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, 2019.~~

3, 2020.

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

For the transition period from
to

Commission File Number:

001-14077

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)


Delaware		94-2203880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

421-7900

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

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

☒

☐

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

☒

☐

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”~~filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

~~Non-accelerated~~ ~~filer~~	☐	~~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

☐

☒

As of ~~June 2, 2019, 78,603,366~~May 31, 2020, 77,758,981 shares of the registrant’s Common Stock were outstanding.

Table of Contents

WILLIAMS-SONOMA, INC.

REPORT ON FORM

10-Q

FOR THE QUARTER ENDED MAY ~~5, 2019~~

3, 2020

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			15

~~Item 3.~~
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			19 21

~~Item 4.~~	~~Controls and Procedures~~			20

	~~PART II. OTHER INFORMATION~~
Item 4.	Controls and Procedures			21


~~Item 1.~~ PART II. OTHER INFORMATION	~~Legal Proceedings~~
		20

~~Item 1A.~~	~~Risk Factors~~			20
Item 1.	Legal Proceedings			22

~~Item 2.~~
Item 1A.	Risk Factors			22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			21 24

~~Item 3.~~
Item 3.	Defaults Upon Senior Securities			21 24

~~Item 4.~~	~~Mine Safety Disclosures~~			21

~~Item 5.~~	~~Other Information~~			21

Item 6. 4.	~~Exhibits~~Mine Safety Disclosures			22 24

Item 5.	Other Information			24

Item 6.	Exhibits			25

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

In thousands, except per share amounts

May 3,
2020

May 5,
2019

Net revenues
$
1,235,203
$
1,241,132

Cost of goods sold

820,943

796,801

Gross profit

414,260

444,331

Selling, general and administrative expenses

365,615

370,199

Operating income

48,645

74,132

Interest expense, net

2,159

2,253

Earnings before income taxes

46,486

71,879

Income taxes

11,063

19,223

Net earnings
$
35,423
$
52,656

Basic earnings per share
$
0.46
$
0.67

Diluted earnings per share
$
0.45
$
0.66

Shares used in calculation of earnings per share:

Basic

77,262

78,683

Diluted

78,399

79,867

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

In thousands

May 3,
2020

May 5,
2019

Net earnings
$

35,423
$

52,656

Other comprehensive income (loss):

Foreign currency translation adjustments

(5,276
)
(3,009
)
Change in fair value of derivative financial instruments, net of tax of $196 and $74

549

204

Reclassification adjustment for realized (gain) on derivative financial instruments, net of tax of $13 and $24

(37
)
(67
)
Comprehensive income
$
30,659
$
49,784

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

May 3,
2020

February 2,
2020

May 5,
2019

ASSETS

Current assets

Cash and cash equivalents
$
861,002
$
432,162
$
107,683

Accounts receivable, net

104,829

111,737

102,195

Merchandise inventories, net

1,070,681

1,100,544

1,155,427

Prepaid expenses

90,433

90,426

98,213

Other current assets

22,099

20,766

22,128

Total current assets

2,149,044

1,755,635

1,485,646

Property and equipment, net

907,219

929,038

916,030

Operating lease
right-of-use
assets

1,175,402

1,166,383

1,200,972

Deferred income taxes, net

33,320

47,977

34,215

Goodwill

85,335

85,343

85,357

Other long-term assets, net

67,795

69,666

66,145

Total assets
$
4,418,115
$
4,054,042
$
3,788,365

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable
$
423,375
$
521,235
$
385,646

Accrued expenses

137,495

175,003

109,169

Gift card and other deferred revenue

299,353

289,613

291,839

Income taxes payable

24,049

22,501

24,384

Current debt

487,823

299,818

—

Operating lease liabilities

224,541

227,923

227,427

Other current liabilities

85,458

73,462

75,750

Total current liabilities

1,682,094

1,609,555

1,114,215

Deferred rent and lease incentives

26,254

27,659

30,536

Long-term debt

299,868

—

299,670

Long-term operating lease liabilities

1,109,473

1,094,579

1,139,625

Other long-term liabilities

81,497

86,389

82,551

Total liabilities

3,199,186

2,818,182

2,666,597

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; 77,759, 77,137 and 78,808 shares issued and outstanding at May 3, 2020, February 2, 2020 and May 5, 2019, respectively

778

772

788

Additional
paid-in
capital

596,184

605,822

571,772

Retained earnings

641,917

644,794

564,127

Accumulated other comprehensive loss

(19,351
)
(14,587
)
(13,945
)
Treasury stock, at cost: 8, 14 and 14 shares as of May 3, 2020, February 2, 2020 and May 5, 2019, respectively

(599
)
(941
)
(974
)
Total stockholders’ equity

1,218,929

1,235,860

1,121,768

Total liabilities and stockholders’ equity
$
4,418,115
$
4,054,042
$
3,788,365

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


	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance at February 2, 2020		77,137		$	772		$	605,822		$	644,794		$	(14,587	)	$	(941	)	$	1,235,860
Net earnings		—			—			—			35,423			—			—			35,423
Foreign currency translation adjustments		—			—			—			—			(5,276	)		—			(5,276	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			549			—			549
Reclassification adjustment for realized (gain) on derivative financial instruments, net of tax		—			—			—			—			(37	)		—			(37	)
Conversion/release of stock-based awards 1		622			6			(28,747	)		—			—			(171	)		(28,912	)
Reissuance of treasury stock under stock-based compensation plans 1		—			—			(499	)		(14	)		—			513			—
Stock-based compensation expense		—			—			19,608			—			—			—			19,608
Dividends declared		—			—			—			(38,286	)		—			—			(38,286	)
Balance at May 3, 2020		77,759		$	778		$	596,184		$	641,917		$	(19,351	)	$	(599	)	$	1,218,929

	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ 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) 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

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.~~

³	~~Primarily relates to our adoption of ASU2014-09,~~ ~~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)

   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

Thirteen
Weeks Ended

In thousands

May 3,
2020

May 5,
2019

Cash flows from operating activities:

Net earnings
$
35,423
$
52,656

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

Depreciation and amortization

46,224

46,838

(Gain) loss on disposal/impairment of assets

16,185

(323
)
Amortization of deferred lease incentives

(1,405
)
(2,306
)
Non-cash
lease expense

54,262

51,596

Deferred income taxes

(2,585
)
(4,126
)
Tax benefit related to stock-based awards

12,039

14,898

Stock-based compensation expense

19,703

18,529

Other

129

69

Changes in:

