Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's Williams-Sonoma, Inc. Third Quarter 2019 Earnings Call. [Operator Instructions] I'd like to remind everyone this call is being recorded. And I'd now like to turn the floor over to Brian Yee, Senior Vice President of Corporate Finance and Treasurer. Please go ahead, sir. Brian Yee;Senior Vice President of Corporate Finance and Treasurer: Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures. 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 Exhibit 1 of our press release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which addresses the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2019 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 release and SEC filings, including the most recent 10-K 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.

Thank you, Brian, and good afternoon, everyone. Also on the call with me today are Julie Whalen, our Chief Financial Officer; Felix Carbullido, our Chief Marketing Officer; and Yasir Anwar, our Chief Technology Officer. Q3 marks another quarter of strong performance. Comparable revenues accelerated to 5.5%, operating margins held flat to last year despite increased tariff headwinds and EPS grew 7.4%. Our results and continued success relative to the industry reflects that our strong value proposition of high-quality, design-led, sustainable products is resonating with our customers. In a fragmented home furnishings industry, it is hard to overstate how important it has been for us to continually evolve to stay ahead of the pack, remained at the forefront of driving profitable growth. Importantly, our digital-first model is a key component of our success. While we continue to innovate the experience in our stores, our revenue growth was led by e-commerce at 9%, reaching almost 57% of revenues. Highlights from the brands include West Elm, which led our performance with a 14.1% comp on top of an 8.3% comp last year. We've also had -- continued the resurgence of growth across our Pottery Barn brands. We also had double-digit increases in our emerging brands, Rejuvenation and Mark and Graham. And despite a negative comp, we improved profitability in the Williams-Sonoma brand. Key to driving results across all our businesses is our increased focus on leveraging the strength of our portfolio through cross-brand initiatives, like our growing Business-to-Business division, our loyalty program and our in-home design services. We are optimistic about the future and excited to serve and inspire our customers with outstanding service and products that will build a deeper connection to our brands. Before I discuss our third quarter performance by brand, I'd like to talk about the effectiveness of our…

Thank you, Laura, and good afternoon, everyone. We are pleased to report another quarter of strong results with profitable revenue growth exceeding expectations, including e-commerce revenues growing to an all-time high. We delivered sequentially improving gross margins, another quarter of operating income growth and operating margin stabilization as well as inventory growth below sales growth, all despite incremental China tariffs during the quarter. These results reflect the ongoing success of our growth and operational initiatives that we have seen all year and further demonstrate our ability to deliver upon our long-term commitments. During the third quarter, we generated net revenues of $1,442 million for a year-over-year increase of 6.3%. Comparable brand revenues grew 5.5% on top of 3.1% last year. Growth was led by e-commerce, growing 9.3% to a record high of almost 57% of total revenues. By brand, we saw another quarter of outperformance in the West Elm brand with a 14.1% comp, continued strength across the Pottery Barn brands, including Pottery Barn at a 3.4% comp and the Kids and Teen businesses accelerating to a 4.0% comp, another quarter of double-digit growth for Rejuvenation and Mark and Graham combined, as well as another solid quarter of growth in our international operations of 9.2%. Gross margin for the third quarter was 36% compared to 36.5% last year. The gross margin deleverage of 50 basis points was driven by the incremental impact from the China tariffs as well as higher shipping costs, primarily from a higher mix of furniture sales, which is more expensive to ship, partially offset by occupancy leverage. Despite the tariff impact almost doubling from the second quarter, our margins sequentially improved because of the continued success we are seeing from all of our mitigation efforts and the overall strength of our business, allowing us to further…

[Operator Instructions] First, from Barclays, we have Adrienne Yih.

