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 May 5,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 every Interactive Data File required to be submitted 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 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 
☐
Non-accelerated filer ☐
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 June 2,September 1, 2019, 78,603,36678,022,213 shares of the registrant’s Common Stock were outstanding.

Table of Contents
WILLIAMS-SONOMA, INC.

REPORT ON FORM10-Q

FOR THE QUARTER ENDED MAY 5,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

  1922 

Item 4.

Controls and Procedures

20
  PART II. OTHER INFORMATION
Item 4.
Controls and Procedures
22
   

Item 1.

PART II. OTHER INFORMATION
 

Legal Proceedings

  20

Item 1A.

Risk Factors

  20
Item 1.
Legal Proceedings
23 

Item 2.

 

Item 1A.
Risk Factors
23
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

  2123 

Item 3.

 

Item 3.
Defaults Upon Senior Securities

  2123 

Item 4.

Mine Safety Disclosures

  21

Item 5.

Other Information

  21 

Item 6.

4.		 

ExhibitsMine Safety Disclosures

  2223
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		 
In thousands, except per share amounts  

May 5,

2019

   

April 29,

2018

 

Net revenues

  $1,241,132   $1,203,000 

Cost of goods sold

   796,801    770,836 

Gross profit

   444,331    432,164 

Selling, general and administrative expenses

   370,199    365,614 

Operating income

   74,132    66,550 

Interest (income) expense, net

   2,253    1,201 

Earnings before income taxes

   71,879    65,349 

Income taxes

   19,223    20,181 

Net earnings

  $52,656   $45,168 

Basic earnings per share

  $0.67   $0.54 

Diluted earnings per share

  $0.66   $0.54 

Shares used in calculation of earnings per share:

    

Basic

   78,683    83,392 

Diluted

   79,867    84,174 

                 
 
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		 
In thousands  

May 5,

2019

  

April 29,

2018

 

Net earnings

  $    52,656  $     45,168 

Other comprehensive income (loss):

   

Foreign currency translation adjustments

   (3,009)   (1,145) 

Change in fair value of derivative financial instruments, net of tax of $74 and $68

   204   1,123 

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

   (67)   49 

Comprehensive income

  $49,784  $45,195 

                 
 
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.


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

In thousands, except per share amounts  

May 5,

2019

  

February 3,

2019

  

April 29,

2018

 

ASSETS

    

Current assets

    

Cash and cash equivalents

  $107,683  $338,954  $290,244 

Accounts receivable, net

   102,195   107,102   102,630 

Merchandise inventories, net

   1,155,427   1,124,992   1,052,892 

Prepaid expenses

   98,213   101,356   56,333 

Other current assets

   22,128   21,939   21,118 

Total current assets

   1,485,646   1,694,343   1,523,217 

Property and equipment, net

   916,030   929,635   926,320 

Operating leaseright-of-use assets

   1,200,972   —     —   

Deferred income taxes, net

   34,215   44,055   58,842 

Goodwill

   85,357   85,382   18,811

Other long-term assets, net

   66,145   59,429   129,715 

Total assets

  $3,788,365  $2,812,844  $2,656,905 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

  $385,646  $526,702  $393,025 

Accrued expenses

   109,169   163,559   99,823 

Gift card and other deferred revenue

   291,839   290,445   256,534 

Income taxes payable

   24,384   21,461   72,036 

Operating lease liabilities

   227,427   —     —   

Other current liabilities

   75,750   72,645   61,403 

Total current liabilities

   1,114,215   1,074,812   882,821 

Deferred rent and lease incentives

   30,536   201,374   204,599 

Long-term debt

   299,670   299,620   299,472 

Long-term operating lease liabilities

   1,139,625   —     —   

Other long-term liabilities

   82,551   81,324   72,779 

Total liabilities

   2,666,597   1,657,130   1,459,671 

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; 78,808, 78,813 and 83,222 shares issued and outstanding at May 5, 2019, February 3, 2019 and April 29, 2018, respectively

   788   789   833 

Additionalpaid-in capital

   571,772   581,900   564,685 

Retained earnings

   564,127   584,333   638,774 

Accumulated other comprehensive loss

   (13,945)   (11,073)   (6,755) 

Treasury stock, at cost: 14, 2 and 3 shares as of May 5, 2019, February 3, 2019 and April 29, 2018, respectively

   (974)   (235)   (303) 

Total stockholders’ equity

   1,121,768   1,155,714   1,197,234 

Total liabilities and stockholders’ equity

  $3,788,365  $2,812,844  $2,656,905 

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.