Accounts receivable

8,950

4,684

Merchandise inventories

28,513

(31,460
)
Prepaid expenses and other assets

(215
)
(4,914
)
Accounts payable

(92,871
)
(144,399
)
Accrued expenses and other liabilities

(29,050
)
(49,196
)
Gift card and other deferred revenue

9,960

1,558

Operating lease liabilities

(57,629
)
(55,099
)
Income taxes payable

6,240

2,915

Net cash provided by (used in) operating activities

53,873

(98,080
)
Cash flows from investing activities:

Purchases of property and equipment

(42,321
)
(36,148
)
Other

242

107

Net cash used in investing activities

(42,079
)
(36,041
)
Cash flows from financing activities:

Borrowings under revolving line of credit

487,823

—

Payment of dividends

(39,391
)
(36,868
)
Tax withholdings related to stock-based awards

(28,912
)
(25,406
)
Repurchases of common stock

—

(33,848
)
Net cash provided by (used in) financing activities

419,520

(96,122
)
Effect of exchange rates on cash and cash equivalents

(2,474
)
(1,028
)
Net increase (decrease) in cash and cash equivalents

428,840

(231,271
)
Cash and cash equivalents at beginning of period

432,162

338,954

Cash and cash equivalents at end of period
$
861,002
$
107,683

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 3, 2020 and May 5, 2019, ~~and April 29, 2018,~~ the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, the Condensed Consolidated Statements of Stockholders’ Equity and the Condensed Consolidated Statements of Cash Flows for the thirteen weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of February ~~3, 2019,~~2, 2020, 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.~~

2, 2020.

The results of operations for the thirteen weeks ended May ~~5, 2019~~3, 2020 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 3,2, 2020.

COVID-19

On March 11, 2020, the World Health Organization declared a novel strain of the coronavirus

(COVID-19)

to be a global pandemic and recommended containment and mitigation measures worldwide. In March 2020, we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the

COVID-19

coronavirus pandemic. While subsequent to quarter end we have announced the reopening of over 350 stores, we have extended such closures in locations where retail restrictions have not been lifted. The preventative or protective actions that governments and businesses around the world have taken to contain the spread of

COVID-19

have resulted in a period of disruption that has materially reduced customer store traffic, and thus our retail store revenues, which comprised approximately 44% of our net revenues in fiscal 2019.

~~Reclassifications~~

~~Certain amounts reported in~~ Throughout the first quarter, we continued to operate our ~~Condensed Consolidated Balance Sheet as of April 29, 2018 have been reclassified in order~~

e-commerce

sites and distribution centers and continued to ~~conform~~deliver products to ~~the current period presentation. These reclassifications impacted goodwill and other long-term assets. There was no change to total current assets as~~our customers.

As a result of ~~these reclassifications.~~

~~New Accounting Pronouncements~~

~~In February 2016,~~the

COVID-19

pandemic and the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2016-02,~~ ~~Leases, which requires lessees~~resulting closure of all of our retail locations, we identified certain assets whose carrying value was now deemed to ~~recognize aright-of-use~~ ~~asset~~have been partially impaired. Given the material reductions in our retail store revenues and an operating ~~lease liability for virtually all leases. This ASU, as amended, was effective for us beginning in~~income during the first quarter of fiscal ~~2019. The adoption~~2020, we evaluated our estimates and assumptions related to our stores’ future sales and cash flows, and performed a comprehensive review of our stores’ long-lived assets for impairment, including both property and equipment and operating lease

right-of-use

assets, at an individual store level. Key assumptions used in estimating fair value of our store assets in connection with our impairment analyses are sales growth, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation, and the overall economics of the ~~ASU resulted in an increase in total long-term assets and total liabilities~~retail industry. Our assumptions account for the estimated impact from the recent closure 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. We also recorded an approximate $3.3 million, net of tax, reduction to the opening balance of retained earnings resulting from impairment of certain long-lived assets upon adoption of the 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~~retail stores and reflect the

re-opening

of our retail stores throughout fiscal 2020 as allowed by the local governmental requirements in the states in which we operate. As a result, during the first quarter of fiscal 2020, we recorded store asset impairment charges within selling, general and administrative expenses of approximately $11,825,000 related to property and equipment and $3,795,000 related to operating lease

right-of-use

assets.

In addition, during the first quarter of fiscal 2020, we recorded charges of approximately $11,378,000 representing write

offs for inventory with minor damage that we could not liquidate through our outlets due to ~~recognize aright-of-use~~ ~~asset and a lease liability~~store closures resulting from

COVID-19.

We test goodwill for ~~short-term leases. The adoption~~impairment annually (on the first day of the ~~ASU did~~fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. As of May 3, 2020 and May 5, 2019, we had goodwill of $85,335,000 and $85,357,000, respectively, primarily related to our fiscal 2017 acquisition of Outward and to our fiscal 2011 acquisition of Rejuvenation, Inc. As a result of the

COVID-19

pandemic and the resulting closure of all of our retail locations during the quarter, we evaluated the need to test goodwill for potential impairment. Our most recently completed qualitative goodwill impairment assessment indicated that the fair values of our reporting units significantly exceeded their carrying values. Further, we currently do not ~~materially~~expect the impact of

COVID-19

to significantly affect the long-term estimates or assumptions of revenue and operating income growth, nor the long-term strategies of our ~~Condensed Consolidated Statement~~brands, considered in our most recently completed goodwill assessment. Therefore, we currently do not consider the pandemic to be a triggering event requiring the testing of ~~Earnings.~~

goodwill between annual tests, and accordingly, we have not recorded any goodwill impairment charges during the first quarter of fiscal 2020.

As of the end of the quarter, we had finalized rent concession negotiations on a limited portion of our stores and therefore any impact on our financials was immaterial for the first quarter of fiscal 2020. We expect most outstanding lease concession negotiations to be finalized during the second quarter of fiscal 2020.

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In ~~August 2017,~~response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act provides tax provisions and other stimulus measures to affected companies. The impact of the CARES Act was not material to our result of operations and financial position for the first quarter of fiscal 2020. We are continuing to assess the financial relief available to us under the CARES Act and expect to record any further impact during the second quarter of fiscal 2020.

