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WILLIAMS SONOMA INC - Quarter Report: 2014 November (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended November 2, 2014.

or

 

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

For the transition period from                      to                     

Commission File Number: 001-14077

 

 

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2203880

(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)

 

 

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  x    No  ¨

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of November 30, 2014, 92,089,110 shares of the registrant’s Common Stock were outstanding.

 

 

 


Table of Contents

WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 2, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

         PAGE  

Item 1.

  Financial Statements      2   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      19   

Item 4.

  Controls and Procedures      20   
  PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      20   

Item 1A.

  Risk Factors      20   

Item 2.

  Unregistered Sales of Equity Securities And Use of Proceeds      20   

Item 3.

  Defaults Upon Senior Securities      21   

Item 4.

  Mine Safety Disclosures      21   

Item 5.

  Other Information      21   

Item 6.

  Exhibits      21   

 

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ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
Dollars and shares in thousands, except per share amounts    November 2,
2014
     November 3,
2013
     November 2,
2014
     November 3,
2013
 

Net revenues

   $   1,143,162       $   1,051,548       $ 3,156,594       $ 2,921,565   

Cost of goods sold

     711,755         646,160         1,974,681         1,813,068   

Gross profit

     431,407         405,388         1,181,913         1,108,497   

Selling, general and administrative expenses

     326,687         312,894         917,531         874,134   

Operating income

     104,720         92,494         264,382         234,363   

Interest (income) expense, net

     117         (103      88         (417

Earnings before income taxes

     104,603         92,597         264,294         234,780   

Income taxes

     39,695         35,878         102,477         89,676   

Net earnings

   $ 64,908       $ 56,719       $ 161,817       $ 145,104   

Basic earnings per share

   $ 0.70       $ 0.59       $ 1.72       $ 1.49   

Diluted earnings per share

   $ 0.68       $ 0.58       $ 1.69       $ 1.46   

Shares used in calculation of earnings per share:

           

Basic

     93,067         95,453         93,862         97,080   

Diluted

     94,920         97,863         95,603         99,075   

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
Dollars in thousands    November 2,
2014
    November 3,
2013
     November 2,
2014
    November 3,
2013
 

Net earnings

   $ 64,908      $ 56,719         $  161,817        $  145,104   

Other comprehensive income (loss):

         

Foreign currency translation adjustments

     (2,880     941         (937     (3,555

Changes in fair value of derivative financial instruments, net of tax

     351        119         144        242   

Reclassification adjustment for realized gains on derivative financial instruments

     (7     (31      (527     (31

Comprehensive income

   $ 62,372      $ 57,748         $  160,497        $  141,760   

See Notes to Condensed Consolidated Financial Statements.

 

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

Dollars and shares in thousands, except per share amounts    November 2,
2014
    February 2,
2014
    November 3,
2013
 

ASSETS

      

Current assets

      

Cash and cash equivalents

   $ 107,703      $ 330,121      $ 128,759   

Restricted cash

     0        14,289        14,283   

Accounts receivable, net

     63,664        60,330        74,886   

Merchandise inventories, net

     979,719        813,160        898,625   

Prepaid catalog expenses

     39,116        33,556        40,613   

Prepaid expenses

     56,517        35,309        49,317   

Deferred income taxes, net

     121,380        121,486        99,003   

Other assets

     14,816        10,852        11,698   

Total current assets

       1,382,915          1,419,103          1,317,184   

Property and equipment, net

     866,670        849,293        843,563   

Non-current deferred income taxes, net

     4,142        13,824        10,931   

Other assets, net

     50,220        54,514        54,764   

Total assets

   $ 2,303,947      $ 2,336,734      $ 2,226,442   

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities

      

Accounts payable

   $ 411,232      $ 404,791      $ 433,926   

Accrued salaries, benefits and other

     117,410        138,181        110,116   

Customer deposits

     265,058        228,193        244,609   

Borrowings under revolving line of credit

     90,000        0        0   

Income taxes payable

     4,750        49,365        2,897   

Current portion of long-term debt

     1,968        1,785        1,793   

Other liabilities

     46,134        38,781        36,137   

Total current liabilities

     936,552        861,096        829,478   

Deferred rent and lease incentives

     168,078        157,856        165,445   

Long-term debt

     0        1,968        1,968   

Other long-term obligations

     62,942        59,812        59,506   

Total liabilities

     1,167,572        1,080,732        1,056,397   

Commitments and contingencies

      

Stockholders’ equity

      

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

     0        0        0   

Common stock: $.01 par value; 253,125 shares authorized; 92,219, 94,049 and 94,379 shares issued and outstanding at November 2, 2014, February 2, 2014 and November 3, 2013, respectively

     923        941        944   

Additional paid-in capital

     519,783        522,595        515,463   

Retained earnings

     612,611        729,043        646,450   

Accumulated other comprehensive income

     5,203        6,524        10,289   

Treasury stock, at cost

     (2,145     (3,101     (3,101

Total stockholders’ equity

     1,136,375        1,256,002        1,170,045   

Total liabilities and stockholders’ equity

   $ 2,303,947      $ 2,336,734      $ 2,226,442   

See Notes to Condensed Consolidated Financial Statements.