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

   

 

Common Stock

  

Additional
Paid-in

Capital

  

Retained

Earnings

  Accumulated
Other
Comprehensive
Income (Loss)		  Treasury
Stock		  

Total

Stockholders’

Equity

 
In thousands  Shares  Amount 

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 awards1

   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 plans1

   —     —     (332)   —     —     332   —   

Stock-based compensation expense

   —     —     18,376   —     —     —     18,376 

Dividends declared

   —     —     —     (39,549)   —     —     (39,549) 

Adoption of accounting pronouncements2

   —     —     —     (3,303)   —     —     (3,303) 

Balance at May 5, 2019

   78,808  $788  $571,772  $564,127  $(13,945)  $(974)  $1,121,768 
   

 

Common Stock

  

Additional
Paid-in

Capital

  

Retained

Earnings

  Accumulated
Other
Comprehensive
Income (Loss)		  Treasury
Stock		  

Total

Stockholders’

Equity

 
In thousands  Shares  Amount 

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 awards1

   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 plans1

   —     —     (290)   (358)   —     648   —   

Stock-based compensation expense

   —     —     12,811   —     —     —     12,811 

Dividends declared

   —     —     —     (36,877)   —     —     (36,877) 

Adoption of accounting pronouncements3

   —     —     —     17,688   —     —     17,688 

Balance at April 29, 2018

   83,222  $833  $564,685  $638,774  $(6,755)  $(303)  $1,197,234 
1

Amounts are shown net of shares withheld for employee taxes.

2

Relates to our adoption of ASU2016-02, Leases, in fiscal 2019. See Note A.

3

Primarily relates to our adoption of ASU2014-09, Revenue from Contracts with Customers, in fiscal 2018.

                             
 
 
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.


Table of Contents
WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

STOCKHOLDERS’ EQUITY

(Unaudited)

   Thirteen
Weeks Ended		 
In thousands  May 5,
2019		  April 29,
2018		 

Cash flows from operating activities:

   

Net earnings

  $52,656  $45,168 

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

   

Depreciation and amortization

   46,838   47,873 

(Gain) loss on disposal/impairment of assets

   (323)   414 

Amortization of deferred lease incentives

   (2,306)   (6,724) 

Non-cash lease expense

   51,596   —   

Deferred income taxes

   (4,126)   (3,241) 

Tax benefit related to stock-based awards

   14,898   6,126 

Stock-based compensation expense

   18,529   12,889 

Other

   69   64 

Changes in:

   

Accounts receivable

   4,684   (9,556) 

Merchandise inventories

   (31,460)   2,388 

Prepaid expenses and other assets

   (4,914)   (4,399) 

Accounts payable

   (144,399)   (76,823) 

Accrued expenses and other liabilities

   (49,196)   (32,047) 

Gift card and other deferred revenue

   1,558   4,815 

Deferred rent and lease incentives

   —     10,004 

Operating lease liabilities

   (55,099)   —   

Income taxes payable

   2,915   13,818 

Net cash (used in) provided by operating activities

   (98,080)   10,769 

Cash flows from investing activities:

   

Purchases of property and equipment

   (36,148)   (34,029) 

Other

   107   120 

Net cash used in investing activities

   (36,041)   (33,909) 

Cash flows from financing activities:

   

Repurchases of common stock

   (33,848)   (37,713) 

Payment of dividends

   (36,868)   (34,081) 

Tax withholdings related to stock-based awards

   (25,406)   (7,438) 

Net cash used in financing activities

   (96,122)   (79,232) 

Effect of exchange rates on cash and cash equivalents

   (1,028)   2,480 

Net decrease in cash and cash equivalents

   (231,271)   (99,892) 

Cash and cash equivalents at beginning of period

   338,954   390,136 

Cash and cash equivalents at end of period

  $107,683  $290,244 

                             
 
 
 
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 May 5,August 4, 2019 and AprilJuly 29, 2018, 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 thirteen
twenty-six
weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of 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 February 3, 2019.

