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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2013.

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.

 

(Exact name of registrant as specified in its charter)

 

Delaware   94-2203880
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA   94109
(Address of principal executive offices)   (Zip Code)

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 mark 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    ü  No              

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    ü  No          

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ü     Accelerated filer         
Non-accelerated filer            (Do not check if a smaller reporting company)   Smaller reporting company         

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes          No    ü  

As of September 1, 2013, 95,704,002 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, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

         PAGE  

Item 1.

 

Financial Statements

     2   
 

Condensed Consolidated Statements of Earnings for the Thirteen and Twenty-Six Weeks Ended
August 4, 2013 and July 29, 2012

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the Thirteen and Twenty-Six Weeks Ended August 4, 2013 and July 29, 2012

     2   
 

Condensed Consolidated Balance Sheets as of August 4, 2013, February 3, 2013 and July 29, 2012

     3   
 

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended August 4, 2013 and
July 29, 2012

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     19   

Item 4.

 

Controls and Procedures

     19   
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     20   

Item 1A.

 

Risk Factors

     20   

Item 2.

 

Unregistered Sales of Equity Securities And Use of Proceeds

     20   

Item 3.

 

Defaults Upon Senior Securities

     20   

Item 4.

 

Mine Safety Disclosures

     20   

Item 5.

 

Other Information

     20   

Item 6.

 

Exhibits

     21   

 

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Table of Contents

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
Dollars and shares in thousands, except per share amounts    August 4,
2013
    July 29,
2012
    August 4,
2013
    July 29,
2012
 

Net revenues

   $ 982,209      $ 874,283      $ 1,870,017      $ 1,691,897   

Cost of goods sold

     613,285        539,803        1,166,908        1,048,151   

Gross margin

     368,924        334,480        703,109        643,746   

Selling, general and administrative expenses

     290,838        264,377        561,240        524,320   

Operating income

     78,086        70,103        141,869        119,426   

Interest (income) expense, net

     (125     (168     (314     (359

Earnings before income taxes

     78,211        70,271        142,183        119,785   

Income taxes

     29,292        26,891        53,798        45,689   

Net earnings

   $ 48,919      $ 43,380      $ 88,385      $ 74,096   

Basic earnings per share

   $ 0.50      $ 0.44      $ 0.91      $ 0.74   

Diluted earnings per share

   $ 0.49      $ 0.43      $ 0.89      $ 0.73   

Shares used in calculation of earnings per share:

        

Basic

     96,892        99,209        97,470        99,815   

Diluted

     98,957        100,818        99,365        101,541   

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
Dollars in thousands    August 4,
2013
    July 29,
2012
    August 4,
2013
    July 29,
2012
 

Net earnings

   $ 48,919      $ 43,380      $ 88,385      $ 74,096   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustment

     (3,148     (1,374     (4,496     (301

Change in fair value of derivative financial instruments

     292        0        123        0   

Comprehensive income

   $ 46,063      $ 42,006      $ 84,012      $ 73,795   

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

Dollars and shares in thousands, except per share amounts    August 4,
2013
    February 3,
2013
     July 29,
2012
 

ASSETS

       

Current assets

       

Cash and cash equivalents

   $ 205,364      $ 424,555       $ 336,550   

Restricted cash

     16,967        16,055         16,043   

Accounts receivable, net

     62,808        62,985         53,424   

Merchandise inventories, net

     736,871        640,024         616,355   

Prepaid catalog expenses

     37,266        37,231         39,362   

Prepaid expenses

     61,725        26,339         33,805   

Deferred income taxes, net

     99,699        99,764         91,728   

Other assets

     11,029        9,819         9,103   

Total current assets

     1,231,729        1,316,772         1,196,370   

Property and equipment, net

     829,951        812,037         743,915   

Non-current deferred income taxes, net

     7,509        12,398         11,483   

Other assets, net

     54,989        46,472         38,116   

Total assets

   $  2,124,178      $  2,187,679       $  1,989,884   

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current liabilities

       

Accounts payable

   $ 318,532      $ 259,162       $ 201,905   

Accrued salaries, benefits and other

     95,762        120,632         85,598   

Customer deposits

     225,822        207,415         202,590   

Income taxes payable

     2,955        41,849         26,442   

Current portion of long-term debt

     1,817        1,724         1,652   

Other liabilities

     35,531        26,345         27,682   

Total current liabilities

     680,419        657,127         545,869   

Deferred rent and lease incentives

     170,817        171,198         178,996   

Long-term debt

     1,968        3,753         5,421   

Other long-term obligations

     51,599        46,463         49,131   

Total liabilities

     904,803        878,541         779,417   

Commitments and contingencies

       

Stockholders’ equity

       

Preferred stock: $.01 par value; 7,500 shares authorized; none issued

     0        0         0   

Common stock: $.01 par value; 253,125 shares authorized; 95,839, 97,734 and 98,687 shares issued and outstanding at August 4, 2013, February 3, 2013 and July 29, 2012, respectively

