WILLIAMS SONOMA INC - Quarter Report: 2021 October (Form 10-Q)

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 October 31, 2021.


☐			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

(State or other jurisdiction of

incorporation or organization)

3250 Van Ness Avenue, San Francisco, CA

(Address of principal executive offices)

94-2203880

(I.R.S. Employer

Identification No.)

94109

(Zip Code)

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

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

_________________________

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

Title of each class:

Trading
Symbol(s):

Name of each exchange
on which registered:

Common Stock, par value $.01 per share

WSM

New York Stock Exchange, Inc.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

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


Large accelerated filer	☒	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of November 28, 2021, 72,954,519 shares of the registrant’s Common Stock were outstanding.

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WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 31, 2021

TABLE OF CONTENTS


	PART I. FINANCIAL INFORMATION
		PAGE
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	23
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25

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ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
In thousands, except per share amounts	October 31, 2021		November 1, 2020		October 31, 2021		November 1, 2020
Net revenues	$	2,047,539	$	1,764,536	$	5,744,907	$	4,490,516
Cost of goods sold	1,152,054		1,058,953		3,238,181		2,819,471
Gross profit	895,485		705,583		2,506,726		1,671,045
Selling, general and administrative expenses	565,218		430,979		1,578,182		1,162,435
Operating income	330,267		274,604		928,544		508,610
Interest expense, net	121		5,344		1,954		13,967
Earnings before income taxes	330,146		269,260		926,590		494,643
Income taxes	80,622		67,488		203,194		122,884
Net earnings	$	249,524	$	201,772	$	723,396	$	371,759
Basic earnings per share	$	3.37	$	2.60	$	9.66	$	4.80
Diluted earnings per share	$	3.29	$	2.54	$	9.40	$	4.71
Shares used in calculation of earnings per share:
Basic	74,010		77,487		74,865		77,511
Diluted	75,943		79,332		76,975		79,012

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
In thousands	October 31, 2021		November 1, 2020		October 31, 2021		November 1, 2020
Net earnings	$	249,524	$	201,772	$	723,396	$	371,759
Other comprehensive income (loss):
Foreign currency translation adjustments	792		(745)		970		716
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(19), $21, $(235), and $146	(54)		54		(654)		403
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $(131), $85, $(312), and $136	369		(231)		859		(375)
Comprehensive income	$	250,631	$	200,850	$	724,571	$	372,503

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


In thousands, except per share amounts	October 31, 2021		January 31, 2021		November 1, 2020
ASSETS
Current assets
Cash and cash equivalents	$	656,898	$	1,200,337	$	773,170
Accounts receivable, net	139,511		143,728		129,782
Merchandise inventories, net	1,272,028		1,006,299		1,125,475
Prepaid expenses	85,433		93,822		84,974
Other current assets	22,852		22,894		23,556
Total current assets	2,176,722		2,467,080		2,136,957
Property and equipment, net	892,226		873,894		869,092
Operating lease right-of-use assets	1,159,315		1,086,009		1,091,649
Deferred income taxes, net	61,768		61,854		42,185
Goodwill	85,392		85,446		85,402
Other long-term assets, net	101,901		87,141		85,394
Total assets	$	4,477,324	$	4,661,424	$	4,310,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	638,371	$	542,992	$	562,294
Accrued expenses	273,722		267,592		194,985
Gift card and other deferred revenue	431,446		373,164		349,671
Income taxes payable	38,320		69,476		36,037
Current debt	—		299,350		—

Operating lease liabilities	218,348		209,754		217,448
Other current liabilities	91,418		85,672		99,691
Total current liabilities	1,691,625		1,848,000		1,460,126
Deferred lease incentives	17,268		20,612		21,858
Long-term debt	—		—		299,173
Long-term operating lease liabilities	1,095,290		1,025,057		1,027,142
Other long-term liabilities	129,771		116,570		100,478
Total liabilities	2,933,954		3,010,239		2,908,777
Commitments and contingencies – See Note F
Stockholders’ equity
Preferred stock: $0.01 par value; 7,500 shares authorized; none issued	—		—		—
Common stock: $0.01 par value; 253,125 shares authorized; 73,326, 76,340 and 76,697 shares issued and outstanding at October 31, 2021, January 31, 2021 and November 1, 2020, respectively	734		764		768
Additional paid-in capital	585,449		638,375		623,379
Retained earnings	963,840		1,019,762		792,196
Accumulated other comprehensive loss	(5,942)		(7,117)		(13,843)
Treasury stock, at cost: 4, 8 and 8 shares as of October 31, 2021, January 31, 2021 and November 1, 2020, respectively	(711)		(599)		(598)
Total stockholders’ equity	1,543,370		1,651,185		1,401,902
Total liabilities and stockholders’ equity	$	4,477,324	$	4,661,424	$	4,310,679

See Notes to Condensed Consolidated Financial Statements.

