.8%, on top of 6.1% growth in 2012. Our exclusive products, great design, lifestyle positioning and…

Thank you, Laura, and good afternoon, everyone. Our results in Q4 and fiscal 2013 exceeded our expectations and reinforced the strength of our multibrand, multichannel model. Before I walk you through the results in more detail, let me remind you that 2013 was a 52-week year as compared to 2012, which was a 53-week year. The financial impact in 2013 of the loss of the 53rd week was approximately $70 million of revenues and $0.07 of diluted earnings per share. All revenue and earnings per share growth will be discussed, excluding this impact from the loss of the 53rd week. For the fourth quarter, net revenues grew to $1,466,000,000 or a year-over-year increase of 10%, with comparable brand revenues increasing 10.4%. Net revenues in our direct-to-customer channel, of which approximately 92% came from e-commerce, grew 19% to $706 million or 48% of total company net revenues compared to 45% last year, a 300-basis-point increase. Net revenues in our retail channel grew 2.7% to $760 million. Total company operating margin for the fourth quarter was 14.8%. The 20-basis-point decline off a record operating margin last year was due to our continued investment in our global operations and the loss of the 53rd week. The operating margin in the direct-to-customer channel increased 180 basis points to a record 24.7%, primarily driven by advertising leverage and lower general expenses. The retail channel operating margin decreased 170 basis points to 17.2%, primarily driven by occupancy deleverage from the loss of the 53rd week and the impact from our investments in global expansion, as well as lower selling margins and employment deleverage, including investments in our global initiatives. Corporate and allocated expenses increased 30 basis points to 6% of net revenues, primarily driven by higher employment costs and the deleverage from the loss of the…

[Operator Instructions] We'll take our first question from Daniel Hofkin from William Blair.

Just a couple of questions maybe about the flow of the quarter. December, let's say, versus January, and what you're seeing so far in the beginning of this year, just from a business flow, weather standpoint, if you will. And then just a clarification on your 3-year plan, are you rolling that forward? Or are you saying that inclusive of what you did this past year, as well as what you're expecting for 2014, kind of the 3-year EPS growth that you're targeting?

Thanks, Daniel. This is Laura. So on the Christmas season, the holiday season, it feels like a long time ago already. We're already actually working on holiday '14. But we had a strong holiday performance from the beginning of Black Friday, Cyber Monday, started off strong, gave us insight to what our customers are most focused on and carried through our January. Our brands, all of them in January, are bringing in a new product; and they have been well received by our customers. With that said, the weather is certainly real. I simply don't like talking about the weather because we're in retail, and weather is a variable each season. But it did -- it was worse than it was last year. In February, we did have an unusual amount of our stores closed at more than 7x the number of closures this year as last year. So it affects particularly the bricks-and-mortar channel. We're fortunate to have a developed e-commerce channel. And at this point, we don't expect a lasting impact because the weather usually evens out but it certainly is real. As we look at the whole year, we see a lot of opportunities regardless of weather, and we are building on the successes we saw last Christmas and also the areas where we know we can make improvements. And I'm going to give Julie -- why don't you answer the question on EPS?

Sure. As far as the 3-year outlook, yes, that's reiterated what we already said for the existing 3 years. It's not rolling it out an additional year.

We'll take our next question from Matthew Fassler from Goldman Sachs.

My primary question relates to the comments you made on social as it relates to West Elm. I know that this is a business that reaches out to a somewhat-younger demographic perhaps than your other channels, and perhaps that's why of focusing on it more for social. But can you talk about just how commercial social is for you? Because if so, it's -- you're one of the first to really speak about it as a meaningful driver. And also then talk about what kind of potential you might see for the other brands to capitalize on that channel as a revenue generator.