The results of operations for the thirteen and
twenty-six
weeks ended May 5,August 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 February 3, 2019.

Reclassifications

Certain amounts reported in our Condensed Consolidated Balance Sheet as of April 29, 2018 have been reclassified in order to conform to the current period presentation. These reclassifications impacted goodwill and other long-term assets. There was no change to total current assets as a result of these reclassifications.

New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02,
Leases
, which requires lessees to recognize a
right-of-use
asset and an operating lease liability for virtually all leases. This ASU, as amended, was effective for us beginning in the first quarter of fiscal 2019. The adoption of thethis 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.billion on the first day of fiscal 2019. We also 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 thethis 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. 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
right-of-use
asset and a lease liability for short-term leases. The adoption of thethis ASU did not 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. 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 andOther—Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract.The
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 second anniversary 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 firstsecond quarter ofand for year-to-date fiscal 2019, we had borrowings of $
60,000,000
under the revolver (at a year-to-date weighted average interest rate of 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 no0 borrowings under the revolver. Additionally, as of May 5,August 4, 2019, $11,716,000$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 May 5,August 4, 2019, we had $300,000,000
outstanding under our term loan (at a year-to-date weighted average interest rate of 3.61%
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 borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1.0% for the term loan.

As of May 5,August 4, 2019, we were in compliance with our financial covenants under the credit facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 24, 2019.$70,000,000. The letter of credit facilities containscontain 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 May 5,August 4, 2019, an aggregate of $6,168,000$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 May 5,August 4, 2019, there were approximately 4,927,0005,345,000 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.

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 May 5,August 4, 2019, we recognized total stock-based compensation expense, as a component of selling, general and Apriladministrative 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 $18,529,000$
13,637,000
 and $12,889,000,$
26,526,000
, respectively.

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirteen
twenty-six
weeks ended May 5,August 4, 2019:

  Shares 

Shares
Balance at February 3, 2019

  
3,012,923
 

Granted

  953,459
1,000,469
 

Granted, with vesting subject to performance conditions

  235,156
238,786
 

Released

1
  
(1,020,670954,327
)

Cancelled

  
(73,482299,687
)

Balance at May 5,August 4, 2019

  3,107,386
2,998,164
 

Vested plus expected to vest at May 5,August 4, 2019

  2,506,509
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.

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 May 5, 2019

      

Basic

  $52,656    78,683   $0.67 

Effect of dilutive stock-based awards

     1,184   

Diluted

  $52,656    79,867   $0.66 

Thirteen weeks ended April 29, 2018

      

Basic

  $45,168    83,392   $0.54 

Effect of dilutive stock-based awards

     782   

Diluted

  $45,168    84,174   $0.54 

             
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 11,4005,259 and 29,99716,813 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended May 5,August 4, 2019, respectively, as their inclusion would be anti-dilutive. Stock-based awards of 17,179 and April15,986 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended July 29, 2018, respectively, as their inclusion would be anti-dilutive.

8
Table of Contents
NOTE E. SEGMENT REPORTING

We identify our operating segments according to how our business activities are managed and evaluated.

Prior to fiscal 2019, we managed
e-commerce
merchandise strategies, which included the results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, separately from our retail business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the
e-commerce
reportable segment. Also, prior to fiscal 2019, we managed retail merchandise strategies, which included the results of our retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, separately from our
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 businesses 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. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.

The following table summarizes our net revenues by brand for the thirteen and
twenty-six
weeks ended May 5,August 4, 2019 and AprilJuly 29, 2018. We have updated fiscal 2018 results to conform with the current year presentation.

