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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2017.

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  ☒    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  ☒    No  ☐

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

 

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

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 28, 2017, 86,636,793 shares of the registrant’s Common Stock were outstanding.

 

 

 


Table of Contents

WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2017

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

          PAGE  

Item 1.

   Financial Statements      1  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      12  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      16  

Item 4.

   Controls and Procedures      17  
   PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      17  

Item 1A.

   Risk Factors      17  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      18  

Item 3.

   Defaults Upon Senior Securities      18  

Item 4.

   Mine Safety Disclosures      18  

Item 5.

   Other Information      18  

Item 6.

   Exhibits      19  


Table of Contents

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

     Thirteen Weeks Ended  
In thousands, except per share amounts   

April 30,

2017

   

May 1,

2016

 

E-commerce net revenues

   $ 580,510     $ 576,234  

Retail net revenues

     530,997       521,583  

Net revenues

     1,111,507       1,097,817  

Cost of goods sold

     715,747       705,300  

Gross profit

     395,760       392,517  

Selling, general and administrative expenses

     333,286       328,992  

Operating income

     62,474       63,525  

Interest (income) expense, net

     (103     (68

Earnings before income taxes

     62,577       63,593  

Income taxes

     23,022       23,996  

Net earnings

   $ 39,555     $ 39,597  

Basic earnings per share

   $ 0.45     $ 0.44  

Diluted earnings per share

   $ 0.45     $ 0.44  

Shares used in calculation of earnings per share:

    

Basic

     86,962       89,298  

Diluted

     87,710       90,514  

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    Thirteen Weeks Ended  
In thousands  

April 30,

2017

   

May 1,

2016

 

Net earnings

  $ 39,555     $ 39,597  

Other comprehensive income (loss):

   

Foreign currency translation adjustments

    (1,566     5,208  

Change in fair value of derivative financial instruments, net of tax (tax benefit) of $237 and $(768)

    655       (2,165

Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax of $5 and $107

    (16     (302

Comprehensive income

  $ 38,628     $ 42,338  

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In thousands, except per share amounts   

April 30,

2017

   

January 29,

2017

   

May 1,

2016

 

ASSETS

      

Current assets

      

Cash and cash equivalents

   $ 93,975     $ 213,713     $ 99,217  

Accounts receivable, net

     63,982       88,803       75,364  

Merchandise inventories, net

     1,037,107       977,505       944,632  

Prepaid catalog expenses

     23,066       23,625       29,916  

Prepaid expenses

     62,014       52,882       53,689  

Other assets

     10,901       10,652       9,844  

Total current assets

     1,291,045       1,367,180       1,212,662  

Property and equipment, net

     920,531       923,283       893,640  

Deferred income taxes, net

     124,977       135,238       131,597  

Other assets, net

     54,624       51,178       52,469  

Total assets

   $ 2,391,177     $ 2,476,879     $ 2,290,368  

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities

      

Accounts payable

   $ 399,336     $ 453,710     $ 339,392  

Accrued salaries, benefits and other liabilities

     91,038       130,187       96,577  

Customer deposits

     289,852       294,276       275,116  

Borrowings under revolving line of credit

     45,000       —         100,000  

Income taxes payable

     37,792       23,245       7,764  

Other liabilities

     49,647       59,838       52,907  

Total current liabilities

     912,665       961,256       871,756  

Deferred rent and lease incentives

     195,201       196,188       188,715  

Other long-term obligations

     73,160       71,215       67,041  

Total liabilities

     1,181,026       1,228,659       1,127,512  

Commitments and contingencies – See Note F

      

Stockholders’ equity

      

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

     —         —         —    

Common stock: $.01 par value; 253,125 shares authorized; 86,883, 87,325 and 89,350 shares issued and outstanding at April 30, 2017,
January 29, 2017 and May 1, 2016, respectively

     869       873       894  

Additional paid-in capital

     549,281       556,928       534,414  

Retained earnings

     671,758       701,702       636,986  

Accumulated other comprehensive loss

     (10,830     (9,903     (7,875

Treasury stock, at cost: 13, 20 and 23 shares as of April 30, 2017,
January 29, 2017 and May 1, 2016, respectively

     (927     (1,380     (1,563

Total stockholders’ equity

     1,210,151       1,248,220       1,162,856  

Total liabilities and stockholders’ equity

   $ 2,391,177     $ 2,476,879     $ 2,290,368  

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         Thirteen Weeks Ended      
In thousands    April 30,
2017
    May 1,
2016
 