     959        977         987   

Additional paid-in capital

     513,246        503,616         488,336   

Retained earnings

     699,012        790,912         708,855   

Accumulated other comprehensive income

     9,260        13,633         12,289   

Treasury stock, at cost

     (3,102     0         0   

Total stockholders’ equity

     1,219,375        1,309,138         1,210,467   

Total liabilities and stockholders’ equity

   $ 2,124,178      $ 2,187,679       $ 1,989,884   

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         Twenty-Six Weeks Ended       
Dollars in thousands   

August 4,

2013

   

July 29,

2012

 

Cash flows from operating activities:

    

Net earnings

   $ 88,385      $ 74,096   

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     73,832        65,318   

Loss on sale/disposal of assets

     1,233        794   

Amortization of deferred lease incentives

     (12,621     (13,179

Deferred income taxes

     (6,937     (5,843

Tax benefit from exercise of stock-based awards

     11,733        12,940   

Excess tax benefit from exercise of stock-based awards

     (5,173     (6,390

Stock-based compensation expense

     18,472        15,092   

Changes in:

    

Accounts receivable

     (1,284     (6,953

Merchandise inventories

     (97,653     (62,778

Prepaid catalog expenses

     (35     (5,068

Prepaid expenses and other assets

     (40,191     (10,533

Accounts payable

     52,336        (22,781

Accrued salaries, benefits and other current and long-term liabilities

     (10,677     (22,658

Customer deposits

     18,710        12,218   

Deferred rent and lease incentives

     12,823        10,449   

Income taxes payable

     (38,890     4,012   

Net cash provided by operating activities

     64,063        38,736   

Cash flows from investing activities:

    

Purchases of property and equipment

     (97,777     (69,608

Restricted cash deposits

     (912     (1,311

Proceeds from insurance reimbursement

     1,232        0   

Other

     42        (54

Net cash used in investing activities

     (97,415     (70,973

Cash flows from financing activities:

    

Repurchase of common stock

     (131,006     (93,076

Payment of dividends

     (52,196     (44,449

Repayments of long-term obligations

     (1,692     (200

Proceeds from exercise of stock-based awards

     6,541        8,980   

Tax withholdings related to stock-based awards

     (11,135     (11,073

Excess tax benefit from exercise of stock-based awards

     5,173        6,390   

Other

     0        (394

Net cash used in financing activities

     (184,315     (133,822

Effect of exchange rates on cash and cash equivalents

     (1,524     (148

Net decrease in cash and cash equivalents

     (219,191     (166,207

Cash and cash equivalents at beginning of period

     424,555        502,757   

Cash and cash equivalents at end of period

   $ 205,364      $ 336,550   

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Twenty-Six Weeks Ended August 4, 2013 and July 29, 2012

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of August 4, 2013 and July 29, 2012, the Condensed Consolidated Statements of Earnings for the thirteen and twenty-six weeks then ended, the Condensed Consolidated Statements of Comprehensive Income for the thirteen and twenty-six weeks then ended, and the Condensed Consolidated Statements of Cash Flows for the twenty-six weeks then ended have been prepared by us, without audit. In our opinion, 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 weeks then ended. Significant intercompany transactions and accounts have been eliminated. The balance sheet as of February 3, 2013, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2013.

The results of operations for the thirteen and twenty-six weeks ended August 4, 2013 are not necessarily indicative of the operating results of the full year.

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 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2013.

NOTE B. STOCK-BASED COMPENSATION

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units, deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 25,760,000 shares. As of August 4, 2013, there were 6,146,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee Board members of the company or any parent or subsidiary. Annual grants are limited to 1,000,000 shares covered by option awards and 400,000 shares covered by stock awards on a per person basis. All grants of option awards made under the Plan have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards and stock awards granted to employees generally vest over a period of four years. Certain option awards, stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Option and stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member).

Stock-Based Compensation Expense

We measure and record stock-based compensation expense in our Consolidated Financial Statements for all employee stock-based awards using a fair value method. During the thirteen and twenty-six weeks ended August 4, 2013, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $9,481,000 and $18,472,000, respectively (including stock-based compensation expense of

 

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$1,341,000 for the twenty-six weeks ended August 4, 2013, associated with the retirement of one of our former brand presidents). During the thirteen and twenty-six weeks ended July 29, 2012, we recognized total stock-based compensation expense of $7,099,000 and $15,092,000, respectively (including stock-based compensation expense of $3,019,000 for the twenty-six weeks ended July 29, 2012, associated with the retirement of our former Executive Vice President, Chief Operating and Chief Financial Officer).

Stock Options

The following table summarizes our stock option activity during the twenty-six weeks ended August 4, 2013:

 

      Shares  

Balance at February 3, 2013

     428,930   

Granted

     0   

Exercised

     (199,442

Cancelled

     0   

Balance at August 4, 2013 (100% vested)

     229,488   

Stock-Settled Stock Appreciation Rights

The following table summarizes our stock-settled stock appreciation right activity during the twenty-six weeks ended August 4, 2013:

 

      Shares  

Balance at February 3, 2013

     2,527,784   

Granted

     0   

Converted into common stock

     (429,269

Cancelled

     (37,950

Balance at August 4, 2013

     2,060,565   

Vested at August 4, 2013

     1,381,248   

Vested plus expected to vest at August 4, 2013

     1,825,834   

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the twenty-six weeks ended August 4, 2013:

 

      Shares  

Balance at February 3, 2013

     2,772,426   

Granted

     855,736   

Released

     (306,164

Cancelled

     (89,747

Balance at August 4, 2013

     3,232,251   

Vested plus expected to vest at August 4, 2013

     2,212,051   

NOTE C. 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 is computed as net earnings divided by the weighted average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consist of shares subject to option awards with exercise prices less than or equal to the average market

 

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price of our common stock for the period, as well as restricted stock units, to the extent their inclusion would be dilutive.