 

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         Thirty-Nine Weeks Ended      
Dollars in thousands   

November 2,

2014

   

November 3,

2013

 

Cash flows from operating activities:

    

Net earnings

   $ 161,817      $ 145,104   

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

    

Depreciation and amortization

     121,135        111,412   

Loss on sale/disposal/impairment of assets

     1,581        1,737   

Amortization of deferred lease incentives

     (18,577     (19,055

Deferred income taxes

     (13,031     (10,722

Tax benefit related to stock-based awards

     49,451        14,393   

Excess tax benefit related to stock-based awards

     (24,408     (6,617

Stock-based compensation expense

     34,729        28,440   

Other

     352        0   

Changes in:

    

Accounts receivable

     (4,455     (13,498

Merchandise inventories

     (165,839     (258,876

Prepaid catalog expenses

     (5,560     (3,382

Prepaid expenses and other assets

     (22,000     (28,251

Accounts payable

     8,193        163,592   

Accrued salaries, benefits and other current and long-term liabilities

     (12,242     12,017   

Customer deposits

     36,897        37,519   

Deferred rent and lease incentives

     18,392        13,833   

Income taxes payable

     (44,634     (38,971

Net cash provided by operating activities

     121,801        148,675   

Cash flows from investing activities:

    

Purchases of property and equipment

     (131,670     (145,236

Restricted cash receipts

     14,289        1,772   

Proceeds from insurance reimbursements

     964        1,418   

Other

     241        45   

Net cash used in investing activities

     (116,176     (142,001

Cash flows from financing activities:

    

Repurchase of common stock

     (195,235     (216,369

Payment of dividends

     (95,267     (82,030

Borrowings under revolving line of credit

     90,000        0   

Tax withholdings related to stock-based awards

     (53,440     (14,162

Excess tax benefit related to stock-based awards

     24,408        6,617   

Net proceeds related to stock-based awards

     3,511        6,541   

Repayments of long-term obligations

     (1,785     (1,716

Other

     (4     (42

Net cash used in financing activities

     (227,812     (301,161

Effect of exchange rates on cash and cash equivalents

     (231     (1,309

Net decrease in cash and cash equivalents

     (222,418     (295,796

Cash and cash equivalents at beginning of period

     330,121        424,555   

Cash and cash equivalents at end of period

   $ 107,703      $ 128,759   

See Notes to Condensed Consolidated Financial Statements.

 

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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 November 2, 2014 and November 3, 2013, the Condensed Consolidated Statements of Earnings and the Condensed Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks then ended, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of February 2, 2014, 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 2, 2014.

The results of operations for the thirteen and thirty-nine weeks ended November 2, 2014 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 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 2, 2014.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. This ASU is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently assessing the potential impact of this ASU on our Condensed Consolidated Financial Statements.

NOTE B. 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 25,760,000 shares. As of November 2, 2014, there were approximately 4,367,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee members of the board of directors of the company (the “Board”) or any parent or subsidiary. Annual grants are limited to 1,000,000 shares covered by option awards and 400,000 shares covered by stock awards on a per person basis. All grants of option awards made under the Plan have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards and stock-awards granted to employees generally vest over a period of four years for service-based awards, and three years for certain performance-based awards. Certain option awards, stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Option and 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

 

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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). Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Stock-Based Compensation Expense

We measure and record stock-based compensation expense for all employee stock-based awards using a fair value method. During the thirteen and thirty-nine weeks ended November 2, 2014, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $12,538,000 and $34,729,000, respectively. During the thirteen and thirty-nine weeks ended November 3, 2013, we recognized total stock-based compensation expense of $9,968,000 and $28,440,000, respectively.

Stock Options

The following table summarizes our stock option activity during the thirty-nine weeks ended November 2, 2014:

 

      Shares  

Balance at February 2, 2014

     222,488   

Granted

     0   

Exercised

     (101,988

Cancelled

     0   

Balance at November 2, 2014 (100% vested)

     120,500   

Stock-Settled Stock Appreciation Rights

The following table summarizes our stock-settled stock appreciation right activity during the thirty-nine weeks ended November 2, 2014:

 

      Shares  

Balance at February 2, 2014

     1,859,762   

Granted

     0   

Converted into common stock

     (524,507

Cancelled

     (23,950

Balance at November 2, 2014

     1,311,305   

Vested at November 2, 2014

     1,033,209   

Vested plus expected to vest at November 2, 2014

     1,234,382   

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirty-nine weeks ended November 2, 2014:

 

      Shares  

Balance at February 2, 2014

     3,079,651   

Granted

     944,084   

Released

     (1,533,261

Cancelled

     (169,218

Balance at November 2, 2014

     2,321,256   

Vested plus expected to vest at November 2, 2014

     1,577,492   

 

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NOTE C. 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 for the period plus common stock equivalents. Common stock equivalents consist of shares subject to option awards with exercise prices less than or equal to the average market price of our common stock for the period, as well as restricted stock units, 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:

 

Dollars and amounts in thousands, except per share amounts    Net Earnings      Weighted
Average Shares
     Earnings
Per Share
 

Thirteen weeks ended November 2, 2014

        

Basic

   $ 64,908         93,067       $ 0.70   

Effect of dilutive stock-based awards

              1,853            

Diluted

   $ 64,908         94,920       $ 0.68   

Thirteen weeks ended November 3, 2013

        

Basic

   $ 56,719         95,453       $ 0.59   

Effect of dilutive stock-based awards

              2,410            

Diluted

   $ 56,719         97,863       $ 0.58   

Thirty-Nine weeks ended November 2, 2014

        

Basic

   $ 161,817         93,862       $ 1.72   

Effect of dilutive stock-based awards

              1,741            

Diluted

   $ 161,817         95,603       $ 1.69   

Thirty-Nine weeks ended November 3, 2013

        

Basic

   $ 145,104         97,080       $ 1.49   

Effect of dilutive stock-based awards

              1,995            

Diluted

   $ 145,104         99,075       $ 1.46   

There were no stock-based awards excluded from the computation of diluted earnings per share for the thirteen or thirty-nine weeks ended November 2, 2014 and November 3, 2013.

NOTE D. SEGMENT REPORTING

We have two reportable segments, e-commerce (formerly direct-to-customer) and retail. The e-commerce segment has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Rejuvenation and Mark and Graham) which sell our products through our e-commerce websites and direct-mail catalogs. Our e-commerce merchandising concepts are operating segments, which have been aggregated into one reportable segment, e-commerce. The retail segment has five merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation) which sell our products through our retail stores. Our retail merchandising concepts are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.

These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are

 

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interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

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

Income tax information by reportable segment has not been included as income taxes are calculated at a company-wide level and are not allocated to each reportable segment.

Segment Information

 

Dollars in thousands    E-commerce1      Retail      Unallocated     Total  

Thirteen weeks ended November 2, 2014

          

Net revenues2

     $   586,976       $   556,186       $ 0      $ 1,143,162   

Depreciation and amortization expense

     8,471         20,344         12,988        41,803   

Operating income (loss)

     136,617         49,973         (81,870     104,720   

Capital expenditures

     5,451         29,005         13,695        48,151   

Thirteen weeks ended November 3, 2013

          

Net revenues2

     $   511,874       $ 539,674       $ 0      $ 1,051,548   

Depreciation and amortization expense

     6,165         19,655         11,760        37,580   

Operating income (loss)

     117,086         49,300         (73,892     92,494   

Capital expenditures

     8,797         26,152         12,510        47,459   

Thirty-Nine weeks ended November 2, 2014

          

Net revenues2

     $1,600,854       $ 1,555,740       $ 0      $ 3,156,594   

Depreciation and amortization expense

     23,608         60,062         37,465        121,135   

Operating income (loss)

     378,365         117,227         (231,210     264,382   

Assets3

     623,674         1,087,683         592,590        2,303,947   

Capital expenditures

     28,326         63,253         40,091        131,670   

Thirty-Nine weeks ended November 3, 2013

          

Net revenues2

     $1,408,615       $ 1,512,950       $ 0      $ 2,921,565   

Depreciation and amortization expense

     19,087         58,407         33,918        111,412   

Operating income (loss)

     327,518         117,925         (211,080     234,363   

Assets3

     540,534         1,034,476         651,432        2,226,442   

Capital expenditures

     28,496         71,302         45,438        145,236   
1  Prior to the third quarter of fiscal 2014, we referred to the e-commerce channel as the direct-to-customer channel.
2  Includes net revenues of approximately $54.6 million and $51.5 million for the thirteen weeks ended November 2, 2014 and November 3, 2013, respectively, and $161.1 million and $150.0 million for the thirty-nine weeks ended November 2, 2014 and November 3, 2013, respectively, related to our foreign operations.
3  Includes approximately $64.4 million and $59.3 million of long-term assets as of November 2, 2014 and November 3, 2013, respectively, related to our foreign operations.

NOTE E. 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 larger. We review the need for any loss contingency reserves and establish reserves when, in the opinion of

 

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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 be time consuming, 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 consolidated financial statements taken as a whole.