   Thirteen Weeks Ended 
In thousands  May 5, 2019   April 29, 2018 

Pottery Barn

  $492,126   $490,372 

West Elm

   309,483    273,349 

Williams Sonoma

   194,894    200,977 

Pottery Barn Kids and Teen

   177,046    180,396 

Other1

   67,583    57,906 

Total2

  $1,241,132   $1,203,000 
                 
 
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 Mark and Graham.
1

Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.

2

Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $86.6$87.7 million and $79.4$80.7 million for the thirteen weeks ended May 5,August 4, 2019 and AprilJuly 29, 2018.

2018, respectively, and approximately $
174.3
million and $160.1million for the
twenty-six
weeks ended August 4,2019 and July 29, 2018, respectively.

Long-lived assets by geographic location are as follows:

In thousands  May 5, 2019   April 29, 2018 

U.S.

  $2,136,000   $1,074,177 

International

   166,719    59,511 

Total

  $2,302,719   $1,133,688 

         
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 May 5,August 4, 2019, we repurchased 593,096635,526 shares of our common stock at an average cost of $57.07$60.24 per share for a total cost of approximately $33,848,000. In March$
38,283
,000. During the
twenty-six
weeks ended August 4, 2019, we repurchased 1,228,622 shares of our Boardcommon stock at an average cost of Directors authorized an increase in our current stock repurchase program by an additional $500,000,000.$58.71 per share for a total cost of approximately $
72,131
,000
. As of May 5,August 4, 2019, there was $689,967,000$651,685,000 remaining under our current stock repurchase program. As of May 5,August 4, 2019, we held treasury stock of $974,000$
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 AprilJuly 29, 2018, we repurchased 731,930
2,409,437
shares of our common stock at an average cost of $51.53 $
56.90
per share for a total cost of approximately $37,713,000. As of April$
137,105,000
. During the
twenty-six
weeks ended July 29, 2018, there was $481,406,000 remaining underwe repurchased
3,141,367
shares of our currentcommon stock repurchase program.at an average cost of $
55.65
per share for a total cost of approximately $
174,818,000
. In addition, as of AprilJuly 29, 2018, we held treasury stock of $303,000$
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.

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 $0.48 $
0.48
and $0.43 per common share during the thirteen weeks ended May 5,August 4, 2019 and AprilJuly 29, 2018, respectively. In March 2019, our BoardWe declared cash dividends of Directors authorized a $0.05, or 11.6%, increase in our quarterly cash dividend, from $0.43 to $0.48$0.96 and $0.86 per common share subject to capital availability.during the
twenty-six
weeks ended August 4, 2019 and July 29, 2018, respectively. Our quarterly cash dividend may be limited or terminated at any time.

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have 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 in cost of goods sold. Based on the rates in effect as of May 5,August 4, 2019, we expect to reclassify a net
pre-tax
gain of approximately $439,000$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 May 5,August 4, 2019 and AprilJuly 29, 2018, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

In thousands  May 5, 2019   April 29, 2018 

Contracts designated as cash flow hedges

  $10,800   $28,500 

Contracts not designated as cash flow hedges

  $—    $52,276 

         
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 May 5,August 4, 2019 and AprilJuly 29, 2018.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and
twenty-six
weeks ended May 5,August 4, 2019 and AprilJuly 29, 2018,
pre-tax,
was as follows:

In thousands  May 5, 2019   April 29, 2018 

Net gain (loss) recognized in OCI

  $278   $1,191 

   May 5, 2019  April 29, 2018 
In thousands  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

  $796,801   $370,199  $770,836  $365,614 

Gain (loss) recognized in income

      

Derivatives designated as cash flow hedges

  $108   $—    $(52)  $(17) 

Derivatives not designated as hedging instruments

  $—     $(6)  $—    $2,760 

                                 
 
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  May 5, 2019   April 29, 2018 

Derivatives designated as cash flow hedges:

    

Other current assets

  $475   $460 

Other long-term assets

  $—     $79 

Other current liabilities

  $—     $(51) 

Derivatives not designated as hedging instruments:

    

Other current assets

  $—     $36 

         
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;

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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 May 5,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.

