UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended ~~October 28, 2018.~~

November 3, 2019.

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

For the transition period from
to

Commission File Number:

001-14077

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)


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

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

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

421-7900

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

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


Title of each class:	Trading Symbol(s):	Name of each exchange on which registered:
Common Stock, par value $.01 per share	WSM	New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T (§

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐

~~Non-accelerated~~ ~~filer~~	☐
Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes

☐

☒

As of ~~November 25, 2018, 80,155,276~~December 1, 2019, 77,467,381 shares of the registrant’s Common Stock were outstanding.

Table of Contents

WILLIAMS-SONOMA, INC.

REPORT ON FORM

10-Q

FOR THE QUARTER ENDED ~~OCTOBER 28, 2018~~

NOVEMBER 3, 2019

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


			PAGE
			~~PAGE~~

Item 1.	Financial Statements			1

~~Item 2.~~
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			15 17

~~Item 3.~~
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			22

~~Item 4.~~	~~Controls and Procedures~~			22

	~~PART II. OTHER INFORMATION~~
Item 4.	Controls and Procedures			22


~~Item 1.~~ PART II. OTHER INFORMATION	~~Legal Proceedings~~
		22

~~Item 1A.~~	~~Risk Factors~~
Item 1.	Legal Proceedings			23

~~Item 2.~~
Item 1A.	Risk Factors			23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			23

~~Item 3.~~
Item 3.	Defaults Upon Senior Securities			23

~~Item 4.~~	~~Mine Safety Disclosures~~			23

~~Item 5.~~	~~Other Information~~			23

Item 6. 4.	~~Exhibits~~Mine Safety Disclosures			23

Item 5.	Other Information			23

Item 6.	Exhibits			24

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

   Thirteen
Weeks Ended    Thirty-nine
Weeks Ended
In thousands, except per share amounts
October 28,
2018

October 29,
2017

October 28,
2018

October 29,
2017

E-commerce net revenues
   $ 746,716    $ 690,045    $ 2,079,838    $ 1,901,348
Retail net revenues
   610,267    609,291    1,755,319    1,711,101
Net revenues
   1,356,983    1,299,336    3,835,157    3,612,449
Cost of goods sold
   861,999    832,269    2,444,067    2,326,911
Gross profit
   494,984    467,067    1,391,090    1,285,538
Selling, general and administrative expenses
   400,600    356,254    1,155,990    1,030,667
Operating income
   94,384    110,813    235,100    254,871
Interest (income) expense, net
   2,288    594    5,073    974
Earnings before income taxes
   92,096    110,219    230,027    253,897
Income taxes
   10,631    38,906    51,681    90,112
Net earnings
   $ 81,465    $ 71,313    $ 178,346    $ 163,785
Basic earnings per share
   $ 1.01    $ 0.84    $ 2.17    $ 1.90
Diluted earnings per share
   $ 1.00    $ 0.84    $ 2.15    $ 1.89
Shares used in calculation of earnings per share:

Basic
   80,475    84,940    82,070    86,111
Diluted
   81,641    85,384    82,951    86,582

Thirteen
Weeks Ended

Thirty-nine
Weeks Ended

In thousands, except per share amounts

November 3,
2019

October 28,
2018

November 3,
2019

October 28,
2018

Net revenues
$
1,442,472
$
1,356,983
$
4,054,418
$
3,835,157

Cost of goods sold

924,300

861,999

2,608,054

2,444,067

Gross profit

518,172

494,984

1,446,364

1,391,090

Selling, general and administrative expenses

416,281

400,600

1,184,176

1,155,990

Operating income

101,891

94,384

262,188

235,100

Interest (income) expense, net

2,564

2,288

7,486

5,073

Earnings before income taxes

99,327

92,096

254,702

230,027

Income taxes

24,614

10,631

64,685

51,681

Net earnings
$
74,713
$
81,465
$
190,017
$
178,346

Basic earnings per share
$
0.96
$
1.01
$
2.43
$
2.17

Diluted earnings per share
$
0.94
$
1.00
$
2.39
$
2.15

Shares used in calculation of earnings per share:

Basic

77,897

80,475

78,356

82,070

Diluted

79,191

81,641

79,465

82,951

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

   Thirteen
Weeks Ended Thirty-nine
Weeks Ended
In thousands
October 28,
2018

October 29,
2017

October 28,
2018

October 29,
2017

Net earnings
   $ 81,465 $ 71,313 $ 178,346 $ 163,785
Other comprehensive income (loss):

Foreign currency translation adjustments
   (1,830 ) 40 (5,968 ) 1,864
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(23), $133, $378 and $(52)
   (65 ) 373 1,064 (138 )
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $43, $45, $19 and $48
   (120 ) (128 ) (71 ) (137 )
Comprehensive income
   $ 79,450 $ 71,598 $ 173,371 $ 165,374

Thirteen
Weeks Ended

Thirty-nine
Weeks Ended

In thousands

November 3,
2019

October 28,
2018

November 3,
2019

October 28,
2018

Net earnings
$
74,713
$
81,465
$
190,017
$

178,346

Other comprehensive income (loss):

Foreign currency translation adjustments

1,783

(1,830
)
(2,477
)
(5,968
)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $97, $(23), $163 and $378

5

(65
)
77

1,064

Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax of $187, $43, $221 and $19

(8
)
(120
)
(235
)
(71
)

Comprehensive income
$
76,493
$
79,450
$
187,382
$
173,371

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

In thousands, except per share amounts
October 28,
2018

January 28,
2018

October 29,
2017

ASSETS

Current assets

Cash and cash equivalents
   $ 164,414 $ 390,136 $ 90,779
Accounts receivable, net
   113,582 90,119 92,282
Merchandise inventories, net
   1,197,554 1,061,593 1,176,941
Prepaid catalog expenses
   —   20,517 19,051
Prepaid expenses
   94,071 62,204 69,267
Other current assets
   21,805 11,876 12,141
Total current assets
   1,591,426 1,636,445 1,460,461
Property and equipment, net
   931,361 932,283 931,131
Deferred income taxes, net
   45,999 67,306 131,793
Goodwill
   85,649 18,838 18,769
Other long-term assets, net
   64,324 130,877 38,230
Total assets
   $ 2,718,759 $ 2,785,749 $ 2,580,384
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable
   $ 487,733 $ 457,144 $ 468,566
Accrued expenses
   132,398 134,207 101,434
Gift card and other deferred revenue
   275,567 300,607 299,031
Borrowings under revolving line of credit
   60,000 —   170,000
Income taxes payable
   9,903 56,783 48,865
Other current liabilities
   71,119 59,082 49,655
Total current liabilities
   1,036,720 1,007,823 1,137,551
Deferred rent and lease incentives
   205,143 202,134 195,220
Long-term debt
   299,571 299,422 —
Other long-term liabilities
   85,388 72,804 75,439
Total liabilities
   1,626,822 1,582,183 1,408,210
Commitments and contingencies – See Note F

