UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended April 29, 2018.May 5, 2019.

or

For the transition period from                to                

Commission File Number:001-14077

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:(415) 421-7900

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 27, 2018, 83,104,613June 2, 2019, 78,603,366 shares of the registrant’s Common Stock were outstanding.

WILLIAMS-SONOMA, INC.

REPORT ON FORM10-Q

FOR THE QUARTER ENDED APRIL 29, 2018MAY 5, 2019

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of May 5, 2019 and April 29, 2018, and April 30, 2017, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, the Condensed Consolidated Statements of Stockholders’ Equity and the Condensed Consolidated Statements of Cash Flows for the thirteen weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of January 28, 2018,February 3, 2019, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form10-K for the fiscal year ended January 28, 2018.February 3, 2019.

The results of operations for the thirteen weeks ended April 29, 2018May 5, 2019 are not necessarily indicative of the operating results of the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form10-K for the fiscal year ended January 28, 2018.February 3, 2019.

Reclassifications

Certain amounts reported in our Condensed Consolidated Balance SheetsSheet as of January 28,April 29, 2018 and April 30, 2017 and our Condensed Consolidated Statement of Cash Flows for the thirteen weeks ended April 30, 2017 have been reclassified in order to conform to the current period presentation. These reclassifications impacted prepaid catalog expenses, prepaid expenses, accounts payable, accrued expenses, gift cardgoodwill and other deferred revenue and other current liabilities.long-term assets. There was no change to total current assets total current liabilities, or net cash used in operating activities as a result of these reclassifications.

New Accounting Pronouncements

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,2016-02,Revenue from Contracts with Customers, Leases, which requires lessees to clarify the principles of recognizing revenuerecognize aright-of-use asset and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. We adopted thean operating lease liability for virtually all leases. This ASU, on a modified retrospective basisas amended, was effective for us beginning in the first quarter of fiscal 2018 and applied the guidance therein to all applicable contracts that were not complete as of the date of application. As a result, we recorded an increase to opening retained earnings as of January 29, 2018 of approximately $17,862,000, net of tax, for the cumulative effect adjustments of adopting the ASU. These adjustments primarily related to the acceleration in the timing of recognizing breakage income related to our unredeemed stored-value cards, the acceleration in the timing of revenue recognition for certain merchandise shipped to our customers, and prepaid catalog advertising costs, which were capitalized and amortized over their expected period of future benefit prior to adoption, and are now expensed as incurred. Prior period balances were not retrospectively adjusted as a result of adopting the ASU. See Note L for further discussion related to the impact of the2019. The adoption of the ASU on our Condensed Consolidated Financial Statements.

In January 2016, the FASB issued ASU2016-01,Recognitionresulted in an increase in total long-term assets and Measurementtotal liabilities of Financial Assetsapproximately $1.2 billion, which includes an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and Financial Liabilities, which revisesdeferred lease incentives of approximately $0.2 billion, and an entity’s accounting relatedincrease inright-of-use assets of approximately $1.2 billion. We also recorded an approximate $3.3 million, net of tax, reduction to the classification and measurementopening balance of investments in equity securities and the presentationretained earnings resulting from impairment of certain fair value changes for financial liabilities measured at fair value. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017.long-lived assets upon adoption of the ASU. We adoptedhave elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the first quarterfinancial statements. We have elected the package of fiscal 2018. Thepractical expedients upon adoption, didwhich permits us not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We have an impact onalso elected not to separate lease andnon-lease components for all of our financial condition, results of operations or cash flows.

In February 2016, the FASB issued ASU2016-02,Leases, which will require lesseesleases and not to recognize aright-of-use asset and a lease liability for virtually allshort-term leases. The adoption of their leases (other than short-term leases). Thisthe ASU is effective for us beginning in the first quarter of fiscal 2019. We are currently assessing the impact of this ASU on our Consolidated Financial Statements, but expect that it will result in a substantial increase in our long-term assets and liabilities, however, we dodid not expect it to materially impact our Condensed Consolidated Statement of Earnings.

In October 2016, the FASB issued ASU2016-16,Intra-Entity Transfers of Assets Other than Inventory. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We adopted this ASU in the first quarter of fiscal 2018. The adoption did not have a material impact on our financial condition, results of operations or cash flows.

In August 2017, the FASB issuedASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815), which expands and refines hedge accounting forboth non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance

also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This ASU is effective for us in the first quarter of fiscal 2019 and early adoption is permitted. Entities should apply the guidance to existing cash flow and net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings on the date of adoption. The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges where the hedge documentation needs to be modified. This ASU was effective for us in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In August 2018, the FASB issued ASU2018-15, Intangibles—Goodwill andOther—Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing ArrangementThat Is a Service Contract.The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.

NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”) and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to the first and second anniversariesanniversary of the closing date of the amendment of the credit facility, elect to extend the maturity date for an additional year, subject to lender approval.

During the first quarter of fiscal 2019 and fiscal 2018, we had no borrowings under the revolver. During the first quarter of fiscal 2017, we had borrowings of $45,000,000 under the revolver (at a weighted average interest rate of 2.01%), all of which were outstanding as of April 30, 2017. Additionally, as of April 29, 2018, $12,772,000May 5, 2019, $11,716,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of April 29, 2018,May 5, 2019, we had $300,000,000 outstanding under our term loan (at a weighted average interest rate of 2.85%3.61%). The term loan matures on January 8, 2021, at which time all outstanding principal and any accrued interest must be repaid.

The interest rates under the credit facility are variable, and may be elected by us as: (i) the London Interbank Offer Rate (“LIBOR”) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1%1.0% for the term loan.

As of April 29, 2018,May 5, 2019, we arewere in compliance with our financial covenants under the credit facility and, based on current projections, we exceptexpect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 25, 2018.24, 2019. The letter of credit facilities containcontains covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility plus an applicable margin based on our leverage ratio. As of April 29, 2018,May 5, 2019, an aggregate of $5,900,000$6,168,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 22, 2019.21, 2020.

NOTE C. STOCK-BASED COMPENSATION

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 32,310,00036,570,000 shares. As of April 29, 2018,May 5, 2019, there were approximately 3,032,0004,927,000 shares available for future grant. Subsequently, on May 30, 2018, our stockholders approved an amendment and restatement of the Plan to increase the number of shares issuable by 4,260,000 shares. Awards may be granted under the Plan to our officers, employees andnon-employee members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Option Awards

Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Stock awards granted tonon-employee Board members generally vest in one year.Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as anon-employee Board member).

Stock-Based Compensation Expense

During the thirteen weeks ended May 5, 2019 and April 29, 2018, and April 30, 2017, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $12,889,000$18,529,000 and $9,817,000,$12,889,000, respectively.

Stock-SettledRestricted Stock Appreciation RightsUnits

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

The following table summarizes our stock-settledrestricted stock appreciation rightunit activity during the thirteen weeks ended April 29, 2018:May 5, 2019:

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirteen weeks ended April 29, 2018:

NOTE D. EARNINGS PER SHARE

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

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

Stock-based awards of 29,99711,400 and 215,59529,997 were excluded from the computation of diluted earnings per share for the thirteen weeks ended May 5, 2019 and April 29, 2018, and April 30, 2017, respectively, as their inclusion would be anti-dilutive.

NOTE E. SEGMENT REPORTING

We have two reportableidentify our operating segments according to how our business activities are managed and evaluated.

Prior to fiscal 2019, we managede-commerce and retail. Thee-commerce segment hasmerchandise strategies, which included the following merchandise strategies:results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen,Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sellseparately from our products through oure-commerce websitesretail business. Because these merchandising strategies shared similar economic and direct-mail catalogs. Oure-commerce merchandise strategies are operating segments, which haveother qualitative characteristics, they had been aggregated into onethee-commerce reportable segment,e-commerce. Thesegment. Also, prior to fiscal 2019, we managed retail segment,merchandise strategies, which includesincluded the results of our franchise operations, has the following merchandise strategies:retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation which sellseparately from our products throughe-commerce business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the retail reportable segment.

Beginning in fiscal 2019, due to the convergence of oure-commerce and retail stores. Ourbusinesses and to better align with how we manage our omni-channel business, we have combined the results of oure-commerce and retail merchandise strategies at the overall brand level. Each of our brands are operating segments, whichsegments. Because they share similar economic and other qualitative characteristics, we have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.into a single reportable segment.

These reportable segments are strategic business units that offer similar productsThe following table summarizes our net revenues by brand for the home. They are managed separately becausethirteen weeks ended May 5, 2019 and April 29, 2018. We have updated fiscal 2018 results to conform with the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third-party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, prepaid expenses, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

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

Segment Informationcurrent year presentation.

Long-lived assets by geographic location are as follows:

NOTE F. COMMITMENTS AND CONTINGENCIES

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Condensed Consolidated Financial Statements taken as a whole.

NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended May 5, 2019, we repurchased 593,096 shares of our common stock at an average cost of $57.07 per share for a total cost of approximately $33,848,000. In March 2018, we announced that2019, our Board of Directors had authorized an increase in our current stock repurchase program by an additional $500,000,000. As of May 5, 2019, there was $689,967,000 remaining under our current stock repurchase program. As of May 5, 2019, we held treasury stock of $974,000 that represents the cost of shares available for issuance that is intended to $500,000,000. satisfy future stock-based award settlements in certain foreign jurisdictions.

During the thirteen weeks ended April 29, 2018, we repurchased 731,930 shares of our common stock at an average cost of $51.53 per share for a total cost of approximately $37,713,000. As of April 29, 2018, there was $481,406,000 remaining under our current stock repurchase program. In addition, as of April 29, 2018, we held treasury stock of $303,000 that represents the cost of shares available for issuance that is intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

During the thirteen weeks ended April 30, 2017, we repurchased 764,543 shares of our common stock at an average cost of $50.16 per share for a total cost of approximately $38,350,000. As of April 30, 2017, we held treasury stock of $927,000.

Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.

Dividends

We declared cash dividends of $0.43$0.48 and $0.39$0.43 per common share during the thirteen weeks ended May 5, 2019 and April 29, 2018, and April 30, 2017, respectively. In March 2019, our Board of Directors authorized a $0.05, or 11.6%, increase in our quarterly cash dividend, from $0.43 to $0.48 per common share, subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time.

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail ande-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with these derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with Accounting Standards Codification (“ASC”) 815,Derivatives and Hedging.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in selling, general and administrative expenses.cost of goods sold. Based on the rates in effect as of April 29, 2018,May 5, 2019, we expect to reclassify a netpre-tax gain of approximately $486,000$439,000 from OCI to cost of goods sold over the next 12 months.

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

As of May 5, 2019 and April 29, 2018, and April 30, 2017, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen weeks ended May 5, 2019 and April 29, 2018 and April 30, 2017.2018.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen weeks ended May 5, 2019 and April 29, 2018, and April 30, 2017,pre-tax, was as follows:

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

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

NOTE I. FAIR VALUE MEASUREMENTS

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

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

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

Long-term Debt

As of April 29, 2018,May 5, 2019, the fair value of our long-term debt approximates its carrying value and is based on observable Level 2 inputs, primarily market interest rates for instruments with similar maturities.

Foreign Currency Derivatives and Hedging Instruments

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

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

Property and EquipmentLong-lived Assets

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure these assetsproperty and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The fairWe measureright-of-use assets on a nonrecurring basis using Level 2 unobservable inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.commensurate with the risk.

There were no transfers between Level 1, 2 or 3 categories during the thirteen weeks ended May 5, 2019 or April 29, 2018 or April 30, 2017.2018.

NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

NOTE K. ACQUISITION OF OUTWARD, INC.

On December 1, 2017, we acquired Outward, Inc. (“Outward”), a3-D imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,864,000$80,812,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of four years from the acquisition date, contingent upon their continued service during that time, and $4,446,000$4,498,000 primarily represents settlement ofpre-existing obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post-combination compensation expense as they are earned.

The purchase consideration has been allocated based on estimates of $80,864,000 was allocated tothe fair value of identifiable assets acquired of $2,767,000, primarily property and equipment, and to liabilities assumed, as set forth in the table below.

Intangible assets acquired primarily represent3-D imaging data and core intellectual property which are being amortized over a useful life of $12,169,000, based on their estimated fair values onfour years. Goodwill is primarily attributable to expected synergies as a result of the acquisition, date. The remaining consideration has been recorded within other long-term assets in our Condensed Consolidated Balance Sheet. We are currently inwhich include the processleverage of valuing intangible assets acquired technology and expecttalent to allocatedrive improved conversion, cost savings and operating efficiencies. None of the remaining consideration between goodwill and intangible assets upon completion.will be deductible for income tax purposes.

Outward is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Condensed Consolidated Financial Statements from the acquisition date. Pro forma results of Outward have not been presented as the results were not material to our Condensed Consolidated Financial Statements for all years presented, and would not have been material had the acquisition occurred at the beginning of fiscal 2017.

NOTE L. REVENUE

The majority of our revenues are generated from sales of merchandise to our customers either in our retail stores or through oure-commerce channel (websiteswebsites, our direct mail catalogs, or direct-mail catalogs)at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. The remainder of our revenues are primarily generated from sales to our franchisees and other wholesale transactions, breakage income related to stored-value cards, and incentives received from credit card issuers in connection with our private label andco-branded credit cards.