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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 January 31, 2021	76,340	$	764	$	638,375	$	1,019,762	$	(7,117)	$	(599)	$	1,651,185
Net earnings	—	—		—		227,802		—		—		227,802
Foreign currency translation adjustments	—	—		—		—		3,700		—		3,700
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		(665)		—		(665)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		153		—		153
Conversion/release of stock-based awards1	686	7		(97,958)		—		—		(500)		(98,451)
Repurchases of common stock	(1,791)	(18)		(9,239)		(306,272)		—		—		(315,529)
Reissuance of treasury stock under stock-based compensation plans1	—	—		(344)		(44)		—		388		—
Stock-based compensation expense	—	—		25,471		—		—		—		25,471
Dividends declared	—	—		—		(46,370)		—		—		(46,370)
Balance at May 2, 2021	75,235	$	753	$	556,305	$	894,878	$	(3,929)	$	(711)	$	1,447,296
Net earnings	—	—		—		246,070		—		—		246,070
Foreign currency translation adjustments	—	—		—		—		(3,522)		—		(3,522)
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		65		—		65
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		337		—		337
Conversion/release of stock-based awards1	25	—		(1,709)		—		—		—		(1,709)
Repurchases of common stock	(834)	(8)		(4,358)		(131,493)		—		—		(135,859)
Stock-based compensation expense	—	—		19,496		—		—		—		19,496
Dividends declared	—	—		—		(45,455)		—		—		(45,455)
Balance at August 1, 2021	74,426	$	745	$	569,734	$	964,000	$	(7,049)	$	(711)	$	1,526,719
Net earnings	—	—		—		249,524		—		—		249,524
Foreign currency translation adjustments	—	—		—		—		792		—		792
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		(54)		—		(54)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		369		—		369
Conversion/release of stock-based awards1	20	—		(2,322)		—		—		—		(2,322)
Repurchases of common stock	(1,120)	(11)		(5,921)		(195,379)		—		—		(201,311)
Stock-based compensation expense	—	—		23,958		—		—		—		23,958
Dividends declared	—	—		—		(54,305)		—		—		(54,305)
Balance at October 31, 2021	73,326	$	734	$	585,449	$	963,840	$	(5,942)	$	(711)	$	1,543,370

1.Amounts are shown net of shares withheld for employee taxes.

See Notes to Condensed Consolidated Financial Statements.

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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 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) loss on derivative financial instruments, net of tax	—	—		—		—		(37)		—		(37)
Conversion/release of stock-based awards1	622	6		(28,747)		—		—		(171)		(28,912)

Reissuance of treasury stock under stock-based compensation plans1	—	—		(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
Net earnings	—	—		—		134,564		—		—		134,564
Foreign currency translation adjustments	—	—		—		—		6,737		—		6,737
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		(200)		—		(200)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		(107)		—		(107)
Conversion/release of stock-based awards1	37	—		(677)		—		—		—		(677)

Stock-based compensation expense	—	—		13,385		—		—		—		13,385
Dividends declared	—	—		—		(39,709)		—		—		(39,709)
Balance at August 2, 2020	77,796	$	778	$	608,892	$	736,772	$	(12,921)	$	(599)	$	1,332,922
Net earnings	—	—		—		201,772		—		—		201,772
Foreign currency translation adjustments	—	—		—		—		(745)		—		(745)
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		54		—		54
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		(231)		—		(231)
Conversion/release of stock-based awards1	20	1		(968)		—		—		1		(966)
Repurchases of common stock	(1,119)	(11)		(5,640)		(103,397)		—		—		(109,048)

Stock-based compensation expense	—	—		21,095		—		—		—		21,095
Dividends declared	—	—		—		(42,951)		—		—		(42,951)
Balance at November 1, 2020	76,697	$	768	$	623,379	$	792,196	$	(13,843)	$	(598)	$	1,401,902

1Amounts are shown net of shares withheld for employee taxes.