Stockholders’ equity

Preferred stock: $.01 par value; 7,500 shares authorized; none issued
   —   —   —
Common stock: $.01 par value; 253,125 shares authorized; 80,282, 83,726 and 84,478 shares issued and outstanding at October 28, 2018, January 28, 2018 and October 29, 2017, respectively
   803 837 845
Additionalpaid-in capital
   570,924 562,814 557,198
Retained earnings
   532,172 647,422 623,170
Accumulated other comprehensive loss
   (11,757 ) (6,782 ) (8,314 )
Treasury stock, at cost: 2, 11 and 11 shares as of October 28, 2018, January 28, 2018 and October 29, 2017, respectively
   (205 ) (725 ) (725 )
Total stockholders’ equity
   1,091,937 1,203,566 1,172,174
Total liabilities and stockholders’ equity
   $ 2,718,759 $ 2,785,749 $ 2,580,384

In thousands, except per share amounts

November 3,
2019

February 3,
2019

October 28,
2018

ASSETS

Current assets

Cash and cash equivalents
$
155,025
$
338,954
$
164,414

Accounts receivable, net

110,131

107,102

113,582

Merchandise inventories, net

1,258,541

1,124,992

1,197,554

Prepaid expenses

115,288

101,356

94,071

Other current assets

20,260

21,939

21,805

Total current assets

1,659,245

1,694,343

1,591,426

Property and equipment, net

915,740

929,635

931,361

Operating lease
right-of-use
assets

1,194,061

—

—

Deferred income taxes, net

41,763

44,055

45,999

Goodwill

85,355

85,382

85,649

Other long-term assets, net

67,660

59,429

64,324

Total assets
$
3,963,824
$
2,812,844
$
2,718,759

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable
$
444,279
$
526,702
$
487,733

Accrued expenses

140,789

163,559

132,398

Gift card and other deferred revenue

296,157

290,445

275,567

Borrowings under revolving line of credit

100,000

—

60,000

Income taxes payable

13,182

21,461

9,903

Operating lease liabilities

225,530

—

—

Other current liabilities

68,973

72,645

71,119

Total current liabilities

1,288,910

1,074,812

1,036,720

Deferred rent and lease incentives

29,388

201,374

205,143

Long-term debt

299,769

299,620

299,571

Long-term operating lease liabilities

1,127,403

—

—

Other long-term liabilities

86,461

81,324

85,388

Total liabilities

2,831,931

1,657,130

1,626,822

Commitments and contingencies – See Note F

Stockholders’ equity

Preferred stock: $.01 par value; 7,500 shares authorized; NaN issued

—


—

—

Common stock: $.01 par value; 253,125 shares authorized; 77,612, 78,813 and 80,282 shares issued and outstanding at November 3, 2019, February 3, 2019 and October 28, 2018, respectively

777

789

803

Additional
paid-in
capital

594,991

581,900

570,924

Retained earnings

550,774

584,333

532,172

Accumulated other comprehensive loss

(13,708
)
(11,073
)
(11,757
)
Treasury stock, at cost: 14, 2 and 2 shares as of November 3, 2019, February 3, 2019 and October 28, 2018, respectively

(941
)
(235
)
(205
)

Total stockholders’ equity

1,131,893

1,155,714

1,091,937

Total liabilities and stockholders’ equity
$
3,963,824
$
2,812,844
$
2,718,759

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’ EQUITY

(Unaudited)

   Thirty-nine
Weeks Ended
In thousands
October 28,
2018

October 29,
2017

Cash flows from operating activities:

Net earnings
   $ 178,346 $ 163,785
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

Depreciation and amortization
   141,167 135,473
Loss on disposal/impairment of assets
   5,290 1,299
Amortization of deferred lease incentives
   (19,728 ) (18,987 )
Deferred income taxes
   12,170 (11,884 )
Tax benefit related to stock-based awards
   10,361 15,439
Stock-based compensation expense
   40,953 30,164
Other
   (389 ) (416 )
Changes in:

Accounts receivable
   (21,851 ) (2,341 )
Merchandise inventories
   (143,723 ) (197,757 )
Prepaid catalog expenses
   —   447
Prepaid expenses and other assets
   (50,171 ) (19,814 )
Accounts payable
   8,689 7,728
Accrued expenses and other liabilities
   19,002 (28,775 )
Gift card and other deferred revenue
   24,048 (4,108 )
Deferred rent and lease incentives
   23,695 17,000
Income taxes payable
   (48,358 ) 25,677
Net cash provided by operating activities
   179,501 112,930
Cash flows from investing activities:

Purchases of property and equipment
   (128,326 ) (135,821 )
Other
   1,804 458
Net cash used in investing activities
   (126,522 ) (135,363 )
Cash flows from financing activities:

Repurchases of common stock
   (220,221 ) (154,321 )
Payment of dividends
   (105,654 ) (101,928 )
Borrowings under revolving line of credit
   60,000 170,000
Tax withholdings related to stock-based awards
   (13,906 ) (14,836 )
Other
   —   (20 )
Net cash used in financing activities
   (279,781 ) (101,105 )
Effect of exchange rates on cash and cash equivalents
   1,080 604
Net decrease in cash and cash equivalents
   (225,722 ) (122,934 )
Cash and cash equivalents at beginning of period
   390,136 213,713
Cash and cash equivalents at end of period
   $ 164,414 $ 90,779

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders’
Equity

Common Stock

In thousands

Shares

Amount

Balance at February 3, 2019

78,813
$
789
$
581,900
$
584,333
$
(11,073
) $
(235
) $
1,155,714

Net earnings

—

—

—

52,656

—

—

52,656

Foreign currency translation adjustments

—

—

—

—

(3,009
)
—

(3,009
)
Change in fair value of derivative financial instruments, net of tax

—

—

—

—

204

—

204

Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax

—

—

—

—

(67
)
—

(67
)
Conversion/release of stock-based awards
1

571

5

(25,298
)
—

—

(113
)
(25,406
)
Repurchases of common stock

(576
)
(6
)
(2,874
)
(30,010
)
—

(958
)
(33,848
)
Reissuance of treasury stock under stock-based compensation plans
1

—

—

(332
)
—

—

332

—

Stock-based compensation expense

—

—

18,376

—

—

—

18,376

Dividends declared

—

—

—

(39,549
)
—

—

(39,549
)
Adoption of accounting pronouncements
2

—

—

—

(3,303
)
—

—

(3,303
)