These events and changes in circumstances, including a more prolonged and/or severe

COVID-19

pandemic, may lead to increased impairment risk in the future; therefore, we will continue to monitor events and changes in circumstances that may indicate the need to test our long-lived assets, including goodwill, for potential impairment.

New Accounting Pronouncements

In June 2016, the FASB issuedASU ~~2017-12,~~ ~~Derivatives and Hedging: Targeted Improvements~~
2016-13,
Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. This standard is intended to ~~Accounting for Hedging Activities~~ ~~(Topic 815),~~ ~~which expands and refines hedge accounting forboth non-financial and~~ ~~financial risk components and aligns~~introduce a revised approach to the recognition and ~~presentation~~measurement 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 earningscredit losses, emphasizing an updated model based 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.~~expected losses rather than incurred losses. This ASU was effective for us in the first quarter of fiscal ~~2019.~~2020. 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 ~~(Subtopic~~

(Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing ArrangementThat 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 was effective for us in the first quarter of fiscal 2020. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2019, the FASB issued ASU

2019-12,

Simplifying the Accounting for Income Taxes

(Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a

step-up

in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 202

, and early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash ~~flows.~~

flow.

NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”) and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders’ option, 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.

During the first quarter of fiscal 2020, we drew down $487,823,000 on the revolver (at a weighted average interest rate of 2.00%). Additionally, as of May 3, 2020, $12,177,000 in issued but undrawn standby letters of credit were outstanding under the revolver, for a total outstanding balance on the revolver of $500,000,000. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs. During the first quarter of fiscal 2019, we had no borrowings under the revolver. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to the first and second ~~anniversary~~anniversaries of the closing date of the amendment of the credit facility, elect to extend the maturity date for an additional year, subject to lender approval.

During the first quarter of fiscal 2019 and fiscal 2018, we had no borrowings under the revolver. Additionally, as of May 5, 2019, $11,716,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of May ~~5, 2019,~~3, 2020, we had $300,000,000 outstanding under our term loan (at a weighted average interest rate of ~~3.61%~~2.55%).

On May 11, 2020, we entered into an amendment to our credit facility (the “Credit Facility Amendment”), which, among other changes, extends the maturity date and amends the interest rate of the term loan, modifies covenants under the credit facility, and maintains the maturity date and interest rate of the revolver. The term loan now matures

on January 8, ~~2021,~~ 2022,

at which time all outstanding principal and any accrued interest must be repaid.

~~The~~ Based on this Credit Facility Amendment, borrowings under our term loan have been presented as long-term debt in our Condensed Consolidated Balance Sheet as of May 3, 2020. Costs incurred in connection with the issuance of the term loan are presented as a reduction to the carrying value of the debt in our Condensed Consolidated Balance Sheet.

Under the Credit Facility Amendment, the interest ~~rates under~~rate applicable to the credit facility ~~are~~is variable, and may be elected by us as: (i) the London Interbank Offer Rate (“LIBOR”) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and ~~1.0%~~1.75% to ~~2.0%~~2.5% for the term ~~loan;~~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%0.75% to ~~1.0%~~1.5% for the term loan.

In addition to the Credit Facility Amendment, subsequent to quarter end, we entered into a new agreement (the

“364-Day

Credit Agreement”) for an additional $200,000,000 unsecured revolving line of credit.

Unde

r the

364-Day

Credit Agreement, the

interest

rate is variable and may be elected by us as: (i) LIBOR plus an applicable margin based on our leverage ratio ranging from 1.75% to 2.5% or (ii) a base rate as defined in the agreement, plus an applicable margin ranging from 0.75% to 1.5%. The

364-Day

Credit Agreement matures on May 10, 2021.

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The Credit Facility Amendment and the

364-Day

Credit Agreement contain certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and rent expense to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of May ~~5, 2019,~~3, 2020, we were in compliance with our ~~financial~~ covenants under ~~the~~our credit ~~facility~~facilities 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.~~23, 2020. The letter of credit facilities ~~contains~~contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility plus an applicable margin based on our leverage ratio. As of May ~~5, 2019,~~3, 2020, an aggregate of ~~$6,168,000~~$7,099,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 21, ~~2020.~~

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, 2019,~~3, 2020, there were approximately ~~4,927,000~~2,479,000 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 from events including, but not limited to, retirement, merger or a similar corporate event.

Stock Awards

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

Stock-Based Compensation Expense

During the thirteen weeks ended May 3, 2020 and May 5, 2019, ~~and April 29, 2018,~~ we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $19,703,000 and $18,529,000, ~~and $12,889,000,~~ respectively.

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Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirteen weeks ended May ~~5, 2019:~~

3, 2020:


	Shares
Balance at February ~~3, 2019~~ 2, 2020		~~3,012,923~~ 2,884,194
Granted 1		~~953,459~~ 1,080,400
~~Granted, with vesting subject to performance conditions~~ Released 2		~~235,156~~ (954,419	)
~~Released~~ Cancelled		(~~1,020,670~~53,699	)
~~Cancelled~~		~~(73,482~~	)
Balance at May ~~5, 2019~~ 3, 2020		~~3,107,386~~ 2,956,476
Vested plus expected to vest at May ~~5, 2019~~ 3, 2020		~~2,506,509~~ 2,390,537

1	Excludes 267,000 restricted stock units for which the accounting grant date has not yet been determined and consequently for which no expense has been recognized. These awards reduced the shares available for future grant under the Plan.

2	Excludes 170,308 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 May 3, 2020
Basic	$	35,423		77,262	$	0.46
Effect of dilutive stock-based awards				1,137
Diluted	$	35,423		78,399	$	0.45
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

Stock-based awards of ~~11,400~~8,000 and ~~29,997~~11,000 were excluded from the computation of diluted earnings per share for the thirteen weeks ended May 3, 2020 and May 5, 2019, ~~and April 29, 2018,~~ respectively, as their inclusion would be anti-dilutive.

NOTE E. SEGMENT REPORTING

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

~~Prior to fiscal 2019, we managede-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 oure-commerce~~ ~~and retail businesses and to better align with how we manage our omni-channel business, we have combined the results of oure-commerce~~ ~~and retail merchandise strategies at the overall brand level.~~ Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.

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The following table summarizes our net revenues by brand for the thirteen weeks ended May 3, 2020 and May 5, ~~2019 and April 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
2019.