Matt, this is Pat. I'll comment on that. Thanks for the question. I think West Elm has really built social into the fabric of the brand from the very beginning, and they've won a lot of awards, particularly in their Pinterest category. I think they were awarded 1 of the top 10 sites on Pinterest. But all of the brands really are active there. In fact, Pottery Barn was the first brand ever to meet with Pinterest. We met with them when they were in a tiny garage in Palo Alto and had been working with them on beta projects from the very beginning. And it's a great source of referral traffic, and it helps to expose the brand. And then we know that those people will come back when they're thinking of buying. So the initial conversion may not be as high as, say, a paid search firm because the customer is really coming to the site to discover the brand, and then they come back later when they're in the market. But it's a very important part of what we do, and we have a real working council among all the social media heads of the brands. They get together every month and we share best practices. So we're advancing social across all of our brands.

And is it accretive financially as you work on this in a way that it can be scaled profitably?

We believe it will be, yes.

We'll go next to Matt McGinley from ISI Group.

The first question is on the supply chain and the additional inventory that you took on. Does that normalize as you cycle through the course of the year? You had a big spike in the third quarter. Or do you continue to take on more categories throughout the course of the year? How should I think about that from a free cash flow and a gross margin standpoint? Does that inventory investment ultimately translate that to higher or helping gross margin?

Yes, so there's a couple of things going on there. First, we have -- if they're looking at the balance sheet, there's sort of an artificial step-up because beginning, I think it was Q2 of last year, we started recording inventory earlier in the ownership process to the supply chain. We started consolidating all of our inventory purchases with our Singapore entity for our global procurement, so that than gets sold to third-party entities and to our internal entities around the world. And as a result of that, that's just the timing change. We're taking ownership of that inventory earlier. So when we hit Q2 of this year, that will be anniversaried. As far as the level of inventory that we have on the books outside of that on a comparable basis, we believe that our inventory levels are strategic. They obviously helped drive our Q4 results, and they position us well for entering into 2014. I think you saw that we had a step-up in Q3 and look at our Q4 results. So the biggest drivers of the inventory increase are primarily in our brands fueling our growth, which is Pottery Barn and West Elm, with 15% and 18% comps in the fourth quarter alone. And we also have additional inventory this year that we didn't have last year to support our global expansion and new brands. And across our core brands, the inventory increases really in our top-selling programs. Our inventory trend, it has grown substantially and therefore, it's driving part of this increase. But it's going to help to improve in-stock levels for our future sales. So we think it's very strategic, and any sort of extra inventory that there's a concern about is already anticipated within our guidance for our gross margin.

And my second question here is on the margin progression you had over the course of this year. You had a very good year in terms of margin expansion in DTC, driven by all the improvements that you talked about in the business. And then it was somewhat challenging in retail based on the promotion international rollout. And then, I guess, cycling that 53rd week, would you expect 2014 to have such a profound bifurcation in the margin trends based on higher expense? Or does that margin gap between the 2 segments narrow in 2014?

We don't really provide that kind of guidance by channel, but we do know that the retail channel does drive sales to our direct channel. So depending on where the customer is shopping in a particular time, you're going to see fluctuation in our retail operating margin. And then as you mentioned, there's significant impact to retail operating margin from the upfront costs associated with our global expansion, which will continue into 2014. With that said, we're always after making that retail profitability stronger. So we have long-term plans to improve that. Retail profitability is a complex issue, and the retail channel is integral to our strategy. So there's several things we're looking at. It's very, very important to our e-commerce traffic and building brand equity and, obviously, gets customers the confidence to shop online. So some of the factors that are working in our favor are our exclusive product design, of course; our cost advantages from the in-sourcing of our foreign agents; and our regionalized supply chain. That ensures quick fulfillment to our customers and retail stores while mitigating freight costs. On the flip side, what's working against us is a persistent promotional environment in retail and a high demand for desirable class A mall space and, of course, the fact that we believe in paying our associates for their performance. So we do believe that, over time, we can maintain our operating profitably in our retail channel to keep our stores great. They're really important to us.

We'll go next to Gary Balter with Crédit Suisse.

The one -- if they were -- they were all good, the divisions, but the one that was surprising was the Williams-Sonoma. And you talked, Laura, a little bit about kind of some of the steps you've taken. Could you go into a bit more detail about how that's turning around so well and kind of bit of your outlook for 2014?