Balance at May 5, 2019

78,808
$
788
$
571,772
$
564,127
$
(13,945
) $
(974
) $
1,121,768

Net earnings

—

—

—

62,648

—

—

62,648

Foreign currency translation adjustments

—

—

—

—

(1,251
)
—

(1,251
)
Change in fair value of derivative financial instruments, net of tax

—

—

—

—

(132
)
—

(132
)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax

—

—

—

—

(160
)
—

(160
)
Conversion/release of stock-based awards
1

31

1

(482
)
—

—

—

(481
)
Repurchases of common stock

(636
)
(6
)
(3,170
)
(35,107
)
—

—

(38,283
)
Stock-based compensation expense

—

—

16,708

—

—

—

16,708

Dividends declared

—

—

—

(39,214
)
—

—

(39,214
)

Balance at August 4, 2019

78,203
$
783
$
584,828
$
552,454
$
(15,488
) $
(974
) $
1,121,603

Net earnings

—

—

—

74,713

—

—

74,713

Foreign currency translation adjustments

—

—

—

—

1,783

—

1,783

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

—

—

—

—

5

—

5

Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax

—

—

—

—

(8
)
—

(8
)
Conversion/release of stock-based awards
1

19

—

(715
)
—

—

(21
)
(736
)
Repurchases of common stock

(610
)
(6
)
(3,068
)
(37,509
)
—

—

(40,583
)
Reissuance of treasury stock under stock-based compensation plans
1

—

—

(54
)
—

—

54

—

Stock-based compensation expense

—

—

14,000

—

—

—

14,000

Dividends declared

—

—

—

(38,884
)
—

—

(38,884
)
Balance at November 3, 2019

77,612
$
777
$
594,991
$
550,774
$
(13,708
) $
(941
) $
1,131,893

1
Amounts are shown net of shares withheld for employee taxes.
2
Relates to our adoption of ASU
2016-02,
Leases, in fiscal 2019. See Note A.

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


							Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
	Common Stock
In thousands	Shares			Amount
Balance at January 28, 2018		83,726		$	837		$	562,814		$	647,422		$	(6,782	)	$	(725	)	$	1,203,566

Net earnings		—			—			—			45,168			—			—			45,168
Foreign currency translation adjustments		—			—			—			—			(1,145	)		—			(1,145	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			1,123			—			1,123
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax		—			—			—			—			49			—			49
Conversion/release of stock-based awards 1		228			3			(7,213	)		—			—			(226	)		(7,436	)
Repurchases of common stock		(732	)		(7	)		(3,437	)		(34,269	)		—			—			(37,713	)
Reissuance of treasury stock under stock-based compensation plans 1		—			—			(290	)		(358	)		—			648			—
Stock-based compensation expense		—			—			12,811			—			—			—			12,811
Dividends declared		—			—			—			(36,877	)		—			—			(36,877	)
Adoption of accounting pronouncements 2		—			—			—			17,688			—			—			17,688

Balance at April 29, 2018		83,222		$	833		$	564,685		$	638,774		$	(6,755	)	$	(303	)	$	1,197,234

Net earnings		—			—			—			51,713			—			—			51,713
Foreign currency translation adjustments		—			—			—			—			(2,993	)		—			(2,993	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			6			—			6
Conversion/release of stock-based awards 1		175			2			(4,869	)		—			—			(32	)		(4,899	)
Repurchases of common stock		(2,409	)		(25	)		(11,431	)		(125,649	)		—			—			(137,105	)
Reissuance of treasury stock under stock-based compensation plans 1		—			—			(72	)		(5	)		—			77			—
Stock-based compensation expense		—			—			13,497			—			—			—			13,497
Dividends declared		—			—			—			(36,465	)		—			—			(36,465	)

Balance at July 29, 2018		80,988		$	810		$	561,810		$	528,368		$	(9,742	)	$	(258	)	$	1,080,988
Net earnings		—			—			—			81,465			—			—			81,465
Foreign currency translation adjustments		—			—			—			—			(1,830	)		—			(1,830	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			(65	)		—			(65	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax		—			—			—			—			(120	)		—			(120	)
Conversion/release of stock-based awards 1		37			—			(1,571	)		—			—			—			(1,571	)
Repurchases of common stock		(743	)		(7	)		(3,604	)		(41,792	)		—			—			(45,403	)
Reissuance of treasury stock under stock-based compensation plans 1		—			—			(53	)		—			—			53			—
Stock-based compensation expense		—			—			14,342			—			—			—			14,342
Dividends declared		—			—			—			(35,869	)		—			—			(35,869	)
Balance at October 28, 2018		80,282		$	803		$	570,924		$	532,172		$	(11,757	)	$	(205	)	$	1,091,937

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

2	Primarily relates to our adoption of ASU 2014-09, Revenue from Contracts with Customers, in fiscal 2018.

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Thirty-nine Weeks Ended
In thousands	November 3, 2019			October 28, 2018
Cash flows from operating activities:
Net earnings	$	190,017		$	178,346
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		140,495			141,167
L oss on disposal/impairment of assets		682			5,290
Amortization of deferred lease incentives		(5,985	)		(19,728	)
Non-cash lease expense		160,138			—
Deferred income taxes		(10,937	)		12,170
Tax benefit related to stock-based awards		13,648			10,361
Stock-based compensation expense		49,516			40,953
Other		14			(389	)
Changes in:
Accounts receivable		(2,842	)		(21,851	)
Merchandise inventories		(133,637	)		(143,723	)
Prepaid expenses and other assets		(24,157	)		(50,171	)
Accounts payable		(92,101	)		8,689
Accrued expenses and other liabilities		(24,148	)		19,002
Gift card and other deferred revenue		5,848			24,048
Deferred rent and lease incentives		—			23,695
Operating lease liabilities		(168,308	)		—
Income taxes payable		(8,293	)		(48,358	)

Net cash provided by operating activities		89,950			179,501

Cash flows from investing activities:
Purchases of property and equipment		(121,154	)		(128,326	)
Other		470			1,804

Net cash used in investing activities		(120,684	)		(126,522	)

Cash flows from financing activities:
Payment of dividends		(113,159	)		(105,654	)
Repurchases of common stock		(112,714	)		(220,221	)
Borrowings under revolving line of credit		100,000			60,000
Tax withholdings related to stock-based awards		(26,623	)		(13,906	)

Net cash used in financing activities		(152,496	)		(279,781	)

Effect of exchange rates on cash and cash equivalents		(699	)		1,080
Net decrease in cash and cash equivalents		(183,929	)		(225,722	)
Cash and cash equivalents at beginning of period		338,954			390,136

Cash and cash equivalents at end of period	$	155,025		$	164,414

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen weeks and thirty-nine weeks then ended and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of ~~January 28, 2018,~~February 3, 2019, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form

10-K

for the fiscal year ended ~~January 28, 2018.~~

February 3, 2019.

The results of operations for the thirteen and thirty-nine weeks ended ~~October 28, 2018~~November 3, 2019 are not necessarily indicative of the operating results of the full year.

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

10-K

for the fiscal year ended ~~January 28, 2018.~~

~~Reclassifications~~

Certain amounts reported in our Condensed Consolidated Balance Sheets as of January 28, 2018 and October 29, 2017 and our Condensed Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 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.