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
In thousands	October 31, 2021		November 1, 2020
Cash flows from operating activities:
Net earnings	$	723,396	$	371,759
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	145,897		140,340
Loss on disposal/impairment of assets	887		26,220
Amortization of deferred lease incentives	(3,345)		(4,538)
Non-cash lease expense	159,757		162,767
Deferred income taxes	(11,440)		(6,969)
Tax benefit related to stock-based awards	10,838		13,143
Stock-based compensation expense	70,566		54,671
Other	4		(9)
Changes in:
Accounts receivable	4,941		(18,017)
Merchandise inventories	(264,094)		(22,990)
Prepaid expenses and other assets	(10,078)		(4,807)
Accounts payable	74,181		54,279
Accrued expenses and other liabilities	24,400		58,539
Gift card and other deferred revenue	58,189		59,953
Operating lease liabilities	(164,569)		(171,245)
Income taxes payable	(31,191)		13,532
Net cash provided by operating activities	788,339		726,628
Cash flows from investing activities:
Purchases of property and equipment	(141,010)		(124,885)
Other	97		506
Net cash used in investing activities	(140,913)		(124,379)
Cash flows from financing activities:
Repurchases of common stock	(652,699)		(109,048)
Repayment of long-term debt	(300,000)		—
Payment of dividends	(135,201)		(116,761)
Tax withholdings related to stock-based awards	(102,482)		(30,555)
Debt issuance costs	(777)		(3,645)
Borrowings under revolving line of credit	—		487,823
Repayments under revolving line of credit	—		(487,823)
Net cash used in financing activities	(1,191,159)		(260,009)
Effect of exchange rates on cash and cash equivalents	294		(1,232)
Net (decrease) increase in cash and cash equivalents	(543,439)		341,008
Cash and cash equivalents at beginning of period	1,200,337		432,162
Cash and cash equivalents at end of period	$	656,898	$	773,170

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 October 31, 2021 and November 1, 2020, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, the Condensed Consolidated Statements of Stockholders’ Equity 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 January 31, 2021, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

The results of operations for the thirteen and thirty-nine weeks ended October 31, 2021 are not necessarily indicative of the operating results of the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

COVID-19

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 pandemic. As of October 31, 2021, all of our stores have reopened for in-person shopping. However, we have experienced, and expect to continue to experience, delays in inventory receipts, increased raw material costs and higher shipping-related charges as a result of port slowdowns and congestion, as well as shipping container shortages, due in part to the impact from COVID-19.

New Accounting Pronouncements

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. This ASU was effective for us in the first quarter of fiscal 2021. The adoption of this ASU did not have an impact on our financial condition, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. We may elect to apply the provisions of the new standard prospectively through December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. We have yet to elect an adoption date, but do not believe the adoption would have a material impact on our financial condition, results of operations or cash flows.

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NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”). The revolver 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 to provide for a total of $750,000,000 of unsecured revolving credit. Our credit facility also provided for a $300,000,000 unsecured term loan facility (“term loan”), which was fully repaid in February 2021. In September 2021, we entered into an amendment to our credit facility (the "Amended Credit Agreement"), which extended the maturity date of the revolver to September 30, 2026 and removed the $300,000,000 term loan component available under the existing credit facility. The Amended Credit Agreement maintains the interest rate of the revolver.

During the third quarter of fiscal 2021 and for year-to-date fiscal 2021, we had no borrowings under the revolver. Additionally, as of October 31, 2021, $11,919,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs. We had no borrowings during the third quarter of fiscal 2020, and for year-to-date fiscal 2020, we had borrowings of $487,823,000 under the revolver (at a year-to-date weighted average interest rate of 2.47%), all of which were repaid prior to the end of fiscal 2020. The revolver matures on September 30, 2026, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may elect to extend the maturity date subject to lender approval.

The interest rate applicable to the revolver is variable, and may be elected by us as: (i) the LIBOR (or future alternative rate) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% or (ii) a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio ranging from 0% to 0.775%.

The credit facility contains 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 October 31, 2021, we were in compliance with our covenants under the credit facility and, based on current projections, we expect to remain in compliance with our covenants under the credit facility throughout the next 12 months.

Letter of Credit Facilities

On August 22, 2021, we renewed all three of our letter of credit facilities on substantially similar terms for a total of $35,000,000. We also extended each facility's maturity date until August 22, 2022. The letter of credit facilities contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As of October 31, 2021, an aggregate of $7,542,000 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 date possible for any future letters of credit issued under the facilities is January 19, 2023.

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, 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 42,720,000 shares. As of October 31, 2021, there were approximately 7,507,000 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. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have

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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 and thirty-nine weeks ended October 31, 2021, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $24,306,000 and $70,566,000, respectively. During the thirteen and thirty-nine weeks ended November 1, 2020, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $21,276,000 and $54,671,000, respectively.

