UNITED STATES
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 | ||
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period fromto
Commission file numberFile Number: 001-14077
WILLIAMS-SONOMA, INC.
California | 94-2203880 | |
(State or | (I.R.S. Employer Identification No.) |
3250 Van Ness Avenue, San Francisco, CA | 94109 | |||
(Address of | (Zip Code) |
Registrant’s Telephone Number, Including Area Codetelephone number, including area code (415) 421-7900
Indicate by check [X]mark (“ü”) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]þ No [ ]o
Indicate by check [X]mark (“ü”) whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]þ No [ ]o
As of December 12, 2002, 116,349,193August 29, 2003, 116,766,169 shares of the Registrant’sregistrant’s Common Stock were outstanding.
WILLIAMS-SONOMA, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION | |||||||||
PAGE | |||||||||
Item 1. | Financial Statements | ||||||||
Condensed Consolidated Balance Sheets | |||||||||
Condensed Consolidated Statements of Earnings for the Thirteen | |||||||||
Condensed Consolidated Statements of Cash Flows for the | |||||||||
Notes to Condensed Consolidated Financial Statements | |||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||||||
Item 4. | Controls and Procedures | ||||||||
PART II. OTHER INFORMATION | |||||||||
Item 1. | Legal Proceedings | ||||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 25 | |||||||
Item 6. | Exhibits and Reports on Form 8-K |
21
ITEM 1. FINANCIAL STATEMENTS
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
November 3, | February 3, | October 28, | August 3, | February 2, | August 4, | |||||||||||||||||||||
Dollars and shares in thousands, except per share amounts | Dollars and shares in thousands, except per share amounts | 2002 | 2002 | 2001 | Dollars and shares in thousands, except per share amounts | 2003 | 2003 | 2002 | ||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||||
Current assets | Current assets | Current assets | �� | |||||||||||||||||||||||
Cash and cash equivalents | $ | 38,461 | $ | 75,374 | $ | 6,897 | Cash and cash equivalents | $ | 81,779 | $ | 193,495 | $ | 89,909 | |||||||||||||
Accounts receivable — net | 53,664 | 32,141 | 48,832 | Accounts receivable – net | 38,522 | 34,288 | 41,518 | |||||||||||||||||||
Merchandise inventories — net | 358,409 | 249,237 | 331,825 | Merchandise inventories – net | 376,860 | 321,247 | 250,397 | |||||||||||||||||||
Prepaid catalog expenses | 41,563 | 29,522 | 34,558 | Prepaid catalog expenses | 41,275 | 35,163 | 28,370 | |||||||||||||||||||
Prepaid expenses | 21,530 | 16,630 | 14,536 | Prepaid expenses | 25,218 | 21,346 | 18,959 | |||||||||||||||||||
Deferred income taxes | 11,458 | 11,553 | 8,161 | Deferred income taxes | 16,316 | 16,304 | 11,553 | |||||||||||||||||||
Other assets | 3,895 | 2,782 | 12,315 | Other assets | 8,549 | 3,541 | 3,613 | |||||||||||||||||||
Total current assets | 528,980 | 417,239 | 457,124 | Total current assets | 588,519 | 625,384 | 444,319 | |||||||||||||||||||
Property and equipment — net | 617,827 | 570,120 | 557,465 | |||||||||||||||||||||||
Other assets — net | 6,702 | 7,544 | 7,430 | |||||||||||||||||||||||
Property and equipment – net | Property and equipment – net | 654,916 | 631,774 | 588,458 | ||||||||||||||||||||||
Other assets – net | Other assets – net | 19,526 | 7,297 | 6,723 | ||||||||||||||||||||||
Total assets | Total assets | $ | 1,153,509 | $ | 994,903 | $ | 1,022,019 | Total assets | $ | 1,262,961 | $ | 1,264,455 | $ | 1,039,500 | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
Current liabilities | Current liabilities | Current liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 175,757 | $ | 98,857 | $ | 119,435 | Accounts payable | $ | 145,074 | $ | 166,102 | $ | 111,576 | |||||||||||||
Accrued expenses | 59,172 | 60,406 | 46,417 | Accrued expenses | 59,646 | 82,027 | 56,055 | |||||||||||||||||||
Customer deposits | 90,775 | 80,425 | 59,057 | Customer deposits | 109,573 | 93,073 | 85,633 | |||||||||||||||||||
Income taxes payable | 15,526 | 37,456 | — | Income taxes payable | 19,786 | 56,442 | 7,490 | |||||||||||||||||||
Current portion of long-term debt | 7,414 | 7,206 | 5,768 | Current portion of long-term debt | 7,427 | 7,419 | 7,401 | |||||||||||||||||||
Line of credit | — | — | 155,250 | Other liabilities | 17,919 | 19,765 | 12,594 | |||||||||||||||||||
Other liabilities | 15,075 | 12,829 | 17,809 | |||||||||||||||||||||||
Total current liabilities | 359,425 | 424,828 | 280,749 | |||||||||||||||||||||||
Total current liabilities | 363,719 | 297,179 | 403,736 | |||||||||||||||||||||||
Deferred lease incentives | 160,825 | 127,094 | 127,183 | |||||||||||||||||||||||
Deferred rent and lease incentives | Deferred rent and lease incentives | 163,570 | 161,091 | 143,108 | ||||||||||||||||||||||
Long-term debt | Long-term debt | 18,494 | 24,625 | 26,044 | Long-term debt | 17,206 | 18,071 | 24,633 | ||||||||||||||||||
Deferred income tax liabilities | Deferred income tax liabilities | 9,928 | 8,792 | 12,231 | Deferred income tax liabilities | 11,350 | 11,341 | 8,791 | ||||||||||||||||||
Other long-term obligations | Other long-term obligations | 4,587 | 4,682 | 4,419 | Other long-term obligations | 7,494 | 5,146 | 4,875 | ||||||||||||||||||
Total liabilities | Total liabilities | 557,553 | 462,372 | 573,613 | Total liabilities | 559,045 | 620,477 | 462,156 | ||||||||||||||||||
Commitments and contingencies | Commitments and contingencies | — | — | — | Commitments and contingencies | — | — | — | ||||||||||||||||||
Shareholders’ equity | Shareholders’ equity | Shareholders’ equity | ||||||||||||||||||||||||
Common stock, $.01 par value, authorized: 253,125 shares; issued: 116,176, 116,468 and 115,837 shares; outstanding: 116,176, 114,486 and 113,855 shares | 1,162 | 1,164 | 1,158 | Common stock, $.01 par value, authorized: 253,125 shares; issued: 116,646, 114,317 and 115,941 shares; outstanding: 116,646, 114,317 and 115,941 shares | 1,166 | 1,143 | 1,159 | |||||||||||||||||||
Additional paid-in capital | 182,938 | 169,991 | 156,094 | Additional paid-in capital | 222,588 | 196,259 | 180,439 | |||||||||||||||||||
Retained earnings | 416,631 | 392,300 | 322,901 | Retained earnings | 478,056 | 446,837 | 401,494 | |||||||||||||||||||
Accumulated foreign currency translation adjustment | (15 | ) | (110 | ) | (6 | ) | Accumulated foreign currency translation adjustment | 2,106 | (11 | ) | (61 | ) | ||||||||||||||
Deferred stock-based compensation | (4,760 | ) | (7,541 | ) | (8,468 | ) | Deferred stock-based compensation | — | (250 | ) | (5,687 | ) | ||||||||||||||
Treasury stock, at cost: nil, 1,982 and 1,982 shares | — | (23,273 | ) | (23,273 | ) | |||||||||||||||||||||
Total shareholders’ equity | 703,916 | 643,978 | 577,344 | |||||||||||||||||||||||
Total shareholders’ equity | 595,956 | 532,531 | 448,406 | |||||||||||||||||||||||
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 1,153,509 | $ | 994,903 | $ | 1,022,019 | Total liabilities and shareholders’ equity | $ | 1,262,961 | $ | 1,264,455 | $ | 1,039,500 | ||||||||||||
See Notes to Condensed Consolidated Financial Statements.
2
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||
August 3, | August 4, | August 3, | August 4, | |||||||||||||||
Dollars and shares in thousands, except per share amounts | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net revenues | $ | 580,423 | $ | 495,593 | $ | 1,117,263 | $ | 973,972 | ||||||||||
Cost of goods sold | 365,345 | 310,219 | 697,877 | 606,700 | ||||||||||||||
Gross margin | 215,078 | 185,374 | 419,386 | 367,272 | ||||||||||||||
Selling, general and administrative expenses | 186,226 | 162,166 | 369,069 | 318,836 | ||||||||||||||
Interest (income) expense – net | (130 | ) | 215 | (446 | ) | 479 | ||||||||||||
Earnings before income taxes | 28,982 | 22,993 | 50,763 | 47,957 | ||||||||||||||
Income taxes | 11,158 | 8,852 | 19,544 | 18,463 | ||||||||||||||
Net earnings | $ | 17,824 | $ | 14,141 | $ | 31,219 | $ | 29,494 | ||||||||||
Basic earnings per share | $ | .15 | $ | .12 | $ | .27 | $ | .26 | ||||||||||
Diluted earnings per share | $ | .15 | $ | .12 | $ | .26 | $ | .25 | ||||||||||
Shares used in calculation of earnings per share: | ||||||||||||||||||
Basic | 116,082 | 115,252 | 115,145 | 114,865 | ||||||||||||||
Diluted | 119,770 | 120,114 | 118,453 | 119,568 | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||||
Dollars and shares in thousands, except per share amounts | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net revenues | $ | 527,894 | $ | 462,096 | $ | 1,501,866 | $ | 1,308,662 | ||||||||||
Cost of goods sold | 321,705 | 296,124 | 928,405 | 849,553 | ||||||||||||||
Gross margin | 206,189 | 165,972 | 573,461 | 459,109 | ||||||||||||||
Selling, general and administrative expenses | 181,469 | 157,974 | 500,305 | 444,966 | ||||||||||||||
Interest expense — net | 106 | 1,733 | 585 | 4,880 | ||||||||||||||
Earnings before income taxes | 24,614 | 6,265 | 72,571 | 9,263 | ||||||||||||||
Income taxes | 9,477 | 2,412 | 27,940 | 3,566 | ||||||||||||||
Net earnings | $ | 15,137 | $ | 3,853 | $ | 44,631 | $ | 5,697 | ||||||||||
Basic earnings per share | $ | .13 | $ | .03 | $ | .39 | $ | .05 | ||||||||||
Diluted earnings per share | $ | .13 | $ | .03 | $ | .37 | $ | .05 | ||||||||||
Shares used in calculation of earnings per share: | ||||||||||||||||||
Basic | 116,015 | 113,590 | 115,069 | 112,234 | ||||||||||||||
Diluted | 119,796 | 116,089 | 119,631 | 115,091 | ||||||||||||||
Twenty-Six Weeks Ended | ||||||||||
August 3, | August 4, | |||||||||
Dollars in thousands | 2003 | 2002 | ||||||||
Cash flows from operating activities: | ||||||||||
Net earnings | $ | 31,219 | $ | 29,494 | ||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||||
Depreciation and amortization | 49,639 | 44,666 | ||||||||
Net loss on disposal of assets | 919 | 1,285 | ||||||||
Amortization of deferred lease incentives | (9,251 | ) | (7,467 | ) | ||||||
Amortization of deferred stock-based compensation | 250 | 1,854 | ||||||||
Other | — | 69 | ||||||||
Changes in: | ||||||||||
Accounts receivable | (4,192 | ) | (9,378 | ) | ||||||
Merchandise inventories | (55,235 | ) | (1,154 | ) | ||||||
Prepaid catalog expenses | (6,112 | ) | 1,152 | |||||||
Prepaid expenses and other assets | (21,235 | ) | (2,602 | ) | ||||||
Accounts payable | (21,799 | ) | 12,650 | |||||||
Accrued expenses and other liabilities | (5,470 | ) | 1,948 | |||||||
Deferred rent and lease incentives | 11,450 | 23,688 | ||||||||
Income taxes payable | (36,679 | ) | (29,926 | ) | ||||||
Net cash provided by (used in) operating activities | (66,496 | ) | 66,279 | |||||||
Cash flows from investing activities: | ||||||||||
Purchases of property and equipment | (71,831 | ) | (64,537 | ) | ||||||
Net cash used in investing activities | (71,831 | ) | (64,537 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Repayments of long-term obligations | (856 | ) | (832 | ) | ||||||
Proceeds from exercise of stock options | 26,353 | 13,416 | ||||||||
Net cash provided by financing activities | 25,497 | 12,584 | ||||||||
Effect of exchange rates on cash and cash equivalents | 1,114 | 209 | ||||||||
Net increase (decrease) in cash and cash equivalents | (111,716 | ) | 14,535 | |||||||
Cash and cash equivalents at beginning of period | 193,495 | 75,374 | ||||||||
Cash and cash equivalents at end of period | $ | 81,779 | $ | 89,909 | ||||||
See Notes to Condensed Consolidated Financial Statements. |
See Notes to Condensed Consolidated Financial Statements.