February 3, 2019.

New Accounting Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)~~2014-09,~~~~Revenue from Contracts with Customers~~

2016-02,

Leases

, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. We adopted the ASU on a modified retrospective basis in the first quarter of fiscal 2018 and applied the guidance therein to all applicable contracts that were not complete as of the 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. These adjustments primarily related to the acceleration in the timing of recognizing breakage income related to our unredeemed stored-value cards, the acceleration in the timing of revenue recognition for certain merchandise shipped to our customers, and prepaid catalog advertising costs, which were capitalized and amortized over their expected period of future benefit prior to adoption, and are now expensed as incurred. Prior period balances were not retrospectively adjusted as a result of adopting the ASU. See Note L for further discussion related to the impact of the adoption of the ASU on our Condensed Consolidated Financial Statements.

~~In February 2016, the FASB issued ASU2016-02,~~~~Leases,~~~~which will require~~requires lessees to recognize a

right-of-use

asset and aan operating lease liability for virtually all ~~of their leases (other than short-term leases).~~leases. This ASU, as amended, iswas effective for us beginning in the first quarter of fiscal 2019. The adoption of this ASU resulted in an increase in total long-term assets and total 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 in

right-of-use

assets of approximately $1.2 billion on the first day of fiscal 2019. We ~~plan~~also recorded an approximate $3.3 million, net of tax, reduction to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of this ASU. We have elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the financial ~~statements, with~~statements. We have elected the package of practical expedients upon adoption, which permits us not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We have also elected not to separate lease and

non-lease

components for all of our leases and not to recognize a ~~cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently assessing the impact~~

right-of-use

asset and a lease liability for short-term leases. The adoption 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, however, we do~~did not ~~expect it to~~ materially impact our Condensed Consolidated Statement of Earnings.

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 2019.~~ Entities should apply the guidance to existing cash flow and net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained 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. This ASU was effective for us in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In August 2018, the FASB issued ASU

2018-15,

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

That Is a Service Contract.

This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use

software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic

350-40

to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us in the first quarter of fiscal 2020. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.

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NOTE B. ~~BORROWING~~BORR

WING ARRANGEMENTS

Credit Facility

We have a credit facility, which provides for a $500,000,000 unsecured revolving line of ~~credit (“revolver”~~cr

dit (the “revolver”) and a $300,000,000 unsecured term loan facility ~~(“term~~(the “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 revolver 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,~~January 8, 2020, elect to extend the maturity date for an additional year, subject to lender approval.

During the third quarter ~~and foryear-to-date~~

fiscal ~~2018,~~2019, we had borrowings of ~~$60,000,000~~ $40,000,000

under the revolver. For year-to-date fiscal 2019, we had borrowings of $100,000,000

under the revolver (at a

year-to-date

weighted average interest rate of ~~3.28%). During the third quarter of fiscal 2017, we had borrowings of $55,000,000 under the revolver. Foryear-to-date~~ ~~fiscal 2017, we borrowed $170,000,000 (at a weighted average interest rate of 2.25%~~3.12%), all of which was outstanding as of ~~October 29, 2017.~~November 3, 2019. During the

third

quarter and for

year-to-date

fiscal 2018, we had borrowings

of $60,000,000

under the revolver

(at a year-to-date weighted average interest rate of 3.28%)

. Additionally, as of ~~October 28, 2018, $11,728,000~~November 3, 2019, $12,402,000 in issued but undrawn standby letters of credit ~~were~~was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of ~~October 28, 2018,~~November 3, 2019, we had $300,000,000 outstanding under our term loan (at a

year-to-date

weighted average interest rate of ~~3.10%~~3.47%). The term loan matures on January 8, 2021, at which time all outstanding principal and any accrued interest must be repaid.

The interest rates under the credit facility are variable, and may be elected by us as: (i) the London Interbank Offer Rate plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver ~~borrowings,~~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 ~~borrowings,~~borrowing, and 0% to 1.0% for the term loan.

As of ~~October 28, 2018,~~November 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 the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000

, each of which matures on August ~~24, 2019.~~23, 2020

. The letter of credit facilities ~~contains~~contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility plus an applicable margin based on our leverage ratio. As of ~~October 28, 2018,~~November 3, 2019, an aggregate of ~~$6,330,000~~$8,221,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we ~~had~~have not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January ~~21, 2020.~~

20, 2021.

NOTE C. STOCK-BASED COMPENSATION

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 36,570,000 shares. As of ~~October 28, 2018,~~November 3, 2019, there were approximately ~~7,465,000~~5,367,000 shares available for future grant. Awards may be granted under the Plan to our officers, employees and

non-employee

members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Option Awards

Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards ismust not be less than 100% of the closing price of our stock on the

trading

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~~

which are triggered upon certain events including, but not limited to, retirement, or a 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.~~basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses ~~resulting from~~which are triggered upon certain events including, but not limited to, retirement, or a merger or a similar corporate event. Stock awards granted to

non-employee

Board members generally vest in one year.

Non-employee

Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a

non-employee

Board member).

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Stock-Based ~~Compensation~~Compe
n
sation Expense

During the thirteen and thirty-nine weeks ended November 3, 2019, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $14,115,000 and $49,516,000, respectively. During the thirteen and thirty-nine weeks ended October 28, 2018, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $14,427,000 and $40,953,000, respectively. During the thirteen and thirty-nine weeks ended October 29, 2017, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $7,335,000 and $30,164,000, respectively.

~~Stock-Settled~~

Restricted 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.

Units

The following table summarizes ~~our stock-settled stock appreciation right activity during the thirty-nine weeks ended October 28, 2018:~~


	~~Shares~~
~~Balance at January 28, 2018 (100% vested)~~		~~167,737~~
~~Granted~~		—
~~Converted into common stock~~		~~(165,847~~	)
~~Cancelled~~		~~(1,290~~	)
~~Balance at October 28, 2018 (100% vested)~~		~~600~~

~~Restricted Stock Units~~

~~The following table summarizes our~~

ur restricted stock unit activity during the thirty-nine weeks ended ~~October 28, 2018:~~

November 3, 2019:


	Shares
Balance at February 3, 2019		3,012,923
	~~Shares~~
~~Balance at January 28, 2018~~ Granted		~~2,358,137~~ 1,036,010
~~Granted~~		~~1,387,023~~
Granted, with vesting subject to performance conditions		~~256,350~~ 238,786
Released 1		(~~647,617~~985,540	)
Cancelled		(~~327,035~~347,205	)
~~Balance at October 28, 2018~~		~~3,026,858~~
Balance at November 3, 2019		2,954,974

Vested plus expected to vest at ~~October 28, 2018~~ November 3, 2019		~~2,342,164~~ 3,115,488

Excludes

105,436

incremental shares released due to achievement of performance conditions above target.