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

 

Dollars and amounts in thousands, except per share amounts    Net Earnings      Weighted
Average Shares
     Earnings
Per Share
 

Thirteen weeks ended August 4, 2013

        

Basic

   $ 48,919         96,892       $ 0.50   

Effect of dilutive stock-based awards

              2,065            

Diluted

   $ 48,919         98,957       $ 0.49   

Thirteen weeks ended July 29, 2012

        

Basic

   $ 43,380         99,209       $ 0.44   

Effect of dilutive stock-based awards

              1,609            

Diluted

   $ 43,380         100,818       $ 0.43   

Twenty-six weeks ended August 4, 2013

        

Basic

   $ 88,385         97,470       $ 0.91   

Effect of dilutive stock-based awards

              1,895            

Diluted

   $ 88,385         99,365       $ 0.89   

Twenty-six weeks ended July 29, 2012

        

Basic

   $ 74,096         99,815       $ 0.74   

Effect of dilutive stock-based awards

              1,726            

Diluted

   $ 74,096         101,541       $ 0.73   

Stock-based awards of 0 and 1,667,000 for the thirteen weeks ended and 133,000 and 1,600,000 for the twenty-six weeks ended August 4, 2013 and July 29, 2012, respectively, were not included in the computation of diluted earnings per share, as their inclusion would be anti-dilutive.

NOTE D. SEGMENT REPORTING

We have two reportable segments, direct-to-customer and retail. The direct-to-customer segment has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Rejuvenation and Mark and Graham) which sell our products through our e-commerce websites and direct-mail catalogs. Our direct-to-customer merchandising concepts are operating segments, which have been aggregated into one reportable segment, direct-to-customer. The retail segment has five merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation) which sell our products through our retail stores. Our retail merchandising concepts are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.

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. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income or expense and income taxes. Unallocated costs before interest and income taxes include

 

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corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third party service costs, primarily in our corporate systems, corporate facilities and other administrative departments. Unallocated assets include corporate cash and cash equivalents, deferred income taxes, the net book value of corporate facilities and related information systems, and other corporate long-lived assets.

Income tax information by reportable segment has not been included as income taxes are calculated at a company-wide level and are not allocated to each reportable segment.

Segment Information

 

Dollars in thousands    Direct-to-
Customer
     Retail      Unallocated     Total  

Thirteen weeks ended August 4, 2013

          

Net revenues1

   $ 477,657       $  504,552       $ 0      $ 982,209   

Depreciation and amortization expense

     6,096         19,535         11,592        37,223   

Operating income (loss)

     114,491         34,609         (71,014     78,086   

Capital expenditures

     9,993         24,428         15,912        50,333   

Thirteen weeks ended July 29, 2012

          

Net revenues1

   $ 414,361       $ 459,922       $ 0      $ 874,283   

Depreciation and amortization expense

     5,677         17,497         9,350        32,524   

Operating income (loss)

     95,223         38,602         (63,722     70,103   

Capital expenditures

     7,482         16,808         17,499        41,789   

Twenty-six weeks ended August 4, 2013

          

Net revenues1

   $ 896,741       $ 973,276       $ 0      $ 1,870,017   

Depreciation and amortization expense

     12,922         38,752         22,158        73,832   

Operating income (loss)

     210,432         68,625         (137,188     141,869   

Assets2

     470,792         937,720         715,666        2,124,178   

Capital expenditures

     19,699         45,150         32,928        97,777   

Twenty-six weeks ended July 29, 2012

          

Net revenues1

   $ 788,768       $ 903,129       $ 0      $ 1,691,897   

Depreciation and amortization expense

     11,294         35,556         18,468        65,318   

Operating income (loss)

     173,178         72,955         (126,707     119,426   

Assets2

     373,340         881,375         735,169        1,989,884   

Capital expenditures

     12,758         26,080         30,770        69,608   

 

1

Includes net revenues of approximately $50.4 million and $31.6 million for the thirteen weeks ended August 4, 2013 and July 29, 2012, respectively, and $98.5 million and $62.2 million for the twenty-six weeks ended August 4, 2013 and July 29, 2012, respectively, related to our foreign operations.

2

Includes approximately $55.5 million and $26.5 million of long-term assets as of August 4, 2013 and July 29, 2012, respectively, related to our foreign operations.

NOTE E. COMMITMENTS AND CONTINGENCIES

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

 

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NOTE F. STOCK REPURCHASE PROGRAM AND DIVIDEND

Stock Repurchase Program

In March 2013, we announced that our Board of Directors had authorized a new three-year stock repurchase program to purchase up to $750,000,000 of our common stock. During the thirteen weeks ended August 4, 2013, we repurchased 1,613,943 shares of our common stock at an average cost of $55.66 per share and a total cost of approximately $89,832,000. During the twenty-six weeks ended August 4, 2013, we repurchased 2,414,825 shares of our common stock at an average cost of $54.25 per share and a total cost of approximately $131,006,000.