Restricted Stock Units

The following table summarizes our restricted stock unit activity during the thirty-nine weeks ended October 31, 2021:


			Shares
Balance at January 31, 2021			3,118,884
Granted			393,572
Granted, with vesting subject to performance conditions			107,075
Released 1			(1,096,821)
Cancelled			(124,603)
Balance at October 31, 2021			2,398,107
Vested plus expected to vest at October 31, 2021			2,373,380

1Excludes 229,000 incremental shares released due to achievement of performance conditions above target.

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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 October 31, 2021
Basic	$	249,524	74,010	$	3.37
Effect of dilutive stock-based awards			1,933
Diluted	$	249,524	75,943	$	3.29
Thirteen weeks ended November 1, 2020
Basic	$	201,772	77,487	$	2.60
Effect of dilutive stock-based awards			1,845
Diluted	$	201,772	79,332	$	2.54
Thirty-nine weeks ended October 31, 2021
Basic	$	723,396	74,865	$	9.66
Effect of dilutive stock-based awards			2,110
Diluted	$	723,396	76,975	$	9.40
Thirty-nine weeks ended November 1, 2020
Basic	$	371,759	77,511	$	4.80
Effect of dilutive stock-based awards			1,501
Diluted	$	371,759	79,012	$	4.71

Stock-based awards of 500 and 4,300 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 31, 2021, respectively, as their inclusion would be anti-dilutive. Stock-based awards of 200 and 19,300 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended November 1, 2020, respectively, as their inclusion would be anti-dilutive.

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NOTE E. SEGMENT REPORTING

We identify our operating segments according to how our business activities are managed and evaluated. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.

The following table summarizes our net revenues by brand for the thirteen and thirty-nine weeks ended October 31, 2021 and November 1, 2020.


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
In thousands	October 31, 2021		November 1, 2020		October 31, 2021		November 1, 2020
Pottery Barn	$	788,732	$	684,029	$	2,200,110	$	1,726,920
West Elm	579,668		474,959		1,636,621		1,170,941
Williams Sonoma	272,361		259,725		793,423		702,160
Pottery Barn Kids and Teen	316,417		277,598		826,421		702,137
Other 1	90,361		68,225		288,332		188,358
Total 2	$	2,047,539	$	1,764,536	$	5,744,907	$	4,490,516

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

2Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $93.1 million and $87.1 million for the thirteen weeks ended October 31, 2021 and November 1, 2020, respectively, and approximately $309.1 million and $219.8 million for the thirty-nine weeks ended October 31, 2021 and November 1, 2020, respectively.

Long-lived assets by geographic location are as follows:


In thousands	October 31, 2021		November 1, 2020
U.S.	$	2,154,392	$	2,025,140
International	146,210		148,582
Total	$	2,300,602	$	2,173,722

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

In August 2021, our Board approved a new $1,250,000,000 stock repurchase authorization, which replaced our existing program and superseded the remaining amount outstanding under our prior stock repurchase authorization. During the thirteen weeks ended October 31, 2021, we repurchased 1,119,748 shares of our common stock at an average cost of $179.78 per share for a total cost of approximately $201,312,000 under our prior and new stock repurchase programs. During the thirty-nine weeks ended October 31, 2021, we repurchased 3,744,767 shares of our common stock at an average cost of $174.30 per share for a total cost of approximately $652,699,000 under our prior and new stock repurchase programs. As of October 31, 2021, there was approximately $1,057,485,000 remaining under our current stock repurchase program.

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During the thirteen and thirty-nine weeks ended November 1, 2020, we repurchased 1,119,335 shares of our common stock at an average cost of $97.42 per share for a total cost of approximately $109,048,000.

As of October 31, 2021 and November 1, 2020, we held treasury stock of $711,000 and $598,000, respectively, that represents the cost of shares available for issuance that are 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

In August 2021, our Board approved a 20.3% increase in our quarterly cash dividend from $0.59 to $0.71 per share. We declared cash dividends of $0.71 and $0.53 per common share during the thirteen weeks ended October 31, 2021 and November 1, 2020, respectively. We declared cash dividends of $1.89 and $1.49 per common share during the thirty-nine weeks ended October 31, 2021 and November 1, 2020, respectively. 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 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 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 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 12 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 October 31, 2021, we expect to reclassify a net pre-tax loss of approximately $696,000 from OCI to cost of goods sold over the next 12 months.

As of October 31, 2021 and November 1, 2020, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:


In thousands	October 31, 2021		November 1, 2020
Contracts designated as cash flow hedges	$	19,500	$	28,200

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended October 31, 2021 and November 1, 2020.