NOTE D. EARNINGS PER SHARE

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:

In thousands, except per share amounts    Net Earnings
Weighted
Average Shares

Earnings
Per Share

Thirteen weeks ended October 28, 2018

Basic
   $ 81,465    80,475    $ 1.01
Effect of dilutive stock-based awards
      1,166
Diluted
   $ 81,465    81,641    $ 1.00
Thirteen weeks ended October 29, 2017

Basic
   $ 71,313    84,940    $ 0.84
Effect of dilutive stock-based awards
      444
Diluted
   $ 71,313    85,384    $ 0.84
Thirty-nine weeks ended October 28, 2018

Basic
   $ 178,346    82,070    $ 2.17
Effect of dilutive stock-based awards
      881
Diluted
   $ 178,346    82,951    $ 2.15
Thirty-nine weeks ended October 29, 2017

Basic
   $ 163,785    86,111    $ 1.90
Effect of dilutive stock-based awards
      471
Diluted
   $ 163,785    86,582    $ 1.89


In thousands, except per share amounts	Net Earnings		Weighted Average Shares		Earnings Per Share
Thirteen weeks ended November 3, 2019
Basic	$	74,713		77,897	$	0.96
Effect of dilutive stock-based awards				1,294
Diluted	$	74,713		79,191	$	0.94

Thirteen weeks ended October 28, 2018
Basic	$	81,465		80,475	$	1.01
Effect of dilutive stock-based awards				1,166
Diluted	$	81,465		81,641	$	1.00

Thirty-nine weeks ended November 3, 2019
Basic	$	190,017		78,356	$	2.43
Effect of dilutive stock-based awards				1,109
Diluted	$	190,017		79,465	$	2.39

Thirty-nine weeks ended October 28, 2018
Basic	$	178,346		82,070	$	2.17
Effect of dilutive stock-based awards				881
Diluted	$	178,346		82,951	$	2.15

Stock-based awards of 2,000 and 28,000 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended November 3, 2019, respectively, a

their inclusion would be anti-dilutive

Stock-based awards of 6,000 and 16,000 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 28, 2018, as their inclusion would be anti-dilutive. Stock-based awards of 994,000 and 1,052,000 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended October 29, 2017, respectively, as their inclusion would be anti-dilutive.

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NOTE E. SEGMENT ~~REPORTING~~

REP

RTING

We ~~have two reportable~~identify our operating segments~~e-commerce~~ according to how our business activities are managed and ~~retail. The~~evaluated.

Prior to fiscal 2019, we managed

e-commerce ~~segment has~~

merchandise strategies, which included the ~~following merchandise strategies:~~results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, ~~PBteen,~~Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, ~~which sell~~separately from our ~~products through oure-commerce~~ ~~websites~~retail business. Because these merchandising strategies shared similar economic and ~~direct-mail catalogs. Oure-commerce~~ ~~merchandise strategies are operating segments, which have~~other qualitative characteristics, they had been aggregated into ~~one~~ the

e-commerce

reportable ~~segment,e-commerce.~~ ~~The~~segment. Also, prior to fiscal 2019, we managed retail ~~segment,~~merchandise strategies, which ~~includes~~included the results of our ~~franchise operations, has the following merchandise strategies:~~retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, ~~which sell~~separately from our ~~products through~~

e-commerce

business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the retail reportable segment.

Beginning in fiscal 2019, due to the convergence of our

e-commerce

and retail ~~stores. Our~~businesses and to better align with how we manage our omni-channel business, we have combined the results of our

e-commerce

and retail merchandise strategies at the overall brand level. Each of our brands are operating ~~segments, which~~segments. Because they share similar economic and other qualitative characteristics, we 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~~into a single reportable ~~segments are strategic business units that offer similar products~~segment.

The following table summarizes our net revenues by brand for the ~~home. They are managed separately because~~thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018. We have updated fiscal 2018 results to conform with 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 since 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.

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 taxes are calculated at an entity level and are not allocated to our reportable segments.~~

current year presentation


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
In thousands	November 3, 2019		October 28, 2018		November 3, 2019		October 28, 2018
Pottery Barn	$	556,985	$	533,469	$	1,573,958	$	1,530,300
West Elm		390,341		339,099		1,057,398		913,662
Williams Sonoma		205,493		203,936		591,761		600,092
Pottery Barn Kids and Teen		228,051		227,331		632,950		621,534
Other 1		61,602		53,148		198,351		169,569

Total 2	$	1,442,472	$	1,356,983	$	4,054,418	$	3,835,157

~~Segment Information~~

In thousands    E-commerce    Retail    Unallocated Total
Thirteen weeks ended October 28, 2018

Net revenues¹
   $ 746,716    $ 610,267    $ —     $ 1,356,983
Depreciation and amortization expense
   9,877    21,574    15,907 47,358
Operating income (loss)²
   152,204    45,052    (102,872 ) 94,384
Capital expenditures
   12,068    20,038    16,199 48,305
Thirteen weeks ended October 29, 2017

Net revenues¹
   $ 690,045    $ 609,291    $ —     $ 1,299,336
Depreciation and amortization expense
   6,870    22,555    16,000 45,425
Operating income (loss)²
   142,865    42,804    (74,856 ) 110,813
Capital expenditures
   13,184    22,066    17,844 53,094
Thirty-nine weeks ended October 28, 2018

Net revenues¹
   $ 2,079,838    $ 1,755,319    $ —     $ 3,835,157
Depreciation and amortization expense
   26,874    67,067    47,226 141,167
Operating income (loss)²
   432,245    101,035    (298,180 ) 235,100
Assets³
   874,259    1,156,075    688,425 2,718,759
Capital expenditures
   26,820    55,728    45,778 128,326
Thirty-nine weeks ended October 29, 2017

Net revenues¹
   $ 1,901,348    $ 1,711,101    $ —     $ 3,612,449
Depreciation and amortization expense
   20,625    67,282    47,566 135,473
Operating income (loss)²
   410,008    99,110    (254,247 ) 254,871
Assets³
   732,842    1,156,117    691,425 2,580,384
Capital expenditures
   24,173    61,851    49,797 135,821

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

Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately ~~$79.0~~$86.2 million and ~~$84.1~~$79.0 million for the thirteen weeks ended November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ respectively, and ~~$239.1~~approximately $260.5 million and ~~$234.1~~$239.1 million for the thirty-nine weeks ended November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ respectively.

The thirteen and thirty-nine weeks ended October 28, 2018 includes: $6.0 million and $17.9 million of expense, respectively, related to our acquisition of Outward, Inc., (primarily acquisition-related compensation costs, the amortization of intangible assets acquired, and the operations of the Outward business), of which $4.6 million and $13.7 million, respectively, is recorded in the~~e-commerce~~ ~~segment and $1.4 million and $4.2 million, respectively, is recorded in the unallocated segment; $1.9 million and $5.4 million, respectively, of employment-related expense associated with aone-time~~ special equity grant, which is recorded within the unallocated segment, as well as $1.1 million and $6.4 million of expense related to impairment and early lease termination charges which is primarily recorded in the retail segment. The thirty-nine weeks ended October 29, 2017 includes $5.7 million of severance-related charges in our corporate functions, which is recorded within the unallocated segment.