Stock repurchases under this program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

During the thirteen weeks ended July 29, 2012, we repurchased 884,763 shares of our common stock at an average cost of $35.43 per share and a total cost of $31,343,000. During the twenty-six weeks ended July 29, 2012, we repurchased 2,529,271 shares of our common stock at an average cost of $36.80 per share and a total cost of $93,076,000 under programs previously authorized by our Board of Directors.

Dividend

Our quarterly cash dividend was $0.31 and $0.22 per common share for the thirteen weeks ended August 4, 2013 and July 29, 2012, respectively.

NOTE G. DERIVATIVE FINANCIAL INSTRUMENTS

Substantially all of our purchases and sales are denominated in U.S. Dollars, which limits our exposure to foreign currency exchange rate fluctuations. However, we are exposed to foreign currency exchange risk related to the transactions of our foreign subsidiaries. To mitigate this risk, in April 2013, we began utilizing foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes.

The assets or liabilities associated with the derivative instruments are recorded at fair value in either other current assets or other current liabilities, respectively, within our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as, and qualifies for, hedge accounting in accordance with the Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging. The majority of our foreign currency forward contracts entered into as of August 4, 2013 are designated as cash flow hedges and, therefore, protect us against the variability of forecasted foreign currency cash flows resulting from purchases in non-functional currencies.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to twelve months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions. We recognize derivative instruments as either assets or liabilities in our Condensed Consolidated Balance Sheet and measure them at fair value. We record the effective portion of changes in the fair value of our derivative instruments designated as cash flow hedging instruments in other comprehensive income (“OCI”) in our Condensed Consolidated Statement of Comprehensive Income until the earlier of either the hedged forecasted

 

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inventory purchase or the maturity of the respective contract. Subsequently, as the inventory is sold to the customer, we reclassify the amounts previously recorded in OCI to cost of goods sold. Changes in fair value of the forward contract related to interest charges or “forward points” are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in other income (expense), net in our Condensed Consolidated Statements of Earnings. As of August 4, 2013, we had foreign currency forward contracts in place to sell Canadian dollars and buy U.S. dollars totaling $23,200,000, consisting of $19,400,000 designated as cash flow hedges and $3,800,000 which have been de-designated due to the related inventory purchases having occurred. Based on the rates in effect on August 4, 2013, we would expect to reclassify a net gain of approximately $123,000 from OCI to cost of goods sold over the next 12 months.

In addition, as of August 4, 2013, we had non-designated foreign currency forward contracts to sell Australian dollars and buy U.S. dollars totaling $5,000,000. Any foreign exchange gains (losses) related to these contracts are recognized in other income (expense). There were no foreign currency forward contracts outstanding as of July 29, 2012.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net in our Condensed Consolidated Statements of Earnings. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and twenty-six weeks ended August 4, 2013.

The effect of derivative instruments in our Condensed Consolidated Financial Statements, pre-tax, was as follows:

 

Dollars in thousands    Thirteen
Weeks Ended
August 4, 2013
    Twenty-Six
Weeks Ended
August 4, 2013
 

Net gain (loss) recognized in OCI

   $ 292      $ 123   

Net gain (loss) reclassified from OCI into cost of goods sold

     0        0   

Net foreign exchange gain (loss) recognized in other income (expense):

    

Instruments designated as cash flow hedges (a)

     (29     (42

Instruments not designated or de-designated during the period (b)

     222        222   

 

(a) Changes in fair value of the forward contract related to interest charges or “forward points”
(b) Changes in fair value subsequent to de-designation for instruments de-designated as cash flow hedges during the period, and changes in fair value related to instruments not designated as cash flow hedges

The fair values of our derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 inputs as defined by the fair value hierarchy described in Note H.

 

Dollars in thousands    Balance sheet location        August 4, 2013  

Derivatives designated as hedging instruments:

     

Cash flow hedge foreign currency forward contracts

   Other current assets    $ 107   

Cash flow hedge foreign currency forward contracts

   Other current liabilities      (48

Total derivatives designated as hedging instruments

        $ 59   

Derivatives not designated as hedging instruments:

     

Foreign currency forward contracts

   Other current assets    $ 204   

Foreign currency forward contracts

   Other current liabilities      0   

Total derivatives not designated as hedging instruments

        $ 204   

 

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We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

Amounts recorded within accumulated other comprehensive income (“AOCI”) associated with our derivative instruments were as follows:

 

Dollars in thousands    Thirteen Weeks Ended
August 4, 2013
    Twenty-Six Weeks Ended
August 4, 2013
 

AOCI beginning balance amount of gain (loss)

   $ (169   $ 0   

Amounts recognized in OCI before reclassifications

     292        123   

Amounts reclassified from OCI into cost of goods sold

     0        0   

AOCI ending balance amount of gain (loss)

   $ 123      $ 123   

NOTE H. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by the ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:

 

   

Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

 

   

Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

 

   

Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.