NOTE F. STOCK REPURCHASE PROGRAM AND DIVIDEND

Stock Repurchase Program

During the thirteen weeks ended November 2, 2014, we repurchased 1,247,046 shares of our common stock at an average cost of $66.70 per share for a total cost of $83,181,000. During the thirty-nine weeks ended November 2, 2014, we repurchased 2,935,753 shares of our common stock at an average cost of $66.50 per share for a total cost of $195,235,000. As of November 2, 2014, we held treasury stock of $2,145,000 which represents the cost of shares repurchased and designated for reissuance in certain foreign jurisdictions as a result of future stock award exercises or releases.

During the thirteen weeks ended November 3, 2013, we repurchased 1,527,327 shares of our common stock at an average cost of $55.89 per share for a total cost of $85,363,000. During the thirty-nine weeks ended November 3, 2013, we repurchased 3,942,152 shares of our common stock at an average cost of $54.89 per share for a total cost of $216,369,000.

Stock repurchases under this 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. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

Dividend

We declared cash dividends of $0.33 and $0.31 per common share for the thirteen weeks ended November 2, 2014 and November 3, 2013, respectively. We declared cash dividends of $0.99 and $0.93 per common share for the thirty-nine weeks ended November 2, 2014 and November 3, 2013, respectively.

NOTE G. DERIVATIVE FINANCIAL INSTRUMENTS

Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to foreign currency exchange rate fluctuations. However, we are exposed to foreign currency exchange risk related to the transactions of our foreign subsidiaries. While the impact of foreign currency exchange rate fluctuations was not significant in the third quarter of fiscal 2014, as we continue to expand globally, the foreign currency exchange risk related to the transactions of our foreign subsidiaries will 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. We do not enter into such contracts for speculative purposes.

The assets or liabilities associated with the derivative instruments are measured at fair value and recorded in either other current assets or other current liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as a hedge and qualifies for hedge accounting in accordance with the Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging.

 

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Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to 12 months. 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 either the hedged forecasted inventory purchase occurs or the respective contracts reach maturity. Subsequently, as the inventory is sold to the customer, we reclassify the amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges or “forward points” are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in other income (expense), net. Based on the rates in effect as of November 2, 2014, we expect to reclassify a net gain of approximately $484,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency contracts to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains (losses) related to these contracts are recognized in other income (expense), net.

As of November 2, 2014, and November 3, 2013, we had foreign currency forward contracts outstanding (in U.S. dollars) as follows:

 

Dollars in thousands    November 2, 2014      November 3, 2013  

Contracts to sell Canadian dollars and buy U.S. dollars

     

Contracts designated as cash flow hedges

   $ 14,600       $ 18,000   

Contracts not designated as cash flow hedges 1

   $ 0       $ 5,800   

Contracts to sell Australian dollars and buy U.S. dollars

     

Contracts not designated as cash flow hedges

   $ 14,000       $ 7,000   
                   
1  These contracts are no longer designated as cash flow hedges as the related inventory purchases have occurred.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended November 2, 2014 and November 3, 2013.

The effect of derivative instruments in our Condensed Consolidated Financial Statements, pre-tax, was as follows:

 

Dollars in thousands   

Thirteen

Weeks Ended

November 2, 2014

   

Thirteen

Weeks Ended

November 3, 2013

   

Thirty-Nine

Weeks Ended
November 2, 2014

   

Thirty-Nine

Weeks Ended
November 3, 2013

 

Net gain recognized in OCI

   $ 472      $ 119      $ 270      $ 242   

Net gain reclassified from OCI into cost of goods sold

     7        31        527        31   

Net foreign exchange gain (loss) recognized in other income (expense):

        

Instruments designated as cash flow hedges 1

     (36     (36     (123     (78

Instruments not designated or de-designated during the period 2

     (482     (291     138        (69
                                  
1  Changes in fair value of the forward contract related to interest charges or “forward points.”
2  Changes in fair value subsequent to de-designation for instruments no longer designated as cash flow hedges, and changes in fair value related to instruments not designated as cash flow hedges.

 

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The fair values of our derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 inputs as defined by the fair value hierarchy described in Note H.

 

Dollars in thousands    Balance sheet location    November 2, 2014     November 3, 2013  

Derivatives designated as hedging instruments:

       

Cash flow hedge foreign currency forward contracts

   Other current assets    $ 372      $ 79   

Cash flow hedge foreign currency forward contracts

   Other current liabilities      0        0   
                       

Total

      $ 372      $ 79   
                       

Derivatives not designated as hedging instruments:

       

Foreign currency forward contracts

   Other current assets    $ 0      $ 106   

Foreign currency forward contracts

   Other current liabilities      (9     0   
                       

Total

      $ (9   $ 106   
                       

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.

