Good day, ladies and gentlemen. Welcome to the Williams-Sonoma Third Quarter 2016 Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Ms. Beth Potillo-Miller, Senior Vice President, Finance and Corporate Treasurer, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, Katherine. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our discussion will contain non-GAAP results and guidance, including non-GAAP EPS and operating margin, which excludes the impact of unusual business events. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press release. During the first and third quarters of 2016, we incurred severance-related organization charges due to the reduction of headcount, primarily in our corporate functions, totaling approximately $13 million or $0.09 per diluted share and $1 million or $0.01 per diluted share, respectively. These charges were recorded as SG&A expense within the unallocated segment. The remainder of the discussion today will reference third quarter results and full year guidance related to EPS and operating margin on a non-GAAP basis, excluding this unusual item. 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 2016 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-K and 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 would now like to turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our third quarter 2016 results.

Good afternoon, and thank you all for joining us today. On the call with me today are Julie Whalen, our Chief Financial Officer; and John Strain, our Chief Digital and Technology Officer. In the third quarter, we delivered revenue growth of 1.1% and earnings per share of $0.79. Growth was fueled by strong year-over-year revenue increases at West Elm; our newer businesses, Rejuvenation and Mark and Graham; and our international company-owned businesses. Comp brand revenues in Williams-Sonoma were essentially flat, up 0.1% with the Pottery Barn brand declining 4.5%. Although the current environment is less certain, we remain focused on what we can control and we are confident that the ongoing progress on our strategic initiative will improve service for our customers and will drive long-term sustainable profitable growth for our shareholders. As we look to the balance of the year, we believe that the customer is resilient and will spend money on the holidays, especially for their home and with brands that they love. And we are entirely focused on delivering a better experience for our customers this holiday season. We continue to make great progress on our customer-centric initiatives, which include supply chain and inventory improvements, innovative products at the best value, marketing strategies to increase new customer acquisition and enhancements of the retail experience. The improvements resulting from these initiatives are the reason that, even with sales not as strong as we'd like, we delivered Q3 earnings at the higher end of our guidance and we delivered this earnings performance without cutting investments in our future growth strategies. And most importantly, these initiatives improve service to our customers. In our supply chain, we made significant progress in our home delivery experience in the third quarter with measurable improvements in pieces per delivery. This was driven by better…

Thank you, Laura, and good afternoon, everyone. Our third quarter results once again reflect our ability to execute against our long-term strategic growth and operational initiatives. And we are pleased that despite a challenging retail environment, the continued success of these initiatives has allowed us to generate year-over-year positive revenue growth, improved gross margins and almost flat operating margins and earnings per share at the high end of our guidance range. For the third quarter, net revenues increased 1.1% to $1,245,000,000 with comparable brand revenues declining 0.4% compared to 4.5% growth last year. Revenue growth was driven by West Elm, our newer businesses and our international company-owned businesses, all of which experienced double-digit year-over-year revenue growth. This strong revenue growth was partially offset by the top-line softness we are seeing particularly across the Pottery Barn brands, which we believe have been most impacted by the overall softening of the retail environment. During the quarter, we did, however, see improved trends across the brands and in Pottery Barn, in particular, we saw sequential improvement across several key categories. And as a result, we believe this is why, in October, our home furnishings brands outperformed the home furnishings industry. In our e-commerce channel, net revenues grew 3.3% to $649 million, driven by the continued growth in West Elm, Williams-Sonoma and Rejuvenation. E-commerce net revenues represented 52.1% of total company net revenues, 110 basis-point increase over last year. Our retail channel net revenues decreased 1.2% to $597 million in the third quarter. Strong growth across West Elm, our international company-owned businesses and Rejuvenation was offset by the declines we saw in the Pottery Barn brands. Gross margins for the third quarter improved 20 basis points year-over-year to 36.8% versus 36.6% last year despite occupancy cost deleverage of 60 basis points to $168 million…

[Operator Instructions] We'll go to Matt Lasser with UBS.

On the Pottery Barn business, can you describe a little bit more by category where you saw the weakness? And how you think the competitive landscape is playing into that? And let me just add a quick follow-up, it sounds like you're going after new customer acquisition, what's been the outcome thus far? Have you been able to be successful with that?