The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.

Foreign Currency Derivatives and Hedging Instruments

We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates, and credit derivative market rates.

The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative

 

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contracts entered into are subject to credit risk-related contingent features or collateral requirements. Our policy is to present the fair value of our foreign currency derivatives on a gross basis in our Condensed Consolidated Balance Sheet as these instruments are not subject to legal right of offset or other netting arrangements with our counterparties.

There were no transfers between Level 1 and Level 2 categories during the thirteen and twenty-six weeks ended August 4, 2013.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: the execution of our strategies; the expansion of our global business; the expansion of our relationship with our franchisee in the Middle East; our business development efforts; our planned use of cash; our compliance with our financial covenants; and our belief that our cash on-hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended February 3, 2013, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

OVERVIEW

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Williams-Sonoma Home, Rejuvenation and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 590 stores. We currently operate in the U.S., Canada, and Australia and offer international shipping to customers worldwide. Our catalogs reach customers throughout the U.S. and Australia and our unaffiliated franchisee operates 25 stores in the Middle East.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended August 4, 2013 (“second quarter of fiscal 2013”), as compared to the thirteen weeks ended July 29, 2012 (“second quarter of fiscal 2012”) and the twenty-six weeks ended August 4, 2013 (“year-to-date 2013”), as compared to the twenty-six weeks ended July 29, 2012 (“year-to-date 2012”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.

All explanations of changes in operational results are discussed in order of their magnitude.

Second Quarter of Fiscal 2013 Financial Results

In the second quarter of fiscal 2013, our net revenues increased 12.3% to $982,209,000, compared to $874,283,000 in the second quarter of fiscal 2012, including a comparable brand revenue increase of 8.4%. Diluted earnings per share in the second quarter of fiscal 2013 increased to $0.49, versus $0.43 in the second

 

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quarter of fiscal 2012, and we returned $120,000,000 to our stockholders through stock repurchases and dividends.

Direct-to-customer net revenues in the second quarter of fiscal 2013 increased $63,296,000, or 15.3%, compared to the second quarter of fiscal 2012, primarily driven by Pottery Barn, West Elm, PBteen and Pottery Barn Kids. Direct-to-customer net revenues generated 49% of our total company net revenues in the second quarter of fiscal 2013 versus 47% in the second quarter of fiscal 2012.

Retail net revenues in the second quarter of fiscal 2013 increased $44,630,000, or 9.7%, compared to the second quarter of fiscal 2012, driven primarily by Pottery Barn, West Elm, and our international franchise operations, partially offset by a decrease in Williams-Sonoma. Including three net new stores within the second quarter of fiscal 2013, retail leased square footage increased 2.2% from the end of the second quarter of fiscal 2012.

In Pottery Barn, our largest brand, comparable brand revenues increased 9.9% in the second quarter of fiscal 2013, driven by strength in our outdoor business with all key categories performing well. In the Williams-Sonoma brand, comparable brand revenues decreased 0.4%, however, our brand extensions, Williams-Sonoma Home and Agrarian, continued to drive incremental growth. Although the retail channel continues to underperform, we have seen strength in our direct-to-customer channel driven by increased traffic and strategic promotions. In Pottery Barn Kids, comparable brand revenues grew by 8.2% in the second quarter of fiscal 2013, driven by strong results across textiles, furniture and decorative accessories. In West Elm, comparable brand revenues increased 16.5% in the second quarter of fiscal 2013 on top of 15.6% in the second quarter of fiscal 2012. Brand growth continues to be driven by all categories, including furniture, textiles, decorative accessories and lighting. In PBteen, comparable brand revenues increased 16.3% in the second quarter of fiscal 2013, driven by strength in our furniture business and textiles.

Results of Operations

NET REVENUES

Net revenues consist of direct-to-customer net revenues and retail net revenues. Direct-to-customer net revenues include sales of merchandise to customers through our e-commerce websites and our catalogs, as well as shipping fees. Retail net revenues include sales of merchandise to customers at our retail stores, as well as shipping fees on any products shipped to our customers’ homes. Shipping fees consist of revenue received from customers for delivery of merchandise to their homes. Revenues are presented net of sales returns and other discounts.

The following table summarizes our net revenues for the second quarter of fiscal 2013 and fiscal 2012, and year-to-date 2013 and 2012:

 

    Thirteen Weeks Ended         Twenty-Six Weeks Ended  
Dollars in thousands   August 4,
2013
    % Total     July 29,
2012
    % Total          August 4,
2013
    % Total     July 29,
2012
    % Total  

Direct-to-customer net revenues

  $ 477,657        48.6%      $  414,361        47.4%        $ 896,741        48.0%      $ 788,768        46.6%   

Retail net revenues

    504,552        51.4%        459,922        52.6%            973,276        52.0%        903,129        53.4%   

Net revenues

  $ 982,209        100.0%      $ 874,283        100.0%          $ 1,870,017        100.0%      $ 1,691,897        100.0%   

Net revenues in the second quarter of fiscal 2013 increased by $107,926,000, or 12.3%, compared to the second quarter of fiscal 2012, with comparable brand revenue growth of 8.4%. This increase was primarily driven by the Pottery Barn, West Elm, Pottery Barn Kids, and PBteen brands.