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The effect of derivative instruments in our Condensed Consolidated Financial Statements from gains or losses recognized in income was not material for the thirteen and thirty-nine weeks ended October 31, 2021 and November 1, 2020.

The fair values of our derivative financial instruments are presented in other current assets and/or other current liabilities in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I. We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

NOTE I. FAIR VALUE MEASUREMENTS

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

We determine the fair value of financial 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.

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 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/decline, 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 thirteen and thirty-nine weeks ended October 31, 2021, no impairment charges were recognized. During the thirteen weeks ended November 1, 2020, no impairment charges were recognized. During the thirty-nine weeks ended November 1, 2020, we recognized impairment charges of $16,514,000, related to the impairment of property and equipment and $5,461,000, related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from the impact of COVID-19.

There were no transfers in and out of Level 3 categories during the thirteen and thirty-nine weeks ended October 31, 2021 or November 1, 2020.

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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

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


In thousands	Foreign Currency Translation		Cash Flow Hedges		Accumulated Other Comprehensive Income (Loss)
Balance at January 31, 2021	$	(6,398)	$	(719)	$	(7,117)
Foreign currency translation adjustments	3,700		—		3,700
Change in fair value of derivative financial instruments	—		(665)		(665)
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1	—		153		153
Other comprehensive income (loss)	3,700		(512)		3,188
Balance at May 2, 2021	$	(2,698)	$	(1,231)	$	(3,929)
Foreign currency translation adjustments	(3,522)		—		(3,522)
Change in fair value of derivative financial instruments	—		65		65
Reclassification adjustment for realized (gain) loss on derivative financial instruments1	—		337		337
Other comprehensive income (loss)	(3,522)		402		(3,120)
Balance at August 1, 2021	$	(6,220)	$	(829)	$	(7,049)
Foreign currency translation adjustments	792		—		792
Change in fair value of derivative financial instruments	—		(54)		(54)
Reclassification adjustment for realized (gain) loss on derivative financial instruments1	—		369		369
Other comprehensive income (loss)	792		315		1,107
Balance at October 31, 2021	$	(5,428)	$	(514)	$	(5,942)

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) loss 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)
Foreign currency translation adjustments	6,737		—		6,737
Change in fair value of derivative financial instruments	—		(200)		(200)
Reclassification adjustment for realized (gain) loss on derivative financial instruments1	—		(107)		(107)
Other comprehensive income (loss)	6,737		(307)		6,430
Balance at August 2, 2020	$	(13,132)	$	211	$	(12,921)
Foreign currency translation adjustments	(745)		—		(745)
Change in fair value of derivative financial instruments	—		54		54
Reclassification adjustment for realized (gain) loss on derivative financial instruments1	—		(231)		(231)
Other comprehensive income (loss)	(745)		(177)		(922)
Balance at November 1, 2020	$	(13,877)	$	34	$	(13,843)

1Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income.

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NOTE K. 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 the disclosure of our net revenues by operating segment.

Merchandise Sales

Revenues from the sale of our merchandise through our e-commerce websites, our direct mail catalogs, 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 that time. For merchandise delivered to the customer, control is transferred when either delivery has been completed or, for certain merchandise, 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 October 31, 2021 and November 1, 2020, we recorded a liability for expected sales returns of approximately $40,956,000 and $37,678,000, respectively, within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $12,127,000 and $12,347,000, respectively, 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 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

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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 six months from issuance.

Deferred Revenue

We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, and incentives received from credit card issuers. As of October 31, 2021 and November 1, 2020, we had recorded $435,213,000 and $349,671,000, respectively, for gift card and other deferred revenue in our Condensed Consolidated Balance Sheet, substantially all of which is expected to be recognized into revenue within the next 12 months.

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 continuing impact of the COVID-19 pandemic on our business, results of operations and financial condition; our revenue growth; expanding our sales and operating margin; supply chain challenges; backorder levels; our strategic initiatives; our beliefs regarding customer behavior and industry trends; 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, including our commitment to continue or increase quarterly dividend payments; our future compliance with the financial covenants contained in our credit facility; our belief that our cash on-hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended January 31, 2021, 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 sustainable products for the home. Our products, representing distinct merchandise strategies – Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct-mail catalogs and retail 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, South Korea, and India as well as e-commerce websites in certain locations. We are also proud to be a leader in the industry with our Environmental, Social and Governance efforts.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended October 31, 2021 (“third quarter of fiscal 2021”), as compared to the thirteen weeks ended November 1, 2020 (“third quarter of fiscal 2020”) and the thirty-nine weeks ended October 31, 2021 (“year-to-date fiscal 2021”), as compared to the thirty-nine weeks ended November 1, 2020 (“year-to-date fiscal 2020”), 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.