Laura, my first question is about, one of your pure-play competitors, Wayfair, they spoke on their call about when the tariffs came in, and since they don't carry inventory, they had a pricing disruption that delayed the consumer behavior, the purchasing behavior. I'm wondering if you've seen any of that. Seems like not. But if you could talk about that. And then secondarily, kind of on a longer-term basis, now that Mark and Graham and Rejuvenation are double-digit kind of growth, what are the long-term plans for that? And then, Julie, really quickly, in terms of kind of helping us with some tariff impact as we roll into 2020, can you help us kind of think about what percentage will be sourced from China. And any impact? How long your current stock of inventory, the pre-tariff inventory can carry you into 2020?

Sure. Thanks, Adrienne. We have not seen any delayed purchasing from our customers. We have very strong demand, and it was very consistent through the quarter, and it's continuing. So I haven't noticed that. In terms of Mark and Graham and Rejuvenation, all of our brands work together in a symbiotic way to serve customers in life stages and lifestyles. And Rejuvenation has a very specific focus on house parts and hardwired lighting. And we know that remodeling homes and that people's love for their homes is not waning, and we're seeing great growth because we sit in a very unique place with this high-quality custom-configured lighting. And it's very difficult. I know many of you have probably done remodels of rooms and to match all the finishes in a room, even from a single retailer, can be tricky and we make it all -- we finish it all, I should say, in Portland. So all the finishes match perfectly. And we'll -- so we continue to see the growth. We're seeing it both in the stores, which are comping nicely and online. We're debating a couple more stores in key locations, but we don't think that we also -- we don't have to open stores to continue this growth. There's a lot of natural growth and natural category growth in Rejuvenation. Mark and Graham really leverages our strong personalization techniques that we have in the company. And it's, again, a differentiated way for a customer to shop for a gift. I mean nothing like giving someone something for the holidays that has their name on it. It really shows that you thought of them. And so we see both of them continuing to grow and be sizeable. And they're both producing very profitable bottom lines. So they're helping us with our EPS, and they will continue to expand and leverage the base that we've built on the foundation of the company.

And Adrienne, this is Julie. Regarding the tariff impact. I mean obviously, our next call, we'll go through a lot more details of the puts and takes with 2020 in our guidance. But certainly, at a high level, we remain committed regardless of tariffs to our long-term commitment to hold op margins and operating income relatively in line with revenue growth. So therefore, operating margin stability regardless of the tariffs. But from a -- as we roll into 2020, to give you directionally some information, I mean, obviously, the first half will have more pressure than the back half because a lot of the tariffs came in towards the back half of the year. However, on the flip side, we're also going to be resourcing more next year. So we've said externally that we plan to get out of about half of our exposure in China by the end of next year. So we're halfway there to that commitment. And so there'll be more that's resourced next year. But what I would say is that I think, you could see that we've done an incredible job of offsetting this tariff exposure. And this quarter, in particular, is a great example of that when you look at sequentially improving gross margins with almost double the tariff impact. And we've done that with strong health of our business and our ability to pull back on promotions and all of this resourcing, cost negotiations, cost reductions through our P&L. We've been working on this for a long time. And so I would say that's going to be helpful for us for next year. As far as the inventory side of things, and maybe I didn't understand your question, but ultimately, just about all of the tariffs that come into play at this point for us, except for the List 4b tariffs, which are currently scheduled, we'll see, but for December 15. And so that's really the incremental inventory impact if you will. Everything else has already gotten the tariff in it. So there's nothing that we can really pull ahead from that perspective.

[Operator Instructions] Moving on, we will hear from Kate McShane with Goldman Sachs.

My question is centered around gross margin. Just wondering if you could help us quantify, Julie, some of the headwinds you saw during the quarter. I noticed, too, that you didn't call out B2B as one of the headwinds to gross margin. So I wondered if you could address that, and just how we should be thinking about gross margins for Q4.