Net revenues for year-to-date 2013 increased by $178,120,000, or 10.5%, compared to year-to-date 2012, with comparable brand revenue growth of 7.8%. These increased net revenues during year-to-date 2013 were driven primarily by the Pottery Barn, West Elm, Pottery Barn Kids, and PBteen brands.

 

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Comparable Brand Revenue Growth

Comparable brand revenue includes retail comparable store sales and direct-to-customer sales, as well as shipping fees, sales returns and other discounts associated with current period sales. Outlet comparable store net revenues are included in their respective brands. Sales related to our international franchised stores have been excluded as these stores are not operated by us. Comparable stores are defined as permanent stores in which gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days.

Percentages represent changes in comparable brand revenue compared to the same period in the prior year.

 

     Thirteen Weeks Ended          Twenty-Six Weeks Ended  
Comparable brand revenue growth (decline)    August 4,
2013
    July 29,
2012
          August 4,
2013
   

July 29,

2012

 

Pottery Barn

     9.9%        11.7%           8.8%        10.4%   

Williams-Sonoma

     (0.4%     (1.5%        0.7%        (2.8%

Pottery Barn Kids

     8.2%        3.8%           7.6%        1.5%   

West Elm

     16.5%        15.6%           14.2%        18.7%   

PBteen

     16.3%        0.8%             16.2%        (2.2%

Total

     8.4%        7.4%             7.8%        6.4%   

 

DIRECT-TO-CUSTOMER NET REVENUES

  

     Thirteen Weeks Ended          Twenty-Six Weeks Ended  
Dollars in thousands    August 4,
2013
    July 29,
2012
          August 4,
2013
    July 29,
2012
 

Direct-to-customer net revenues

   $ 477,657      $ 414,361         $ 896,741      $ 788,768   

Direct-to-customer net revenue growth

     15.3%        12.6%             13.7%        10.8%   

Direct-to-customer net revenues in the second quarter of fiscal 2013 increased $63,296,000, or 15.3%, compared to the second quarter of fiscal 2012, with increases across all brands. This growth was primarily led by the Pottery Barn, West Elm, PBteen, and Pottery Barn Kids brands.

 

Direct-to-customer net revenues for year-to-date 2013 increased $107,973,000, or 13.7%, compared to year-to-date 2012, with increases across all brands. This growth was primarily led by the Pottery Barn, West Elm, PBteen, and Pottery Barn Kids brands.

 

RETAIL NET REVENUES AND OTHER DATA

    

   

  

     Thirteen Weeks Ended          Twenty-Six Weeks Ended  
Dollars in thousands    August 4,
2013
    July 29,
2012
         

August 4,

2013

    July 29,
2012
 

Retail net revenues

   $ 504,552      $ 459,922         $ 973,276      $ 903,129   

Retail net revenue growth

     9.7%        3.0%           7.8%        3.4%   

Number of stores - beginning of period

     587        575           581        576   

Number of new stores

     5        5           12        7   

Number of new stores due to remodeling1

     -        2           4        3   

Number of permanently closed stores

     (1     (1        (4     (3

Number of closed stores due to remodeling1

     (1     (2        (3     (4

Number of stores - end of period

     590        579           590        579   

Store selling square footage at period-end

     3,600,000        3,526,000           3,600,000        3,526,000   

Store leased square footage (“LSF”) at period-end

     5,863,000        5,738,000             5,863,000        5,738,000   

1 Remodeled stores are defined as those stores temporarily closed and subsequently reopened during the year due to square footage expansion, store modification or relocation.

 

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     Store Count      Avg. LSF Per Store  
     

  May 5,

2013

     Openings      Closings    

August 4,

2013

    

July 29,

2012

    

  August 4,

2013

    

July 29,

2012

 

Williams-Sonoma

     254         -         (1     253         259         6,600         6,500   

Pottery Barn

     195         1         -        196         193         13,800         13,800   

Pottery Barn Kids

     85         1         -        86         83         8,000         8,100   

West Elm

     49         3         (1     51         40         14,600         16,400   

Rejuvenation

     4         -         -        4         4         13,200         13,200   

Total

     587         5         (2     590         579         9,900         9,900   

Retail net revenues in the second quarter of fiscal 2013 increased $44,630,000, or 9.7%, compared to the second quarter of fiscal 2012, driven primarily by Pottery Barn, West Elm, and our international franchise operations, partially offset by a decrease in Williams-Sonoma. Including three net new stores within the second quarter of fiscal 2013, retail leased square footage increased 2.2% from the end of the second quarter of fiscal 2012.

Retail net revenues for year-to-date 2013 increased $70,147,000, or 7.8%, compared to year-to-date 2012, driven primarily by Pottery Barn, West Elm, and our international franchise operations, partially offset by a decrease in Williams-Sonoma. Including nine net new stores for year-to-date 2013, retail leased square footage increased 2.2% from the end of the second quarter of fiscal 2012.