Sure. It was a successful holiday season, perhaps the most successful we've had in 5 years. We know that our strategy to bring in more exclusive products and improve our retail execution and to refine our marketing model is working and that we can build on it. And also importantly, we know now that our results are really a function of our execution in the things we do. It doesn't mean we can ignore the competition. There's a lot of it from the biggest online retailer, flash-sale entrant, traditional department stores and the like. We know that if we execute our strategies well, we're going to grow; and we have a lot of exclusive products coming through the pipeline across categories. It's very competitive, so I'm sorry not to share all those exciting things to come with you. So it's both product, but also execution at every level, and especially in our retail stores. I think the last thing I said -- or I'll say about is that we've had much more cohesive marketing, and that makes a big difference. We took the approach of testing and rolling ideas, and we know that not every test -- we knew that not every test would work, but we have had many of them work and we're building on those areas and we're moving forward in a disciplined way and analyzing our results as we progress. And it's an exciting time for the Williams-Sonoma brand. The team is motivated and empowered, and we are really excited about the future and believe that we are going to see gradual and sustained growth over time.

We'll take our next question from Brad Thomas from KeyBanc Capital Markets.

Wanted to just follow up about operating margin in general. I know as part of the 3-year plan that you outlined last year, that as you move further back into the plan, that there would be an opportunity to generate some leverage and some margin expansion. I know in the first half of this year, there will be some unique investments. But how are you thinking about margins as we move through this year and as we look out to even 2015?

Okay, sure. So we've guided our operating margin for the year at the high end to be in line with last year's new record operating margin, and it represents record operating income for our business. Can it be higher? Sure, over time. Right now, we are continuing to invest in the business. It's important to remember that we do plan to drive continued long-term profitable growth by investing in our business both domestically and globally. So we're maintaining significant earnings growth, while investing for the future to fulfill our vision to double the size of our revenues. There's absolutely no structural reason why we can't raise our operating margin as we did in 2013, but we're invested in our business and future growth and we are focused on operating margin dollars, which is going to be growth that's gradual and incremental over time. We're always focused on expanding our operating margin when possible and this will occur, which is factored within our 3-year outlook.

We'll go next to Aram Rubinson from Wolfe Research.

I've got 2, if you can answer them both; if not, one. Amazon is making a change to their Prime membership, whether it'd be taking prices up by some amount that we don't yet know. For a company that's historically gotten, let's say, maybe some flak for charging for shipping as much as you do, do you think that relieves a lot of the pressure or shifts kind of the marketing message that you'll be offering? And the second question has to do around customer metrics. For a lot of companies that are in e-commerce, they talk about new customer growth, cost to acquire a lifetime value. I was wondering if there's any way you could subjectively just give us a range around some of those measures.

Sure. We watch what everyone does. Our mantra on shipping is that it needs to be easy to understand and competitive but also that you can't ignore the difference in our business shipping large-scale furniture into people's homes versus shipping apparel. And we have never believed that free shipping was a good idea in furniture, in particular, because when 2 people come to deliver that sofa to your door, you know that it's not free. And also the customer is very smart in that they will add up the price of the product plus the shipping and compare it to someone who may embed the shipping into the price. And so we look at total price offers, and I think people have to grow into a profit model. A lot of the online players are going to find that ship -- shipping free -- free shipping on large items is a very difficult business model, so it doesn't surprise me. And at the same time, we're very different from Amazon in that we're offering exclusive products in our brands and across all of them, including Williams-Sonoma. We're continuing to differentiate ourselves further from commoditized product that is offered elsewhere, and that's probably the best antidote to this issue of people undercutting prices. I'm going to let Pat answer the customer metric question.