4
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
Thirty-Nine Weeks Ended | ||||||||||
November 3, | October 28, | |||||||||
Dollars in thousands | 2002 | 2001 | ||||||||
Cash flows from operating activities: | ||||||||||
Net earnings | $ | 44,631 | $ | 5,697 | ||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||||
Depreciation and amortization | 67,891 | 59,414 | ||||||||
Net loss on disposal of assets | 2,079 | 1,974 | ||||||||
Amortization of deferred lease incentives | (11,606 | ) | (9,436 | ) | ||||||
Deferred income taxes | 1,254 | — | ||||||||
Amortization of deferred stock-based compensation | 2,781 | 2,320 | ||||||||
Other | 88 | 777 | ||||||||
Changes in: | ||||||||||
Accounts receivable | (21,502 | ) | (10,669 | ) | ||||||
Merchandise inventories | (109,104 | ) | (48,786 | ) | ||||||
Prepaid catalog expenses | (12,041 | ) | (4,526 | ) | ||||||
Prepaid expenses and other assets | (5,033 | ) | (4,291 | ) | ||||||
Accounts payable | 76,670 | (39,571 | ) | |||||||
Accrued expenses and other liabilities | 12,421 | 4,595 | ||||||||
Deferred lease incentives | 45,499 | 24,118 | ||||||||
Income taxes payable | (21,949 | ) | (32,170 | ) | ||||||
Net cash provided by (used in) operating activities | 72,079 | (50,554 | ) | |||||||
Cash flows from investing activities: | ||||||||||
Purchases of property and equipment | (117,482 | ) | (118,639 | ) | ||||||
Other | — | 350 | ||||||||
Net cash used in investing activities | (117,482 | ) | (118,289 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Borrowings under line of credit | — | 504,400 | ||||||||
Repayments under line of credit | — | (349,150 | ) | |||||||
Repayments of long-term obligations | (6,959 | ) | (12,151 | ) | ||||||
Proceeds from exercise of stock options | 15,918 | 12,937 | ||||||||
Credit facility renewal costs | (511 | ) | — | |||||||
Net cash provided by financing activities | 8,448 | 156,036 | ||||||||
Effect of exchange rates on cash and cash equivalents | 42 | (26 | ) | |||||||
Net decrease in cash and cash equivalents | (36,913 | ) | (12,833 | ) | ||||||
Cash and cash equivalents at beginning of period | 75,374 | 19,730 | ||||||||
Cash and cash equivalents at end of period | $ | 38,461 | $ | 6,897 | ||||||
See Notes to Condensed Consolidated Financial Statements.
5
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
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 NovemberAugust 3, 20022003 and October 28, 2001,August 4, 2002, the condensed consolidated statements of earnings for the thirteen and thirty-ninetwenty-six week periods ended NovemberAugust 3, 20022003 and October 28, 2001,August 4, 2002, and the condensed consolidated statements of cash flows for the thirty-ninetwenty-six week periods ended NovemberAugust 3, 20022003 and October 28, 2001August 4, 2002 have been prepared by Williams-Sonoma, Inc.,us, without audit. In theour opinion, of management, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-ninetwenty-six week periods then ended. These financial statements include Williams-Sonoma, Inc., and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and accounts have been eliminated. The balance sheet at February 3, 2002,2, 2003, presented herein, has been derived from theour audited balance sheet of the Company included in the Company’sour Annual Report on Form 10-K for the fiscal year ended February 3, 2002.2, 2003.
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 the Company’sour Annual Report on Form 10-K for the fiscal year ended February 3, 2002.2, 2003.
Certain reclassifications have been made to the prior period financial statements to conform to the presentation used in the current period.
The results of operations for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 3, 20022003 are not necessarily indicative of the operating results of the full year.
NOTE B. NEW ACCOUNTING PRONOUNCEMENTPOLICIES
Stock-Based CompensationWe account for stock options granted to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized in the condensed consolidated financial statements for stock options.
We entered into employment agreements with certain executive officers during fiscal 2001. We recognized no stock-based compensation expense related to these employment agreements in the thirteen weeks ended August 3, 2003 due to there being no remaining deferred compensation expense related to these agreements. We recognized approximately $927,000 of stock-based compensation expense related to these employment agreements in the thirteen weeks ended August 4, 2002. Approximately $250,000 and $1,854,000 of stock-based compensation expense related to these employment agreements was recognized in the twenty-six weeks ended August 3, 2003 and August 4, 2002, respectively.
5
The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” to all of our stock-based compensation arrangements. Under SFAS No. 123, the fair value of stock option awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. Our calculations are based on a single option valuation approach and forfeitures are recognized as they occur. Had compensation cost been determined consistent with SFAS No. 123, our net earnings and earnings per share would have been changed to the pro forma amounts indicated below:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||
August 3, | August 4, | August 3, | August 4, | ||||||||||||||
Dollars in thousands, except per share amounts | 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net earnings, as reported | $ | 17,824 | $ | 14,141 | $ | 31,219 | $ | 29,494 | |||||||||
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effect | — | 570 | 154 | 1,140 | |||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect | (4,337 | ) | (4,815 | ) | (8,701 | ) | (8,939 | ) | |||||||||
Pro forma net earnings | $ | 13,487 | $ | 9,896 | $ | 22,672 | $ | 21,695 | |||||||||
Basic earnings per share | |||||||||||||||||
As reported | $ | .15 | $ | .12 | $ | .27 | $ | .26 | |||||||||
Pro forma | .12 | .09 | .20 | .19 | |||||||||||||
Diluted earnings per share | |||||||||||||||||
As reported | $ | .15 | $ | .12 | $ | .26 | $ | .25 | |||||||||
Pro forma | .11 | .08 | .19 | .18 | |||||||||||||
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
August 3, 2003 | August 4, 2002 | August 3, 2003 | August 4, 2002 | |||||||||||||
Dividend yield | — | — | — | — | ||||||||||||
Volatility | 64.4 | % | 66.1 | % | 64.8 | % | 65.8 | % | ||||||||
Risk-free interest | 3.4 | % | 5.1 | % | 3.4 | % | 5.1 | % | ||||||||
Expected term (years) | 6.6 | 6.6 | 6.6 | 6.6 | ||||||||||||
New Accounting PronouncementsIn June 2002,January 2003, the Financial Accounting Standards Board (“FASB”) issued StatementInterpretation No. 46 (“FIN 46”), “Consolidation of Financial Accounting Standard (“SFAS”) No. 146, “AccountingVariable Interest Entities.” FIN 46 explains how to identify and assess variable interest entities and how to decide whether to consolidate such entities. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 is effective immediately for Costs Associated with Exitvariable interest entities created after January 31, 2003, and for variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies in the first fiscal year or Disposal Activities.” SFAS No. 146 appliesinterim period beginning after June 15, 2003 to costs associated withvariable interest entities in which an exit activityenterprise holds a variable interest that does not involve an entity newlyit acquired before February 1, 2003.
We previously determined and disclosed that two partnerships from which we lease our Memphis-based distribution facilities qualified as variable interest entities and required consolidation under FIN 46. We now estimate that the consolidation (which will be effective as of August 4, 2003) will result in a business combination or with a disposal activity covered by SFAS No. 144. The Company is requiredincreases to adopt the provisionsour consolidated balance sheet of SFAS No. 146 for exit or disposal activities, if any, initiated after December 31, 2002. Management does not believe the adoption of SFAS No. 146 will have an impact on the consolidated financial position or results of operation of the Company.approximately $21,000,000 in assets (primarily buildings), $18,500,000 in long-
6
term debt, and $2,500,000 in other liabilities, with no cumulative effect charge to our third quarter of fiscal year 2003 consolidated statement of earnings.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which requires certain guarantees to be recorded at fair value. The interpretation also requires a guarantor to make new disclosures, even when the likelihood of making any payments under the guarantee is remote. In general, the interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying obligation that is related to an asset, liability, or an equity security of the guaranteed party. We lease an aircraft for a term of 60 months ending January 2005. At the end of the lease term, we may either purchase the aircraft for $11,500,000 or sell it. If the proceeds of such sale are in excess of $11,500,000, then we are entitled to retain the excess. If the proceeds are less than $11,500,000, we will be required to pay the lessor the difference up to $9,080,000. We currently estimate that the fair value of the aircraft at the end of the lease term will exceed $11,500,000 and therefore no liability has been recorded for the residual value.
NOTE C. BORROWING ARRANGEMENTS
The Company’sWe have a $200,000,000 unsecured revolving line of credit facility provides for a $200,000,000 unsecured revolving credit facilitythat expires on October 22, 2005 and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratio (funded debt adjusted for lease and rent expense to EBITDAR), minimum fixed charge coverage ratio, and maximum annual capital expenditures. The line of credit facility was renewed by an amended and restated agreement dated October 22, 2002. The amended agreement expires on October 22, 2005. Through April 22, 2005, the Companywe may, upon notice to the lenders, request an increase in the facility up to $250,000,000. The CompanyWe may elect interest rates calculated by reference to the agent’s internal reference rate or LIBOR plus a margin based on the Company’sour leverage ratio. As of NovemberAugust 3, 2002, the Company2003, we had no borrowings outstanding under the line of credit facility.
We have three unsecured commercial letter of credit reimbursement agreements for an aggregate of $115,000,000, which expire on July 2, 2004. The latest expiration for the letters of credit issuable under the agreements is November 29, 2004. As of NovemberAugust 3, 2002,2003, $87,663,000 was outstanding under the Companyletter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which we had issued andnot taken legal title as of August 3, 2003.
As of August 3, 2003, we had outstanding standby letters of credit under the line of credit facility in an aggregate amount of $9,964,000. The standby letters of credit were issued to replace surety bonds that supportsecure liabilities associated with workers’ compensation and other insurance programs.
In July 2002, the Company entered into three new unsecured commercial letter of credit reimbursement agreements for an aggregate of $100,000,000. These agreements expire on July 2, 2003. The latest expiration for the letters of credit issued under the agreements is November 29, 2003. Per the new agreements, the Company is permitted to have issued and outstanding up to $120,000,000 under both the new letter of credit agreements and the prior letter of credit agreement. As of November 3, 2002, $1,037,000 was outstanding under the prior letter of credit agreement, and $75,892,000 was outstanding under the new letter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which the Company had not taken legal title as of November 3, 2002.