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 entered into are subject to credit risk-related contingent features or collateral requirements.

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 property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We 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 commensurate with the risk.

There were no transfers between Level 1, 2 or 3 categories during the thirteen and
twenty-six
weeks ended May 5,August 4, 2019 or AprilJuly 29, 2018.


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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

In thousands  

Foreign Currency

Translation

  

Cash Flow

Hedges

  

Accumulated Other

Comprehensive

Income (Loss)

 

Balance at 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 instruments1

   —     (67)   (67) 

Other comprehensive income (loss)

   (3,009)   137   (2,872) 

Balance at May 5, 2019

  $(14,268)  $323  $(13,945) 

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) 
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., 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.

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     

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 

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 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.

NOTE L. REVENUE

The majority of our revenues are generated from sales of merchandise to our customers through our
e-commerce
websites, our direct mail catalogs, or at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. The remainder of our revenues are primarily generated from sales to our franchisees and other wholesale transactions, breakage income related to stored-value cards, and incentives received from credit card issuers in connection with our private label 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 a discussion of our net revenues by operating segment.

Merchandise Sales

Revenues from the sale of our merchandise through our
e-commerce
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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Table of Contents
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 May 5,August 4, 2019 and July 29,2018, we recorded a liability for expected sales returns of approximately $30,154,000$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 $11,204,000$10,685,000 and $
11,036,000
 within other current assets in our Condensed Consolidated Balance Sheet.

Stored-value Cards

We issue stored-value cards that may be redeemed on future merchandise purchases. 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. 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 May 5,August 4, 2019, we held $298,557,000$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.

NOTE M. LEASES

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

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


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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 leaseslease costs for the thirteen and
twenty-six
weeks ended May 5,August 4, 2019 are as follows:

In thousands     

Operating lease costs

  $64,968 

Variable lease costs

   4,634 

Total lease costs

  $69,602 

         
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 thirteen and
twenty-six
weeks ended May 5,August 4, 2019.

Supplemental cash flow information related to our leases for the thirteen and
twenty-six
weeks ended May 5,August 4, 2019 are as follows:

In thousands     

Cash paid for amounts included in the measurement of operating lease liabilities

  $69,814 

Net additions toright-of-use assets

  $18,522 

         
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 May 5,August 4, 2019 are as follows:

Weighted average remaining lease term (years)

  7.71
7.55
 

Weighted average incremental borrowing rate

  3.88
3.86
%


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As of May 5,August 4, 2019, the future minimum lease payments under our operating lease liabilities are as follows:

In thousands     

Remaining fiscal 2019

  $212,392 

Fiscal 2020

   254,252 

Fiscal 2021

   221,022 

Fiscal 2022

   188,561 

Fiscal 2023

   158,676 

Fiscal 2024

   136,186 

Fiscal 2025 and thereafter

   426,080 

Total lease payments

   1,597,169 

Less interest

   (230,117) 

Total operating lease liability

   1,367,052 

Less current operating lease liability

   (227,427) 

Totalnon-current operating lease liability

  $1,139,625 

     
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 May 5,August 4, 2019 or AprilJuly 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, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form10-K for the year ended 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, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed throughe-commerce websites, direct-mail catalogs and 625623 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 May 5,August 4, 2019 (“firstsecond quarter of fiscal 2019”), as compared to the thirteen weeks ended AprilJuly 29, 2018 (“firstsecond quarter of fiscal 2018”) and the twenty-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”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude.

First

Second Quarter of Fiscal 2019 Financial Results

Net revenues in the firstsecond quarter of fiscal 2019 increased by $38,132,000,$95,640,000, or 3.2%7.5%, compared to the firstsecond quarter of fiscal 2018, with comparable brand revenue growth of 3.5%6.5%. This growth was primarily driven by West Elm, Pottery Barn and our emerging brands.Pottery Barn Kids and Teen. Net revenue growth included a 9.0%an 8.7% increase in international revenuesrevenue primarily related to our franchise operations.