Amounts recorded within accumulated other comprehensive income (“AOCI”) associated with our derivative instruments were as follows:

 

Dollars in thousands   

Thirteen

Weeks Ended

November 2, 2014

   

Thirteen

Weeks Ended

November 3, 2013

   

Thirty-Nine

Weeks Ended

November 2, 2014

   

Thirty-Nine

Weeks Ended

November 3, 2013

 

AOCI beginning balance amount of gain

   $ 19      $ 123      $ 741      $ 0   

Amounts recognized in OCI before reclassifications

     472        119        270        242   

Amounts reclassified from OCI into cost of goods sold

     (7     (31     (527     (31
                                  

AOCI ending balance amount of gain

   $ 484      $ 211      $ 484      $ 211   
                                  

NOTE H. 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.

 

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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 currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.

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

There were no transfers between Level 1 and Level 2 categories during the thirteen and thirty-nine weeks ended November 2, 2014.

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: 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 compliance with our financial covenants; 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; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended February 2, 2014, 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 eight distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams-Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 603 stores. Williams-Sonoma, Inc. currently operates in the United States, Canada, Australia and the United Kingdom, offers international shipping to customers worldwide, and has unaffiliated franchisees that operate stores in the Middle East and the Philippines.

 

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The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended November 2, 2014 (“third quarter of fiscal 2014”), as compared to the thirteen weeks ended November 3, 2013 (“third quarter of fiscal 2013”) and the thirty-nine weeks ended November 2, 2014 (“year-to-date 2014”), as compared to the thirty-nine weeks ended November 3, 2013 (“year-to-date 2013”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.

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

Prior to the third quarter of fiscal 2014, we referred to the e-commerce channel as the direct-to-customer channel.

Third Quarter of Fiscal 2014 Financial Results

In the third quarter of fiscal 2014, our net revenues increased 8.7% to $1,143,162,000, compared to $1,051,548,000 in the third quarter of fiscal 2013, with comparable brand revenue growth of 8.7%. Diluted earnings per share in the third quarter of fiscal 2014 increased to $0.68, versus $0.58 in the third quarter of fiscal 2013, and we returned $114,452,000 to our stockholders through stock repurchases and dividends.

E-commerce (formerly direct-to-customer) net revenues in the third quarter of fiscal 2014 increased $75,102,000, or 14.7%, compared to the third quarter of fiscal 2013, with increases in all brands, primarily driven by Pottery Barn and West Elm. E-commerce net revenues generated 51% of our total company net revenues in the third quarter of fiscal 2014 compared to 49% in the third quarter of fiscal 2013.

Retail net revenues in the third quarter of fiscal 2014 increased $16,512,000, or 3.1%, compared to the third quarter of fiscal 2013, primarily driven by West Elm and Pottery Barn, partially offset by a decrease in Williams-Sonoma due to eight fewer stores in the third quarter of fiscal 2014.

In Pottery Barn, our largest brand, comparable brand revenues increased 7.0% in the third quarter of fiscal 2014 on top of 8.4% in the third quarter of fiscal 2013, driven by strength across our proprietary upholstery collections and unique proprietary bedroom furniture collections. In the Williams-Sonoma brand, comparable brand revenues increased 4.3% in the third quarter of fiscal 2014, on top of 1.4% in the third quarter of fiscal 2013, with solid performance across the tools, cutlery, entertaining and tabletop product categories. Proprietary and exclusive product introductions also contributed to the brand’s net revenue growth. In West Elm, comparable brand revenues increased 17.4% in the third quarter of fiscal 2014, on top of 22.2% in the third quarter of fiscal 2013, as brand growth continued to be broad-based across categories. In Pottery Barn Kids, comparable brand revenues increased 8.6% in the third quarter of fiscal 2014, on top of 3.9% in the third quarter of fiscal 2013, with strong performance in our nursery and furniture businesses. In PBteen, comparable brand revenues increased 11.7% in the third quarter of fiscal 2014, on top of 16.7% in the third quarter of fiscal 2013, with solid results across furniture, textiles and decorative accessories.

Results of Operations

NET REVENUES

Net revenues consist of e-commerce and retail net revenues. E-commerce net revenues include sales of merchandise to customers through our e-commerce websites and our catalogs, as well as shipping fees. Retail net revenues include sales of merchandise to customers at our retail stores, as well as shipping fees on any products shipped to our customers’ homes. Shipping fees consist of revenue received from customers for delivery of merchandise to their homes. Revenues are presented net of sales returns and other discounts.