NOTE D. COMPREHENSIVE INCOME
Comprehensive income for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 3, 20022003 and October 28, 2001August 4, 2002 was as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||
November 3, | October 28, | November 3, | October 28, | August 3, | August 4, | August 3, | August 4, | |||||||||||||||||||||||||
Dollars in thousands | 2002 | 2001 | 2002 | 2001 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||
Net earnings | $ | 15,137 | $ | 3,853 | $ | 44,631 | $ | 5,697 | $ | 17,824 | $ | 14,141 | $ | 31,219 | $ | 29,494 | ||||||||||||||||
Other comprehensive income (loss) - Foreign currency translation adjustment | 46 | 8 | 95 | (6 | ) | |||||||||||||||||||||||||||
Other comprehensive income - Foreign currency translation adjustment | 322 | (65 | ) | 2,117 | 49 | |||||||||||||||||||||||||||
Comprehensive income | $ | 15,183 | $ | 3,861 | $ | 44,726 | $ | 5,691 | $ | 18,146 | $ | 14,076 | $ | 33,336 | $ | 29,543 | ||||||||||||||||
7
NOTE E. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options.
The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:
7
Net | Weighted | Per-Share | ||||||||||||
Dollars and amounts in thousands, except per share amounts | Earnings | Average Shares | Amount | |||||||||||
Thirteen weeks ended November 3, 2002 | ||||||||||||||
Basic | $ | 15,137 | 116,015 | $ | 0.13 | |||||||||
Effect of dilutive stock options | — | 3,781 | ||||||||||||
Diluted | $ | 15,137 | 119,796 | $ | 0.13 | |||||||||
Thirteen weeks ended October 28, 2001 | ||||||||||||||
Basic | $ | 3,853 | 113,590 | $ | 0.03 | |||||||||
Effect of dilutive stock options | — | 2,499 | ||||||||||||
Diluted | $ | 3,853 | 116,089 | $ | 0.03 | |||||||||
Thirty-Nine weeks ended November 3, 2002 | ||||||||||||||
Basic | $ | 44,631 | 115,069 | $ | 0.39 | |||||||||
Effect of dilutive stock options | — | 4,562 | ||||||||||||
Diluted | $ | 44,631 | 119,631 | $ | 0.37 | |||||||||
Thirty-Nine weeks ended October 3, 2001 | ||||||||||||||
Basic | $ | 5,697 | 112,234 | $ | 0.05 | |||||||||
Effect of dilutive stock options | — | 2,857 | ||||||||||||
Diluted | $ | 5,697 | 115,091 | $ | 0.05 |
Net | Weighted | Per-Share | ||||||||||||
Dollars and amounts in thousands, except per share amounts | Earnings | Average Shares | Amount | |||||||||||
Thirteen weeks ended August 3, 2003 | ||||||||||||||
Basic | $ | 17,824 | 116,082 | $ | .15 | |||||||||
Effect of dilutive stock options | — | 3,688 | ||||||||||||
Diluted | $ | 17,824 | 119,770 | $ | .15 | |||||||||
Thirteen weeks ended August 4, 2002 | ||||||||||||||
Basic | $ | 14,141 | 115,252 | $ | .12 | |||||||||
Effect of dilutive stock options | — | 4,862 | ||||||||||||
Diluted | $ | 14,141 | 120,114 | $ | .12 | |||||||||
Twenty-Six weeks ended August 3, 2003 | ||||||||||||||
Basic | $ | 31,219 | 115,145 | $ | .27 | |||||||||
Effect of dilutive stock options | — | 3,308 | ||||||||||||
Diluted | $ | 31,219 | 118,453 | $ | .26 | |||||||||
Twenty-Six weeks ended August 4, 2002 | ||||||||||||||
Basic | $ | 29,494 | 114,865 | $ | .26 | |||||||||
Effect of dilutive stock options | — | 4,703 | ||||||||||||
Diluted | $ | 29,494 | 119,568 | $ | .25 | |||||||||
Options with an exercise price greater than the average market price of common shares were 63,000237,000 and 268,000307,000 for the thirteen weeks and 46,0001,548,000 and 213,000346,000 for the thirty-ninetwenty-six weeks ended NovemberAugust 3, 20022003 and October 28, 2001,August 4, 2002, respectively, and were not included in the computation of diluted earnings per share.
NOTE F. STOCK-BASED COMPENSATION
In fiscal 2001, the Company entered into an employment agreement (the “Agreement”), effective April 2, 2001, with Dale Hilpert to serve as the Company’s Chief Executive Officer and as a Director. Under the Agreement, the Company agreed to issue Mr. Hilpert 500,000 restricted shares of the Company’s common stock. Such restricted shares will vest on March 31, 2004 based upon Mr. Hilpert’s continued employment through such date. Accordingly, total compensation expense (based upon the fair market value of $15.45 on the issue date) of $7,725,000 is being recognized ratably through March 31, 2004. In both the thirteen weeks ended November 3, 2002 and October 28, 2001, the Company recognized $624,000, and in the thirty-nine weeks ended November 3, 2002 and October 28, 2001, recognized $1,872,000 and $1,696,000, respectively, of compensation expense related to these restricted shares, with a remaining $3,533,000 of deferred compensation included in shareholders’ equity at November 3, 2002.
The Company entered into other employment agreements with executive officers during fiscal 2001. The Company has recognized $303,000 in both the thirteen weeks ended November 3, 2002 and October 28, 2001, and $909,000 and $624,000 in the thirty-nine weeks ended November 3, 2002 and October 28, 2001, respectively, of stock-based compensation expense related to these other employment agreements. At November 3, 2002, $1,227,000 of deferred compensation related to these agreements was included in shareholders’ equity.
8
NOTE G. SEGMENT REPORTING
The Company hasWe have two reportable segments, retail and direct-to-customer. The retail segment sells products for the home through itsour four retail concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The four retail concepts are operating segments, which have been aggregated into one reportable segment, retail. The direct-to-customer segment sells similar products through its sevenour eight direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Pottery Barn Teen, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com).
These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Management’s expectation is that the overall economics of each of the Company’sour major concepts within each reportable segment will be similar over time.
The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002. The Company uses8
We use earnings before unallocated corporate overhead, interest and income taxes to evaluate segment profitability. Unallocated earnings before income taxes is comprised solely of unallocated expenses which primarily include employment, occupancy, and other general expenses for corporate administrative and information technology functions, and company-wide incentive compensation. Unallocated assets include corporate cash and equivalents, the net book value of corporate facilities and related information systems, deferred tax amountsincome taxes and other corporate long-lived assets.
Segment Information
Dollars in thousands | Retail | Direct-to-Customer | Unallocated | Total | |||||||||||||
Thirteen weeks ended November 3, 2002 | |||||||||||||||||
Net revenues | $ | 307,813 | $ | 220,081 | $ | — | $ | 527,894 | |||||||||
Depreciation and amortization expense | 14,847 | 5,102 | 3,276 | 23,225 | |||||||||||||
Earnings (loss) before income taxes | 28,154 | 31,733 | (35,273 | ) | 24,614 | ||||||||||||
Capital expenditures | 43,130 | 4,548 | 5,267 | 52,945 | |||||||||||||
Thirteen weeks ended October 28, 2001 | |||||||||||||||||
Net revenues | $ | 259,361 | $ | 202,735 | $ | — | $ | 462,096 | |||||||||
Depreciation and amortization expense | 13,233 | 4,794 | 2,904 | 20,931 | |||||||||||||
Earnings (loss) before income taxes | 15,257 | 16,170 | (25,162 | ) | 6,265 | ||||||||||||
Capital expenditures | 37,044 | 2,100 | 6,034 | 45,178 | |||||||||||||
Thirty-nine weeks ended November 3, 2002 | |||||||||||||||||
Net revenues | $ | 864,716 | $ | 637,150 | $ | — | $ | 1,501,866 | |||||||||
Depreciation and amortization expense | 43,619 | 14,818 | 9,454 | 67,891 | |||||||||||||
Earnings (loss) before income taxes | 83,525 | 91,171 | (102,125 | ) | 72,571 | ||||||||||||
Assets | 765,389 | 177,517 | 210,603 | 1,153,509 | |||||||||||||
Capital expenditures | 97,367 | 9,350 | 10,765 | 117,482 | |||||||||||||
Thirty-nine weeks ended October 28, 2001 | |||||||||||||||||
Net revenues | $ | 729,985 | $ | 578,677 | $ | — | $ | 1,308,662 | |||||||||
Depreciation and amortization expense | 37,057 | 13,928 | 8,429 | 59,414 | |||||||||||||
Earnings (loss) before income taxes | 40,092 | 48,591 | (79,420 | ) | 9,263 | ||||||||||||
Assets | 680,878 | 177,281 | 163,860 | 1,022,019 | |||||||||||||
Capital expenditures | 83,333 | 13,773 | 21,533 | 118,639 |
Direct-to- | |||||||||||||||||
Dollars in thousands | Retail | Customer | Unallocated | Total | |||||||||||||
Thirteen weeks ended August 3, 2003 | |||||||||||||||||
Net revenues | $ | 337,232 | $ | 243,191 | — | $ | 580,423 | ||||||||||
Depreciation and amortization expense | 17,667 | 4,096 | $ | 3,603 | 25,366 | ||||||||||||
Earnings before income taxes | 27,320 | 37,410 | (35,748 | ) | 28,982 | ||||||||||||
Capital expenditures | 34,557 | 5,426 | 7,468 | 47,451 | |||||||||||||
Thirteen weeks ended August 4, 2002 | |||||||||||||||||
Net revenues | $ | 287,758 | $ | 207,835 | — | $ | 495,593 | ||||||||||
Depreciation and amortization expense | 14,625 | 4,748 | $ | 3,138 | 22,511 | ||||||||||||
Earnings before income taxes | 29,817 | 29,018 | (35,842 | ) | 22,993 | ||||||||||||
Capital expenditures | 32,769 | 3,106 | 2,664 | 38,539 | |||||||||||||
Twenty-Six weeks ended August 3, 2003 | |||||||||||||||||
Net revenues | $ | 641,771 | $ | 475,492 | — | $ | 1,117,263 | ||||||||||
Depreciation and amortization expense | 33,773 | 8,627 | $ | 7,239 | 49,639 | ||||||||||||
Earnings before income taxes | 53,051 | 67,760 | (70,048 | ) | 50,763 | ||||||||||||
Assets | 774,531 | 186,164 | 302,266 | 1,262,961 | |||||||||||||
Capital expenditures | 52,896 | 9,555 | 9,380 | 71,831 | |||||||||||||
Twenty-Six weeks ended August 4, 2002 | |||||||||||||||||
Net revenues | $ | 556,903 | $ | 417,069 | — | $ | 973,972 | ||||||||||
Depreciation and amortization expense | 28,772 | 9,716 | $ | 6,178 | 44,666 | ||||||||||||
Earnings before income taxes | 55,371 | 59,438 | (66,852 | ) | 47,957 | ||||||||||||
Assets | 633,468 | 152,832 | 253,200 | 1,039,500 | |||||||||||||
Capital expenditures | 54,237 | 4,802 | 5,498 | 64,537 | |||||||||||||
9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Risk Factors
The plans, projections and otherThis document contains forward-looking statements included in Management’s Discussionthat involve risks and Analysis of Financial Conditionuncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the business and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q with respect to the financial condition, results of operations and business of Williams-Sonoma, Inc. and its wholly-owned subsidiaries (the “Company”(“we”, “us” or “our”) are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth inexpressed or implied by such forward-looking statements. These risks and uncertaintiesSuch forward-looking statements include, without limitation, the following and should be read in conjunction with the Risk Factors portionany projections of Management’s Discussion and Analysis sectionearnings, revenues or financial items, any statements of the Company’s Annual Reportplans, strategies and objectives of management for future operations, any statements relating to our projected capital expenditures and available cash, any statements relating to our plans to open additional stores, any statements relating to anticipated comparable store sales increases and decreases, any statements relating to the outcome of pending legal proceedings, any statements related to the effect of new accounting pronouncements on Form 10-K forour financial statements and statements of belief and any statements of assumptions underlying the fiscal year ended February 3, 2002:
The Company has not undertaken, nor is it required, to publicly update or revise any of its forward-looking statements, even if experience or future events make it clear that the results set forth in such statements will not be realized.