Sure. So from a gross margin perspective to kind of walk you through it, they basically came down 50 basis points, which is a 60 basis point improvement from the second quarter despite having double the impact from the China tariffs. And so we were pleased to see that with the fact that we had accelerating operating margin leverage to 70 basis points that, that helped offset it in addition to the fact that we were able to, given the strength of our business, as I said earlier, pull off of promotions that basically offset entirely the tariffs. So if you back out, to your point, there is some B2B exposure. It wasn't as significant relative to the total, but there was some B2B exposure in our gross margin. Of course, that's accretive to our op margin. But if you back sort of those things out and some onetime things, you get to a pure merch margin that is basically flat despite the incremental tariffs. As far as Q4 going forward, obviously, we don't provide details necessarily at the gross margin and quarterly gross margin line, but directionally, it's another quarter that we have incremental tariffs, to be honest. So with the List 4a tariffs came in towards the end of this quarter and then we have potentially the list 4b tariffs that are coming in December 15. So it's another quarter of absorbing incremental tariffs. But on the flip side, given the success we've had in this quarter, we feel really good about our ability to cover that. And so we're, again, committed to the bottom line with op margins stabilizing, operating income growth in line with revenue growth. And so if there's pressure on the gross margin like we've done all year, we will offset it with other cost reduction opportunities within SG&A.

And next question comes from Steve Forbes with Guggenheim Securities.

I wanted to focus on -- sorry, expense leverage, given the sequential moderation, right? You talked about the improvement there in gross, which is certainly a positive. But if we look at expenses, the leverage, right, it looked like it moderated. So I don't know if there were certain costs that hit during the quarter? Or if you could just remind us, right, as we model the -- model forward how much the corporate realignment helped you on the leverage line item and/or whether you're still leveraging store-level payroll given the strong comp performance?

So we definitely saw a considerable leverage again within the employment line. So certainly, the -- unfortunately or fortunately, the reduction in force in the beginning of the year is certainly helping us as we move through. We're definitely seeing leverage from a store perspective as well. The difference sequentially is simply -- of course, by quarter-by-quarter, the leverage -- the amount of leverage is going to fluctuate for many reasons. But relative to last quarter, the reason why it's a little bit less leverage is because of 2 things. One, we made some more investments on the advertising side, even though advertising leverage, it didn't leverage as much as the second quarter, and I'll let Felix talk about it in a second. And then secondly, we had a state sales tax settlement that happened during the quarter that wasn't there last year or in the second quarter. So both of those sort of put pressure, if you will, on a lower leverage within SG&A. But we're really proud that we've been able to, with our cost containment initiatives, maintain this leverage as we move throughout the year, even though it's going to vary by quarter. Felix, you want to talk about our advertising?

Yes, absolutely. As Julie said, for the third quarter in a row, we leveraged our marketing spend. And our customer count, which from a longer-term perspective, we recognize that's what fuels our growth in the long term. So introducing new customers, retaining happy customers is still our #1 priority. And where we see efficient ROI, we will spend. That said, as Julie said, given the ongoing challenge of the tariffs, we will find efficiencies. We've taken all of our online media buying in-house. It allows us to better leverage costs across the digital ecosystem. We have a cross-brand learning agenda, a learning agenda with our 7 brands, which allows us to test and learn quickly on 1 brand and then roll it to the others when we see the return on investment. And finally, we -- for 25-plus years, we've been focused on performance marketing because of our catalog days. We've had a continuous improvement in investment in customer and marketing analytics that gives us the confidence to spend when we see the right return on investment.

Then next from Telsey Advisory Group, we have Cristina Fernández.

On the Williams-Sonoma brand, can you talk about some of the new units that's coming in, in the fourth quarter that gives you confidence that you can get a positive comp? And also, a couple of department stores have talked about incremental promotions on house worth. Did you feel like that have an -- that had an impact on that brand during the quarter?