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COVID-19

Third Quarter of Fiscal 2021 Financial Results

Net revenues in the third quarter of fiscal 2021 increased by $283,003,000 or 16.0%, compared to the third quarter of fiscal 2020, with comparable brand revenue growth of 16.9% and growth in all brands. This was primarily driven by strength in both e-commerce and retail, primarily due to an increase in furniture sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during the third quarter of fiscal 2020. The increase in net revenues also included a 6.9% increase in international revenues primarily related to our franchise operations. On a two-year basis, comparable brand revenues increased 41.3%.

For the third quarter of fiscal 2021, we delivered comparable brand revenue growth of 16.9%. In West Elm, comparable brand revenue growth was 22.5%, with all categories driving growth. The upholstery business was strong, and customers responded well to new products, including bedroom, dining and occasional categories. Additionally, new categories such as bath, kids, and kitchen contributed to incremental growth. Pottery Barn, our largest brand, delivered 15.9% comparable brand revenue growth during the quarter driven by strong growth in all product categories, including our seasonal decorating business. In addition, we saw strength across our core lifestyle furniture category, our design services, and our furniture-advantaged growth initiatives such as apartment and our curated market-place assortments. The Williams Sonoma brand delivered comparable brand revenue growth of 7.6%, with growth across all key categories driven primarily by product innovation, edited and relevant assortments, and high demand for Thanksgiving and Holiday products. Both our exclusive and Williams Sonoma branded products continued to grow, and we saw strength in key entertaining items. In our Pottery Barn Kids and Teen businesses, we saw comparable brand revenue growth of 16.9% during the quarter. The demand for our GREENGUARD GOLD furniture remained strong, our baby business continued to accelerate as our customers expanded their families, and the response to our holiday and gifting offerings was strong. Finally, our emerging brands Rejuvenation and Mark and Graham, combined accelerated to 26.5% comparable brand revenue growth.

As of October 31, 2021, we had approximately $656,898,000 in cash and generated positive operating cash flow of $788,339,000 year-to-date. In addition to our strong cash balance, we also ended the quarter with no outstanding borrowings under our revolving line of credit. This strong liquidity position allowed us to fund the operations of the business by investing over $141,010,000 in capital expenditures year-to-date, and to provide shareholder returns of approximately $787,900,000 year-to-date through share repurchases and dividends.

For the third quarter of fiscal 2021, diluted earnings per share was $3.29 (which included a $0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.), versus $2.54 in the third quarter of fiscal 2020 (which included a $0.02 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.).

Looking Ahead

Looking forward to the balance of the year, we believe we will continue to see strong sales and operating margins. We believe the favorable macro trends and our operating model, which includes our key differentiators – our in-house design, our digital-first channel strategy, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. However, we continue to experience stronger than expected demand across all brands, as well as various supply chain disruptions and delays in inventory receipts, particularly in Vietnam. It is hard to predict with certainty when these supply chain challenges will be fully resolved. This, combined with our strong demand, we expect will cause backorder levels to remain elevated and we do not expect full recovery of our inventory levels until the middle of fiscal year 2022. For more information on risks, please see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

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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.

Net revenues for year-to-date fiscal 2021 increased by $1,254,391,000, or 27.9%, compared to year-to-date fiscal 2020, with comparable brand revenue growth of 27.7% and double-digit comparable brand revenue growth across all our brands. This was primarily driven by strength in both e-commerce and retail, primarily due to an increase in furniture sales, as well as the impact of stores operating at a limited capacity due to COVID-19 during year-to-date fiscal 2020. The increase in net revenues also included a 40.6% increase in international revenues primarily related to our franchise and company-owned operations. On a two-year basis, comparable brand revenues increased 40.8%.

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 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				Thirty-nine Weeks Ended
Comparable brand revenue growth	October 31, 2021		November 1, 2020		October 31, 2021		November 1, 2020
Pottery Barn	15.9	%	24.1	%	27.5	%	10.9	%
West Elm	22.5	%	21.8	%	39.5	%	11.4	%
Williams Sonoma	7.6	%	30.4	%	15.1	%	21.9	%
Pottery Barn Kids and Teen	16.9	%	23.8	%	20.2	%	12.7	%
Total 1	16.9	%	24.4	%	27.7	%	13.1	%

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

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STORE DATA


	Store Count 1					Average Leased Square Footage Per Store
	August 1, 2021	Openings	Closings	October 31, 2021	November 1, 2020	October 31, 2021	November 1, 2020
Williams Sonoma	196	—	(2)	194	210	6,800	6,800
Pottery Barn	195	—	—	195	201	14,500	14,400
West Elm	123	1	(3)	121	122	13,100	13,100
Pottery Barn Kids	57	—	—	57	71	7,800	7,800
Rejuvenation	10	—	—	10	10	8,700	8,500
Total	581	1	(5)	577	614	10,900	10,700
Store selling square footage at period-end						3,978,000	4,143,000
Store leased square footage at period-end						6,263,000	6,569,000

1Store count data does not reflect temporary closures due to COVID-19.