In

West Elm our fastest growing brand, we had a strong quarter with comparable revenue growth accelerating to 17.5%, on top of 11.8%9.5% in the second quarter of fiscal 2018. These results were driven by stronge-commerce and broad-based strength execution across product categories.all our key growth strategies. In Pottery Barn, with a comparable revenue growth of 1.5% hadaccelerated to 4.2% and continued to be led by furniture, with strength in furniture and had momentum heading into summer in our outdoorproprietary upholstery business. In Pottery Barn Kids and Teen, had anothercomparable revenue growth was 3.7%. Our baby business continues to be an important growth initiative, and during the quarter, ofwe saw significant growth with particular strength in the baby business.across our back-to-school offerings and foundational furniture categories. Our emerging brands, Rejuvenation and Mark & Graham continued to expand their product offer anddrove another quarter of solid growth. In the new stores in Rejuvenation are performing well. Williams Sonoma brand, while we are disappointed with athe 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 1.6% had a disappointing first quarter driven by Easter, which did not perform to our expectations, and continued reductions in promotional activity.

Instant Pot last year. In the firstsecond quarter of fiscal 2019, diluted earnings per share was $0.66$0.79 (which included a $0.09 impact from employment-related expenses, primarily associated with severance, and a $0.06$0.07 impact related to Outward, Inc.), and a $0.01 impact from employment-related expenses) versus $0.54$0.62 in the firstsecond quarter of fiscal 2018 (which included a $0.06$0.05 impact related to Outward, Inc., a $0.04$0.05 impact related to impairment and early lease termination charges, a $0.03 impact associated with tax expense from U.S. Tax Reform, and a $0.03$0.02 impact related to other discrete items)from employment-related expenses). We also returned $70,716,000$76,868,000 to our stockholders through dividends and stock repurchases and dividends.

repurchases.

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

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

Another key highlightproject pipeline with more strategic partnerships across industry verticals.

Also, during the first quarter, waswe made substantial progress on our ongoing efforts to improve the ongoing improvement in customer experience. In technology innovation, we completedhave significantly expanded our technology experimentation agenda with the launch of many new capabilities over the last six months, across each of our machine-learning search engine across all brands, and improved our mobile site speed to deliver a faster and more compelling mobile experience.engaging, content-rich customer experiences. In our supply chain order visibility and operational improvements remain two of our top priorities and, during the firstthis quarter, we successfully completedlaunched furniture delivery scheduling capability which gives customers the migration of our order managementoption to schedule their delivery on their mobile devices. We added further enhancements such as email and fulfillment capabilitiesmobile notifications to a new platform, for all brands. We also fully redesigned 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 give customers andbe fully operational in September. And finally, our internal teamsin-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 accurate and granular viewdomestic production, which helps to mitigate the impact of their orders.

the China tariffs.

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

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through oure-commerce websites, direct mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label andco-branded credit cards.

Net revenues in the firstsecond quarter of fiscal 2019 increased by $38,132,000,$95,640,000, or 3.2%7.5%, compared to the firstsecond quarter of fiscal 2018, with comparable brand revenue growth of 3.5%6.5%. This growth was primarily driven by West 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.
Net revenues for year-to-date fiscal 2019 increased by $133,772,000, or 5.4%, compared to year-to-date fiscal 2018, with comparable brand revenue growth of 5.1%. This growth was primarily driven by West Elm, Pottery Barn and our emerging brands.franchise operations. Net revenue growth included a 9.0%an 8.8% increase in international revenuesrevenue primarily related to our franchise operations.

Comparable Brand Revenue

Comparable brand revenue includes 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 
Comparable brand revenue growth (decline)  

May 5,

2019

  

April 29,

2018

 

Pottery Barn

   1.5%  2.7% 

West Elm

   11.8%   9.0% 

Williams Sonoma

   (1.6%)   5.6% 

Pottery Barn Kids and Teen

   1.2%   5.3% 

Total1

   3.5%   5.5% 
                 
 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

Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.

