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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 August 4, 2002.
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.

Registrant’s Telephone Number, Including Area Code (415) 421-7900

     Indicate by check üwhether 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___

     As of September 4, 2002, 115,968,550 shares of the Registrant’s Common Stock were outstanding.

Table of Contents

WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 4, 2002

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

											PAGE
Item					1.			Financial Statements				3
									Condensed Consolidated Balance Sheets August 4, 2002, February 3, 2002 and July 29, 2001
									Condensed Consolidated Statements of Earnings Thirteen weeks ended August 4, 2002 and July 29, 2001 Twenty-six weeks ended August 4, 2002 and July 29, 2001
									Condensed Consolidated Statements of Cash Flows Twenty-six weeks ended August 4, 2002 and July 29, 2001
									Notes to Condensed Consolidated Financial Statements
Item					2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations				10
Item					3.			Quantitative and Qualitative Disclosures About Market Risk				16
PART II. OTHER INFORMATION
Item					1.			Legal Proceedings				17
Item					4.			Submission of Matters to a Vote of Security Holders				17
Item					6.			Exhibits and Reports on Form 8-K				18

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ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

			August 4,				February 3,				July 29,
Dollars and shares in thousands, except per share amounts			2002				2002				2001
ASSETS
Current assets
	Cash and cash equivalents		$	89,909			$	75,374			$	7,816
	Accounts receivable — net			41,518				32,141				38,420
	Merchandise inventories — net			250,397				249,237				270,434
	Prepaid catalog expenses			28,370				29,522				18,452
	Prepaid expenses			18,959				16,630				14,548
	Deferred income taxes			11,553				11,553				8,161
	Other assets			3,613				2,782				13,704
	Total current assets			444,319				417,239				371,535
Property and equipment — net				588,458				570,120				533,187
Other assets — net				6,723				7,544				8,657
Total assets			$	1,039,500			$	994,903			$	913,379
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable		$	111,576			$	98,857			$	101,893
	Accrued expenses			56,055				60,406				44,388
	Customer deposits			85,633				80,425				56,833
	Income taxes payable			7,490				37,456				—
	Current portion of long-term debt			7,401				7,206				5,850
	Line of credit			—				—				81,750
	Other liabilities			12,594				12,829				25,005
	Total current liabilities			280,749				297,179				315,719
Deferred lease incentives				143,108				127,094				114,341
Long-term debt				24,633				24,625				23,146
Deferred income tax liabilities				8,791				8,792				12,231
Other long-term obligations				4,875				4,682				5,093
Total liabilities				462,156				462,372				470,530
Commitments and contingencies				—				—				—
Shareholders’ equity
	Common stock, $.01 par value, authorized: 253,125 shares; issued: 115,941, 116,468 and 115,256 shares; outstanding: 115,941, 114,486 and 113,274 shares			1,159				1,164				1,153
	Additional paid-in capital			180,439				169,991				144,542
	Retained earnings			401,494				392,300				319,048
	Accumulated other comprehensive loss			(61	)			(110	)			(14	)
	Deferred stock-based compensation			(5,687	)			(7,541	)			1,393
	Treasury stock, at cost: nil, 1,982 and 1,982 shares			—				(23,273	)			(23,273	)
	Total shareholders’ equity			577,344				532,531				442,849
Total liabilities and shareholders’ equity			$	1,039,500			$	994,903			$	913,379

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

				Thirteen Weeks Ended								Twenty-Six Weeks Ended
				August 4,				July 29,				August 4,				July 29,
Dollars and shares in thousands, except per share amounts				2002				2001				2002				2001
Net revenues				$	495,593			$	428,994			$	973,972			$	846,566
Cost of goods sold					310,219				282,823				606,700				553,429
		Gross margin			185,374				146,171				367,272				293,137
Selling, general and administrative expenses					162,166				142,300				318,836				286,992
Interest expense — net					215				1,673				479				3,147
		Earnings before income taxes			22,993				2,198				47,957				2,998
Income taxes					8,852				846				18,463				1,154
		Net earnings		$	14,141			$	1,352			$	29,494			$	1,844
Basic earnings per share				$	.12			$	.01			$	.26			$	.02
Diluted earnings per share				$	.12			$	.01			$	.25			$	.02
Shares used in calculation of earnings per share:
	Basic				115,252				112,624				114,865				111,962
	Diluted				120,114				116,110				119,568				114,828