	Thirteen Weeks Ended

In thousands	May 3, 2020		May 5, 2019
Pottery Barn	$	479,615	$	492,126
West Elm		315,430		309,483
Williams Sonoma		199,302		194,894
Pottery Barn Kids and Teen		188,552		177,046
Other 1		52,304		67,583
Total 2	$	1,235,203	$	1,241,132

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

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~~$55.2 million and ~~$79.4~~$86.6 million for the thirteen weeks ended May 3, 2020 and May 5, ~~2019 and April 29, 2018.~~

2019.

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	May 3, 2020		May 5, 2019
U.S.	$	2,117,469	$	2,136,000
International		151,602		166,719
Total	$	2,269,071	$	2,302,719

NOTE F. COMMITMENTS AND CONTINGENCIES

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

NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended May 3, 2020, we did 0t repurchase any shares of our common stock and as of May 3, 2020, there

was $574,982,000 remaining under our current stock repurchase program. As of May 3, 2020, we held treasury stock of $599,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

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

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

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 ~~and $0.43~~ per common share during the thirteen weeks ended May 3, 2020 and May 5, 2019, ~~and April 29, 2018,~~ respectively. ~~In March 2019, our Board of Directors authorized a $0.05, or 11.6%, increase in our quarterly cash dividend, from $0.43 to $0.48 per common share, subject to capital availability.~~ Our quarterly cash dividend may be limited or terminated at any time.

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail and

e-commerce

businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a

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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~~the 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 the 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, 2019,~~3, 2020, we expect to reclassify a net

pre-tax

gain of

approximately ~~$439,000~~ $

702,000

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.

As of May 3, 2020 and May 5, 2019, ~~and April 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	May 3, 2020		May 5, 2019
Contracts designated as cash flow hedges	$	11,600	$	10,800
Contracts not designated as cash flow hedges	$	—	$	—

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. NoNaN gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen weeks ended May 3, 2020 and May 5, ~~2019 and April 29, 2018.~~

2019.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen weeks ended May 3, 2020 and May 5, 2019, ~~and April 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


In thousands	May 3, 2020		May 5, 2019
Net gain recognized in OCI	$	745	$	278


	May 3, 2020				May 5, 2019
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	$	820,943	$	365,615	$	796,801	$	370,199
Gain (loss) recognized in income
Derivatives designated as cash flow hedges	$	50	$	—	$	108	$	—
Derivatives not designated as hedging instruments	$	—	$	2	$	—	$	(6	)

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

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In thousands	May 3, 2020		May 5, 2019
Derivatives designated as cash flow hedges:
Other current assets	$	698	$	475

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210,

Balance Sheet

, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

NOTE I. FAIR VALUE MEASUREMENTS

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

We determine the fair value of financial and

non-financial

assets and liabilities using the fair value hierarchy established by ASC 820,

Fair Value Measurement

, which defines three levels of inputs that may be used to measure fair value, as follows:

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

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

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

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

~~Long-term~~

Debt

As of May ~~5, 2019,~~3, 2020, the fair value of our ~~long-term~~ debt, which consists of outstanding borrowings under our revolver and term loan, approximates its carrying value, as the instruments are relatively short-term in nature and the interest rate under the term loan is based on observable Level 2 inputs, which consist primarily of quoted 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 we 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.

The significant unobservable inputs used in the fair value measurement of our store assets are sales growth, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate , inflation and the overall economics of the retail industry. Significant fluctuations in any of these inputs individually could significantly impact our measurement of fair value.

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During the first quarter of fiscal 2020, we recognized impairment charges of $11,825,000 related to the impairment of property and equipment and $3,795,000 related to the impairment of operating lease

right-of-use

assets, due to the impact of

COVID-19.

During the first quarter of fiscal 2019, 0 impairment charges were recognized.

There were no transfers ~~between~~in and out of Level ~~1, 2 or~~ 3 categories during the thirteen weeks ended May 3, 2020 or May 5, ~~2019 or April 29, 2018.~~

2019.

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 )


In thousands	Foreign Currency Translation			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at February 2, 2020	$	(14,593	)	$	6		$	(14,587	)
Foreign currency translation adjustments		(5,276	)		—			(5,276	)
Change in fair value of derivative financial instruments		—			549			549
Reclassification adjustment for realized (gain) on derivative financial instruments 1		—			(37	)		(37	)
Other comprehensive income (loss)		(5,276	)		512			(4,764	)
Balance at May 3, 2020	$	(19,869	)	$	518		$	(19,351	)
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) on derivative financial instruments 1		—			(67	)		(67	)
Other comprehensive income (loss)		(3,009	)		137			(2,872	)
Balance at May 5, 2019	$	(14,268	)	$	323		$	(13,945	)

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

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NOTE K. ~~ACQUISITION OF OUTWARD, INC.~~

~~On December 1, 2017, we acquired Outward, Inc., a3-D~~ imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,812,000 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

~~Intangible assets acquired primarily represent3-D~~ imaging data and core intellectual property which are being amortized over a useful life of four 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 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 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. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of May 3, 2020 and May 5, 2019, we recorded a liability for expected sales returns of approximately $33,357,000 and $30,154,000 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $11,603,000 and $11,204,000 within other current assets in our Condensed Consolidated Balance Sheet.

Stored-value Cards

We issue stored-value cards that may be redeemed on future merchandise purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards (breakage) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately 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.

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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 3, 2020 and May 5, 2019, we held $301,031,000 and $298,557,000 in gift card and other deferred revenue on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized into revenue within the next 12 months.

~~NOTE M. LEASES~~

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

Table 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 andnon-lease~~ ~~components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record aright-of-use~~ ~~asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability andright-of-use~~ asset when a change to our future minimum lease payments occurs. Key assumptions and judgements included in the determination of the lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal and termination options.

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

~~Discount Rate~~

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

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

In thousands
Operating lease costs
   $ 64,968
Variable lease costs
   4,634
Total lease costs
   $ 69,602

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

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

In thousands
Cash paid for amounts included in the measurement of operating lease liabilities
   $ 69,814
Net additions toright-of-use assets
   $ 18,522

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


~~Weighted average remaining lease term (years)~~	~~7.71~~
~~Weighted average incremental borrowing rate~~	~~3.88~~	%

~~As of May 5, 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

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

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 weeks ended May 5, 2019 or April 29, 2018.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form

10-Q

contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: the impact of the

COVID-19

pandemic on our business, results of operations and financial condition, 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 cash

on-hand,

in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document

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and our Annual Report on Form

10-K

for the year ended February ~~3, 2019,~~2, 2020, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

OVERVIEW

Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through

e-commerce

websites, direct-mail catalogs and ~~625~~616 stores. These brands are also part of The Key Rewards, our

free-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 as

e-commerce

websites in certain locations. In ~~December~~ 2017, we acquired Outward, Inc., a

3-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, 2019~~3, 2020 (“first quarter of fiscal ~~2019”~~2020”), as compared to the thirteen weeks ended ~~April 29, 2018~~May 5, 2019 (“first quarter of fiscal ~~2018”~~2019”), 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.