 

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The following table summarizes our net revenues for the third quarter of fiscal 2014 and fiscal 2013, and year-to-date 2014 and 2013:

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Dollars in thousands    November 2,
2014
     % Total     November 3,
2013
     % Total     November 2,
2014
     % Total     November 3,
2013
     % Total  

E-commerce net revenues

   $ 586,976         51.3   $ 511,874         48.7   $ 1,600,854         50.7   $ 1,408,615         48.2

Retail net revenues

     556,186         48.7     539,674         51.3     1,555,740         49.3     1,512,950         51.8
                                                                      

Net revenues

   $ 1,143,162         100.0   $ 1,051,548         100.0   $ 3,156,594         100.0   $ 2,921,565         100.0
                                                                      

Net revenues in the third quarter of fiscal 2014 increased by $91,614,000, or 8.7%, compared to the third quarter of fiscal 2013, with comparable brand revenue growth of 8.7%. This increase was primarily driven by the West Elm and Pottery Barn brands.

Net revenues for year-to-date 2014 increased by $235,029,000, or 8.0%, compared to year-to-date 2013, with comparable brand revenue growth of 8.1% and increases in all brands, led by the West Elm and Pottery Barn brands.

Comparable Brand Revenue Growth

Comparable brand revenues include e-commerce sales and retail comparable store sales, as well as shipping fees, sales returns and other discounts associated with current period sales. Outlet comparable store net revenues are included in their respective brands. Sales related to our international franchised stores have been excluded as these stores are not operated by us. Comparable stores are defined as permanent stores in which 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.

Percentages represent changes in comparable brand revenues compared to the same period in the prior year.

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Comparable brand revenue growth    November 2,
2014
    November 3,
2013
    November 2,
2014
   

November 3,

2013

 

Pottery Barn

     7.0     8.4     7.0     8.6

Williams-Sonoma

     4.3     1.4     4.5     0.9

Pottery Barn Kids

     8.6     3.9     7.5     6.2

West Elm

     17.4     22.2     17.6     17.1

PBteen

     11.7     16.7     7.1     16.4
                                  

Williams-Sonoma, Inc.

     8.7     8.2     8.1     8.0
                                  

E-COMMERCE NET REVENUES

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Dollars in thousands    November 2,
2014
    November 3,
2013
    November 2,
2014
    November 3,
2013
 

E-commerce net revenues

   $ 586,976      $ 511,874      $ 1,600,854      $ 1,408,615   

E-commerce net revenue growth

     14.7     14.5     13.6     14.0
                                  

E-commerce net revenues in the third quarter of fiscal 2014 increased $75,102,000, or 14.7%, compared to the third quarter of fiscal 2013, with increases in all brands, primarily driven by Pottery Barn and West Elm. E-commerce net revenues generated 51% of our total company net revenues in the third quarter of fiscal 2014 compared to 49% in the third quarter of fiscal 2013.

 

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E-commerce net revenues for year-to-date 2014 increased $192,239,000, or 13.6%, compared to year-to-date 2013, with increases across all brands. This growth was primarily led by Pottery Barn and West Elm.

RETAIL NET REVENUES AND OTHER DATA

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Dollars in thousands   

November 2,

2014

    November 3,
2013
    November 2,
2014
    November 3,
2013
 

Retail net revenues

   $ 556,186      $ 539,674      $ 1,555,740      $ 1,512,950   

Retail net revenue growth

     3.1     8.5     2.8     8.0

Store count - beginning of period

     589        590        585        581   

Store openings

     17        8        26        24   

Store closings

     (3     (3     (8     (10

Store count - end of period1, 2

     603        595        603        595   

Store selling square footage at period-end

     3,688,000        3,632,000        3,688,000        3,632,000   

Store leased square footage (“LSF”) at period-end

     5,988,000        5,908,000        5,988,000        5,908,000   
                                  
1  Included in the fiscal 2014 numbers above are 9 stores in Australia and 1 store in the United Kingdom.
2  Included in the fiscal 2013 numbers above are 5 stores in Australia.

 

     Store Count      Avg. LSF Per Store  
     

August 3,

2014

     Openings      Closings    

November 2,

2014

    

November 3,

2013

    

November 2,

2014

    

November 3,

2013

 

Williams-Sonoma

     247         3         (2     248         256         6,600         6,600   

Pottery Barn

     195         3                198         196         13,700         13,800   

Pottery Barn Kids

     84         2         (1     85         84         7,700         8,000   

West Elm

     59         9                68         55         13,800         14,300   

Rejuvenation

     4                        4         4         13,200         13,200   
                                                               

Total

     589         17         (3     603         595         9,900         9,900   
                                                               

Retail net revenues in the third quarter of fiscal 2014 increased $16,512,000, or 3.1%, compared to the third quarter of fiscal 2013, primarily driven by West Elm and Pottery Barn, partially offset by a decrease in Williams-Sonoma due to eight fewer stores compared to the third quarter of fiscal 2013.

Retail net revenues for year-to-date 2014 increased $42,790,000, or 2.8%, compared to year-to-date 2013, primarily driven by West Elm and Pottery Barn, partially offset by a decrease in Williams-Sonoma due to eight fewer stores compared to year-to-date 2013 and our international franchise operations.