Thanks, Matt. So by category, that really doesn't tell the story as much as it does when you look at what's selling and where we have fatigue. And we're really pleased to see that what we thought would sell is selling. I mean, that sounds like a very simplistic thing but it's a good indication that we're on the right track. And you can see with a brand the size of Pottery Barn that there's a lot of differences of aesthetic and styles that people relate to. There's some core aesthetics and there's emerging aesthetics and so we are very cognizant of keeping our current and loyal customers, who love the brand, top of mind and not changing what they come to the brand for but at the same time, we have an opportunity to attract new customers and we're doing that very carefully by looking at what they're buying and building other things in the future that are in the same aesthetic of what they've already purchased. We also know that there's opportunity to design into lower price points. Price points where we used to be when we started the brand. And so it's a natural place to go to look at things that are smaller in scale, they are still great quality, but that are cheaper than some of the best sellers that we've gotten accustomed selling. Also, just in terms of our stores and the whole experience, we know that new customers are usually attracted to the brand by lower price points. You don't often wake up in the morning and the first time you go to brand, buy a bed. You might go in buy a candle or a decorative item. So the holiday season in particular is a very important time of year to bring new customers in through smaller ticket items. And if you go to our stores, and I hope you do, you'll see that we have a lot of great gifts, we have a beautiful plaid collection and a paisley collection. And we have not just the textiles, we have a lot of scent and home decor in those categories that is both beautiful but also positioned to attract new customers.

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

So I guess, my question, my primary question relates to operating margin in the fourth quarter last year. If I'm not mistaken, your operating margin was around 14%. And so far this year, your margin has been down very mildly, kind of anywhere from 1 to 21 basis points, and kind of in the middle there in the third quarter. In the fourth quarter, your revenue guidance isn't really worse than what you noted in Q3 -- what you experienced in Q3 in terms of comparable brand revenue. But it seems like the implied EBIT margin decline is greater. So if you could please talk about what's leading that to happen? Which line item is more stubborn, whether it's fixed cost or whether it's promotional pressure to get those sales? What's factoring into your thought process there?

Matt, this is Julie. I'll take that. So a couple of things. First of all, when we gave guidance last time from the implied Q4 perspective, it was already implied that margins will be down for the fourth quarter but to walk you kind of through it, there is an impact to the revenue guidance depending on where you believe will come out, in that range, and obviously it causes you to deleverage occupancy and some of the fixed costs more so, but really a couple of things that are in play is the incremental investments in e-marketing, and we also are investing in supply chain labor to better serve our customers this holiday season. As you recall, you have to really attract, train and retain some of the best in this holiday season in order to serve the customer and it's getting more and more competitive to get those people. So we are going for it and so there's a little bit of an investment there. Also, we believe that it's going to be a promotional environment and probably more promotional than it's been. We have seen that the customer is shopping later and later and there's a lot of retailers that haven't had very good results. They've got a lot of extra inventory and they've got to get rid of it in a very short time period. So we were also counting on a little bit of some promotional pressure. Also, though, we still will have the supply chain benefits rolling through. They have less of an impact when it's on our largest quarter. And so we don't have as much of an ability to offset as we have in the past. And so I think those are some of the biggest puts and takes there.

We'll continue on to Christopher Horvers with JPMorgan.

I wanted to follow up on Matt's questions. Talking about the confidence in your sales outlook, you said a few things that perked my interest. So comps deteriorated sequentially from 2Q to 3Q despite an easier compare but yet you're sort of implying that, at the midpoint, it's going to be better. You mentioned that October for the home furnishings brands, which I would assume includes Pottery Barn, outperformed the industry. So what was the industry performance in October? Are you benchmarking against the census retail sales data? And then related to that, you did mention the election, you do have a high income customer base that tends to sit on the coasts. So is it our interpretation that November is off to a choppier start given what's gone on in the world?

