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UNITED STATES

FORM 10-Q

Commission file number 001-14077

WILLIAMS-SONOMA, INC.

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

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check [X] whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

     Indicate by check [X] whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

     As of December 12, 2002, 116,349,193 shares of the Registrant’s Common Stock were outstanding.

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WILLIAMS-SONOMA, INC.

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PART I. FINANCIAL INFORMATION

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ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES

NOTE A. FINANCIAL STATEMENTS — BASIS OF PRESENTATION

The condensed consolidated balance sheets as of November 3, 2002 and October 28, 2001, the condensed consolidated statements of earnings for the thirteen and thirty-nine week periods ended November 3, 2002 and October 28, 2001, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 3, 2002 and October 28, 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 thirty-nine 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 thirty-nine weeks ended November 3, 2002 are not necessarily indicative of the operating results of the full year.

NOTE B. NEW ACCOUNTING PRONOUNCEMENT

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 operation of the Company.

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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 ratio, minimum fixed charge coverage ratio, and maximum annual capital expenditures. The line of credit facility was renewed by an amended and restated agreement dated October 22, 2002. The amended agreement expires on October 22, 2005. Through April 22, 2005, the Company may, upon notice to the lenders, request an increase in the facility up to $250,000,000. 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. As of November 3, 2002, the Company had no borrowings outstanding under the line of credit facility.

As of November 3, 2002, the Company had issued and outstanding standby letters of credit under the line of credit facility 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.

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 November 3, 2002, $1,037,000 was outstanding under the prior letter of credit agreement, and $75,892,000 was outstanding under the new letter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which the Company had not taken legal title as of November 3, 2002.

NOTE D. COMPREHENSIVE INCOME

Comprehensive income for the thirteen and thirty-nine weeks ended November 3, 2002 and October 28, 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.

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 63,000 and 268,000 for the thirteen weeks and 46,000 and 213,000 for the thirty-nine weeks ended November 3, 2002 and October 28, 2001, respectively, and were not included in the computation of diluted earnings per share.

NOTE F. 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 both the thirteen weeks ended November 3, 2002 and October 28, 2001, the Company recognized $624,000, and in the thirty-nine weeks ended November 3, 2002 and October 28, 2001, recognized $1,872,000 and $1,696,000, respectively, of compensation expense related to these restricted shares, with a remaining $3,533,000 of deferred compensation included in shareholders’ equity at November 3, 2002.

The Company entered into other employment agreements with executive officers during fiscal 2001. The Company has recognized $303,000 in both the thirteen weeks ended November 3, 2002 and October 28, 2001, and $909,000 and $624,000 in the thirty-nine weeks ended November 3, 2002 and October 28, 2001, respectively, of stock-based compensation expense related to these other employment agreements. At November 3, 2002, $1,227,000 of deferred compensation related to these agreements was included in shareholders’ equity.

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NOTE G. 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.

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 and/or carriers 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 thirty-nine weeks ended November 3, 2002 and October 28, 2001.

Net revenues for the thirteen weeks ended November 3, 2002 (Third Quarter of 2002) were $527,894,000, an increase of $65,798,000 or 14.2% over net revenues for the thirteen weeks ended October 28, 2001 (Third Quarter of 2001). Net revenues for the thirty-nine week period ended November 3, 2002 (Year-to-Date 2002) were $1,501,866,000, an increase of $193,204,000 or 14.8% from the thirty-nine week period ended October 28, 2001 (Year-to-Date 2001). The reasons for these increases are discussed in the segment analyses below.

During the Third Quarter of 2002, the Company launched a private label credit card program in both the retail and direct-to-customer channels of the Pottery Barn and Pottery Barn Kids brands. A third party credit provider administers the program, and the Company bears no credit risk. To support the launch of the card, the Company offered introductory discounts and a loyalty rewards program to customers who used the card. The cost of these programs is accounted for as a reduction of net revenues and negatively impacted quarter-over-quarter and year-over-year top line sales growth.

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Retail Revenues

Retail revenues for the Third Quarter of 2002 increased $48,452,000 or 18.7% over retail revenues for the Third Quarter of 2001 primarily due to a net increase of 65 stores and a 2.8% increase in comparable store sales, partially offset by sales discounts to customers utilizing the Company’s private label credit card. Pottery Barn and Pottery Barn Kids brands accounted for 49 of the 65 net increase of stores and 67.5% of the growth in retail revenues from Third Quarter of 2001 to Third Quarter of 2002.

Total retail revenues for Year-to-Date 2002 grew $134,731,000 or 18.5% over the same period of the prior year, primarily due to new store openings. Retail sales for the Third Quarter of 2001 were negatively impacted by the economic aftermath of the events of September 11th. The Pottery Barn and the Pottery Barn Kids brands accounted for 77.7% 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 of merchandise are computed monthly for purposes of this analysis.