10
foregoing.
Business
The Company isWe are a specialty retailer of products for the home. The retail segment of our business sells itsour products through itsour four retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The direct-to-customer segment of our business sells similar products through its sevenour eight direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Pottery Barn Teen, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com). The principal concepts in both retail and direct-to-customer are: Williams-Sonoma, which sells cookwarecooking and entertaining essentials; Pottery Barn, which sells home furnishings, decorative accessories, and contemporary tableware and home furnishings;tableware; and Pottery Barn Kids, which sells stylish children’s furnishings.furnishings and decorative accessories. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company’sour condensed consolidated financial statements and the notes thereto.
Net Revenues
Net revenues consist of retail sales, direct-to-customer sales and shipping fees. Direct-to-customerRetail sales include catalogsales of merchandise to customers at our retail stores, direct-to-customer sales include sales of merchandise to customers through catalogs and the Internet, sales. Shippingand shipping fees consist of revenue received from customers for delivery of merchandise.
The following table summarizes the Company’sour net revenues for the thirteen and thirty-ninetwenty-six weeks ended NovemberAugust 3, 2003 (“Second Quarter of 2003”) and August 4, 2002 and October 28, 2001.(“Second Quarter of 2002”).
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
November 3, | October 28, | November 3, | October 28, | August 3, | August 4, | August 3, | August 4, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dollars in thousands | 2002 | % Total | 2001 | % Total | 2002 | % Total | 2001 | % Total | 2003 | % Total | 2002 | % Total | 2003 | % Total | 2002 | % Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail sales | $ | 306,078 | 58.0 | % | $ | 257,610 | 55.7 | % | $ | 859,469 | 57.2 | % | $ | 725,044 | 55.4 | % | $ | 335,272 | 57.8 | % | $ | 285,813 | 57.7 | % | $ | 638,356 | 57.1 | % | $ | 553,391 | 56.8 | % | ||||||||||||||||||||||||||||||||
Direct-to-customer sales | 187,656 | 35.5 | % | 176,218 | 38.1 | % | 543,037 | 36.2 | % | 502,235 | 38.4 | % | 206,327 | 35.5 | % | 177,100 | 35.7 | % | 404,947 | 36.2 | % | 355,381 | 36.5 | % | ||||||||||||||||||||||||||||||||||||||||
Shipping fees | 34,160 | 6.5 | % | 28,268 | 6.2 | % | 99,360 | 6.6 | % | 81,383 | 6.2 | % | 38,824 | 6.7 | % | 32,680 | 6.6 | % | 73,960 | 6.7 | % | 65,200 | 6.7 | % | ||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 527,894 | 100.0 | % | $ | 462,096 | 100.0 | % | $ | 1,501,866 | 100.0 | % | $ | 1,308,662 | 100.0 | % | $ | 580,423 | 100.0 | % | $ | 495,593 | 100.0 | % | $ | 1,117,263 | 100.0 | % | $ | 973,972 | 100.0 | % | ||||||||||||||||||||||||||||||||
Net revenues for the thirteen weeks ended November 3, 2002 (ThirdSecond Quarter of 2002) were $527,894,000, an increase of $65,798,0002003 increased by $84,830,000 or 14.2%17.1% over net revenues for the thirteen weeks ended October 28, 2001 (ThirdSecond Quarter of 2001). Net2002. This net revenue increase was primarily driven by incremental revenues for the thirty-nine week period ended November 3, 2002 (Year-to-Date 2002) were $1,501,866,000, anfrom 44 new stores (net of closures), a comparable store sales increase of $193,204,000 or 14.8%6.5%, increased catalog circulation, and strong momentum from the thirty-nine week period ended October 28, 2001 (Year-to-Date 2001). The reasons for these increases are discussed in the segment analyses below.Internet growth initiatives.
During the Third Quarter of 2002, the Company launched a private label credit card program in both the retail and direct-to-customer channels of the Pottery Barn and Pottery Barn Kids brands. A third party credit provider administers the program, and the Company bears no credit risk. To support the launch of the card, the Company offered introductory discounts and a loyalty rewards program to customers who used the card. The cost of these programs is accounted for as a reduction of net revenues and negatively impacted quarter-over-quarter and year-over-year top line sales growth.
1110
Net revenues for the twenty-six week period ended August 3, 2003 (“Year-to-Date 2003”) increased by $143,291,000 or 14.7% over net revenues for the twenty-six week period ended August 4, 2002 (“Year-to-Date 2002”). This net revenue increase was primarily driven by incremental revenues from 44 new stores (net of closures), a comparable store sales increase of 2.9%, increased catalog circulation, and strong momentum from Internet growth initiatives.
Retail Revenues and Other Data
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||||||||||||||||||
Dollars in thousands | 2002 | 2001 | 2002 | 2001 | August 3, 2003 | August 4, 2002 | August 3, 2003 | August 4, 2002 | ||||||||||||||||||||||||
Retail sales | $ | 306,078 | $ | 257,610 | $ | 859,469 | $ | 725,044 | $ | 335,272 | $ | 285,813 | $ | 638,356 | $ | 553,391 | ||||||||||||||||
Shipping fees | 1,735 | 1,751 | 5,247 | 4,941 | 1,960 | 1,945 | 3,415 | 3,512 | ||||||||||||||||||||||||
Total retail revenues | $ | 307,813 | $ | 259,361 | $ | 864,716 | $ | 729,985 | $ | 337,232 | $ | 287,758 | $ | 641,771 | $ | 556,903 | ||||||||||||||||
Percent growth in retail sales | 18.8 | % | 15.1 | % | 18.5 | % | 15.7 | % | 17.3 | % | 16.9 | % | 15.4 | % | 18.4 | % | ||||||||||||||||
Percent increase (decrease) in comparable store sales | 2.8 | % | (1.1 | %) | 2.9 | % | (1.0 | %) | ||||||||||||||||||||||||
Number of stores — beginning of period | 445 | 393 | 415 | 382 | ||||||||||||||||||||||||||||
Percent increase in comparable store sales | 6.5 | % | 0.0 | % | 2.9 | % | 2.9 | % | ||||||||||||||||||||||||
Number of stores - beginning of period | 487 | 425 | 478 | 415 | ||||||||||||||||||||||||||||
Number of new stores | 34 | 21 | 70 | 40 | 6 | 22 | 18 | 36 | ||||||||||||||||||||||||
Number of closed stores | (2 | ) | (2 | ) | (8 | ) | (10 | ) | (4 | ) | (2 | ) | (7 | ) | (6 | ) | ||||||||||||||||
Number of stores — end of period | 477 | 412 | 477 | 412 | ||||||||||||||||||||||||||||
Number of stores - end of period | 489 | 445 | 489 | 445 | ||||||||||||||||||||||||||||
Store selling square footage at quarter-end (sq. ft.) | 2,331,000 | 1,925,000 | 2,331,000 | 1,925,000 | 2,411,000 | 2,173,000 | 2,411,000 | 2,173,000 | ||||||||||||||||||||||||
Store leased square footage (“LSF”) at quarter-end (sq. ft.) | 3,681,000 | 3,038,000 | 3,681,000 | 3,038,000 | 3,833,000 | 3,429,000 | 3,833,000 | 3,429,000 | ||||||||||||||||||||||||
Avg. LSF | Avg. LSF | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Store Count | Avg. LSF Per Store | Store Count | Avg. LSF Per Store | Store Count | per Store | Store Count | per Store | |||||||||||||||||||||||||||||||||||||||||||||||||
August 4, | November 3, | November 3, | October 28, | October 28, | May 4, | August 3, | August 3, | August 4, | August 4, | |||||||||||||||||||||||||||||||||||||||||||||||
2002 | Openings | Closings | 2002 | 2002 | 2001 | 2001 | 2003 | Openings | Closing | 2003 | 2003 | 2002 | 2002 | |||||||||||||||||||||||||||||||||||||||||||
Williams-Sonoma | 223 | 12 | — | 235 | 5,200 | 211 | 5,000 | 237 | 2 | (3 | ) | 236 | 5,300 | 223 | 5,100 | |||||||||||||||||||||||||||||||||||||||||
Pottery Barn | 151 | 10 | (2 | ) | 159 | 11,400 | 141 | 11,200 | 160 | 1 | (1 | ) | 160 | 11,500 | 151 | 11,400 | ||||||||||||||||||||||||||||||||||||||||
Pottery Barn Kids | 42 | 12 | — | 54 | 7,600 | 23 | 7,400 | 63 | 3 | — | 66 | 7,700 | 42 | 7,500 | ||||||||||||||||||||||||||||||||||||||||||
Hold Everything | 15 | — | — | 15 | 3,700 | 24 | 3,500 | 13 | — | — | 13 | 3,800 | 15 | 3,700 | ||||||||||||||||||||||||||||||||||||||||||
Outlets | 14 | — | — | 14 | 13,100 | 13 | 10,900 | 14 | — | — | 14 | 13,100 | 14 | 13,100 | ||||||||||||||||||||||||||||||||||||||||||
Total | 445 | 34 | (2 | ) | 477 | 7,700 | 412 | 7,400 | 487 | 6 | (4 | ) | 489 | 7,800 | 445 | 7,700 | ||||||||||||||||||||||||||||||||||||||||
Retail revenues for the ThirdSecond Quarter of 2003 increased by $49,474,000 or 17.2% over the Second Quarter of 2002 increased $48,452,000 or 18.7% over retail revenues for the Third Quarter of 2001 primarily due to a net increaseincremental revenues from 44 new stores (net of 65 storesclosures) and a 2.8% increase in comparable store sales increase of 6.5%. Net revenues generated in the Pottery Barn Kids, Williams-Sonoma and Pottery Barn brands as well as the Outlet stores, partially offset by a planned reduction in Hold Everything, drove this revenue increase. A significant increase in year-over-year merchandise inventory levels, especially in Williams-Sonoma, supported this strong retail sales discounts to customers utilizing the Company’s private label credit card. Pottery Barn and Pottery Barn Kids brands accounted for 49 of the 65 net increase of stores and 67.5% of the growth in retail revenues from Third Quarter of 2001 to Third Quarter of 2002.performance.
Total retailRetail revenues for Year-to-Date 20022003 grew $134,731,000$84,868,000 or 18.5%15.2% over the same period of the prior year, primarily due to 44 new store openings. Retailopenings (net of closures) and a comparable store sales for the Third Quarterincrease of 2001 were negatively impacted by the economic aftermath of the events of September 11th. The Pottery Barn and2.9%. Net revenues generated in the Pottery Barn Kids, Williams-Sonoma, and Pottery Barn brands accounted for 77.7% of the growthas well as Outlet stores, partially offset by a planned reduction in Hold Everything, drove this revenue increase. A significant increase in year-over-year merchandise inventory levels, especially in Williams-Sonoma, supported these retail revenues from Year-to-Date 2001 to Year-to-Date 2002.sales results.