STORE DATA

   Store Count   Average Leased Square
Footage Per Store		 
    February 3,
2019		   Openings   Closings  

May 5,

2019

   

April 29,

2018

   

May 5,

2019

   

April 29,

2018

 

Williams Sonoma

   220    2    (3)   219    224    6,800    6,800 

Pottery Barn

   205    —      —     205    203    14,100    13,900 

West Elm

   112    1    —     113    108    13,100    13,000 

Pottery Barn Kids

   78    —      —     78    84    7,500    7,400 

Rejuvenation

   10    —      —     10    8    8,500    8,800 

Total

   625    3    (3)   625    627    10,500    10,300 

Store selling square footage atperiod-end

 

      4,094,000    4,015,000 

Store leased square footage atperiod-end

 

            6,549,000    6,441,000 

                             
 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 
In thousands  

May 5,

2019

   

% Net

Revenues

  

April 29,

2018

   

% Net

Revenues

 

Cost of goods sold1

  $796,801    64.2%  $770,836    64.1% 
                                 
 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 $173,853$176,814,000 and $173,485$170,798,000 for the firstsecond quarter of fiscal 2019 and the firstsecond quarter of fiscal 2018, respectively, and $350,667,000 and $344,283,000 for year-to-date fiscal 2019 and year-to-date fiscal 2018, respectively.

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

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

First

Second Quarter of Fiscal 2019 vs. FirstSecond Quarter of Fiscal 2018

Cost of goods sold increased by $25,965,000,$75,721,000, or 3.4%9.3%, in the firstsecond quarter of fiscal 2019 compared to the firstsecond quarter of fiscal 2018. Cost of goods sold as a percentage of net revenues increased to 64.2%64.7% in the firstsecond quarter of fiscal 2019 from 64.1%63.6% in the firstsecond quarter of fiscal 2018. This increase 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.
Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018
Cost of goods sold increased by $101,686,000, or 6.4%, for year-to-date fiscal 2019 compared to year-to-date fiscal 2018. Cost of goods sold as a percentage of net revenues increased to 64.5% for year-to-date fiscal 2019 from 63.8% for year-to-date fiscal 2018. This increase 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 higher product margins.

trade, partially offset by the leverage of occupancy costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   Thirteen Weeks Ended 
In thousands  

May 5,

2019

   

% Net

Revenues

  

April 29,

2018

   

% Net

Revenues

 

Selling, general and administrative expenses

  $370,199    29.8%  $365,614    30.4% 

                                 
 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.

First

Second Quarter of Fiscal 2019 vs. FirstSecond Quarter of Fiscal 2018

Selling, general and administrative expenses increased by $4,585,000,$7,920,000, or 1.3%2.0%, in the firstsecond quarter of fiscal 2019 compared to the firstsecond quarter of fiscal 2018. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.8%29.0% in the firstsecond quarter of fiscal 2019 from 30.4%30.6% in the firstsecond quarter of fiscal 2018. This decrease as a percentage of net revenues was driven by the leverage of employment, advertising and general expenses driven by higher sales and the continued benefits of our cost savings initiatives across the business, as well as our overall expense discipline.
Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018
Selling, general and administrative expenses increased by $12,505,000, or 1.7%, for year-to-date fiscal 2019 compared to year-to-date fiscal 2018. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.4% for year-to-date fiscal 2019 from 30.5% for year-to-date fiscal 2018. This decrease as a percentage of net revenues was driven by the leverage of advertising, employment costs, partially offsetand general expenses driven by an increase in severance-related expenses.

higher sales and the continued benefits of our cost savings initiatives across the business, as well as our overall expense discipline.