Cash flows from operating activities:

    

Net earnings

   $ 39,555     $ 39,597  

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

    

Depreciation and amortization

     44,950       41,240  

Loss on disposal/impairment of assets

     519       880  

Amortization of deferred lease incentives

     (6,477     (5,987

Deferred income taxes

     (3,848     (5,796

Tax benefit related to stock-based awards

     13,742       20,087  

Excess tax benefit related to stock-based awards

     —         (3,824

Stock-based compensation expense

     9,817       15,732  

Other

     (76     (418

Changes in:

    

Accounts receivable

     24,610       3,781  

Merchandise inventories

     (60,246     37,424  

Prepaid catalog expenses

     559       (997

Prepaid expenses and other assets

     (12,472     (7,683

Accounts payable

     (65,990     (113,510

Accrued salaries, benefits and other liabilities

     (47,235     (20,875

Customer deposits

     (4,154     (22,465

Deferred rent and lease incentives

     5,806       9,439  

Income taxes payable

     14,564       (59,285

Net cash used in operating activities

     (46,376     (72,660

Cash flows from investing activities:

    

Purchases of property and equipment

     (32,153     (28,149

Other

     5       294  

Net cash used in investing activities

     (32,148     (27,855

Cash flows from financing activities:

    

Borrowings under revolving line of credit

     45,000       100,000  

Repurchases of common stock

     (38,350     (40,639

Payment of dividends

     (34,189     (34,423

Tax withholdings related to stock-based awards

     (13,780     (22,904

Excess tax benefit related to stock-based awards

     —         3,824  

Proceeds related to stock-based awards

     —         995  

Other

     —         (48

Net cash provided by (used in) financing activities

     (41,319     6,805  

Effect of exchange rates on cash and cash equivalents

     105       (720

Net decrease in cash and cash equivalents

     (119,738     (94,430

Cash and cash equivalents at beginning of period

     213,713       193,647  

Cash and cash equivalents at end of period

   $ 93,975     $ 99,217  

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 April 30, 2017 and May 1, 2016, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income for the thirteen weeks then ended, and the Condensed Consolidated Statements of Cash Flows for the thirteen 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 weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of January 29, 2017, 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 January 29, 2017.

The results of operations for the thirteen weeks ended April 30, 2017 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 (“U.S. GAAP”) 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 January 29, 2017.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. In addition, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The FASB also issued ASU 2016-10, Identifying Performance Obligations and Licensing in April 2016, which amends certain aspects of ASU 2014-09 for identifying performance obligations and the implementation guidance on licensing. These ASUs are effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We are currently assessing the impact of these ASUs on our Consolidated Financial Statements, however, we expect that the adoption of these standards will result in a change in the timing of revenue recognition for certain merchandise shipped to the customer, as well as a change in the timing of recognizing breakage income related to our gift cards.

In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the impact of this ASU on our Consolidated Financial Statements, but expect that it will result in a substantial increase in our long-term assets and liabilities.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions (including the accounting for income taxes and forfeitures, among other areas). The ASU requires entities to, among other things, recognize all excess tax benefits and deficiencies in the income statement, as a benefit or expense within income taxes, in the period in which they occur. The ASU also allows an entity to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. We adopted this ASU in the first quarter of fiscal 2017 and accordingly, have recorded tax expense related to stock-based awards of approximately $1,400,000 within income taxes in our Condensed Consolidated Statement of Earnings. As of the first quarter of fiscal 2017, we no longer classify excess tax benefits related to stock-based awards as a financing cash inflow and an operating cash outflow. These classification requirements were adopted prospectively and, as such, our Condensed Consolidated Statement of Cash Flows for the first quarter of fiscal 2016 has not been retrospectively adjusted. We continue to estimate expected forfeitures.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.

 

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In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill impairment by eliminating step two from the goodwill impairment test. The ASU requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019 and early adoption is permitted. We early adopted this ASU in the first quarter of fiscal 2017. The adoption of this ASU had no impact on our financial condition, results of operations or cash flows.

NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a $500,000,000 unsecured revolving line of credit (“credit facility”) that may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facility by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. As of April 30, 2017, we were in compliance with our financial covenants under the credit facility and based on current projections, we expect to remain in compliance throughout the next 12 months. The credit facility matures on November 19, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.