11
Comparable Store Sales
Comparable stores are defined as those stores whose gross square feet did not change by more than 20% in the previous 12 fiscal months and which have been open for at least 12 consecutive fiscal months without closure for seven or more consecutive days. Comparable store sales are computed based on aggregate sales of comparable stores for the reporting period. By measuring the year-over-year sales of merchandise are computed monthlyin the stores that have a history of being open for purposesa full comparable 12 fiscal months or more, we can better gauge how the core store base is performing since it excludes store openings, expansions and closings.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
August 3, | August 4, | August 3, | August 4, | |||||||||||||
Percent increase (decrease) in comparable store sales | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Williams-Sonoma | 12.1 | % | (1.7 | )% | 8.9 | % | (0.1 | )% | ||||||||
Pottery Barn | 2.6 | % | 1.3 | % | (0.9 | )% | 6.3 | % | ||||||||
Pottery Barn Kids | 5.7 | % | 2.6 | % | (1.6 | )% | 3.7 | % | ||||||||
Hold Everything | (2.5 | )% | (15.8 | )% | (5.0 | )% | (13.4 | )% | ||||||||
Outlets | 6.5 | % | 6.6 | % | 8.4 | % | 0.7 | % | ||||||||
Total | 6.5 | % | 0.0 | % | 2.9 | % | 2.9 | % | ||||||||
The Second Quarter of 2003 comparable store sales increase in Williams-Sonoma was primarily due to a substantial increase in retail inventory levels, a strong merchandise offering, and the sales impact of higher markdowns (primarily due to a significant transition in the tabletop assortment). The Second Quarter of 2003 comparable store sales increase in Pottery Barn was primarily due to a positive consumer response to our product offerings, a merchandising emphasis on our core assortment, and a synchronized multi-channel marketing effort to support our summer merchandising themes. The Second Quarter of 2003 comparable store sales increase in Pottery Barn Kids was primarily driven by a strong comparable store sales increase in single-store markets, offset by a negative, but improving, comparable store sales decrease in multi-store markets. Higher inventory levels, successful in-store marketing programs, and new merchandise assortments drove the positive Second Quarter of 2003 results. We expect comparable store sales for Pottery Barn Kids stores in multi-store markets to remain volatile (and negative) during the growth phase of the concept, consistent with our experience in the early years of the Pottery Barn store rollout.
The Year-to-Date 2003 comparable store sales increase in Williams-Sonoma was primarily due to a substantial increase in retail inventory levels, a strong merchandise offering, and the sales impact of higher markdowns (primarily due to a significant transition in the tabletop assortment). The Year-to-Date 2003 comparable store sales decrease in Pottery Barn was primarily due to a difficult year-over-year sales comparison (positive 6.3% in Year-to-Date 2002) and a challenging in-stock position on certain core merchandise categories that continued until the end of the Second Quarter of 2003.
The Year-to-Date 2003 comparable store sales in Pottery Barn Kids were negative primarily due to a comparable store sales decrease in the first quarter of 2003. This first quarter of 2003 decrease was primarily due to a challenging year-over-year sales comparison and the significant pressure that the rapid opening of new stores in multi-store markets imposed on the performance of existing comparable stores. This first quarter of 2003 comparable store sales decrease was significantly offset by a stronger second quarter performance. The Second Quarter of 2003 comparable store sales increase in Pottery Barn Kids was primarily driven by a strong performance in single-store markets and an improving performance in multi-store markets. Higher inventory levels, successful in-store marketing programs, and new merchandise assortments drove this analysis.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
Percent increase (decrease) in sales | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Williams-Sonoma | 4.9 | % | (0.5 | %) | 1.6 | % | 1.9 | % | ||||||||
Pottery Barn | 1.5 | % | (0.9 | %) | 4.6 | % | (3.6 | %) | ||||||||
Pottery Barn Kids | (2.7 | %) | (1.9 | %) | 0.8 | % | (1.9 | %) | ||||||||
Hold Everything | 6.6 | % | (15.4 | %) | (7.0 | %) | (5.3 | %) | ||||||||
Outlets | 3.6 | % | 7.3 | % | 1.7 | % | 11.8 | % | ||||||||
Total | 2.8 | % | (1.1 | %) | 2.9 | % | (1.0 | %) | ||||||||
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Comparable storeDirect-to-Customer Revenues
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
August 3, | August 4, | August 3, | August 4, | |||||||||||||
Dollars in thousands | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Catalog sales | $ | 137,008 | $ | 132,399 | $ | 275,398 | $ | 272,551 | ||||||||
Internet sales | 69,319 | 44,701 | 129,549 | 82,830 | ||||||||||||
Total direct-to-customer sales | 206,327 | 177,100 | 404,947 | 355,381 | ||||||||||||
Shipping fees | 36,864 | 30,735 | 70,545 | 61,688 | ||||||||||||
Total direct-to-customer revenues | $ | 243,191 | $ | 207,835 | $ | 475,492 | $ | 417,069 | ||||||||
Percent growth in direct-to-customer sales | 16.5 | % | 11.9 | % | 13.9 | % | 9.0 | % | ||||||||
Percent growth in number of catalogs circulated | 15.6 | % | (3.9 | )% | 16.9 | % | 10.4 | % | ||||||||
Direct-to-customer revenues in the Second Quarter of 2003 increased by $35,356,000 or 17.0% over the Second Quarter of 2002. This increase was primarily driven by incremental net revenues generated by the Pottery Barn, Pottery Barn Kids, West Elm, Williams-Sonoma, and Hold Everything brands in addition to incremental revenues from our newest catalog, Pottery Barn Teen. This increase was partially offset by a decrease in revenues from the Chambers catalog due to increased prospecting and lower productivity of the catalog.
The Pottery Barn Teen brand, launched in April 2003, is a home retail concept that is exclusively focused on the teenage market. Pottery Barn Teen offers exclusive lifestyle collections for bedrooms, study, and lounge areas that include products in five key merchandise categories: furniture, rugs, lighting, bedding, and decorative accessories. The products in Pottery Barn Teen are designed to reflect teen personalities and interests and are intended to speak to teenagers with the voice of a teen magazine.
Direct-to-customer revenues for Year-to-Date 2003 increased $58,423,000 or 14.0% over Year-to-Date 2002. This increase was primarily driven by incremental net revenues generated by the Pottery Barn, Pottery Barn Kids, West Elm, Williams-Sonoma, and Hold Everything brands in addition to incremental revenues from our newest catalog, Pottery Barn Teen. This increase was partially offset by a decrease in revenues from the Chambers catalog due to increased prospecting and lower productivity of the catalog.
Internet sales in the Pottery Barn Kids concept have and are expected to continue to fluctuate due to the rapid growth of the retail store base in fiscal 2002 and fiscal 2001 and the initial impact of new store openings on existing comparable stores; strong first year sales in new stores due to grand opening events; and inventory management challenges that resulted from aggressive store opening calendars and better than expected merchandise successes in a new retail concept. At the end of the ThirdSecond Quarter of 2002, Pottery Barn Kids operated 54 retail stores versus 23 stores at2003 increased by $24,618,000 or 55.1% over the end of the Third Quarter of 2001. For the comparable store sales base calculation, 20 stores were included in the ThirdSecond Quarter of 2002 and only three stores were includedcontributed 33.6% of total direct-to-customer sales in the ThirdSecond Quarter of 2001.
Direct-to-Customer Revenues
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
Dollars in thousands | 2002 | 2001 | 2002 | 2001 | ||||||||||||
Catalog sales | $ | 139,614 | $ | 140,724 | $ | 412,165 | $ | 418,152 | ||||||||
Internet sales | 48,042 | 35,494 | 130,872 | 84,083 | ||||||||||||
Total direct-to-customer sales | 187,656 | 176,218 | 543,037 | 502,235 | ||||||||||||
Shipping fees | 32,425 | 26,517 | 94,113 | 76,442 | ||||||||||||
Total direct-to-customer revenues | $ | 220,081 | $ | 202,735 | $ | 637,150 | $ | 578,677 | ||||||||
Percent growth in direct-to-customer sales | 6.5 | % | 0.8 | % | 8.1 | % | 9.4 | % | ||||||||
Percent increase in number of catalogs mailed | 36.6 | % | 3.6 | % | 19.8 | % | 6.9 | % |
Direct-to-customer revenues of $220,081,0002003 versus 25.2% in the ThirdSecond Quarter of 20022002. Internet sales in Year-to-Date 2003 increased $17,346,000by $46,719,000 or 8.6%56.4% over direct-to-customer revenues in the Third Quarter of 2001. For Year-to-Date 2002 and contributed 32.0% of total direct-to-customer revenues increased $58,473,000 or 10.1% to $637,150,000 fromsales in Year-to-Date 2001. These increases were primarily due to strong growth2003 versus 23.3% in Year-to-Date 2002. Although the Pottery Barn, Williams-Sonoma and Pottery Barn Kids brands and incremental revenues from the West Elm catalog launched in April 2002, partially offset by an expected decrease in the Hold Everything brand and introductory sales discounts to customers utilizing the Company’s private label credit card.
Direct-to-customer growth was driven primarily by the Internet, which increased sales during the Third Quarteramount of 2002 by $12,548,000 or 35.4% to $48,042,000 from the Third Quarter of 2001. Direct-to-customer sales for the Third Quarter of 2001 were negatively impacted by the economic aftermath of the events of September 11th. For Year-to-Date 2002, Internet sales increased $46,789,000 or 55.6%that are incremental to $130,872,000 from Year-to-Date 2001. The Company estimatesour direct-to-customer channel cannot be identified precisely, we estimate that approximately 40% to 50%-50% of non-bridal e-commerceInternet sales are incremental to the direct-to-customer channelschannel and approximately 50% to 60%-60% are from mail order customers who would have potentially placed an order via the catalog call center. Catalog sales were affected by the continuing trend in customer preference to place orders via the internet rather than by phone, and by initial purchase and loyalty program discounts on private label credit card catalog sales.recently received a catalog.
Cost of Goods Sold
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
November 3, | % Net | October 28, | %Net | November 3, | % Net | October 28, | % Net | August 3, | % Net | August 4, | % Net | August 3, | % Net | August 4, | % Net | |||||||||||||||||||||||||||||||||||||||||||||||||
Dollars in thousands | 2002 | Revenues | 2001 | Revenues | 2002 | Revenues | 2001 | Revenues | 2003 | Revenues | 2002 | Revenues | 2003 | Revenues | 2002 | Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of goods and occupancy expenses | $ | 293,338 | 55.6 | % | $ | 265,692 | 57.5 | % | $ | 840,759 | 56.0 | % | $ | 763,520 | 58.3 | % | $ | 335,213 | 57.8 | % | $ | 280,297 | 56.6 | % | $ | 637,510 | 57.1 | % | $ | 547,421 | 56.2 | % | ||||||||||||||||||||||||||||||||
Shipping costs | 28,367 | 5.3 | % | 30,432 | 6.6 | % | 87,646 | 5.8 | % | 86,033 | 6.6 | % | 30,132 | 5.2 | % | 29,922 | 6.0 | % | 60,367 | 5.4 | % | 59,279 | 6.1 | % | ||||||||||||||||||||||||||||||||||||||||
Total cost of goods sold | $ | 321,705 | 60.9 | % | $ | 296,124 | 64.1 | % | $ | 928,405 | 61.8 | % | $ | 849,553 | 64.9 | % | $ | 365,345 | 63.0 | % | $ | 310,219 | 62.6 | % | $ | 697,877 | 62.5 | % | $ | 606,700 | 62.3 | % | ||||||||||||||||||||||||||||||||
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Cost of goods and occupancy expenses increased $27,646,000 to $293,338,000by $54,916,000 in the ThirdSecond Quarter of 2002 from $265,692,000 in2003 over the ThirdSecond Quarter of 2001. Cost of goods and occupancy expenses expressed as2002. As a percentage of net revenues, for the Third Quarter of 2002 decreased 190 basis points to 55.6% from 57.5% in the Third Quarter of 2001. For Year-to-Date 2002, cost of goods and occupancy expenses increased $77,239,000120 basis points for the Second Quarter of 2003 from Second Quarter of 2002. This percentage increase was primarily driven by an overall increase in markdown activity in 2003 compared to $840,759,000
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an exceptionally low level of markdown activity in 2002; higher freight to store and other distribution costs due to the incremental expense associated with the ongoing inventory reinstatement initiative; and a higher cost of merchandise from $763,520,000 from Year-to-Date 2001. euro-based vendors due to the weakening of the U.S. dollar against the euro. Ongoing operational improvements, however, including a decrease in customer returns, replacements and damages, improved shipping profitability for merchandise delivered to the customers, and lower inventory shrinkage partially offset this increase.