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

				Twenty-Six Weeks Ended
				August 4,				July 29,
Dollars in thousands				2002				2001
Cash flows from operating activities:
Net earnings				$	29,494			$	1,844
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
	Depreciation and amortization				44,666				38,483
	Net loss on disposal of assets and provision for store closures				1,285				1,057
	Amortization of deferred lease incentives				(7,467	)			(6,146	)
	Amortization of deferred stock-based compensation				1,854				1,393
	Other				69				527
	Changes in:
		Accounts receivable			(9,378	)			(239	)
		Merchandise inventories			(1,154	)			12,651
		Prepaid catalog expenses			1,152				11,580
		Prepaid expenses and other assets			(2,602	)			(13,669	)
		Accounts payable			12,650				(57,354	)
		Accrued expenses and other liabilities			1,948				76
		Deferred lease incentives			23,688				7,958
		Income taxes payable			(29,926	)			(24,191	)
Net cash provided by (used in) operating activities					66,279				(26,030	)
Cash flows from investing activities:
	Purchase of property and equipment				(64,537	)			(73,461	)
Net cash used in investing activities					(64,537	)			(73,461	)
Cash flows from financing activities:
	Borrowings under line of credit				—				316,250
	Repayments under line of credit				—				(234,500	)
	Repayments of long-term obligations				(832	)			(6,327	)
	Proceeds from exercise of stock options				13,416				12,168
Net cash provided by financing activities					12,584				87,591
Effect of exchange rates on cash and cash equivalents					209				(14	)
Net increase (decrease) in cash and cash equivalents					14,535				(11,914	)
Cash and cash equivalents at beginning of period					75,374				19,730
Cash and cash equivalents at end of period				$	89,909			$	7,816

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-Six Weeks Ended August 4, 2002 and July 29, 2001
(Unaudited)

NOTE A. FINANCIAL STATEMENTS — BASIS OF PRESENTATION

The condensed consolidated balance sheets as of August 4, 2002 and July 29, 2001 and the condensed consolidated statements of earnings for the thirteen and twenty-six week periods ended August 4, 2002 and July 29, 2001, and of cash flows for the twenty-six week periods ended August 4, 2002 and July 29, 2001 have been prepared by Williams-Sonoma, Inc., without audit. In the opinion of management, 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 and twenty-six week periods then ended. These financial statements include Williams-Sonoma, Inc., and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and accounts have been eliminated. The balance sheet at February 3, 2002, presented herein, has been derived from the audited balance sheet of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002.

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 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002.

Certain reclassifications have been made to the prior period financial statements to conform to the presentation used in the current period.

The results of operations for the thirteen and twenty-six weeks ended August 4, 2002 are not necessarily indicative of the operating results of the full year.

NOTE B. ACCOUNTING POLICIES

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 will have an impact on the consolidated financial position or results of operations.

NOTE C. BORROWING ARRANGEMENTS

The Company’s line of credit facility provides for a $200,000,000 unsecured revolving credit facility and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratios, fixed charge coverage requirements, restrictions on maximum capital expenditures and a prohibition on payment of cash dividends. The Company may elect interest rates calculated by reference to the agent’s internal reference rate or LIBOR plus a margin based on the Company’s leverage ratio or, for advances under $10,000,000, IBOR plus a margin based on the Company’s leverage ratio. The agreement expires on August 23, 2003. As of August 4, 2002, the Company had no borrowings outstanding under the line of credit facility.

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In July 2002, the Company entered into three new unsecured commercial letter of credit reimbursement agreements for an aggregate of $100,000,000. These agreements expire on July 2, 2003. The latest expiration for the letters of credit issued under the agreements is November 29, 2003. Per the new agreements, the Company is permitted to have issued and outstanding up to $120,000,000 under both the new letter of credit agreements and the prior letter of credit agreement. As of August 4, 2002, $40,914,000 was outstanding under the prior letter of credit agreement and $52,627,000 was outstanding under the new letter of credit agreements. Such letters of credit represent only a commitment to fund inventory purchases to which the Company had not taken legal title as of August 4, 2002. Additionally, as of August 4, 2002, the Company has issued and outstanding standby letters of credit under separate letter of credit agreements in an aggregate amount of $9,964,000. The standby letters of credit were issued to replace surety bonds that support workers’ compensation and other insurance programs.

NOTE D. COMPREHENSIVE INCOME

Comprehensive income for the thirteen and twenty-six weeks ended August 4, 2002 and July 29, 2001 was as follows:

NOTE E. 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 reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities.

