WILLIAMS SONOMA INC - Quarter Report: 2022 July (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 July 31, 2022.


☐			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 August 28, 2022, 66,711,363 shares of the registrant’s Common Stock were outstanding.

Table of Content s

WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JULY 31, 2022

TABLE OF CONTENTS


	PART I. FINANCIAL INFORMATION
		PAGE
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	22

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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	For the Thirteen Weeks Ended				For the Twenty-six Weeks Ended
(In thousands, except per share amounts)	July 31, 2022		August 1, 2021		July 31, 2022		August 1, 2021
Net revenues	$	2,137,537	$	1,948,339	$	4,028,764	$	3,697,368
Cost of goods sold	1,208,728		1,089,951		2,271,407		2,086,127
Gross profit	928,809		858,388		1,757,357		1,611,241
Selling, general and administrative expenses	563,288		535,288		1,068,355		1,012,964
Operating income	365,521		323,100		689,002		598,277
Interest (income) expense, net	(344)		(39)		(507)		1,833
Earnings before income taxes	365,865		323,139		689,509		596,444
Income taxes	98,790		77,069		168,321		122,572
Net earnings	$	267,075	$	246,070	$	521,188	$	473,872
Basic earnings per share	$	3.92	$	3.29	$	7.50	$	6.29
Diluted earnings per share	$	3.87	$	3.21	$	7.36	$	6.11
Shares used in calculation of earnings per share:
Basic	68,180		74,786		69,516		75,293
Diluted	69,081		76,584		70,844		77,516

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Thirteen Weeks Ended				For the Twenty-six Weeks Ended
(In thousands)	July 31, 2022		August 1, 2021		July 31, 2022		August 1, 2021
Net earnings	$	267,075	$	246,070	$	521,188	$	473,872
Other comprehensive income (loss):
Foreign currency translation adjustments	(1,385)		(3,522)		(2,899)		178
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $9, $25, $42, and $(216)	26		65		119		(600)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $2, $(126), $8, and $(181)	(5)		337		(23)		490
Comprehensive income	$	265,711	$	242,950	$	518,385	$	473,940

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	As of
(In thousands, except per share amounts)	July 31, 2022		January 30, 2022		August 1, 2021
ASSETS
Current assets
Cash and cash equivalents	$	124,944	$	850,338	$	655,211
Accounts receivable, net	133,500		131,683		141,814
Merchandise inventories, net	1,542,428		1,246,372		1,170,561
Prepaid expenses	102,312		69,252		85,587
Other current assets	25,537		26,249		20,537
Total current assets	1,928,721		2,323,894		2,073,710
Property and equipment, net	973,676		920,773		875,295
Operating lease right-of-use assets	1,174,354		1,132,764		1,052,617
Deferred income taxes, net	52,897		56,585		58,848
Goodwill	85,269		85,354		85,421
Other long-term assets, net	104,257		106,250		99,146
Total assets	$	4,319,174	$	4,625,620	$	4,245,037
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	680,097	$	612,512	$	601,879
Accrued expenses	244,559		319,924		224,089
Gift card and other deferred revenue	498,354		447,770		403,409
Income taxes payable	87,159		79,554		61,335


Operating lease liabilities	206,931		217,409		213,784
Other current liabilities	93,945		94,517		74,331
Total current liabilities	1,811,045		1,771,686		1,578,827
Deferred lease incentives	14,725		16,360		18,359

Long-term operating lease liabilities	1,115,501		1,066,839		994,165
Other long-term liabilities	99,624		106,528		126,967
Total liabilities	3,040,895		2,961,413		2,718,318

Stockholders’ equity
Preferred stock: $0.01 par value; 7,500 shares authorized; none issued	—		—		—
Common stock: $0.01 par value; 253,125 shares authorized; 67,057, 71,982 and 74,426 shares issued and outstanding at July 31, 2022, January 30, 2022 and August 1, 2021, respectively	671		720		745
Additional paid-in capital	541,895		600,942		569,734
Retained earnings	750,083		1,074,084		964,000
Accumulated other comprehensive loss	(13,631)		(10,828)		(7,049)
Treasury stock, at cost: 1, 4 and 4 shares as of July 31, 2022, January 30, 2022 and August 1, 2021, respectively	(739)		(711)		(711)
Total stockholders’ equity	1,278,279		1,664,207		1,526,719
Total liabilities and stockholders’ equity	$	4,319,174	$	4,625,620	$	4,245,037