Cost of goods and occupancy expenses expressed asincreased by $90,089,000 for Year-to-Date 2003 over the same period of fiscal 2002. As a percentage of net revenues, for Year-to-Date 2002 decreased 230cost of goods and occupancy expenses increased 90 basis points to 56.0% from 58.3% for Year-to-Date 2001. These decreases wereover the same period of fiscal 2002. This percentage increase was primarily driven by severalan overall increase in markdown activity in 2003 compared to an exceptionally low level of markdown activity in 2002; higher freight to store and other distribution costs due to the incremental expense associated with the ongoing inventory reinstatement initiative; and a higher cost of merchandise from euro-based vendors due to the weakening of the U.S. dollar against the euro. Ongoing operational improvements, however, including (1) an increase in net shipping profitability; (2) a substantial reductiondecrease in customer returns, replacements and replacements fromdamages, improved shipping profitability for merchandise quality, changes indelivered to the Company’s return policy for furniture in the Pottery Barn brands,customers, and new processes for handling returns in the call centers; (3) a substantial reduction in retaillower inventory shrinkage due to better than expected mid-year physical inventory results; (4) lower cost of merchandise due to improved sourcing; and (5) lower freight costs from the distribution center to the stores.partially offset this increase.
Shipping costs consist of third-party delivery services and shipping materials. Shipping costs decreased to $28,367,000increased by $210,000 in the ThirdSecond Quarter of 2002 from $30,432,000 in2003 versus the ThirdSecond Quarter of 2001.2002. This increase was directly related to a higher number of direct-to-customer shipments associated with the increase in direct-to-customer sales, but was substantially offset by a lower cost per shipment due to the consolidation of freight providers and the successful renegotiation of freight-to-customer contracts. As a percentageresult of these efficiencies, shipping fees, shipping costs have decreased to 83.0% in the Third Quarter of 2002 from 107.7% in the Third Quarter of 2001. For Year-to-Date 2002, shipping costs increased to $87,646,000 from $86,033,000 for Year-to-Date 2001. As a percentage of shipping fees, shipping costs have decreased to 88.2% for Year-to-Date 2002 from 105.7% for Year-to-Date 2001. Shipping costs, as a percentage of shipping fees, decreasedhave continued to decline from 91.6% in the Second Quarter of 2002 to 77.6% in the Second Quarter of 2003.
For Year-to-Date 2003, shipping costs increased by $1,088,000 from Year-to-Date 2002 due to an increase in the number of customer shipments. This increase was directly related to a higher number of direct-to-customer shipments associated with the increase in direct-to-customer sales, but was substantially offset by a lower cost per shipment due to the consolidation of freight providers and the successful renegotiation of freight-to-customer contracts. As a result of these efficiencies, shipping costs, as a percentage of shipping fees, have decreased to 81.6% for Year-to-Date 2003 from the modification of the Company’s shipping rates and surcharge tables. In addition, shipping costs decreased due to improved logistics.90.9% for Year-to-Date 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $23,495,000$24,060,000 or 14.9%14.8% to $181,469,000$186,226,000 in the ThirdSecond Quarter of 20022003 from $157,974,000$162,166,000 in the ThirdSecond Quarter of 2001. Selling, general and administrative expenses expressed as a percent of net revenues increased by 20 basis points to 34.4% in the Third Quarter of 2002 from 34.2% in the Third Quarter of 2001. As a percentage of net revenues, this increase in selling, general and administrative expenses was primarily due to an increase in employment costs offset by significant leverage in administrative expenses and lower advertising. The employment cost increase as a percentage of net revenues was primarily due to an increase in incentive compensation based upon improved profitability, higher retail employment due to a year-over-year increase in new store openings and higher employment costs to support information technology initiatives. The significant leverage in administrative expenses was primarily due to a reduction in credit card exchange fees due to the customer shifting from major credit cards to the Company’s private label credit card during the Third Quarter of 2002; a reduction in bad debt expense due to the implementation of check authorization in the fourth quarter of 2001; and ongoing reductions in other general operating expenses.
For Year-to-Date 2002, selling, general and administrative expenses increased $55,339,000 or 12.4% to $500,305,000 from $444,966,000 for Year-to-Date 2001.2002. Selling, general and administrative expenses expressed as a percentage of net revenues decreased by 7060 basis points to 33.3% for Year-to-Date 200232.1% in the Second Quarter of 2003 from 34.0% for Year-to-Date 2001. As32.7% in the Second Quarter of 2002. The improvement in selling, general and administrative expenses as a percentage of net revenues this decreasewas primarily driven by lower employment and other administrative costs, partially offset by higher advertising costs. Lower employment costs were primarily driven by reduced incentive compensation and the elimination of restricted stock compensation expense. Lower administrative costs were driven by the ongoing corporate-wide initiative to control discretionary overhead expenses. The advertising cost increase was primarily driven by relatively higher costs associated with our new catalog concepts, including the April 2003 launch of Pottery Barn Teen and the substantial circulation increase in West Elm.
For Year-to-Date 2003, selling, general and administrative expenseexpenses increased $50,233,000 or 15.8% to $369,069,000 for Year-to-Date 2003 from $318,836,000 for Year-to-Date 2002. Selling, general and administrative expenses expressed as a percentage of net revenues increased by 30 basis points to 33.0% for Year-to-Date 2003 from 32.7% for Year-to-Date 2002. This percentage increase was primarily due to a significant leverage inhigher catalog advertising, costs and other operating expenses, partially offset by higher employment costs.a reduction in other general expenses. The reducedincrease in catalog advertising costs as a percentage of net revenues was primarily duedriven by increased circulation in our emerging businesses, including West Elm, Pottery Barn Teen and Hold Everything, in addition to an overall reductionlower productivity in the percentage of total net revenues being generated by direct-to-customer channel, higher catalog productivity,Pottery Barn Kids and lower catalog production costs. The employment cost increase as a percentage of net revenues was primarily due toPottery Barn catalogs which resulted from an increase in incentive compensation based upon improved year-over-year profitability.circulation to prospect mailing lists.
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Interest Expense —- Net
Net interest expense decreased $1,627,000 to $106,000income was $130,000 in the ThirdSecond Quarter of 2002 from $1,733,000 in the Third Quarter of 2001. For Year-to-Date 2002,2003 versus net interest expense decreased $4,295,000 to $585,000 from $4,880,000of $215,000 in the Second Quarter of 2002. For Year-to-Date 2003, net interest income was $446,000 versus net interest expense of $479,000 for Year-to-Date 2001. These decreases were2002. The decrease in interest expense was primarily due to no borrowings under the revolving line of credit facility during fiscal 2002.an increase in capitalized interest.
Income Taxes
The Company’sOur effective tax rate was 38.5% for Year-to-Date 20022003 and Year-to-Date 2001.2002.
Liquidity and Capital Resources
For Year-to-Date 2002,2003, net cash used in operating activities was $66,496,000 as compared to net cash provided by operating activities was $72,079,000 as compared to cash used by operating activities of $50,554,000$66,279,000 in Year-to-Date 2001.2002. This improvement inuse of operating cash isfor Year-to-Date 2003 was primarily attributable to higher net earnings and a significant increase in accounts payable partially offset by an increase in merchandise inventories.inventories due to our decision to substantially reinstate the in-stock position on core merchandise inventories, a reduction in income taxes payable because of the payment of our fiscal 2002 income taxes, a reduction in accounts payable due to the timing of expenditures, and a reduction in accrued expenses primarily driven by the payout of our 2002 incentive compensation in the first quarter of 2003.
Net cash used in investing activities was $117,482,000$71,831,000 for Year-to-Date 20022003 as compared to net cash used$64,537,000 for Year-to-Date 2002. Year-to-Date 2003 purchases of property and equipment included approximately $41,976,000 for stores, $27,559,000 for systems development projects (including e-commerce websites) and $2,296,000 for distribution and facility infrastructure projects. During the first quarter of 2003, we entered into an agreement to purchase a corporate aircraft in late 2003. We are investing activitiesin this asset in response to the increasing complexity of $118,289,000 forour global sourcing program (currently representing 58% of annual inventory purchases from over 41 countries), the same periodcontinued expansion of fiscal 2001. our retail stores and distribution centers and the increasing difficulty and risks associated with worldwide travel.
Year-to-Date 2002 purchases of property and equipment includeincluded approximately $88,146,000$48,636,000 for stores, $25,770,000$14,306,000 for systems development projects (including e-commerce websites) and $3,566,000$1,595,000 for distribution and facility infrastructure projects.
Year-to-Date 2001 purchases of property and equipment include approximately $74,584,000 for stores, $30,067,000 for systems development projects, $12,527,000 for the buildout of corporate facilities and $1,461,000 for distribution capacity expansion.
Based on the Company’s current plans, gross capital expenditures in fiscal 2002 are projected to be approximately $160,000,000, including $114,000,000 for stores, $40,000,000 for systems development and approximately $6,000,000 for distribution and facility infrastructure projects. In addition to these projected expenditures, on March 4, 2002, the Company’s Board of Directors authorized management to obtain information, conduct negotiations and enter into appropriate agreements with the intent to pursue potential acquisitions of two distribution facilities currently leased from certain related parties prior to the end of fiscal 2002.
For Year-to-Date 2002,2003, cash provided by financing activities was $8,448,000,$25,497,000, comprised primarily of $15,918,000 in proceeds from the exercise of stock options, partially offset by the repayment of long-term obligations of $6,959,000 including the repayment of capital lease and long-term debt obligations.
obligations.For Year-to-Date 2001,2002, cash provided by financing activities was $156,036,000,$12,584,000, comprised primarily of net line of credit borrowings of $155,250,000 and $12,937,000 in proceeds from the exercise of stock options, partially offset by the repayment of long-termcapital lease obligations of $12,151,000 including the repayment of.
We have a mortgage agreement and long-term debt obligations.
15
The Company’s$200,000,000 unsecured revolving line of credit facility provides for a $200,000,000 unsecured revolving credit facilitythat expires on October 22, 2005 and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratio (funded debt adjusted for lease and rent expense to EBITDAR), minimum fixed charge coverage ratio, and maximum annual capital expenditures. The line of credit facility was renewed by an amended and restated agreement dated October 22, 2002. The amended agreement expires on October 22, 2005. Through April 22, 2005, the Companywe may, upon notice to the lenders, request an increase in the facility up to $250,000,000. The CompanyWe may elect interest rates calculated by reference to the agent’s internal reference rate or LIBOR plus a margin based on the Company’sour leverage ratio. As of NovemberAugust 3, 2002, the Company2003, we had no borrowings outstanding under the line of credit facility.
We have three unsecured commercial letter of credit reimbursement agreements for an aggregate of $115,000,000, which expire on July 2, 2004. The latest expiration for the letters of credit issuable under the agreements is November 29, 2004. As of NovemberAugust 3, 2002,2003, $87,663,000 was outstanding under the Companyletter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which we had issued andnot taken legal title as of August 3, 2003.
15
As of August 3, 2003, we had outstanding standby letters of credit under the line of credit facility in an aggregate amount of $9,964,000. The standby letters of credit were issued to replace surety bonds that supportsecure liabilities associated with workers’ compensation and other insurance programs.