COVID-19

On March 11, 2020, the World Health Organization declared a novel strain of the coronavirus
(COVID-19)
to be a global pandemic and recommended containment and mitigation measures worldwide. In March 2020, we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the
COVID-19
coronavirus pandemic. While subsequent to quarter end we have announced the reopening of over 350 stores, we have extended such closures in locations where retail restrictions have not been lifted. Throughout the first quarter, we continued to operate our
e-commerce
sites and distribution centers and continued to deliver products to our customers.

First Quarter of Fiscal ~~2019~~2020 Financial Results

Net revenues in the first quarter of fiscal ~~2019 increased~~2020 decreased by ~~$38,132,000,~~$5,929,000, or ~~3.2%~~0.5%, compared to the first quarter of fiscal ~~2018,~~2019, with comparable brand revenue growth of ~~3.5%~~2.6%. This ~~growth~~slight decline was primarily driven by ~~West Elm, Pottery Barn and~~the temporary closure of all 616 of our ~~emerging brands. Net revenue growth~~retail stores throughout the back half of the quarter due to

COVID-19,

almost entirely offset by an increase in

e-commerce

revenues. The decrease in net revenues also included a ~~9.0% increase~~36.3% decrease in international revenues primarily related to our company-owned and franchise ~~operations.~~

operations, driven by temporary retail store closures.

For the first quarter of fiscal 2020, we delivered positive comparable brand revenue growth in almost all of our brands. In ~~West Elm, our fastest growing~~the Williams Sonoma brand, we ~~had comparable revenue~~saw growth ~~of 11.8% driven by stronge-commerce~~ ~~and broad-based strength across product categories. Pottery Barn,~~in nearly all merchandise categories, with ~~a comparable revenue growth of 1.5% had~~particular strength in ~~furniture~~electrics, cookware, food and ~~had momentum heading into summer~~housewares. Growth in ~~our outdoor business.~~ Pottery Barn Kids and Teen ~~had another~~accelerated even further this quarter. As a business that generated the majority of its revenues in fiscal 2019 from online sales, we were primed to meet the surge in demand for children’s home furnishings as schools and childcare centers closed nationwide, and parents turned to us for study and playroom solutions to keep their children occupied at home. In West Elm, furniture continued to lead our growth in the first quarter with strong demand for our expanded outdoor assortment, as well as home office furniture. In the Pottery Barn brand, despite a decline in comparable brand revenues for the quarter, we began the quarter with positive trends in all product divisions and our

on-line

growth initiatives continued to contribute incrementally to the brand.

Across the company, we implemented planned reductions in selling, general and administrative expenses, inventory and capital expenditures and we will continue to prioritize investments in strategic priorities. In order to further bolster our financial flexibility, we also increased our liquidity position. As of May 3, 2020, we now have over $860,000,000 in cash as a result of our performance and our decision to draw down on our existing revolving line of credit. Additionally, subsequent to quarter end, we also were able to obtain additional liquidity through the extension of our $300,000,000 term loan and an additional $200,000,000 in an unsecured

364-day

revolving line of credit.

For the first quarter of ~~growth,~~fiscal 2020, diluted earnings per share was $0.45 (which included a $0.15 impact related to store asset impairments, an $0.11 impact related to inventory write-offs, and a $0.03 impact associated with ~~particular strength~~the acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.) versus $0.66 in the baby business. Our emerging brands, Rejuvenation and Mark & Graham continued to expand their product offer and the new stores in Rejuvenation are performing well. Williams Sonoma, with a comparable revenue decline of 1.6% had a disappointing first quarter driven by Easter, which did not perform to our expectations, and continued reductions in promotional activity.

In the first quarter of fiscal 2019 ~~diluted earnings per share was $0.66~~ (which included a $0.09 impact ~~from~~related to certain employment-related expenses ~~primarily associated with severance,~~ and a $0.06 impact ~~related to~~associated with acquisition-related compensation expense, amortization of acquired intangibles as well as the operations of Outward, Inc.) ~~versus $0.54 in the first quarter~~.

Table of ~~fiscal 2018 (which included a $0.06 impact related~~Contents

Our ability to Outward, Inc., a $0.04 impact associated with tax expense from U.S. Tax Reform and a $0.03 impact related to other discrete items). We also returned $70,716,000 to our stockholders through stock repurchases and dividends.

~~Operationally~~grow revenue during the ~~first quarter of fiscal 2019, we also made progress across our strategic initiatives of driving growth through cross-brand initiatives and improving~~

COVID-19

pandemic speaks to the ~~customer experience through technology innovation and operational improvements.~~

~~Our cross-brand initiatives continue to build as an important source of revenue growth and customer acquisition. The Key Rewards is one~~power of our ~~most valuable assets with total membership having grown significantly since~~omnichannel model, and our organizational agility rooted in a longstanding culture of innovation. We are particularly encouraged to see that our

e-commerce

growth has been fueled by new customers and previously retail-only customers. To maximize demand online, we have enhanced our digital experience and expanded our services, including Design Chat, Virtual Design Appointment and Ask the ~~launch of this loyalty program two years ago. Our Design Crew Room Planner also continues~~Expert, leveraging our Outward Inc. 3D visualization technology, and redeployed our retail associates to ~~gain traction, where total rooms created increased over the first quarter, as we doubled~~serve our ~~product coverage and enhanced the user experience with more accurate and intuitive design features. And~~customers in ~~our newest division, Williams-Sonoma Inc.Business-to-Business,~~ we are thrilled with the progress that our team has already made, including putting in place the organizational infrastructure to support our growth, building a cross-brand, cross-functional support team, and establishing standardized processes to facilitate large-scale contract projects.