We may elect interest rates calculated at (i) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent, or a rate based on LIBOR plus one percent) plus a margin based on our leverage ratio or (ii) LIBOR plus a margin based on our leverage ratio. During the first quarter of fiscal 2017, we had borrowings of $45,000,000 under the credit facility (at a weighted average interest rate of 2.01%), all of which was outstanding as of April 30, 2017. During the first quarter of fiscal 2016, we had borrowings of $100,000,000 under the credit facility (at a weighted average interest rate of 1.45%), all of which was outstanding as of May 1, 2016. Additionally, as of April 30, 2017, $12,120,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 26, 2017. The letter of credit facilities contain covenants that are consistent with our unsecured revolving line of credit. Interest on unreimbursed amounts under the letter of credit facilities accrues at the lender’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent) plus 2.0%. As of April 30, 2017, an aggregate of $6,831,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 23, 2018.

NOTE C. 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 (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 32,310,000 shares. As of April 30, 2017, there were approximately 8,278,000 shares available for future grant. Awards may be granted under the Plan to our officers, employees and non-employee members of the board of directors (the “Board”) or those of any of our subsidiaries. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Option Awards

Annual grants of option awards are limited to 1,000,000 shares on a per person basis and 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 granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. 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).

 

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Stock-Based Compensation Expense

During the thirteen weeks ended April 30, 2017 and May 1, 2016, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $9,817,000 and $15,732,000, respectively.

Stock-Settled Stock Appreciation Rights

A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the grant date and the conversion date for the number of shares converted.

The following table summarizes our stock-settled stock appreciation right activity during the thirteen weeks ended April 30, 2017:

 

      Shares  

Balance at January 29, 2017 (100% vested)

     411,710  

Granted

     —    

Converted into common stock

     (33,674

Cancelled

     —    

Balance at April 30, 2017 (100% vested)

     378,036  

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirteen weeks ended April 30, 2017:

 

      Shares  

Balance at January 29, 2017

     2,232,486  

Granted

     79,904  

Released

     (568,999

Cancelled

     (343,244

Balance at April 30, 2017

     1,400,147  

Vested plus expected to vest at April 30, 2017

     974,175  

 

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NOTE D. 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 and common stock equivalents for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, 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:

 

In thousands, except per share amounts    Net Earnings     

Weighted

Average Shares

    

Earnings

Per Share

 

Thirteen weeks ended April 30, 2017

        

Basic

   $ 39,555        86,962      $ 0.45  

Effect of dilutive stock-based awards

        748     

Diluted

   $ 39,555        87,710      $ 0.45  

Thirteen weeks ended May 1, 2016

        

Basic

   $ 39,597        89,298      $ 0.44  

Effect of dilutive stock-based awards

        1,216     

Diluted

   $ 39,597        90,514      $ 0.44  

Stock-based awards of 215,595 and 203,000 were excluded from the computation of diluted earnings per share for the thirteen weeks ended April 30, 2017 and May 1, 2016, respectively, as their inclusion would be anti-dilutive.

NOTE E. SEGMENT REPORTING

We have two reportable segments, e-commerce and retail. The e-commerce segment has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through our e-commerce websites and direct mail catalogs. Our e-commerce merchandise strategies are operating segments, which have been aggregated into one reportable segment, e-commerce. The retail segment, which includes our franchise operations, has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, which sell our products through our retail stores. Our retail merchandise strategies 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 products for the home. 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 (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third-party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, prepaid expenses, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

Income taxes are calculated at an entity level and are not allocated to our reportable segments.

 

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Segment Information

 

In thousands    E-commerce      Retail      Unallocated     Total  

Thirteen weeks ended April 30, 2017

          

Net revenues1

   $ 580,510      $ 530,997      $ —       $ 1,111,507  

Depreciation and amortization expense

     6,967        22,342        15,641       44,950  

Operating income (loss)2

     132,004        21,714        (91,244     62,474  

Assets3

     653,898        1,067,169        670,110       2,391,177  

Capital expenditures

     2,870        16,497        12,786       32,153  

Thirteen weeks ended May 1, 2016

          

Net revenues1

   $   576,234      $ 521,583      $ —       $   1,097,817  

Depreciation and amortization expense

     7,614        20,749        12,877       41,240  

Operating income (loss)2

     131,545        30,125        (98,145     63,525  

Assets3

     600,053          1,039,580          650,735       2,290,368  

Capital expenditures

     3,849        13,752        10,548       28,149  
1 Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $69.4 million and $69.7 million for the thirteen weeks ended April 30, 2017 and May 1, 2016, respectively.
2 Includes $5.7 million and $13.2 million of severance-related charges for the thirteen weeks ended April 30, 2017 and May 1, 2016, respectively, primarily in our corporate functions, which is recorded in selling, general and administrative expenses within the unallocated segment.
3 Includes long-term assets related to our international operations of approximately $57.9 million and $64.4 million as of April 30, 2017 and May 1, 2016, respectively.