³	~~Includes long-term assets related to our international operations of approximately $51.0 million and $58.5 million as of October 28, 2018 and October 29, 2017, respectively.~~

Long-lived assets by geographic location are as follows:


In thousands	November 3, 2019		October 28, 2018
U.S.	$	2,140,505	$	1,076,367
International		164,074		50,966

Total	$	2,304,579	$	1,127,333

NOTE F. COMMITMENTS AND CONTINGENCIES

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

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NOTE G. STOCK REPURCHASE ~~PROGRAM~~PR

GRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended November 3, 2019, we repurchased 610,349 shares of our common stock at an average cost of $66.49 per share for a total cost of approximately $40,583,000. During the thirty-nine weeks ended November 3, 2019, we repurchased 1,838,971 shares of our common stock at an average cost of $61.29 per share for a total cost of approximately $112,714,000. As of November 3, 2019, there was $611,101,000 remaining under our current stock repurchase program. As of November 3, 2019

and

October

28,

2018

, we held treasury stock of $941,000

and $205,000, respectively, that represents the cost of shares available for issuance that are intended to satisfy future stock-based award settlements in certain foreign jurisdictions.

During the thirteen weeks ended October 28, 2018, we repurchased 742,508 shares of our common stock at an average cost of $61.15 per share for a total cost of approximately $45,403,000. During the thirty-nine weeks ended October 28, 2018, we repurchased 3,883,875 shares of our common stock at an average cost of $56.70 per share for a total cost of approximately $220,221,000. As of October 28, 2018, there was $298,898,000 remaining under our current stock repurchase program. In addition, as of October 28, 2018, we held treasury stock in the amount of $205,000, which represents the cost of shares available for issuance to satisfy future stock-based award settlements in certain foreign jurisdictions.

220,221,000

During the thirteen weeks ended October 29, 2017, we repurchased 1,301,373 shares of our common stock at an average cost of $46.84 per share for a total cost of approximately $60,960,000. During the thirty-nine weeks ended October 29, 2017, we repurchased 3,226,297 shares of our common stock at an average cost of $47.83 per share for a total cost of approximately $154,321,000. As of October 29, 2017, we held treasury stock in the amount of $725,000.

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.

Dividends

We declared cash dividends of ~~$0.43~~$0.48 and ~~$0.39~~$0.43 per common share during the thirteen weeks ended November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ respectively. We declared cash dividends of ~~$1.29~~$1.44 and ~~$1.17~~$1.29 per common share during the thirty-nine weeks ended November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ respectively. Our quarterly cash dividend may be limited or terminated at any time.

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have ~~retail 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 these 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 Accounting Standards Codification (“ASC”) 815,

Derivatives and Hedging

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or ~~when~~ 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.~~cost of goods sold. Based on the rates in effect as of ~~October 28, 2018,~~November 3, 2019, we expect to reclassify a net

pre-tax

gain of approximately ~~$595,000~~$37,000 from OCI to cost of goods sold over the next 12 months.

We also enter into

non-designated

foreign currency forward contracts (to sell Australian dollars and British pounds and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses.

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As of November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~ we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

In thousands    October 28, 2018    October 29, 2017
Contracts designated as cash flow hedges
   $ 13,300    $ 23,000
Contracts not designated as cash flow hedges
   $ 5,200    $ 48,000


In thousands	November 3, 2019		October 28, 2018
Contracts designated as cash flow hedges	$	19,700	$	13,300
Contracts not designated as cash flow hedges	$	—	$	5,200

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, ~~2018 and October 29, 2017.~~

2018.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and thirty-nine weeks ended November 3, 2019 and October 28, 2018, ~~and October 29, 2017,~~

pre-tax,

was as follows:

In thousands
Thirteen
Weeks Ended
October 28, 2018

Thirteen
Weeks Ended
October 29, 2017

Thirty-nine
Weeks Ended
October 28, 2018

Thirty-nine
Weeks Ended
October 29, 2017

Net gain (loss) recognized in OCI
   $ (88 ) $ 506    $ 1,442    $ (190 )
Net gain (loss) reclassified from OCI into cost of goods sold
   $ 163 $ 173    $ 90    $ 185
Net foreign exchange gain (loss) recognized in selling, general and administrative expenses:

Instruments designated as cash flow hedges¹
   $ 16 $ 20    $ 49    $ 75
Instruments not designated orde-designated
   $ 105 $ 1,752    $ 4,048    $ (1,096 )

¹	~~Changes in fair value of the forward contract related to interest charges (or forward points).~~


	Thirteen Weeks Ended								Thirty-nine Weeks Ended
	November 3, 2019				October 28, 2018				November 3, 2019				October 28, 2018
In thousands	Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses		Cost of goods sold		Selling, general and administrative expenses
Line items presented in the Condensed Consolidated Statement of Earnings in which the effects of derivatives are recorded	$	924,300	$	416,281	$	861,999	$	400,600	$	2,608,054	$	1,184,176	$	2,444,067	$	1,155,990
Gain (loss) recognized in income
Derivatives designated as cash flow hedges	$	204	$	—	$	163	$	16	$	499	$	—	$	90	$	49
Derivatives not designated as hedging instruments	$	—	$	6	$	—	$	105	$	—	$	24	$	—	$	4,048

The fair values of our derivative financial instruments are presented below according to their classification in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.

In thousands    October 28, 2018    October 29, 2017
Derivatives designated as cash flow hedges:

Other current assets
   $ 504    $ 161
Other long-term assets
   $ —      $ 25
Other current liabilities
   $ —      $ (131 )
Other long-term liabilities
   $ —      $ (11 )
Derivatives not designated as hedging instruments:

Other current assets
   $ 118    $ 209


In thousands	November 3, 2019		October 28, 2018
Derivatives designated as cash flow hedges:
Other current assets	$	132	$	504
Derivatives not designated as hedging instruments:
Other current assets	$	—	$	118

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~~

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TE I. FAIR VALUE MEASUREMENTS

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

We determine the fair value of financial and

non-financial

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

Fair Value Measurement

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

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

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

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

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

Long-term Debt

As of ~~October 28, 2018,~~November 3, 2019, the fair value of our long-term debt approximates its carrying value and is based on observable Level 2 inputs, primarily market interest rates for instruments with similar maturities.

Foreign Currency Derivatives and Hedging Instruments

We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use

mid-market

pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.

The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and

non-performance

to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts ~~that we have~~ entered into are subject to credit risk-related contingent features or collateral requirements.