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:

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Options with an exercise price greater than the average market price of common shares were 21,000 and 90,000 for the thirteen weeks and 39,000 and 234,000 for the twenty-six weeks ended August 4, 2002 and July 29, 2001, respectively, and were not included in the computation of diluted earnings per share.

NOTE F. SHAREHOLDERS’ EQUITY

On April 15, 2002, the Board of Directors declared a two-for-one stock split of the common stock of Williams-Sonoma, Inc. The stock split was effected by issuing one additional share of common stock for each outstanding share of common stock. The additional shares were distributed on May 9, 2002 to shareholders of record on April 29, 2002. All share and per share amounts have been restated to give effect to this stock split.

In fiscal 2000 and 1999, the Company repurchased a total of 1,982,000 shares of its common stock for a cost of $23,273,000. During June and July 2002, the Company retired these shares.

NOTE G. STOCK-BASED COMPENSATION

In fiscal 2001, the Company entered into an employment agreement (the “Agreement”), effective April 2, 2001, with Dale Hilpert to serve as the Company’s Chief Executive Officer and as a Director. Under the Agreement, the Company agreed to issue Mr. Hilpert 500,000 restricted shares of the Company’s common stock. Such restricted shares will vest on March 31, 2004 based upon Mr. Hilpert’s continued employment through such date. Accordingly, total compensation expense (based upon the fair market value of $15.45 on the issue date) of $7,725,000 is being recognized ratably through March 31, 2004. In the thirteen weeks ended August 4, 2002 and July 29, 2001, the Company recognized approximately $624,000 and $869,000, respectively, and in the twenty-six weeks ended August 4, 2002 and July 29, 2001, recognized $1,248,000 and $1,072,000, respectively, of compensation expense related to these restricted shares with a remaining $4,157,000 of deferred compensation included in shareholders’ equity at August 4, 2002.

The Company entered into other employment agreements during fiscal 2001. The Company has recognized approximately $303,000 in the thirteen weeks ended August 4, 2002 and July 29, 2001, and approximately $606,000 and $321,000 in the twenty-six weeks ended August 4, 2002 and July 29, 2001, respectively, of stock-based compensation expense related to these other employment agreements. At August 4, 2002, deferred compensation related to these agreements was $1,530,000.

NOTE H. SEGMENT REPORTING

The Company has two reportable segments, retail and direct-to-customer. The retail segment sells products for the home through its four retail concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The four retail concepts are operating segments which have been aggregated into one reportable segment, retail. The direct-to-customer segment sells similar products through its seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com).

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. Management’s expectation is that the overall economics of each of the Company’s major concepts within each reportable segment will be similar over time.

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The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002. The Company uses earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability. Unallocated assets include corporate cash and equivalents, the net book value of corporate facilities and related information systems, deferred tax amounts and other corporate long-lived assets.

Segment Information

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Risk Factors

The plans, projections and other forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q with respect to the financial condition, results of operations and business of Williams-Sonoma, Inc. and its subsidiaries (the “Company”) are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. These risks and uncertainties include, without limitation, the following and should be read in conjunction with the Risk Factors portion of Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002:

•		The Company’s ability to anticipate consumer preferences and buying trends
•		The Company’s dependence on timely introduction and customer acceptance of its merchandise
•		Construction and other delays in store openings
•		Labor disputes experienced by the Company’s suppliers of goods or services, and union organizing activities at any of its facilities
•		Competition from companies with concepts or products similar to those of the Company
•		The Company’s timely and effective sourcing of its merchandise from its foreign and domestic vendors and delivery of merchandise through its supply chain to its stores and customers
•		The Company’s effective inventory management commensurate with customer demand
•		The Company’s successful catalog management, including timing, sizing and merchandising
•		Uncertainties in Internet marketing, infrastructure and regulation
•		Changes in consumer spending based on weather, economic, political, competitive and other conditions beyond the Company’s control
•		Multi-channel and multi-brand complexities
•		The Company’s dependence on external funding sources for operating funds
•		The Company’s ability to control employment, occupancy and other operating costs
•		The Company’s ability to improve and control its systems and processes
•		General economic and market conditions and events
•		Other risks and uncertainties contained in the Company’s public announcements, reports to shareholders and SEC filings, including but not limited to Reports on Forms 10-K, 8-K and 10-Q.

The Company has not undertaken, nor is it required, to publicly update or revise any of its forward-looking statements, even if experience or future events make it clear that the results set forth in such statements will not be realized.