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 30, 2022	71,982	$	720	$	600,942	$	1,074,084	$	(10,828)	$	(711)	$	1,664,207
Net earnings	—	—		—		254,113		—		—		254,113
Foreign currency translation adjustments	—	—		—		—		(1,514)		—		(1,514)
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		93		—		93
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		(18)		—		(18)
Conversion/release of stock-based awards 1	617	6		(78,142)		—		—		(372)		(78,508)
Repurchases of common stock	(3,380)	(33)		(18,590)		(482,452)		—		—		(501,075)
Reissuance of treasury stock under stock-based compensation plans 1	—	—		(344)		—		—		344		—
Stock-based compensation expense	—	—		28,339		—		—		—		28,339
Dividends declared	—	—		—		(55,893)		—		—		(55,893)
Balance at May 1, 2022	69,219	$	693	$	532,205	$	789,852	$	(12,267)	$	(739)	$	1,309,744
Net earnings	—	—		—		267,075		—		—		267,075
Foreign currency translation adjustments	—	—		—		—		(1,385)		—		(1,385)
Change in fair value of derivative financial instruments, net of tax	—	—		—		—		26		—		26
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax	—	—		—		—		(5)		—		(5)
Conversion/release of stock-based awards 1	26	—		(767)		—		—		—		(767)
Repurchases of common stock	(2,188)	(22)		(12,519)		(252,808)		—		—		(265,349)
Stock-based compensation expense	—	—		22,976		—		—		—		22,976
Dividends declared	—	—		—		(54,036)		—		—		(54,036)
Balance at July 31, 2022	67,057	$	671	$	541,895	$	750,083	$	(13,631)	$	(739)	$	1,278,279

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 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 awards 1	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 plans 1	—	—		(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 awards 1	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

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)


	For the Twenty-six Weeks Ended
(In thousands)	July 31, 2022		August 1, 2021
Cash flows from operating activities:
Net earnings	$	521,188	$	473,872
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	102,455		96,687
Loss on disposal/impairment of assets	5,413		455
Amortization of deferred lease incentives	(1,635)		(2,254)
Non-cash lease expense	110,511		105,739
Deferred income taxes	(7,636)		(7,037)
Tax benefit related to stock-based awards	10,828		10,302
Stock-based compensation expense	51,743		46,260
Other	154		(274)
Changes in:
Accounts receivable	(1,985)		2,002
Merchandise inventories	(295,458)		(163,621)
Prepaid expenses and other assets	(30,585)		(4,622)
Accounts payable	59,404		48,457
Accrued expenses and other liabilities	(78,895)		(43,653)
Gift card and other deferred revenue	50,503		30,308
Operating lease liabilities	(120,036)		(108,791)
Income taxes payable	7,623		(8,162)
Net cash provided by operating activities	383,592		475,668
Cash flows from investing activities:
Purchases of property and equipment	(148,548)		(78,281)
Other	86		97
Net cash used in investing activities	(148,462)		(78,184)
Cash flows from financing activities:
Repurchases of common stock	(766,424)		(451,388)
Payment of dividends	(112,674)		(91,069)
Tax withholdings related to stock-based awards	(79,275)		(100,160)
Repayment of long-term debt	—		(300,000)



Net cash used in financing activities	(958,373)		(942,617)
Effect of exchange rates on cash and cash equivalents	(2,151)		7
Net decrease in cash and cash equivalents	(725,394)		(545,126)
Cash and cash equivalents at beginning of period	850,338		1,200,337
Cash and cash equivalents at end of period	$	124,944	$	655,211

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 July 31, 2022 and August 1, 2021, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen and twenty-six weeks then ended and the Condensed Consolidated Statements of Cash Flows for the twenty-six weeks then ended, have been prepared by us, and have not been audited. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. Intercompany transactions and accounts have been eliminated in our consolidation. The balance sheet as of January 30, 2022, 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 30, 2022.

The results of operations for the thirteen and twenty-six weeks ended July 31, 2022 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 30, 2022.

During fiscal 2021 and continuing through the first half of fiscal 2022, global supply chain disruptions, including COVID-19 related factory closures and increased port congestion, caused delays in inventory receipts, increased raw material costs, and higher shipping-related charges. We expect these supply chain challenges to continue through the second half of fiscal 2022 and into the first half of fiscal 2023, which could negatively impact our business.