We recognize revenue as control of promised goods or services are transferred to our customers. We record a liability at each period end where we have an obligation to transfer goods or services for which we have received consideration or have a right to consideration.

We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services.

See Note E for disaggregationa discussion of our net revenues by reportableoperating segment.

Merchandise Sales

Revenues from the sale of our merchandise through oure-commerce channel,websites, at our retail stores, as well as to our franchisees and wholesale customers are, in each case, recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the end customer. For merchandise delivered to the customer, control is transferred when either delivery has been completed, or we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of April 29, 2018,May 5, 2019, we recorded a liability for expected sales returns of approximately $25,158,000$30,154,000 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $9,395,000$11,204,000 within other current assets in our Condensed Consolidated Balance Sheet.

Stored-value Cards

We issue stored-value cards that may be redeemed on future merchandise purchases at our stores or through oure-commerce channel.purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards (breakage) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately 4four years, the majority of which is recognized within one year of the card issuance. Breakage revenue is not material to our Condensed Consolidated Financial Statements.

Credit Card Incentives

We enter into agreements with credit card issuers in connection with our private label andco-branded credit cards whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to end customers. Services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term.

We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our stored-value cards, merchandise sales, and incentives received from credit card issuers. Deferred revenue related to these transactions was $280,557,000 as of January 28, 2018. Of this balance, $133,883,000 was recognized as revenue during the first quarter of fiscal 2018 and $49,494,000 was recorded to retained earnings due to the adoption of ASU 2014-09. As of April 29, 2018, deferred revenue related to these transactions was $235,046,000. We expect the majority of this balance to be recognized as revenue during fiscal 2018.

Customer Loyalty Programs

We have customer loyalty programs which allow members to earn points for each qualifying purchase. Points earned enable members to receive certificates that may be redeemed on future merchandise purchases at our stores or through oure-commerce channel.purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Condensed Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within 6 months from issuance.

AdoptionDeferred Revenue

We defer revenue when cash payments are received in advance of ASU2014-09

The adoption of ASU2014-09 most significantly impactedsatisfying performance obligations, primarily associated with our Condensed Consolidated Financial Statements as follows:

The following summarizes the impact of adopting ASU2014-09 on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized into revenue within the next 12 months.

NOTE M. LEASES

We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations with initial terms generally ranging from 2 to 22 years. We determine whether an arrangement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset.

The rental payments for our store leases are typically structured as either: minimum rent; minimum rate with stated increases or increases based on a future index; rent based on a percentage of store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include: rent payments that are based on a percentage of sales; contingent payments until the resolution of the contingency is reasonably certain; and rent increases based on a future index.

Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease andnon-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record aright-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability andright-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgements included in the determination of the lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal and termination options.

Many of our leases contain renewal options and early termination options. The option periods are generally not included in the lease term used to measure our lease liabilities andright-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability andright-of-use asset when we are reasonably certain to exercise a renewal or early termination option.

Discount Rate

Our leases do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The components of leases costs for the thirteen weeks ended May 5, 2019 are as follows:

Sublease income and short-term lease costs were not material to us for the thirteen weeks ended May 5, 2019.

Supplemental cash flow information related to our leases for the thirteen weeks ended May 5, 2019 are as follows:

Weighted average remaining operating lease term and incremental borrowing rate as of May 5, 2019 are as follows:

As of May 5, 2019, the future minimum lease payments under our operating lease liabilities are as follows:

As previously disclosed in our 2018 Annual Report on Form10-K and under the previous lease accounting standard, future minimum lease payments undernon-cancellable operating leases as of February 3, 2019 were as follows:

Memphis-Based Distribution Facility

In fiscal 2015, we entered into an agreement with a partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties to lease a distribution facility in Memphis, Tennessee through July 2017. In fiscal 2017, we exercised the first of twoone-year extensions available under the lease to extend the term through July 2018. Subsequently, in fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additionalone-year renewal options. Rental payments under this agreement including applicable taxes, insurance and maintenance expenses were not material to us for the thirteen weeks ended May 5, 2019 or April 29, 2018 and our Condensed Consolidated Statement of Earnings for the first quarter of fiscal 2018. The adoption of ASU2014-09 had no impact to net cash provided by (or used in) operating, financing, or investing activities reported in our Condensed Consolidated Statement of Cash Flows for the first quarter of fiscal 2018.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: our strategic initiatives; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash; our future compliance with the financial covenants contained in our credit facilities; our belief that our cashon-hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form10-K for the year ended January 28, 2018,February 3, 2019, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