COST OF GOODS SOLD

 

    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Dollars in thousands   November 2,
2014
    % Net
Revenues
    November 3,
2013
    % Net
Revenues
    November 2,
2014
    % Net
Revenues
    November 3,
2013
    % Net
Revenues
 

Cost of goods sold1

  $  711,755        62.3   $  646,160        61.4   $  1,974,681        62.6   $  1,813,068        62.1
1 Includes total occupancy expenses of $153,975,000 and $141,892,000 for the third quarter of fiscal 2014 and the third quarter of fiscal 2013, respectively, and $448,556,000 and $412,964,000 for year-to-date 2014 and year-to-date 2013, 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.

 

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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.

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

Third Quarter of Fiscal 2014 vs. Third Quarter of Fiscal 2013

Cost of goods sold increased by $65,595,000, or 10.2%, in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. Cost of goods sold as a percentage of net revenues increased to 62.3% in the third quarter of fiscal 2014 from 61.4% in the third quarter of fiscal 2013. This increase was primarily driven by lower selling margins.

In the e-commerce channel, cost of goods sold as a percentage of net revenues increased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 primarily driven by lower selling margins.

In the retail channel, cost of goods sold as a percentage of net revenues increased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 primarily driven by occupancy deleverage.

Year-to-Date 2014 vs. Year-to-Date 2013

Cost of goods sold for year-to-date 2014 increased by $161,613,000, or 8.9%, compared to year-to-date 2013. Cost of goods sold as a percentage of net revenues increased to 62.6% for year-to-date 2014 from 62.1% for year-to-date 2013. This increase was primarily driven by lower selling margins.

In the e-commerce channel, cost of goods sold as a percentage of net revenues increased for year-to-date 2014 compared to year-to-date 2013 primarily driven by lower selling margins and occupancy deleverage.

In the retail channel, cost of goods sold as a percentage of net revenues increased for year-to-date 2014 compared to year-to-date 2013 primarily driven by occupancy deleverage.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
Dollars in thousands    November 2,
2014
     % Net
Revenues
    November 3,
2013
     % Net
Revenues
    November 2,
2014
     % Net
Revenues
    November 3,
2013
     % Net
Revenues
 

Selling, general and administrative expenses

   $  326,687         28.6   $ 312,894         29.8   $  917,531         29.1   $ 874,134         29.9
                                                                      

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

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

 

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Third Quarter of Fiscal 2014 vs. Third Quarter of Fiscal 2013

Selling, general and administrative expenses increased by $13,793,000, or 4.4%, in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. Selling, general and administrative expenses as a percentage of net revenues decreased to 28.6% in the third quarter of fiscal 2014 from 29.8% in the third quarter of fiscal 2013. This decrease as a percentage of net revenues was primarily driven by advertising efficiency, lower general expenses and the leverage of employment costs.

In the e-commerce channel, selling, general and administrative expenses as a percentage of net revenues decreased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 primarily driven by advertising efficiency and the leverage of both employment costs and general expenses.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 primarily driven by lower general expenses, partially offset by the deleverage of employment costs.

Year-to-Date 2014 vs. Year-to-Date 2013

Selling, general and administrative expenses for year-to-date 2014 increased by $43,397,000, or 5.0%, compared to year-to-date 2013. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.1% for year-to-date 2014 from 29.9% for year-to-date 2013. This decrease was primarily driven by advertising efficiency and lower general expenses.

In the e-commerce channel, selling, general and administrative expenses as a percentage of net revenues decreased for year-to-date 2014 compared to year-to-date 2013 primarily driven by advertising efficiency.

In the retail channel, selling, general and administrative expenses as a percentage of net revenues remained relatively flat for year-to-date 2014 compared to year-to-date 2013 primarily due to higher employment costs, offset by lower general expenses.

INCOME TAXES

Our effective tax rate was 38.8% for year-to-date 2014 compared to 38.2% for year-to-date 2013.

LIQUIDITY AND CAPITAL RESOURCES

As of November 2, 2014, we held $107,703,000 in cash and cash equivalent funds, the majority of which is held in demand deposit accounts, including $61,074,000 held by our foreign 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.

Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2014, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, stock repurchases and dividend payments and purchases of property and equipment. In addition to our cash balances on hand, we have an unsecured revolving line of credit (“credit facility”) that may be used for borrowing loans or issuing letters of credit. As of November 2, 2014, we had borrowings of $90,000,000 outstanding under the credit facility, all of which were repaid in the fourth quarter of fiscal 2014. We had no borrowings under the credit facility as of November 3, 2013. On November 19, 2014, we entered into the Sixth Amended and Restated Credit Agreement that amends and replaces our previous agreement. The new credit facility provides for a $500,000,000 unsecured revolving line of credit that may be used for borrowing loans or issuing letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facility by up to $250,000,000 to provide for a total of $750,000,000 of unsecured revolving credit, at such lenders’ option.