Sure. Thanks, Laura. Aram, great question. I think new customers are absolutely essential to any business, and so we're constantly acquiring new customers. We acquire new customers at a profit. And I think as you point out, some analysts are beginning to write about how e-commerce pure-plays are getting away with reporting rapid growth with little or no earnings. And we actually believe that, ultimately, the greatest stockholder value will come -- will accrue to those companies that can demonstrate both growth and a high rate of earnings. And we started 6 e-commerce businesses here, and all of our e-commerce websites have been profitable within a matter of months while growing rapidly. So we believe you can grow and be profitable at the same time. And as far as -- we're one of the few retailers that actually breaks out and shows their e-commerce operating contribution on their financial statements. So we can do both, we believe.

We have time for one last question from Joe Feldman with Telsey Advisory Group.

Wanted to ask about the store plans. I know it's more focused on West Elm and you mentioned Pottery Barn, too. But how are you thinking about it in light of the strong e-commerce sales? Because my understanding was also that you -- because of the strong e-commerce, maybe you wouldn't need as many stores as once thought years ago. And maybe just if you could talk about the balance between the 2.

Sure. We believe our stores are billboards for our brands and that they are the face of our brands and that the great service and in-store -- the in-store experience really supports our e-commerce sales and makes our customer confident in ordering from us because they've been to our stores and they see their -- our stores in their mind as they place the goods online -- the orders online. We have said before, we have a very disciplined real estate process. It's a constant process of looking at each market as leases come up for renewal. And we -- in some cases, we expand, we move. In other cases, we close the store. And we're constantly testing retail formats in all of our brands. We're always trying to take the experience to a new level, and so you're going to continue to see us do that. And particularly, where there's great landlords with exciting new projects, we want to be part of them because we believe it's key to the customer experience.

And then if I could ask another question, you mentioned on -- with the Pottery Barn brand expanding the in-home decorating part of the business, could you give a little more color on that, like what you guys are thinking and what might be required in terms of staffing and presumably, it's more people to go into homes? Or just if you could give a little more color on that.

Sure. We have been so fortunate to have such a strong field team that has embraced this initiative, and it's -- they're really driving it. They're really rolling out more trainings and more people are being certified. We brought more technology into the stores to help them serve the customers, both in-store and also in the customers' homes. And so we're going to continue to improve the tools we give them, both the technology, but also swatches you see in some of our stores, new design studios that we've put in. And then we're also doing some pretty competitive things with our one-on-one interactions. We -- we are actually -- we've always been very focused on the one-on-one interaction. It'd be incredibly difficult to do because it's a continuous feedback loop really between the database management, customer engagement strategy and execution. And we are really, I think, ahead of what most people can do because while they may have good intention, they don't have the data analytics to know what the customer wants. Simply put, if we know who you are, we can market to you better, and we know who you are.

Got it. Got it. And if I could maybe sneak one more in, same -- similar kind of question. The Williams-Sonoma Home expansion, I guess, what is giving you the confidence there? And maybe you could give more color because I recall a few years ago, you pared it back as separate stores and I know now it's not really stores. But has there been a change that -- or is it the way you're approaching it, the way you're marketing it, maybe what's helping to drive that -- the increase there?

Sure. We have a big aesthetic change. The goods are entirely different. High-end goods, but a much more casual approach to it and really understanding who you're selling to. You're selling to a person who's buying a bigger home, not someone who's paring back. And that aesthetic is very different than what we offered before. We're using our knowledge from our other home furnishings brand to choose the products and also to put together compelling catalogs and then also to optimize the website. Of course, because it's an online business, it's easier to maneuver. And that is the way we've incubated most of our businesses here, I think all of them, is to start online first and to really build the customer base and test new things before we do anything at retail. The reason we believe in it, we know the market is there in -- with the higher-end goods, and we can see through our response rates and our income per book that the customer is really responding. And with every mailing, we are able to add more customers to our help file and expand our reach.

And that concludes our question-and-answer session for today. I will now turn the conference call back over to Ms. Alber for any additional or closing remarks.

Sure. Thank you, all, for joining us this afternoon. We really appreciate your time and your continued support, and we'll speak with you again in May.

Thank you, and that does conclude our conference call for today. We thank you for your participation. You may now disconnect.