COST OF GOODS SOLD

 

     Thirteen Weeks Ended           Twenty-Six Weeks Ended  
Dollars in thousands    August 4,
2013
     % Net
Revenues
     July 29,
2012
     % Net
Revenues
           August 4,
2013
     % Net
Revenues
     July 29,
2012
     % Net
Revenues
 

Cost of goods sold1

   $ 613,285         62.4%       $  539,803         61.7%            $ 1,166,908         62.4%       $ 1,048,151         62.0%   

 

1

Includes total occupancy expenses of $138,068,000 and $124,492,000 for the second quarter of fiscal 2013 and second quarter of fiscal 2012, respectively, and $271,072,000 and $249,679,000 for year-to-date 2013 and year-to-date 2012, respectively.

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services and shipping materials.

Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third party warehouse management and other distribution-related administrative expenses, are recorded in selling, general and administrative expenses.

Within our reportable segments, the direct-to-customer channel does not incur freight-to-store or store occupancy expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel. However, the direct-to-customer channel incurs higher customer shipping, damage and replacement costs than the retail channel.

 

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Second Quarter of Fiscal 2013 vs. Second Quarter of Fiscal 2012

Cost of goods sold increased by $73,482,000, or 13.6%, in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Cost of goods sold as a percentage of net revenues increased to 62.4% in the second quarter of fiscal 2013 from 61.7% in the second quarter of fiscal 2012. This increase was primarily driven by lower selling margins, partially offset by the leverage of fixed occupancy expenses due to increasing net revenues.

In the direct-to-customer channel, cost of goods sold as a percentage of net revenues in the second quarter of fiscal 2013 remained unchanged from the second quarter of fiscal 2012.

In the retail channel, cost of goods sold as a percentage of net revenues increased 160 basis points in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. This increase was primarily driven by lower selling margins.

Year-to-Date 2013 vs. Year-to-Date 2012

Cost of goods sold for year-to-date 2013 increased by $118,757,000, or 11.3%, compared to year-to-date 2012. Cost of goods sold as a percentage of net revenues increased to 62.4% for year-to-date 2013 from 62.0% for year-to-date 2012. This increase was primarily driven by lower selling margins, partially offset by the leverage of fixed occupancy expenses due to increasing net revenues.

In the direct-to-customer channel, cost of goods sold as a percentage of net revenues decreased 20 basis points for year-to-date 2013 compared to year-to-date 2012. This decrease as a percentage of net revenues was primarily driven by improved selling margins.

In the retail channel, cost of goods sold as a percentage of net revenues increased 150 basis points for year-to-date 2013 compared to year-to-date 2012. This increase as a percentage of net revenues was primarily driven by lower selling margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

     Thirteen Weeks Ended           Twenty-Six Weeks Ended  
Dollars in thousands    August 4,
2013
     % Net
Revenues
     July 29,
2012
     % Net
Revenues
           August 4,
2013
     % Net
Revenues
     July 29,
2012
     % Net
Revenues
 

Selling, general and administrative expenses

   $ 290,838         29.6%       $ 264,377         30.2%            $ 561,240         30.0%       $ 524,320         31.0%   

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

We experience differing employment and advertising costs as a percentage of net revenues within the retail and direct-to-customer channels due to their distinct distribution and marketing strategies. Store employment costs represent a greater percentage of retail net revenues than employment costs as a percentage of net revenues within the direct-to-customer channel. However, advertising expenses are higher within the direct-to-customer channel than in the retail channel.

Second Quarter of Fiscal 2013 vs. Second Quarter of Fiscal 2012

Selling, general and administrative expenses increased by $26,461,000, or 10.0%, in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.6% in the second quarter of fiscal 2013 from 30.2% in the second quarter of fiscal 2012. This decrease as a percentage of net revenues was primarily driven by the leverage of employment and advertising costs due to increasing net revenues.

 

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In the direct-to-customer channel, selling, general and administrative expenses as a percentage of net revenues decreased 100 basis points in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012, primarily driven by the leverage of advertising costs due to increasing net revenues.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreased 10 basis points in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. This decrease was primarily driven by the leverage of employment-related costs due to increasing net revenues, partially offset by an increase in other general expenses.

Year-to-Date 2013 vs. Year-to-Date 2012

Selling, general and administrative expenses for year-to-date 2013 increased by $36,920,000, or 7.0%, compared to year-to-date 2012. Including employee separation charges of $2,932,000, selling, general and administrative expenses as a percentage of net revenues decreased to 30.0% for year-to-date 2013 from 31.0% for year-to-date 2012 (which included employee separation charges of $6,935,000). This decrease as a percentage of net revenues was primarily driven by the leverage of advertising and employment costs due to increasing net revenues, and a reduction in year-over-year employee separation charges.

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of net revenues decreased 130 basis points for year-to-date 2013 compared to year-to-date 2012, primarily driven by the leverage of advertising costs due to increasing net revenues.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreased 50 basis points for year-to-date 2013 compared to year-to-date 2012. This decrease was primarily driven by the leverage of employment-related costs due to increasing net revenues, partially offset by an increase in other general expenses.

INCOME TAXES

The effective tax rate was 37.8% for year-to-date 2013 and 38.1% for year-to-date 2012.

