the success of other retail stores in and around our retail locations;
our ability to secure required governmental permits and approvals;
our hiring and training of skilled store operating personnel, especially management;
the availability of financing on acceptable terms, if at all; and
the financial stability of our landlords and potential landlords.
Many of these factors are beyond our control. For example, for the purpose of identifying suitable store locations, we rely, in part, on demographic surveys regarding the location of consumers in our target market segments. While we believe that the surveys and other relevant information are helpful indicators of suitable store locations, we recognize that these information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, changes in demographics, in consumer shopping patterns, such as a reduction in mall traffic, in the types of merchandise that we sell and in the pricing of our products, may reduce the number of suitable store locations or cause formerly suitable locations to become less desirable. Further, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays or unexpected cancellations. We may not be able to open new stores or, if opened, operate those stores profitably. Construction and other delays in store openings could have a negative impact on our business and operating results. Additionally, we may not be able to renegotiate the terms of our current leases or close our underperforming stores on terms favorable to us, any of which could negatively impact our operating results.
Our sales may be negatively impacted by increasing competition from companies with brands or products similar to ours.
The specialtye-commerce and retail businesses are highly competitive. We compete with other retailers that market lines of merchandise similar to ours. We compete with national, regional and local businesses that utilize a similar retail store strategy, as well as traditional furniture stores, department stores,direct-to-consumer businesses and specialty stores. The substantial sales growth in thee-commerce industry within the last decade has encouraged the entry of many new competitors, including discount retailers selling similar products at reduced prices, new business models, and an increase in competition from established companies, many of whom are willing to spend significant funds and/or reduce pricing in order to gain market share. In addition, the decline in the global economic environment has led to increased competition from discount retailers selling similar products at reduced prices.
The competitive challenges facing us include:
anticipating and quickly responding to changing consumer demands or preferences better than our competitors;
maintaining favorable brand recognition and achieving customer perception of value;
effectively marketing and competitively pricing our products to consumers in several diverse market segments;
effectively managing and controlling our costs;
effectively managing increasingly competitive promotional activity;
effectively attracting new customers;
developing new innovative shopping experiences, like mobile and tablet applications that effectively engage today’s digital customers;
developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups, tastes and regions, and in ways that favorably distinguish us from our competitors; and
effectively managing our supply chain and distribution strategies in order to provide our products to our consumers on a timely basis and minimize returns, replacements and damaged products.
In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could reduce our sales and harm our operating results and business.
Our business and operating results may be harmed if we are unable to timely and effectively deliver merchandise to our stores and customers.
If we are unable to effectively manage our inventory levels and responsiveness of our supply chain, including predicting the appropriate levels and type of inventory to stock within each of our distribution facilities, our
business and operating results may be harmed. We continue to insource furniture delivery hubs in certain geographies and continue with the regionalization of our retail ande-commerce fulfillment capabilities. We are subject to risks that may disrupt our supply chain operations or regionalization efforts, such as increasing labor costs, union organizing activity and our ability to effectively locate real estate for our distribution facilities or other supply chain operations.
Further, we cannot control all of the various factors that might affect oure-commerce fulfillment rates and timely and effective merchandise delivery to our stores. We rely upon third-party carriers for our merchandise shipments and reliable data regarding the timing of those shipments, including shipments to our customers and to and from our stores. In addition, we are heavily dependent upon two carriers for the delivery of our merchandise to our customers. As a result of our dependence on all of these third-party providers, we are subject to risks, including labor disputes (such as the disruptions at the west coastU.S. West Coast ports in early 2015), union organizing activity, inclement weather, natural disasters, the closure of such carriers’ offices or a reduction in operational hours due to an economic slowdown or the inability to sufficiently ramp up operational hours during an economic recovery or upturn, availability of adequate trucking or railway providers, possible acts of terrorism or other factors affecting such carriers’ ability to provide delivery services to meet our shipping needs, disruptions or increased fuel costs and costs associated with any regulations to address climate change. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, fuel costs have been volatile and airline and other transportation companies continue to struggle to operate profitably, which could lead to increased fulfillment expenses. Any rise in fulfillment expenses could negatively affect our business and operating results.
Our failure to successfully manage our order-taking and fulfillment operations could have a negative impact on our business and operating results.
Oure-commerce business depends, in part, on our ability to maintain efficient and uninterrupted order-taking and fulfillment operations in our distribution facilities, our customer care centers and on oure-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone or network services, power outages, inadequate system capacity, system hardware or software issues, computer viruses, security breaches, human error, changes in programming, union organizing activity, insufficient or inadequate labor to fulfill the orders, disruptions in our third-party labor contracts, inefficiencies due to inventory levels and limited distribution facility space, issues with third-party order fulfillment and dropshipping, natural disasters or adverse weather conditions. Industries that are particularly seasonal, such as the home furnishings business, face a higher risk of harm from operational disruptions during peak sales seasons. These problems could result in a reduction in sales as well as increased selling, general and administrative expenses.
In addition, we face the risk that we cannot hire enough qualified employees to support oure-commerce operations, or that there will be a disruption in the workforce we hire from our third-party providers, especially during our peak season. The need to operate with fewer employees could negatively impact our customer service levels and our operations.
Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters and other unexpected events, any of which could result in an interruption in our business and harm our operating results.
Our retail stores, corporate offices, distribution and manufacturing facilities, infrastructure ande-commerce operations, as well as the operations of our vendors from which we receive goods and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods or other volatile weather, power losses, telecommunications failures, hardware and software failures, computer viruses and similar events. If any of these events result in damage to our facilities or systems, or those of our vendors, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.
Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business.
Catalog mailings are an important component of our business. Postal rate increases affect the cost of our catalog mailings. We rely on discounts from the basic postal rate structure, which could be changed or discontinued at
any time. Further, the U.S. Postal Service may raise rates in the future, which could negatively impact our business. The cost of paper, printing and catalog distribution also impacts our catalog business. We have consolidated all of our catalog printing work with one printer. Our dependence on one vendor subjects us to various risks if the vendor fails to perform under our agreement. Paper costs have also fluctuated significantly in the past and may continue to fluctuate in the future. We have also recently consolidated all of our paper purchasing through a single broker. Consolidation within the paper industry has reduced the number of potential suppliers capable of meeting our paper requirements, leading to increased costs. Our dependence on a single broker and/or further consolidation in the paper industry could limit our ability in the future to obtain favorable terms including price, custom paper quality, paper quantity and service. Future increases in postal rates, paper costs or printing costs could have a negative impact on our operating results to the extent that we are unable to offset such increases by raising prices, implementing more efficient printing, mailing, delivery and order fulfillment systems, or through the use of alternative direct maildirect-mail formats. In addition, if the performance of our catalogs declines, if we misjudge the correlation between our catalog circulation and net sales, or if our catalog strategy overall does not continue to be successful, our results of operations could be negatively impacted.
We have historically experienced fluctuations in our customers’ response to our catalogs. Customer response to our catalogs is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the selection of customers to whom the catalogs are mailed, changes in mailing strategies, the size of our mailings, timing of delivery of our mailings, as well as the general retail sales environment and current domestic and global economic conditions. In addition, environmental organizations and other consumer advocacy groups may attempt to create an unfavorable impression of our paper use in catalogs and our distribution of catalogs generally, which may have a negative effect on our sales and our reputation. Further, we depend upon external vendors to print and mail our catalogs. The failure to effectively produce or distribute our catalogs could affect the timing of catalog delivery. The timing of catalog delivery has been and can be affected by postal service delays and may be impacted in the future by changes in the services provided by the post office. Any delays in the timing of catalog delivery could cause customers to forego or defer purchases, negatively impacting our business and operating results.
Declines in our comparable brand revenues may harm our operating results and cause a decline in the market price of our common stock.
Various factors affect comparable brand revenues, including the number, size and location of stores we open, close, remodel or expand in any period, the overall economic and general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition (including competitive promotional activity and discount retailers), current local and global economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, the cannibalization of existing store sales by our new stores, changes in catalog circulation and in oure-commerce business and fluctuations in
foreign exchange rates. Among other things, weather conditions have affected, and may continue to affect, comparable brand revenues by limiting our ability to deliver our products to our stores, altering consumer behavior, or requiring us to close certain stores temporarily, and thus reducing store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused, and may continue to cause, our comparable brand revenue results to differ materially from prior periods and from earnings guidance we have provided. For example, the overall economic and general retail sales environment, as well as local and global economic conditions, has caused a significant decline in our comparable brand revenue results in the past.
Our comparable brand revenues have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable brand revenues will continue to fluctuate in the future. In addition, past comparable brand revenues are not necessarily an indication of future results and comparable brand revenues may decrease in the future. Our ability to improve our comparable brand revenue results depends, in large part, on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, effectively driving traffic to our stores,e-commerce websites and direct maildirect-mail catalogs through marketing and various promotional events, providing an appropriate mix of merchandise for our broad
and diverse customer base and using effective pricing strategies. Any failure to meet the comparable brand revenue expectations of investors and securities analysts in one or more future periods could significantly reduce the market price of our common stock.
Our failure to successfully anticipate merchandise returns might have a negative impact on our business.
We record a reserve for merchandise returns based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected and reserved for by management, additional sales returns might be recorded in the future. In addition, to the extent that returned merchandise is damaged, we often do not receive full retail value from the resale or liquidation of the merchandise. Further, the introduction of new merchandise, changes in merchandise mix, changes in consumer confidence, or other competitive and general economic conditions may cause actual returns to differ from merchandise return reserves. Any significant increase in merchandise returns that exceeds our reserves could harm our business and operating results.
If we are unable to successfully manage the complexities associated with a multi-channel and multi-brand business, we may suffer declines in our existing business and our ability to attract new business.
With the expansion of oure-commerce business, the development of new brands, acquired brands, and brand extensions, our overall business has become substantially more complex. The changes in our business have forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the risk that oure-commerce business, including our catalog circulation, might cannibalize a significant portion of our retail sales.sales or our newer brands, brand extensions and products may result in a decrease in sales of existing brands and products. While we recognize that oure-commerce sales and sales from new brands and products cannot be entirely incremental to sales through our retail channel or from existing brands and products, respectively, we seek to attract as many new customers as possible with the most relevant channels, brands and products to meet customer needs and grow our e-commerce websites.market share. We continually analyze the business results of our channels, brands and the relationships among the channelsproducts in an effort to find opportunities to build incremental sales.
If we are unable to introduce new brands and brand extensions successfully, or to reposition or close existing brands, our business and operating results may be negatively impacted.
We have in the past and may in the future introduce new brands and brand extensions, reposition brands, close existing brands, or acquire new brands, especially as we continue to expand globally. Our newest brands and brand extensions — Williams Sonoma Home PBteen and Mark and Graham, and any other new brands, as well as our acquired brand, Rejuvenation, oras well as our expansion into new lines of business, including our recently acquired business, Outward, our new business to business division, which targets commercial businesses across a number of verticals, including commercial furniture and hospitality, and our planned subscription-based services,
may not grow as we project and plan for.expected. The work involved with integrating new brands or businesses into our existing systems and operations could be time consuming, require significant amounts of management time and result in the diversion of substantial operational resources. Further, if we devote time and resources to new brands, acquired brands, brand extensions, brand repositioning, or new lines of business and those businesses are not as successful as we planned, then we risk damaging our overall business results or incurring impairment charges to write off any existing goodwill or intangible assets associated with previously acquired brands. Alternatively, if our new brands, acquired brands, brand extensions, repositioned brands or new lines of business prove to be very successful, we risk hurting our other existing brands through the potential migration of existing brand customers to the new businesses. Further, in an effort to acquire or build new brands at an early enough stage to leverage the full scale of our capabilities and assets, we may forego the long-term evidence to guarantee success in new or emerging businesses. As a result, we may not be able to introduce new brands and brand extensions, integrate newly acquired brands, reposition existing brands, develop new lines of business or expand our brands globally, in a manner that improves our overall business andand/or operating results and may therefore be forced to close the brands or new lines of business, which may damage our reputation andand/or negatively impact our operating results.
We must protect and maintain our brand image and reputation.
Our brands have wide recognition, and our success has been due in large part to our ability to maintain, enhance and protect our brand image and reputation and our customers’ connection to our brands. Our continued success depends in part on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Even if we react appropriately to negative posts or comments about us and/or our brands on social media and online, our customers’ perception of our brand image and our reputation could be negatively impacted. In addition, customer sentiment could be shaped by our sustainability policies and related design, sourcing and operations decisions. Failure to maintain, enhance and protect our brand image could have a material adverse effect on our results of operations.
Any significant changes in U.S.tax, trade tax or other policies in the U.S. or other countries, including policies that restrict imports or increase import tariffs, could have a material adverse effect on our results of operations.
A significant portion of our products are manufactured outside of the U.S. Lawmakers are evaluating proposals for substantialWhile the U.S. Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, has not had an adverse effect on our results of operations and is not expected to have an adverse effect on our results of operations going forward, significant changes toin tax, trade or other polices either in the U.S. trade and tax policies, which could include import restrictions, increased import tariffs
or border-adjustment taxes. These policies — particularly a border-adjustment tax —other countries could significantly increase our tax burden.burden or costs of goods sold. These changes in policies may also require us to increase our prices, which would likely adversely affect our sales and revenue. In addition, other countries might retaliate through the imposition of their own restrictions or increased tariffs, which could adversely affect our globalsales.
Recent tariffs could result in increased prices and/or costs of goods or delays in product received from our vendors and could adversely affect our results of operations.
Recently, the U.S. administration has enacted certain tariffs and proposed additional tariffs on many items sourced from China, including certain furniture, accessories, furniture parts, and raw materials for domestic furniture manufacturing products imported into the U.S. We may not be able to fully or substantially mitigate the impact of these tariffs, pass price increases on to our customers, or secure adequate alternative sources of products or materials. The tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could adversely affect customer sales, and revenue. Any significant changesincluding potential delays in current U.S. trade, tax or other policies could have a material adverse effect onproduct received from our vendors, our cost of goods sold and results of operations.
Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results.
We are subject to income taxes in many U.S. and certain foreign jurisdictions. Our provision for income taxes is subject to volatility and could be adversely impacted by a number of factors that require significant judgment and estimation. Although we believe our estimates are reasonable, actual results may differ materially differ from our estimates and adversely affect our financial condition or operating results. We record income tax expense based on our estimates of future payments, which include reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly and annual effective tax rates as taxable events occur and uncertain tax positions are evaluated.either evaluated or resolved.
In addition, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings or losses in countries with differing statutory tax rates or by changes to existing laws or regulations. For example, U.S. lawmakers are evaluating proposals for substantial changes to U.S. fiscal and tax policies, which could include comprehensive tax reform. We cannot predict the impact, if any, these changes may have on our business; however, such changes could have a materialTax Act has not had an adverse effect on our business and results of operations.operations and is not expected to have an adverse effect on our results of operations going forward, but it will materially impact our effective tax rate.
Our inability to obtain commercial insurance at acceptable rates or our failure to adequately reserve for self-insured exposures might increase our expenses and have a negative impact on our business.
We believe that commercial insurance coverage is prudent in certain areas of our business for risk management. Insurance costs may increase substantially in the future and may be affected by natural catastrophes,disasters, fear of terrorism, financial irregularities, cybersecurity breaches and other fraud at publicly-traded companies, intervention by the government, an increase in the number of claims received by the carriers, and a decrease in the number of insurance carriers. In addition, the carriers with which we hold our policies may go out of business or be otherwise unable to fulfill their contractual obligations, or may disagree with our interpretation of the coverage or the amounts owed. In addition, for certain types or levels of risk, such as risks associated with certain natural disasters or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable rates, if at all. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. We are primarily self-insured for workers’ compensation, employment practices liability, employee health benefits, and product and other general liability claims, among others. If we suffer a substantial loss that is not covered by commercial insurance or our self-insurance reserves, the loss and related expenses could harm our business and operating results. In addition, exposures exist for which no insurance may be available and for which we have not reserved.
Our inability or failure to protect our intellectual property would have a negative impact on our brands, reputation and operating results.
We may not be able to adequatelyeffectively protect our intellectual property in the U.S. or in foreign jurisdictions, particularly as we continue to expand globally. Our trademarks, service marks, copyrights, trade dress rights, trade secrets, domain names, patents, designs and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction, theft or other misappropriation of our intellectual property could diminish the value of our brands or reputation and cause a decline in our sales. Protection of our intellectual property and maintenance of distinct branding are particularly important as they distinguish our products and services from our competitors. In addition, the costs of defendingdeveloping and protecting our growing intellectual property portfolio may adversely affect our operating results.
We may be subject to legal proceedings that could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. 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. There has been a rise in the number of lawsuits against companies like us that gather information in order to market to consumers online or through the mail and, along with other retailers, we have been named in lawsuits for gathering zip code information from our customers. We believe that we have meritorious defenses against these actions, and we will continue to vigorously defend against them. There have also been a growing number of consumer protection, data breach, ande-commerce-related patent infringement lawsuits and employment-related lawsuits in recent years. From time to time, we have been subject to these types of lawsuits. The cost of defending against these types of claims against us or the ultimate resolution of any such claims, whether by settlement or adverse court decision, may harm our business and operating results. In addition, the increasingly regulated business environment may result in a greater number of enforcement actions and private litigation. This could subject us to increased exposure to stockholder lawsuits. Additionally, in recent years there has been an increase in the number of employment claims and, in particular, discrimination and harassment claims. Coupled with the expansion of social media
platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Certain companies that have faced employment- or harassment-related lawsuits have had to terminate management or other key personnel, and have suffered reputational harm that has negatively impacted their business.
Our operating results may be harmed by unsuccessful management of our employment, occupancy and other operating costs, and the operation and growth of our business may be harmed if we are unable to attract qualified personnel.
To be successful, we need to manage our operating costs and continue to look for opportunities to reduce costs. We recognize that we may need to increase the number of our employees, especially during holiday selling seasons, and incur other expenses to support new brands and brand extensions and the growth of our existing brands, including the opening of new stores. In addition, the market for prime real estate is competitive, especially in San Francisco where our corporate offices are headquartered. If we are unable to make substantial adjustments to our cost structure during times of uncertainty, such as an economic downturn or during times of expansion, we may incur unnecessary expensesexpense or we may have inadequate resources to properly run our business, and our business and operating results may be negatively impacted. From time to time, we may also experience union organizing activity in currentlynon-union facilities, including in our stores and distribution facilities. Union organizing activity may result in work slowdowns or stoppages and higher labor costs. In addition, there appears to be a growing number ofwage-and-hour lawsuits and other employment-related lawsuits against retail companies, especially in California. State, federal and global laws and regulations regarding employment change frequently and the ultimate cost of compliance cannot be precisely estimated. Further, there have been and may continue to be increases in minimum wage and health care requirements. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, or health care, could have an adverse impact on our financial condition and results of operations.
We contract with various agencies to provide us with qualified personnel for our workforce. Any negative publicity regarding these agencies, such as in connection with immigration issues or employment practices, could damage our reputation, disrupt our ability to obtain needed labor or result in financial harm to our business, including the potential loss of business-related financial incentives in the jurisdictions where we operate. Although we strive to secure long-term contracts on favorable terms with our service providers and other vendors, we may not be able to avoid unexpected operating cost increases in the future, such as those associated with minimum wage increases or enhanced health care requirements. Further, we incur substantial costs to warehouse and distribute our inventory. We continue to insource furniture delivery hubs in certain geographies and continue to regionalize our retail ande-commerce fulfillment capabilities. Significant increases in our inventory levels may result in increased warehousing and distribution costs, such as costs related to additional distribution facilities, which we may not be able to lease on acceptable terms, if at all. Such increases in inventory levels may also lead to increases in costs associated with inventory that is lost, damaged or aged. Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results. In addition, in times of economic uncertainty, these long-term contracts may make it difficult to quickly reduce our fixed operating costs, which could negatively impact our business and operating results.
We are undertaking certain systems changes that might disrupt our business operations.
Our success depends, in part, on our ability to source, sell and distribute merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems, which involves updating or replacing legacy systems with successor systems over the course of several years. There are inherent risks associated with replacing our core systems, including supply chain and merchandising systems disruptions, that could affect our ability to get the correct products into the appropriate stores and delivered to customers. We may not successfully launch these new systems, or the launch of such systems may result in disruptions to our business operations. In addition, changes to any of our software
implementation strategies could result in the impairment of software-related assets. We are also subject to the risks associated with the ability of our vendors to provide information technology solutions to meet our needs. Any disruptions could negatively impact our business and operating results.
In addition, we are in the process of replacing our core financial reporting and human capital management systems with new enterprise resource planning systems to standardize our processes worldwide and adoptbest-in-class capabilities. During our implementations, and as we utilize the systems going forward, we may experience periodic or prolonged disruption of our core financial and human capital operations, including our ability to complete our financial close and provide accurate financial reporting on a timely basis, and maintain our internal control compliance efforts. We may also experience errors in data and security or technical reliability issues. In order to realize the benefits of our systems, we may be required to change certain business and financial processes, which involves the risk of disruption to our operations or data errors. In addition, we are heavily reliant on third-party vendors for access to our systems and the accuracy of the functionality within the systems. If we encounter implementation or usage problems with these new systems or other related systems and infrastructure, or if the systems do not operate as intended, do not give rise to anticipated benefits, or fail to integrate properly with our other systems or software platforms, then our business, results of operations, and internal controls over financial reporting may be adversely affected.
We outsource certain aspects of our business to third-party vendors and are in the process of insourcing certain business functions from third-party vendors, both of which subject us to risks, including disruptions in our business and increased costs.
We outsource certain aspects of our business to third-party vendors that subject us to risks of disruptions in our business as well as increased costs. For example, we utilize outside vendors for such things as payroll processing, email and other digital marketing and various distribution facilities and delivery services. In some cases, we rely on a single vendor for such services. Accordingly, we are subject to the risks associated with their ability to successfully provide the necessary services to meet our needs. If our vendors are unable to adequately protect our data and information is lost, our ability to deliver our services is interrupted, our vendors’ fees are higher than expected, or our vendors make mistakes in the execution of operations support, then our business and operating results may be negatively impacted.
In addition, we are in the process of insourcing certain aspects of our business, including certain technology services and the management of certain furniture manufacturing and delivery, and in fiscal 2015have recently completed the insourcing of the management of our global vendors, each of which were previously outsourced to third-party providers. We may also need to continue to insource other aspects of our business in the future in order to control our costs and to stay competitive. This may cause disruptions in our business and result in increased cost to us. In addition, if we are unable to perform these functions better than, or at least as well as, our third-party providers, our business may be harmed.
If our operating and financial performance in any given period does not meet the guidance that we have provided to the public or the expectations of our investors and analysts, our stock price may decline.
We provide public guidance on our expected operating and financial results for future periods. Beginning in fiscal 2019, we have discontinued providing quarterly guidance and instead we will provide guidance on an annual basis only. We believe this approach is better aligned with the long-term view we take in managing our business and our focus on long-term stockholder value creation. Although we believe that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided or the expectations of our investors and analysts, especially in times of economic uncertainty. In the past, when we have reduced our previously provided guidance, the market price of our common stock has declined. If, in the future, our operating or financial results for a particular period do not meet our guidance or the expectations of our investors and analysts or if we reduce our guidance for future periods, the market price of our common stock may decline.
A variety of factors, including seasonality and the economic environment, may cause our quarterly operating results to fluctuate, leading to volatility in our stock price.
Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including changes in economic conditions, shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas, as well as timing shifts due to53-week fiscal
years, which occur approximately every five years. Historically, a significant portion of our net revenues and net earnings have typically been realized during the period from October through January each year, our peak selling season. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses prior to and during peak selling seasons, including fixed catalog production and mailing costs and the costs associated with hiring a substantial number of temporary employees to supplement our existing workforce.
We may require funding from external sources, which may not be available at the levels we require, or may cost more than we expect, and, as a consequence, our expenses and operating results could be negatively affected.
We regularly review and evaluate our liquidity and capital needs. AlthoughWhile we have a growing balance of cash that is held offshore, we currently believe that our available cash, cash equivalents and cash flow from operations will be sufficient to finance our operations and expected capital requirements for at least the next 12 months. However, we might experience periods during which we encounter additional cash needs and we might need additional external funding to support our operations. Although we were able to amend and increase our line of credit facility during fiscal 20142017 on acceptable terms to provide for a $500,000,000 unsecured revolving line of credit and a $300,000,000 unsecured term loan facility, in the event we require additional liquidity from our lenders, such funds may not be available to us on acceptable terms, or at all. For example, in the event we were to breach any of our financial covenants, our banks would not be required to provide us with additional funding, or they may require us to renegotiate our existing credit facility on less favorable terms. In addition, we may not be able to renew our letters of credit that we use to help pay our suppliers on terms that are acceptable to us, or at all, as the availability of letter of credit facilities may become limited. Further, the providers of such credit may reallocate the available credit to other borrowers. If we are unable to access credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results.
Disruptions in the financial markets may adversely affect our liquidity and capital resources and our business.
Global financial markets can experience extreme volatility, disruption and credit contraction, which adversely affect global economic conditions. Such turmoil in financial and credit markets or other changes in economic conditions could adversely affect sources of liquidity available to us or our costs of capital. We have access to capital through our revolving line of credit facility. EachFor example, each financial institution which is part ofin the syndicate for our revolving line of credit facility is responsible for providing a portion of the loans to be made under the facility. If any lender, or group of lenders, with a significant portion of the commitments in our revolving line of credit facility fails to satisfy its obligations to extend credit under the facility and we are unable to find a replacement for such lender or group of lenders on a timely basis, if at all, our liquidity and our business may be materially adversely affected.
If we are unable to pay quarterly dividends or repurchase our stock at intended levels, our reputation and stock price may be harmed.
We have a $500,000,000 stock repurchase program that we intend to execute over three years, of which we have $410,578,000had $224,000,000 remaining for future repurchases under our existing stock repurchase program as of January 29, 2017.February 3, 2019. In March 2017, we announced that2019, our Board of Directors had authorized an increase in our stock repurchase program by an additional $500,000,000, as well as an increase in our quarterly cash dividend from $0.37$0.43 to $0.39$0.48 per common share for an annual cash dividend of $1.56$1.92 per share. The stock repurchase program and dividend may require the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures, which could adversely affect our financial performance. Further, our Board of Directors may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. The stock repurchase program does not have an expiration date and may be limited or eliminated at any time. Our ability to pay dividends and repurchase stock will depend on our ability to generate sufficient cash flows from operations
in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends or repurchase stock after we have announced our intention to do so may negatively impact our reputation and investor confidence in us, and may negatively impact our stock price.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and our investors’ views of us could be harmed.
We have evaluated and tested our internal controls in order to allow management to report on, and our registered independent public accounting firm to attest to, the effectiveness of our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we are not able to continue to meet the requirements of Section 404 in a timely manner, or with adequate compliance, we wouldmay be required to disclose material weaknesses if they develop or are uncovered, and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange CommissionSEC or the New York Stock Exchange. In addition, our internal controls may not prevent or detect all errors and fraud on a timely basis, if at all. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met. If any of the above were to occur, our business and the perception of us in the financial markets could be negatively impacted.
Changes to accounting rules or regulations may adversely affect our operating results.
Changes to existing accounting rules or regulations may impact our future operating results. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective. The introduction of new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future.future, such as the new revenue recognition standard, effective for us in fiscal 2018, and the new lease accounting standard, effective for us in fiscal 2019. Future changes to accounting rules or regulations, or the questioning of current accounting practices, may adversely affect our operating results.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect the amounts reported, which, if not accurate, may impact our financial results.
We make assumptions, judgments and estimates that impact amounts reported in our consolidated financial statements for a number of items, including merchandise inventories, property and equipment, goodwill, self-insured liabilities, and income taxes, among others. These assumptions, judgments and estimates are derived from historical experience and various other factors that we believe are reasonable under the circumstances as of the date our consolidated financial statements are prepared. Actual results could differ materially from our estimates, and such differences may impact our financial results.
Changes to estimates related to our cash flow projections may cause us to incur impairment charges related to our retail store locations and other property and equipment, including information technology systems, as well as goodwill.
We make estimates and projections in connection with impairment analyses for our retail store locations and other property and equipment, including information technology systems, as well as goodwill. These analyses require us to make a number of estimates and projections of future results. If these estimates or projections change or prove incorrect, we may be, and have been, required to record impairment charges on certain store locations and other property and equipment, including information technology systems. These impairment charges have been significant in the past and may be significant in the future and, as a result of these charges, our operating results have been and may, in the future, be adversely affected.
If we fail to attract and retain key personnel, our business and operating results may be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of key personnel in our senior management, whose vision for our company, knowledge of our business and expertise would be difficult
to replace. If any one of our key employees leaves, is seriously injured or unable to work, or fails to perform and we are unable to find a qualified replacement, we may be unable to execute our business strategy. In addition, our main offices are located in the San Francisco Bay Area, where competition for personnel with retail and technology skills can be intense. In addition, several of our strategic initiatives, including our technology and supply chain initiatives, require that we hire and/or develop employees with appropriate experience. We may not be successful in recruiting, retaining and motivating skilled personnel domestically or globally who have the requisite experience to achieve our global business goals, and failure to do so may harm our business. Further, in the event we need to hire additional personnel, we may experience difficulties in attracting and successfully hiring such individuals due to competition for highly skilled personnel, as well as the significantly higher cost of living expenses in our market.markets.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
We lease store locations, distribution and manufacturing facilities, corporate facilities and customer care centers for our U.S. and foreign operations for original terms generally ranging from 5 to 22 years. Certain leases contain renewal options for periods of up to 20 years.
For our store locations, our gross leased store space as of January 29, 2017February 3, 2019 totaled approximately 6,359,0006,557,000 square feet for 629625 stores compared to approximately 6,163,0006,451,000 square feet for 618631 stores as of January 31, 2016.28, 2018.
Leased Properties
The following table summarizes the location and size of our leased facilities occupied by us as of January 29, 2017:February 3, 2019:
| Location | Occupied Square Footage (Approximate) | |||
Distribution and Manufacturing Facilities | ||||
Mississippi | ||||
New Jersey | 2,103,000 | |||
California | 1,432,000 | |||
Georgia | 1,075,000 | |||
Texas | ||||
Tennessee | 603,000 | |||
North Carolina | 412,000 | |||
Ohio | 265,000 | |||
Massachusetts | 140,000 | |||
Florida | 135,000 | |||
Oregon | 91,000 | |||
| ||||
Corporate Facilities | ||||
California | 266,000 | |||
New York | ||||
| ||||
Oregon | ||||
Customer Care Centers | ||||
Nevada | 36,000 | |||
| ||||
Other | ||||
In addition to the above contracts,leased properties, we enter into other agreements for offsite storage needs for our distribution facilities and our retail store locations, as necessary. As of January 29, 2017,February 3, 2019, the total leased space
relating to these properties was not material to us and is not included in the occupied square footage reported above.
Owned Properties
As of January 29, 2017February 3, 2019, we owned 471,000 square feet of space, primarily in California, for our corporate headquarters and certain data center operations.
We believe that all of our facilities are adequate for our current needs and that suitable additional or substitute space will be available in the future to replace our existing facilities, or to accommodate the expansion of our operations, if necessary.
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 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 consolidated financial statements taken as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION
Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol WSM. The following table sets forth the high and low selling prices of our common stock on the NYSE for the periods indicated:
| Fiscal 2016 | High | Low | ||||||||
4th Quarter | $56.94 | $45.98 | ||||||||
3rd Quarter | $57.40 | $45.96 | ||||||||
2nd Quarter | $61.03 | $47.66 | ||||||||
1st Quarter | $61.97 | $49.39 | ||||||||
| Fiscal 2015 | High | Low | ||||||||
4th Quarter | $75.90 | $47.33 | ||||||||
3rd Quarter | $89.38 | $71.03 | ||||||||
2nd Quarter | $85.37 | $74.75 | ||||||||
1st Quarter | $84.75 | $73.14 | ||||||||
The closing price of our common stock on the NYSE on March 26, 201731, 2019 was $47.96.$56.27.
STOCKHOLDERS
The number of stockholders of record of our common stock as of March 26, 201731, 2019 was 358.320. This number excludes stockholders whose stock is held in nominee or street name by brokers.
PERFORMANCE GRAPH
This graph compares the cumulative total stockholder return for our common stock with those of the NYSE Composite Index and the S&P Retailing, Index, our peer group index. The cumulative total return listed below assumed an initial investment of $100 and reinvestment of dividends. The graph shows historical stock price performance, including reinvestment of dividends, and is not necessarily indicative of future performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
Among Williams-Sonoma, Inc., the NYSE Composite Index,
and the S&P Retailing Index
| 1/29/12 | 2/3/13 | 2/2/14 | 2/1/15 | 1/31/16 | 1/29/17 | |||||||
Williams-Sonoma, Inc. | 100.00 | 131.04 | 162.36 | 237.56 | 160.06 | 151.39 | ||||||
NYSE Composite Index | 100.00 | 116.94 | 133.26 | 144.28 | 135.18 | 162.58 | ||||||
S&P Retailing Index | 100.00 | 129.17 | 162.55 | 195.46 | 229.73 | 273.22 |
| * | $100 invested on 2/2/14 in stock or index, including reinvestment of dividends. Fiscal year ending February 3. |
| 2/2/14 | 2/1/15 | 1/31/16 | 1/29/17 | 1/28/18 | 2/03/19 | |||||||
Williams-Sonoma, Inc. | 100.00 | 146.32 | 98.58 | 93.24 | 108.08 | 112.76 | ||||||
NYSE Composite Index | 100.00 | 108.27 | 101.44 | 122.00 | 151.10 | 140.18 | ||||||
S&P Retailing | 100.00 | 119.10 | 140.73 | 167.81 | 241.26 | 249.58 |
* Notes:
| A. | The lines represent monthly index levels derived from compounded daily returns that include all dividends. |
| B. | The indices arere-weighted daily, using the market capitalization on the previous trading day. |
| C. | If the monthly interval, based on the fiscalyear-end, is not a trading day, the preceding trading day is used. |
DIVIDENDSSTOCK REPURCHASE PROGRAMS
InDuring fiscal 2016, fiscal 2015 and fiscal 2014, total cash dividends declared were approximately $133,588,000, or $1.482018, we repurchased 5,373,047 shares of our common stock at an average cost of $54.96 per common share, $130,290,000, or $1.40 per common share and $125,378,000, or $1.32 per common share, respectively.a total cost of $295,304,000. In March 2017, we announced that2019, our Board of Directors had authorized a 5%an increase in the amount available for repurchase under our quarterly cash dividend, from $0.37 to $0.39existing stock repurchase plan by an additional $500,000,000. During fiscal 2017, we repurchased 4,050,697 shares of our common stock at an average cost of $48.43 per common share subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time.
STOCK REPURCHASE PROGRAMS
and a total cost of $196,179,000. During fiscal 2016, we repurchased 2,871,480 shares of our common stock at an average cost of $52.68 per share and a total cost of $151,272,000. During fiscal 2015, we repurchased 2,950,438 shares of our common stock at an average cost of $76.26 per share and a total cost of $224,995,000. During fiscal 2014, we repurchased 3,331,557 shares of our common stock at an average cost of $67.35 per share and a total cost of $224,377,000.
The following table summarizes our repurchases of shares of our common stock during the fourth quarter of fiscal 20162018 under our $500,000,000 stock repurchase program:
| Fiscal period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program |
| |||||||||
October 31, 2016 | – November 27, 2016 | 179,052 | $ 49.33 | 179,052 | $ 437,851,000 | |||||||||||||
November 28, 2016 | – December 25, 2016 | 256,723 | $ 54.46 | 256,723 | $ 423,871,000 | |||||||||||||
December 26, 2016 | – January 29, 2017 | 271,232 | $ 49.01 | 271,232 | $ 410,578,000 | |||||||||||||
Total | 707,007 | $ 51.07 | 707,007 | $ 410,578,000 |
| Fiscal period | | Total Number of Shares Purchased1 | | Average Price Paid |
| | Total Number of Shares Purchased as Part of a Publicly Announced Program1 |
| | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program |
| |||||||
October 29, 2018 | – November 25, 2018 | 141,671 | $ 59.12 | 141,671 | $ 290,522,000 | |||||||||||||
November 26, 2018 | – December 30, 2018 | 1,074,046 | $ 48.96 | 1,074,046 | $ 237,934,000 | |||||||||||||
December 31, 2018 | – February 3, 2019 | 273,455 | $ 51.63 | 273,455 | $ 223,815,000 | |||||||||||||
Total | 1,489,172 | $ 50.42 | 1,489,172 | $ 223,815,000 | ||||||||||||||
| 1 | Excludes shares withheld for employee taxes upon vesting of stock-based awards. |
Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.
| ITEM 6. | SELECTED FINANCIAL DATA |
Five-Year Selected Financial Data
| In thousands, except percentages, per share amounts and retail stores data | Fiscal 2016 (52 Weeks) | Fiscal 2015 (52 Weeks) | Fiscal 2014 (52 Weeks) | Fiscal 2013 (52 Weeks) | Fiscal 2012 (53 Weeks) | Fiscal 20181 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | Fiscal 2015 (52 Weeks) | Fiscal 2014 (52 Weeks) | ||||||||||||||||||||||||||||||
Results of Operations | ||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 5,083,812 | $ | 4,976,090 | $ | 4,698,719 | $ | 4,387,889 | $ | 4,042,870 | $ | 5,671,593 | $ | 5,292,359 | $ | 5,083,812 | $ | 4,976,090 | $ | 4,698,719 | ||||||||||||||||||||
Net revenue growth | 2.2% | 5.9% | 7.1% | 8.5% | 8.7% | 7.2% | 4.1% | 2.2% | 5.9% | 7.1% | ||||||||||||||||||||||||||||||
Comparable brand revenue growth1 | 0.7% | 3.7% | 7.1% | 8.8% | 6.1% | |||||||||||||||||||||||||||||||||||
Comparable brand revenue growth2 | 3.7% | 3.2% | 0.7% | 3.7% | 7.1% | |||||||||||||||||||||||||||||||||||
Gross profit | $ | 1,883,310 | $ | 1,844,214 | $ | 1,800,504 | $ | 1,704,216 | $ | 1,592,476 | $ | 2,101,013 | $ | 1,931,711 | $ | 1,883,310 | $ | 1,844,214 | $ | 1,800,504 | ||||||||||||||||||||
Gross margin | 37.0% | 37.1% | 38.3% | 38.8% | 39.4% | 37.0% | 36.5% | 37.0% | 37.1% | 38.3% | ||||||||||||||||||||||||||||||
Operating income | $ | 472,599 | $ | 488,634 | $ | 502,265 | $ | 452,098 | $ | 409,163 | $ | 435,953 | $ | 453,811 | $ | 472,599 | $ | 488,634 | $ | 502,265 | ||||||||||||||||||||
Operating margin2 | 9.3% | 9.8% | 10.7% | 10.3% | 10.1% | |||||||||||||||||||||||||||||||||||
Operating margin3 | 7.7% | 8.6% | 9.3% | 9.8% | 10.7% | |||||||||||||||||||||||||||||||||||
Net earnings | $ | 305,387 | $ | 310,068 | $ | 308,854 | $ | 278,902 | $ | 256,730 | $ | 333,684 | $ | 259,545 | $ | 305,387 | $ | 310,068 | $ | 308,854 | ||||||||||||||||||||
Basic earnings per share | $ | 3.45 | $ | 3.42 | $ | 3.30 | $ | 2.89 | $ | 2.59 | $ | 4.10 | $ | 3.03 | $ | 3.45 | $ | 3.42 | $ | 3.30 | ||||||||||||||||||||
Diluted earnings per share | $ | 3.41 | $ | 3.37 | $ | 3.24 | $ | 2.82 | $ | 2.54 | $ | 4.05 | $ | 3.02 | $ | 3.41 | $ | 3.37 | $ | 3.24 | ||||||||||||||||||||
Weighted average basic shares outstanding during the period | 88,594 | 90,787 | 93,634 | 96,669 | 99,266 | |||||||||||||||||||||||||||||||||||
Weighted average diluted shares outstanding during the period | 89,462 | 92,102 | 95,200 | 98,765 | 101,051 | |||||||||||||||||||||||||||||||||||
Shares used in calculation of earnings per share: | 81,420 | 85,592 | 88,594 | 90,787 | 93,634 | |||||||||||||||||||||||||||||||||||
Diluted | 82,340 | 86,080 | 89,462 | 92,102 | 95,200 | |||||||||||||||||||||||||||||||||||
Financial Position | ||||||||||||||||||||||||||||||||||||||||
Working capital3 | $ | 405,924 | $ | 339,673 | $ | 515,975 | $ | 558,007 | $ | 659,645 | ||||||||||||||||||||||||||||||
Working capital4 | $ | 619,531 | $ | 628,622 | $ | 405,924 | $ | 339,673 | $ | 515,975 | ||||||||||||||||||||||||||||||
Total assets | $ | 2,476,879 | $ | 2,417,427 | $ | 2,330,277 | $ | 2,336,734 | $ | 2,187,679 | $ | 2,812,844 | $ | 2,785,749 | $ | 2,476,879 | $ | 2,417,427 | $ | 2,330,277 | ||||||||||||||||||||
Return on assets | 12.5% | 13.1% | 13.2% | 12.3% | 12.0% | 11.9% | 9.9% | 12.5% | 13.1% | 13.2% | ||||||||||||||||||||||||||||||
Net cash provided by operating activities | $ | 524,709 | $ | 544,026 | $ | 461,697 | $ | 453,769 | $ | 364,127 | $ | 585,986 | $ | 499,704 | $ | 524,709 | $ | 544,026 | $ | 461,697 | ||||||||||||||||||||
Capital expenditures | $ | 197,414 | $ | 202,935 | $ | 204,800 | $ | 193,953 | $ | 205,404 | $ | 190,102 | $ | 189,712 | $ | 197,414 | $ | 202,935 | $ | 204,800 | ||||||||||||||||||||
Long-term debt and other long-term obligations | $ | 71,215 | $ | 49,713 | $ | 62,698 | $ | 61,780 | $ | 50,216 | ||||||||||||||||||||||||||||||
Long-term debt and other long-term liabilities | $ | 380,944 | $ | 372,226 | $ | 71,215 | $ | 49,713 | $ | 62,698 | ||||||||||||||||||||||||||||||
Stockholders’ equity | $ | 1,248,220 | $ | 1,198,226 | $ | 1,224,706 | $ | 1,256,002 | $ | 1,309,138 | $ | 1,155,714 | $ | 1,203,566 | $ | 1,248,220 | $ | 1,198,226 | $ | 1,224,706 | ||||||||||||||||||||
Stockholders’ equity per share (book value) | $ | 14.29 | $ | 13.38 | $ | 13.33 | $ | 13.35 | $ | 13.39 | $ | 14.66 | $ | 14.37 | $ | 14.29 | $ | 13.38 | $ | 13.33 | ||||||||||||||||||||
Return on equity | 25.0% | 25.6% | 24.9% | 21.7% | 20.0% | 28.3% | 21.2% | 25.0% | 25.6% | 24.9% | ||||||||||||||||||||||||||||||
Annual dividends declared per share | $ | 1.48 | $ | 1.40 | $ | 1.32 | $ | 1.24 | $ | 0.88 | $ | 1.72 | $ | 1.56 | $ | 1.48 | $ | 1.40 | $ | 1.32 | ||||||||||||||||||||
E-commerce Net Revenues | ||||||||||||||||||||||||||||||||||||||||
E-commerce net revenue growth | 4.4% | 6.4% | 12.1% | 13.1% | 14.5% | 10.9% | 5.5% | 4.4% | 6.4% | 12.1% | ||||||||||||||||||||||||||||||
E-commerce net revenues as a percent of net revenues | 51.8% | 50.7% | 50.5% | 48.2% | 46.2% | 54.3% | 52.5% | 51.8% | 50.7% | 50.5% | ||||||||||||||||||||||||||||||
Retail Net Revenues | ||||||||||||||||||||||||||||||||||||||||
Retail net revenue growth (decline) | (0.1% | ) | 5.4% | 2.4% | 4.6% | 4.1% | 3.0% | 2.6% | (0.1% | ) | 5.4% | 2.4% | ||||||||||||||||||||||||||||
Retail net revenues as a percent of net revenues | 48.2% | 49.3% | 49.5% | 51.8% | 53.8% | 45.7% | 47.5% | 48.2% | 49.3% | 49.5% | ||||||||||||||||||||||||||||||
Number of stores at year-end | 629 | 618 | 601 | 585 | 581 | 625 | 631 | 629 | 618 | 601 | ||||||||||||||||||||||||||||||
Store selling square footage at year-end | 3,951,000 | 3,827,000 | 3,684,000 | 3,590,000 | 3,548,000 | 4,105,000 | 4,019,000 | 3,951,000 | 3,827,000 | 3,684,000 | ||||||||||||||||||||||||||||||
Store leased square footage at year-end | 6,359,000 | 6,163,000 | 5,965,000 | 5,838,000 | 5,778,000 | 6,557,000 | 6,451,000 | 6,359,000 | 6,163,000 | 5,965,000 | ||||||||||||||||||||||||||||||
| 1 | In fiscal 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. Amounts reported for fiscal 2017 and prior years have not been adjusted, and continue to be reported in accordance with previous revenue recognition guidance. See Note A to the Consolidated Financial Statements. |
| 2 | Comparable brand revenue is calculated on a52-week to52-week basis, with the exception of fiscal |
Operating margin is defined as operating income as a percent of net revenues. |
In fiscal 2015, we prospectively adopted |
The information set forth above is not necessarily indicative of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto in this Annual Report on Form10-K.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the 53 weeks ended February 3, 2019 (“fiscal 2018”), the 52 weeks ended January 28, 2018 (“fiscal 2017”), and the 52 weeks ended January 29, 2017 (“fiscal 2016”), the 52 weeks ended January 31, 2016 (“fiscal 2015”), and the 52 weeks ended February 1, 2015 (“fiscal 2014”) should be read in conjunction with our Consolidated Financial Statements and notes thereto. As fiscal 2018 is a 53-week year as compared to a 52-week year in fiscal 2017, our discussion of fiscal 2018 results below includes approximately $85,000,000 of net revenues and $0.10 of diluted earnings per share associated with the additional week. All explanations of changes in operational results are discussed in order of magnitude.
OVERVIEW
Net revenues in fiscal 20162018, including the impact of the additional week, increased by $107,722,000$379,234,000, or 2.2%7.2%, compared to fiscal 2015,2017, with comparable brand revenue growth of 0.7%3.7%. This increase in net revenues was driven by a 4.4%10.9% increase in e-commerce net revenues (primarily driven by West Elm, Williams Sonoma and Rejuvenation),a 3.0% increase in retail net revenues, with particular strength in furniture. This net revenue increase was partially offset by a 0.1% decrease in retail net revenues (primarily in Pottery Barn and Williams Sonoma, partially offset by increases in West Elm and Rejuvenation). Total fiscal 20162018 net revenue growth includedwas partially attributable to a 7.5%1.6% increase in store leased square footage and a 5.7% increase in international revenues, primarily related to our company-owned international operations.operations, as well as the favorable impact of the adoption of ASU 2014-09 primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues (see Note A to our Consolidated Financial Statements). Revenue growth was also supported by our double digit new customer growth, which reflects the success of our strategies to increase customer acquisition and drive our future growth.
InAll brands delivered positive comparable brand revenue growth in fiscal 2018. Growth in Pottery Barn our largest brand,accelerated from last year, driven by strength in e-commerce and growth in new businesses: Marketplace and Pottery Barn Apartment, as well as strong upholstery growth. The Pottery Barn Kids and Teen business improved from last year, delivering combined comparable brand revenues declined 3.5% in fiscal 2016 comparedrevenue growth of 2.8%. Our Baby business continued to fiscal 2015. This decrease was primarilygain momentum attracting new customers as the entry point to our brand and through registry creations. West Elm had another year of double digit net revenue growth driven by ourstrong e-commerce performance and continued strength in the core furniture decorative accessories and table top collections, partially offset by stronger sales in upholstery. In thebusiness. The Williams Sonoma brand delivered comparable brand revenues increased 1.3% in fiscal 2016 compared to fiscal 2015. Growth in cookware, cutlery, tabletop and our Williams Sonoma Home business contributed to these results. In West Elm, comparable brand revenues increased 12.8% in fiscal 2016 on toprevenue growth of 14.8% in fiscal 2015. Growth continued to be broad-based across categories, primarily furniture. In Pottery Barn Kids, comparable brand revenues declined 1.4% in fiscal 2016 compared to fiscal 2015. Strength in our furniture business was more than offset by softness in textiles and decorative accessories. In PBteen, comparable brand revenues declined 6.2% in fiscal 2016 compared to fiscal 2015. Strength in back to school and dorm categories was more than offset by weakness in textiles and out of stock inventory in key furniture collections and gifting categories.1.7%. And, in our emerging brands, Rejuvenation and Mark and Graham, continued to scale with double digit net revenuesrevenue growth and increased 26.6%.profitability.
Additionally,Across the business, fiscal 2018 was a year of delivering more compelling experiences for our customers. As part of our strategic priority of digital leadership, we enhanced the e-commerce experience through two differentiators: content and convenience. In fiscal 2018, we updated our shop path with more accurate and engaging content that is inspirational and drives conversion. We also enhanced our product information pages with a focus on product quality and reasons to buy. To provide our customers with omni-channel convenience, we launched Buy Online Pickup In Store in our brands and are in the process of scaling other fulfillment capabilities such as Buy Online Ship To Store and Buy Online Ship From Store. As a result, our e-commerce revenue growth almost doubled in fiscal 2016, diluted earnings per share increased2018. With over 54% of our business conducted online, we are among the top 25 e-commerce retailers in North America.
We are using cross-brand initiatives to $3.41, versus $3.37strengthen our position as the resource for all home furnishing, cooking and entertaining needs. In fiscal 2018, we continued to scale our loyalty program, The Key, where we have seen strong membership growth over the past year, as well as our complimentary design service, Design Crew. We also launched two new initiatives during the year: Design Crew Room Planner and The One Registry collective, both of which are enabling a more personalized and convenient shopping experience for our customers.
In our supply chain, we continued to drive operational improvements in fiscal 2015,2018. In our non-furniture business, our order consolidation efforts and continued improvement in distribution center productivity enabled us to lower our cartons-per-order and order-to-delivery time so that our customers received their orders faster this holiday season and with less waste. Additionally, we returned $284,811,000were proud to be recognized once again by Barron’s for all of our sustainability efforts across the business. At a ranking of number 24, we were the only company in our industry to be among the financial publication’s annual list of 100 Most Sustainable U.S. companies.
In summary, 2018 was another year of solid financial and operational accomplishments resulting in earnings and cash flow generation that allowed us to return approximately $435,629,000 to our stockholders through stock repurchases and dividends.
AsOver the next few years, we look forward to fiscal 2017,plan target whitespace in the market; we plan to drive growth by focusing oncross-brand initiatives that leverage our strategic priorities of innovationplatform; and operational excellence. We plan to increase our competitive advantage through innovation ine-commerce, our products and our services, as well as the retail experience. To accomplish this, we plan to investbring technology innovation and continued improvement in digitalcustomer experience. We have a strong foundation to support the execution of our initiatives in fiscal 2019 and online advertising initiatives. In Pottery Barn Kids and PBteen, we plan to drive innovation in product offerings across all stages of early life, and in Williams Sonoma, we plan to introduce high-quality products under the Williams Sonoma brand,beyond, as well as to develop innovative exclusives with our third party vendors. To enhance the customer experience in all of our stores, we plan to invest in point-of-sale technology and scheduling tools which will provide additional functionality and operational efficiencies. We plan to evaluate the role our retail stores can and should play and plan to invest in optimizing top-performing stores while closing underperforming stores. We also plan to continue to focus on operational excellence, driving strategies that directly improve our customers’ experience and value perceptions. We believe that collectively these strategies will extend our leadership position across all of our brands.deliver long-term shareholder value.
Results of Operations
NET REVENUES
Net revenues consist ofe-commerce net revenues and retail net revenues.E-commerce net revenues include sales of merchandise to customers through oure-commerce websites and our catalogs, as well as shipping fees. Retail net revenues include sales of merchandise to customers at our retail stores and to our franchisees, as well as shipping fees on any products shipped to our customers’ homes. Shipping fees consist of revenue received from customers for delivery of merchandise to their homes. Revenues are presented net of sales returns and other discounts. Due to the adoption of ASU 2014-09 in fiscal 2018, certain incentives received from credit card issuers as well as breakage income related to our unredeemed stored-value cards are now presented within net revenues (see Note A to our Consolidated Financial Statements).
| In thousands | Fiscal 2016 | % Total | Fiscal 2015 | % Total | Fiscal 2014 | % Total | Fiscal 2018 (53 Weeks) | % Total | Fiscal 2017 (52 Weeks) | % Total | Fiscal 2016 (52 Weeks) | % Total | ||||||||||||||||||||||||||||||||||||
E-commerce net revenues | $ | 2,633,602 | 51.8% | $ | 2,522,580 | 50.7% | $ | 2,370,694 | 50.5% | $ | 3,082,064 | 54.3% | $ | 2,778,457 | 52.5% | $ | 2,633,602 | 51.8% | ||||||||||||||||||||||||||||||
Retail net revenues | 2,450,210 | 48.2% | 2,453,510 | 49.3% | 2,328,025 | 49.5% | 2,589,529 | 45.7% | 2,513,902 | 47.5% | 2,450,210 | 48.2% | ||||||||||||||||||||||||||||||||||||
Net revenues | $ | 5,083,812 | 100.0% | $ | 4,976,090 | 100.0% | $ | 4,698,719 | 100.0% | $ | 5,671,593 | 100.0% | $ | 5,292,359 | 100.0% | $ | 5,083,812 | 100.0% | ||||||||||||||||||||||||||||||
Net revenues in fiscal 20162018, including the impact of the additional week of net revenues, increased by $107,722,000$379,234,000 or 2.2%7.2%, compared to fiscal 2015, with comparable brand revenue growth of 0.7%. This increase in net revenues was driven by a 4.4% increase in e-commerce net revenues (primarily driven by West Elm, Williams Sonoma and Rejuvenation), with particular strength in furniture. This net revenue increase was partially offset by a 0.1% decrease in retail net revenues (primarily in Pottery Barn and Williams Sonoma, partially offset by increases in West Elm and Rejuvenation). Total fiscal 2016 net revenue growth included a 7.5% increase in international revenues primarily related to our company-owned international operations.
Net revenues in fiscal 2015 increased by $277,371,000, or 5.9%, compared to fiscal 2014,2017, with comparable brand revenue growth of 3.7%. This increase in net revenues was driven by a 6.4%10.9% increase ine-commerce net revenues (primarily driven by West Elm, Pottery Barn and Pottery Barn Kids and Teen) and a 3.0% increase in retail net revenues (primarily driven by West Elm and Pottery Barn), with particular strength in furniture. Total fiscal 2018 net revenue growth was partially attributable to a 1.6% increase in store leased square footage and a 5.7% increase in international revenues primarily related to our company-owned international operations, as well as the favorable impact of the adoption of ASU2014-09 primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues (see Note A to our Consolidated Financial Statements).
Net revenues in fiscal 2017 increased by $208,547,000 or 4.1%, compared to fiscal 2016, with comparable brand revenue growth of 3.2%. This increase in net revenues was driven by a 5.5% increase ine-commerce net revenues (primarily driven by West Elm, Williams Sonoma and Pottery Barn Kids),Rejuvenation) and a 5.4%2.6% increase in our retail net revenues (primarily driven by Pottery Barn and West Elm), with particular strength in furniture. Total fiscal 20152017 net revenue growth includedwas partially attributable to a 26.8%1.4% increase in store leased square footage primarily due to 2 net new stores, and a 2.2% increase in international revenues primarily related to our franchise operations, and a 3.3% increase in retail leased square footage primarily due to 17 net new stores.company-owned international operations.
The following table summarizes our net revenues by brand for fiscal 2016,2018, fiscal 20152017 and fiscal 2014:2016:
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | ||||||||||||||||||
Pottery Barn | $ | 2,024,218 | $ | 2,074,051 | $ | 2,022,331 | $ | 2,177,344 | $ | 2,066,302 | $ | 2,024,218 | ||||||||||||
West Elm | 1,292,928 | 1,114,339 | 971,568 | |||||||||||||||||||||
Williams Sonoma | 1,002,194 | 993,609 | 994,651 | 1,056,125 | 1,022,434 | 1,002,194 | ||||||||||||||||||
West Elm | 971,568 | 821,136 | 669,074 | |||||||||||||||||||||
Pottery Barn Kids | 635,381 | 640,073 | 624,594 | |||||||||||||||||||||
PBteen | 237,818 | 253,602 | 260,617 | |||||||||||||||||||||
Other1 | 212,633 | 193,619 | 127,452 | |||||||||||||||||||||
Pottery Barn Kids and Teen1 | 895,762 | 860,468 | 873,199 | |||||||||||||||||||||
Other2 | 249,434 | 228,816 | 212,633 | |||||||||||||||||||||
Total | $ | 5,083,812 | $ | 4,976,090 | $ | 4,698,719 | $ | 5,671,593 | $ | 5,292,359 | $ | 5,083,812 | ||||||||||||
| 1 | Net revenues of the Pottery Barn Kids and PBteen brands are being reported on a combined basis as Pottery Barn Kids and Teen. |
| 2 | Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham. |
Comparable Brand Revenue
Comparable brand revenue includes retail comparable store sales ande-commerce sales, as well as shipping fees, sales returns and other discounts associated with current period sales. Outlet comparable store net revenues are included in their respective brands. Comparable brand revenue excludes sales from certain operations until such time that we believe those sales are meaningful to evaluating the performance of the brand. Sales to our international franchisees have also been excluded as their stores and e-commerce websites are not operated by us.
Comparable stores are defined as
permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days.
| Comparable brand revenue growth (decline) | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | |||||||||
Pottery Barn | (3.5% | ) | 1.9% | 5.8% | ||||||||
Williams Sonoma | 1.3% | 1.1% | 3.8% | |||||||||
West Elm | 12.8% | 14.8% | 18.2% | |||||||||
Pottery Barn Kids | (1.4% | ) | 2.2% | 5.9% | ||||||||
PBteen | (6.2% | ) | (2.7% | ) | 5.7% | |||||||
Total | 0.7% | 3.7% | 7.1% | |||||||||
RETAIL STORE DATA Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores ande-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | |||||||||
Retail net revenues | $ | 2,450,210 | $ | 2,453,510 | $ | 2,328,025 | ||||||
Retail net revenue growth (decline) | (0.1% | ) | 5.4% | 2.4% | ||||||||
Store count – beginning of year | 618 | 601 | 585 | |||||||||
Store openings | 29 | 34 | 35 | |||||||||
Store closings | (18 | ) | (17 | ) | (19 | ) | ||||||
Store count – end of year | 629 | 618 | 601 | |||||||||
Store selling square footage at year-end | 3,951,000 | 3,827,000 | 3,684,000 | |||||||||
Store leased square footage (“LSF”) at year-end | 6,359,000 | 6,163,000 | 5,965,000 | |||||||||
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | ||||||||||||||||||||||
Store Count | Avg. LSF Per Store | Store Count | Avg. LSF Per Store | Store Count | Avg. LSF Per Store | |||||||||||||||||||
Williams Sonoma | 234 | 6,600 | 239 | 6,600 | 243 | 6,600 | ||||||||||||||||||
Pottery Barn | 201 | 13,900 | 197 | 13,800 | 199 | 13,700 | ||||||||||||||||||
West Elm | 98 | 13,300 | 87 | 13,200 | 69 | 13,700 | ||||||||||||||||||
Pottery Barn Kids | 89 | 7,400 | 89 | 7,500 | 85 | 7,600 | ||||||||||||||||||
Rejuvenation | 7 | 9,100 | 6 | 9,000 | 5 | 10,000 | ||||||||||||||||||
Total | 629 | 10,100 | 618 | 10,000 | 601 | 9,900 | ||||||||||||||||||
COST OF GOODS SOLD
| In thousands | Fiscal 2016 | % Net Revenues | Fiscal 2015 | % Net Revenues | Fiscal 2014 | % Net Revenues | ||||||||||||||||||
Cost of goods sold1 | $ | 3,200,502 | 63.0% | $ | 3,131,876 | 62.9% | $ | 2,898,215 | 61.7% | |||||||||||||||
| Comparable brand revenue growth (decline)1 | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | |||||||||
Pottery Barn | 1.2% | 1.0% | (3.5% | ) | ||||||||
West Elm | 9.5% | 10.2% | 12.8% | |||||||||
Williams Sonoma | 1.7% | 3.2% | 1.3% | |||||||||
Pottery Barn Kids and Teen | 2.8% | (1.7% | ) | (2.8% | ) | |||||||
Total2 | 3.7% | 3.2% | 0.7% | |||||||||
| 1 | Comparable brand revenue is calculated on a53-week to53-week basis for fiscal 2018 and on a52-week to52-week basis for fiscal 2017 and fiscal 2016. |
| 2 | Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham. |
RETAIL STORE DATA
| In thousands | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | |||||||||
Retail net revenues | $ | 2,589,529 | $ | 2,513,902 | $ | 2,450,210 | ||||||
Retail net revenue growth (decline) | 3.0% | 2.6% | (0.1% | ) | ||||||||
Store count – beginning of year | 631 | 629 | 618 | |||||||||
Store openings1 | 23 | 28 | 29 | |||||||||
Store closings1 | (29 | ) | (26 | ) | (18 | ) | ||||||
Store count – end of year | 625 | 631 | 629 | |||||||||
Store selling square footage atyear-end | 4,105,000 | 4,019,000 | 3,951,000 | |||||||||
Store leased square footage (“LSF”) atyear-end | 6,557,000 | 6,451,000 | 6,359,000 | |||||||||
| 1 | Store openings and closings in fiscal 2017 include two Williams Sonoma, two Pottery Barn and one West Elm temporary closures in Puerto Rico and Florida due to hurricanes in these areas. These stores reopened during the fourth quarter of fiscal 2017. |
| Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||||||||||||||
Store Count | Avg. LSF Per Store | Store Count | Avg. LSF Per Store | Store Count | Avg. LSF Per Store | |||||||||||||||||||
Williams Sonoma | 220 | 6,900 | 228 | 6,700 | 234 | 6,600 | ||||||||||||||||||
Pottery Barn | 205 | 14,200 | 203 | 13,900 | 201 | 13,900 | ||||||||||||||||||
West Elm | 112 | 13,100 | 106 | 13,100 | 98 | 13,300 | ||||||||||||||||||
Pottery Barn Kids | 78 | 7,500 | 86 | 7,400 | 89 | 7,400 | ||||||||||||||||||
Rejuvenation | 10 | 8,500 | 8 | 8,800 | 7 | 9,100 | ||||||||||||||||||
Total | 625 | 10,500 | 631 | 10,200 | 629 | 10,100 | ||||||||||||||||||
COST OF GOODS SOLD
| In thousands | Fiscal 2018 (53 Weeks) | % Net Revenues | Fiscal 2017 (52 Weeks) | % Net Revenues | Fiscal 2016 (52 Weeks) | % Net Revenues | ||||||||||||||||||
Cost of goods sold1 | $ | 3,570,580 | 63.0% | $ | 3,360,648 | 63.5% | $ | 3,200,502 | 63.0% | |||||||||||||||
| 1 | Includes occupancy expenses of |
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses,freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials.
Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy relatednon-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 relateddistribution-related administrative expenses, are recorded in selling, general and administrative expenses.
Within our reportable segments, thee-commerce channel does not incurfreight-to-store or store occupancy expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel.
However, thee-commerce channel incurs higher customer shipping, damage and replacement costs than the retail channel.
Fiscal 20162018 vs. Fiscal 20152017
Cost of goods sold increased by $68,626,000,$209,932,000, or 2.2%6.2%, in fiscal 20162018 compared to fiscal 2015.2017. Cost of goods sold as a percentage of net revenues remained relatively flat, increasing less than 10 basis pointsdecreased to 63.0% in fiscal 20162018 from 62.9%63.5% in fiscal 2015. Higher selling margins from reduced shipping and fulfillment-related costs as a result2017. This decrease was primarily driven by the leverage of our focus on our supply chain and inventory initiatives were offset by an increase in occupancy costs related to investments in our supply chain.and includes the favorable impact from the adoption of ASU2014-09, primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues.
In thee-commerce channel, cost of goods sold as a percentage of net revenues decreased in fiscal 20162018 compared to fiscal 20152017, primarily driven by higher selling margins from reduced shipping and fulfillment-related costs as a result of our focus on our supply chain and inventory initiatives, partially offset by an increase in occupancy costs related to investments in our supply chain.margins.
In the retail channel, cost of goods sold as a percentage of net revenues increased in fiscal 20162018 compared to fiscal 2015,2017, primarily driven by occupancy deleverage and lower selling margins.margins, partially offset by the leverage of occupancy costs.
Fiscal 20152017 vs. Fiscal 20142016
Cost of goods sold increased by $233,661,000,$160,146,000, or 8.1%5.0%, in fiscal 20152017 compared to fiscal 2014.2016. Cost of goods sold as a percentage of net revenues increased to 62.9%63.5% in fiscal 20152017 from 61.7%63.0% in fiscal 2014.2016. This increase was driven by increasedlower merchandise margins, higher shipping costs and reduced shipping income, partially offset by reduced fulfillment-related costs in our supply chain and higher franchise revenues, which have a lower gross margin.the leverage of occupancy costs.
In thee-commerce channel, cost of goods sold as a percentage of net revenues increased in fiscal 20152017 compared to fiscal 20142016 primarily driven by increasedlower merchandise margins, reduced shipping income and higher shipping costs, partially offset by reduced fulfillment-related costs in our supply chain and an increasea reduction in occupancy expenses.costs.
In the retail channel, cost of goods sold as a percentage of net revenues increased forin fiscal 20152017 compared to fiscal 20142016 primarily driven by lower selling margins, as well as higher franchise revenues and increased fulfillment-relatedoccupancy costs partially offset by a reduction in advertising and employment costs.to support our growth initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
| In thousands | Fiscal 2016 | % Net Revenues | Fiscal 2015 | % Net Revenues | Fiscal 2014 | % Net Revenues | Fiscal 2018 (53 weeks)1 | % Net Revenues1 | Fiscal 2017 (52 weeks) | % Net Revenues | Fiscal 2016 (52 weeks) | % Net Revenues | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 1,410,711 | 27.7% | $ | 1,355,580 | 27.2% | $ | 1,298,239 | 27.6% | $ | 1,665,060 | 29.4% | $ | 1,477,900 | 27.9% | $ | 1,410,711 | 27.7% | ||||||||||||||||||||||||||||||
| 1 | Includes the impact of the adoption of ASU 2014-09 primarily from the reclassification of other income from selling, general and administrative expenses into net revenues. |
Selling, general and administrative expenses consist of non-occupancy relatednon-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.
We experience differing employment and advertising costs as a percentage of net revenues within the retail ande-commerce channels due to their distinct distribution and marketing strategies. Employment costs represent a greater percentage of net revenues within the retail channel as compared to thee-commerce channel. However, advertising expenses are higher within thee-commerce channel than in the retail channel.
Fiscal 20162018 vs. Fiscal 20152017
Selling, general and administrative expenses increased by $55,131,000,$187,160,000, or 4.1%12.7%, in fiscal 20162018 compared to fiscal 2015.2017. Selling, general and administrative expenses as a percentage of net revenues increased to 27.7%29.4% in fiscal 20162018 from 27.2%27.9% in fiscal 2015.2017. This increase as a percentage of net revenues was primarily driven by severance-related reorganization chargesan increase in general expenses primarily from the reclassification of approximately $14,406,000 during fiscal 2016,other income from selling, general and administrative expenses into net revenues due to the adoption of ASU2014-09, an increase in incentive compensation, as well as an increase inincreased hourly wages and digital advertising expenses.from the reinvestment of tax savings, the impact from our acquisition of Outward, and impairment and early lease termination charges related to underperforming retail stores. This was partially offset by the optimization of catalog advertising costs.
In thee-commerce channel, selling, general and administrative expenses as a percentage of net revenues increased in fiscal 20162018 compared to fiscal 2015 primarily2017, driven by an increase in general expenses primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues, the impact from our acquisition of Outward, as well as increased hourly wages and digital advertising expenses as a resultfrom the reinvestment of our focus on new customer acquisition,tax savings, partially offset by the leverageoptimization of employmentcatalog advertising costs.
In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreasedincreased in fiscal 20162018 compared to fiscal 2015 primarily2017, driven by an increase in general expenses primarily associated with the leveragereclassification of employment costs.other income from selling, general and administrative expenses into net revenues as well as impairment and early lease termination charges related to underperforming retail stores.
Fiscal 20152017 vs. Fiscal 20142016
Selling, general and administrative expenses for fiscal 2015 increased by $57,341,000,$67,189,000, or 4.4%4.8%, in fiscal 2017 compared to fiscal 2014.2016. Selling, general and administrative expenses as a percentage of net revenues decreasedincreased to 27.2%27.9% in fiscal 20152017 from 27.6%27.7% in fiscal 2014.2016. This decreaseincrease as a percentage of net revenues was primarily driven by the leverage ofhigher digital advertising expenses and employment costs,resulting from our focus on new customer acquisition. This increase was partially offset by litigation settlement income of $7,414,000 recorded in fiscal 2014 that did not recur in fiscal 2015.lower employment expenses within the unallocated segment.
In thee-commerce channel, selling, general and administrative expenses as a percentage of net revenues was relatively flat forincreased in fiscal 20152017 compared to fiscal 20142016 primarily due todriven by higher digital advertising leverage, offset by an increase in employment costs associated with incremental labor costs in our supply chain.expenses.
In the retail channel, selling, general and administrative expenses as a percentage of net revenues decreased forincreased in fiscal 20152017 compared to fiscal 20142016 primarily driven by the leverage ofan increase in employment costs dueexpenses to higher franchise revenues.support our growth initiatives.
INCOME TAXES
Our effectiveThe 2017 Tax Cuts and Jobs Act (“the Tax Act”) was enacted on December 22, 2017. Among other things, the Tax Act reduced the corporate income tax rate to 21% as of January 1, 2018, introduced a new tax on global intangiblelow-taxed income (“GILTI”), and implemented a modified territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries.
Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provided us with up to one year to finalize our measurement of the income tax effects of the Tax Act on our fiscal year ended January 28, 2018. As of January 28, 2018, we had made reasonable estimates of the income tax effects of the Tax Act, including the transition tax under Internal Revenue Code section 965.
As of February 3, 2019, we have completed the accounting for the income tax effects of the Tax Act based on our current interpretation of available notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service. As a result, during fiscal 2018 we recorded an immaterial adjustment to the fiscal 2017 provisional transition tax amount. In addition, during fiscal 2018, we booked a net tax benefit of approximately $10,576,000 from there-measurement of our deferred tax assets.
We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. Under Internal Revenue Code section 965 of the Tax Act, we are deemed to have distributed all the post-1986 earnings of our foreign subsidiaries to the U.S. as of December 31, 2017. In light of the Tax Act, were-evaluated our permanent reinvestment assertion with respect to unremitted foreign earnings, and we are now only permanently reinvested with respect to our foreign earnings in Canada beginning in fiscal 2018. As a result, we recorded approximately $1,493,000 of foreign withholding tax and additional state income tax in fiscal 2018. As of February 3, 2019, the post-fiscal 2017 earnings of our Canadian subsidiary are permanently reinvested. If we did not consider these earnings to be permanently reinvested, the deferred tax liability would have been immaterial as of February 3, 2019.
In fiscal 2018, we are subject to several provisions of the Tax Act, including GILTI, the base erosion anti-abuse tax and a deduction for foreign-derived intangible income. We have elected to account for GILTI as a periodic expense when the tax arises. The net impact due to these provisions was immaterial in fiscal 2018.
Our effective tax rate was 22.3% for fiscal 2018, 42.6% for fiscal 2017 and 35.3% for fiscal 2016, 36.5% for fiscal 2015, and 38.5% for fiscal 2014.2016. The decrease in the effective tax rate from fiscal 2017 was primarily due to the reduction of the U.S. corporate income tax rate in fiscal 2016 reflectsfrom 35% to 21% as of January 1, 2018 as a one-time favorable tax adjustment. The decrease inresult of the effective income tax rate in fiscal 2015 compared to fiscal 2014 reflects fluctuations in the level and mix of earnings,Tax Act, as well as the favorable resolutiontax benefit from the true up of certain incomethe remeasurement of our deferred tax matters.assets under SAB 118.
LIQUIDITY AND CAPITAL RESOURCES
As of January 29, 2017,February 3, 2019, we held $213,713,000$338,954,000 in cash and cash equivalents, the majority of which iswas held in interest-bearing demand deposit accounts and money market funds, and of which $72,995,000$185,810,000 was held by our foreign subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.
Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2017,2019, we plan to use our cash resources to fund our inventory and inventory relatedinventory-related purchases, advertising and marketing initiatives, property and equipment purchases, stock repurchases and dividend payments.payments, and property and equipment purchases. In addition to our cash balances on hand, we have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“credit facility”revolver”) that, and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facilityrevolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. During fiscal 2016,2018, we had borrowings of $125,000,000 under the credit facility,revolver of $60,000,000, all of which were repaid in the fourth quarter of fiscal 2016.2018. During fiscal 2015,2017, we had borrowings of $200,000,000 under the credit facility,revolver of $170,000,000, all of which
were repaid in the fourth quarter of fiscal 2015.
During fiscal 2014, we redeemed restricted cash deposits of $14,289,000 previously held under collateralized trust agreements. These deposits, which secured potential liabilities associated with our workers’ compensation and other insurance programs, were replaced with standby letters of credit.2017. As of February 3, 2019, we had $300,000,000 outstanding under our term loan. The term loan matures on January 29, 2017,8, 2021, at which point all outstanding principal and any accrued interest must be repaid. Additionally, as of February 3, 2019, a total of $12,090,000$11,732,000 in issued but undrawn standby letters of credit waswere outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.
Additionally, we hadhave three unsecured letter of credit reimbursement facilities, which were amended during the year, for a total of $70,000,000, of which an aggregate of $6,565,000$6,820,000 was outstanding as of January 29, 2017.February 3, 2019. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title.
We are currently in compliance with all of our financial covenants under the credit facility
and, based on our current projections, we expect to remain in compliance throughout fiscal 2017.2019. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.
Cash Flows from Operating Activities
For fiscal 2016,2018, net cash provided by operating activities was $524,709,000$585,986,000 compared to $544,026,000$499,704,000 in fiscal 2015.2017. For fiscal 2016,2018, net cash provided by operating activities was primarily attributable to net earnings adjusted fornon-cash items, an increase in accounts payable and accrued expenses and other liabilities, as well as an increase in gift card and other deferred revenue, partially offset by an increase in merchandise inventories and prepaid expenses and other assets and a decrease in income taxes payable. This represents an increase in net cash provided by operating activities compared to fiscal 2017 primarily due to an increase in accounts payable and accrued expenses and other liabilities offset by a change in income taxes payable.
For fiscal 2017, net cash provided by operating activities was $499,704,000 compared to $524,709,000 in fiscal 2016. For fiscal 2017, net cash provided by operating activities was primarily attributable to net earnings adjusted fornon-cash items, an increase in income taxes payable, as well as deferred rent and lease incentives, as well as accrued salaries, benefits and other liabilities, partially offset by a decreasean increase in income taxes payable.merchandise inventories. This represents a decrease in net cash provided by operating activities compared to fiscal 20152016 primarily due to an increase in merchandise inventories and a decrease in net earnings, partially offset by a decrease in income taxes paid in fiscal 20162017 compared to fiscal 2015.
For fiscal 2015, net cash provided by operating activities was $544,026,000 compared to $461,697,000 in fiscal 2014. For fiscal 2015, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items and an increase in accounts payable, customer deposits and income taxes payable, partially offset by an increase in merchandise inventories. This represents an increase in net cash provided by operating activities compared to fiscal 2014 primarily due to an increase in accounts payable and income taxes payable due to the timing of payments, partially offset by an increase in merchandise inventories.2016.
Cash Flows from Investing Activities
For fiscal 2016,2018, net cash used in investing activities was $196,975,000$187,899,000 compared to $202,166,000 for$269,760,000 in fiscal 2015,2017, and was primarily attributable to purchases of property and equipment. Net cash used in investing activities compared to fiscal 2015 decreased primarily2017 is lower due to a reductionthe acquisition of Outward in purchases of property and equipment.fiscal 2017 (see Note O to our Consolidated Financial Statements).
For fiscal 2015,2017, net cash used in investing activities was $202,166,000$269,760,000 compared to $188,600,000 for$196,975,000 in fiscal 2014,2016, and was primarily attributable to purchases of property and equipment.equipment and the acquisition of Outward. Net cash used in investing activities compared to fiscal 20142016 increased primarily due to restricted cash receipts received in fiscal 2014 that did not recur in fiscal 2015.the acquisition of Outward.
Cash Flows from Financing Activities
For fiscal 2016,2018, net cash used in financing activities was $305,806,000$450,066,000 compared to $369,383,000$51,707,000 in fiscal 2015.2017. For fiscal 2016,2018, net cash used in financing activities was primarily attributable to repurchases of common stock of $151,272,000$295,304,000 and the payment of dividends of $133,539,000.$140,325,000. Net cash used in financing activities compared to fiscal 20152017 decreased primarily due to a decreaseterm loan borrowings in fiscal 2017 and an increase in repurchases of common stock.stock in fiscal 2018.
For fiscal 2015,2017, net cash used in financing activities was $369,383,000$51,707,000 compared to $379,020,000$305,806,000 in fiscal 2014.2016. For fiscal 2015,2017, net cash used in financing activities was primarily attributable to repurchases of common stock of $224,995,000$196,179,000 and the payment of dividends of $127,636,000.$135,010,000, partially offset by proceeds from issuance of long-term debt of $300,000,000. Net cash used in financing activities compared to fiscal 20142016 decreased primarily due to a decreaseproceeds from the issuance of long-term debt, partially offset by an increase in tax withholding payments related to stock-based awards.repurchases of common stock.
Dividends
See section titled Dividends within Part II, Item 5
In fiscal 2018, fiscal 2017 and fiscal 2016, total cash dividends declared were approximately $144,609,000, or $1.72 per common share, $135,779,000, or $1.56 per common share, and $133,588,000, or $1.48 per common share, respectively. In March 2019, our Board of this Annual Report on Form 10-KDirectors authorized a $0.05, or 11.6%, increase in our quarterly cash dividend, from $0.43 to $0.48 per common share, for further information.an annual cash dividend of $1.92 per share, subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time.
Stock Repurchase Programs
See section titled Stock Repurchase Programs within Part II, Item 5 of this Annual Report on Form10-K for further information.
Contractual Obligations
The following table provides summary information concerning our future contractual obligations as of January 29, 2017:February 3, 2019:
| Payments Due by Period1 | Payments Due by Period1 | |||||||||||||||||||||||||||||||||||||||
| In thousands | Fiscal 2017 | Fiscal 2018 to Fiscal 2020 | Fiscal 2021 to Fiscal 2022 | Thereafter | Total | Fiscal 2019 | Fiscal 2020 to Fiscal 2022 | Fiscal 2023 to Fiscal 2024 | Thereafter | Total | ||||||||||||||||||||||||||||||
Operating leases2 | $ | 268,593 | $ | 703,308 | $ | 322,910 | $ | 531,699 | $ | 1,826,510 | ||||||||||||||||||||||||||||||
Purchase obligations3 | 973,102 | 8,889 | 871 | — | 982,862 | |||||||||||||||||||||||||||||||||||
Long-term debt 2 | $ | — | $ | 300,000 | $ | — | $ | — | $ | 300,000 | ||||||||||||||||||||||||||||||
Interest | 10,898 | 10,232 | — | — | 21,130 | |||||||||||||||||||||||||||||||||||
Operating leases3 | 292,387 | 678,447 | 298,086 | 422,024 | 1,690,944 | |||||||||||||||||||||||||||||||||||
Purchase obligations4 | 960,132 | 29,271 | 186 | — | 989,589 | |||||||||||||||||||||||||||||||||||
Total | $ | 1,241,695 | $ | 712,197 | $ | 323,781 | $ | 531,699 | $ | 2,809,372 | $ | 1,263,417 | $ | 1,017,950 | $ | 298,272 | $ | 422,024 | $ | 3,001,663 | ||||||||||||||||||||
| 1 | This table excludes |
| 2 | Long-term debt consists of term loan borrowings under our credit facility. See Note C to our Consolidated Financial Statements for discussion of our borrowing arrangements. |
| 3 | Projected undiscounted payments include only those amounts that are fixed and determinable as of the reporting date. See Note E to our Consolidated Financial Statements for discussion of our operating leases. |
Represents estimated commitments atyear-end to purchase inventory and other goods and services in the normal course of business to meet operational requirements. |
Other Contractual Obligations
We have other liabilities reflected in our Consolidated Balance Sheet. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. The timing of these payments cannot be determined, except for amounts estimated to be payable in fiscal 2017,2019, which are included in our current liabilities as of January 29, 2017.February 3, 2019.
We are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to commercial matters, operating leases, trademarks, intellectual property and financial matters. Under these contracts, we may provide certain routine indemnification relating to representations and warranties or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.
Commercial Commitments
The following table provides summary information concerning our outstanding commercial commitments as of January 29, 2017:February 3, 2019:
| Amount of Outstanding Commitment Expiration By Period1 | Amount of Outstanding Commitment Expiration by Period1 | |||||||||||||||||||||||||||||||||||||||
| In thousands | Fiscal 2017 | Fiscal 2018 to Fiscal 2020 | Fiscal 2021 to Fiscal 2022 | Thereafter | Total | Fiscal 2019 | Fiscal 2020 to Fiscal 2022 | Fiscal 2023 to Fiscal 2024 | Thereafter | Total | ||||||||||||||||||||||||||||||
Standby letters of credit | $ | 12,090 | — | — | — | $ | 12,090 | $ | 11,732 | $ | — | $ | — | $ | — | $ | 11,732 | |||||||||||||||||||||||
Letter of credit facilities | 6,565 | — | — | — | 6,565 | 6,820 | — | — | — | 6,820 | ||||||||||||||||||||||||||||||
Credit facility | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Total | $ | 18,655 | — | — | — | $ | 18,655 | $ | 18,552 | $ | — | $ | — | $ | — | $ | 18,552 | |||||||||||||||||||||||
| 1 | See Note C to our Consolidated Financial Statements for discussion of our borrowing arrangements. |
IMPACT OF INFLATION
The impact of inflation (or deflation) on our results of operations for the past three fiscal years has not been significant. However, we cannot be certain of the effect inflation (or deflation) may have on our results of operations in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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 from these estimates.
We believe the following critical accounting policies used in the preparation of our Consolidated Financial Statements include the significant estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. See Note A to our Consolidated Financial Statements for a detailed descriptionfurther discussion of each policy.
Merchandise Inventories
Merchandise inventories, net of an allowance for excess quantitiesshrinkage and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost, we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends aging reports,of inventory sold below cost and specific identification and our estimates of future sales and selling prices.identification.
Reserves for shrinkage are estimated and recorded throughout the year as a percentage of net sales based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded atyear-end based on the results of our cycle count and year end physical inventory counts and can vary from our estimates due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities,off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end.year-end, with the exception of a cycle count reserve based on the historical cycle count results in our distribution centers. This reserve was not material to our Consolidated Financial Statements as of February 3, 2019. Historically, actual shrinkage has not differed materially from our estimates.
Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling
environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. In addition, we do not believe a 10% change in our inventory reserves would have a material effect on our net earnings. As of January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, our inventory obsolescence reserves were $13,770,000$13,580,000 and $9,782,000,$12,649,000, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the 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. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. Impairment may result when the carrying value of the asset exceeds the estimated undiscounted future cash flows over its remaining useful life. For store impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be
impaired, the amount recognized for impairment is equal to the difference betweenexcess of the asset’s net carrying value andover its fair value. Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy.hierarchy (see Note M to our Consolidated Financial Statements). The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.
During fiscal 2016, fiscal 2015 and fiscal 2014,2018, we recorded asset impairment charges of approximately $1,765,000, $2,100,000 and $241,000, respectively,$9,639,000, related to our retail stores, which is recorded within selling, general and administrative expenses. During fiscal 2017, we did not record any asset impairment charges. During fiscal 2016, we recorded asset impairment charges of approximately $1,765,000 related to our retail stores.
Business Combinations
We account for acquired businesses when we obtain control of the business using the acquisition method of accounting. Assets acquired and liabilities assumed are recorded based upon the estimated fair value as of the acquisition date. Estimated fair values represent the estimated price that would be paid by a third-party market participant based upon the highest and best use of the assets acquired or liabilities assumed. The determination of the fair value of assets acquired and liabilities assumed requires significant judgment and estimates. In making such judgments and estimates, we utilize inputs from independent third-party valuation specialists and other internal sources. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. Acquisition-related expenses are expensed as incurred. During fiscal 2017, we acquired Outward (see Note O to our Consolidated Financial Statements). During the second quarter of fiscal 2018, we finalized the valuation of intangible assets acquired, which primarily represent3-D imaging data and core intellectual property which are being amortized over a useful life of four years.
Goodwill
Goodwill is initially recorded as of the acquisition date, and is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is subject to impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. We first perform a qualitative assessment to evaluate goodwill for potential impairment. If based on that assessment it is more likely than not that the fair value of the reporting unit is below its carrying value, a two-step quantitative impairment test is necessary. The first step of the quantitative impairment test requires determining the fair value of the reporting
unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future such as sales growth, gross margins, employment rates,costs, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, exceeds its fair value, impairment is recorded for the excess, not to exceed the total amount of goodwill may be impaired. We then must perform a second stepallocated to the reporting unit.
As of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge, if any.
At January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, we had goodwill of $18,680,000$85,382,000 and $18,703,000,$18,838,000, respectively, included in other assets primarily related to our fiscal 2017 acquisition of Outward and our fiscal 2011 acquisition of Rejuvenation, Inc. In fiscal 2018, fiscal 2017, and fiscal 2016, we performed a qualitative assessment of potential goodwill impairment and determined it was more likely than not that the fair value of each of our reporting units exceeded its carrying value. Accordingly, no further impairment testing of goodwill was performed and weperformed. We did not recognize any goodwill impairment in fiscal 2016. In2018, fiscal 2015 and fiscal 2014, we performed a quantitative goodwill impairment test and determined that the fair value of both our reporting units substantially exceeded their carrying value. Accordingly, we did not recognize any goodwill impairment in fiscal 20152017, or fiscal 2014.2016.
Self-Insured Liabilities
We are primarily self-insured for workers’ compensation, employee health benefits, and product and other general liability claims. We record self-insurance liability reserves based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported.reported, based on an actuarial analysis of historical claims data. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different number of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’ compensation liability and product and general liability claims reserves based on an actuarial analysis of historical claims data. Self-insurance reserves for workers’ compensation, employee health benefits, and product and other general liability claims were $24,988,000$28,542,000 and $25,290,000$26,370,000 as of January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and
update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrencesoccurrence of other events.
In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions.jurisdictions or changes in tax law.
| ITEM 7A. | 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 revolving line of credit hasrevolver and our term loan each have a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. DuringAs of February 3, 2019, we had $300,000,000 outstanding under the term loan, and during fiscal 2016,2018 we had borrowings of $125,000,000$60,000,000 under the credit facility,revolver, all of which were repaid in the fourth quarter of fiscal 2016.2018. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instrumentinstruments would not materially affect our results of operations or cash flows.
In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of January 29, 2017,February 3, 2019, our investments, made primarily in interest bearing demand deposit accounts and money market funds, are stated at cost and approximate their fair values.
Foreign Currency Risks
We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 1% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Anydollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us during fiscal 20162018 or fiscal 2015.2017. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.
In addition, our retail and/ore-commerce 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 fiscal 2016,2018, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note L to our Consolidated Financial Statements).
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Williams-Sonoma, Inc.
Consolidated Statements of Earnings
| In thousands, except per share amounts | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | | Fiscal 2018 (53 weeks) |
| | Fiscal 2017 (52 weeks) |
| | Fiscal 2016 (52 weeks) |
| ||||||||||||
E-commerce net revenues | $ 2,633,602 | $ 2,522,580 | $ 2,370,694 | $ 3,082,064 | $ 2,778,457 | $ 2,633,602 | ||||||||||||||||||
Retail net revenues | 2,450,210 | 2,453,510 | 2,328,025 | 2,589,529 | 2,513,902 | 2,450,210 | ||||||||||||||||||
Net revenues | 5,083,812 | 4,976,090 | 4,698,719 | 5,671,593 | 5,292,359 | 5,083,812 | ||||||||||||||||||
Cost of goods sold | 3,200,502 | 3,131,876 | 2,898,215 | 3,570,580 | 3,360,648 | 3,200,502 | ||||||||||||||||||
Gross profit | 1,883,310 | 1,844,214 | 1,800,504 | 2,101,013 | 1,931,711 | 1,883,310 | ||||||||||||||||||
Selling, general and administrative expenses | 1,410,711 | 1,355,580 | 1,298,239 | 1,665,060 | 1,477,900 | 1,410,711 | ||||||||||||||||||
Operating income | 472,599 | 488,634 | 502,265 | 435,953 | 453,811 | 472,599 | ||||||||||||||||||
Interest (income) expense, net | 688 | 627 | 62 | 6,706 | 1,372 | 688 | ||||||||||||||||||
Earnings before income taxes | 471,911 | 488,007 | 502,203 | 429,247 | 452,439 | 471,911 | ||||||||||||||||||
Income taxes | 166,524 | 177,939 | 193,349 | 95,563 | 192,894 | 166,524 | ||||||||||||||||||
Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | $ 333,684 | $ 259,545 | $ 305,387 | ||||||||||||||||||
Basic earnings per share | $ 3.45 | $ 3.42 | $ 3.30 | $ 4.10 | $ 3.03 | $ 3.45 | ||||||||||||||||||
Diluted earnings per share | $ 3.41 | $ 3.37 | $ 3.24 | $ 4.05 | $ 3.02 | $ 3.41 | ||||||||||||||||||
Shares used in calculation of earnings per share: | ||||||||||||||||||||||||
Basic | 88,594 | 90,787 | 93,634 | 81,420 | 85,592 | 88,594 | ||||||||||||||||||
Diluted | 89,462 | 92,102 | 95,200 | 82,340 | 86,080 | 89,462 | ||||||||||||||||||
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc. Consolidated Statements of Comprehensive Income
|
| |||||||||||||||||||||||
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | |||||||||||||||||||||
Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | |||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustments | 1,523 | (7,958 | ) | (9,305 | ) | |||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | (916 | ) | 1,074 | 806 | ||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | 106 | (1,184 | ) | (573 | ) | |||||||||||||||||||
Comprehensive income | $ 306,100 | $ 302,000 | $ 299,782 | |||||||||||||||||||||
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc.
Consolidated Statements of Comprehensive Income
| In thousands | | Fiscal 2018 (53 weeks) |
| | Fiscal 2017 (52 weeks) |
| | Fiscal 2016 (52 weeks) |
| |||
Net earnings | $ 333,684 | $ 259,545 | $ 305,387 | |||||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustments | (5,032 | ) | 3,730 | 1,523 | ||||||||
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $390, $(259) and $(327) | 1,098 | (715 | ) | (916 | ) | |||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $122, $(38) and $(41) | (357 | ) | 106 | 106 | ||||||||
Comprehensive income | $ 329,393 | $ 262,666 | $ 306,100 | |||||||||
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc.
| In thousands, except per share amounts | Jan. 29, 2017 | Jan. 31, 2016 | Feb. 3, 2019 | Jan. 28, 2018 | ||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ 213,713 | $ 193,647 | $ | 338,954 | $ | 390,136 | ||||||||||
Accounts receivable, net | 88,803 | 79,304 | 107,102 | 90,119 | ||||||||||||
Merchandise inventories, net | 977,505 | 978,138 | 1,124,992 | 1,061,593 | ||||||||||||
Prepaid catalog expenses | 23,625 | 28,919 | — | 20,517 | ||||||||||||
Prepaid expenses | 52,882 | 44,654 | 101,356 | 62,204 | ||||||||||||
Other assets | 10,652 | 11,438 | ||||||||||||||
Other current assets | 21,939 | 11,876 | ||||||||||||||
Total current assets | 1,367,180 | 1,336,100 | 1,694,343 | 1,636,445 | ||||||||||||
Property and equipment, net | 923,283 | 886,813 | 929,635 | 932,283 | ||||||||||||
Deferred income taxes, net | 135,238 | 141,784 | 44,055 | 67,306 | ||||||||||||
Other assets, net | 51,178 | 52,730 | ||||||||||||||
Goodwill | 85,382 | 18,838 | ||||||||||||||
Other long-term assets, net | 59,429 | 130,877 | ||||||||||||||
Total assets | $ 2,476,879 | $ 2,417,427 | $ | 2,812,844 | $ | 2,785,749 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ 453,710 | $ 447,412 | $ | 526,702 | $ | 457,144 | ||||||||||
Accrued salaries, benefits and other liabilities | 130,187 | 127,122 | ||||||||||||||
Customer deposits | 294,276 | 296,827 | ||||||||||||||
Accrued expenses | 163,559 | 134,207 | ||||||||||||||
Gift card and other deferred revenue | 290,445 | 300,607 | ||||||||||||||
Income taxes payable | 23,245 | 67,052 | 21,461 | 56,783 | ||||||||||||
Other liabilities | 59,838 | 58,014 | ||||||||||||||
Other current liabilities | 72,645 | 59,082 | ||||||||||||||
Total current liabilities | 961,256 | 996,427 | 1,074,812 | 1,007,823 | ||||||||||||
Deferred rent and lease incentives | 196,188 | 173,061 | 201,374 | 202,134 | ||||||||||||
Other long-term obligations | 71,215 | 49,713 | ||||||||||||||
Long-term debt | 299,620 | 299,422 | ||||||||||||||
Other long-term liabilities | 81,324 | 72,804 | ||||||||||||||
Total liabilities | 1,228,659 | 1,219,201 | 1,657,130 | 1,582,183 | ||||||||||||
Commitments and contingencies – See Note I | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Preferred stock: $.01 par value; 7,500 shares authorized; none issued | — | — | — | — | ||||||||||||
Common stock: $.01 par value; 253,125 shares authorized; | ||||||||||||||||
87,325 and 89,563 shares issued and outstanding at January 29, 2017 and January 31, 2016, respectively | 873 | 896 | ||||||||||||||
Common stock: $.01 par value; 253,125 shares authorized; 78,813 and 83,726 shares issued and outstanding at February 3, 2019 and January 28, 2018, respectively | 789 | 837 | ||||||||||||||
Additional paid-in capital | 556,928 | 541,307 | 581,900 | 562,814 | ||||||||||||
Retained earnings | 701,702 | 668,545 | 584,333 | 647,422 | ||||||||||||
Accumulated other comprehensive loss | (9,903 | ) | (10,616 | ) | (11,073 | ) | (6,782 | ) | ||||||||
Treasury stock – at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively | (1,380 | ) | (1,906 | ) | ||||||||||||
Treasury stock – at cost: 2 and 11 shares as of February 3, 2019 and January 28, 2018, respectively | (235 | ) | (725 | ) | ||||||||||||
Total stockholders’ equity | 1,248,220 | 1,198,226 | 1,155,714 | 1,203,566 | ||||||||||||
| Total liabilities and stockholders’ equity | $ 2,476,879 | $ 2,417,427 | $ | 2,812,844 | $ | 2,785,749 | ||||||||||
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc.
Consolidated Statements of Stockholders’ Equity
Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders’ Equity |
Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| In thousands | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at February 2, 2014 | 94,049 | $ | 941 | $ | 522,595 | $ | 729,043 | $ | 6,524 | $ | (3,101 | ) | $ | 1,256,002 | ||||||||||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 308,854 | — | — | 308,854 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (9,305 | ) | — | (9,305 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | — | — | — | — | 806 | — | 806 | |||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | — | — | — | (573 | ) | — | (573 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards and related tax effect | 116 | 1 | 31,021 | — | — | — | 31,022 | |||||||||||||||||||||||||||||||||||||||||||||||||
Conversion/release of stock-based awards1 | 1,058 | 10 | (56,053 | ) | — | — | — | (56,043 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (3,332 | ) | (33 | ) | (13,776 | ) | (210,568 | ) | — | — | (224,377 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Reissuance of treasury stock under stock-based compensation plans1 | — | — | (1,158 | ) | (737 | ) | — | 961 | (934 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 44,632 | — | — | — | 44,632 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (125,378 | ) | — | — | (125,378 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at February 1, 2015 | 91,891 | 919 | 527,261 | 701,214 | (2,548 | ) | (2,140 | ) | 1,224,706 | |||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 310,068 | — | — | 310,068 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (7,958 | ) | — | (7,958 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | — | — | — | — | 1,074 | — | 1,074 | |||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | — | — | — | (1,184 | ) | — | (1,184 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards and related tax effect | 68 | 1 | 17,238 | — | — | — | 17,239 | |||||||||||||||||||||||||||||||||||||||||||||||||
Conversion/release of stock-based awards1 | 554 | 6 | (31,411 | ) | — | — | — | (31,405 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (2,950 | ) | (30 | ) | (12,646 | ) | (212,319 | ) | — | — | (224,995 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Reissuance of treasury stock under stock-based compensation plans1 | — | — | (492 | ) | (128 | ) | — | 234 | (386 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 41,357 | — | — | — | 41,357 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (130,290 | ) | — | — | (130,290 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 31, 2016 | 89,563 | 896 | 541,307 | 668,545 | (10,616 | ) | (1,906 | ) | 1,198,226 | 89,563 | $ | 896 | $ | 541,307 | $ | 668,545 | $ | (10,616) | $ | (1,906 | ) | $ | 1,198,226 | |||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 305,387 | — | — | 305,387 | — | — | — | 305,387 | — | — | 305,387 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 1,523 | — | 1,523 | — | — | — | — | 1,523 | — | 1,523 | ||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | — | — | — | — | (916 | ) | — | (916 | ) | — | — | — | — | (916 | ) | — | (916 | ) | ||||||||||||||||||||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | — | — | — | 106 | — | 106 | — | — | — | — | 106 | — | 106 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock-based awards and related tax effect | 39 | — | 4,762 | — | — | — | 4,762 | 39 | — | 4,762 | — | — | — | 4,762 | ||||||||||||||||||||||||||||||||||||||||||
Conversion/release of stock-based awards1 | 594 | 6 | (26,805 | ) | — | — | (263 | ) | (27,062 | ) | 594 | 6 | (26,805 | ) | — | — | (263 | ) | (27,062 | ) | ||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (2,871 | ) | (29 | ) | (12,684 | ) | (138,559 | ) | — | — | (151,272 | ) | (2,871 | ) | (29 | ) | (12,684 | ) | (138,559 | ) | — | — | (151,272 | ) | ||||||||||||||||||||||||||||||||
Reissuance of treasury stock under stock-based compensation plans1 | — | — | (706 | ) | (83 | ) | — | 789 | — | — | — | (706 | ) | (83 | ) | — | 789 | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 51,054 | — | — | — | 51,054 | — | — | 51,054 | — | — | — | 51,054 | ||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (133,588 | ) | — | — | (133,588 | ) | — | — | — | (133,588 | ) | — | — | (133,588 | ) | ||||||||||||||||||||||||||||||||||||||
Balance at January 29, 2017 | 87,325 | $ | 873 | $ | 556,928 | $ | 701,702 | $ | (9,903 | ) | $ | (1,380 | ) | $ | 1,248,220 | 87,325 | 873 | 556,928 | 701,702 | (9,903 | ) | (1,380 | ) | 1,248,220 | ||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 259,545 | — | — | 259,545 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 3,730 | — | 3,730 | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | — | — | — | — | (715 | ) | — | (715 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | — | — | — | 106 | — | 106 | |||||||||||||||||||||||||||||||||||||||||||||||||
Conversion/release of stock-based awards1 | 452 | 5 | (17,810 | ) | — | — | (325 | ) | (18,130 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (4,051 | ) | (41 | ) | (18,518 | ) | (177,620 | ) | — | — | (196,179 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Reissuance of treasury stock under stock-based compensation plans1 | — | — | (554 | ) | (426 | ) | — | 980 | — | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 42,768 | — | — | — | 42,768 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (135,779 | ) | — | — | (135,779 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 28, 2018 | 83,726 | 837 | 562,814 | 647,422 | (6,782 | ) | (725 | ) | 1,203,566 | |||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 333,684 | — | — | 333,684 | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (5,032 | ) | — | (5,032 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative financial instruments, net of tax | — | — | — | — | 1,098 | — | 1,098 | |||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | — | — | — | (357 | ) | — | (357 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Conversion/release of stock-based awards1 | 460 | 5 | (14,149 | ) | — | — | (291 | ) | (14,435 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | (5,373 | ) | (53 | ) | (25,775 | ) | (269,476 | ) | — | — | (295,304 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Reissuance of treasury stock under stock-based compensation plans1 | — | — | (418 | ) | (363 | ) | — | 781 | — | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 59,428 | — | — | — | 59,428 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (144,609 | ) | — | — | (144,609 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Adoption of accounting pronouncements2 | — | — | — | 17,675 | — | — | 17,675 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at February 3, 2019 | 78,813 | $ | 789 | $ | 581,900 | $ | 584,333 | $ | (11,073 | ) | $ | (235 | ) | $ | 1,155,714 | |||||||||||||||||||||||||||||||||||||||||
| 1 | Amounts are shown net of shares withheld for employee taxes. |
| 2 | Primarily relates to our adoption of ASU2014-09 in fiscal 2018. See Note A. |
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc.
Consolidated Statements of Cash Flows
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net earnings | $ | 305,387 | $ | 310,068 | $ | 308,854 | $ | 333,684 | $ | 259,545 | $ | 305,387 | ||||||||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | 173,195 | 167,760 | 162,273 | 188,808 | 183,077 | 173,195 | ||||||||||||||||||
Loss on disposal/impairment of assets | 3,806 | 4,339 | 2,410 | 10,209 | 1,889 | 3,806 | ||||||||||||||||||
Amortization of deferred lease incentives | (25,212 | ) | (24,721 | ) | (24,419 | ) | (26,199 | ) | (25,372 | ) | (25,212 | ) | ||||||||||||
Deferred income taxes | 7,114 | (7,436 | ) | (248 | ) | 23,639 | 63,381 | 7,114 | ||||||||||||||||
Tax benefit related to stock-based awards | 3,230 | 14,592 | 26,952 | — | — | 3,230 | ||||||||||||||||||
Excess tax benefit related to stock-based awards | (4,894 | ) | (14,494 | ) | (26,560 | ) | — | — | (4,894 | ) | ||||||||||||||
Stock-based compensation expense | 51,116 | 41,357 | 44,632 | 59,802 | 42,988 | 51,116 | ||||||||||||||||||
Other | (423 | ) | 149 | 595 | (579 | ) | (135 | ) | (423 | ) | ||||||||||||||
Changes in: | ||||||||||||||||||||||||
Accounts receivable | (9,794 | ) | (12,849 | ) | (9,366 | ) | (15,329 | ) | 149 | (9,794 | ) | |||||||||||||
Merchandise inventories | 4,493 | (92,647 | ) | (76,964 | ) | (70,331 | ) | (80,235 | ) | 4,493 | ||||||||||||||
Prepaid catalog expenses | 5,294 | 5,022 | (386 | ) | — | (1,019 | ) | 6,448 | ||||||||||||||||
Prepaid expenses and other assets | (6,367 | ) | (9,245 | ) | (61 | ) | (54,691 | ) | (15,475 | ) | (7,521 | ) | ||||||||||||
Accounts payable | 3,169 | 60,507 | 4,455 | 62,377 | 2,549 | 4,276 | ||||||||||||||||||
Accrued salaries, benefits and other liabilities | 25,876 | (135 | ) | 8,867 | ||||||||||||||||||||
Customer deposits | (3,037 | ) | 35,877 | 34,400 | ||||||||||||||||||||
Accrued expenses and other liabilities | 45,976 | 9,597 | 19,712 | |||||||||||||||||||||
Gift card and other deferred revenue | 38,899 | (3,002 | ) | 2,020 | ||||||||||||||||||||
Deferred rent and lease incentives | 35,559 | 31,334 | 23,297 | 24,929 | 28,226 | 35,559 | ||||||||||||||||||
Income taxes payable | (43,803 | ) | 34,548 | (17,034 | ) | (35,208 | ) | 33,541 | (43,803 | ) | ||||||||||||||
Net cash provided by operating activities | 524,709 | 544,026 | 461,697 | 585,986 | 499,704 | 524,709 | ||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of property and equipment | (197,414 | ) | (202,935 | ) | (204,800 | ) | (190,102 | ) | (189,712 | ) | (197,414 | ) | ||||||||||||
Restricted cash receipts | — | — | 14,289 | |||||||||||||||||||||
Acquisition of Outward, Inc., net of cash received | — | (80,528 | ) | — | ||||||||||||||||||||
Other | 439 | 769 | 1,911 | 2,203 | 480 | 439 | ||||||||||||||||||
Net cash used in investing activities | (196,975 | ) | (202,166 | ) | (188,600 | ) | (187,899 | ) | (269,760 | ) | (196,975 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Repurchases of common stock | (151,272 | ) | (224,995 | ) | (224,377 | ) | (295,304 | ) | (196,179 | ) | (151,272 | ) | ||||||||||||
Payment of dividends | (133,539 | ) | (127,636 | ) | (125,758 | ) | (140,325 | ) | (135,010 | ) | (133,539 | ) | ||||||||||||
Borrowings under revolving line of credit | 125,000 | 200,000 | 90,000 | 60,000 | 170,000 | 125,000 | ||||||||||||||||||
Repayments of borrowings under revolving line of credit | (125,000 | ) | (200,000 | ) | (90,000 | ) | (60,000 | ) | (170,000 | ) | (125,000 | ) | ||||||||||||
Tax withholdings related to stock-based awards | (27,062 | ) | (31,790 | ) | (56,977 | ) | (14,437 | ) | (18,130 | ) | (27,062 | ) | ||||||||||||
Proceeds from issuance of long-term debt | — | 300,000 | — | |||||||||||||||||||||
Excess tax benefit related to stock-based awards | 4,894 | 14,494 | 26,560 | — | — | 4,894 | ||||||||||||||||||
Proceeds related to stock-based awards | 1,532 | 2,647 | 4,077 | — | — | 1,532 | ||||||||||||||||||
Repayment of long-term obligations | — | (1,968 | ) | (1,785 | ) | |||||||||||||||||||
Debt issuance costs | — | (1,191 | ) | (359 | ) | |||||||||||||||||||
Other | (359 | ) | (135 | ) | (760 | ) | — | (1,197 | ) | — | ||||||||||||||
Net cash used in financing activities | (305,806 | ) | (369,383 | ) | (379,020 | ) | (450,066 | ) | (51,707 | ) | (305,806 | ) | ||||||||||||
Effect of exchange rates on cash and cash equivalents | (1,862 | ) | (1,757 | ) | (1,271 | ) | 797 | (1,814 | ) | (1,862 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 20,066 | (29,280 | ) | (107,194 | ) | (51,182 | ) | 176,423 | 20,066 | |||||||||||||||
Cash and cash equivalents at beginning of year | 193,647 | 222,927 | 330,121 | 390,136 | 213,713 | 193,647 | ||||||||||||||||||
Cash and cash equivalents at end of year | $ | 213,713 | $ | 193,647 | $ | 222,927 | $ | 338,954 | $ | 390,136 | $ | 213,713 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
Cash paid during the year for interest | $ | 2,202 | $ | 1,989 | $ | 1,269 | $ | 11,424 | $ | 2,915 | $ | 2,202 | ||||||||||||
Cash paid during the year for income taxes, net of refunds | $ | 203,426 | $ | 134,478 | $ | 172,305 | $ | 107,951 | $ | 99,062 | $ | 203,426 | ||||||||||||
Non-cash investing activities: | ||||||||||||||||||||||||
Purchases of property and equipment not yet paid for at end of year | $ | 625 | $ | 2,715 | $ | 4,808 | $ | 2,773 | $ | 1,257 | $ | 625 | ||||||||||||
See Notes to Consolidated Financial Statements.
Williams-Sonoma, Inc.
Notes to Consolidated Financial Statements
Note A: Summary of Significant Accounting Policies
We are a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed throughe-commerce websites, direct maildirect-mail catalogs and 629625 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 have retail and/or e-commerce businessesoperate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, and ship our productsoffer international shipping to customers worldwide. Our catalogs reach customers throughout the U.S.worldwide, and Australia. In addition, we have unaffiliated franchisees that operate stores and/ore-commerce websites in the Middle East, the Philippines, Mexico and Mexico. In addition, during fiscal 2016, we entered into a franchise agreement with an unaffiliated franchisee to operate stores ande-commerce websites in South Korea, beginningas well ase-commerce websites in fiscal 2017.certain locations. In 2017, we acquired Outward, Inc., a3-D imaging and augmented reality platform for the home furnishings and décor industry.
Reclassifications
Certain amounts reported in our Consolidated Balance Sheet as of January 28, 2018 and our Consolidated Statements of Cash Flows for thefifty-two weeks ended January 28, 2018 and January 29, 2017 have been reclassified in order to conform to the current period presentation. These reclassifications impacted prepaid catalog expenses, prepaid expenses, goodwill, other long-term assets, accounts payable, accrued expenses, gift card and other deferred revenue and other current liabilities. There was no change to total current assets, total assets, total current liabilities, or cash flows as a result of these reclassifications.
Consolidation
The Consolidated Financial Statements include the accounts of Williams-Sonoma, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
Fiscal Year
Our fiscal year ends on the Sunday closest to January 31, based on a 52 or53-week year. Fiscal 2018, a53-week year, ended on February 3, 2019; Fiscal 2017, a52-week year, ended on January 28, 2018; and Fiscal 2016, a52-week year, ended on January 29, 2017; Fiscal 2015, a 52-week year, ended on January 31, 2016; and Fiscal 2014, a 52-week year, ended on February 1, 2015.2017.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 from these estimates.
Cash Equivalents
Cash equivalents include highly liquid investments with an original maturity of three months or less. As of January 29, 2017,February 3, 2019, we were invested primarily in interest-bearing demand deposit accounts and money market funds. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at their carrying values, net of an allowance for doubtful accounts. Accounts receivable consist primarily of credit card, franchisee and landlord receivables for which collectability is reasonably assured. Receivables are evaluated for collectability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. Our allowance for doubtful accounts was not material to our financial statements as of January 29, 2017February 3, 2019 and January 31, 2016.28, 2018.
Merchandise Inventories
Merchandise inventories, net of an allowance for excess quantitiesshrinkage and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost,
we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends, aging reports, specific identification and our estimates of future sales and selling prices.
Reserves for shrinkage are estimated and recorded throughout the year as a percentage of net sales based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels. Actual shrinkage is
recorded atyear-end based on the results of our physical inventory counts and can vary from our estimates due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities,off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end.year-end, with the exception of a cycle count reserve based on the historical cycle count results in our distribution centers. This reserve was not material to our Consolidated Financial Statements as of February 3, 2019. Historically, actual shrinkage has not differed materially from our estimates.
Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. As of January 29, 2017February 3, 2019, and January 31, 2016,28, 2018, our inventory obsolescence reserves were $13,770,000$13,580,000 and $9,782,000, respectively.
Advertising and Prepaid Catalog Expenses
Advertising expenses consist of media and production costs related to e-commerce advertising, catalog mailings and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily of third-party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and amortized over their expected period of future benefit, generally three months.
Total advertising expenses (including e-commerce advertising, catalog advertising and other advertising costs) were approximately $347,474,000, $333,276,000 and $330,070,000 in fiscal 2016, fiscal 2015 and fiscal 2014,$12,649,000, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets:
Leasehold improvements | Shorter of estimated useful life or lease term (generally 5 – 22 years) | |
Fixtures and equipment | 2 – 20 years | |
Buildings and building improvements | 10 – 40 years | |
Capitalized software | 2 |
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. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. Impairment may result when the carrying value of the asset exceeds the estimated undiscounted future cash flows over its remaining useful life. For store impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference betweenexcess of the asset’s net carrying value andover its fair value. Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy.hierarchy (see Note M). The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.
During fiscal 2016, fiscal 2015 and fiscal 2014,2018, we recorded asset impairment charges of approximately $1,765,000, $2,100,000 and $241,000, respectively,$9,639,000, related to our retail stores, which is recorded within selling, general and administrative expenses. During fiscal 2017, we did not record any asset impairment charges. During fiscal 2016, we recorded asset impairment charges of approximately $1,765,000, related to our retail stores.
Goodwill
Goodwill is initially recorded as of the acquisition date, and is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is subject to
impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. We first perform a qualitative assessment to evaluate goodwill for potential impairment. If based on that assessment it is more likely than not that the fair value of the reporting unit is below its carrying value, a two-step quantitative impairment test is necessary. The first step of the quantitative impairment test requires determining the fair value of the reporting unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future such as sales growth, gross margins, employment rates,costs, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, exceeds its fair value, impairment is recorded for the excess, not to exceed the total amount of goodwill may be impaired. We then must perform a second stepallocated to the reporting unit.
As of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge, if any.
At January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, we had goodwill of $18,680,000$85,382,000 and $18,703,000,$18,838,000, respectively, included in other assets primarily related to our fiscal 2017 acquisition of Outward (see Note O) and to our fiscal 2011 acquisition of Rejuvenation, Inc. In fiscal 2018, fiscal 2017 and fiscal 2016, we performed a qualitative assessment of potential goodwill impairment and determined it was more likely than not that the fair value of each of our reporting units exceeded its carrying value. Accordingly, no further impairment testing of goodwill was performed and weperformed. We did not recognize any goodwill impairment in fiscal 2016. In2018, fiscal 2015 and fiscal 2014, we performed a quantitative goodwill impairment test and determined that the fair value of both our reporting units substantially exceeded their carrying value. Accordingly, we did not recognize any goodwill impairment in fiscal 20152017 or fiscal 2014.2016.
Self-Insured Liabilities
We are primarily self-insured for workers’ compensation, employee health benefits, and product and other general liability claims. We record self-insurance liability reserves based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported.reported, based on an actuarial analysis of historical claims data. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different number of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’ compensation liability and product and general liability claims reserves based on an actuarial analysis of historical claims data. Self-insurance reserves for workers’ compensation, employee health benefits, and product and other general liability claims were $24,988,000$28,542,000 and $25,290,000$26,370,000 as of January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, respectively.
Customer Deposits
Customer deposits are primarily comprised of deferred revenues related to unredeemed gift cards, merchandise credits and undelivered merchandise. We maintain a liability for unredeemed gift cards and merchandise credits until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our gift cards being redeemed beyond four years from the date of issuance is remote. Income from unredeemed gift cards and merchandise credits, which is recorded in other income within selling, general and administrative expense, is not material to our consolidated financial statements. Our gift cards and merchandise credits have no expiration dates.
Deferred Rent and Lease Incentives
For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rentalrent expense on a straight-line basis over the lease term, including the construction period, and record the difference between rent expense and the amount currently payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term, including the construction period.
For any store or facility closure where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the cease use date.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and debt approximate their estimated fair values. We use derivative financial instruments to hedge against foreign currency exchange rate fluctuations. The assets or liabilities associated with our derivative financial instruments are recorded at fair value in either other current or long-term assets or other current or long-term liabilities. The fair value of our foreign currency derivative instruments is measured using the income approach whereby we use observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. These observable inputs include spot rates, forward rates, interest rates and credit derivative market rates (refer to(see Notes L and M for additional information).
Revenue RecognitionMerchandise Sales
We recognize revenuesRevenues from the sale of our merchandise through oure-commerce channel, 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 related cost of goods sold (including shipping costs)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 products aresale to the customer. For merchandise delivered to our customers. Revenuethe customer, control is recognizedtransferred either when delivery has been completed, or when we have a present right to payment which, for retail sales (excluding home-delivered merchandise)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 in the storefor merchandise sales and for home-delivered merchandisemost services. We have elected to account for shipping and e-commerce sales, whenhandling as fulfillment activities, and not as a separate performance obligation.
Revenue from the sale of merchandise is delivered to the customer. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to the customer. Revenues are presentedreported net of any taxes collected from customers and remitted to governmental authorities.sales returns. We recognize revenues from sales to franchisees at the time merchandise ownership is transferred to the franchisee.
Sales Returns Reserve
Our customers may return purchased items for an exchange or refund. We record a reserve for estimated productestimate future returns net of cost of goods sold, based on historical return trends together with current product sales performance. A summaryAs of activityFebruary 3, 2019, we recorded a liability for expected sales returns of approximately $26,276,000 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $10,030,000 within other current assets in our Consolidated Balance Sheet.
Prior to the adoption of Auditing Standards Update (“ASU”)2014-09,Revenue from Contracts with Customers in the first quarter of fiscal 2018, we recorded a reserve for estimated product returns, net of cost of merchandise inventory to be returned, within other current liabilities. For fiscal 2017 and fiscal 2016, the opening balance of our sales returns reserve was $16,058,000 and $19,113,000, respectively. For fiscal 2017 and fiscal 2016, provision for sales returns was $302,320,000 and $303,694,000, respectively, and actual sales returns were $306,536,000 and $306,749,000, respectively. The closing balance of our sales returns reserve was $11,842,000 and $16,058,000 for fiscal 2017 and fiscal 2016, respectively.
Gift Card and Other 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, customer loyalty programs, and incentives received from credit card issuers.
We issue stored-value cards that may be redeemed on future merchandise purchases at our stores or through oure-commerce channel. 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 follows: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 Consolidated Financial Statements.
For merchandise sales, we record a liability at each period end where we have not fulfilled our obligation to transfer goods or services to the customer, but for which we have already received consideration or have a right to consideration.
| In thousands | Fiscal 20161 | Fiscal 20151 | Fiscal 20141 | |||||||||
Balance at beginning of year | $ | 19,113 | $ | 14,782 | $ | 15,954 | ||||||
Provision for sales returns | 303,694 | 321,421 | 311,911 | |||||||||
Actual sales returns | (306,749 | ) | (317,090 | ) | (313,083 | ) | ||||||
Balance at end of year | $ | 16,058 | $ | 19,113 | $ | 14,782 | ||||||
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 at our stores or through oure-commerce channel. 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 Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within 6 months from issuance.
We enter into agreements with credit card issuers in connection with our private label andco-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.
As of February 3, 2019, we had recorded $298,435,000 for gift card and other deferred revenue in our Consolidated Balance Sheet, substantially all of which will be recognized into revenue within the next 12 months.
Vendor Allowances
We receive allowances or credits from certain vendors for volume rebates. We treat such volume rebates as an offset to the cost of the product or services provided at the time the expense is recorded. These allowances and credits received are recorded in both cost of goods sold and in selling, general and administrative expenses.
Cost of Goods Sold
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 relatedinventory-related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of non-occupancy relatednon-occupancy-related costs associated with our retail stores, distribution 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.
Stock-Based Compensation
We account for stock-based compensation arrangements by measuring and recognizing compensation expense in our Consolidated Financial Statements for all stock-based awards using a fair value based method. Restricted stock units are valued using the closing price of our stock on the date prior to the date of grant. The fair value of each stock-based award is amortized over the requisite service period.
Advertising Expenses
Advertising expenses consist of media and production costs related to digital advertising, catalog mailings and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement. Prior to the adoption of ASU 2014-09 in fiscal 2018, prepaid advertising costs were capitalized and amortized over their expected period of future benefit of approximately three months.
Total advertising expenses (including digital advertising, catalog advertising and other advertising costs) were approximately $390,115,000, $382,206,000 and $347,474,000 in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Foreign Currency Translation
Some of our foreign operations have a functional currency other than the U.S. dollar. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within stockholders’ equity. Foreign currency exchange gains and losses are recorded in selling, general and administrative expenses, (exceptexcept for those discussed in Note L).L.
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 plus common stock equivalents 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.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events.
In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision, due to changes in our estimated effective tax rate, are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions.jurisdictions or changes in tax law.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU2014-09,Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles (“GAAP”)GAAP and International Financial Reporting Standards. In addition,We adopted the ASU on a modified retrospective basis in March 2016, the FASB issued ASU 2016-08,Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intendedfirst quarter of fiscal 2018 and applied the guidance therein to improve the operability and understandabilityall applicable contracts that were not complete as of the implementation guidance on principal versus agent considerations.date of application. As a result, we recorded an increase to opening retained earnings as of January 29, 2018 of approximately $17,862,000, net of tax, for the cumulative effect adjustments of adopting the ASU. The FASB also issued ASU 2016-10,Identifying Performance Obligations and Licensingin April 2016, which amends certain aspectsadoption of ASU 2014-09 for identifying performance obligations and the implementation guidance on licensing. These ASUs are effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We are currently assessing the impact of these ASUs onthis standard most significantly impacted our Consolidated Financial Statements however, we expect that due to:
the adoptionreclassification from selling, general and administrative expenses into net revenues for certain incentives received from credit card issuers,
the reclassification of these standards will resultbreakage income related to our unredeemed stored-value cards from selling, general and administrative expenses into net revenues, as well as the acceleration in a changethe timing of recognizing breakage income,
the acceleration in the timing of revenue recognition for certain merchandise shipped to our customers, and
the customer,recording of a right of return asset for merchandise we expect to receive back from customers.
In addition, prepaid catalog advertising costs, which were capitalized and amortized over their expected period of future benefit prior to adoption, and are now expensed as wellincurred. Prior period balances were not retrospectively adjusted as a change inresult of adopting the timingASU.
The following summarizes the impact of recognizing breakage income related toadopting ASU2014-09 on our gift cards.Consolidated Statement of Earnings for the fiscal year ended February 3, 2019:
In January 2016, the FASB issued ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, which revises an entity’s accounting related to the classification and measurement of
| In thousands | As Reported | ASU 2014-09 Adjustment | As Adjusted | |||||||||
Net revenue | $ | 5,671,593 | $ | (61,106 | ) | $ | 5,610,487 | |||||
Cost of goods sold | 3,570,580 | (6,059 | ) | 3,564,521 | ||||||||
Gross profit | 2,101,013 | (55,047 | ) | 2,045,966 | ||||||||
Selling, general and administrative expenses | 1,665,060 | (48,766 | ) | 1,616,294 | ||||||||
Operating income | $ | 435,953 | $ | (6,281 | ) | $ | 429,672 | |||||
investments in equity securities andOther than the presentation of certain fair value changes for financialour sales returns liability and a right of return asset, which resulted in a reclassification of liabilities measured at fair value. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. We do not expectinto other current assets, all other impacts to our Consolidated Balance Sheet from the adoption of this ASU were not material either individually or in the aggregate as of February 3, 2019. The adoption of this ASU had no net impact to have a material impact on our financial condition, resultsConsolidated Statement of operations or cash flows.Cash Flows for the fiscal year ended February 3, 2019.
In February 2016, the FASB issued ASU2016-02,Leases,, which will requirerequires lessees to recognize aright-of-use asset and a lease liability for virtually all of their leases (other than short-term leases).leases. This ASU, as amended, is effective for fiscal years and interim periods within those yearsus beginning after December 15, 2018. We are currently assessing the impact of this ASU on our Consolidated Financial Statements, but expect that it will result in a substantial increase in our long-term assets and liabilities.
In March 2016, the FASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions (including the accounting for income taxes and forfeitures, among other areas). The ASU requires entities to, among other things, recognize all excess tax benefits and deficiencies in the income statement, as a component of income tax expense or benefit, in the period in which they occur. The ASU also allows an entity to make an accounting policy election to either estimate expected forfeitures or account for them as they occur. We will adopt this ASU in the first quarter of fiscal 2017. Any increased volatility in2019. We estimate that the income statement as a result of applying the provisionsadoption of the ASU will be dependent on future vesting activityresult in an increase in total long-term assets and volatilitytotal liabilities of approximately $1.2 billion, which includes an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and deferred lease incentives of approximately $0.2 billion, and an increase inright-of-use assets of approximately $1.2 billion. We have elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the financial statements. We will elect the package of practical expedients upon adoption, which permits us not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We will also elect not to separate lease andnon-lease components for all of our stock price.leases and not to recognize aright-of-use asset and a lease liability for short-term leases. We plando not expect the adoption of the ASU to continue to estimate expected forfeitures.materially impact our Consolidated Statement of Earnings or our Consolidated Statement of Cash Flows.
In October 2016, the FASB issued ASU2016-16,Intra-Entity Transfers of Assets Other than Inventory. The amendments remove the prohibition against the recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We adopted this ASU in the first quarter of fiscal 2018. The adoption did not have a material impact on our financial condition, results of operations or cash flows.
In January 2017, the FASB issued ASU2017-04,Simplifying the Test for Goodwill Impairment,which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. We adopted this ASU in the first quarter of fiscal 2018. The adoption of this ASU had no impact on our Consolidated Financial Statements.
In August 2017, the FASB issuedASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815), which expands and refines hedge accounting forboth non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This ASU is effective for us in the first quarter of fiscal years2019. Entities should apply the guidance to existing cash flow and interim periods within those years beginning after December 15, 2017.net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings on the date of adoption. The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges where the hedge documentation needs to be modified. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.
In January 2017,August 2018, the FASB issued ASU 2017-04,2018-15,Simplifying the Test Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Goodwill Impairment,Implementation Costs Incurred in a Cloud Computing Arrangement which simplifies the measurement of goodwill impairment by eliminating step two from the goodwill impairment test. That Is a Service Contract.The ASU requires goodwill impairmentaligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to be measureddevelop or obtain internal-use software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the total amount of goodwill allocatedan asset related to the reporting unit. This ASU is effective for fiscal yearsservice contract and interim periods within those fiscal years beginning after December 15, 2019 and early adoption is permitted.which costs to expense. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.
Note B: Property and Equipment
Property and equipment consists of the following:
| In thousands | Jan. 29, 2017 | Jan. 31, 2016 | Feb. 3, 2019 | Jan. 28, 2018 | ||||||||||||
Leasehold improvements | $ | 923,909 | $ | 861,852 | $ | 950,259 | $ | 950,024 | ||||||||
Fixtures and equipment | 762,379 | 714,911 | 836,400 | 800,003 | ||||||||||||
Capitalized software | 584,122 | 455,954 | 733,941 | 621,730 | ||||||||||||
Land and buildings | 172,856 | 172,782 | 175,181 | 173,457 | ||||||||||||
Corporate systems projects in progress1 | 52,352 | 115,296 | ||||||||||||||
Construction in progress2 | 13,704 | 20,325 | ||||||||||||||
Corporate systems projects in progress | 39,416 | 65,283 | ||||||||||||||
Construction in progress1 | 7,205 | 8,615 | ||||||||||||||
Total | 2,509,322 | 2,341,120 | 2,742,402 | 2,619,112 | ||||||||||||
Accumulated depreciation | (1,586,039 | ) | (1,454,307 | ) | (1,812,767 | ) | (1,686,829 | ) | ||||||||
Property and equipment, net | $ | 923,283 | $ | 886,813 | $ | 929,635 | $ | 932,283 | ||||||||
| 1 |
Construction in progress primarily consists of leasehold improvements and furniture and fixtures related to new, expanded or remodeled retail stores where construction had not been completed as ofyear-end. |
Note C: Borrowing Arrangements
Credit Facility
We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“credit facility”revolver”) thatand a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facilityrevolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to the first and second anniversaries of the closing date of the amendment of the credit facility, elect to extend the maturity date for an additional year, subject to lender approval.
During fiscal 2018, we had borrowings of $60,000,000 under the revolver (at a weighted average interest rate of 3.20%), all of which were repaid in the fourth quarter of fiscal 2018, and no amounts were outstanding as of February 3, 2019. During fiscal 2017, we had borrowings of $170,000,000 under the revolver (at a weighted average interest rate of 2.21%), all of which were repaid in the fourth quarter of fiscal 2017, and no amounts were outstanding as of January 28, 2018. Additionally, as of February 3, 2019, $11,732,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.
As of February 3, 2019, we had $300,000,000 outstanding under our term loan (at a weighted average interest rate of 3.21%). The term loan matures on January 29, 2017,8, 2021, at which time all outstanding principal and any accrued interest must be repaid. Costs incurred in connection with the issuance of the term loan are presented as a reduction to the carrying value of the debt in our Consolidated Balance Sheet.
The interest rate under the credit facility is variable, and may be elected by us as: (i) the London Interbank Offer Rate (“LIBOR”) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility, plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1.0% for the term loan.
As of February 3, 2019, we were in compliance with our financial covenants under the credit facility and, based on current projections, we expect to remain in compliance throughout fiscal 2017. The credit facility matures on November 19, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.
We may elect interest rates calculated at (i) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent, or a rate based on LIBOR plus one percent) plus a margin based on our leverage ratio or (ii) LIBOR plus a margin based on our leverage ratio. During fiscal 2016, we had borrowings of $125,000,000 under the credit facility (at a weighted average interest rate of 1.54%), all of which were repaid in the fourth quarter of fiscal 2016, and no amounts were outstanding as of January 29, 2017. During fiscal 2015, we had borrowings of $200,000,000 under the credit facility (at a weighted average interest rate of 1.11%), all of which were repaid in the fourth quarter of fiscal 2015, and no amounts were outstanding as of January 31, 2016. Additionally, as of January 29, 2017, $12,090,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.2019.
Letter of Credit Facilities
We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 26, 2017.24, 2019. The letter of credit facilities contain covenants that are consistent with our unsecured revolving line of credit.credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in
the lender’s prime rate (or, if greater, the average ratecredit facility, plus an applicable margin based on overnight federal funds plus one-half of one percent) plus 2.0%.our leverage ratio. As of January 29, 2017,February 3, 2019, an aggregate of $6,565,000$6,820,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 23, 2018.21, 2020.
Note D: Income Taxes
The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among other things, the Tax Act reduced thecorporate income tax rate to 21.0% as of January 1, 2018, introduced a new tax on global intangiblelow-taxed income (“GILTI”), and implemented a modified territorial tax system that includes aone-time transition tax on deemed repatriated earnings of foreign subsidiaries.
Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provided us up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act (“the Tax Act”) on our fiscal year ended January 28, 2018. As of January 28, 2018, we had made reasonable estimates of the income tax effects of the Tax Act, including the transition tax under Internal Revenue Code section 965.
As of February 3, 2019, we have completed the accounting for the income tax effects of the Tax Act based on our current interpretation of available notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service. As a result, during fiscal 2018, we recorded an immaterial adjustment to the fiscal 2017 provisional transition tax amount. In addition, during fiscal 2018, we booked a net tax benefit of approximately $10,576,000 from there-measurement of our deferred tax assets.
The components of earnings before income taxes, by tax jurisdiction, are as follows:
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | |||||||||
United States | $ | 425,517 | $ | 462,701 | $ | 482,739 | ||||||
Foreign | 46,394 | 25,306 | 19,464 | |||||||||
Total earnings before income taxes | $ | 471,911 | $ | 488,007 | $ | 502,203 | ||||||
The provision for income taxes consists of the following:
|
| |||||||||||
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | |||||||||
Current | ||||||||||||
Federal | $ | 125,760 | $ | 156,812 | $ | 157,227 | ||||||
State | 26,197 | 22,969 | 31,959 | |||||||||
Foreign | 7,453 | 5,594 | 4,411 | |||||||||
Total current | 159,410 | 185,375 | 193,597 | |||||||||
Deferred | ||||||||||||
Federal | 8,307 | (6,093 | ) | 2,719 | ||||||||
State | (807 | ) | 1,258 | (2,547 | ) | |||||||
Foreign | (386 | ) | (2,601 | ) | (420 | ) | ||||||
Total deferred | 7,114 | (7,436 | ) | (248 | ) | |||||||
Total provision | $ | 166,524 | $ | 177,939 | $ | 193,349 | ||||||
| In thousands | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | |||||||||
United States | $ 333,594 | $ 379,000 | $ 425,517 | |||||||||
Foreign | 95,653 | 73,439 | 46,394 | |||||||||
Total earnings before income taxes | $ 429,247 | $ 452,439 | $ 471,911 | |||||||||
The provision for income taxes consists of the following:
| In thousands | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | |||||||||
Current | ||||||||||||
Federal | $ 43,745 | $ 97,202 | $ 125,760 | |||||||||
State | 15,357 | 19,552 | 26,197 | |||||||||
Foreign | 12,822 | 12,759 | 7,453 | |||||||||
Total current | 71,924 | 129,513 | 159,410 | |||||||||
Deferred | ||||||||||||
Federal | 23,507 | 62,893 | 8,307 | |||||||||
State | 1,562 | 460 | (807 | ) | ||||||||
Foreign | (1,430 | ) | 28 | (386 | ) | |||||||
Total deferred | 23,639 | 63,381 | 7,114 | |||||||||
Total provision | $ 95,563 | $ 192,894 | $ 166,524 | |||||||||
We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. Under Internal Revenue Code section 965 of the Tax Act, we are deemed to have distributed all the post-1986 earnings of our foreign subsidiaries to the U.S. as of December 31, 2017. In light of the Tax Act, were-evaluated our permanent reinvestment assertion with respect to unremitted foreign earnings, and we are now
only permanently reinvested with respect to our foreign earnings in Canada beginning in fiscal 2018. As a result, we recorded approximately $1,493,000 of foreign withholding tax and additional state income tax in fiscal 2018. As of January 29,February 3, 2019, the post-fiscal 2017 the accumulated undistributed earnings of all foreign subsidiaries of $118,700,000our Canadian subsidiary are needed to support our anticipated future cash needs for our foreign operations. We currently intend to utilize those undistributed earnings for an indefinite period of time and will only repatriate such earnings when it is tax effective to do so.permanently reinvested. If we did not consider these earnings to be indefinitelypermanently reinvested, the deferred tax liability would have been immaterial as of February 3, 2019.
In fiscal 2018, we are subject to several provisions of the Tax Act, including GILTI, the base erosion anti-abuse tax and a deduction for foreign-derived intangible income. The company has elected to account for GILTI as a periodic expense when the tax arises. The net impact due to these provisions was immaterial in the range of $18,000,000 to $26,000,000 at January 29, 2017.fiscal 2018.
A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | |||||||||||||||||||
Federal income taxes at the statutory rate | 35.0% | 35.0% | 35.0% | 21.0% | 33.9% | 35.0% | ||||||||||||||||||
Re-measurement of deferred tax assets and liabilities | (2.2% | ) | 6.7% | — | ||||||||||||||||||||
Transition tax | (0.6% | ) | 2.9% | — | ||||||||||||||||||||
State income tax rate | 3.5% | 3.2% | 4.0% | 3.8% | 2.5% | 3.5% | ||||||||||||||||||
Change in uncertain tax positions | 4.1% | (1.6% | ) | 2.8% | ||||||||||||||||||||
Rate differential | (2.3% | ) | (2.9% | ) | (5.7% | ) | ||||||||||||||||||
Research and development credits | (2.1% | ) | — | — | ||||||||||||||||||||
Other | (3.2% | ) | (1.7% | ) | (0.5% | ) | 0.6% | 1.1% | (0.3% | ) | ||||||||||||||
Effective tax rate | 35.3% | 36.5% | 38.5% | 22.3% | 42.6% | 35.3% | ||||||||||||||||||
Significant components of our deferred income tax accounts are as follows:
| Deferred tax assets (liabilities), in thousands | Jan. 29, 2017 | Jan. 31, 2016 | Feb. 3, 2019 | Jan. 28, 2018 | ||||||||||||
Deferred rent | $ 18,942 | $ 18,387 | ||||||||||||||
Merchandise inventories | 18,703 | 23,314 | ||||||||||||||
Customer deposits | $ 64,776 | $ 64,742 | 14,345 | 23,601 | ||||||||||||
Merchandise inventories | 32,003 | 31,752 | ||||||||||||||
Deferred rent | 24,182 | 19,952 | ||||||||||||||
Stock-based compensation | 14,281 | 9,024 | ||||||||||||||
Accrued liabilities | 23,994 | 17,028 | 13,470 | 13,626 | ||||||||||||
Stock-based compensation | 17,437 | 21,365 | ||||||||||||||
Compensation | 16,781 | 15,776 | 11,251 | 14,127 | ||||||||||||
State taxes | 7,107 | 6,723 | 7,435 | 5,099 | ||||||||||||
Executive deferred compensation | 7,060 | 6,003 | 5,739 | 5,886 | ||||||||||||
Federal and state net operating loss | 4,223 | 6,026 | ||||||||||||||
Depreciation | (31,557 | ) | (17,361 | ) | ||||||||||||
Deferred lease incentives | (36,715 | ) | (36,475 | ) | (26,032 | ) | (24,854 | ) | ||||||||
Depreciation | (22,477 | ) | (4,527 | ) | ||||||||||||
Prepaid catalog expenses | (8,726 | ) | (10,883 | ) | ||||||||||||
Other | 10,811 | 11,451 | (4,797 | ) | (3,116 | ) | ||||||||||
Valuation allowance | (995 | ) | (1,123 | ) | (3,542 | ) | (1,067 | ) | ||||||||
Prepaid catalog expenses | (936 | ) | (5,386 | ) | ||||||||||||
Total deferred income tax assets, net | $ 135,238 | $ 141,784 | $ 41,525 | $ 67,306 | ||||||||||||
As a result of the acquisition of Outward, Inc. (see Note O), we had net operating loss carry-forwards of $4,979,000 and $7,102,000 for U.S. federal and state, respectively, as of February 3, 2019. A valuation allowance has been provided to the state net operating loss carry-forwards, as we don’t expect to fully utilize the losses in future years.
The following table summarizes the activity related to our gross unrecognized tax benefits:
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||||||||||
Balance at beginning of year | $ | 13,290 | $ | 14,359 | $ | 10,765 | $ 18,051 | $ 25,864 | $ 13,290 | |||||||||||||||
Increases related to current year’s tax positions | 11,772 | 2,765 | 3,093 | 4,694 | 3,345 | 11,772 | ||||||||||||||||||
Increases related to prior years’ tax positions | 3,456 | 101 | 2,007 | 14,905 | 808 | 3,456 | ||||||||||||||||||
Decreases related to prior years’ tax positions | (818 | ) | (341 | ) | (138 | ) | (1,279 | ) | (10,610 | ) | (818 | ) | ||||||||||||
Lapses in statute of limitations | (786 | ) | (1,356 | ) | (1,122 | ) | ||||||||||||||||||
Settlements | (714 | ) | (2,912 | ) | (1,144 | ) | (376 | ) | — | (714 | ) | |||||||||||||
Lapses in statute of limitations | (1,122 | ) | (682 | ) | (224 | ) | ||||||||||||||||||
Balance at end of year | $ | 25,864 | $ | 13,290 | $ | 14,359 | $ 35,209 | $ 18,051 | $ 25,864 | |||||||||||||||
As of January 29, 2017,February 3, 2019, we had $25,864,000$35,209,000 of gross unrecognized tax benefits of which $21,134,000$31,209,000 would, if recognized, affect the effective tax rate.
We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, our accruals for the payment of interest and penalties totaled $2,882,000$5,437,000 and $2,649,000,$3,719,000, respectively.
Due to the potential resolution of statetax issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0 to $10,200,000.$10,800,000.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (IRS) has concludedWe are subject to examination of ourby the tax authorities in these jurisdictions. Our U.S. federal income tax returnstaxable years for which the statute of limitations has not expired are fiscal years 2014 to 2017. Substantially all material states, local and foreign jurisdictions’ statutes of limitations are closed for taxable years prior to fiscal
2012 without any significant adjustments. Substantially all material state, local and foreign income tax examinations have been concluded through fiscal 2004.2014.
Note E: Accounting for Leases
Operating Leases
We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations for original terms generally ranging from 5 to 22 years. Certain leases contain renewal options for periods up to 20 years. The rental payments for our store leases are typically structured as either: minimum rent; rent based on a percentage of store sales; minimum rent plus additional rent based on a percentage of store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. Contingent rental payments, including rental payments that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, such contingent rental payments are recorded as incurred each period and are excluded from our calculation of deferred rent liability.
Total rent expense for all operating leases was as follows:
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 (53 Weeks) | Fiscal 2017 (52 Weeks) | Fiscal 2016 (52 Weeks) | ||||||||||||||||||
Rent expense | $ | 251,066 | $ | 224,564 | $ | 215,221 | $ 271,522 | $ 263,409 | $ 251,066 | |||||||||||||||
Contingent rent expense | 26,980 | 33,985 | 32,699 | 26,414 | 24,918 | 26,980 | ||||||||||||||||||
Rent expense before deferred lease incentive income | 278,046 | 258,549 | 247,920 | 297,936 | 288,327 | 278,046 | ||||||||||||||||||
Deferred lease incentive income | (25,298 | ) | (24,679 | ) | (24,420 | ) | (26,189 | ) | (25,293 | ) | (25,298 | ) | ||||||||||||
Less: sublease rental income | (558 | ) | (608 | ) | (560 | ) | (522 | ) | (578 | ) | (558 | ) | ||||||||||||
Total rent expense1 | $ | 252,190 | $ | 233,262 | $ | 222,940 | $ 271,225 | $ 262,456 | $ 252,190 | |||||||||||||||
| 1 | Excludes all other occupancy-related costs including depreciation, common area maintenance, property taxes and utilities. |
The aggregate contractual future minimum annual cash rental payments undernon-cancellable operating leases in effect at January 29, 2017February 3, 2019 were as follows:
In thousands | Lease Commitments1 | |||
| ||||
| ||||
Fiscal 2019 | ||||
Fiscal 2020 | ||||
Fiscal 2021 | ||||
Fiscal 2022 | 190,263 | |||
Fiscal 2023 | 160,308 | |||
Thereafter | ||||
Total | $ |
| 1 | Projected cash payments include only those amounts that are fixed and determinable as of the reporting date and are not necessarily representative of future expected rent expense. We currently pay rent for certain store locations based on a percentage of store sales. As future store sales cannot be predicted with certainty, projected payments for these locations are based on minimum rent, which is generally higher than rent based on a percentage of store sales. We incur other lease obligation expenses, such as common area maintenance and other executory costs, which are not fixed in nature and are thus not included in the future projected cash payments reflected above. In addition, projected cash payments do not include any benefit from deferred lease incentive income, which is reflected within “Total rent expense” above. |
Memphis-Based Distribution Facility
In August 1990, fiscal 2015,we entered into an agreement to leasewith a distribution facility in Memphis, Tennessee. The lessor is a general partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties. The terms of the lease automatically renewed until the second quarter of fiscal 2015 when the bonds that financed the construction of the facility were fully repaid. Simultaneously, we entered into an agreement with the partnershipparties to lease thea distribution facility in Memphis, Tennessee through July 2017. In fiscal 2017, we
exercised the first of twoone-year extensions available under the lease which extendedto extend the term through July 2018. Subsequently, in fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additionalone-year renewal options. We made annual rental payments of approximately $1,689,000, $1,629,000, and $1,599,000 $3,050,000 and $2,432,000 includingplus applicable taxes, insurance and maintenance expenses in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
Note F: Earnings Per Share
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 | Net Earnings | Weighted Average Shares | Earnings Per Share | ||||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||
Fiscal 2018 (53 Weeks) | ||||||||||||||||||||||||
Basic | $ | 305,387 | 88,594 | $ | 3.45 | $ | 333,684 | 81,420 | $ | 4.10 | ||||||||||||||
Effect of dilutive stock-based awards | 868 | 920 | ||||||||||||||||||||||
Diluted | $ | 305,387 | 89,462 | $ | 3.41 | $ | 333,684 | 82,340 | $ | 4.05 | ||||||||||||||
Fiscal 2015 | ||||||||||||||||||||||||
Fiscal 2017 (52 Weeks) | ||||||||||||||||||||||||
Basic | $ | 310,068 | 90,787 | $ | 3.42 | $ | 259,545 | 85,592 | $ | 3.03 | ||||||||||||||
Effect of dilutive stock-based awards | 1,315 | 488 | ||||||||||||||||||||||
Diluted | $ | 310,068 | 92,102 | $ | 3.37 | $ | 259,545 | 86,080 | $ | 3.02 | ||||||||||||||
Fiscal 2014 | ||||||||||||||||||||||||
Fiscal 2016 (52 Weeks) | ||||||||||||||||||||||||
Basic | $ | 308,854 | 93,634 | $ | 3.30 | $ | 305,387 | 88,594 | $ | 3.45 | ||||||||||||||
Effect of dilutive stock-based awards | 1,566 | 868 | ||||||||||||||||||||||
Diluted | $ | 308,854 | 95,200 | $ | 3.24 | $ | 305,387 | 89,462 | $ | 3.41 | ||||||||||||||
Stock-based awards of 261,000, 12,00031,000, 577,000, and 21,000261,000 were excluded from the computation of diluted earnings per share in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively, as their inclusion would be anti-dilutive.
Note G: Stock-Based Compensation
Equity Award Programs
Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 32,310,000approximately 36,570,000 shares. As of January 29, 2017,February 3, 2019, there were approximately 7,371,0007,436,000 shares available for future grant. Awards may be granted under the Plan to officers, employees andnon-employee members of the boardBoard of directorsDirectors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.
Option Awards
Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event.
Stock Awards
Annual grants of stock awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, 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,
merger or a similar corporate event. Stock awards granted tonon-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 anon-employee Board member).
Stock-Based Compensation Expense
During fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $51,116,000, $41,357,000$59,802,000, $42,988,000, and $44,632,000,$51,116,000, respectively. As of January 29, 2017,February 3, 2019, there was $62,212,000$78,694,000 of unrecognized stock-based compensation expense (net of estimated forfeitures), which we expect to recognize on a straight-line basis over a weighted average remaining service period of approximately two years. At each reporting period, all compensation expense attributable to vested awards has been fully recognized.
Stock Options
No stock options were granted in fiscal 2016, fiscal 2015 or fiscal 2014. Stock options exercised in fiscal 2016 were 38,500 at a weighted average exercise price of $39.80. The total intrinsic value of stock options exercised was $663,000 for fiscal 2016, $2,722,000 for fiscal 2015 and $3,564,000 for fiscal 2014. Intrinsic value for options exercised is based on the excess of the market value over the exercise price on the date of exercise. No stock options were outstanding as of January 29, 2017.
Stock-Settled Stock Appreciation Rights
A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the grant date and the conversion date for the number of shares converted.
The following table summarizes our stock-settled stock appreciation right activity during fiscal 2016:2018:
| Shares | Weighted Average Conversion | Weighted Average Contractual Term | Intrinsic Value2 | Shares | Weighted Average Conversion | |||||||||||||||||||
Balance at January 31, 2016 (100% vested) | 634,609 | $ | 27.76 | |||||||||||||||||||||
Balance at January 28, 2018 (100% vested) | 167,737 | $ | 30.91 | |||||||||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||||
Converted into common stock | (222,899 | ) | 30.99 | (166,447 | ) | 30.83 | ||||||||||||||||||
Cancelled | — | — | (1,290 | ) | 40.87 | |||||||||||||||||||
Balance at January 29, 2017 (100% vested) | 411,710 | $ | 26.02 | 1.45 | $ | 8,844,000 | ||||||||||||||||||
Balance at February 3, 2019 | — | $ | — | |||||||||||||||||||||
| 1 | Conversion price is equal to the market value on the date of grant. |
No stock-settled stock appreciation rights were granted in fiscal 2016,2018, fiscal 20152017 or fiscal 2014.2016. The total intrinsic value of awards converted to common stock was $4,394,000 for fiscal 2018, $7,287,000 for fiscal 2017 and $5,237,000 for fiscal 2016, $24,465,000 for fiscal 2015 and $26,837,000 for fiscal 2014.2016. Intrinsic value for conversions is based on the excess of the market value on the date of conversion over the conversion price.
Restricted Stock Units
The following table summarizes our restricted stock unit activity during fiscal 2016:2018:
| Shares | Weighted Fair Value | Weighted Average Contractual Term | Intrinsic Value1 | Shares | Weighted Fair Value | Weighted Average Contractual Term | Intrinsic Value1 | |||||||||||||||||||||||||
Balance at January 31, 2016 | 2,288,958 | $ | 60.89 | |||||||||||||||||||||||||||||
Balance at January 28, 2018 | 2,358,137 | $ | 58.18 | |||||||||||||||||||||||||||||
Granted | 1,159,211 | 59.17 | 1,432,954 | 49.72 | ||||||||||||||||||||||||||||
Granted, with vesting subject to performance conditions | 256,350 | 48.76 | ||||||||||||||||||||||||||||||
Released | (976,110 | ) | 52.33 | (677,251 | ) | 59.47 | ||||||||||||||||||||||||||
Cancelled | (239,573 | ) | 60.70 | (357,267 | ) | 60.48 | ||||||||||||||||||||||||||
Balance at January 29, 2017 | 2,232,486 | $ | 63.75 | 3.11 | $ | 106,043,000 | ||||||||||||||||||||||||||
Vested plus expected to vest at January 29, 2017 | 1,520,660 | $ | 63.96 | 3.14 | $ | 72,231,000 | ||||||||||||||||||||||||||
Balance at February 3, 2019 | 3,012,923 | $ | 52.88 | 3.03 | $ | 162,698,000 | ||||||||||||||||||||||||||
Vested plus expected to vest at February 3, 2019 | 2,389,343 | $ | 52.74 | 3.10 | $ | 129,025,000 | ||||||||||||||||||||||||||
| 1 | Intrinsic value for outstanding and unvested restricted stock units is based on the market value of our common stock on the last business day of the fiscal year (or |
The following table summarizes additional information about restricted stock units:
| Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||||||||||||
Weighted average grant date fair value per share of awards granted | $ | 59.17 | $ | 76.19 | $ | 63.18 | $ | 49.57 | $ | 52.76 | $ | 59.17 | ||||||||||||
Intrinsic value of awards released1 | $ | 56,405,000 | $ | 50,773,000 | $ | 101,189,000 | $ | 34,213,000 | $ | 35,508,000 | $ | 56,405,000 | ||||||||||||
| 1 | Intrinsic value for releases is based on the market value on the date of release. |
Tax Effect
We presentIn accordance with ASU2016-09, Improvements to Employee Share-Based Payment Accounting, we record excess tax benefits and deficiencies resulting from the settlement of stock-based awards as operating cash flowsa benefit or expense within income taxes in our Consolidated Statements of Cash Flows. Tax deductionsthe period in excess ofwhich they occur. Further, in accordance with the cumulative compensation cost recognized for stock-based awards settled are presentedASU, we no longer classify such tax benefits as a financing cash inflow and an operating cash outflow. We adopted the classification requirements of this ASU prospectively as of the first quarter of fiscal 2017 and, as such, our Consolidated Statement of Cash Flows for fiscal 2016 has not been retrospectively adjusted. During fiscal 2016,2018, fiscal 2015 2017
and fiscal 2014,2016, proceeds related to stock-based awards waswere $0, $0 and $1,532,000, $2,647,000 and $4,077,000, respectively, and the current tax benefit related to stock-based awards totaled $24,129,000, $30,352,000$9,927,000, $16,066,000 and $52,798,000,$24,129,000, respectively.
Note H: Williams-Sonoma, Inc. 401(k) Plan and Other Employee Benefits
We have a defined contribution retirement plan, the Williams-Sonoma, Inc. 401(k) Plan (the “401(k) Plan”), which is intended to be qualified under Internal Revenue Code sections 401(a), 401(k), 401(m) and 4975(e)(7). The 401(k) Plan permits eligible employees to make salary deferral contributions up to 75% of their eligible compensation each pay period (7% for highly-compensated employees). Employees designate the funds in which their contributions are invested. Each participant may choose to have his or her salary deferral contributions and earnings thereon invested in one or more investment funds, including our company stock fund.
Our matching contribution is equal to 50% of each participant’s salary deferral contribution, taking into account only those contributions that do not exceed 6% of the participant’s eligible pay for the pay period. Each participant’s matching contribution is earned on a semi-annual basis with respect to eligible salary deferrals for those employeesparticipants that are employed with the company on June 30th or December 31st of the year in which the deferrals are made. Each associate must complete one year of service prior to receiving company matching contributions. For the first five years of the participant’s employment, all matching contributions vest at the rate of 20% per year of service, measuring service from the participant’s hire date. Thereafter, all matching contributions vest immediately. Our contributions to the plan were $7,725,000, $6,915,000$9,036,000, $8,224,000 and $6,038,000$7,725,000 in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively.
The 401(k) Plan consists of two parts: a profit sharing plan portion and a stock bonus plan/employee stock ownership plan (the “ESOP”). The ESOP portion is the portion that is invested in the Williams-Sonoma, Inc. Stock Fund. The profit sharing and ESOP components of the 401(k) Plan are considered a single plan under Internal Revenue Code section 414(l).
We also have a nonqualified executive deferred compensation plan that provides supplemental retirement income benefits for a select group of management. This plan permits eligible employees to make salary and bonus deferrals that are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. As of January 29, 2017February 3, 2019 and January 31, 2016, $18,736,00028, 2018, $23,319,000 and $15,929,000,$24,151,000, respectively, is included in other long-term obligationsliabilities related to these deferred compensation liabilities.obligations. Additionally, we have purchased life insurance policies on certain participants to potentially offset these unsecured obligations. The cash surrender value of these policies was $19,000,000$25,390,000 and $17,112,000$25,550,000 as of January 29, 2017February 3, 2019 and January 31, 2016,28, 2018, respectively, and is included in other long-term assets, net.
Note I: 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 Consolidated Financial Statements taken as a whole.
Note J: Stock Repurchase Program and Dividends
During fiscal 2018, we repurchased 5,373,047 shares of our common stock at an average cost of $54.96 per share and a total cost of approximately $295,304,000 under our stock repurchase program. As of February 3, 2019,
there was approximately $223,815,000 remaining under our current stock repurchase program. In March 2019, our Board of Directors authorized an increase in our current stock repurchase program by an additional $500,000,000. As of February 3, 2019, we held treasury stock of $235,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions.
During fiscal 2017, we repurchased 4,050,697 shares of our common stock at an average cost of $48.43 per share and a total cost of approximately $196,179,000. During fiscal 2016, we repurchased 2,871,480 shares of our common stock at an average cost of $52.68 per share and a total cost of approximately $151,272,000 under our stock repurchase programs. As of January 29, 2017, we held treasury stock of $1,380,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions.
During fiscal 2015, we repurchased 2,950,438 shares of our common stock at an average cost of $76.26 per share and a total cost of approximately $224,995,000. During fiscal 2014, we repurchased 3,331,557 shares of our common stock at an average cost of $67.35 per share and a total cost of approximately $224,377,000.$151,272,000.
Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.
Total cash dividends declared in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, were approximately $144,609,000, or $1.72 per common share, $135,779,000, or $1.56 per common share and $133,588,000, or $1.48 per common share, $130,290,000, or $1.40 per common share and $125,378,000, or $1.32 per common share, respectively. In March 2017, we announced that2019, our Board of Directors had authorized a 5%$0.05, or 11.6%, increase in our quarterly cash dividend, from $0.37$0.43 to $0.39$0.48 per common share, subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time.
Note K: Segment Reporting
We have two reportable segments,e-commerce and retail. Thee-commerce segment has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through oure-commerce websites and direct maildirect-mail catalogs. Oure-commerce merchandise strategies are operating segments, which have been aggregated into one reportable segment,e-commerce. The retail segment, which includes our franchise operations, has the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West
Elm and Rejuvenation, which sell our products through our retail stores. Our retail merchandise strategies are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.
These reportable segments are strategic business units that offer similar products for the home. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group. Beginning in fiscal 2019, due to the convergence of oure-commerce and retail businesses, we will only report one reportable segment.
We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third-party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, prepaid expenses, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.
Income tax information by reportable segment has not been included as income taxes are calculated at a company-widean entity level and are not allocated to eachour reportable segment.segments.
Segment Information
| In thousands | E-commerce | Retail | Unallocated | Total | E-commerce | Retail | Unallocated | Total | ||||||||||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||||||||||
Fiscal 2018 (53 Weeks) | ||||||||||||||||||||||||||||||||
Net revenues1 | $ | 2,633,602 | $ | 2,450,210 | $ | — | $ | 5,083,812 | $ 3,082,064 | $ 2,589,529 | $ — | $ 5,671,593 | ||||||||||||||||||||
Depreciation and amortization expense | 31,135 | 86,228 | 55,832 | 173,195 | 36,294 | 89,419 | 63,095 | 188,808 | ||||||||||||||||||||||||
Operating income (loss)2 | 606,286 | 231,929 | (365,616 | ) | 472,599 | 643,592 | 217,070 | (424,709 | ) | 435,953 | ||||||||||||||||||||||
Assets3 | 614,213 | 1,077,593 | 785,073 | 2,476,879 | 914,452 | 1,183,604 | 714,788 | 2,812,844 | ||||||||||||||||||||||||
Capital expenditures | 21,479 | 102,859 | 73,076 | 197,414 | 45,151 | 82,840 | 62,111 | 190,102 | ||||||||||||||||||||||||
Fiscal 2015 | ||||||||||||||||||||||||||||||||
Fiscal 2017 (52 Weeks) | ||||||||||||||||||||||||||||||||
Net revenues1 | $ | 2,522,580 | $ | 2,453,510 | $ | — | $ | 4,976,090 | $ 2,778,457 | $ 2,513,902 | $ — | $ 5,292,359 | ||||||||||||||||||||
Depreciation and amortization expense | 32,056 | 83,027 | 52,677 | 167,760 | 28,977 | 90,625 | 63,475 | 183,077 | ||||||||||||||||||||||||
Operating income (loss) | 562,081 | 239,288 | (312,735 | ) | 488,634 | |||||||||||||||||||||||||||
Operating income (loss) 4 | 599,491 | 224,608 | (370,288 | ) | 453,811 | |||||||||||||||||||||||||||
Assets3 | 625,951 | 1,049,892 | 741,584 | 2,417,427 | 776,569 | 1,114,726 | 894,454 | 2,785,749 | ||||||||||||||||||||||||
Capital expenditures | 22,293 | 102,717 | 77,925 | 202,935 | 39,273 | 83,750 | 66,689 | 189,712 | ||||||||||||||||||||||||
Fiscal 2014 | ||||||||||||||||||||||||||||||||
Fiscal 2016 (52 Weeks) | ||||||||||||||||||||||||||||||||
Net revenues1 | $ | 2,370,694 | $ | 2,328,025 | $ | — | $ | 4,698,719 | $ 2,633,602 | $ 2,450,210 | $ — | $ 5,083,812 | ||||||||||||||||||||
Depreciation and amortization expense | 32,116 | 80,154 | 50,003 | 162,273 | 31,135 | 86,228 | 55,832 | 173,195 | ||||||||||||||||||||||||
Operating income (loss) | 560,396 | 248,535 | (306,666 | ) | 502,265 | |||||||||||||||||||||||||||
Operating income (loss)4 | 606,286 | 231,929 | (365,616 | ) | 472,599 | |||||||||||||||||||||||||||
Assets3 | 600,503 | 1,028,293 | 701,481 | 2,330,277 | 614,213 | 1,077,593 | 785,073 | 2,476,879 | ||||||||||||||||||||||||
Capital expenditures | 41,633 | 97,247 | 65,920 | 204,800 | 21,479 | 102,859 | 73,076 | 197,414 | ||||||||||||||||||||||||
| 1 | Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately |
| 2 |
|
| 3 | Includes long-term assets related to our international operations of approximately |
| 4 | The 52 weeks ended January 28, 2018 includes approximately $8.6 million for severance-related charges, primarily in our corporate functions, which is recorded within the unallocated segment and approximately $6.2 million for costs related to the acquisition of Outward and its ongoing operations, of which $3.3 million is recorded in thee-commerce segment and $2.9 million is recorded in the unallocated segment. The 52 weeks ended January 29, 2017 includes $14.4 million for severance-related reorganization charges, primarily in our corporate functions, which is recorded within the unallocated segment. |
Note L: Derivative Financial Instruments
We have retail and/or ande-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 FASB Accounting Standards Codification (“ASC”) 815,Derivatives and Hedging.
Cash Flow Hedges
We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries.Canadian subsidiary. These
hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately in selling, general and administrative expenses. Based on the rates in effect as of January 29, 2017,February 3, 2019, we expect to reclassify a netpre-tax gain of approximately $74,000$253,000 from OCI to cost of goods sold over the next 12 months.
We also enter intonon-designated foreign currency forward contracts (to sell Australian dollars and British pounds and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses.
As of January 29, 2017,February 3, 2019, and January 31, 2016,28, 2018, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:
| In thousands | Jan. 29, 2017 | Jan. 31, 2016 | Feb. 3, 2019 | Jan. 28, 2018 | ||||||||||||
Contracts designated as cash flow hedges | $ | 19,550 | $ | 24,500 | $ | 16,600 | $ | 28,200 | ||||||||
Contracts not designated as cash flow hedges | $ | 46,000 | $ | 40,000 | $ | 5,300 | $ | 46,000 | ||||||||
Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureablemeasurable 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 fiscal 2016,2018, fiscal 20152017 and fiscal 2014.2016.
The effect of derivative instruments in our Consolidated Financial Statements,pre-tax, was as follows:
| In thousands | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | ||||||||||||||||||
Net gain (loss) recognized in OCI | $ | (1,243 | ) | $ | 1,454 | $ | 1,153 | $ | 1,488 | $ | (974 | ) | $ | (1,243 | ) | |||||||||
Net gain (loss) reclassified from OCI to cost of goods sold | $ | (147 | ) | $ | 1,605 | $ | 573 | $ | 478 | $ | (144 | ) | $ | (147 | ) | |||||||||
Net foreign exchange gain (loss) recognized in selling, general and administrative expenses: | ||||||||||||||||||||||||
Instruments designated as cash flow hedges1 | $ | (4 | ) | $ | (66 | ) | $ | (155 | ) | $ | 57 | $ | 88 | $ | (4 | ) | ||||||||
Instruments not designated or de-designated | $ | (3,569 | ) | $ | 2,838 | $ | (1,795 | ) | $ | 3,967 | $ | (3,286 | ) | $ | (3,569 | ) | ||||||||
| 1 | Changes in fair value of the forward contract related to interest charges (or forward points). |
The fair values of our derivative financial instruments are presented below according to their classification in our Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note M.
| In thousands | Jan. 29, 2017 | Jan. 31, 2016 | Feb. 3, 2019 | Jan. 28, 2018 | ||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||
Other current assets | $ | 241 | $ | 866 | $ | 358 | $ | — | ||||||||
Other long-term assets | $ | 21 | $ | — | ||||||||||||
Other current liabilities | $ | (230 | ) | $ | (115 | ) | $ | — | $ | (635 | ) | |||||
Other long-term liabilities | $ | — | $ | (54 | ) | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Other current assets | $ | 111 | $ | — | $ | 4 | $ | — | ||||||||
Other current liabilities | $ | — | $ | (471 | ) | $ | — | $ | (299 | ) | ||||||
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 M: 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 andnon-financial assets and liabilities using the fair value hierarchy established by ASC 820,Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:
Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;
Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and
Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.
The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.
Long-term Debt
As of February 3, 2019, the fair value of our long-term debt, which consists of outstanding borrowings under our term loan, approximates its carrying value, as the instrument is relatively short-term in nature and the interest rate under the term loan is based on observable Level 2 inputs, primarily quoted market interest rates for instruments with similar maturities.
Foreign Currency Derivatives and Hedging Instruments
We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that
participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We usemid-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 andnon-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements.
Property and Equipment
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 these assets at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.
There were no transfers between Level 1, 2 or 3 categories during fiscal 20162018 or fiscal 2015.2017.
Note N: 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) | Foreign Currency Translation | Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
Balance at February 2, 2014 | $ | 5,783 | $ | 741 | $ | 6,524 | ||||||||||||||||||
Foreign currency translation adjustments | (9,305 | ) | — | (9,305 | ) | |||||||||||||||||||
Change in fair value of derivative financial instruments | — | 806 | 806 | |||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | (573 | ) | (573 | ) | |||||||||||||||||||
Other comprehensive income (loss) | (9,305 | ) | 233 | (9,072 | ) | |||||||||||||||||||
Balance at February 1, 2015 | (3,522 | ) | 974 | (2,548 | ) | |||||||||||||||||||
Foreign currency translation adjustments | (7,958 | ) | — | (7,958 | ) | |||||||||||||||||||
Change in fair value of derivative financial instruments | — | 1,074 | 1,074 | |||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | (1,184 | ) | (1,184 | ) | |||||||||||||||||||
Other comprehensive income (loss) | (7,958 | ) | (110 | ) | (8,068 | ) | ||||||||||||||||||
Balance at January 31, 2016 | (11,480 | ) | 864 | (10,616 | ) | $ | (11,480) | $ | 864 | $ | (10,616) | |||||||||||||
Foreign currency translation adjustments | 1,523 | — | 1,523 | 1,523 | — | 1,523 | ||||||||||||||||||
Change in fair value of derivative financial instruments | — | (916 | ) | (916 | ) | — | (916 | ) | (916 | ) | ||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | 106 | 106 | — | 106 | 106 | ||||||||||||||||||
Other comprehensive income (loss) | 1,523 | (810 | ) | 713 | 1,523 | (810 | ) | 713 | ||||||||||||||||
Balance at January 29, 2017 | $ | (9,957 | ) | $ | 54 | $ | (9,903 | ) | (9,957 | ) | 54 | (9,903 | ) | |||||||||||
Foreign currency translation adjustments | 3,730 | — | 3,730 | |||||||||||||||||||||
Change in fair value of derivative financial instruments | — | (715 | ) | (715 | ) | |||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | 106 | 106 | |||||||||||||||||||||
Other comprehensive income (loss) | 3,730 | (609 | ) | 3,121 | ||||||||||||||||||||
Balance at January 28, 2018 | (6,227 | ) | (555 | ) | (6,782 | ) | ||||||||||||||||||
Foreign currency translation adjustments | (5,032 | ) | — | (5,032 | ) | |||||||||||||||||||
Change in fair value of derivative financial instruments | — | 1,098 | 1,098 | |||||||||||||||||||||
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | (357 | ) | (357 | ) | |||||||||||||||||||
Other comprehensive income (loss) | (5,032 | ) | 741 | (4,291 | ) | |||||||||||||||||||
Balance at February 3, 2019 | $ | (11,259 | ) | $ | 186 | $ | (11,073 | ) | ||||||||||||||||
| 1 | Refer to Note L for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Consolidated Statements of Earnings. |
Note O: Acquisition of Outward, Inc.
On December 1, 2017, we acquired Outward, Inc., a3-D imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,812,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of four years from the acquisition date, contingent upon their continued service during that time, and $4,498,000 primarily represents settlement ofpre-existing obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post-combination compensation expense as they are earned.
The purchase consideration has been allocated based on estimates of the fair value of identifiable assets acquired and liabilities assumed, as set forth in the table below.
| In thousands | ||||
Working capital and other assets | $ | 718,000 | ||
Property and equipment, net | 2,049,000 | |||
Intangible assets | 18,300,000 | |||
Liabilities | (6,886,000 | ) | ||
Total identifiable net assets acquired | $ | 14,181,000 | ||
Goodwill | 66,631,000 | |||
Total purchase consideration | $ | 80,812,000 | ||
During the second quarter of fiscal 2018, we finalized the valuation of intangible assets acquired, which primarily represent3-D imaging data and core intellectual property which are being amortized over a useful life of four years. Goodwill is primarily attributable to expected synergies as a result of the acquisition, which include the leverage of acquired technology and talent to drive improved conversion, cost savings and operating efficiencies. Goodwill of $55,215,000 and $11,416,000 was assigned to thee-commerce and retail reportable segments, respectively. None of the goodwill will be deductible for income tax purposes.
Outward is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Consolidated Financial Statements from the acquisition date. Pro forma results of Outward have not been presented as the results are insignificant to our Consolidated Financial Statements for all periods presented and would not have been significant had the acquisition occurred at the beginning of fiscal 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Stockholders of Williams-Sonoma, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the “Company”) as of January 29, 2017February 3, 2019 and January 31, 2016, and28, 2018, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended January 29, 2017.February 3, 2019, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of January 29, 2017,February 3, 2019, based on criteria established inInternal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 3, 2019 and January 28, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2019, in conformity with the accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2019, based on criteria established inInternal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of January 29, 2017 and January 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2017, based on the criteria established inInternal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 30, 2017April 4, 2019
We have served as the Company’s auditor since 1980.
Quarterly Financial Information
(Unaudited)
| In thousands, except per share amounts | ||||||||||||||||||||
Fiscal 2016 | | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter |
| | Full Year |
| |||||
Net revenues | $1,097,817 | $ | 1,159,029 | $ | 1,245,385 | $ | 1,581,581 | $ | 5,083,812 | |||||||||||
Gross profit | 392,517 | 410,539 | 458,223 | 622,031 | 1,883,310 | |||||||||||||||
Operating income1 | 63,525 | 83,276 | 109,979 | 215,819 | 472,599 | |||||||||||||||
Net earnings2 | 39,597 | 51,785 | 69,378 | 144,627 | 305,387 | |||||||||||||||
Basic earnings per share3 | $ 0.44 | $ | 0.58 | $ | 0.78 | $ | 1.65 | $ | 3.45 | |||||||||||
Diluted earnings per share3 | $ 0.44 | $ | 0.58 | $ | 0.78 | $ | 1.63 | $ | 3.41 | |||||||||||
Fiscal 2015 | | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter |
| | Full Year |
| |||||
Net revenues | $1,030,676 | $ | 1,127,028 | $ | 1,232,082 | $ | 1,586,304 | $ | 4,976,090 | |||||||||||
Gross profit | 378,841 | 406,625 | 451,188 | 607,560 | 1,844,214 | |||||||||||||||
Operating income | 71,928 | 83,343 | 110,683 | 222,680 | 488,634 | |||||||||||||||
Net earnings | 44,790 | 53,668 | 70,482 | 141,128 | 310,068 | |||||||||||||||
Basic earnings per share3 | $ 0.49 | $ | 0.59 | $ | 0.78 | $ | 1.57 | $ | 3.42 | |||||||||||
Diluted earnings per share3 | $ 0.48 | $ | 0.58 | $ | 0.77 | $ | 1.55 | $ | 3.37 | |||||||||||
| In thousands, except per share amounts | ||||||||||||||||||||
Fiscal 2018 (53 Weeks) | | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter1 |
| | Full Year |
| |||||
Net revenues | $1,203,000 | $ | 1,275,174 | $ | 1,356,983 | $ | 1,836,436 | $ | 5,671,593 | |||||||||||
Gross profit | 432,164 | 463,942 | 494,984 | 709,923 | 2,101,013 | |||||||||||||||
Operating income,2,3,4 | 66,550 | 74,166 | 94,384 | 200,853 | 435,953 | |||||||||||||||
Net earnings5,6 | 45,168 | 51,713 | 81,465 | 155,338 | 333,684 | |||||||||||||||
Basic earnings per share7 | $ 0.54 | $ | 0.63 | $ | 1.01 | $ | 1.95 | $ | 4.10 | |||||||||||
Diluted earnings per share7 | $ 0.54 | $ | 0.62 | $ | 1.00 | $ | 1.93 | $ | 4.05 | |||||||||||
Fiscal 2017 (52 Weeks) | | First Quarter |
| | Second Quarter |
| | Third Quarter |
| | Fourth Quarter1 |
| | Full Year |
| |||||
Net revenues | $1,111,507 | $ | 1,201,606 | $ | 1,299,336 | $ | 1,679,910 | $ | 5,292,359 | |||||||||||
Gross profit | 395,760 | 422,711 | 467,067 | 646,173 | 1,931,711 | |||||||||||||||
Operating income2,3 | 62,474 | 81,584 | 110,813 | 198,940 | 453,811 | |||||||||||||||
Net earnings5,6 | 39,555 | 52,917 | 71,313 | 95,760 | 259,545 | |||||||||||||||
Basic earnings per share7 | $ 0.45 | $ | 0.61 | $ | 0.84 | $ | 1.14 | $ | 3.03 | |||||||||||
Diluted earnings per share7 | $ 0.45 | $ | 0.61 | $ | 0.84 | $ | 1.13 | $ | 3.02 | |||||||||||
| 1 | Our fourth quarter of fiscal 2018 included 14 weeks as compared to 13 weeks in fiscal 2017. |
| 2 | Fiscal 2018 includes approximately |
| 3 | Fiscal 2018 includes approximately $1.7 million in the first quarter, $1.9 million in the second quarter, $1.9 million in the third quarter and $2.5 million in the fourth quarter for employment-related expense primarily associated with an equity grant which is recorded in selling, general and administrative expenses. Fiscal 2017 includes approximately $5.7 million in the first quarter and |
Includes |
Includes tax expense of approximately $1.1 million in the first quarter of fiscal 2018, tax expense of approximately $1.4 million in the first quarter of fiscal 2017 and a tax benefit of approximately $1.7 million in the fourth quarter of fiscal 2017 associated with the adoption of new accounting rules related to stock-based compensation. |
| 6 | Fiscal 2018 includes tax expense of $3.3 million in the first quarter, tax expense of $2.9 million in the second quarter, a tax benefit of $10.6 million in the third quarter and tax expense of $0.3 million in the fourth quarter, while fiscal 2017 includes provisional tax expense of approximately $41.5 million in the fourth quarter, resulting from the enactment of the Tax Cuts and Jobs Act. |
| 7 | Due to differences between quarterly and full year weighted average share count calculations, and the effect of quarterly rounding to the nearest cent per share, full year earnings per share may not equal the sum of the quarters. |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of January 29, 2017,February 3, 2019, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that
our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and 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 SEC.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over the company’s financial reporting. These internal controls are designed to provide reasonable assurance that the reported information is fairly presented, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of any internal control may vary over time.
Our management assessed the effectiveness of the company’s internal control over financial reporting as of January 29, 2017.February 3, 2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework (2013).Based on our assessment using those criteria, our management concluded that, as of January 29, 2017,February 3, 2019, our internal control over financial reporting is effective.
Our independent registered public accounting firm audited the Consolidated Financial Statements included in this Annual Report on Form10-K and the company’s internal control over financial reporting. Their audit report appears on pages 5865 and 5966 of this Annual Report on Form10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.On April 3, 2019, the Company’s Compensation Committee adopted the Amended and Restated 2012 EVP Level Management Retention Plan (the “MRP”). The terms of the MRP are substantially identical to the terms of the Company’s 2012 EVP Level Management Retention Plan adopted on November 1, 2012 by the Company’s Compensation Committee, which terms were described in the Company’s Current Report onForm 8-K as filed with the Commission on November 7, 2012.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required by this Item is incorporated by reference herein to information under the headings “Election of Directors,” “Information Concerning Executive Officers,” “Audit and Finance Committee Report,” “Corporate Governance — Corporate Governance Guidelines and Code of Business Conduct and Ethics,” “Corporate Governance — Audit and Finance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.Statement for the 2019 Annual Meeting of Stockholders (the “Proxy Statement”).
| ITEM 11. | EXECUTIVE COMPENSATION |
Information required by this Item is incorporated by reference herein to information under the headings “Corporate Governance — Compensation Committee,” “Corporate Governance — Director Compensation,” and “Executive Compensation” in our Proxy Statement.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by this Item is incorporated by reference herein to information under the headingsheading “Security Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information” in our Proxy Statement.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required by this Item is incorporated by reference herein to information under the heading “Certain Relationships and Related Transactions” in our Proxy Statement.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information required by this Item is incorporated by reference herein to information under the headings “Committee Reports — Audit“Audit and Finance Committee Report” and “Proposal 43 — Ratification of Selection of Independent Registered Public Accounting Firm — Deloitte Fees and Services” in our Proxy Statement.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a)(1) | Financial Statements: | |||||
The following Consolidated Financial Statements of Williams-Sonoma, Inc. and subsidiaries and the related notes are filed as part of this report pursuant to Item 8:
Consolidated Statements of Earnings for the fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015
Consolidated Statements of Comprehensive Income for the fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015
Consolidated Balance Sheets as of January 29, 2017 and January 31, 2016
Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015
Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Quarterly Financial Information
| The following Consolidated Financial Statements of Williams-Sonoma, Inc. and subsidiaries and the related notes are filed as part of this report pursuant to Item 8: | ||||||
| PAGE | ||||||
| Consolidated Statements of Earnings | 40 | |||||
| Consolidated Statements of Comprehensive Income | 40 | |||||
| Consolidated Balance Sheets | 41 | |||||
| Consolidated Statements of Stockholders’ Equity | 42 | |||||
| Consolidated Statements of Cash Flows | 43 | |||||
| Notes to Consolidated Financial Statements | 44 | |||||
| Report of Independent Registered Public Accounting Firm | 65 | |||||
| Quarterly Financial Information | 67 | |||||
| (a)(2) | Financial Statement Schedules: Schedules have been omitted because they are not required, are not applicable, or because the required information, where material, is included in the financial statements, notes, or supplementary financial information. | |||||
| (a)(3) | Exhibits: | |||||
| (b) | Exhibits: | |||||
| (c) | Financial Statement Schedules: Schedules have been omitted because they are not required or are not applicable. | |||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.Exhibit Index
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE
FISCAL YEAR ENDED JANUARY 29, 2017
| CERTIFICATE OF INCORPORATION AND BYLAWS | ||
| 3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form8-K as filed with the Commission on May 25, 2011,File No. 001-14077) | |
| 3.2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form8-K as filed with the Commission on | |
| INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES | ||
| 4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form8-K as filed with the Commission on May 25, 2011, FileNo. 001-14077) | |
| XBRL | ||
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
| * | Filed herewith. |
| + | Indicates a management contract or compensatory plan or arrangement. |
| ITEM 16. | FORM10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||||||||
Date: April 4, 2019 | By | /s/ LAURA ALBER | ||||||
| Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: April 4, 2019 | /s/ ADRIAN BELLAMY | |
| Adrian Bellamy | ||
| Chairman of the Board of Directors | ||
| Date: April 4, 2019 | /s/ LAURA ALBER | |
Laura Alber | ||
Chief Executive Officer | ||
(principal executive officer) | ||
| Date: April 4, 2019 | /s/ JULIE WHALEN | |
Julie Whalen | ||
Chief Financial Officer | ||
(principal financial officer and principal accounting officer) | ||
| Date: April 4, 2019 | /s/ ANTHONY GREENER | |
Anthony Greener | ||
Director | ||
| Date: April 4, 2019 | /s/ ROBERT LORD | |
Robert Lord | ||
Director | ||
| Date: April 4, 2019 | /s/ ANNE MULCAHY | |
Anne Mulcahy | ||
Director | ||
| Date: April 4, 2019 | /s/ GRACE PUMA | |
Grace Puma | ||
Director | ||
| Date: April 4, 2019 | /s/ CHRISTIANA SMITH SHI | |
Christiana Smith Shi | ||
Director | ||
| Date: April 4, 2019 | /s/ SABRINA SIMMONS | |
Sabrina Simmons | ||
Director | ||
| Date: April 4, 2019 | /s/ FRITS VAN PAASSCHEN | |
Frits van Paasschen | ||
Director | ||
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