~~Another~~these new ways. A key ~~highlight during the first quarter was the ongoing improvement in customer experience. In technology innovation, we completed the launch~~part of our ~~machine-learning search engine across all brands~~success is our omni services, including Buy Online Pick Up in Store and ~~improved~~we have accelerated our ~~mobile site~~ speed to ~~deliver~~market in a ~~faster~~number of digital innovations to enhance the convenience of shopping online. We have also redeployed more resources to digital content creation and are producing more ~~compelling mobile experience. In~~live events to engage and interact with our supply chain, order visibility and operational improvements remain two of our top priorities and, during the first quarter, we successfully completed the migration of our order management and fulfillment capabilities to a new platform, for all brands. We also fully redesigned our order tracking capability to give customers ~~and our internal teams a more accurate and granular view of their orders.~~

~~For~~in real time.

Looking Ahead

Throughout the remainder of fiscal ~~2019~~2020, we ~~plan~~will continue to ~~drive~~invest in strengthening our digital-first model, enhancing the convenience of our online business. We will also continue to prioritize the growth initiatives that we laid out at the beginning of last year, including West Elm and our cross-brand initiatives ~~that leverage~~The Key and Business to Business.

The long-term impact of

COVID-19

on our ~~platform,~~business, results of operations and ~~we plan to bring technology innovation~~financial condition remains uncertain. A prolonged pandemic could further interrupt our operations, our vendors’ operations, the economy and ~~continued improvement in customer experience. We~~overall consumer spending, which could have a ~~strong foundation to support the execution~~material impact on our revenues, results of operations, and cash flows. For more information on risks associated with

COVID-19,

please see “Risk Factors” in Part I, Item 1A of our ~~initiatives throughout~~Annual Report on Form

10-K

for the ~~remainder of~~ fiscal ~~2019 and beyond,~~year ended February 2, 2020, as well as in Note A to ~~deliver long-term shareholder value.~~

our Condensed Consolidated Financial Statements and Part II, Item 1A of this Quarterly Report on Form

10-Q.

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through our

e-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 and

co-branded

credit cards.

COVID-19,

almost entirely offset by an increase in

e-commerce

revenues. The decrease in net revenues also included a ~~9.0% increase~~36.3% decrease in international revenues primarily related to our company-owned and franchise ~~operations.~~

operations, driven by temporary retail store closures.

Comparable Brand Revenue

Comparable brand revenue includes comparable store sales and

e-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 typically 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. Comparable stores that were temporarily closed on March 17, 2020 throughout the quarter due to

COVID-19

were not excluded from the comparable stores calculation. 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 and

e-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
Comparable brand revenue growth (decline)	May 3, 2020			May 5, 2019
Pottery Barn		(1.1	%)		1.5	%
West Elm		3.3	%		11.8	%
Williams Sonoma		5.4	%		(1.6	%)
Pottery Barn Kids and Teen		8.5	%		1.2	%
Total 1		2.6	%		3.5	%

¹	Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.

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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
	February 2, 2020		Openings		Closings			May 3, 2020 1		May 5, 2019		May 3, 2020		May 5, 2019
Williams Sonoma		211		1		—			212		219		6,900		6,800
Pottery Barn		201		—		—			201		205		14,400		14,100
West Elm		118		2		(1	)		119		113		13,200		13,100
Pottery Barn Kids		74		—		—			74		78		7,700		7,500
Rejuvenation		10		—		—			10		10		8,500		8,500
Total		614		3		(1	)		616		625		10,700		10,500
Store selling square footage at period-end													4,148,000		4,094,000
Store leased square footage at period-end													6,580,000		6,549,000

1	Store counts as of May 3,2020 do not reflect those stores temporarily closed due to COVID-19.

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
In thousands	May 3, 2020		% Net Revenues			May 5, 2019		% Net Revenues
Cost of goods sold 1	$	820,943		66.5	%	$	796,801		64.2	%

¹	Includes total occupancy expenses of ~~$173,853~~$174,873,000 and ~~$173,485~~$173,853,000 for the first quarter of fiscal ~~2019~~2020 and the first quarter of fiscal ~~2018,~~2019, respectively.

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses,

freight-to-store

expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials.

Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include

non-occupancy

related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution related administrative expenses, are recorded in selling, general and administrative expenses.

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First Quarter of Fiscal ~~2019~~2020 vs. First Quarter of Fiscal ~~2018~~

2019

Cost of goods sold increased by ~~$25,965,000,~~$24,142,000, or ~~3.4%~~3.0%, in the first quarter of fiscal ~~2019~~2020 compared to the first quarter of fiscal ~~2018.~~2019. Cost of goods sold as a percentage of net revenues increased to 66.5% in the first quarter of fiscal 2020 from 64.2% in the first quarter of fiscal ~~2019 from 64.1% in the first quarter of fiscal 2018.~~2019. This increase was primarily driven by increased shipping costs due to a significantly greater portion of our total revenues being generated from

e-commerce,

the year-over year impact from incremental China tariffs, expenses for inventory write-offs of approximately $11,378,000 due to the closure of our outlet stores in the first quarter of 2020, as well as the deleverage of occupancy costs due to the closure of all of our retail stores during the back half of the quarter. This increase was partially offset by ~~the leverage of occupancy costs and~~ higher product margins.

from less promotions during the first quarter of fiscal 2020.

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
In thousands	May 3, 2020		% Net Revenues			May 5, 2019		% Net Revenues
Selling, general and administrative expenses	$	365,615		29.6	%	$	370,199		29.8	%

Selling, general and administrative expenses consist of

non-occupancy

related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

First Quarter of Fiscal ~~2019~~2020 vs. First Quarter of Fiscal ~~2018~~

2019

Selling, general and administrative expenses ~~increased~~decreased by ~~$4,585,000,~~$4,584,000, or ~~1.3%~~1.2%, in the first quarter of fiscal ~~2019~~2020 compared to the first quarter of fiscal ~~2018.~~2019. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.6% in the first quarter of fiscal 2020 from 29.8% in the first quarter of fiscal ~~2019 from 30.4% in the first quarter of fiscal 2018.~~2019. This decrease as a percentage of net revenues was driven by the leverage of advertising ~~and employment~~ costs due to the ongoing shift in our advertising spend from catalog to more efficient digital initiatives, as well as stronger returns on our advertising investments, cost reductions across the business in response to the impact of

COVID-19,

as well as severance-related expenses recorded during the first quarter of fiscal 2019 that did not recur in fiscal 2020, partially offset by ~~an increase in severance-related expenses.~~

store asset impairment charges of approximately $15,620,000 due to the impact of

COVID-19

on our retail stores.