Sure. Thank you for the question. In terms of things that we're bringing in, we have -- we've seen some strength in some categories that flex up during the holidays, and cookware continues to be quite strong, especially with our exclusive launches, our Le Creuset Star Wars collection, which is great. That sells in the fourth quarter. We also see continued momentum in our WS branded, and that is going to be something that we continue to tick up as a percent of total. We've also been working on a better marketing strategy so that we can drive double-digit traffic growth online, which is really key to the holiday time period, and we have tested it and are on track to execute that, and we funded it through catalog cuts. We also really realized in a market where there is a lot of competition, it is important for us to better describe and communicate why we are different and what products are different. And so you're going to see us continue to pull back on promos and the promo marketing so we can tell better lifestyle stories. And you're going to notice that in the e-mail and also on our sites. And furthermore, in terms of the whole model, we believe that as we continue to focus on bigger stories and tell them better, we're going to be able to improve our margins and improve sales because we're not so over assorted.

And then as a follow-up, on the tariffs, so List 3 tariffs didn't go to 30 from 25 as had been indicated in the last quarter. And then if List 4b tariffs are delayed, how should you think about that benefit of reinvesting it or falling to the bottom line?

Julie, would you like to...

Sure. So List 4b, as you mentioned, if it doesn't go through, it was supposed to go through December 15. And so by the time we receive goods into our distribution centers and ultimately sell it, it's a relatively small impact to the fourth quarter. For us, if it were to get lifted and it depends on the fact and circumstances, does it get repealed, 4a and all these other ones that are already in place, who knows? But based on 4b alone, if that one didn't go into play, it wouldn't be significant for us for the fourth quarter, but certainly, it takes pressure off of next year.

And then moving on, we'll take our next question from Chuck Grom with Gordon Haskett.

Can you just maybe take a step back and -- how should we think about the health of your business? Only because most of your banners saw a little bit of a slowdown on the stacks. Just wondering if you're still feeling confident? And then the full year comp range, 3.5% to 6%, is pretty -- implies a pretty big or wide range here for the fourth quarter. Just wondering if you could help us narrow that range a little bit? And then on B2B, I just wanted to make sure I heard you correctly that, that was about 100 basis points of comp benefit to the third quarter. And in my understanding, that can be lumpy at times. But how should we think about that going forward?

So from a B2B perspective, yes, it came in about the same this quarter, about almost 100 basis points of our comp growth, but that could be lumpy. I mean again, it depends on the size of the deals and the timing of the deals, and so we're just thrilled to see again that it was a significant contributor to our results from a comp perspective. As far as how we're feeling? So what I would say is, we feel great about the strength that we're seeing in our business. We are not seeing any signs of a slowdown as we've entered the fourth quarter. We remain confident in our long-term ability to outperform and take market share. Our fiscal year guidance at the high end is in line with our outperformance we have seen year-to-date with strong top line growth of the 5.7% as I mentioned and double-digit EPS growth. As far as your questions on the implied fourth quarter guidance in a wider range, I really wouldn't read anything into that. We have simply provided fiscal year guidance where, given the strength of our business, we raised the low end of our guidance ranges for the third time this year, despite absorbing another quarter of incremental China tariffs, which again remind everybody we're going to have a full quarter now of the List 4a tariffs and the addition of the planned implementation of List 4b tariffs. So it's another quarter of incremental tariffs. But we believe this guidance reflects the range of outcomes that are possible and, obviously, with the mixed retail results that we're seeing out there, we think these guidance ranges are appropriate at the time. But at the end of the day, we remain confident in the growth and operational initiatives that we have been executing against this year that has driven our outperformance all year and will allow us to deliver long-term market share gains.