COST OF GOODS SOLD


	Thirteen Weeks Ended								Thirty-nine Weeks Ended
In thousands	October 31, 2021		% Net Revenues		November 1, 2020		% Net Revenues		October 31, 2021		% Net Revenues		November 1, 2020		% Net Revenues
Cost of goods sold 1	$	1,152,054	56.3	%	$	1,058,953	60.0	%	$	3,238,181	56.4	%	$	2,819,471	62.8	%

1Includes total occupancy expenses of $183.1 million and $174.2 million for the third quarter of fiscal 2021 and the third quarter of fiscal 2020, respectively, and $534.8 million and $515.3 million for year-to-date fiscal 2021 and year-to-date fiscal 2020, 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 replacements, damages, obsolescence and shrinkage. 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.

Third Quarter of Fiscal 2021 vs. Third Quarter of Fiscal 2020

Cost of goods sold increased by $93,101,000, or 8.8%, in the third quarter of fiscal 2021, compared to the third quarter of fiscal 2020. Cost of goods sold as a percentage of net revenues decreased to 56.3% in the third quarter of fiscal 2021 from 60.0% in the third quarter of fiscal 2020. This decrease was primarily driven by higher merchandise margins from reduced promotional activity and the leverage of occupancy costs from higher sales and low occupancy dollar growth, partially offset by higher ocean freight rates as a result of container shortages coming out of Asia.

Year-to-date Fiscal 2021 vs. Year-to-date Fiscal 2020

Cost of goods sold increased by $418,710,000, or 14.9%, for year-to-date fiscal 2021, compared to year-to-date fiscal 2020. Cost of goods sold as a percentage of net revenues decreased to 56.4% for year-to-date fiscal 2021 from 62.8% for year-to-date fiscal 2020. This decrease was primarily driven by higher selling margins from reduced promotional activity and the leverage of occupancy costs from higher sales and low occupancy dollar growth, as well as inventory write-offs of approximately $11,378,000 from the closure of our outlet stores due to COVID-19 in the first quarter of fiscal 2020 that did not recur in fiscal 2021.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


	Thirteen Weeks Ended								Thirty-nine Weeks Ended
In thousands	October 31, 2021		% Net Revenues		November 1, 2020		% Net Revenues		October 31, 2021		% Net Revenues		November 1, 2020		% Net Revenues
Selling, general and administrative expenses	$	565,218	27.6	%	$	430,979	24.4	%	$	1,578,182	27.5	%	$	1,162,435	25.9	%

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.

Third Quarter of Fiscal 2021 vs. Third Quarter of Fiscal 2020

Selling, general and administrative expenses increased by $134,239,000, or 31.1%, in the third quarter of fiscal 2021, compared to the third quarter of fiscal 2020. Selling, general and administrative expenses as a percentage of net revenues increased to 27.6% in the third quarter of fiscal 2021 from 24.4% in the third quarter of fiscal 2020. This increase was primarily driven by significantly reduced advertising costs in the third quarter of fiscal 2020 as a result of our financial response to COVID-19 and an incremental investment in highly efficient advertising in the third quarter of fiscal 2021.

Year-to-date Fiscal 2021 vs. Year-to-date Fiscal 2020

Selling, general and administrative expenses increased by $415,747,000, or 35.8%, for year-to-date fiscal 2021, compared to year-to-date fiscal 2020. Selling, general and administrative expenses as a percentage of net revenues increased to 27.5% for year-to-date fiscal 2021 from 25.9% for year-to-date fiscal 2020. This increase was primarily driven by significantly reduced advertising costs for year-to-date fiscal 2020 as a result of our financial response to COVID-19 and an incremental investment in highly efficient advertising for year-to-date fiscal 2021. This increase was partially offset by the leverage of employment costs and other general expenses from higher sales and overall cost discipline, as well as store asset impairment charges of approximately $21,975,000 due to the impact of COVID-19 on our retail stores in year-to-date fiscal 2020 that did not recur in year-to-date fiscal 2021.