In July 2002, the Company entered into three new unsecured commercial letter of credit reimbursement agreements for an aggregate of $100,000,000. These agreements expire on July 2, 2003. The latest expiration for the letters of credit issued under the agreements is November 29, 2003. Per the new agreements, the Company is permitted to have issuedWe regularly review and outstanding up to $120,000,000 under both the new letter of credit agreements and the prior letter of credit agreement. As of November 3, 2002, $1,037,000 was outstanding under the prior letter of credit agreement, and $75,892,000 was outstanding under the new letter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which the Company had not taken legal title as of November 3, 2002.
The Company regularly reviews and evaluates itsevaluate our liquidity and capital needs. As the Company continueswe continue to grow, the Companywe may experience peak periods for itsour cash needs during the course of itsour fiscal year. The Company believes itWe believe we would have access to additional debt and/or capital market funding as required to meet such needs are required. The Companyneeds. We currently believesbelieve that itsour available cash, cash equivalents, cash flowflows from operations and cash available under itsour existing credit facilities will be sufficient to finance the Company’sour operations and capital requirements for at least the next twelve months.
Stock Repurchase Program
In January 2003, the Board of Directors authorized a stock repurchase program to acquire up to four million shares of the Company’s outstanding common stock in the open market. During the fourth quarter of fiscal year 2002, we repurchased and retired two million shares of our common stock under the program. At August 3, 2003, the remaining authorized amount of stock eligible for repurchase was two million shares. Future purchases under this program will be made through open market transactions at times and amounts that management deems appropriate. The timing and actual number of shares to be purchased in the future will depend on a variety of factors such as price, corporate and regulatory requirements, and other market conditions. We may terminate or limit the stock repurchase program at any time without prior notice.
Impact of Inflation
The impact of inflation on results of operations has not been significant.significant to date.
Seasonality
The Company’sOur business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company’sour revenues and net earnings have been realized during the period from October through December, and levels of net revenues and net earnings have generally been significantly lower during the period from January through September. The Company believesWe believe this is the general pattern associated with the direct-to-customerretail and retaildirect-to-customer industries. In anticipation of itsour peak season, the Company hireswe hire a substantial number of additional employees in itsour retail stores and direct-to-customer processing and distribution areas, and incursincur significant fixed catalog production and mailing costs.
Risk Factors
The following information describes certain significant risks inherent in our business. You should carefully consider such risks, together with the other information contained in our Annual Report on Form 10-K for the fiscal year ended February 2, 2003 and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other disclosed risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which, in turn, could cause the market price of our stock to decline, perhaps significantly.
We must successfully anticipate changing consumer preferences and buying trends, and manage our inventory commensurate with customer demand.
Our success depends upon our ability to anticipate and respond to changing merchandise trends and customer demands in a timely manner. We must keep our merchandise assortment fresh, but consumer preferences cannot
16
be predicted with certainty and may change between sales seasons. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our sales may decline significantly and we may be required to mark down certain products to sell the resulting excess inventory or sell such inventory through our outlet stores at prices which are significantly lower than our retail prices, each of which would harm our business and operating results.
In addition, we must manage our inventory effectively, commensurate with customer demand. Much of our inventory is sourced from vendors located outside the United States. Thus, we usually must order merchandise, and enter into contracts for the purchase and manufacture of such merchandise, well in advance of the applicable selling season and frequently before trends are known. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing trends. In addition, the seasonal nature of the specialty home products business requires us to carry a significant amount of inventory prior to peak selling season. As a result, we are vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of merchandise purchases. If we do not accurately predict our customers’ preferences and acceptance levels of our products, our inventory levels will not be appropriate and our business and operating results may be negatively impacted.
Over the last twelve months, we have increased our merchandise inventories by approximately 50% in order to improve our fulfillment rates and customer service. As a result of this increase, we have also seen a related increase in distribution costs. If we are unable to sell through this inventory to our customers, we may experience additional pressure on our gross margins or inventory writedowns in future periods which could negatively affect our business, results of operations and financial condition.
Our business depends, in part, on factors affecting consumer spending that are out of our control.
Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer income, recession and fears of recession, war and fears of war, inclement weather, electrical power disruptions, consumer debt, interest rates, sales tax rates and rate increases, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security generally. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our sales and harming our business and operating results.
The growth of our sales and profits depends, in large part, on our ability to successfully open new stores.
In each of the past three fiscal years, our retail stores have generated approximately 59.0% of our net revenues. We plan a net increase of approximately 35 new retail stores in fiscal 2003 as part of our growth strategy. There is no assurance that this strategy will be successful. Our ability to open additional stores successfully will depend upon a number of factors, including:
• | our identification and availability of suitable store locations; | ||
• | our success in negotiating leases on acceptable terms; | ||
• | our ability to secure required governmental permits and approvals; | ||
• | our hiring and training of skilled store operating personnel, especially management; | ||
• | our timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays in store openings; | ||
• | the availability of financing on acceptable terms (if at all); and | ||
• | general economic conditions. |
Many of these factors are beyond our control. For example, for the purpose of identifying suitable store locations, we rely, in part, on demographics surveys regarding location of consumers in our target market
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segments. While we believe that the surveys and other relevant information are helpful indicators of suitable store locations, we recognize that the information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays. Construction and other delays in store openings could have a negative impact on our business and operating results. There can be no assurance that we will be able to open new stores or that, if opened, those stores will be operated profitably.
We face intense competition from companies with brands or products similar to ours.
The specialty retail and direct-to-customer business is highly competitive. Our specialty retail stores, mail order catalogs and e-commerce websites compete with other retail stores, other mail order catalogs and other e-commerce websites that market lines of merchandise similar to ours. We compete with national, regional and local businesses utilizing a similar retail store strategy, as well as traditional furniture stores, department stores and specialty stores. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies.
The competitive challenges facing us include, without limitation:
• | anticipating and quickly responding to changing consumer demands better than our competitors; | ||
• | maintaining favorable brand recognition and achieving customer perception of value; | ||
• | effectively marketing and competitively pricing our products to consumers in several diverse market segments; and | ||
• | developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups and tastes, and in ways that favorably distinguish us from our competitors. |
In light of the many competitive challenges facing us, there can be no assurance that we will be able to compete successfully. Increased competition could adversely affect our sales, operating results and business.
We depend on key domestic and foreign vendors for timely and effective sourcing of our merchandise, and we are subject to various risks and uncertainties that might affect our vendors’ ability to produce quality merchandise.
Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Any inability to acquire suitable merchandise or the loss of one or more key vendors could have a negative effect on our business and operating results because we would be missing products that we felt were important to our assortment, unless and until alternative supply arrangements are secured. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those we currently purchase.
In addition, we are subject to certain risks, including availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and general economic and political conditions, that might limit our vendors’ ability to provide us with quality merchandise on a timely basis. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to our stores or customers. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer litigation against us and an attendant increase in our routine litigation costs.
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Our dependence on foreign vendors subjects us to a variety of risks and uncertainties.
We source our products from manufacturers in over 41 countries. Specifically, in fiscal 2002, approximately 58% of our merchandise purchases were foreign sourced, primarily from Asia and Europe.
Our dependence on foreign vendors means, in part, that we may be affected by declines in the relative value of the U.S. dollar to other foreign currencies. Although a majority of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, changes in foreign currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices for merchandise, hold up merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.
We are also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, work stoppages, economic uncertainties (including inflation), foreign government regulations, war and fears of war, political unrest and trade restrictions. We cannot predict whether any of the countries in which our products are currently manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, against home-centered items could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and operating results. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds and/or other trade disruptions.
In addition, although we are in the process of developing and implementing an enhanced global compliance program, there remains a risk that one or more of our foreign vendors will not adhere to our global compliance standards (including, e.g., fair labor standards and the prohibition on child labor). If this happens, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business and operating results.
We must timely and effectively deliver merchandise to our stores and customers.
We cannot control all of the various factors that might affect our fulfillment rates in direct-to-customer sales and/or timely and effective merchandise delivery to our stores. We rely upon third party carriers for our merchandise shipments, including shipments to our customers and to and from all of our stores. Accordingly, we are subject to the risks, including labor disputes (e.g., west coast port lock-out of 2002), union organizing activity, inclement weather, natural disasters, and possible acts of terrorism associated with such carriers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, we are seeing fuel costs increase substantially and airline companies struggle to operate profitably, which could lead to increased fulfillment expenses and negatively affect our business and operating results by increasing costs and negatively affecting the efficiency of our shipments.
Our failure to successfully manage our order-taking and fulfillment operations might have a negative impact on our business.
The operation of our direct-to-customer business depends on our ability to maintain the efficient and uninterrupted operation of our order-taking and fulfillment operations and our e-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone service or power outages, inadequate system capacity, human error, natural disasters or adverse weather conditions. These problems could result in a reduction in sales as well as increased selling, general and administrative expenses.
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In addition, we face the risk that we cannot hire enough qualified employees, especially during our peak season, to support our direct-to-customer operations, due to war or other circumstances that reduce the relevant workforce. The need to operate with fewer employees could negatively impact our customer service levels and our operations and ultimately could negatively affect our business, results of operations and financial condition.
We experience fluctuations in our comparable store sales.
Our success depends, in part, upon our ability to increase sales at our existing stores. Various factors affect comparable store sales, including the number of stores we open, close and expand in any period, the general retail sales environment, changes in sales mix between distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition, current economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, and cannibalization of existing store sales by new stores. Among other things, weather conditions or electrical power disruptions can affect comparable store sales, because they can require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors may cause our comparable store sales results to differ materially from prior periods and from earnings guidance we have provided. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in the future. Our comparable store sales increases for fiscal years 2002, 2001 and 2000 were 2.7%, 1.7% and 5.5%, respectively. Comparable store sales increased by 2.9% in the twenty-six weeks ended August 3, 2003. Past comparable store sales are no indication of future results, and there can be no assurance that our comparable store sales will not decrease in the future. Our ability to maintain and improve our comparable store sales results depends in large part on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using more effective pricing strategies. Any failure to meet the comparable store sales expectations of investors and security analysts in one or more future periods could significantly reduce the market price of our common stock.
Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business.
Postal rate increases and paper and printing costs affect the cost of our catalog mailings. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. Our cost of paper has fluctuated significantly during the past three fiscal years, and our paper costs may increase in the future. Although we have entered into long-term contracts for catalog paper and catalog printing, these contracts offer no assurance that our catalog production costs will not substantially increase following expiration of these contracts. Future increases in postal rates or paper or printing costs would have a negative impact on our operating results to the extent that we are unable to pass such increases on directly to customers or offset such increases by raising selling prices or by implementing more efficient printing, mailing, delivery and order fulfillment systems.
We have historically experienced fluctuations in customer response to our catalogs. Customer response to our catalogs is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the sizing and timing of delivery of the catalogs. The failure to effectively produce or distribute the catalogs could affect the timing of catalog delivery, which could cause customers to forego or defer purchases.
We must successfully manage our Internet business.
The success of our Internet business depends, in part, on factors over which we have limited control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain
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additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, changes in applicable federal and state regulation, security breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales through our Internet business, as well as damage our reputation and brands.
We must successfully manage the complexities associated with a multi-channel and multi-brand business.
During the past few years, with the launch and expansion of our Internet business, new brands and brand expansions, our overall business has become substantially more complex. The changes in our business have forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the risk that our Internet business might cannibalize a significant portion of our retail and catalog businesses. While we recognize that our Internet sales cannot be entirely incremental to sales through our retail and catalog channels, we seek to attract as many new customers as possible to our websites. We continually analyze the business results of our three channels and the relationships among the channels, in an effort to find opportunities to build incremental sales. However, we cannot ensure that, as our Internet business grows, it will not cannibalize a portion of our retail and catalog businesses.