And KPIs are very strong, Chuck, including customer counts, customer retention. The digital traffic to our websites, as I said earlier, is double digit, which is very good. Retail is strong. We're well set up. We're set in the stores, we've been out, we've seen them. They look great. And we're operationally ready for the compressed calendar. So we know that there's some opportunity with the last year compares in Q4. Pottery Barn was flattish last year, and it's a big -- it's a big upside for us this year because we continue to see increasing momentum in Pottery Barn. And remember that as we grow furniture, our net comp, which is the one that we publish, often lags demand comp. So that makes us even more confident as we have seen demand comps continue to grow in Pottery Barn and some of our other furniture-based brands. So there's a lot of good news here. We also -- because last Q4 wasn't as robust as other quarters, we have the opportunity not just to drive incremental sales, but also to drive increased margins because we had a lot of plans and promotional levels last year that we are hoping not to be -- not to comp, and that could give us upside as well. So I'd say it's exactly what Julie said, we're set up extremely well. KPIs prove it. Macro backdrop is healthy, and we have opportunity on the 2 year.

Okay, great. And just one quick one. Julie, you did a great job unpacking the gross margin for us. Just wondering if you could help us quantify the tariff headwinds, specifically in the third quarter, I guess, relative to what it was in the second quarter.

I'm going to take that one since she didn't let me take other. I'll just say that we've assumed the worst, okay? So we continue to assume the worst. All the tariffs go into play. What we haven't assumed is that they make them worse yet. But the ones that have been mentioned, every time they mention them, we double down our plans to offset them. So that's what's in as we think about the end of this year and next year. So obviously, there would be some upside if that didn't happen, if any of them go back, of course. But you be -- who can judge what's going to happen here. It's impossible. And to overthink it, I think, is a waste of time. We're just prepared for it. We're not running all these models all the time because they change daily, hourly, as we all know. But I think we're better prepared for it than most that we're evidencing right now that we're covering it despite them increasing.

Next question will come from Chris Horvers with JPMorgan.

So 2 questions. You mentioned December last year, obviously, the stock market dropped pretty sharply, and it seems like some of your peers at the high end saw a pretty big impact on that. So did you see that in your business, the impact of the market in terms of trends? And then the second question is, you did mention demand comp. Last year, you talked about demand comp -- actual comp lagging demand comp by 150 basis points. That seems like an easy compare there? Is that something that helped comps overall? And how would you look at that?

So on the demand comp. So our furniture business is our fastest-growing business. And as you know, part of our tariff mitigation was to bring some of the upholstery back from China to America. And as a result, that upholstery is made to order, it is not stocked. So that is actually at work right now different from last year as part of our tariff mitigation, which means that when both of those things happen, you're going to continue to see this lag. And it's just the reality of a growing furniture business that's made to order. Julie, do you want to talk about the high end last year?

Yes, I don't think we saw as much as others have reported, the correlation between the stock market impact. We certainly had an impact in our results, but it wasn't as significant as others have said.

We could have done better last year. I mean last year, you remember the comps, and they were -- they were pretty flattish, except for West Elm.

And next from Evercore ISI, we have Oliver Wintermantel.

Julie, you mentioned e-comm grew about 9% in the quarter. Could you remind us or could you tell us what it grew in the first half? And if it accelerated, where the acceleration came from? And then just to follow up to the B2B question quickly. Which -- when you said it helped comp by 100 basis points, what line item would that hit? Is that West Elm? Is that Pottery Barn? Maybe a little bit more detail where that actually is helping?

Sure. From an e-commerce perspective, it's been holding relatively around that spot all year long. So we're pleased to see that, that strong growth is continuing as we move throughout the year. And from a B2B perspective, it's definitely across-brand. I would say it's predominantly in West Elm and in Pottery Barn, but it's across the brands.

And moving on from UBS, we have Michael Lasser.

A couple of part questions, but I hope you don't mind. First, as you look at the comp and you factor in like-for-like price increases and more full price selling because of less discounting, how much did those 2 factors contribute to the comp in the period?

That wasn't significant. Certainly, we saw higher AURs, but it wasn't the main driver of that. A lot of the big driver of that is the fact that we're selling just more furniture period. And more of the B2B operations is obviously more finished furniture driven as well.