NOTE F. 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. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could 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.

NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended April 30, 2017, we repurchased 764,543 shares of our common stock at an average cost of $50.16 per share for a total cost of approximately $38,350,000 under our $500,000,000 stock repurchase authorization. As of April 30, 2017, we held treasury stock of $927,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

During the thirteen weeks ended May 1, 2016, we repurchased 727,629 shares of our common stock at an average cost of $55.85 per share for a total cost of approximately $40,639,000. As of May 1, 2016, we held treasury stock of $1,563,000.

Stock repurchases under our 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. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

Dividends

We declared cash dividends of $0.39 and $0.37 per common share during the thirteen weeks ended April 30, 2017 and May 1, 2016, respectively. Our quarterly cash dividend may be limited or terminated at any time.

 

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NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail and/or e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which 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. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with 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 measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as a hedge and qualifies for hedge accounting in accordance with the FASB Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the 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 selling, general and administrative expenses. Based on the rates in effect as of April 30, 2017, we expect to reclassify a net pre-tax gain of approximately $944,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency forward contracts (to sell Australian dollars and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses.

As of April 30, 2017 and May 1, 2016, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

 

In thousands      April 30, 2017        May 1, 2016  

Contracts designated as cash flow hedges

   $ 19,200      $ 27,150  

Contracts not designated as cash flow hedges

   $ 48,000      $ 43,000  

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 selling, general and administrative expenses. 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 weeks ended April 30, 2017 and May 1, 2016.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen weeks ended April 30, 2017 and May 1, 2016, pre-tax, was as follows:

 

In thousands      April 30, 2017        May 1, 2016  

Net gain (loss) recognized in OCI

   $ 892      $ (2,933

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

   $ 21      $ 409  

Net foreign exchange gain (loss) recognized in selling, general and administrative expenses:

     

Instruments designated as cash flow hedges 1

   $ 8      $ 23  

Instruments not designated or de-designated

   $ 341      $ (3,342
                   
1 Changes in fair value of the forward contract related to interest charges (or forward points).

 

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The fair values of our derivative financial instruments are presented below according to their classification in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.

 

In thousands      April 30, 2017       May 1, 2016  

Derivatives designated as cash flow hedges:

    

Other current assets

   $ 925     $ —    

Other long-term assets

   $ 52     $ —    

Other current liabilities

   $ —       $ (2,160

Derivatives not designated as hedging instruments:

    

Other current liabilities

   $ (83   $ (287
                  

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.

NOTE I. 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 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 in active markets 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; 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 contracts entered into are subject to credit risk-related contingent features or collateral requirements.

Property and Equipment

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure these assets at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.

There were no transfers between Level 1, 2 or 3 categories during the thirteen weeks ended April 30, 2017 or May 1, 2016.

 

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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:

 

In thousands   

Foreign Currency

Translation

   

Cash Flow

Hedges

   

Accumulated Other

Comprehensive

Income (Loss)

 

Balance at January 29, 2017

   $ (9,957   $ 54     $ (9,903

Foreign currency translation adjustments

     (1,566     —         (1,566

Change in fair value of derivative financial instruments

     —         655       655  

Reclassification adjustment for realized (gain) loss on derivative financial instruments 1

     —         (16     (16

Other comprehensive income (loss)

     (1,566     639       (927

Balance at April 30, 2017

     (11,523     693       (10,830
      

Balance at January 31, 2016

     (11,480     864       (10,616

Foreign currency translation adjustments

     5,208         5,208  

Change in fair value of derivative financial instruments

     —         (2,165     (2,165

Reclassification adjustment for realized (gain) loss on derivative financial instruments 1

     —         (302     (302

Other comprehensive income (loss)

     5,208       (2,467     2,741  

Balance at May 1, 2016

   $ (6,272   $ (1,603   $ (7,875
1 Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Condensed Consolidated Statements of Earnings.