OVERVIEW

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen,Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed throughe-commerce websites, direct-mail catalogs and 627625 stores. These brands are also part of The Key Rewards, ourfree-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well ase-commerce websites in certain locations. In December 2017, we acquired Outward, Inc., a3-D imaging and augmented reality platform for the home furnishings and décor industry. Headquartered in San Jose, California, Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended April 29, 2018May 5, 2019 (“first quarter of fiscal 2018”2019”), as compared to the thirteen weeks ended April 30, 201729, 2018 (“first quarter of fiscal 2017”2018”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.

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

First Quarter of Fiscal 20182019 Financial Results

Net revenues in the first quarter of fiscal 20182019 increased by $91,493,000,$38,132,000, or 8.2%3.2%, compared to the first quarter of fiscal 2017,2018, with comparable brand revenue growth of 5.5%3.5%. The increase in net revenuesThis growth was driven by an 11.3% increase in oure-commerce net revenues (primarilyprimarily driven by West Elm, Pottery Barn Pottery Barn Kids and Teen and Williams Sonoma), with growth across all brands, and a 4.9% increase in retail net revenues (primarily driven by Pottery Barn and West Elm), with particular strength in furniture. Total netour emerging brands. Net revenue growth for the first quarter of fiscal 2018 also included a 14.4%9.0% increase in international revenues primarily related to our company-owned international operations, as well asfranchise operations.

In West Elm, our fastest growing brand, we had comparable revenue growth of 11.8% driven by stronge-commerce and broad-based strength across product categories. Pottery Barn, with a comparable revenue growth of 1.5% had strength in furniture and had momentum heading into summer in our outdoor business. Pottery Barn Kids and Teen had another quarter of growth, with particular strength in the favorable impactbaby business. Our emerging brands, Rejuvenation and Mark & Graham continued to expand their product offer and the new stores in Rejuvenation are performing well. Williams Sonoma, with a comparable revenue decline of the adoption of ASU2014-09 (see Note L1.6% had a disappointing first quarter driven by Easter, which did not perform to our Condensed Consolidated Financial Statements).expectations, and continued reductions in promotional activity.

In the first quarter of fiscal 2018, we made progress on our four strategic priorities of digital leadership, product innovation, retail transformation2019, diluted earnings per share was $0.66 (which included a $0.09 impact from employment-related expenses, primarily associated with severance, and operational excellence. In digital leadership, we are enhancing thee-commerce experience through two key differentiators: content and convenience. We are updating our shop path across all brands with more accurate and compelling content, and we introduced online self-service scheduling capability forin-home delivery. In digital advertising, we are continuing our transition from catalog mailingsa $0.06 impact related to higher impact digital channels as we further refine our marketing mix to drive short-term return on investment and long-term gainsOutward, Inc.) versus $0.54 in customer growth. In product innovation, we continued to expand our core offerings with newness and aesthetic diversification, while growing brand concepts to new and focused customer categories in collaborations and partnerships.    In our retail transformation, during the first quarter of fiscal 2018 both our retail revenue and comp growth accelerated from last year, which speaks to our efforts to enhance the retail experience. And we are making progress in reducing unproductive store footprints, while at the same time, investing in high-impact store remodels and relocations. We remain committed to operational excellence to further improve customer service and reduce costs. To reduce inventory levels, as well as back orders, aged inventory, andout-of-market shipping costs, we are working with our overseas vendors for morein-time inventory and frequent flow. We have also implemented a new inventory planning software, which should improve our inventory position in each of our regional distribution facilities.

And in our global business, we saw double-digit revenue growth in our company-owned operations in Australia, the United Kingdom and Canada, with oure-commerce business being particularly strong in the quarter. In addition, our existing franchise partners added another eight retail locations in the first quarter.

In the first quarter of fiscal 2018, diluted earnings per share was $0.54 (which included a $0.06 impact related to Outward, Inc., a $0.04 impact associated with tax expense from U.S. Tax Reform and a $0.03 impact related to other discrete items) versus $0.45 in the first quarter of fiscal 2017, (which included severance-related reorganization charges of $0.04 and an unfavorable tax impact from the adoption of ASU2016-09,Improvements to Employee Share-Based Payment Accounting, of $0.02). Our first quarter of fiscal 2018 results also included the impact from the adoption of the new revenue standard, ASU2014-09. We also returned $71,794,000$70,716,000 to our stockholders through stock repurchases and dividends.