INCOME TAXES

The effective tax rate was 23.8% for the first quarter of fiscal 2020, and 26.7% for the first quarter of fiscal 2019, and 30.9% for the first quarter 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, 2018.2019. The decrease in the ~~effective~~ tax rate ~~for the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018 was~~is primarily due to an excess tax benefit from stock-based compensation in fiscal 2020 compared to a ~~SAB 118 adjustment~~deficiency of ~~approximately $2,871,000 to increase~~ the ~~transition~~ tax ~~under the Tax Act~~benefit in ~~the first quarter of~~ fiscal ~~2018.~~

2019.

LIQUIDITY AND CAPITAL RESOURCES

As of May ~~5, 2019,~~3, 2020, we held ~~$107,683,000~~$861,002,000 in cash and cash equivalents, the majority of which was held in ~~interest bearing~~interest-bearing demand deposit accounts and money market funds, and of which ~~$70,075,000~~$72,764,000 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,~~2020, we plan to use our cash resources to fund our inventory and ~~inventory related~~inventory-related purchases, employment-related costs, advertising and marketing initiatives, property and equipment purchases ~~stock repurchases~~ and dividend payments. ~~In addition to our cash balances on hand, we~~We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”), and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or to 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. As a precautionary measure to maximize our liquidity and to increase our available cash on hand in the event of a protracted

COVID-19

pandemic, during the first quarter of fiscal 2020, we drew down $487,823,000 on our revolving line of credit, for an outstanding balance on our revolver of $500,000,000 as of May 3, 2020. We had no borrowings under the revolver during the first quarter of fiscal ~~2019 or the first quarter of fiscal 2018.~~2019. As of May ~~5, 2019,~~3, 2020, 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, 2019,~~3, 2020, a total of ~~$11,716,000~~$12,177,000 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.~~

programs

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In order to further strengthen our liquidity position, maximize our balance sheet and maintain financial flexibility, in May 2020, we entered into an amendment to our credit facility which, among other changes, extends the maturity date and amends the interest rate of the term loan, modifies covenants under the credit facility, and maintains the maturity date and interest rate of the revolver. Under the credit facility amendment, the term loan now matures on January 8, 2022, at which time all outstanding principal and any accrued interest must be repaid. Additionally, subsequent to quarter end we entered into a new agreement for an additional $200,000,000 unsecured 364-day revolving line of credit.

As of May ~~5, 2019,~~3, 2020, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which ~~$6,168,000~~$7,099,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title.

The Credit Facility Amendment and the

364-Day

Credit Agreement contain certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and rent expense to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. We are currently in compliance with ~~all of~~ our financial covenants under ~~the~~our credit ~~facility~~facilities and, based on our current projections, we expect to remain in compliance throughout the next 12 months. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.

Cash Flows from Operating Activities

For the first quarter of fiscal ~~2019,~~2020, net cash provided by operating activities was $53,873,000 compared to net cash used in operating activities ~~was~~of $98,080,000 ~~compared to~~for the first quarter of fiscal 2019. For the first quarter of fiscal 2020, net cash provided by operating activities ~~of $10,769,000~~was primarily attributable to net earnings adjusted for

non-cash

items and a decrease in merchandise inventories, as well as, a decrease in accounts payable due to cost containment measures throughout the quarter. Net cash provided by operating activities in the first quarter of fiscal ~~2018. For the first quarter of fiscal 2019,~~2020 improved compared to 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 for~~non-cash~~ ~~items. Net~~ cash used in operating activities in the first quarter of fiscal 2019, ~~compared to net cash provided by operating activities in the first quarter of fiscal 2018 was~~ primarily due to a year-over-year reduction in ~~accounts payable~~merchandise inventories and an increase in ~~merchandise inventories.~~

accounts payable and accrued expenses.

Cash Flows from Investing Activities

For the first quarter of fiscal ~~2019,~~2020, net cash used in investing activities was ~~$36,041,000~~$42,079,000 compared to ~~$33,909,000~~$36,041,000 for the first quarter of fiscal ~~2018,~~2019, and was primarily attributable to purchases of property and equipment.

Cash Flows from Financing Activities

For the first quarter of fiscal ~~2019,~~2020, net cash provided by financing activities was $419,520,000 compared to net cash used in financing activities ~~was~~of $96,122,000 ~~compared to $79,232,000~~ for the first quarter of fiscal ~~2018.~~2019. For the first quarter of fiscal ~~2019,~~2020, net cash ~~used in~~provided by financing activities was primarily attributable to borrowings under our revolving line of credit partially offset by the payment of dividends, ~~repurchases of common stock~~ and tax withholdings related to stock-based awards. The increase in cash ~~used in~~provided by financing activities in the first quarter of fiscal ~~2019~~2020 compared to the use of cash in the first quarter of fiscal ~~2018~~2019 was primarily attributable to ~~an increase~~borrowings under the revolving line of credit and a reduction in ~~tax withholdings related to increased vesting of stock-based awards.~~

stock repurchases.

Stock Repurchase Program and Dividends

See Note G to our Condensed Consolidated Financial Statements,

Stock Repurchase Program and Dividends,

within Item 1 of this Quarterly Report on Form

10-Q

for further information.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the first quarter of fiscal ~~2019, other than those discussed in Notes I and M to our Condensed Consolidated Financial Statements,~~2020, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form

10-K

for the year ended February ~~3, 2019.~~

2, 2020.

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.

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Contractual Obligations, Commitments, Contingencies and

Off-balance

Sheet Arrangements

Except as described in Note B of Part I, Item 1, there were no material changes during the quarter to the Company’s contractual obligations, commitments, contingencies and

off-balance

sheet arrangements that are described in Part II, Item 7 of the Company’s Annual Report on Form

10-K

for the fiscal year ended February 2, 2020, which is incorporated herein by reference.

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 first quarter of fiscal ~~2019,~~2020, we ~~had no borrowings~~drew down $487,823,000 on our revolving line of credit, for an outstanding balance on our revolver of $500,000,000. Additionally, we have $300,000,000 outstanding under our ~~revolver.~~term loan and a new $200,000,000 unsecured revolving line of credit that has not been drawn upon. 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, 2019,~~3, 2020, 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%2% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any foreign currency impact related to these international purchase transactions was not significant to us during the first quarter of fiscal ~~2019~~2020 or the first quarter of fiscal ~~2018.~~2019. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.