 

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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: our merchandise strategies; our growth strategies for our brands; trends in Pottery Barn categories; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash; our compliance with the financial covenants contained in our credit facilities; 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; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, 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 January 29, 2017, 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, West Elm, PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 628 stores. We have retail and/or e-commerce businesses in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, and ship our products to customers worldwide. Our catalogs reach customers throughout the U.S. and Australia. In addition, we have unaffiliated franchisees that operate stores and/or e-commerce websites in the Middle East, the Philippines and Mexico. During fiscal 2016, we entered into a franchise agreement with an unaffiliated franchisee to operate stores and e-commerce websites in South Korea, beginning in fiscal 2017.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended April 30, 2017 (“first quarter of fiscal 2017”), as compared to the thirteen weeks ended May 1, 2016 (“first quarter of fiscal 2016), 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.

First Quarter of Fiscal 2017 Financial Results

Net revenues in the first quarter of fiscal 2017 increased by $13,690,000, or 1.2%, compared to the first quarter of fiscal 2016, with comparable brand revenue growth of 0.1%. The increase in net revenues was driven by a 0.7% increase in our e-commerce net revenues (primarily driven by West Elm and Williams Sonoma, partially offset by the Pottery Barn brands), and a 1.8% increase in retail net revenues (primarily driven by West Elm and Pottery Barn), with particular strength in furniture. Net revenue growth in the first quarter of fiscal 2017 also included a 2% increase in retail leased square footage primarily due to 4 net new stores.

In Pottery Barn, comparable brand revenues declined 1.4% in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Despite this decline, the brand showed improved trends in furniture – specifically upholstery, bedroom and home office – and experienced growth in other categories such as decorating and entertaining. In Williams Sonoma, comparable brand revenues increased 3.2% in the first quarter of fiscal 2017 on top of 3.5% in the first quarter of fiscal 2016. The brand launched several products and collaborations during the first quarter, and we saw particular strength across tabletop, electrics and cutlery. In West Elm, comparable brand revenues increased 6.0% in the first quarter of fiscal 2017 on top of 19.0% in the first quarter of fiscal 2016. This growth was driven by furniture and our outdoor collections. In Pottery Barn Kids, comparable brand revenues declined 5.7% in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Growth in our furniture business was more than offset by out-of-stock inventory in key categories and softness in our textiles and accessories. In PBteen, comparable brand revenues declined 14.3% in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 primarily due to out-of-stock inventory in key categories. While our furniture categories showed improved trends during the quarter, we saw softness in textiles and accessories. And in our emerging brands, Rejuvenation and Mark and Graham, net revenues increased 29.8% in the first quarter of fiscal 2017.

 

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In the first quarter of fiscal 2017, diluted earnings per share was $0.45 (which included severance-related charges of $0.04 and an unfavorable tax impact from the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, of $0.02) versus $0.44 in the first quarter of fiscal 2016, (which included severance-related reorganization charges of $0.09). We also returned $72,539,000 to our stockholders through stock repurchases and dividends.

NET REVENUES

Net revenues consist of e-commerce net revenues and retail net revenues. E-commerce 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 and to our franchisees, 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.

 

     Thirteen Weeks Ended  
In thousands   

April 30,

2017

     % Total    

May 1,

2016

     % Total  

E-commerce net revenues

   $ 580,510        52.2   $ 576,234        52.5

Retail net revenues

     530,997        47.8     521,583        47.5

Net revenues

   $ 1,111,507        100.0   $ 1,097,817        100.0

Net revenues in the first quarter of fiscal 2017 increased by $13,690,000, or 1.2%, compared to the first quarter of fiscal 2016, with comparable brand revenue growth of 0.1%. The increase in net revenues was driven by a 0.7% increase in our e-commerce net revenues (primarily driven by West Elm and Williams Sonoma, partially offset by the Pottery Barn brands), and a 1.8% increase in retail net revenues (primarily driven by West Elm and Pottery Barn), with particular strength in furniture. Net revenue growth in the first quarter of fiscal 2017 also included a 2% increase in retail leased square footage primarily due to 4 net new stores.

Comparable Brand Revenue

Comparable brand revenue includes retail comparable store sales and e-commerce 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. Comparable brand revenue excludes sales from certain operations until such time that we believe those sales are meaningful to evaluating the performance of the brand. Sales to our international franchisees have also been excluded as their stores and e-commerce websites are not operated by us.

Comparable stores are defined as permanent stores where 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.