New Accounting Pronouncements

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.

NOTE B. BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility (the "Credit Facility") which provides for a $500 million unsecured revolving line of credit (the “Revolver”). Our 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 million to provide for a total of $750 million of unsecured revolving credit.

During the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021, we had no borrowings under our Revolver. Additionally, as of July 31, 2022, issued but undrawn standby letters of credit of $11.3 million were outstanding under our Revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs. Our 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 our 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 our Credit Facility, plus an applicable margin based on our leverage ratio, ranging from 0% to 0.775%.

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Our Credit Facility contains certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for operating lease liabilities 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 July 31, 2022, we were in compliance with our financial covenants under our Credit Facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities aggregating to $35.0 million. Our letter of credit facilities contain covenants that are consistent with our Credit Facility. Interest on unreimbursed amounts under our letter of credit facilities accrues at a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio. As of July 31, 2022, the aggregate amount outstanding under our letter of credit facilities was $6.4 million, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. On August 19, 2022, we renewed all three of our letter of credit facilities on substantially similar terms. Two of the letter of credit facilities totaling $30.0 million mature on August 19, 2023, and the latest expiration date possible for future letters of credit issued under these facilities is January 16, 2024. One of the letter of credit facilities totaling $5.0 million matures on September 30, 2026, which is also the latest expiration date possible for future letters of credit issued under the facility.

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 42.7 million shares. As of July 31, 2022, there were approximately 6.1 million shares available for future grant. Awards may be granted under our 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 one million 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 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 which cover 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). Non-employee directors may also elect, on terms prescribed by the Company, to receive all of their annual cash compensation to be earned in respect of the applicable fiscal year (or the last two quarters thereof in the case of fiscal 2021) either in the form of (i) fully vested stock units or (ii) fully vested deferred stock units.

Stock-Based Compensation Expense

During the thirteen and twenty-six weeks ended July 31, 2022, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $23.2 million and $51.7 million, respectively. During the thirteen and twenty-six weeks ended August 1, 2021, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $20.0 million and $46.3 million, respectively.

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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 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 July 31, 2022
Basic	$	267,075	68,180	$	3.92
Effect of dilutive stock-based awards			901
Diluted	$	267,075	69,081	$	3.87
Thirteen weeks ended August 1, 2021
Basic	$	246,070	74,786	$	3.29
Effect of dilutive stock-based awards			1,798
Diluted	$	246,070	76,584	$	3.21
Twenty-six weeks ended July 31, 2022
Basic	$	521,188	69,516	$	7.50
Effect of dilutive stock-based awards			1,328
Diluted	$	521,188	70,844	$	7.36
Twenty-six weeks ended August 1, 2021
Basic	$	473,872	75,293	$	6.29
Effect of dilutive stock-based awards			2,223
Diluted	$	473,872	77,516	$	6.11

The effect of anti-dilutive stock-based awards was not material for the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.

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 twenty-six weeks ended July 31, 2022 and August 1, 2021.


	For the Thirteen Weeks Ended				For the Twenty-six Weeks Ended
(In thousands)	July 31, 2022		August 1, 2021		July 31, 2022		August 1, 2021
Pottery Barn	$	879,107	$	732,323	$	1,653,753	$	1,411,378
West Elm	607,918		579,636		1,144,211		1,056,953
Williams Sonoma	248,611		255,455		500,831		521,062
Pottery Barn Kids and Teen	284,162		273,937		511,131		510,004


Other 1	117,739		106,988		218,838		197,971
Total 2	$	2,137,537	$	1,948,339	$	4,028,764	$	3,697,368
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 $113.3 million and $116.1 million for the thirteen weeks ended July 31, 2022 and August 1, 2021, respectively, and approximately $208.3 million and $216.0 million for the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively.

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Long-lived assets by geographic location are as follows:


	As of
(In thousands)	July 31, 2022 1		August 1, 2021 1
U.S.	$	2,268,961	$	2,021,577
International	121,492		149,750
Total	$	2,390,453	$	2,171,327

1Includes total goodwill, deferred tax assets and intangibles of $148.5 million and $154.7 million as of July 31, 2022 and August 1, 2021, respectively, of which $135.0 million and $143.3 million, respectively, is related to the U.S.

NOTE F. COMMITMENTS AND CONTINGENCIES

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

NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended July 31, 2022, we repurchased 2,188,037 shares of our common stock at an average cost of $121.27 per share for a total cost of $265.3 million. During the twenty-six weeks ended July 31, 2022, we repurchased 5,567,768 shares of our common stock at an average cost of $137.65 per share for a total cost of $766.4 million. As of July 31, 2022, there was $803.6 million remaining under our current stock repurchase program. During the thirteen weeks ended August 1, 2021, we repurchased 834,294 shares of our common stock at an average cost of $162.84 per share for a total cost of $135.9 million. During the twenty-six weeks ended August 1, 2021, we repurchased 2,625,019 shares of our common stock at an average cost of $171.96 per share for a total cost of $451.4 million.

Stock repurchased by the Company is typically cancelled after purchasing. However, we hold some shares in treasury to satisfy future stock-based award settlements in certain foreign jurisdictions. We held treasury stock of $0.7 million as of July 31, 2022 and August 1, 2021.

Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.

Dividends

We declared cash dividends of $0.78 and $0.59 per common share during the thirteen weeks ended July 31, 2022 and August 1, 2021, respectively. We declared cash dividends of $1.56 and $1.18 per common share during the twenty-six weeks ended July 31, 2022 and August 1, 2021, respectively. Our quarterly cash dividend may be limited or terminated at any time.

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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 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 financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with 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 July 31, 2022, our reclassification of pre-tax gains or losses from OCI to cost of goods sold over the next 12 months is not expected to be material.

We had foreign currency forward contracts outstanding (in U.S. dollars) with notional amounts of $18.0 million and $19.5 million as of July 31, 2022 and August 1, 2021, respectively.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021.

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 twenty-six weeks ended July 31, 2022 and August 1, 2021.

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.

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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.

During the thirteen and twenty-six weeks ended July 31, 2022, we recognized impairment charges of $2.6 million related to the impairment of property and equipment and $2.6 million related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from underperforming stores in Australia. During the thirteen and twenty-six weeks ended August 1, 2021, no impairment charges were recognized.

There were no transfers in and out of Level 3 categories during the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021.

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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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 30, 2022	$	(10,886)	$	58	$	(10,828)
Foreign currency translation adjustments	(1,514)		—		(1,514)
Change in fair value of derivative financial instruments	—		93		93
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1	—		(18)		(18)
Other comprehensive income (loss)	(1,514)		75		(1,439)
Balance at May 1, 2022	$	(12,400)	$	133	$	(12,267)
Foreign currency translation adjustments	(1,385)		—		(1,385)
Change in fair value of derivative financial instruments	—		26		26
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1	—		(5)		(5)
Other comprehensive income (loss)	(1,385)		21		(1,364)
Balance at July 31, 2022	$	(13,785)	$	154	$	(13,631)






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 instruments 1	—		337		337
Other comprehensive income (loss)	(3,522)		402		(3,120)
Balance at August 1, 2021	$	(6,220)	$	(829)	$	(7,049)

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

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NOTE K. REVENUE

Merchandise Sales

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

Revenues from sales of merchandise are recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the customer. For merchandise delivered to the customer, control is transferred either when delivery has been completed, or when we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of July 31, 2022 and August 1, 2021, we recorded a liability for expected sales returns of approximately $45.7 million and $28.3 million, respectively, within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $13.9 million and $7.8 million, respectively, within other current assets in our Condensed Consolidated Balance Sheet.

See Note E for the disclosure of our net revenues by operating segment.

Gift Card and Other Deferred Revenue

We defer revenue and record a liability when cash payments are received in advance of satisfying performance obligations, primarily associated with our merchandise sales, stored-value cards, customer loyalty programs, and incentives received from credit card issuers.

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.

We have customer loyalty programs, which allow members to earn points for each qualifying purchase. Customers can earn points through spend on both our private label and co-branded credit cards, or can earn points as part of our non-credit card related loyalty program. Points earned through both loyalty programs 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 or certificates earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be issued and redeemed, based on historical patterns. This measurement is applied to our portfolio of performance obligations for points or certificates 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.

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. These separate non-loyalty program related 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.

As of July 31, 2022 and August 1, 2021, we had recorded $501.8 million and $406.5 million, respectively, for gift card and other deferred revenue in our Condensed Consolidated Balance Sheets, substantially all of which is expected to be recognized into revenue within the next 12 months.

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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: supply chain challenges; backorder levels and inventory constraints; 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; the impact of inflation and measures to control inflation on consumer spending; 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 30, 2022, 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. ("Company", "we", or "us") is a specialty retailer of high-quality sustainable products for the home. Our products in our portfolio of eight brands – 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, at our retail stores and through our direct-mail catalogs. These brands are also part of The Key Rewards, our loyalty and credit card 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 our 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 July 31, 2022 (“second quarter of fiscal 2022”), as compared to the thirteen weeks ended August 1, 2021 (“second quarter of fiscal 2021”) and the twenty-six weeks ended July 31, 2022 (“first half of fiscal 2022”), as compared to the twenty-six weeks ended August 1, 2021 (“first half of fiscal 2021”), 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.

Second Quarter of Fiscal 2022 Financial Results

Net revenues in the second quarter of fiscal 2022 increased by $189.2 million or 9.7%, compared to the second quarter of fiscal 2021, with comparable brand revenue growth of 11.3% and growth in all brands. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales. On a two-year basis, comparable brand revenues increased 41.1%.

Pottery Barn, our largest brand, delivered 21.5% comparable brand revenue growth during the quarter, and 51.1% comparable brand revenue growth on a two-year basis. All channels and product divisions contributed, with growth primarily driven by our high-quality proprietary furniture business. In West Elm, comparable brand revenue growth was 6.1%, on top of 51.1% growth last year, resulting in a 57.2% comparable brand revenue growth on a two-year basis. Growth was driven by improved in-stock positions. The Williams Sonoma brand saw a comparable brand revenue growth of 0.5% during the quarter, an acceleration from the first quarter of fiscal 2022, driven by an improved in-stock position, newness in product assortment, as well as higher conversion on the website powered by our ongoing ecommerce initiative. In our Pottery Barn Kids and Teen brands, we saw comparable brand revenue growth of 5.3% during the quarter, driven by an improvement in inventory receipts out of Vietnam which followed factory closures that occurred in the second half of fiscal 2021, allowing us to fulfill orders.

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For the second quarter of fiscal 2022, diluted earnings per share was $3.87, compared to $3.21 in the second quarter of fiscal 2021 (which included a $0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.).

As of July 31, 2022, we had $124.9 million in cash and generated operating cash flow of $383.6 million in the first half of fiscal 2022. 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 $148.5 million in capital expenditures in the first half of fiscal 2022, and to provide stockholder returns of $879.1 million in the first half of fiscal 2022 through stock repurchases and dividends.

Looking Ahead

Looking forward to the balance of the year, we believe 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 delays and increased costs across our global supply chain, including higher product costs, elevated backorders, higher freight and incremental distribution center costs for additional space to support our overall growth and our ongoing mix shift to furniture. It is hard to predict with certainty when these supply chain challenges will be fully resolved and we currently expect these supply chain challenges, combined with our strong demand, to negatively impact our inventory levels through the second half of fiscal year 2022 and into the first half of 2023. Despite these challenges, we believe the demand for our proprietary and sustainably-sourced products, our growth strategies and the efficiencies of our operating model leave us well-positioned to mitigate these costs in both the short- and long-term. 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 30, 2022.

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, at our retail stores and through our direct mail catalogs, 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, incentives received from credit card issuers in connection with our private label and co-branded credit cards, and breakage income related to our stored-value cards. Revenue from the sale of merchandise is reported net of sales returns.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Net revenues for the first half of fiscal 2022 increased by $331.4 million, or 9.0%, compared to the first half of fiscal 2021, with comparable brand revenue growth of 10.5%. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales. On a two-year basis, comparable brand revenues increased 45.1%.

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 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 more than seven consecutive days within the same fiscal month. Comparable stores that were temporarily closed due to COVID-19 were not excluded from the comparable brand revenue 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.

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	For the Thirteen Weeks Ended				For the Twenty-six Weeks Ended
Comparable brand revenue growth (decline)	July 31, 2022		August 1, 2021		July 31, 2022		August 1, 2021
Pottery Barn	21.5	%	29.6	%	18.2	%	35.0	%
West Elm	6.1		51.1		9.1		51.0
Williams Sonoma	0.5		6.4		(0.9)		19.4
Pottery Barn Kids and Teen	5.3		18.0		1.4		22.3

Total 1	11.3	%	29.8	%	10.5	%	34.6	%

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

STORE DATA


	Store Count					Average Leased Square Footage Per Store
	May 1, 2022	Openings	Closings	July 31, 2022	August 1, 2021 1	July 31, 2022	August 1, 2021 1
Pottery Barn	188	2	(1)	189	195	14,600	14,600
Williams Sonoma	175	1	(1)	175	196	6,800	6,800
West Elm	121	1	(1)	121	123	13,200	13,100
Pottery Barn Kids	52	—	—	52	57	7,700	7,800
Rejuvenation	9	—	—	9	10	9,400	8,500
Total	545	4	(3)	546	581	11,100	10,900
Store selling square footage at period-end						3,856,000	3,994,000
Store leased square footage at period-end						6,044,000	6,319,000

1Retail store data for fiscal 2021 includes stores temporarily closed due to COVID-19. All stores were reopened as of the end of fiscal 2021.

COST OF GOODS SOLD


	For the Thirteen Weeks Ended								For the Twenty-six Weeks Ended
(In thousands)	July 31, 2022		% Net Revenues		August 1, 2021		% Net Revenues		July 31, 2022		% Net Revenues		August 1, 2021		% Net Revenues
Cost of goods sold 1	$	1,208,728	56.5	%	$	1,089,951	55.9	%	$	2,271,407	56.4	%	$	2,086,127	56.4	%

1Includes total occupancy expenses of $193.0 million and $176.0 million for the second quarter of fiscal 2022 and the second quarter of fiscal 2021, respectively, and $379.4 million and $351.7 million for the first half of fiscal 2022 and the first half of fiscal 2021, 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, other occupancy costs (including property taxes, common area maintenance and utilities) and depreciation. 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.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

Cost of goods sold increased $118.8 million, or 10.9%, in the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Cost of goods sold as a percentage of net revenues increased to 56.5% in the second quarter of fiscal 2022 from 55.9% in the second quarter of fiscal 2021. This increase was primarily driven by higher freight costs resulting from strong furniture demand, high backorder fulfillment and global supply chain disruptions, partially offset by merchandise margin expansion.

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First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Cost of goods sold increased by $185.3 million, or 8.9%, for the first half of fiscal 2022, compared to the first half of fiscal 2021. Cost of goods sold as a percentage of net revenues was 56.4% for both the first half of fiscal 2022 and the first half of fiscal 2021. This was primarily driven by higher freight costs resulting from strong furniture demand, high backorder fulfillment and global supply chain disruptions, offset by merchandise margin expansion.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


	For the Thirteen Weeks Ended								For the Twenty-six Weeks Ended
(In thousands)	July 31, 2022		% Net Revenues		August 1, 2021		% Net Revenues		July 31, 2022		% Net Revenues		August 1, 2021		% Net Revenues
Selling, general and administrative expenses	$	563,288	26.4	%	$	535,288	27.5	%	$	1,068,355	26.5	%	$	1,012,964	27.4	%

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.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

Selling, general and administrative expenses increased $28.0 million, or 5.2%, in the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.4% in the second quarter of fiscal 2022 from 27.5% in the second quarter of fiscal 2021. This decrease in rate was primarily driven by the leverage of advertising expenses and employment costs from higher sales and overall cost discipline.

First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Selling, general and administrative expenses increased by $55.4 million, or 5.5%, for the first half of fiscal 2022, compared to the first half of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.5% for the first half of fiscal 2022 from 27.4% for the first half of fiscal 2021. This decrease in rate was primarily driven by the leverage of employment costs and advertising expenses from higher sales and overall cost discipline.

INCOME TAXES

The effective tax rate was 24.4% for the first half of fiscal 2022 compared to 20.6% for the first half of fiscal 2021. The increase in the effective tax rate is primarily due to less excess tax benefit from stock-based compensation in fiscal 2022 compared to fiscal 2021, the tax effect of earnings mix change between the two fiscal years, the statute of limitation of uncertain tax positions expiring in fiscal 2021 and the change in permanent reinvestment assertion on Canadian earnings in 2022.

Since the Tax Cuts and Jobs Act of 2017, we have elected not to provide for income taxes with respect to the earnings of Canada after fiscal 2017. In the second quarter of fiscal 2022, we assessed the overall cash needs and financial position of our foreign subsidiaries, and management decided to no longer assert its intent to indefinitely reinvest undistributed earnings in Canada. As a result of this change in assertion, we recorded $2.4 million of tax expense mainly related to Canadian withholding taxes.

The Inflation Reduction Act was enacted on August 16, 2022, and includes a new 15% minimum tax on “adjusted financial statement income” beginning with the Company’s fiscal year 2023, and a new 1% excise tax on stock repurchases after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, we will continue to evaluate its impact as further information becomes available.

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LIQUIDITY AND CAPITAL RESOURCES

Material Cash Requirements

There were no material changes during the quarter to the Company’s material cash requirements, commitments and contingencies that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2022, which is incorporated herein by reference.

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.

Liquidity Outlook

For the remainder of fiscal 2022, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, advertising and marketing initiatives, stock repurchases, the payment of income taxes, property and equipment purchases, rental payments on our leases and dividend payments.

We believe our cash on hand, cash flows from operations, and our available credit facilities will provide adequate liquidity for our business operations as well as stock repurchases, capital expenditures, dividends and other liquidity requirements associated with our business operations over the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

Sources of Liquidity

As of July 31, 2022, we held $124.9 million in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts, and of which $96.1 million was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

In addition to our cash balances on hand, we have a credit facility (the "Credit Facility") which provides for a $500 million unsecured revolving line of credit (the “Revolver”). Our 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 million to provide for a total of $750 million of unsecured revolving credit.

Letter of Credit Facilities

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Cash Flows from Operating Activities

For the first half of fiscal 2022, net cash provided by operating activities was $383.6 million compared to $475.7 million for the first half of fiscal 2021. For the first half of fiscal 2022, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, an increase in accounts payable, and an increase in gift card and other deferred revenue (as a result of an increase in sales), partially offset by higher spending on merchandise inventories (as a result of the strong customer demand for our products) and decreases in operating lease liabilities and accrued expenses and other liabilities. Net cash provided by operating activities for the first half of fiscal 2022 decreased compared to the first half of fiscal 2021, primarily due to increases in merchandise inventories and prepaid expenses and other assets, and a decrease in accrued expenses and other liabilities, partially offset by an increase in net earnings adjusted for non-cash items.

Cash Flows from Investing Activities

For the first half of fiscal 2022, net cash used in investing activities was $148.5 million compared to $78.2 million for the first half of fiscal 2021, and was primarily attributable to purchases of property and equipment related to technology and supply chain enhancements.

Cash Flows from Financing Activities

For the first half of fiscal 2022, net cash used in financing activities was $958.4 million compared to $942.6 million for the first half of fiscal 2021, primarily driven by repurchases of common stock. Net cash used in financing activities for the first half of fiscal 2022 increased compared to the first half of fiscal 2021, primarily due to an increase in repurchases of common stock, partially offset by the repayment of debt in the first quarter of fiscal 2021 that did not recur in the first quarter of fiscal 2022.

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, distribution facilities and customer care centers.

CRITICAL ACCOUNTING ESTIMATES

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 second quarter of fiscal 2022, there were no significant changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

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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 second quarter of fiscal 2022, we had no borrowings under our 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 July 31, 2022, our investments, made primarily in interest-bearing demand deposit accounts, 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 primarily 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 second quarter of fiscal 2022 or the second quarter of fiscal 2021. 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 second quarter of fiscal 2022 or fiscal 2021, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note H to our Condensed Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of July 31, 2022, 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, as amended, 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 second quarter of fiscal 2022, 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 30, 2022 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 July 31, 2022 with respect to shares of common stock we repurchased during the second quarter of fiscal 2022. 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
May 2, 2022 - May 29, 2022	457,400	$	122.30	457,400	$	1,012,987,000
May 30, 2022 - June 26, 2022	745,647	$	120.56	745,647	$	923,088,000
June 27, 2022 - July 31, 2022	984,990	$	121.33	984,990	$	803,576,000
Total	2,188,037	$	121.27	2,188,037	$	803,576,000

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


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 July 31, 2022, 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: September 2, 2022