INCOME TAXES

The effective tax rate was 21.9% for year-to-date fiscal 2021 compared to 24.8% for year-to-date fiscal 2020. The decrease in the effective tax rate is primarily due to an increase in our excess tax benefit from stock-based compensation in fiscal 2021 compared to fiscal 2020.

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2021, we held $656,898,000 in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts and money market funds, and of which $132,093,000 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.

For the remainder of fiscal 2021, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, stock repurchases and dividend payments, advertising and marketing initiatives, and property and equipment purchases.

In addition to our cash balances, we have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”). 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. In September 2021, we entered into an amendment to our credit facility (the "Amended Credit Agreement"), which extended the maturity date of the revolver to September 30, 2026 and removed the $300,000,000 term loan component available under the existing credit facility, which was fully repaid in February 2021. The Amended Credit Agreement maintains the interest rate of the revolver.

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During the third quarter of fiscal 2021, we had no borrowings under the revolver. Additionally, as of October 31, 2021, a total of $11,919,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs.

The credit facility contains 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 October 31, 2021, we were in compliance with our financial covenants under the credit facility and, based on our current projections, we expect to remain in compliance with the covenants under our credit facility throughout the next 12 months. We believe our cash on hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months.

Letter of Credit Facilities

Cash Flows from Operating Activities

For year-to-date fiscal 2021, net cash provided by operating activities was $788,339,000 compared to $726,628,000 for year-to-date fiscal 2020. For year-to-date fiscal 2021, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items and an increase in accounts payable and gift card and other deferred revenue, partially offset by an increase in merchandise inventories. Net cash provided by operating activities for year-to-date fiscal 2021 increased compared to year-to-date fiscal 2020 primarily due to an increase in net earnings, partially offset by an increase in merchandise inventories and an increase in income taxes paid.

Cash Flows from Investing Activities

For year-to-date fiscal 2021, net cash used in investing activities was $140,913,000 compared to $124,379,000 for year-to-date fiscal 2020, and was primarily attributable to purchases of property and equipment.

Cash Flows from Financing Activities

For year-to-date fiscal 2021, net cash used in financing activities was $1,191,159,000 compared to net cash used in financing activities of $260,009,000 for year-to-date fiscal 2020. For year-to-date fiscal 2021, net cash used in financing activities was primarily attributable to repurchases of common stock, the repayment of our term loan and payment of dividends. Net cash used in financing activities for year-to-date fiscal 2021 increased compared to year-to-date fiscal 2020 primarily due to an increase in repurchases of common stock and the repayment of our term loan in year-to-date fiscal 2021.

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 third quarter

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of fiscal 2021, there were no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

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.

Contractual Obligations, Commitments, Contingencies and Off-balance Sheet Arrangements

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 January 31, 2021, 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 has a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During the third quarter of fiscal 2021, we had no borrowings under the revolver.

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 October 31, 2021, 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 the majority of our inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars and, as such, any foreign currency impact related to our international purchase transactions was not significant to us during the third quarter of fiscal 2021 or the third quarter of fiscal 2020. 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 third quarter of fiscal 2021 or the third quarter of fiscal 2020, 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).

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of October 31, 2021, 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 were no changes in our internal control over financial reporting that occurred during the third quarter of fiscal 2021, that materially affected, or are 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 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 January 31, 2021 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 October 31, 2021 with respect to shares of common stock we repurchased during the third quarter of fiscal 2021 under our current stock repurchase program. 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 Purchased 1	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program 1	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
August 2, 2021 - August 29, 2021	60,448	$	162.96	60,448	$	1,248,946,000
August 30, 2021 - September 26, 2021	431,023	$	182.73	431,023	$	1,170,183,000
September 27, 2021 - October 31, 2021	628,277	$	179.38	628,277	$	1,057,485,000
Total	1,119,748	$	179.78	1,119,748	$	1,057,485,000

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

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*						Eig hth Amendment to Reimbursement Agreement between the Company , Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 22 , 202 1

10.2*						Eighth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 22, 2021

10.3*						Eighth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 22, 2021

10.4*						Eighth Amended and Restated Credit Agreement, dated September 30, 2021, between the Company and Bank of America, N.A., as administrative agent, letter of credit issuer and swingline lender, Wells Fargo Bank, National Association, as syndication agent and the lenders party thereto

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*						The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2021, 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

104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted under Exhibit 101).



*			Filed herewith

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SIGNATURE

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


WILLIAMS-SONOMA, INC.

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

Date: December 6, 2021