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INCOME TAXES

The effective tax rate was 26.7%25.8% for the first quarter ofyear-to-date fiscal 2019, and 30.9%29.8% for the first quarteryear-to-date of fiscal 2018. Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provided us with up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act (“the Tax Act”) on our fiscal year ended January 28, 2018. The year-over-year decrease in the effective tax rate for the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 was primarily due to athe adjustment of the provisional transition tax and the adjustment to the re-measurement of our deferred tax liabilities under SAB 118 adjustment of approximately $2,871,000 to increase the transition tax under the Tax Act in the first quartertwo quarters of fiscal 2018.

LIQUIDITY AND CAPITAL RESOURCES

As of May 5,August 4, 2019, we held $107,683,000$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 $70,075,000$98,512,000 was held by our international 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 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”) 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. WeFor year-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 during the first quarter of fiscal 2019 or the first quarter of fiscal 2018.revolver. As of May 5,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 May 5,August 4, 2019, a total of $11,716,000$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 May 5,August 4, 2019, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which $6,168,000$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

For the first quarter ofyear-to-date fiscal 2019, net cash used in operating activities was $98,080,000$26,636,000 compared to net cash provided by operating activities of $10,769,000$120,123,000 for the first quarter ofyear-to-date fiscal 2018. For the first quarter ofyear-to-date fiscal 2019, net cash used in operating activities was primarily attributable to a decrease in accounts payable and accrued expenses and other liabilities and an increase in our merchandise inventories, partially offset by net earnings adjusted fornon-cash items. Net cash used in operating activities in the first quarter offor year-to-date fiscal 2019 compared to net cash provided by operating activities in the first quarter offor year-to-date fiscal 2018 was primarily due to a year-over-year reduction in accounts payable and an increase in merchandise inventories.

due to the timing of payments.

Cash Flows from Investing Activities

For the first quarter ofyear-to-date fiscal 2019, net cash used in investing activities was $36,041,000$76,719,000 compared to $33,909,000$79,508,000 for the first quarter ofyear-to-date fiscal 2018, and was primarily attributable to purchases of property and equipment.

Cash Flows from Financing Activities

For the first quarter ofyear-to-date fiscal 2019, net cash used in financing activities was $96,122,000$113,471,000 compared to $79,232,000$257,484,000 for the first quarter ofyear-to-date fiscal 2018. For the first quarter ofyear-to-date fiscal 2019, net cash used in financing activities was primarily attributable to the payment of dividends, repurchases of common stock and tax withholdings related to stock-based awards.awards, partially offset by borrowings under our revolver. The increasedecrease in cash used in financing activities in the first quarter offor year-to-date fiscal 2019 compared to the first quarter ofyear-to-date fiscal 2018 was primarily attributable to a decrease in repurchases of common stock, as well as an increase in tax withholdings related to increased vesting of stock-based awards.

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 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 firstsecond quarter of fiscal 2019, other than those discussed in Notes 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 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 firstsecond quarter of fiscal 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 May 5,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 firstsecond quarter of fiscal 2019 or the firstsecond quarter of fiscal 2018. 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 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 firstsecond quarter ofor year-to-date fiscal 2019 or the firstsecond quarter ofor year-to-date fiscal 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 May 5,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.

Changes in Internal Control Over Financial Reporting

During the first quarter of fiscal 2019, we implemented controls related to the adoption of ASC 842 and the related financial statement reporting.

There werewas no other changeschange 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 February 3, 2019 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.

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

In March 2019, our Board of Directors authorized an increase in the amount available for repurchase under our existing stock repurchase plan by an additional $500,000,000.

The following table provides information as of May 5,August 4, 2019 with respect to shares of common stock we repurchased during the firstsecond quarter of fiscal 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

 

February 4, 2019 – March 3, 2019

   156,930   $55.86    156,930   $215,050,000 

March 4, 2019 – March 31, 2019

   179,349   $57.44    179,349   $704,749,000 

April 1, 2019 – May 5, 2019

   256,817   $57.56    256,817   $689,967,000 

Total

   593,096   $57.07    593,096   $689,967,000 
                 
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.

ITEM 5. OTHER INFORMATION

None.

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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 Restricted Stock Unit Award Agreement for Grants toNon-Employee Directors 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).

+

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: June 14,September 12, 2019

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