Chris, I'll take that, that's Julie. As far as October, the data that just came out showed that it was down, I think, negative 1.7 and that's that NAICS 442, I believe, that is home furnishings industry. And so we specifically called that out in the script, because I think a couple of things. We typically, as you know, don't give color throughout the quarter because we are working on specific initiatives with Pottery Barn and we saw that these trends sequentially improved, so much so that when we saw the results of the home furnishing industry relative to our home furnishings brand and the fact that we outperformed, give us a lot of confidence in the long-term for our Pottery Barn brand. So I thought it was important to tell you that. Secondly, I think you're picking up on the clues that we're saying about the timing of when we're giving guidance. Obviously, there is a -- we believe every retailer is going through, whether they're discussing it or not, there's a little bit of a time period where there are cautious consumers as a result of the election and so it's a difficult time to set guidance. With that said, we also have a little bit of an easier compare year-over-year. And so when you look at Q4 last year, we were at a 0.8 versus last Q3, it was a 4.5. So it's a different hurdle to get over. The way we set the guidance, which I'm sure you guys can do your own math and figure out, is, basically, at the low end of the negative 1 is sort of holding it relatively close to where our 1-year trend is for Q3 and at the high end at 4, it's holding it relatively close, slight improvement to the 2-year trend relative to Q3. And we think at this time, that is the right guidance to provide.

And we'll go to Greg Melich with Evercore ISI.

I had a quick follow-up on that one and my real question was about inventory. Did I get that right, Julie, that your sales in October were better than negative 1.7 or better than positive 1.7?

The industry, in my recollection, is a negative 1.7 so I'm saying that we outperformed the industry in October.

Better than that in the home furnishing brands?

Correct.

Right. So then what I really want to talk about was inventory. Looks like you're down a little over 3% year-over-year. And I know you, Laura, went through a lot of the things you've done on the merchandising front to get positioned for holiday. And I remember from last quarter, you talked about not having enough, I think, opening price point items or maybe not marketing to that enough. Could you help us, give us an update on where we are with that in the context of inventory being less now than it was last year? Are you where you want to be? Is it the right inventory? Is it not enough? Is it -- have we shifted to that [indiscernible]

I would tell you we're never going to be where we want to be because inventory is one of the most difficult things retailers do. We've made a lot of improvements and we still see tons of opportunity in the future. What we've done is we've reduced our overstocks substantially versus last year and that's allowed us to better serve our customers because we can more quickly, efficiently get to what they've purchased versus carrying and storing a bunch of things that aren't selling and that's been really positive. We've also, as you know, regionalized at the same time, which on the one hand makes things more complicated for inventory management. On the other hand it's better for your customer. So we're balancing that. And then at the same time, within each brand there's different strategies and so what I've talked about in terms of lower price points is not really an inventory in-stock opportunity, it's more of mix of what you're carrying and so it's really important in all these home furnishings businesses to have a great combination of considered purchase and also traffic drivers and things that allow customers to have a piece of the brand without spending $2,000. And so in terms of the cash and carry that you see in our stores and the lower ticket, we're in pretty good stock position going into the holidays. There are some pockets of things, as there always will be, it's a high-class problem of where you have oversold and you're chasing inventory. I guess the good news, bad news is that we have quite a few pockets of those in Pottery Barn. The big opportunity for us to better predict those items in the future and these are the things we've been chasing since the beginning of Q3, so we expect to be able to get them in at the very least at the end of Q4, if not the very beginning of Q1 and then once you're in stock, these cycles on these best sellers last longer than they do in apparel so we should see our in-stock go up next year as we get -- as we catch up with these best sellers.

So just to make sure, I've got to write that down, through [ph] inventory, you're comfortable with where you are now with that, but we might see that actually go up a little bit as we get ready for Q1?

That's not really what I was implying.

Okay. So the down 3% in inventory, now that we're there...

I think, you can look at a total number but really, the quality of the inventory is by brand and there's a lot of things going on. We said -- what we said is that we're going to grow inventory slower than sales and who knows how low you can go and be in stock at the same time. But it's not just about taking inventory down, it's also about being in stock.

And our next question comes from Peter Benedict with Robert Baird.

I had a question, just on the fleet optimization efforts that Laura, you had mentioned. Just, can you give us a sense of maybe what really is working in some of these remodels? And what, potentially, could be the pace of remodel effort as you look into next year?