 

     Thirteen Weeks Ended  
Comparable brand revenue growth (decline)   

April 30,

2017

   

May 1,

2016

 

Pottery Barn

     (1.4 %)      0.2

Williams Sonoma

     3.2     3.5

West Elm

     6.0     19.0

Pottery Barn Kids

     (5.7 %)      1.7

PBteen

     (14.3 %)      1.9

Total

     0.1     4.5

 

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RETAIL STORE DATA

 

     Store Count      Average Leased Square
Footage Per Store
 
      January 29,
2017
     Openings      Closings    

April 30,

2017

    

May 1,

2016

    

April 30,

2017

    

May 1,

2016

 

Williams Sonoma

     234        2        (3     233        241        6,600        6,600  

Pottery Barn

     201        1        (3     199        200        13,800        13,800  

West Elm

     98        1        —         99        87        13,300        13,200  

Pottery Barn Kids

     89        —          —         89        90        7,400        7,500  

Rejuvenation

     7        1        —         8        6        8,800        9,000  

Total

     629        5        (6     628        624        10,100        10,000  

Store selling square footage at period-end

 

             3,942,000        3,867,000  

Store leased square footage at period-end

 

                               6,341,000        6,218,000  

COST OF GOODS SOLD

 

     Thirteen Weeks Ended  
In thousands   

April 30,

2017

    

% Net

Revenues

   

May 1,

2016

    

% Net

Revenues

 

Cost of goods sold1

   $ 715,747        64.4   $ 705,300        64.2
1  Includes occupancy expenses of $167,493,000 and $162,019,000 for the first quarter of fiscal 2017 and the first quarter of fiscal 2016, 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, property taxes 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 e-commerce 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 e-commerce channel incurs higher customer shipping, damage and replacement costs than the retail channel.

First Quarter of Fiscal 2017 vs. First Quarter of Fiscal 2016

Cost of goods sold increased by $10,447,000, or 1.5%, in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Cost of goods sold as a percentage of net revenues increased to 64.4% in the first quarter of fiscal 2017 from 64.2% in the first quarter of fiscal 2016. This increase was primarily driven by higher occupancy costs to support our growth and operational initiatives, partially offset by improved selling margins from reduced shipping and fulfillment related costs as a result of our focus on our supply chain initiatives.

In the e-commerce channel, cost of goods sold as a percentage of net revenues decreased in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 primarily driven by reduced shipping and fulfillment-related costs as a result of our focus on our supply chain and inventory initiatives.

In the retail channel, cost of goods sold as a percentage of net revenues increased in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 primarily driven by higher occupancy costs to support our growth and operational initiatives.

 

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

     Thirteen Weeks Ended  
In thousands   

April 30,

2017

    

% Net

Revenues

   

May 1,

2016

    

% Net

Revenues

 

Selling, general and administrative expenses

   $ 333,286        30.0   $ 328,992        30.0

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution and manufacturing facilities, 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 e-commerce channels due to their distinct distribution and marketing strategies. Employment costs represent a greater percentage of net revenues within the retail channel as compared to the e-commerce channel. However, advertising expenses are higher within the e-commerce channel than in the retail channel.

First Quarter of Fiscal 2017 vs. First Quarter of Fiscal 2016

Selling, general and administrative expenses increased by $4,294,000, or 1.3%, in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. Selling, general and administrative expenses as a percentage of net revenues were 30.0% in the first quarter of fiscal 2017 and the first quarter of fiscal 2016. An increase in digital advertising expenses as a result of our focus on new customer acquisition as well as an increase in employment costs associated with our growth initiatives was offset by a decrease in severance-related charges within the unallocated segment ($5,705,000 in the first quarter of fiscal 2017 compared to $13,221,000 in the first quarter of fiscal 2016) and a decrease in general expenses.

In the e-commerce channel, selling, general and administrative expenses as a percentage of net revenues increased in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 primarily driven by an increase in digital advertising expenses.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues increased in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 primarily driven by an increase in employment costs associated with our growth initiatives.

INCOME TAXES

The effective tax rate was 36.8% for the first quarter of fiscal 2017, and 37.7% for the first quarter of fiscal 2016. The decrease in the effective tax rate in the first quarter of fiscal 2017 was primarily driven by improved profitability across our international operations, which are taxed at a lower tax rate, partially offset by an unfavorable impact from the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2017, we held $93,975,000 in cash and cash equivalents, the majority of which is held in demand deposit accounts and money market funds, and of which $49,048,000 was held by our foreign subsidiaries. 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.