 

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During the year, we redeemed restricted cash deposits of $14,289,000 previously held under collateralized trust agreements. These deposits, which secured potential liabilities associated with our workers’ compensation and other insurance programs, were replaced with standby letters of credit upon redemption. As of November 2, 2014, a total of $17,440,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. Additionally, as of November 2, 2014, we had three unsecured letter of credit reimbursement facilities, which were amended during the quarter, for a total of $70,000,000, of which an aggregate of $8,764,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title. We are currently in compliance with all of our financial covenants and, based on our current projections, we expect to remain in compliance throughout fiscal 2014. 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 year-to-date 2014, net cash provided by operating activities was $121,801,000 compared to $148,675,000 for year-to-date 2013. For year-to-date 2014, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items and an increase in customer deposits, partially offset by an increase in merchandise inventories as well as a decrease in income taxes payable due to the timing of payments. This represents a decrease in net cash provided by operating activities, compared to year-to-date 2013, primarily due to a decrease in accounts payable resulting from the timing of payments, partially offset by a decrease in merchandise inventory purchases and an increase in net earnings adjusted for non-cash items.

Cash Flows from Investing Activities

For year-to-date 2014, net cash used in investing activities was $116,176,000 compared to $142,001,000 for year-to-date 2013, and was primarily attributable to purchases of property and equipment, partially offset by the redemption of restricted cash deposits we previously held under collateralized trust agreements. Net cash used compared to year-to-date 2013 decreased primarily due to a decrease in purchases of property and equipment and the redemption of restricted cash deposits.

Cash Flows from Financing Activities

For year-to-date 2014, net cash used in financing activities was $227,812,000 compared to $301,161,000 for year-to-date 2013. For year-to-date 2014, net cash used in financing activities was primarily attributable to repurchases of common stock, the payment of dividends and tax withholding payments related to stock-based awards, partially offset by borrowings under our revolving line of credit. Net cash used compared to year-to-date 2013 decreased primarily due to borrowings under our revolving line of credit in 2014, partially offset by an increase in tax withholding payments related to stock-based awards.

Stock Repurchase Program and Dividend

See Note F to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividend, 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 accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and

 

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expenses and related disclosures of contingent assets and liabilities. The 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 may differ significantly from these estimates. During the third quarter of fiscal 2014, 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 2, 2014.

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 anticipation of our holiday selling season, we hire a substantial number of additional temporary employees in our retail stores, customer care centers and distribution centers, and incur significant fixed catalog production and mailing costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rates, including the devaluation of the U.S. dollar, and the effects of uncertain economic forces 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 line of credit facility is the only instrument we hold with a variable interest rate which subjects us to interest rate risk. As of November 2, 2014, we had borrowings of $90,000,000 outstanding under our credit facility, all of which were repaid in the fourth quarter of fiscal 2014. If the interest rate on this existing variable rate debt instrument rose 10%, our results from operations and cash flows would not be materially affected.

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 November 2, 2014, our investments, made primarily in demand deposit accounts, 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 2% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any currency risks related to these international purchase transactions were not significant to us during the third quarter of fiscal 2014 or the third quarter of fiscal 2013. 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 retail stores in Canada, Australia and the United Kingdom, and 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. While the impact of foreign currency exchange rate fluctuations was not significant in the third quarter of fiscal 2014, as we continue to expand globally, the foreign currency exchange risk related to the transactions of our foreign subsidiaries will 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 G to our Condensed Consolidated Financial Statements).

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of November 2, 2014, 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

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 2, 2014 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.

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

The following table provides information as of November 2, 2014 with respect to shares of common stock we repurchased during the third quarter of fiscal 2014. For additional information, please see Note F 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 Program
     Maximum Dollar Value
of Shares That May Yet
Be Purchased Under the
Program
 

August 4, 2014 to August 31, 2014

     121,305       $ 70.89         121,305       $ 390,569,000   

September 1, 2014 to September 28, 2014

     706,367       $ 66.42         706,367       $ 343,649,000   

September 29, 2014 to November 2, 2014

     419,374       $ 65.96         419,374       $ 315,987,000   
                                     

Total

     1,247,046       $ 66.70         1,247,046       $ 315,987,000   
                                     

 

1 In March 2013, our Board of Directors announced a $750,000,000 stock repurchase program. Stock repurchases under this 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. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM  5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

 

Exhibit

Number

  

Exhibit Description

  10.1    First Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 29, 2014
  10.2    First Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 29, 2014
  10.3    First Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 29, 2014
  31.1    Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
  31.2    Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
  32.1    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURE

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

 

WILLIAMS-SONOMA, INC.
By:  

/s/ Julie P. Whalen

  Julie P. Whalen
  Chief Financial Officer

Date: December 5, 2014

 

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