Sure. Like anything else, we're very measured about looking at ROI and so -- in each of our brands I've mentioned new [indiscernible]. So particularly in the brands with a more mature fleet, Williams-Sonoma and Pottery Barn. And so you saw in Williams-Sonoma bring in a new look at Ponce, a new look at South Coast Plaza last year, those worked and that's what all new stores are getting. And then we're doing selective remodels and that's what I mentioned early in my script, where we're really reading the results of those remodels to make sure we get our investment back and we're going to continue through the balance this year and get through holiday and then make an assessment for next year. Same approach for Pottery Barn except we have a bit of a different test going on. We have the full remodel like we did in Corte Madera and some other locations. But then we also have these mini refreshes and we just tried 4 more of those to see if we can't give the stores a bit of a paint job and some other new fixturing pieces and have them look really fresh and new without doing a full remodel. So we're really reading the results too early to come out and say how many we're going to do next year but we're pleased, very pleased with our initial results.

And we'll continue on to Brad Thomas with KeyBanc Capital Markets.

Hoping to ask about international and how that's been affecting profitability of the business and then, well, it may be a little bit early and you might not want to give comments on 2017, any puts, takes you might highlight in terms of investments such as international or supply chain as we think about 2017?

Brad, it's Julie, to give you an update on global and where we are, it grew -- just so you guys know, you'll see it in the Q, obviously, it grew 3.5% in total to about $83 million. We did specifically call out, though, you'll see in the script, that our company-owned, our owned stores and our owned websites did phenomenally well during the quarter. Strong double digits and we continue to see that. And so it's really exciting. From a profitability perspective, at the same time, the loss that we incur on the company-owned stores has come down by half and so we're making considerable progress there. We are profitable in total and have been all year. From a margin perspective, profitability, because there was less franchise revenue, you saw less of an impact on the gross margin but obviously, that is accretive to the op margin so there was an impact on the bottom, but the net result you should take from it is it's going very strong and it's improving profitability as we continue to move through the years. Regarding 2017, yes, we're not prepared today to give any future outlook on '17.

And Dan Binder with Jefferies, please go ahead.

Just wanted to ask you a question on the promotional environment. Obviously, it's been pretty promotional, I was just curious, when you look at what seems to be resonating with customers, are they the same things that were before? How is that changing? And then curious how your friends and family promotion went recently. I saw you had extended it a couple of days.

We haven't seen any pullback in the promotional environment. As Julie said, we think, in fact because of some people having more inventory than they like, that it could get more promotional. The customers are just smart. They're looking for the best value but not at the expense of quality. And we have also tested some different shipping offers because we want to see if they're more price-sensitive to shipping versus total price and we haven't come to any conclusion on that yet. But we know that customers are definitely interested in the best price they can get. And what we feel great about is that our exclusive design capabilities, direct sourcing advantages allows us to deliver outstanding quality at a great value.

If I could just ask a related question, you talked about the merchandise margins only being down slightly. When you look across the brand portfolio, is that the case across each brand? Or is there big differences when you look at each brand?

We don't really give it by brand but I wouldn't say there's much difference across.

We have time for one more question. We'll go to Budd Bugatch with Raymond James.

Just if you could give us an update on Braselton, how that's operating? And maybe what that impact has been to improve deliveries and where you've seen that?

Thanks for the question. Braselton has been a great addition to our company. As Laura said in her script, that it's about 75% full and it's reducing freight costs and, even more importantly, it's getting our goods to our customers 3 to 5 days quicker. So it's been a huge win for our company.

Our team's done a great job there. So while we have the question, I just want to do a shout out to the Atlanta team, Braselton team for doing a wonderful job serving our customers there.

When do you think it will be full? And what do you think it will impact on -- how will it impact margins or how will we see it in the financials?

As we continue to move through 2017, we'll expect it will get a little fuller. Obviously, we don't want to be at 100%. That's not necessarily the target you want, you want to have a little bit capacity room within the DC, so shooting for 85 to 90 or something like that. And we're already seeing the benefits, so obviously as we continue to get a little bit more full with having less freight costs and quicker shipping delivery times, we'll see that benefit continue to grow as we move through 2017.

Thank you. That concludes our question-and-answer session for today. I'll now turn the conference back over to Ms. Alber for any additional or closing remarks.

Well I want to say thank you all for your interest and your support, and as Julie said, happy holidays.

Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again, for your participation.