In fiscal 2017, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, property and equipment purchases, stock repurchases and dividend payments. In addition to our cash balances on hand, we have a $500,000,000 unsecured revolving line of credit (“credit facility”) that may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facility by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. During the first quarter of fiscal 2017, we borrowed $45,000,000 under the credit facility, all of which was outstanding as of April 30, 2017. During the first quarter of fiscal 2016, we borrowed $100,000,000 under the credit facility, all of which was outstanding as of May 1, 2016.

As of April 30, 2017, issued but undrawn standby letters of credit totaling $12,120,000 were outstanding under the credit facility. Additionally, as of April 30, 2017, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which $6,831,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title. We are currently in compliance with all of our financial covenants under the credit facility and the three unsecured letter of credit reimbursement facilities and, based on our current projections, we expect to remain in compliance throughout the next 12 months. 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.

 

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Cash Flows from Operating Activities

For the first quarter of fiscal 2017, net cash used in operating activities was $46,376,000 compared to $72,660,000 for the first quarter of fiscal 2016. For the first quarter of fiscal 2017, net cash used in operating activities was primarily attributable to accounts payable and accrued salaries, benefits and other liabilities, as well as merchandise inventories, partially offset by net earnings adjusted for non-cash items. Net cash used in operating activities decreased compared to the first quarter of fiscal 2016 primarily due to a decrease in payments related to income taxes and accounts payable, partially offset by an increase in merchandise inventories.

Cash Flows from Investing Activities

For the first quarter of fiscal 2017, net cash used in investing activities was $32,148,000 compared to $27,855,000 for the first quarter of fiscal 2016, and was primarily attributable to purchases of property and equipment. Net cash used in investing activities increased compared to the first quarter of fiscal 2016 primarily due to an increase in purchases of property and equipment.

Cash Flows from Financing Activities

For the first quarter of fiscal 2017, net cash used in financing activities was $41,319,000 compared to net cash provided by financing activities of $6,805,000 for the first quarter of fiscal 2016. For the first quarter of fiscal 2017, net cash used in financing activities was primarily attributable to repurchases of common stock and the payment of dividends partially offset by borrowings under our revolving line of credit. The decrease in cash flows from financing activities in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 was primarily attributable to a decrease in borrowings under our revolving line of credit.

Stock Repurchase Program and Dividends

See Note G to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividends, 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 U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These 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 could differ significantly from these estimates. During the first quarter of fiscal 2017, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended January 29, 2017.

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 preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, customer care centers and distribution facilities, and incur significant fixed catalog production and mailing costs.

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 rate fluctuations, and the effects of economic uncertainty 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 revolving line of credit has a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. As of April 30, 2017, we had borrowings of $45,000,000 outstanding under the credit facility. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instrument would not materially affect our results of operations or cash flows.

 

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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 April 30, 2017, our investments, made primarily in demand deposit accounts and money market funds, 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 1% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any foreign currency impact related to these international purchase transactions was not significant to us during the first quarter of fiscal 2017 or the first quarter of fiscal 2016. 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 and/or e-commerce businesses in Canada, Australia and the United Kingdom, and our operations throughout 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. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in the first quarter of fiscal 2017 or the first quarter of fiscal 2016, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note H to our Condensed Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of April 30, 2017, 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 Securities and Exchange Commission.

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 F 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 fiscal year ended January 29, 2017 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.

 

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

The following table provides information as of April 30, 2017 with respect to shares of common stock we repurchased during the first quarter of fiscal 2017 under our $500,000,000 stock repurchase authorization. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

 

Fiscal period   

Total Number

of Shares

Purchased1

    

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

 

January 30, 2017 – February 26, 2017

     241,970      $ 47.74        241,970      $ 399,026,000  

February 27, 2017 – March 26, 2017

     250,684      $ 48.57        250,684      $ 386,851,000  

March 27, 2017 – April 30, 2017

     271,889      $ 53.78        271,889      $ 372,227,000  
                                     

Total

     764,543      $ 50.16        764,543      $ 372,227,000  
                                     
1 Excludes shares withheld for employee taxes upon vesting of stock-based awards.

Stock repurchases under our 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. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

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

  10.1+*    Separation Agreement and General Release with Sandra Stangl dated March 14, 2017
  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

 

+ Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.

 

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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: June 2, 2017

 

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