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Business

The Company is a specialty retailer of products for the home. The retail segment sells its products through its four retail concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The direct-to-customer segment sells similar products through its seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com). The principal concepts in retail and direct-to-customer are: Williams-Sonoma, which sells cookware essentials; Pottery Barn, which sells contemporary tableware and home furnishings; and Pottery Barn Kids, which sells stylish children’s furnishings. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company’s condensed consolidated financial statements and the notes thereto.

Net Revenues

Net revenues consist of retail sales, direct-to-customer sales and shipping fees. Direct-to-customer sales include catalog and Internet sales. Shipping fees consist of revenue received from customers for delivery of merchandise.

The following table summarizes the Company’s net revenues for the thirteen and twenty-six weeks ended August 4, 2002 and July 29, 2001.

		Thirteen Weeks Ended																Twenty-Six Weeks Ended
		August 4,								July 29,								August 4,								July 29,
Dollars in thousands		2002				% Total				2001				% Total				2002				% Total				2001				% Total
Retail sales		$	285,813				57.7	%		$	244,410				57.0	%		$	553,391				56.8	%		$	467,434				55.2	%
Direct-to-customer sales			177,100				35.7	%			158,308				36.9	%			355,381				36.5	%			326,017				38.5	%
Shipping fees			32,680				6.6	%			26,276				6.1	%			65,200				6.7	%			53,115				6.3	%
Net revenues		$	495,593				100.0	%		$	428,994				100.0	%		$	973,972				100.0	%		$	846,566				100.0	%

Net revenues for the thirteen weeks ended August 4, 2002 (Second Quarter of 2002) were $495,593,000, an increase of $66,599,000 or 15.5% over net revenues for the thirteen weeks ended July 29, 2001 (Second Quarter of 2001). Net revenues for the twenty-six week period ended August 4, 2002 (Year-to-Date 2002) were $973,972,000, an increase of $127,406,000 or 15.0% from the twenty-six week period ended July 29, 2001 (Year-to-Date 2001).

Retail Revenues

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		August 4,				July 29,				August 4,				July 29,
Dollars in thousands		2002				2001				2002				2001
Retail sales		$	285,813			$	244,410			$	553,391			$	467,434
Shipping fees			1,945				1,884				3,512				3,190
Total retail revenues		$	287,758			$	246,294			$	556,903			$	470,624
Percent growth in retail sales			16.9	%			18.2	%			18.4	%			16.1	%
Percent increase (decrease) in comparable store sales			0.0	%			1.0	%			2.9	%			(0.9	)%
Number of stores — beginning of period			425				383				415				382
Number of new stores			22				15				36				19
Number of closed stores			2				5				6				8
Number of stores — end of period			445				393				445				393
Store selling square footage at quarter-end (sq. ft.)			2,173,000				1,830,000				2,173,000				1,830,000
Store leased square footage (“LSF”) at quarter-end (sq.ft.)			3,429,000				2,862,000				3,429,000				2,862,000

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																		Avg. LSF								Avg. LSF
		Store Count																Per Store				Store Count				per Store
		May 5,												August 4,				August 4,				July 29,				July 29,
		2002				Openings				Closings				2002				2002				2001				2001
Williams-Sonoma			218				6				(1	)			223				5,100				205				5,000
Pottery Barn			147				4				—				151				11,400				136				11,100
Pottery Barn Kids			31				11				—				42				7,500				15				7,000
Hold Everything			15				—				—				15				3,700				24				3,500
Outlets			14				1				(1	)			14				13,100				13				10,900
Total			425				22				(2	)			445				7,700				393				7,300

Retail revenues for the Second Quarter of 2002 increased $41,464,000 or 16.8% over retail revenues for the Second Quarter of 2001 primarily due to a net increase of 52 stores. Pottery Barn and Pottery Barn Kids brands accounted for 42 of the 52 net increase of stores and 81.4% of the growth in retail revenues from Second Quarter of 2001 to Second Quarter of 2002.

Total retail revenues for Year-to-Date 2002 grew $86,279,000 or 18.3% over the same period of the prior year, primarily due to new store openings. Pottery Barn and Pottery Barn Kids brands accounted for 83.5% of the growth in retail revenues from Year-to-Date 2001 to Year-to-Date 2002.

Comparable Store Sales

Comparable stores are defined as those whose gross square feet did not change by more than 20% in the previous 12 months and which have been open for at least 12 months without closure for seven or more consecutive days. Comparable store sales are computed monthly for purposes of this analysis.