LIQUIDITY AND CAPITAL RESOURCES

As of August 4, 2013, we held $205,364,000 in cash and cash equivalent funds, the majority of which are held in money market funds and interest-bearing demand deposit accounts. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2013, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, stock repurchases, purchases of property and equipment and dividend payments. In addition to the current cash balances on hand, we have a credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit. Prior to December 22, 2016, we may, upon notice to the lenders, request an increase in the credit facility of up to $200,000,000 to provide for a total of $500,000,000 of unsecured revolving credit. During the thirteen and twenty-six weeks ended August 4, 2013 and July 29, 2012, we had no borrowings under the credit facility, and no amounts were outstanding as of August 4, 2013 or July 29, 2012. However, as of August 4, 2013, $4,970,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. Additionally, as of August 4, 2013, we had three unsecured letter of credit reimbursement facilities for a total of $90,000,000, of which an aggregate of $18,530,000 was outstanding. On August 30, 2013, we renewed all three of our letter of credit facilities for an aggregate of $70,000,000, and each of these facilities now matures on August 29, 2014. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title.

 

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We are currently in compliance with all of our financial covenants and, based on our current projections, we expect to remain in compliance throughout fiscal 2013. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.

Cash Flows from Operating Activities

For year-to-date 2013, net cash provided by operating activities was $64,063,000 compared to $38,736,000 for year-to-date 2012. For year-to-date 2013, net cash provided by operating activities was primarily attributable to an increase in net earnings adjusted for non-cash items and an increase in accounts payable, partially offset by an increase in merchandise inventories and prepaid expenses as well as a decrease in income taxes payable resulting from the timing of payments. This represents an increase in net cash provided, compared to year-to-date 2012, primarily due to an increase in accounts payable resulting from the timing of payments and an increase in adjusted net earnings, partially offset by a decrease in income taxes payable and an increase in both merchandise inventories and prepaid expenses.

Cash Flows from Investing Activities

For year-to-date 2013, net cash used in investing activities was $97,415,000 compared to $70,973,000 for year-to-date 2012, and was primarily attributable to purchases of property and equipment. Net cash used compared to year-to-date 2012 increased primarily due to an increase in purchases of property and equipment.

Cash Flows from Financing Activities

For year-to-date 2013, net cash used in financing activities was $184,315,000 compared to $133,822,000 for year-to-date 2012. For year-to-date 2013, net cash used in financing activities was primarily attributable to our repurchase of common stock and the payment of dividends. Net cash used compared to year-to-date 2012 increased primarily due to an increase in our repurchase of common stock.

Stock Repurchase Program and Dividend

See Note F to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividend, within Item 1 of this Quarterly Report on Form 10-Q for further information.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ significantly from these estimates. During the second quarter of fiscal 2013, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended February 3, 2013.

Seasonality

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In anticipation of our peak season, we hire a substantial number of additional temporary employees in our retail stores, customer care centers and distribution centers, and incur significant fixed catalog production and mailing costs.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rates, including the devaluation of the U.S. dollar, and the effects of uncertain economic forces which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

Our line of credit facility is the only instrument we hold with a variable interest rate which could, if drawn upon, subject us to risks associated with changes in that interest rate. As of August 4, 2013, there were no amounts outstanding under our credit facility.

In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of August 4, 2013, our investments, made primarily in money market funds and interest-bearing demand deposit accounts, are stated at cost and approximate their fair values.

Foreign Currency Risks

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 3% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any currency risks related to these international purchase transactions were not significant to us during year-to-date 2013 or year-to-date 2012. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.

In addition, our retail stores in Canada and Australia, and our limited operations in Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk and, as such, these exchange rate fluctuations have not been material to us in the past. However, as we continue to expand globally, we are exposed to foreign currency exchange risk related to the transactions of our foreign subsidiaries. To mitigate this risk, in April 2013, we began utilizing foreign currency forward contracts in accordance with our risk management policies (see Note G to our Condensed Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of August 4, 2013, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

 

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Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is contained in Note E to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 3, 2013 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information as of August 4, 2013 with respect to shares of common stock we repurchased during the second quarter of fiscal 2013. For additional information, please see Note F to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

 

  Fiscal period    Total Number of
Shares Purchased
     Average Price
Paid Per Share
     Total Number of
Shares Purchased as
Part of a Publicly
Announced Program
     Maximum Dollar Value
of Shares That May Yet
Be Purchased Under
the Program
 

  May 6, 2013 to June 2, 2013

     180,910         $  55.47         180,910         $  699,286,505   

  June 3, 2013 to June 30, 2013

     926,852         $  54.43         926,852         $  648,838,210   

  July 1, 2013 to August 4, 2013

     506,181         $  57.98         506,181         $  619,490,120   

  Total

     1,613,943         $  55.66         1,613,943         $  619,490,120   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

(a) Exhibits

 

Exhibit

Number

  

Exhibit Description

  31.1    Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
  31.2    Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
  32.1    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.INS*    XBRL Instance Document
  101.SCH*    XBRL Taxonomy Extension Schema Document
  101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
  101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WILLIAMS-SONOMA, INC.
By:  

/s/ Julie P. Whalen

  Julie P. Whalen
  Chief Financial Officer

Date: September 12, 2013

 

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