We have recently introduced two new brands, West Elm and Pottery Barn Teen, and may introduce additional new brands and brand extensions in the future. Our introduction of new brands and brand extensions poses another set of risks. If we devote time and resources to new brands and brand extensions, and those businesses are not as successful as we planned, then we risk damaging our overall business results. Alternatively, if our new brands and brand extensions prove to be very successful, we risk hurting our existing brands through the migration of customers to the new businesses. There can be no assurance that we can and will introduce new brands and brand extensions that improve our overall business and operating results.
Our inability to obtain commercial insurance at acceptable prices might have a negative impact on our business.
There has been a substantial increase in the costs of insurance, partly in response to the terrorist attacks of September 11, 2001, and financial irregularities and other fraud at publicly-traded companies. We believe that extensive commercial insurance coverage is prudent for risk management and anticipate that our insurance costs may further increase. In addition, for certain types or levels of risk (e.g., risks associated with earthquakes or terrorist attacks), we might determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we might choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our business and operating results.
Our inability or failure to protect our intellectual property would have a negative impact on our business.
Our trademarks, service marks, copyrights, patents, trade dress rights, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales. There can be no assurance that we will be able to adequately protect our intellectual property or that the costs of defending our intellectual property will not adversely affect our operating results.
We have been sued and may be named in additional lawsuits in a growing number of industry-wide patent litigation cases relating to the Internet.
There appears to be a growing number of patent infringement lawsuits instituted against companies such as ours that have an Internet business. The plaintiff in each case claims to hold a patent that covers web technology, which is allegedly infringed by the operation of the defendants’ websites. We are currently a defendant in certain
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such patent infringement cases and anticipate being named in others in the future, as part of an industry-wide trend. Even in cases where a plaintiff’s claim lacks merit, the defense costs in a patent infringement case are very high. There can be no assurance that additional patent infringement claims will not be brought against us, or that the cost of defending such claims or the ultimate resolution of such claims will not negatively impact our business and operating results.
We are planning certain systems changes that might disrupt our operations.
Our success depends on our ability to source merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems supporting the product pipeline, including design, sourcing, merchandise planning, forecasting and purchasing, inventory, distribution, transportation and price management. Modifications will involve updating or replacing legacy systems with successor systems during the course of several years. There are inherent risks associated with replacing our core systems, including any disruptions that affect our ability to get products into our stores and delivered to customers. There can be no assurance that we will successfully launch these new systems or that the launch will occur without any disruptions. Any resulting disruptions could have a material adverse effect on our business and operating results.
We need to manage our employment, occupancy and other operating costs.
To be successful, we need to manage our operating costs while we continue to look for opportunities to reduce costs. We recognize that we may need to increase the number of our employees, especially in peak sales seasons, and incur other expenses to support new brands and brand extensions, as well as the opening of new stores and direct-to-customer growth of our existing brands. In addition, although we strive to secure long-term contracts with our service providers and other vendors and otherwise limit our financial commitment to them, there can be no assurance that we will avoid unexpected operating cost increases in the future. Lower than expected sales, coupled with higher than expected costs, would negatively impact our business and operating results.
We depend on external funding sources for operating funds.
We regularly review and evaluate our liquidity and capital needs. We currently believe that our available cash, cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next twelve months. However, as we continue to grow, we might experience peak periods for our cash needs during the course of our fiscal year, and we might need additional external funding to support our operations. Although we believe we would have access to additional debt and/or capital market funding if needed, there can be no assurance that such funds will be available to us on acceptable terms. If the cost of such funds is greater than expected, it could adversely affect our expenses and our operating results.
Our operating and financial performance in any given period might not meet the extensive guidance that we have provided to the public.
We provide extensive public guidance on our expected operating and financial results for future periods which is based solely on estimates made by management using information available at the time of estimate. Such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. We cannot ensure that our guidance will be accurate, particularly in light of the degree of specificity included in our guidance. If in the future our operating or financial results for a particular period do not meet our guidance or the expectations of investment analysts, the market price of our common stock could decline.
We have not undertaken to publicly update or revise this or any of our other forward-looking statements, even if experience or future events make it clear that the results set forth in such statements will not be realized.
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Our quarterly results of operations might fluctuate due to a variety of factors including seasonality.
Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including, but not limited to, shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas, and the strategic importance of fourth quarter results. A significant portion of our revenues and net earnings have been realized during the period from October through December. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize significantly lower-than-expected revenues or net earnings during the October through December selling season, our business and results of operations would be materially adversely affected.
Our failure to successfully anticipate merchandise returns might have a negative impact on our business.
We record a reserve for merchandise returns based on historical return trends together with current product sales performance in each reporting period. There can be no assurance that actual merchandise returns will not exceed our reserves. In addition, there can be no assurance that the introduction of new merchandise, changes in merchandise mix, changes in consumer confidence, or other competitive and general economic conditions will not cause actual returns to exceed merchandise return reserves. Any significant increase in merchandise returns that exceed our reserves could materially affect our business and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company isWe are exposed to market risks, which include changes in U.S. interest rates and foreign exchange rates. The Company doesWe do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
The interest payable on the Company’sour bank line of credit and on two of our operating leases is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt and operating leases rose 2621 basis points (a(an approximately 10% changeincrease in the associated debt’s variable raterates as of NovemberAugust 3, 2002)2003), the Company’seffect on our results fromof operations and cash flows would not be materially affected. In addition,material.
For one of the Company has fixed andoperating leases with a variable income investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest rates.
The Company hasrate (2.41% at August 3, 2003), we have an interest rate cap contract at 5.88% with a notional amount of $13,083,000 which extends through February 2005 related to an operating lease.2005. The contract has not been designated as a hedge and is accounted for by adjusting the carrying amount of the contract to market. A loss of approximately $19,000Losses on the contract have not been and $88,000 was recordedare not expected to be significant and are included in selling, general and administrative expenses forexpenses.
In addition, we have fixed and variable income investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest rates. An increase in interest rates of 10% would have an immaterial effect on the thirteen and thirty-nine weeks ended November 3, 2002, respectively, and nilvalue of these investments. Declines in interest rates would, however, decrease the thirteen and thirty-nine weeks ended October 28, 2001.income derived from these investments.
Foreign Currency RisksThe Company enters into a significant amount
We purchase approximately 58% of purchasesour inventory from vendors in transactions outside of the U.S. that, a majority of which are primarilydenominated in U.S. dollar transactions.dollars. A small percentage of the Company’sour international purchase transactions are in currencies other than the U.SU.S. dollar. Any currency risks related to these transactions are immaterial to us. A decline in the Company as a whole. relative value of the U.S. dollar to other foreign currencies could, however, lead to increased purchasing costs.
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As of NovemberAugust 3, 2002, the Company has eight2003, we have 9 retail stores in Toronto and Vancouver, Canada and expectsexpect to open one or more2 additional Canadian stores in fiscal 2003, which exposes the Companyexpose us to market risk associated with foreign currency exchange rate fluctuations.
During fiscal 2002, due Due to the Company’s newour operations in Canada, andwe monitor the volatility of the Canadian dollar 30-dayexchange rate and purchase forward contracts have been purchased in orderas considered appropriate to limit the currency exposure associated with intercompany asset and liability accounts thatof our Canadian subsidiary. Losses on these contracts have not been and are denominatednot expected to be significant and are included in Canadian dollars. The Company continues to monitor currency exposure, which has been immaterial during fiscal 2002 to date,selling, general and will continue to take steps toward limiting foreign currency risk.administrative expenses.
ITEM 4. CONTROLS AND PROCEDURES
As of NovemberAugust 3, 2002,2003, an evaluation was performed under the supervision and with the participation of the Company’sour management, including theour Chief Executive Officer (“CEO”) and the Seniorour Executive Vice President, Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures. Based on that evaluation, the Company’sour management, including theour CEO and CFO, concluded that the Company’sour disclosure controls and procedures were effective asto ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of November 3, 2002.1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have beenwas no significant changeschange in our internal control over financial reporting that occurred during the Company’speriod covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal controls or in other factors that could significantly affect internal controls subsequent to November 3, 2002.control over financial reporting.
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
ThereAs of the date hereof, there are no material pending legal proceedings pending against the Company. The Company is, however, involved in routine litigation arising inus. From time to time, we may become a party to and subject to claims incident to the ordinary course of its business, and, whileour business. Although the results of the proceedings and claims cannot be predicted with certainty, the Company believeswe believe that the final outcomeultimate resolution of such matters will not have a material adverse effect on the Company’s consolidatedour business, results of operations or financial statements taken as a whole.condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company’s Annual Meeting of Shareholders was held on May 28, 2003.
At the Company’s 2003 Annual Meeting of Shareholders, the shareholders took the following actions:
(I) | The shareholders elected each of the following persons by the vote indicated to serve as a Director of the Company until the next Annual Meeting of Shareholders or until his or her successor is elected and qualified: |
Name | For | Withheld | |||||||
Adrian D.P. Bellamy | 100,090,783 | 5,884,513 | |||||||
Patrick J. Connolly | 101,225,067 | 4,750,229 | |||||||
Jeanne Jackson | 101,974,454 | 4,000,842 | |||||||
W. Howard Lester | 101,159,293 | 4,816,003 | |||||||
Michael R. Lynch | 101,881,574 | 4,093,722 | |||||||
James A. McMahan | 74,978,194 | 30,997,102 | |||||||
Edward A. Mueller | 101,059,579 | 4,915,717 | |||||||
Richard T. Robertson | 75,051,740 | 30,923,556 | |||||||
Charles E. Williams | 101,159,537 | 4,815,759 |
(II) | The shareholders approved, by the vote indicated, an amendment of our restated articles of incorporation to amend the section that provides authority to us to indemnify our officers, directors, employees and other agents under California law: |
For | Against | Withheld | |||||||
104,357,935 | 1,530,878 | 86,483 |
(III) | The shareholders ratified, by the vote indicated, the selection of Deloitte & Touche LLP as the independent accountants for the Company’s fiscal year ending February 1, 2004: |
For | Against | Withheld | |||||||
103,985,094 | 1,938,321 | 51,881 |
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number | Exhibit Description | |||
3.1 | Certificate of Amendment of Restated Articles of Incorporation, as Amended, of the Company, dated as of July 22, 2003 (Restated Articles of Incorporation, as Amended, is incorporated by reference to Exhibit 3.1 and Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the period ended February 2, 2003 as filed with the Commission on April 15, 2003, File No. 001-14077) | |||
10.1 | First Amendment, dated as of July 2, 2003, to the Reimbursement Agreement | |||
10.2 | First Amendment, dated as | |||
10.3 | First Amendment, dated as of July 2, 2003, to the Reimbursement Agreement between the Company and Fleet National Bank, dated July 2, 2002 | |||
10.4 | Fifth Amendment, dated May 30, 2003, to the First Amendment and Restatement of the Williams-Sonoma, Inc. Associate Stock Incentive Plan, effective as of January 1, 1997 | |||
10.5 | Amendment to the Agreement between the Company and James Boike, dated May 8, 2003 (the original agreement is incorporated by reference to Exhibit 10.78 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002 as filed with the Commission on April 29, 2002, File No. 001-14077) | |||
31.1 | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2 | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
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 |
(b) Reports on Form 8-K | ||
18On May 22, 2003, we furnished our earnings release for the first quarter of 2003 to the Securities and Exchange Commission on a Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrantregistrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereunto duly authorized.
WILLIAMS-SONOMA, INC. | ||||
By: | /s/ SHARON L. MCCOLLAM | |||
Sharon L. McCollam | ||||
Executive Vice President | ||||
Chief Financial Officer |
19Dated: September 11, 2003
CERTIFICATION
I, Dale W. Hilpert, Chief Executive Officer, certify that:
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CERTIFICATION
I, Sharon L. McCollam, Senior Vice President and Chief Financial Officer, certify that:
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