In addition, our businesses in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in the first quarter of fiscal ~~2019~~2020 or the first quarter of fiscal ~~2018,~~2019, 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, 2019,~~3, 2020, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

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

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

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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~~2, 2020 for a description of the risks and uncertainties associated with our business. ~~There were~~We are providing the following information regarding changes that have occurred to the previously disclosed risk factors in our Form

10-K.

Except for such additional information, we believe there have been no material changes ~~to such~~from the risk factors previously disclosed in our Form

10-K.

Our business has been and may continue to be materially impacted by the

COVID-19

pandemic, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

Our business has been and may continue to be materially impacted by the

COVID-19

pandemic, which has negatively affected the U.S. and global economies, disrupted businesses and financial markets, and led to significant travel and transportation restrictions, mandatory closures of

non-essential

retailers and other businesses, and orders to

“shelter-in-place”.

The preventative or protective actions that governments and businesses around the world have taken to contain the spread of

COVID-19

have resulted in a period of disruption that has and may continue to negatively impact our retail store revenues, which comprised approximately 44% of our net revenues in fiscal 2019. In March 2020, we temporarily closed all of our retail stores and have extended such closures in locations where retail restrictions had not been lifted. While we have begun to

re-open

stores in specific locations consistent with government guidelines, there is significant uncertainty around our customers’ willingness to visit retail stores even after they are reopened. Further, while we have implemented strict safety protocols based on Center for Disease Control and Prevention and government recommendations in stores that we have

re-opened,

there is no guarantee that such protocols will be effective, and any virus-related illnesses linked or alleged to be linked to our stores, whether accurate or not, may negatively affect our reputation, operating results and/or financial condition.

Although to date, the impact of our store closures on our retail store revenues has been predominantly offset by growth in our

e-commerce

business, there is no guarantee that such growth will continue if the recent economic downturn continues or deteriorates further due to the

COVID-19

pandemic, and results in decreased consumer spending in the ~~current quarterly reporting period.~~

markets in which we operate. Further, we have and may continue to record store asset impairment charges and write-offs due to store closures, which may affect our operating results.

We have also implemented work-from-home policies for certain employees, which continue to be in effect. While such policies have not significantly impacted productivity or disrupted our business to date, over a prolonged period time, such policies could adversely impact our ability to conduct our business in the ordinary course.

Governmental mandates, illness or the absence of a substantial number of distribution center employees may require that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers from delivering packages to our customers and our stores, which could complicate or prevent us from fulfilling

e-commerce

orders and, once some or all of our stores reopen, could complicate or prevent our ability to supply merchandise to our stores. As of the date of this report, all our distribution centers remain open and operational, and we are not experiencing material disruptions in the delivery of our products despite the temporary closure of one of our distribution centers in April 2020.

Further,

COVID-19

related containment efforts and illnesses could also impact our vendors who manufacture or deliver our merchandise to us or our customers, which could adversely affect our ability to acquire and sell our merchandise, thus adversely affecting our results of operations, cash flows and liquidity.

While the extent of the economic impact of

COVID-19

and the duration of that impact may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which has impacted the value of our common stock. In addition, a recession or long-term market correction, resulting from the spread of

COVID-19

could in the future materially impact the value of our common stock over the long-term, impact our access to capital and affect our business in the near and long-term.

We currently believe that our available cash, cash equivalents and cash flow from operations will be sufficient to finance our operations and expected capital requirements for at least the next 12 months unless we experience a material decline in revenue relating to the

COVID-19

pandemic. However, we might experience periods during which we encounter additional cash needs, and we

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might need additional external funding to support our operations. To maximize our liquidity and increase our available cash on hand in the event of a protracted

COVID-19

pandemic, as previously disclosed, on March 23, 2020 we drew down $488,000,000 on our revolving line of credit, for an outstanding balance of $500,000,000 as of the end of the first quarter of fiscal 2020. In addition, on May 11, 2020, we entered into an agreement to amend the Credit Facility for our $300,000,000 unsecured term loan facility to extend its maturity date by one year to and also entered into a

364-Day

Credit Agreement for an additional $200,000,000 unsecured revolving line of credit. If we are unable to access additional credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results. Further, additional borrowings on our revolving line of credit has resulted or will result in us incurring additional interest expense, which would negatively affect our earnings.

The

COVID-19

pandemic continues to rapidly evolve. The ultimate impact of the

COVID-19

pandemic on our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, such as the severity and transmission rate of the disease, the extent and effectiveness of containment actions, particularly as areas are reopened, and the impact of these and other factors on our stores, offices, employees, distributors, vendors and customers. If we are not able to respond to and manage the impact of such events effectively, our business, operating results, financial condition and cash flows could be adversely affected.

Please see Note A to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about the potential impact of the

COVID-19

pandemic on our business, and the actual operational and financial impacts that we have experienced to date.

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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, 2019 with respect to shares of common stock we repurchased during the first quarter of fiscal 2019. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form~~10-Q.~~

Fiscal period
Total Number
of Shares
Purchased¹

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of a Publicly
Announced 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

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.

There were no repurchases of common stock in the first quarter of fiscal 2020. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form

10-Q.

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+*		~~Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants toNon-Employee~~ ~~Directors~~
31.1* Exhibit Number				Exhibit Description
	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*
	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*
	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*
	32.2*			Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		~~XBRL Instance Document~~
101.SCH*		~~XBRL Taxonomy Extension Schema Document~~
101.CAL*	101*		~~XBRL Taxonomy Extension Calculation Linkbase Document~~	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 3, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags
101.DEF*		~~XBRL Taxonomy Extension Definition Linkbase Document~~
101.LAB*		~~XBRL Taxonomy Extension Label Linkbase Document~~
101.PRE*	104*			Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Presentation Linkbase Document~~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:~~
WILLIAMS-SONOMA, INC.

By:		/s/ Julie Whalen
		Julie Whalen
		Duly Authorized Officer and Chief Financial Officer

Date: June ~~14, 2019~~

5, 2020


	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
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


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	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
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


In thousands
Operating lease costs	$	64,968
Variable lease costs		4,634
Total lease costs	$	69,602


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
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
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


	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	%


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