And just remember, all of the strategy we've put into place to have the #1 furniture supply chain and then to also help people furnish their homes and make good decisions about what works together. And then our in-store design crew and Outward planner, all those things are coming together to drive that furniture, which is a much higher ticket than bedding or deck.

And as we think about the Pottery Barn comp, should we assume that between PB Apartment, the expansion of the marketplace and the B2B, those were the 3 contributors to the comp growth during the period? Then I have one last part.

No. Those were big contributors, but I'll say, in this quarter, in particular, we launched a lot of new furniture that is off to a very strong start. And I've said this before, and I think you've all seen it, that when we get something that's new and it works, we have a long time to optimize that, add pieces to it. So for example, if you start with a coffee table, you can add a dining table and a bedroom collection, and so it's great to see those collections be so strong because that gives us a really strong foundation to build on. And that's not just in these new businesses. That's in the foundation and is what we're really excited about.

And my last question is as we calibrate our models for 2020, how should we think about the outward expenses that you'll be excluding from the P&L? Will they -- will you include any of that? Or -- and will they get larger than they were this year?

No. So what we have said is that after this year, the Outward -- the operations from Outward will now be included within our P&L for 2020. The pieces that are associated with the acquisition of will continue until that's done, which is about another 2 years. And so you can square root the math. I think if you look at our Ks or Qs, there is some information in there for you to be able to determine how much is associated with the acquisition, and then you can come up with your estimates as to how much of that will be absorbed next year.

What's also going to be great is that, by the time we reach next year, all the key building bricks are going to be in place because this quarter we've just put in Pottery Barn Teen, and we continue to improve our cross-brand room planner, and there's a lot more to come next year with how that's going to work. We're also starting to really measure the impact and the lift from some of these tools, which is exciting. It's early days there. But as much as we're going to be incurring the cost of Outward next year, we're also going to be next year, really, for the first time, seeing the true benefits in the P&L from using the cross-brand room planner successfully.

Next question will come from Simeon Gutman with Morgan Stanley.

My question, I'll put it into 2 parts. So the business seems to be growing well in both the consumer and the B2B channels. Can you talk about how your top line visibility is changing as a result? I think the B2B may have longer lead times, and so do you have a better sense of the business 6 months, 12 months out? And then the part 2 of it is, what are the implications from the B2B growth for the margin profile of the company?

Sure. So B2B, we're pleased to have a second consecutive quarter of double-digit growth, and we continue to believe that's a tremendous opportunity for long term, as we told you, and we saw you, it's a very fragmented market. It's right for disruption. It's really hard for people to furnish their commercial spaces right now. And we are in advanced discussions with a number of Fortune 500 companies. We can't talk about them yet, but the progress we're making really reinforces the competitive advantages that truly set us apart in this very fragmented market. So we've said $2 billion. That's the number we believe in annual revenues. They're getting there faster than I would have thought, and I don't want to underestimate how quickly they can do it. But it's one of these things where if you get one deal done, it can really -- if you're doing something for a big chain and they take some of your products in a certain region, it can then expand rapidly as they then get used to working with you. So it's got a very fast multiplier.

And from a margin perspective, similar to what we talk about with franchise and things like that, there are certainly some pressure that happens on the gross margin line. But from an op margin perspective, it's accretive and it's definitely what you want us to keep moving forward on.

If I can just sneak 1 follow-up. If you think about the long-term target for margin stability, anything change in how you think about it, the mix between expense leverage or gross margin over time?

No.

Okay. And ladies and gentlemen, that does conclude the question-and-answer portion of our call for today. I'd like to turn the floor back over to management for any additional or closing remarks.

Yes. Thank you all for being with us today. I hope you have a wonderful Thanksgiving and a great holiday season. Please shop with us, and we'll be looking forward to talking to you after the holidays is over.

And ladies and gentlemen, that does conclude our call. Once again, we thank you for joining us today. You may now disconnect.