Operationally during the first quarter of fiscal 2019, we also made progress across our strategic initiatives of driving growth through cross-brand initiatives and improving the customer experience through technology innovation and operational improvements.

Our cross-brand initiatives continue to build as an important source of revenue growth and customer acquisition. The Key Rewards is one of our most valuable assets with total membership having grown significantly since the launch of this loyalty program two years ago. Our Design Crew Room Planner also continues to gain traction, where total rooms created increased over the first quarter, as we doubled our product coverage and enhanced the user experience with more accurate and intuitive design features. And in our newest division, Williams-Sonoma Inc.Business-to-Business, we are thrilled with the progress that our team has already made, including putting in place the organizational infrastructure to support our growth, building a cross-brand, cross-functional support team, and establishing standardized processes to facilitate large-scale contract projects.

Another key highlight during the first quarter was the ongoing improvement in customer experience. In technology innovation, we completed the launch of our machine-learning search engine across all brands and improved our mobile site speed to deliver a faster and more compelling mobile experience. In our supply chain, order visibility and operational improvements remain two of our top priorities and, during the first quarter, we successfully completed the migration of our order management and fulfillment capabilities to a new platform, for all brands. We also fully redesigned our order tracking capability to give customers and our internal teams a more accurate and granular view of their orders.

For the remainder of fiscal 2019 we plan to drive cross-brand initiatives that leverage our platform, and we plan to bring technology innovation and continued improvement in customer experience. We have a strong foundation to support the execution of our initiatives throughout the remainder of fiscal 2019 and beyond, as well as to deliver long-term shareholder value.

NET REVENUES

Net revenues primarily consist ofe-commerce net revenues and retail net revenues.E-commerce net revenues include sales of merchandise to our customers through oure-commerce websites, and ourdirect mail catalogs, as well as shipping fees. Retail net revenues include sales of merchandise to customersand at our retail stores and to our franchisees, as well asinclude shipping fees on any products shipped to our customers’ homes. Shipping fees consist of revenue received from customers for delivery of merchandise to their homes. Revenues are presented net ofOur revenues also include sales returnsto our franchisees and other discounts.wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label andco-branded credit cards.

Net revenues in the first quarter of fiscal 20182019 increased by $91,493,000,$38,132,000, or 8.2%3.2%, compared to the first quarter of fiscal 2017,2018, with comparable brand revenue growth of 5.5%3.5%. The increase in net revenuesThis growth was driven by an 11.3% increase in oure-commerce net revenues (primarilyprimarily driven by West Elm, Pottery Barn Pottery Barn Kids and Teen and Williams Sonoma), with growth across all brands, and a 4.9% increase in retail net revenues (primarily driven by Pottery Barn and West Elm), with particular strength in furniture. Total netour emerging brands. Net revenue growth for the first quarter of fiscal 2018 also included a 14.4%9.0% increase in international revenues primarily related to our company-owned international operations, as well as the favorable impact of the adoption of ASU2014-09.franchise operations.

Comparable Brand Revenue

Comparable brand revenue includes retail comparable store sales ande-commerce sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores ande-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.

STORE DATA

COST OF GOODS SOLD

STORE DATA

COST OF GOODS SOLD

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

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

First Quarter of Fiscal 20182019 vs. First Quarter of Fiscal 20172018

Cost of goods sold increased by $55,089,000,$25,965,000, or 7.7%3.4%, in the first quarter of fiscal 20182019 compared to the first quarter of fiscal 2017.2018. Cost of goods sold as a percentage of net revenues decreasedincreased to 64.2% in the first quarter of fiscal 2019 from 64.1% in the first quarter of fiscal 2018 from 64.4% in the first quarter of fiscal 2017.2018. This decreaseincrease was primarily driven by the impact from the adoption of ASU2014-09 in the first quarter of fiscal 2018 as well asincreased shipping costs, partially offset by the leverage of occupancy costs and reduced fulfillment related costs in our supply chain. This decrease was partially offset by lower merchandisehigher product margins and higher shipping costs..

In thee-commerce channel, cost of goods sold as a percentage of net revenues remained relatively flat in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 primarily driven by reduced fulfillment related costs in our supply chain, the impact from the adoption of ASU 2014-09 and the leverage of occupancy costs, offset by lower merchandise margins.

In the retail channel, cost of goods sold as a percentage of net revenues increased in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 primarily driven by lower selling margins, partially offset by the impact from the adoption of ASU 2014-09 and the leverage of occupancy costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES