Table of Contents
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM
10-Q

(Mark One)

☒

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

For the quarterly period ended July 29, 2018.

August 4, 2019.

or

☐

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

For the transition period from
to

Commission File Number:
001-14077

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

Delaware 94-2203880

Delaware
94-2203880
(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3250 Van Ness Avenue,
San Francisco, CA
 
94109
(Address of principal executive offices)
 
(Zip Code)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading
Symbol(s):
Name of each exchange
on which registered:
Common Stock, par value $.01 per share
WSM
New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
☒
    No  
☐

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

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

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

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

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

As of August 26, 2018, 80,554,866September 1, 2019, 78,022,213 shares of the registrant’s Common Stock were outstanding.

Table of Contents
WILLIAMS-SONOMA, INC.

REPORT ON FORM10-Q

FOR THE QUARTER ENDED JULY 29, 2018

AUGUST 4, 2019

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PAGE
    PAGE 

Item 1.

 

Financial Statements

  1 

Item 2.

 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1517 

Item 3.

 

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

21
PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

  22 

Item 1A.

 

Item 4.
Risk FactorsControls and Procedures

  22 

Item 2.

 

PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
23
Item 1A.
Risk Factors
23
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

22

Item 4.

Mine Safety Disclosures

22

Item 5.

Other Information

  23 

Item 6.

 

Item 3.
Defaults Upon Senior Securities
23
Item 4.
Mine Safety Disclosures
23
Item 5.
Other Information
23
Item 6.
Exhibits

  24 

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

   Thirteen
Weeks Ended		   Twenty-six
Weeks Ended		 
In thousands, except per share amounts  

July 29,

2018

   

July 30,

2017

   

July 29,

2018

   

July 30,

2017

 

E-commerce net revenues

  $686,942   $630,793   $1,333,122   $1,211,303 

Retail net revenues

   588,232    570,813    1,145,052    1,101,810 

Net revenues

   1,275,174    1,201,606    2,478,174    2,313,113 

Cost of goods sold

   811,232    778,895    1,582,068    1,494,642 

Gross profit

   463,942    422,711    896,106    818,471 

Selling, general and administrative expenses

   389,776    341,127    755,390    674,413 

Operating income

   74,166    81,584    140,716    144,058 

Interest (income) expense, net

   1,584    483    2,785    380 

Earnings before income taxes

   72,582    81,101    137,931    143,678 

Income taxes

   20,869    28,184    41,050    51,206 

Net earnings

  $51,713   $52,917   $96,881   $92,472 

Basic earnings per share

  $0.63   $0.61   $1.17   $1.07 

Diluted earnings per share

  $0.62   $0.61   $1.16   $1.06 

Shares used in calculation of earnings per share:

        

Basic

   82,342    86,429    82,867    86,696 

Diluted

   83,167    86,848    83,519    87,238 

                 
 
Thirteen
Weeks Ended
  
Twenty-six

Weeks Ended
 
In thousands, except per share amounts
 
August 4,
2019
  
July 29,
2018
  
August 4,
2019
  
July 29,
2018
 
Net revenues
 $
1,370,814
  $
1,275,174
  $
2,611,946
  $
2,478,174
 
Cost of goods sold
  
886,953
   
811,232
   
1,683,754
   
1,582,068
 
Gross profit
  
483,861
   
463,942
   
928,192
   
896,106
 
Selling, general and administrative expenses
  
397,696
   
389,776
   
767,895
   
755,390
 
Operating income
  
86,165
   
74,166
   
160,297
   
140,716
 
Interest (income) expense, net
  
2,669
   
1,584
   
4,922
   
2,785
 
Earnings before income taxes
  
83,496
   
72,582
   
155,375
   
137,931
 
Income taxes
  
20,848
   
20,869
   
40,071
   
41,050
 
Net earnings
 $
62,648
  $
51,713
  $
115,304
  $
96,881
 
Basic earnings per share
 $
0.80
  $
0.63
  $
1.47
  $
1.17
 
Diluted earnings per share
 $
0.79
  $
0.62
  $
1.45
  $
1.16
 
Shares used in calculation of earnings per share:
            
Basic
  
78,488
   
82,342
   
78,586
   
82,867
 
Diluted
  
79,470
   
83,167
   
79,633
   
83,519
 
See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

   Thirteen
Weeks Ended		  Twenty-six
Weeks Ended		 
In thousands  

July 29,

2018

  

July 30,

2017

  

July 29,

2018

  

July 30,

2017

 

Net earnings

  $51,713  $52,917  $96,881  $92,472 

Other comprehensive income (loss):

     

Foreign currency translation adjustments

   (2,993)   3,390   (4,138)   1,824 

Change in fair value of derivative financial instruments, net of tax (tax benefit) of $333, $(422), $401 and $(185)

   6   (1,166)   1,129   (511) 

Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $(21), $(2), $(24) and $3

   —     7   49   (9) 

Comprehensive income

  $48,726  $55,148  $93,921  $93,776 

                 
 
Thirteen
Weeks Ended
  
Twenty-six

Weeks Ended
 
In thousands
 
August 4,
2019
  
July 29,
2018
  
August 4,
2019
  
July 29,
2018
 
Net earnings
 $
62,648
  $
51,713
  $
115,304
  $
96,881
 
Other comprehensive income (loss):
            
Foreign currency translation adjustments
  
(1,251
)  
(2,993
)  
(4,260
)  
(4,138
)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of
$(8), $333, $66 and $401
  
(132
)  
6
   
72
   
1,129
 
Reclassification adjustment for realized (gain) loss on derivative financial
instruments, net of tax (tax benefit) of $10, $(21), $34 and $(24)
  (160)  
—  
   (227)  
49
 
Comprehensive income
 $   
61,105
  $  
48,726
  $   
110,889
  $  
93,921
 
See Notes to Condensed Consolidated Financial Statements.

1


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

In thousands, except per share amounts  

July 29,

2018

  

January 28,

2018

  

July 30,

2017

 

ASSETS

    

Current assets

    

Cash and cash equivalents

  $174,580  $390,136  $103,109 

Accounts receivable, net

   106,322   90,119   78,735 

Merchandise inventories, net

   1,099,888   1,061,593   1,072,976 

Prepaid catalog expenses

   —     20,517   20,881 

Prepaid expenses

   74,811   62,204   76,611 

Other current assets

   21,891   11,876   12,066 

Total current assets

   1,477,492   1,636,445   1,364,378 

Property and equipment, net

   919,689   932,283   929,331 

Deferred income taxes, net

   60,960   67,306   130,212 

Goodwill

   85,673   18,838   18,773 

Other long-term assets, net

   64,163   130,877   37,166 

Total assets

  $2,607,977  $2,785,749  $2,479,860 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

  $466,903  $457,144  $427,474 

Accrued expenses

   112,381   134,207   97,965 

Gift card and other deferred revenue

   263,546   300,607   294,694 

Borrowings under revolving line of credit

   —     —     115,000 

Income taxes payable

   35,529   56,783   35,582 

Other current liabilities

   69,589   59,082   49,355 

Total current liabilities

   947,948   1,007,823   1,020,070 

Deferred rent and lease incentives

   207,190   202,134   196,982 

Long-term debt

   299,521   299,422   —   

Other long-term obligations

   72,330   72,804   74,284 

Total liabilities

   1,526,989   1,582,183   1,291,336 

Commitments and contingencies – See Note F

    

Stockholders’ equity

    

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

   —     —     —   

Common stock: $.01 par value; 253,125 shares authorized; 80,988, 83,726 and 85,754 shares issued and outstanding at July 29, 2018, January 28, 2018 and July 30, 2017, respectively

   810   837   858 

Additionalpaid-in capital

   561,810   562,814   556,702 

Retained earnings

   528,368   647,422   640,368 

Accumulated other comprehensive loss

   (9,742)   (6,782)   (8,599) 

Treasury stock, at cost: 2, 11 and 12 shares as of July 29, 2018, January 28, 2018 and July 30, 2017, respectively

   (258)   (725)   (805) 

Total stockholders’ equity

   1,080,988   1,203,566   1,188,524 

Total liabilities and stockholders’ equity

  $2,607,977  $2,785,749  $2,479,860 

In thousands, except per share amounts
 
August 4,
2019
  
February 3,
2019
  
July 29,
2018
 
ASSETS
         
Current assets
         
Cash and cash equivalents
 $
120,467
  $
338,954
  $
174,580
 
Accounts receivable, net
  
111,114
   
107,102
   
106,322
 
Merchandise inventories, net
  
1,187,728
   
1,124,992
   
1,099,888
 
Prepaid expenses
  
117,017
   
101,356
   
74,811
 
Other current assets
  
21,693
   
21,939
   
21,891
 
Total current assets
  
1,558,019
   
1,694,343
   
1,477,492
 
Property and equipment, net
  
913,059
   
929,635
   
919,689
 
Operating lease
right-of-use
assets
  
1,208,528
   
—  
   
—  
 
Deferred income taxes, net
  
38,803
   
44,055
   
60,960
 
Goodwill
  
85,348
   
85,382
   
85,673
 
Other long-term assets, net
  
65,924
   
59,429
   
64,163
 
Total assets
 $
3,869,681
  $
2,812,844
  $
2,607,977
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
         
Current liabilities
         
Accounts payable
 $
404,337
  $
526,702
  $
466,903
 
Accrued expenses
  
127,137
   
163,559
��  
112,381
 
Gift card and other deferred revenue
  
283,108
   
290,445
   
263,546
 
Borrowings under revolving line of credit  60,000   —   — 
Income taxes payable
  
13,065
   
21,461
   
35,529
 
Operating lease liabilities
  
222,978
   
—  
   
—  
 
Other current liabilities
  
76,254
   
72,645
   
69,589
 
Total current liabilities
  
1,186,879
   
1,074,812
   
947,948
 
Deferred rent and lease incentives
  
28,618
   
201,374
   
207,190
 
Long-term debt
  
299,719
   
299,620
   
299,521
 
Long-term operating lease liabilities
  
1,148,031
   
—  
   
—  
 
Other long-term liabilities
  
84,831
   
81,324
   
72,330
 
Total liabilities
  
2,748,078
   
1,657,130
   
1,526,989
 
Commitments and contingencies – See Note F
            
Stockholders’ equity
         
Preferred stock: $
.01
par value; 7,500 shares authorized; NaN issued
  
—  
   
—  
   
—  
 
Common stock: $
.01
par value; 253,125 shares authorized; 78,203, 78,813 and 80,988 shares issued and outstanding at August 4, 2019, February 3, 2019 and July 29, 2018, respectively
  
783
   
789
   
810
 
Additional
paid-in
capital
  
584,828
   
581,900
   
561,810
 
Retained earnings
  
552,454
   
584,333
   
528,368
 
Accumulated other comprehensive loss
  
(15,488
)  
(11,073
)  
(9,742
)
Treasury stock, at cost: 14, 2 and 2 shares as of August 4, 2019, February 3, 2019 and July 29, 2018, respectively
  
(974
)  
(235
)  
(258
)
Total stockholders’ equity
  
1,121,603
   
1,155,714
   
1,080,988
 
Total liabilities and stockholders’ equity
 $
3,869,681
  $
2,812,844
  $
2,607,977
 
See Notes to Condensed Consolidated Financial Statements.

2


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

STOCKHOLDERS’ EQUITY

(Unaudited)

   Twenty-six
Weeks Ended		 
In thousands  

July 29,

2018

  

July 30,

2017

 

Cash flows from operating activities:

   

Net earnings

  $96,881  $92,472 

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

   

Depreciation and amortization

   93,809   90,048 

Loss on disposal/impairment of assets

   4,466   845 

Amortization of deferred lease incentives

   (13,210)   (12,680) 

Deferred income taxes

   (4,415)   (8,937) 

Tax benefit related to stock-based awards

   9,711   14,511 

Stock-based compensation expense

   26,526   22,829 

Other

   166   102 

Changes in:

   

Accounts receivable

   (13,567)   10,658 

Merchandise inventories

   (45,159)   (92,711) 

Prepaid catalog expenses

   —     (1,384) 

Prepaid expenses and other assets

   (29,217)   (25,739) 

Accounts payable

   (1,735)   (36,917) 

Accrued expenses and other liabilities

   (12,209)   (34,453) 

Gift card and other deferred revenue

   11,927   (8,553) 

Deferred rent and lease incentives

   18,861   12,635 

Income taxes payable

   (22,712)   12,409 

Net cash provided by operating activities

   120,123   35,135 

Cash flows from investing activities:

   

Purchases of property and equipment

   (80,021)   (82,727) 

Other

   513   44 

Net cash used in investing activities

   (79,508)   (82,683) 

Cash flows from financing activities:

   

Repurchases of common stock

   (174,818)   (93,361) 

Payment of dividends

   (70,331)   (68,197) 

Tax withholdings related to stock-based awards

   (12,335)   (14,117) 

Borrowings under revolving line of credit

   —     115,000 

Net cash used in financing activities

   (257,484)   (60,675) 

Effect of exchange rates on cash and cash equivalents

   1,313   (2,381) 

Net decrease in cash and cash equivalents

   (215,556)   (110,604) 

Cash and cash equivalents at beginning of period

   390,136   213,713 

Cash and cash equivalents at end of period

  $174,580  $103,109 

                             
 
 
Common Stock
 
 
Additional
Paid-in
 
 
Retained
 
 
Accumulated
Other
Comprehensive
 
 
Treasury
 
 
Total
Stockholders’
 
In thousands
 
Shares
 
 
 
Amount
 
 
Capital
 
 
Earnings
 
 
Income (Loss)
 
 
Stock
 
 
Equity
 
Balance at February 3, 2019
  
78,813
  $
789
  $
581,900
  $
584,333
  $
(11,073
) $
(235
) $
1,155,714
 
Net earnings
  
—  
   
—  
   
—  
   
52,656
   
—  
   
—  
   
52,656
 
Foreign currency translation adjustments
  
—  
   
—  
   
—  
   
—  
   
(3,009
)  
—  
   
(3,009
)
Change in fair value of derivative financial
instruments, net of tax
  
—  
   
—  
   
—  
   
—  
   
204
   
—  
   
204
 
Reclassification adjustment for realized (gain)
loss on derivative financial instruments, net
of tax
  
—  
   
—  
   
—  
   
—  
   
(67
)  
—  
   
(67
)
Conversion/release of stock-based awards
1
  
571
   
5
   
(25,298
)  
—  
   
—  
   
(113
)  
(25,406
)
Repurchases of common stock
  
(576
)  
(6
)  
(2,874
)  
(30,010
)  
—  
   
(958
)  
(33,848
)
Reissuance of treasury stock under stock-based
compensation plans
1
  
—  
   
—  
   
(332
)  
—  
   
—  
   
332
   
—  
 
Stock-based compensation expense
  
—  
   
—  
   
18,376
   
—  
   
—  
   
—  
   
18,376
 
Dividends declared
  
—  
   
—  
   
—  
   
(39,549
)  
—  
   
—  
   
(39,549
)
Adoption of accounting pronouncements
2
  
—  
   
—  
   
—  
   
(3,303
)  
—  
   
—  
   
(3,303
)
Balance at May 5, 2019
  
78,808
  $
788
  $
571,772
  $
564,127
  $
(13,945
) $
(974
) $
1,121,768
 
Net earnings
  —   —   
—
   
62,648
   
—
   
—
   
62,648
 
Foreign currency translation adjustments
  —   —   
—
   
—
   
(1,251
)  
—
   
(1,251
)
Change in fair value of derivative financial
instruments, net of tax
  —   —   
—
   
—
   
(132
)  
—
   
(132
)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net
of tax
  —   —   
—
   
—
   
(160
)  
—
   
(160
)
Conversion/release of stock-based awards
1
  
31
   
1
   
(482
)  
—
   
—
   
—
   
(481
)
Repurchases of common stock
  
(636
)  
(6
)  
(3,170
)  
(35,107
)  
—
   
—
   
(38,283
)
Stock-based compensation expense
  —   —   
16,708
   
—
   
—
   
—
   
16,708
 
Dividends declared
  —   —   
—
   
(39,214
)  
—
   
—
   
(39,214
)
Balance at August 4, 2019
  
78,203
  $
783
  $
584,828
  $
552,454
  $
(15,488
) $
(974
) $
1,121,603
 
1
Amounts are shown net of shares withheld for employee taxes.
2
Relates to our adoption of ASU 2016-02, Leases, in fiscal 2019. See Note A.
See Notes to Condensed Consolidated Financial Statements.

3


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
                             
 
 
 
Common Stock
 
 
 
Additional
Paid-in
 
 
 
Retained
 
 
 
Accumulated
Other
Comprehensive
 
 
 
Treasury
 
 
 
Total
Stockholders’
 
In thousands
 
 
Shares
 
 
 
Amount
 
 
 
Capital
 
 
 
Earnings
 
 
 
Income (Loss)
 
 
 
Stock
 
 
 
Equity
 
Balance at January 28, 2018
  
83,726
  $
837
  $
562,814
  $
647,422
  $
(6,782
) $
(725
) $
1,203,566
 
Net earnings
  
—  
   
—  
   
—  
   
45,168
   
—  
   
—  
   
45,168
 
Foreign currency translation adjustments
  
—  
   
—  
   
—  
   
—  
   
(1,145
)  
—  
   
(1,145
)
Change in fair value of derivative financial instruments, net of tax
  
—  
   
—  
   
—  
   
—  
   
1,123
   
—  
   
1,123
 
Reclassification adjustment for realized (gain)
loss on derivative financial instruments, net of tax
  
—  
   
—  
   
—  
   
—  
   
49
   
—  
   
49
 
Conversion/release of stock-based awards
1
  
228
   
3
   
(7,213
)  
—  
   
—  
   
(226
)  
(7,436
)
Repurchases of common stock
  
(732
)  
(7
)  
(3,437
)  
(34,269
)  
—  
   
—  
   
(37,713
)
Reissuance of treasury stock under stock-based
compensation plans
1
  
—  
   
—  
   
(290
)  
(358
)  
—  
   
648
   
—  
 
Stock-based compensation expense
  
—  
   
—  
   
12,811
   
—  
   
—  
   
—  
   
12,811
 
Dividends declared
  
—  
   
—  
   
—  
   
(36,877
)  
—  
   
—  
   
(36,877
)
Adoption of accounting pronouncements
2
  
—  
   
—  
   
—  
   
17,688
   
—  
   
—  
   
17,688
 
Balance at April 29, 2018
  
83,222
  $
833
  $
564,685
  $
638,774
  $
(6,755
) $
(303
) $
1,197,234
 
Net earnings
  
—  
   
—  
   
—  
   
51,713
   
—  
   
—  
   
51,713
 
Foreign currency translation adjustments
  
—  
   
—  
   
—  
   
—  
   
(2,993
)  
—  
   
(2,993
)
Change in fair value of derivative financial instruments, net of tax
  
—  
   
—  
   
—  
   
—  
   
6
   
—  
   
6
 
Conversion/release of stock-based awards
1
  
175
   
2
   
(4,869
)  
—  
   
—  
   
(32
)  
(4,899
)
Repurchases of common stock
  
(2,409
)  
(25
)  
(11,431
)  
(125,649
)  
—  
   
—  
   
(137,105
)
Reissuance of treasury stock under stock-based
compensation plans
1
  
—  
   
—  
   
(72
)  
(5
)  
—  
   
77
   
—  
 
Stock-based compensation expense
  
—  
   
—  
   
13,497
   
—  
   
—  
   
—  
   
13,497
 
Dividends declared
  
—  
   
—  
   
—  
   
(36,465
)  
—  
   
—  
   
(36,465
)
Balance at July 29, 2018
  
80,988
  $
810
  $
561,810
  $
528,368
  $
(9,742
) $
(258
) $
1,080,988
 
1 
Amounts are shown net of shares withheld for employee taxes.
2  
Primarily relates to our adoption of ASU 2014-09, Revenue from Contracts with Customers, in fiscal 2018.
See Notes to Condensed Consolidated Financial Statements.

Table of Contents
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Twenty-six

Weeks Ended
 
In thousands
 
August 4,
2019
  
July 29,
20
18
 
Cash flows from operating activities:
      
Net earnings
 $
115,304
  $
96,881
 
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
      
Depreciation and amortization
  
93,744
   
93,809
 
(Gain) loss on disposal/impairment of assets
  
(6
)  
4,466
 
Amortization of deferred lease incentives
  
(4,228
)  
(13,210
)
Non-cash
lease expense
  
105,437
   
—  
 
Deferred income taxes
  
(8,428
)  
(4,415
)
Tax benefit related to stock-based awards
  
14,110
   
9,711
 
Stock-based compensation expense
  
35,401
   
26,526
 
Other
  
92
   
166
 
Changes in:
      
Accounts receivable
  
(4,430
)  
(13,567
)
Merchandise inventories
  
(63,576
)  
(45,159
)
Prepaid expenses and other assets
  
(24,506
)  
(29,217
)
Accounts payable
  
(127,511
)  
(1,735
)
Accrued expenses and other liabilities
  
(30,677
)  
(12,209
)
Gift card and other deferred revenue
  
(7,173
)  
11,927
 
Deferred rent and lease incentives
  
—  
   
18,861
 
Operating lease liabilities
  
(111,782
)  
—  
 
Income taxes payable
  
(8,407
)  
(22,712
)
Net cash (used in) provided by operating activities
  
(26,636
)  
120,123
 
Cash flows from investing activities:
      
Purchases of property and equipment
  
(77,189
)  
(80,021
)
Other
  
470
   
513
 
Net cash used in investing activities
  
(76,719
)  
(79,508
)
         
Cash flows from financing activities:
      
Payment of dividends  (75,453)  (70,331)
Repurchases of common stock
  
(72,131
)  
(174,818
)
Borrowings under revolving line of credit  
60,000
   
—  
 
Tax withholdings related to stock-based awards
  
(25,887
)  
(12,335
)
Net cash used in financing activities
  
(113,471
)  
(257,484
)
Effect of exchange rates on cash and cash equivalents
  
(1,661
)  
1,313
 
Net decrease in cash and cash equivalents
  
(218,487
)  
(215,556
)
Cash and cash equivalents at beginning of period
  
338,954
   
390,136
 
Cash and cash equivalents at end of period
 $
120,467
  $
174,580
 
See Notes to Condensed Consolidated Financial Statements.

Table of Contents
WILLIAMS-SONOMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of August 4, 2019 and July 29, 2018, and July 30, 2017, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen weeks and
twenty-six
weeks then ended and the Condensed Consolidated Statements of Cash Flows for the
twenty-six
weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen andtwenty-six 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 Form
10-K
for the fiscal year ended January 28, 2018.

February 3, 2019.

The results of operations for the thirteen and
twenty-six
weeks ended July 29, 2018August 4, 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 Form
10-K
for the fiscal year ended January 28, 2018.

Reclassifications

Certain amounts reported in our Condensed Consolidated Balance Sheets as of January 28, 2018 and July 30, 2017 and our Condensed Consolidated Statement of Cash Flows for thetwenty-six weeks ended July 30, 2017 have been reclassified in order to conform to the current period presentation. These reclassifications impacted prepaid catalog expenses, prepaid expenses, goodwill, other long-term assets, accounts payable, accrued expenses, gift card and other deferred revenue and other current liabilities. There was no change to total current assets, total assets, total current liabilities, or cash flows as a result of these reclassifications.

February 3, 2019.

New Accounting Pronouncements

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,Revenue from Contracts with Customers
2016-02,
Leases
, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. We adopted the ASU on a modified retrospective basis 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 the adoption of the ASU on our Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02,Leases,which will requirerequires lessees to recognize a

right-of-use
asset and aan operating lease liability for virtually all of their leases (other than short-term leases).leases. This ASU, as amended, iswas effective for us beginning in the first quarter of fiscal 2019. The adoption of this ASU resulted in an increase in total long-term assets and total liabilities of approximately $1.2 billion, which includes an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and deferred lease incentives of approximately $0.2 billion, and an increase in
right-of-use
assets of approximately $1.2 billion on the first day of fiscal 2019. We planalso recorded an approximate $3.3 million, net of tax, reduction to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of this ASU. We have elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the financial statements, withstatements. We have elected the package of practical expedients upon adoption, which 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 also elected not to separate lease and
non-lease
components for all of our leases and not to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently assessing the impact
right-of-use
asset and a lease liability for short-term leases. The adoption 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 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

4

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 ASU
2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement 
That Is a Service Contract.
This 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 obtain
internal-use
software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic
350-40
to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us in the first quarter of fiscal 2020. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.


Table of Contents
NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility, which provides for a $500,000,000 unsecured revolving line of credit (“revolver”(the “revolver”) and a $300,000,000 unsecured term loan facility (“term(the “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 anniversaries of the closing date of the amendment of the credit facility,January 8, 2020, elect to extend the maturity date for an additional year, subject to lender approval.

During the second quarter and foryear-to-date fiscal 2018, we had no borrowings under the revolver. During the second quarter andyear-to-date fiscal 2017,2019, we had borrowings of $70,000,000 and $115,000,000, respectively, $
60,000,000
under the revolver both at(at a year-to-date weighted average interest rate of 2.24%.3.42%), all of which was outstanding as of August 4, 2019. During the second quarter and for year-to-date fiscal 2018, we had 0 borrowings under the revolver. Additionally, as of July 29, 2018, $13,574,000August 4, 2019, $12,400,000 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 July 29, 2018,August 4, 2019, we had $300,000,000
outstanding under our term loan (at a year-to-date weighted average interest rate of 3.00%
3.57
%). 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 plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowings,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 borrowings,borrowing, and 0% to 1.0% for the term loan.

As of July 29, 2018,August 4, 2019, we arewere in compliance with our financial covenants under the credit facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000. On August 24, 2018, we renewed all three of our letter of credit facilities for an aggregate of $70,000,000 and extended each of these facilities’ maturity dates until August 24, 2019. The letter of credit facilities contain 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 July 29, 2018,August 4, 2019, an aggregate of $6,049,000$7,356,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we hadhave not taken legal title.
On August 23, 2019, we renewed all three of our letter of credit facilities for an aggregate of $70,000,000 and extended each of these facilities’ maturity dates until
August 23, 2020. 
The latest expiration possible for any future letters of credit issued under the facilities is January 21, 2020.

20, 2021.

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 36,570,000 shares. As of July 29, 2018,August 4, 2019, there were approximately 7,404,0005,345,000 shares available for future grant. Awards may be granted under the Plan to our officers, employees and
non-employee
members of the board of directors 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 ismust not be 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 fromwhich are triggered upon certain events including, but not limited to, retirement, or a merger or a similar corporate 
event.

5

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.basis. 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, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting fromwhich are triggered upon certain events including, but not limited to, retirement, or a merger or a similar corporate event. Stock awards granted to
non-employee
Board members generally vest in one year.
Non-employee
Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a
non-employee
Board member).


Table of Contents
Stock-Based Compensation Expense

During the thirteen and
twenty-six
weeks ended August 4, 2019, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $16,872,000 and $35,401,000, respectively. During the thirteen and
twenty-six
weeks ended July 29, 2018, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $13,637,000$
13,637,000
 and $26,526,000,$
26,526,000
, respectively. During the thirteen andtwenty-six weeks ended July 30, 2017, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $13,012,000 and $22,829,000, respectively.

Stock-Settled Stock Appreciation Rights

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

The following table summarizes our stock-settled stock appreciation right activity during thetwenty-six weeks ended July 29, 2018:

Shares

Balance at January 28, 2018 (100% vested)

167,737

Granted

—  

Converted into common stock

(134,837) 

Cancelled

(1,290) 

Balance at July 29, 2018 (100% vested)

31,610

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the
twenty-six
weeks ended July 29, 2018:

August 4, 2019:
  Shares 

Shares
Balance at January 28, 2018

February 3, 2019
  2,358,137
3,012,923
 

Granted

  1,357,106
1,000,469
 

Granted, with vesting subject to performance conditions

  256,350
238,786
 

Released

1
  
(607,682954,327
)

Cancelled

  
(264,735299,687
)

Balance at July 29, 2018

August 4, 2019
  3,099,176
2,998,164
 

Vested plus expected to vest at July 29, 2018

August 4, 2019
  2,393,642
3,158,678
 

1
Excludes 105,436 incremental shares released due to achievement of performance conditions above target.
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.

6

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

In thousands, except per share amounts  Net Earnings   

Weighted

Average Shares

   

Earnings

Per Share

 

Thirteen weeks ended July 29, 2018

      

Basic

  $51,713    82,342   $0.63 

Effect of dilutive stock-based awards

     825   

Diluted

  $51,713    83,167   $0.62 

Thirteen weeks ended July 30, 2017

      

Basic

  $52,917    86,429   $0.61 

Effect of dilutive stock-based awards

     419   

Diluted

  $52,917    86,848   $0.61 

Twenty-six weeks ended July 29, 2018

      

Basic

  $96,881    82,867   $1.17 

Effect of dilutive stock-based awards

     652   

Diluted

  $96,881    83,519   $1.16 

Twenty-six weeks ended July 30, 2017

      

Basic

  $92,472    86,696   $1.07 

Effect of dilutive stock-based awards

     542   

Diluted

  $92,472    87,238   $1.06 

             
In thousands, except per share amounts
 
Net Earnings
  
Weighted
Average Shares
  
Earnings
Per Share
 
Thirteen weeks ended August 4, 2019
         
Basic
 $
62,648
   
78,488
  $
0.80
 
Effect of dilutive stock-based awards
     
982
    
Diluted
 $
62,648
   
79,470
  $
0.79
 
Thirteen weeks ended July 29, 2018
         
Basic
 $
51,713
   
82,342
  $
0.63
 
Effect of dilutive stock-based awards
     
825
    
Diluted
 $
51,713
   
83,167
  $
0.62
 
Twenty-six
weeks ended August 4, 2019
         
Basic
 $
115,304
   
78,586
  $
1.47
 
Effect of dilutive stock-based awards
     
1,047
    
Diluted
 $
115,304
   
79,633
  $
1.45
 
Twenty-six
weeks ended July 29, 2018
         
Basic
 $
96,881
   
82,867
  $
1.17
 
Effect of dilutive stock-based awards
     
652
    
Diluted
 $
96,881
   
83,519
  $
1.16
 
Stock-based awards of 5,259 and 16,813 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended August 4, 2019, respectively, as their inclusion would be anti-dilutive. Stock-based awards of 17,179 and 15,986 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended July 29, 2018, as their inclusion would be anti-dilutive. Stock-based awards of 1,638,306 and 1,048,547 were excluded from the computation of diluted earnings per share for the thirteen andtwenty-six weeks ended July 30, 2017, respectively, as their inclusion would be anti-dilutive.

8
Table of Contents
NOTE E. SEGMENT REPORTING

We have two reportableidentify our operating segmentse-commerce according to how our business activities are managed and retail. Theevaluated.
Prior to fiscal 2019, we managed
e-commerce segment has
merchandise 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 one the
e-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 through
e-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 our
e-commerce
and retail stores. Ourbusinesses and to better align with how we manage our omni-channel business, we have combined the results of our
e-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.

Theseinto a single reportable segments are strategic business units that offer similar productssegment.

The following table summarizes our net revenues by brand for the home. They are managed separately becausethirteen and
twenty-six
weeks ended August 4, 2019 and July 29, 2018. We have updated fiscal 2018 results to conform with the business units utilize two distinct distributioncurrent year presentation.
                 
 
Thirteen
Weeks Ended
  
Twenty-six

Weeks Ended
 
In thousands
 
August 4,
2019
  
July 29,
2018
  
August 4,
2019
  
July 29,
2018
 
Pottery Barn
 $
524,847
  $
506,460
  $
1,016,973
  $
996,831
 
West Elm
  
357,574
   
301,213
   
667,057
   
574,562
 
Williams Sonoma
  
191,374
   
195,178
   
386,267
   
396,156
 
Pottery Barn Kids and Teen
  
227,853
   
213,807
   
404,899
   
394,203
 
Other
1
  
69,166
   
58,516
   
136,750
   
116,422
 
Total
2
 $
1,370,814
  $
1,275,174
  $
2,611,946
  $
2,478,174
 
1
Primarily consists of net revenues from our international franchise operations, Rejuvenation and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertisingMark 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 since 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.

7

Graham.

Segment Information

In thousands  E-commerce   Retail   Unallocated  Total 

Thirteen weeks ended July 29, 2018

       

Net revenues1

  $686,942   $588,232   $—      $1,275,174 

Depreciation and amortization expense

   7,651    22,494    15,791   45,936 

Operating income (loss)2

   137,236    33,922    (96,992)   74,166 

Capital expenditures

   8,958    18,495    18,539   45,992 

Thirteen weeks ended July 30, 2017

       

Net revenues1

  $630,793   $570,813   $—     $1,201,606 

Depreciation and amortization expense

   6,788    22,385    15,925   45,098 

Operating income (loss)2

   135,139    34,592    (88,147)   81,584 

Capital expenditures

   8,119    23,288    19,167   50,574 

Twenty-six weeks ended July 29, 2018

       

Net revenues1

  $1,333,122   $1,145,052   $—      $2,478,174 

Depreciation and amortization expense

   16,997    45,493    31,319   93,809 

Operating income (loss)2

   280,041    55,983    (195,308)   140,716 

Assets3

   801,253    1,116,904    689,820   2,607,977 

Capital expenditures

   14,752    35,690    29,579   80,021 

Twenty-six weeks ended July 30, 2017

       

Net revenues1

  $1,211,303   $1,101,810   $—     $2,313,113 

Depreciation and amortization expense

   13,755    44,727    31,566   90,048 

Operating income (loss)2

   267,143    56,306    (179,391)   144,058 

Assets3

   672,522    1,129,925    677,413   2,479,860 

Capital expenditures

   10,989    39,785    31,953   82,727 
1

2
Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $80.7$87.7 million and $80.6$80.7 million for the thirteen weeks ended August 4, 2019 and July 29, 2018, and July 30, 2017, respectively, and $160.1 approximately $
174.3
million and $150.0 million$160.1million for the
twenty-six
weeks ended August 4,2019 and July 29, 2018, and July 30, 2017, respectively.

2

The thirteen andtwenty-six weeks ended July 29, 2018 includes: $5.3 million of expense related to impairment and early lease termination charges which is primarily recorded in the retail segment, $5.0 million and $11.9 million of expense, respectively, related to our acquisition of Outward, Inc., (primarily acquisition-related compensation costs, the amortization of intangible assets acquired, and the operations of the Outward business), of which $3.6 million and $9.1 million, respectively, is recorded in thee-commerce segment and $1.4 million and $2.8 million, respectively, is recorded in the unallocated segment, as well as $1.9 million and $3.6 million, respectively, of employment-related expense in our corporate functions, which is recorded within the unallocated segment. Thetwenty-six weeks ended July 30, 2017 includes $5.7 million of severance-related charges in our corporate functions, which is recorded within the unallocated segment.

3

Includes long-term assets related to our international operations of approximately $52.9 million and $61.9 million as of July 29, 2018 and July 30, 2017, respectively.

Long-lived assets by geographic location are as follows:
         
In thousands
 
August 4, 2019
  
July 29, 2018
 
U.S.
 $
2,146,995
  $
1,077,547
 
International
  
164,667
   
52,938
 
Total
 $
2,311,662
  $
1,130,485
 
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.

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NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended July 29, 2018,August 4, 2019, we repurchased 2,409,437635,526 shares of our common stock at an average cost of $56.90$60.24 per share for a total cost of approximately $137,105,000.$
38,283
,000. During the
twenty-six
weeks ended July 29, 2018,August 4, 2019, we repurchased 3,141,3671,228,622 shares of our common stock at an average cost of $55.65$58.71 per share for a total cost of approximately $174,818,000.$
72,131
,000
. As of July 29, 2018August 4, 2019, there was $344,302,000$651,685,000 remaining under our current stock repurchase program. As of August 4, 2019, we held treasury stock of $
974
,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 July 29, 2018, we repurchased
2,409,437
shares of our common stock at an average cost of $
56.90
per share for a total cost of approximately $
137,105,000
. During the
twenty-six
weeks ended July 29, 2018, we repurchased
3,141,367
shares of our common stock at an average cost of $
55.65
per share for a total cost of approximately $
174,818,000
. In addition, as of July 29, 2018, we held treasury stock in the amount of $258,000, which$
258
,000
 that represents the cost of shares available for issuance that is intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

8

During the thirteen weeks ended July 30, 2017, we repurchased 1,160,381 shares of our common stock at an average cost of $47.41 per share for a total cost of approximately $55,011,000. During thetwenty-six weeks ended July 30, 2017, we repurchased 1,924,924 shares of our common stock at an average cost of $48.50 per share for a total cost of approximately $93,361,000. As of July 30, 2017, we held treasury stock in the amount of $805,000.

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 August 4, 2019 and July 29, 2018, and July 30, 2017, respectively. We declared cash dividends of $0.86$0.96 and $0.78$0.86 per common share during the
twenty-six
weeks ended August 4, 2019 and July 29, 2018, and July 30, 2017, respectively. 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 July 29, 2018,August 4, 2019, we expect to reclassify a net
pre-tax
gain of approximately $846,000$130,000 from OCI to cost of goods sold over the next 12 months.

We also enter into
non-designated
foreign currency forward contracts (to sell Australian dollars and 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.

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As of August 4, 2019 and July 29, 2018, and July 30, 2017, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

                          
In thousands  July 29, 2018   July 30, 2017 

Contracts designated as cash flow hedges

  $20,800  $24,600

Contracts not designated as cash flow hedges

  $6,600   $48,000 

         
In thousands
 
August 4, 2019
  
July 29, 2018
 
Contracts designated as cash flow hedges
 $
6,000
  $
20,800
 
Contracts not designated as cash flow hedges
 $
—  
  $
6,600
 
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 and
twenty-six
weeks ended August 4, 2019 and July 29, 2018 and July 30, 2017.

9

2018.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and
twenty-six
weeks ended August 4, 2019 and July 29, 2018, and July 30, 2017,
pre-tax,
was as follows:

In thousands  Thirteen
Weeks Ended
July 29, 2018		  Thirteen
Weeks Ended
July 30, 2017		  Twenty-six
Weeks Ended
July 29, 2018		  Twenty-six
Weeks Ended
July 30, 2017		 

Net gain (loss) recognized in OCI

  $339  $(1,588)  $1,530  $(696) 

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

  $(21)  $(9)  $(73)  $12 

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

     

Instruments designated as cash flow hedges1

  $50  $47  $33  $55 

Instruments not designated orde-designated

  $1,183  $—   $3,943  $341 
1

Changes in fair value of the forward contract related to interest charges (or forward points).

                                 
 
Thirteen Weeks Ended
  
Twenty-six
Weeks Ended
 
 
August 4, 2019
  
July 29, 2018
  
August 4, 2019
  
July 29, 2018
 
In thousands
 
Cost of 
goods
sold
  
Selling,
general and
administrative
expenses
  
Cost of 
goods     
sold     
  
Selling,
general and
administrative
expenses
  
Cost of 
goods
sold
  
Selling,
general and
administrative
expenses
  
Cost of 
goods
sold
  
Selling,
general and
administrative
expenses
 
Line items presented
in the Condensed
Consolidated
Statement of
Earnings in which
the effects of
derivatives are
recorded
 $
         
886,953
  $
         
397,696
  $
811,232
  $
389,776
  $
         
1,683,754
  $
         
767,895
  $
1,582,068
  $
755,390
 
Gain (loss)
recognized in
income
                        
Derivatives
designated as
cash flow
hedges
 $
187
  $
—
  $
(21
) $
50
  $
295
  $
—
  $
(73
) $
33
 
Derivatives not
designated as
hedging instruments
 $
—
  $
24
  $
—  
  $
1,183
  $
—
  $
18
  $
—  
  $
3,943
 
The fair values of our derivative financial instruments are presented below according to their classification in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.

                          
In thousands  July 29, 2018   July 30, 2017 

Derivatives designated as cash flow hedges:

    

Other current assets

  $690   $—  

Other long-term assets

  $57   $—  

Other current liabilities

  $—    $(704) 

Other long-term liabilities

  $—    $(90) 

Derivatives not designated as hedging instruments:

    

Other current assets

  $5   $6 

         
In thousands
 
August 4, 2019
  
July 29, 2018
 
Derivatives designated as cash flow hedges:
      
Other current assets
 $
         
142
  $
690
 
Other long-term assets
 $
—
  $
57
 
Derivatives not designated as hedging instruments:
      
Other current assets
 $
—
  $
5
 
We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210,
Balance Sheet
, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

NOTE I. FAIR VALUE MEASUREMENTS

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

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

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

11
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Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

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

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

Long-term Debt

As of July 29, 2018,August 4, 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.

10

Foreign Currency Derivatives and Hedging Instruments

We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use
mid-market
pricing as a practical expedient for fair value measurements. Key inputs for 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 and
non-performance
to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts that we have entered into are subject to credit risk-related contingent features or collateral requirements.

Property and Equipment

Long-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 measure
right-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 and
twenty-six
weeks ended August 4, 2019 or July 29, 2018 or July 30, 2017.

11

2018.


Table of Contents
NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

In thousands  Foreign Currency
Translation		  Cash Flow
Hedges		  Accumulated Other
Comprehensive
Income (Loss)		 

Balance at January 28, 2018

  $(6,227)  $(555)  $(6,782) 

Foreign currency translation adjustments

   (1,145)   —     (1,145) 

Change in fair value of derivative financial instruments

   —     1,123   1,123 

Reclassification adjustment for realized (gain) loss on derivative financial instruments1

   —     49   49 

Other comprehensive income (loss)

   (1,145)   1,172   27 

Balance at April 29, 2018

   (7,372)   617   (6,755) 

Foreign currency translation adjustments

   (2,993)   —     (2,993) 

Change in fair value of derivative financial instruments

   —     6   6 

Reclassification adjustment for realized (gain) loss on derivative financial instruments1

   —     —     —   

Other comprehensive income (loss)

   (2,993)   6   (2,987) 

Balance at July 29, 2018

  $(10,365)  $623  $(9,742) 

Balance at January 29, 2017

  $(9,957)  $54  $(9,903) 

Foreign currency translation adjustments

   (1,566)   —     (1,566) 

Change in fair value of derivative financial instruments

   —     655   655 

Reclassification adjustment for realized (gain) loss on derivative financial instruments1

   —     (16)   (16) 

Other comprehensive income (loss)

   (1,566)   639   (927) 

Balance at April 30, 2017

   (11,523)   693   (10,830) 

Foreign currency translation adjustments

   3,390   —     3,390 

Change in fair value of derivative financial instruments

   —     (1,166)   (1,166) 

Reclassification adjustment for realized (gain) loss on derivative financial instruments1

   —     7   7 

Other comprehensive income (loss)

   3,390   (1,159)   2,231 

Balance at July 30, 2017

  $(8,133)  $(466)  $(8,599) 
1

Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Condensed Consolidated Statements of Earnings.

In thousands
 
Foreign Currency
Translation
  
Cash Flow
Hedges
  
Accumulated Other
Comprehensive
Income (Loss)
 
Balance at February 3, 2019 $(11,259) $186  $(11,073)
Foreign currency translation adjustments  (3,009)     (3,009)
Change in fair value of derivative financial instruments  —     204   204 
Reclassification adjustment for realized (gain) loss on derivative financial instruments  —     (67)  (67)
Other comprehensive income (loss)  (3,009)  137   (2,872)
Balance at May 5, 2019  (14,268)  323   (13,945)
Foreign currency translation adjustments  (1,251)  —     (1,251)
Change in fair value of derivative financial instruments  —     (132)  (132)
Reclassification adjustment for realized (gain) loss on derivative financial instruments  —     (160)  (160)
Other comprehensive income (loss)  (1,251)  (292)  (1,543)
Balance at August 4, 2019 $(15,519) $31  $(15,488)
         
Balance at January 28, 2018 $(6,227) $(555) $(6,782)
Foreign currency translation adjustments  (1,145)  —     (1,145)
Change in fair value of derivative financial instruments  —     1,123   1,123 
Reclassification adjustment for realized (gain) loss on derivative financial instruments  —     49   49 
Other comprehensive income (loss)  (1,145)  1,172   27 
Balance at April 29, 2018  (7,372)  617   (6,755)
Foreign currency translation adjustments  (2,993)  —     (2,993)
Change in fair value of derivative financial instruments  —     6   6 
Other comprehensive income (loss)  (2,993)  6   (2,987)
Balance at July 29, 2018 $(10,365) $623  $(9,742)
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NOTE K. ACQUISITION OF OUTWARD, INC.

On December 1, 2017, we acquired Outward, Inc. (“Outward”), a
3-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 $80,812,000 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 $4,498,000 primarily represents settlement of
pre-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.

12

The purchase consideration has been allocated based on estimates of the fair value of identifiable assets acquired and liabilities assumed, as set forth in the table below.

In thousands  July 29, 2018 

Working capital and other assets

  $718,000 

Property and equipment, net

   2,049,000 

Intangible assets

   18,300,000 

Liabilities

   (7,160,000) 

Total identifiable net assets acquired

  $13,907,000 

Goodwill

   66,905,000 

Total purchase consideration

  $80,812,000 

During the second quarter of fiscal 2018, we finalized the valuation of intangible

Working capital and other assets
 $
718,000
 
Property and equipment, net
  
2,049,000
 
Intangible assets
  
18,300,000
 
Liabilities
  
(6,886,000
)
Total identifiable net assets acquired
 $
14,181,000
 
Goodwill
  
66,631,000
 
Total purchase consideration
 $
80,812,000
 
Intangible assets acquired which primarily represent
3-D
imaging data and core intellectual property, which are being amortized over a useful life of
four years.years
. Goodwill is primarily attributable to expected synergies as a result of the acquisition, which include the leverage of acquired technology and talent to drive improved conversion, cost savings and operating efficiencies. None of the goodwill will be deductible for income tax purposes.

Outward, Inc. 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 are insignificant to our Condensed Consolidated Financial Statements for all periods presented and would not have been significant 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 inthrough our
e-commerce
websites, our direct mail catalogs, or at our retail stores or through oure-commerce channel (websites or direct-mail catalogs) 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 and
co-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 our
e-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.

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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 August 4, 2019 and July 29, 2018,29,2018, we recorded a liability for expected sales returns of approximately $30,432,000$28,778,000 and $
30,432,000
 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $11,036,000$10,685,000 and $
11,036,000
 within other current assets in our Condensed Consolidated Balance Sheet.

13

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)
(“breakage
”
) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately
four 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 and
co-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.

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.

Deferred Revenue

We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, and incentives received from credit card issuers. As of July 29, 2018,August 4, 2019, we held $263,546,000$288,564,000 in gift card and other deferred revenue on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized intoas revenue within the next 12 months.

Adoption

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 ASU2014-09

the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset.

The adoptionrental 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 ASU2014-09 most significantly impactedstore 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 Condensed Consolidated Financial Statementscalculation 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.

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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 and
non-lease
components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a
right-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 and
right-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 and
right-of-use
assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and
right-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 lease costs for the thirteen and
twenty-six
weeks ended August 4, 2019 are as follows:

         
In thousands
 
Thirteen
weeks ended
August 
4, 2019
  
Twenty-six
weeks ended
August 
4, 2019
 
Operating lease costs
 $
             66,143
  $
           131,111
 
Variable lease costs
  
5,129
   
9,763
 
Total lease costs
 $
71,272
  $
140,874
 

Sublease income and short-term lease costs were not material to us for the reclassification from selling, generalthirteen and administrative expenses into net revenues for certain incentives received from credit card issuers,

twenty-six

weeks ended August 4, 2019.

the reclassification of breakage incomeSupplemental cash flow information related to our unredeemed stored-value cards from selling, general and administrative expenses into net revenues, as well as an acceleration in the timing of recognizing breakage income,

an acceleration in the timing of revenue recognition for certain merchandise shipped to our customers, and

the recording of a right of return asset for merchandise we expect to receive back from customers of $11,036,000.

The following summarizes the impact of adopting ASU2014-09 on our Condensed Consolidated Statement of Earningsleases for the thirteen and

twenty-six
weeks ended August 4, 2019 are as follows:
         
In thousands
 
Thirteen
weeks ended
August 
4, 2019
  
Twenty-six
weeks ended
 
August 4, 2019
 
Cash paid for amounts included in the measurement of operating lease liabilities
 $
             71,580
  $
   ��      141,394
 
Net additions to
right-of-use
assets
  
63,871
   
82,393
 
Weighted average remaining operating lease term and incremental borrowing rate as of August 4, 2019 are as follows:
Weighted average remaining lease term (years)
7.55
Weighted average incremental borrowing rate
3.86
%

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As of August 4, 2019, the future minimum lease payments under our operating lease liabilities are as follows:
     
In thousands
  
Remaining fiscal 2019
 $
143,927
 
Fiscal 2020
  
265,375
 
Fiscal 2021
  
233,052
 
Fiscal 2022
  
201,593
 
Fiscal 2023
  
170,283
 
Fiscal 2024
  
146,808
 
Fiscal 2025 and thereafter
  
441,650
 
Total lease payments
  
1,602,688
 
Less interest
  
(231,679
)
     
Total operating lease liability
  
1,371,009
 
Less current operating lease liability
  
(222,978
)
Total
non-current
operating lease liability
 $
1,148,031
 
As previously disclosed in our 2018 Annual Report on Form
10-K
and under the previous lease accounting standard, future minimum lease payments under
non-cancellable
operating leases as of February 3, 2019 were as follows:
     
In thousands
  
Fiscal 2019
 $
292,387
 
Fiscal 2020
  
262,429
 
Fiscal 2021
  
225,755
 
Fiscal 2022
  
190,263
 
Fiscal 2023
  
160,308
 
Thereafter
  
559,802
 
Total
 $
1,690,944
 
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 two
one-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 additional
one-year
renewal options. Rental payments under this agreement including applicable taxes, insurance and maintenance expenses were not material to us for the thirteen or
twenty-six
weeks ended August 4, 2019 or July 29, 2018.

14

   Thirteen Weeks Ended July 29, 2018   Twenty-six Weeks Ended July 29, 2018 
In thousands  As
Reported		   ASU 2014-09
Adjustment		  As
Adjusted		   As
Reported		   ASU 2014-09
Adjustment		  As
Adjusted		 

Net revenue

  $1,275,174   $(16,831)  $1,258,343   $2,478,174   $(41,932)  $2,436,242 

Cost of goods sold

   811,232    (2,257)   808,975    1,582,068    (8,401)   1,573,667 

Gross profit

   463,942    (14,574)   449,368    896,106    (33,531)   862,575 

Selling, general and administrative expenses

   389,776    (10,908)   378,868    755,390    (23,170)   732,220 

Operating income

  $74,166   $(3,666)  $70,500   $140,716   $(10,361)  $130,355 

Other than the presentation of our sales returns liability and a right of return asset, which resulted in a reclassification of liabilities into other current assets within our Condensed Consolidated Balance Sheet as of July 29, 2018, all other impacts to the Condensed Consolidated Balance Sheet from the adoption of this ASU were not material either individually or in the aggregate for the second quarter of fiscal 2018. The adoption of ASU2014-09 had no net impact to our Condensed Consolidated Statement of Cash Flows for thetwenty-six weeks ended July 29, 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, the potential impact of tariffs, including our ability to mitigate the potential impact, and 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.

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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 632623 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.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended July 29, 2018August 4, 2019 (“second quarter of fiscal 2018”2019”), as compared to the thirteen weeks ended July 30, 201729, 2018 (“second quarter of fiscal 2017”2018”) and thetwenty-six weeks ended August 4, 2019 (“year-to-date fiscal 2019”), as compared to the twenty-six weeks ended July 29, 2018(“ (“year-to-date fiscal 2018”), as compared to thetwenty-six weeks ended July 30, 2017(“year-to-date fiscal 2017”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.

15

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

Second Quarter of Fiscal 20182019 Financial Results

Net revenues in the second quarter of fiscal 20182019 increased by $73,568,000,$95,640,000, or 6.1%7.5%, compared to the second quarter of fiscal 2017,2018, with comparable brand revenue growth of 4.6%6.5%. The increase in net revenuesThis growth was primarily driven by an 8.9% increase in oure-commerce net revenues with growth across all brands and a 3.1% increase in retail net revenues (primarily driven byWest Elm, Pottery Barn and Pottery Barn Kids and Teen. Net revenue growth included an 8.7% increase in international revenue primarily related to our franchise operations.
West Elm)Elm had a strong quarter with comparable revenue growth accelerating to 17.5%, on top of 9.5% in the second quarter of fiscal 2018. These results were driven by strong execution across all our key growth strategies. In Pottery Barn, comparable revenue growth accelerated to 4.2% and continued to be led by furniture, with particular strength in furniture. Total netour proprietary upholstery business. In Pottery Barn Kids and Teen, comparable revenue growth forwas 3.7%. Our baby business continues to be an important growth initiative, and during the quarter, we saw significant growth across our back-to-school offerings and foundational furniture categories. Our emerging brands, Rejuvenation and Mark & Graham drove another quarter of solid growth. In the Williams Sonoma brand, while we are disappointed with the 1.1% comparable revenue decline this quarter, we did have comparable revenue growth in our full-price business and new introductions were solid. However, they weren’t strong enough to overcome the clearance volume, misses in tabletop and the very successful launch of Instant Pot last year. In the second quarter of fiscal 2019, diluted earnings per share was $0.79 (which included a $0.07 impact related to Outward, Inc., and a $0.01 impact from employment-related expenses) versus $0.62 in the second quarter of fiscal 2018 also(which included a double-digit net revenue increase in our company-owned international operations, as well as the favorable$0.05 impact of the adoption of ASU2014-09 (see Note Lrelated to our Condensed Consolidated Financial Statements).

In the second quarter of fiscal 2018, we made progress on our four strategic priorities of digital leadership, product innovation, retail transformation and operational excellence. In digital leadership, we are leveraging our cross-brand platform through initiatives and technology including our cross-brand loyalty program, The Key, which continued to gain momentum. We continued to make progress on our integration of Outward, and launched our photo-realistic space planning experience, “Ensemble” earlier this month. We also improved the digital customer experience through content creation including updating our shop path with more engaging content, and enhanced product information pages. Further, we are optimizing catalog mailings to focus on more profitable digital channels that drive more reach, more efficiently. In product innovation, we continued to have exclusive designs, high-impact collaborations and category expansions. We also built incremental businesses, including PB Apartment, Pottery Barn Modern Baby, as well as a cross brand collaboration between West Elm and Pottery Barn Kids. We made progress on our retail transformation strategy during the quarter by reducing our fleet of underperforming stores and selectively investing in new stores, remodels and relocations, while elevating the store experience. We also remain committed to operational excellence. During the second quarter, we continued to make progress against our inventory initiatives. We reduced overstocks and clearance in stores, bringing our inventory growth down to 2.5%Inc., while revenues grew 6.1%. We continue to focus on managing inventory more effectively, including morein-time inventory and frequent flow from our overseas vendors. In addition to inventory management, we drove further cost reductions across our supply chain, including improved efficiency in our personalization operations and our domestic upholstery manufacturing facility. And in our global business, we saw another quarter of double-digit revenue growth in our company-owned operations. In addition, our existing franchise partners added another six retail locations in the second quarter.

In the second quarter of fiscal 2018, diluted earnings per share was $0.62 (which included a $0.05 impact related to impairment and early lease termination charges, a $0.05 impact related to Outward, a $0.03 impact associated with tax expense from U.S. tax legislationTax Reform, and a $0.02 impact associated withfrom employment-related expense) versus $0.61 inexpenses). We also returned $76,868,000 to our stockholders through dividends and stock repurchases.

Operationally during the second quarter of fiscal 2017.2019, 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.
A key driver of our accelerated growth this quarter was the focus on our portfolio of brands. The Key continues to be an impactful driver of customer engagement and revenue growth as total membership continued to grow during the quarter. Our cross-brand Business-to-Business division also delivered strong growth this quarter and we are aggressively working to put in place the cross-brand, cross-functional infrastructure to support our growth, as well as expanding our large-scale project pipeline with more strategic partnerships across industry verticals.
Also, during the quarter, we made substantial progress on our ongoing efforts to improve the customer experience. In technology innovation, we have significantly expanded our technology experimentation agenda with the launch of many new capabilities over the last six months, across each of our brands, to deliver more engaging, content-rich customer experiences. In our supply chain this quarter, we launched furniture delivery scheduling capability which gives customers the option to schedule their delivery on their mobile devices. We added further enhancements such as email and mobile notifications to our order tracking capability launched in the first quarter. And, in the second quarter, we successfully opened our West Elm West Coast distribution center in Fontana, California, which we expect to be fully operational in September. And finally, our in-house manufacturing operation continues to be a strategic advantage for us, where shipments are up 30% year-over-year as we continue to drive operational improvements to enable more domestic production, which helps to mitigate the impact of the China tariffs.
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For the remainder of fiscal 2018 results also included2019 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 impact fromexecution of our initiatives throughout the adoptionremainder of the new revenue standard, ASU2014-09. We also returned $173,355,000fiscal 2019 and beyond, as well as to our stockholders through stock repurchases and dividends.

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.

   Thirteen Weeks Ended  Twenty-six Weeks Ended 
In thousands  July 29,
2018		   % Total  July 30,
2017		   % Total  July 29,
2018		   % Total  July 30,
2017		   % Total 

E-commerce net revenues

  $686,942    53.9%  $630,793    52.5%  $1,333,122    53.8%  $1,211,303    52.4% 

Retail net revenues

   588,232    46.1%   570,813    47.5%   1,145,052    46.2%   1,101,810    47.6% 

Net revenues

  $1,275,174    100.0%  $1,201,606    100.0%  $2,478,174    100.0%  $2,313,113    100.0% 

wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards.

Net revenues in the second quarter of fiscal 20182019 increased by $73,568,000,$95,640,000, or 6.1%7.5%, compared to the second quarter of fiscal 2017,2018, with comparable brand revenue growth of 4.6%6.5%. The increase in net revenuesThis growth was primarily driven by an 8.9% increase in oure-commerce net revenues with growth across all brands and a 3.1% increase in retail net revenues (primarily driven byWest Elm, Pottery Barn and West Elm), with particular strength in furniture. Total netPottery Barn Kids and Teen. Net revenue growth for the second quarter of fiscal 2018 also included a double-digit net revenuean 8.7% increase in our company-owned international operations, as well as the favorable impact of the adoption of ASU2014-09 (see Note Lrevenue primarily related to our Condensed Consolidated Financial Statements).

16

franchise operations.

Net revenues foryear-to-date fiscal 20182019 increased by $165,061,000,$133,772,000, or 7.1%5.4%, compared toyear-to-date fiscal 2017,2018, with comparable brand revenue growth of 5.1%. The increase in net revenuesThis growth was primarily driven by a 10.1% increase in oure-commerce net revenues with growth across all brands and a 3.9% increase in our retail net revenues (primarily driven byWest Elm, Pottery Barn West Elm and Williams Sonoma), with particular strength in furniture.our franchise operations. Net revenue growth also included the favorable impact of the adoption of ASU2014-09 (see Note Lan 8.8% increase in international revenue primarily related to our Condensed Consolidated Financial Statements).

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.

   Thirteen
Weeks Ended		  Twenty-six
Weeks Ended		 
Comparable brand revenue growth (decline)  July 29,
2018		  July 30,
2017		  July 29,
2018		  July 30,
2017		 

Pottery Barn

   2.0%   1.2%   2.3%   (0.1%) 

West Elm

   9.5%   10.1%   9.2%   8.1% 

Williams Sonoma

   1.6%   1.9%   3.6%   2.5% 

Pottery Barn Kids and Teen1

   5.7%   (2.7%)   5.5%   (5.2%) 

Total

   4.6%   2.8%   5.1%   1.5% 
                 
 Thirteen
Weeks Ended		  Twenty-six
Weeks Ended		 
Comparable brand revenue growth (decline)
 August 4,
2019		  July 29,
2018		  August 4,
2019		  July 29,
2018		 
Pottery Barn  4.2%  2.0%  2.9%  2.3%
West Elm  17.5%  9.5%  14.8%  9.2%
Williams Sonoma  (1.1%)  1.6%  (1.3%)  3.6%
Pottery Barn Kids and Teen  3.7%  5.7%  2.6%  5.5%
Total
1
  6.5%  4.6%  5.1%  5.1%
1

The performanceTotal comparable brand revenue growth includes the results of the Pottery Barn KidsRejuvenation and PBteen brands are being reported on a combined basis as Pottery Barn KidsMark and Teen.

Graham.

STORE DATA

   Store Count   Average Leased Square
Footage Per Store		 
    

April 29,

2018

   Openings   Closings  

July 29,

2018

   

July 30,

2017

   

July 29,

2018

   

July 30,

2017

 

Williams Sonoma

   224    4    (2)   226    234    6,800    6,600 

Pottery Barn

   203    2    —     205    204    13,900    13,800 

West Elm

   108    3    (2)   109    101    13,100    13,200 

Pottery Barn Kids

   84    —      —     84    88    7,400    7,400 

Rejuvenation

   8    —      —     8    8    8,800    8,800 

Total

   627    9    (4)   632    635    10,300    10,100 

Store selling square footage atperiod-end

 

      4,058,000    3,998,000 

Store leased square footage atperiod-end

 

            6,504,000    6,428,000 

                             
 Store Count  Average Leased Square
Footage Per Store		 
 May 5,
2019		  Openings  Closings  
August 4,
2019
  
July 29,
2018
  
August 4,
2019
  
July 29,
2018
 
Williams Sonoma  219   —     (1)  218   226   6,800   6,800 
Pottery Barn  205   2   (2)  205   205   14,400   13,900 
West Elm  113   —     (1)  112   109   13,100   13,100 
Pottery Barn Kids  78   —     —     78   84   7,500   7,400 
Rejuvenation  10   —     —     10   8   8,500   8,800 
Total  625   2   (4)  623   632   10,600   10,300 
Store selling square footage at period-end        4,124,000   4,058,000 
Store leased square footage at period-end        6,587,000   6,504,000 
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COST OF GOODS SOLD

   Thirteen Weeks Ended  Twenty-six Weeks Ended 
In thousands  

July 29,

2018

   

% Net

Revenues

  

July 30,

2017

   

% Net

Revenues

  

July 29,

2018

   

% Net

Revenues

  

July 30,

2017

   

% Net

Revenues

 

Cost of goods sold1

  $811,232    63.6%  $778,895    64.8%  $1,582,068    63.8%  $1,494,642    64.6% 
                                 
 Thirteen Weeks Ended  Twenty-six Weeks Ended 
In thousands
 
August 4,
2019
  
% Net
Revenues
  
July 29,
2018
  
% Net
Revenues
  
August 4,
2019
  
% Net
Revenues
  
July 29,
2018
  
% Net
Revenues
 
Cost of goods sold
1
 $886,953   64.7% $811,232   63.6% $1,683,754   64.5% $  1,582,068   63.8%
1

Includes total occupancy expenses of $170,798,000$176,814,000 and $168,359,000$170,798,000 for the second quarter of fiscal 20182019 and the second quarter of fiscal 2017,2018, respectively, and $350,667,000 and $344,283,000 for year-to-date fiscal 2019 and $335,852,000 foryear-to-date fiscal 2018, andyear-to-date fiscal 2017, respectively.

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

17

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.

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

Second Quarter of Fiscal 20182019 vs. Second Quarter of Fiscal 2017

2018

Cost of goods sold increased by $32,337,000,$75,721,000, or 4.2%9.3%, in the second quarter of fiscal 20182019 compared to the second quarter of fiscal 2017.2018. Cost of goods sold as a percentage of net revenues decreasedincreased to 64.7% in the second quarter of fiscal 2019 from 63.6% in the second quarter of fiscal 2018 from 64.8% in the second quarter of fiscal 2017.2018. This decreaseincrease was primarily driven by higher selling marginsincreased shipping costs due to a larger mix of furniture sales, the incremental impact of the implementation of the List 3 China tariffs, as well as a growing share of our business coming from franchise and trade, partially offset by the leverage of occupancy costs, which includes the impact from the adoption of ASU2014-09.

In thee-commerce channel, cost of goods sold as a percentage of net revenues decreased in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, primarily driven by higher selling margins.

In the retail channel, cost of goods sold as a percentage of net revenues decreased in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, primarily driven by higher selling margins.

costs.

Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018 vs.Year-to-Date Fiscal 2017

Cost of goods sold increased by $87,426,000,$101,686,000, or 5.8%6.4%, foryear-to-date fiscal 20182019 compared toyear-to-date fiscal 2017.2018. Cost of goods sold as a percentage of net revenues decreasedincreased to 64.5% for year-to-date fiscal 2019 from 63.8% foryear-to-date fiscal 2018 from 64.6% foryear-to-date fiscal 2017.2018. This decreaseincrease was primarily driven by increased shipping costs due to a larger mix of furniture sales, the incremental impact of the implementation of the List 3 China tariffs, as well as a growing share of our business coming from franchise and trade, partially offset by the leverage of occupancy costs and higher selling margins, which includes the impact from the adoption of ASU2014-09.

In thee-commerce channel, cost of goods sold as a percentage of net revenues decreased foryear-to-date fiscal 2018 compared toyear-to-date fiscal 2017, primarily driven by higher selling margins.

In the retail channel, cost of goods sold as a percentage of net revenues decreased for year-to-date fiscal 2018 compared to year-to-date fiscal 2017, primarily driven by the leverage of occupancy costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   Thirteen Weeks Ended  Twenty-six Weeks Ended 
In thousands  

July 29,

2018

   % Net
Revenues		  

July 30,

2017

   % Net
Revenues		  

July 29,

2018

   % Net
Revenues		  

July 30,

2017

   % Net
Revenues		 

Selling, general and administrative expenses

  $389,776    30.6%  $341,127    28.4%  $755,390    30.5%  $674,413    29.2% 

                                 
 Thirteen Weeks Ended  Twenty-six Weeks Ended 
In thousands
 
August 4,
2019
  % Net
Revenues		  
July 29,
2018
  % Net
Revenues		  
August 4,
2019
  % Net
Revenues		  
July 29,
2018
  % Net
Revenues		 
Selling, general and administrative expenses $397,696   29.0% $389,776   30.6% $767,895   29.4% $755,390   30.5%
Selling, general and administrative expenses consist ofnon-occupancy related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

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

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Second Quarter of Fiscal 20182019 vs. Second Quarter of Fiscal 2017

2018

Selling, general and administrative expenses increased by $48,649,000,$7,920,000, or 14.3%2.0%, in the second quarter of fiscal 20182019 compared to the second quarter of fiscal 2017.2018. Selling, general and administrative expenses as a percentage of net revenues increaseddecreased to 29.0% in the second quarter of fiscal 2019 from 30.6% in the second quarter of fiscal 2018 from 28.4% in the second quarter of fiscal 2017.2018. This increasedecrease as a percentage of net revenues was driven by an increase inthe leverage of employment, advertising and general expenses primarily from the reclassification of other income from selling, general and administrative expenses into net revenues due to the adoption of ASU2014-09, higher digital advertising costs and increased hourly wages from the reinvestment of tax savings, impairment and early lease termination charges related to underperforming retail stores, and the impact from our acquisition of Outward in the fourth quarter of fiscal 2017. This was partially offset by the optimization of catalog advertising costs.

In thee-commerce channel, selling, general and administrative expenses as a percentage of net revenues increased in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, primarily driven by higher digital advertising costssales and increased hourly wages from the reinvestmentcontinued benefits of taxour cost savings initiatives across the impact frombusiness, as well as our acquisition of Outward, and an increase in general expenses, partially offset by the optimization of catalog advertising costs.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues increased in the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, primarily driven by impairment and early lease termination charges related to underperforming retail stores.

overall expense discipline.

Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018 vs.Year-to-Date Fiscal 2017

Selling, general and administrative expenses increased by $80,977,000,$12,505,000, or 12.0%1.7%, foryear-to-date fiscal 20182019 compared toyear-to-date fiscal 2017.2018. Selling, general and administrative expenses as a percentage of net revenues increaseddecreased to 29.4% for year-to-date fiscal 2019 from 30.5% foryear-to-date fiscal 2018 from 29.2% foryear-to-date fiscal 2017.2018. This increasedecrease as a percentage of net revenues was driven by an increase inthe leverage of advertising, employment and general expenses primarily from the reclassification of other income from selling, general and administrative expenses into net revenues due to the adoption of ASU2014-09, higher digital advertising costs and increased hourly wages from the reinvestment of tax savings, and impairment and early lease termination charges related to underperforming retail stores. This was partially offset by the optimization of catalog advertising costs.

In thee-commerce channel, selling, general and administrative expenses as a percentage of net revenues increased foryear-to-date fiscal 2018 compared toyear-to-date fiscal 2017, primarily driven by higher digital advertising costs and increased hourly wages from the reinvestment of tax savings, an increase in general expenses,sales and the impact fromcontinued benefits of our acquisitioncost savings initiatives across the business, as well as our overall expense discipline.

20
Table of Outward. ThisContents
INCOME TAXES
The effective tax rate was partially offset by the optimization25.8% for year-to-date fiscal 2019, and 29.8% for year-to-date of catalog advertising costs.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues increased foryear-to-datefiscal 2018 compared toyear-to-date fiscal 2017, primarily driven by impairment and early lease termination charges related to underperforming retail stores.

INCOME TAXES

2018. Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 providesprovided us with up to one year to finalize our measurement of the income tax effects of the U.S.2017 Tax ReformCuts and Jobs Act (“the Tax Act”) on our fiscal year ended January 28, 2018. As of January 28, 2018, we had made reasonable estimates of the transition tax under Internal Revenue Code Section 965.

As a result of the issuance of IRS Notice2018-26, we recorded a measurement period adjustment in the first quarter of fiscal 2018 to increase the transition tax by approximately $2,871,000. In the second quarter of fiscal 2018, we finalized our valuation of intangible assets acquired in connection with the acquisition of Outward. As a result, we recorded an increase to tax expense of approximately $1,757,000 representing an adjustment to there-measurement of our deferred tax liabilities under SAB 118.

The effective tax rate was 29.8% foryear-to-date fiscal 2018 and 35.6% foryear-to-date fiscal 2017. Theyear-over-year decrease in the effective tax rate was primarily due to the reduction of the U.S. corporate income tax rate from 35% to 21%, and was partially offset by the adjustment of the provisional transition tax under SAB 118 and the adjustment to there-measurement of our deferred tax liabilities under SAB 118.

In fiscal 2018, we are subject to several provisions of U.S. Tax Reform including a tax on global intangiblelow-taxed income (“GILTI”),118 in the base erosion anti-abuse tax and a deduction for foreign-derived intangible income. The impact of these provisions was immaterial for the second quarterfirst two quarters of fiscal 2018.

A company can elect an accounting policy to account for GILTI as either a periodic expense when the tax arises or as part of deferred taxes related to the investment in the subsidiary. We are currently in the process of analyzing this provision and, as a result, are not yet able to reasonably estimate its effect. Therefore, we have not yet made a policy election regarding the accounting for GILTI. The ultimate impact of U.S. Tax Reform may differ from our provisional amounts due to changes in interpretations and assumptions and/or additional regulatory guidance that may be issued. We expect to revise our U.S. Tax Reform impact estimates as we refine our analysis of the new rules and as new guidance is issued. We expect to finalize accounting for the impact of U.S. Tax Reform under SAB 118 once our 2017 U.S. corporate income tax return is filed in the fourth quarter of fiscal 2018.

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LIQUIDITY AND CAPITAL RESOURCES

As of July 29, 2018,August 4, 2019, we held $174,580,000$120,467,000 in cash and cash equivalents, the majority of which was held in interest bearing demand deposit accounts and money market funds, and of which $92,403,000$98,512,000 was held by our foreigninternational subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

In fiscal 2018,2019, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, property and equipment purchases, stock repurchases and dividend payments. In addition to our cash balances on hand, we have a $500,000,000 unsecured revolving line of credit (“the revolver”) under our credit facility.and a $300,000,000 unsecured term loan facility (“the 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. Foryear-to-date fiscal 2019, we had borrowings of $60,000,000 under the revolver. For year-to-date fiscal 2018, we had no borrowings under the revolver. Foryear-to-date fiscal 2017, we borrowed $115,000,000 under the revolver, all of which was outstanding as of July 30, 2017. As of July 29, 2018,August 4, 2019, we had $300,000,000 outstanding under our term loan. The term loan matures on January 8, 2021, at which point all outstanding principal and any accrued interest must be repaid. Additionally, as of July 29, 2018,August 4, 2019, a total of $13,574,000$12,400,000 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 July 29, 2018,August 4, 2019, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which $6,049,000$7,356,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we hadhave not taken legal title.

On August 23, 2019, we renewed all three of our letter of credit facilities for substantially similar terms.

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

Cash Flows from Operating Activities

Foryear-to-date fiscal 2018,2019, net cash used in operating activities was $26,636,000 compared to net cash provided by operating activities of $120,123,000 for year-to-date fiscal 2018. For year-to-date fiscal 2019, net cash used in operating activities was $120,123,000primarily attributable to a decrease in accounts payable and an increase in merchandise inventories, partially offset by net earnings adjusted for non-cash items. Net cash used in operating activities for year-to-date fiscal 2019 compared to $35,135,000 foryear-to-date fiscal 2017. Foryear-to-date fiscal 2018, net cash provided by operating activities was primarily attributable to net earnings adjusted fornon-cash items, partially offset by an increase in merchandise inventories, prepaid expenses and other assets, and a decrease in income taxes payable. Net cash provided by operating activities increased compared toyear-to-date fiscal 2017,2018 was primarily due to lower merchandise inventory purchases and an increasea year-over-year reduction in accounts payable.

payable due to the timing of payments.

Cash Flows from Investing Activities

Foryear-to-date fiscal 2018,2019, net cash used in investing activities was $79,508,000$76,719,000 compared to $82,683,000$79,508,000 foryear-to-date fiscal 2017,2018, and was primarily attributable to purchases of property and equipment. Net cash used in investing activities decreased compared toyear-to-date fiscal 2017, primarily due to a decrease in purchases of property and equipment.

Cash Flows from Financing Activities

Foryear-to-date fiscal 2018,2019, net cash used in financing activities was $257,484,000$113,471,000 compared to $60,675,000$257,484,000 foryear-to-date fiscal 2017.2018. Foryear-to-date fiscal 2018,2019, net cash used in financing activities was primarily attributable to the payment of dividends, repurchases of common stock and the payment of dividends. Nettax withholdings related to stock-based awards, partially offset by borrowings under our revolver. The decrease in cash used in financing activities increasedfor year-to-date fiscal 2019 compared toyear-to-date fiscal 2017,2018 was primarily dueattributable to borrowings under our revolver duringyear-to-date 2017 which did not recura decrease inyear-to-date 2018, repurchases of common stock, as well as an increase in repurchases of common stock.

borrowings under our revolver.

Stock Repurchase Program and Dividends

See Note G to our Condensed Consolidated Financial Statements,
Stock Repurchase Program and Dividends,
within Item 1 of this Quarterly Report on Form10-Q for further information.

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Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and

20

expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the second quarter of fiscal 2018,2019, other than those discussed in Note LNotes H, I and M to our Condensed Consolidated Financial Statements, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form10-K for the year ended January 28, 2018.

February 3, 2019.

Seasonality

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our revolver and our term loan each have a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During the second quarter of fiscal 2018,2019, we had no borrowings of $60,000,000 under ourthe revolver. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instruments would not materially affect our results of operations or cash flows.

In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of July 29, 2018,August 4, 2019, our investments, made primarily in interest bearing demand deposit accounts and money market funds, are stated at cost and approximate their fair values.

Foreign Currency Risks

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 1% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any foreign currency impact related to these international purchase transactions was not significant to us during the second quarter of fiscal 20182019 or the second quarter of fiscal 2017. However, since2018. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies wouldcould subject us to the risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.

In addition, our retail ande-commerce businesses in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in the second quarter ofor year-to-date fiscal 20182019 or the second quarter ofor year-to-date fiscal 2017,2018, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note H to our Condensed Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of July 29, 2018,August 4, 2019, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and
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communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

21

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report onForm 10-K for the fiscal year ended January 28, 2018February 3, 2019 for a description of the risks and uncertainties associated with our business. We are providing the following information regardingThere were no material changes that have occurred to the previously disclosedsuch risk factors in our Form10-K. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our Form10-K.

Recently proposed tariffs could result in increased prices and/or costs of goods and could adversely affect our results of operations.

Recently, the U.S. administration proposed tariffs on many items sourced from China, including certain furniture, accessories, furniture parts, and raw materials for domestic furniture manufacturing products imported into the U.S. While we expect there to be minimal financial impact on our fiscal 2018 results of operations if the proposed tariffs are enacted, it is difficult to quantify the impact until any tariffs are finalized. We may not be able to fully or substantially mitigate the impact of these tariffs, pass price increases on to our customers, or secure adequate alternative sources of products or materials. The tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could adversely affect customer sales, our cost of goods sold and results of operations.

current quarterly reporting period.

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

The following table provides information as of July 29, 2018August 4, 2019 with respect to shares of common stock we repurchased during the second quarter of fiscal 2018 under our $500,000,000 stock repurchase program.2019. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form10-Q.

Fiscal period  

Total Number

of Shares

Purchased1

   

Average Price

Paid Per Share

   

Total Number of

Shares Purchased as

Part of a Publicly

Announced Program1

   

Maximum Dollar Value

of Shares That May

Yet Be Purchased

Under the Program

 

April 30, 2018 – May 27, 2018

   245,134   $48.95    245,134   $469,407,000 

May 28, 2018 – June 24, 2018

   1,133,700   $56.04    1,133,700   $405,869,000 

June 25, 2018 – July 29, 2018

   1,030,603   $59.74    1,030,603   $344,302,000 

Total

   2,409,437   $56.90    2,409,437   $344,302,000 
                 
Fiscal period 
Total Number
of Shares
Purchased
1
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased as
Part of a Publicly
Announced Program
1
  
Maximum Dollar Value
of Shares That May
Yet Be Purchased
Under the Program
 
May 6, 2019 – June 2, 2019  223,925  $53.61   223,925  $677,963,000 
June 3, 2019 – June 30, 2019  188,106  $60.55   188,106  $666,573,000 
July 1, 2019 – August 4, 2019  223,495  $66.62   223,495  $651,685,000 
Total  635,526  $60.24   635,526  $651,685,000 
1

Excludes shares withheld for employee taxes upon vesting of stock-based awards.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

22

ITEM 5. OTHER INFORMATION

None.

23

Table of Contents

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit

Number

 

Exhibit Description

10.1+ 
Exhibit
Number
Exhibit Description
10.1+*
Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan as amended and restated (incorporated by referenceRestricted Stock Unit Award Agreement for Grants to Exhibit A to the Company’s Definitive Proxy Statement as filed as April 13, 2018, File No. 001-14077)Employees (for grants made after June 10, 2019)
31.1*
 
Certification of Chief Executive Officer, pursuant to Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended
31.2*
 
Certification of Chief Financial Officer, pursuant to Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended
32.1*
 
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* 
101.INS*
eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted under Exhibit 101).

*

Filed herewith.

+

Indicates a management contract or compensatory plan or arrangement.

*Filed herewith.
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SIGNATURE

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

WILLIAMS-SONOMA, INC.
By: 

/s/ Julie Whalen

 Julie Whalen
 Duly Authorized Officer and Chief Financial Officer

Date: September 7, 2018

12, 2019     

25