~~Property and Equipment~~

Long-lived Assets

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure ~~these assets~~property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. ~~The fair~~We measure

right-of-use

assets on a nonrecurring basis using Level 2 unobservable inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate ~~that approximates our weighted average cost of capital.~~

commensurate with the risk.

There were no transfers between Level 1, 2 or 3 categories during the thirteen and thirty-nine weeks ended November 3, 2019 or October 28, ~~2018 or October 29, 2017.~~

2018.

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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in ~~accumulated~~accum

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

In thousands
Foreign Currency
Translation

Cash Flow
Hedges

Accumulated Other
Comprehensive
Income (Loss)

Balance at January 28, 2018
   $ (6,227 ) $ (555 ) $ (6,782 )
Foreign currency translation adjustments
   (1,145 ) —   (1,145 )
Change in fair value of derivative financial instruments
   —   1,123 1,123
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   49 49
Other comprehensive income (loss)
   (1,145 ) 1,172 27
Balance at April 29, 2018
   (7,372 ) 617 (6,755 )
Foreign currency translation adjustments
   (2,993 ) —   (2,993 )
Change in fair value of derivative financial instruments
   —   6 6
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   —   —
Other comprehensive income (loss)
   (2,993 ) 6 (2,987 )
Balance at July 29, 2018
   (10,365 ) 623 (9,742 )
Foreign currency translation adjustments
   (1,830 ) —   (1,830 )
Change in fair value of derivative financial instruments
   —   (65 ) (65 )
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   (120 ) (120 )
Other comprehensive income (loss)
   (1,830 ) (185 ) (2,015 )
Balance at October 28, 2018
   $ (12,195 ) $ 438 $ (11,757 )
Balance at January 29, 2017
   $ (9,957 ) $ 54 $ (9,903 )
Foreign currency translation adjustments
   (1,566 ) —   (1,566 )
Change in fair value of derivative financial instruments
   —   655 655
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   (16 ) (16 )
Other comprehensive income (loss)
   (1,566 ) 639 (927 )
Balance at April 30, 2017
   (11,523 ) 693 (10,830 )
Foreign currency translation adjustments
   3,390 —   3,390
Change in fair value of derivative financial instruments
   —   (1,166 ) (1,166 )
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   7 7
Other comprehensive income (loss)
   3,390 (1,159 ) 2,231
Balance at July 30, 2017
   (8,133 ) (466 ) (8,599 )
Foreign currency translation adjustments
   40 —   40
Change in fair value of derivative financial instruments
   —   373 373
Reclassification adjustment for realized (gain) loss on derivative financial instruments¹
   —   (128 ) (128 )
Other comprehensive income (loss)
   40 245 285
Balance at October 29, 2017
   $ (8,093 ) $ (221 ) $ (8,314 )

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


In thousands	Foreign Currency Translation			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at February 3, 2019	$	(11,259	)	$	186		$	(11,073	)
Foreign currency translation adjustments		(3,009	)		—			(3,009	)
Change in fair value of derivative financial instruments		—			204			204
Reclassification adjustment for realized (gain) loss on derivative financial instruments		—			(67	)		(67	)
Other comprehensive income (loss)		(3,009	)		137			(2,872	)
Balance at May 5, 2019		(14,268	)		323			(13,945	)
Foreign currency translation adjustments		(1,251	)		—			(1,251	)
Change in fair value of derivative financial instruments		—			(132	)		(132	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments		—			(160	)		(160	)
Other comprehensive income (loss)		(1,251	)		(292	)		(1,543	)
Balance at August 4, 2019		(15,519	)		31			(15,488	)
Foreign currency translation adjustments		1,783			—			1,783
Change in fair value of derivative financial instruments		—			5			5
Reclassification adjustment for realized (gain) loss on derivative financial instruments		—			(8	)		(8	)
Other comprehensive income (loss)		1,783			(3	)		1,780
Balance at November 3, 2019	$	(13,736	)	$	28		$	(13,708	)

Balance at January 28, 2018	$	(6,227	)	$	(555	)	$	(6,782	)
Foreign currency translation adjustments		(1,145	)		—			(1,145	)
Change in fair value of derivative financial instruments		—			1,123			1,123
Reclassification adjustment for realized (gain) loss on derivative financial instruments		—			49			49
Other comprehensive income (loss)		(1,145	)		1,172			27
Balance at April 29, 2018		(7,372	)		617			(6,755	)
Foreign currency translation adjustments		(2,993	)		—			(2,993	)
Change in fair value of derivative financial instruments		—			6			6
Other comprehensive income (loss)		(2,993	)		6			(2,987	)
Balance at July 29, 2018		(10,365	)		623			(9,742	)
Foreign currency translation adjustments		(1,830	)		—			(1,830	)
Change in fair value of derivative financial instruments		—			(65	)		(65	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments		—			(120	)		(120	)
Other comprehensive income (loss)		(1,830	)		(185	)		(2,015	)
Balance at October 28, 2018	$	(12,195	)	$	438		$	(11,757	)

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NOTE K. ACQUISITION OF OUTWARD, INC.

On December 1, 2017, we acquired Outward, Inc. ~~(“Outward”)~~, a

3-D

imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,812,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of four years from the acquisition date, contingent upon their continued service during that time, and $4,498,000 primarily represents settlement of

pre-existing

obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post-combination compensation expense as they are earned.

The purchase consideration has been allocated based on estimates of the fair value of identifiable assets acquired and liabilities assumed, as set forth in the table below.

In thousands
Working capital and other assets
   $ 718,000
Property and equipment, net
   2,049,000
Intangible assets
   18,300,000
Liabilities
   (7,160,000 )
Total identifiable net assets acquired
   $ 13,907,000
Goodwill
   66,905,000
Total purchase consideration
   $ 80,812,000

~~During the second quarter of fiscal 2018, we finalized the valuation of intangible~~

Working capital and other assets	$	718,000
Property and equipment, net		2,049,000
Intangible assets		18,300,000
Liabilities		(6,886,000	)
Total identifiable net assets acquired	$	14,181,000
Goodwill		66,631,000
Total purchase consideration	$	80,812,000

Intangible assets acquired ~~which~~ primarily represent

3-D

imaging data and core intellectual property, which are being amortized over a useful life of four years. Goodwill is primarily attributable to expected synergies as a result of the acquisition, which include the leverage of acquired technology and talent to drive improved conversion, cost savings and operating efficiencies. None of the goodwill will be deductible for income tax purposes.

Outward, Inc. is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Condensed Consolidated Financial Statements from the acquisition date. Pro forma results of Outward have not been presented as the results are insignificant to our Condensed Consolidated Financial Statements for all periods presented and would not have been significant had the acquisition occurred at the beginning of fiscal 2017.

NOTE L. REVENUE

The majority of our revenues are generated from sales of merchandise to our customers ~~either in~~through our

e-commerce

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

co-branded

credit cards.

We recognize revenue as control of promised goods or services are transferred to our customers. We record a liability at each period end where we have an obligation to transfer goods or services for which we have received consideration or have a right to consideration. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services.

See Note E for ~~disaggregation~~a discussion of our net revenues by ~~reportable~~operating segment.

Merchandise Sales

Revenues from the sale of our merchandise through our

e-commerce ~~channel,~~

websites, at our retail stores, as well as to our franchisees and wholesale customers are, in each case, recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the end customer. For merchandise delivered to the customer, control is transferred when either delivery has been completed, or we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

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Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of November 3,

2019 and October 28, 2018, we recorded a liability for expected sales returns of approximately $23,447,000 and $25,555,000 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $9,221,000 and $9,567,000 within other current assets in our Condensed Consolidated Balance Sheet.

Stored-value Cards

We issue stored-value cards that may be redeemed on future merchandise ~~purchases at our stores or through oure-commerce~~ ~~channel.~~purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards ~~(breakage)~~(“breakage”) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately four years, the majority of which is recognized within one year of the card issuance. Breakage revenue is not material to our Condensed Consolidated Financial Statements.

Credit Card Incentives

We enter into agreements with credit card issuers in connection with our private label and

co-branded

credit cards whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to end customers. Services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term.

Customer Loyalty Programs

We have customer loyalty programs which allow members to earn points for each qualifying purchase. Points earned enable members to receive certificates that may be redeemed on future merchandise ~~purchases at our stores or through oure-commerce~~ ~~channel.~~purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Condensed Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms

less than one year, as our certificates generally expire within 6 months from issuance.

Deferred Revenue

We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, and incentives received from credit card issuers. As of ~~October 28, 2018,~~November 3, 2019, we held ~~$275,567,000~~

approximately

$300,354,000 in gift card and other deferred revenue on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized ~~into~~as revenue within the next 12 months.

~~Adoption~~

NOTE M. LEASES

We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations with initial terms generally ranging from
2
to
22
years. We determine whether an arrangement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of ~~ASU2014-09~~

the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset.

The ~~adoption~~rental payments for our store leases are typically structured as either: minimum rent; minimum rate with stated increases or increases based on a future index; rent based on a percentage of ~~ASU2014-09~~ ~~most significantly impacted~~store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our ~~Condensed Consolidated Financial Statements as follows:~~

calculation of lease liabilities. Our variable lease payments include: rent payments that are based on a percentage of sales; contingent payments until the ~~reclassification from selling, general~~resolution of the contingency is reasonably certain; and ~~administrative expenses into net revenues~~rent increases based on a future index.

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Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and

non-lease

components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a

right-of-use

asset for ~~certain incentives received from credit card issuers,~~

an amount equal to the ~~reclassification of breakage income related~~lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and

right-of-use

asset when a change to our ~~unredeemed stored-value cards from selling, general~~future minimum lease payments occurs. Key assumptions and ~~administrative expenses into net revenues, as well as an acceleration~~judgments included in the ~~timing~~determination of ~~recognizing breakage income,~~

the lease liability include the discount rate applied to determine the present value of the future lease payments, and whether we are reasonably certain to exercise lease renewal and termination options.

~~an acceleration~~

Many of our leases contain renewal options and early termination options. The option periods are generally not included in the ~~timing~~lease term used to measure our lease liabilities and

right-of-use

assets upon commencement as exercise of ~~revenue recognition~~the options is not reasonably certain. We remeasure the lease liability and

right-of-use

asset when we are reasonably certain to exercise a renewal or early termination option.

Discount Rate

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

in a similar economic environment.

~~the recording~~

The components of ~~a right of return asset for merchandise we expect to receive back from customers of $9,567,000.~~

~~The following summarizes the impact of adopting ASU2014-09~~ ~~on our Condensed Consolidated Statement of Earnings~~lease costs for the thirteen and thirty-nine weeks ended ~~October 28, 2018.~~

   Thirteen Weeks Ended October 28, 2018    Thirty-nine Weeks Ended October 28, 2018
In thousands
As
Reported

ASU 2014-09
Adjustment¹

As
Adjusted

As
Reported

ASU 2014-09
Adjustment¹

As
Adjusted

Net revenue
   $ 1,356,983    $ (17,390 ) $ 1,339,593    $ 3,835,157    $ (59,322 ) $ 3,775,835
Cost of goods sold
   861,999    (2,775 ) 859,224    2,444,067    (11,176 ) 2,432,891
Gross profit
   494,984    (14,615 ) 480,369    1,391,090    (48,146 ) 1,342,944
Selling, general and administrative expenses
   400,600    (10,334 ) 390,266    1,155,990    (33,504 ) 1,122,486
Operating income
   $ 94,384    $ (4,281 ) $ 90,103    $ 235,100    $ (14,642 ) $ 220,458

~~Net revenue adjustment is primarily associated with the reclassification of other~~November 3, 2019 are as follows:

In thousands

Thirteen
weeks ended
November 3, 2019

Thirty-nine
weeks ended
November 3, 2019

Operating lease costs
$
68,909
$
200,020

Variable lease costs

5,816

15,579

Total lease costs
$
74,725
$
215,599

Sublease income ~~from selling, general and administrative expenses into net revenues due to the adoption of ASU2014-09.~~

~~Other than the presentation of our sales returns liability~~ and a right of return asset, which resulted in a reclassification of liabilities into other current assets of approximately $9,567,000, all other impacts to our Condensed Consolidated Balance Sheet from the adoption of this ASUshort-term lease costs were not material ~~either individually or in~~to us for the ~~aggregate as of October 28, 2018. The adoption of this ASU had no net impact to our Condensed Consolidated Statement of Cash Flows for the~~thirteen and thirty-nine weeks ended November 3 ,2019.

Supplemental cash flow information related to our leases for the thirteen and thirty-nine weeks ended November 3, 2019

as follows:


In thousands	Thirteen weeks ended November 3, 2019		Thirty-nine weeks ended November 3, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	71,136	$	212,530
Net additions to right-of-use assets		38,311		120,704

As of November 3, 2019, additional information related to our leases is as follows:


Weighted average remaining lease term (years)	7.43
Weighted average incremental borrowing rate	3.72	%

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As of November 3, 2019, the future minimum lease payments under our operating lease liabilities are as follows:


In thousands
Remaining fiscal 2019	$	66,826
Fiscal 2020		273,977
Fiscal 2021		240,772
Fiscal 2022		207,974
Fiscal 2023		174,827
Fiscal 2024		151,029
Fiscal 2025 and thereafter		453,319
Total lease payments		1,568,724
Less interest		(215,791	)
Total operating lease liabilities		1,352,933
Less current operating lease liabilities		(225,530	)
Total non-current operating lease liabilities	$	1,127,403

As previously disclosed in our 2018 Annual Report on Form

10-K

and under the previous lease accounting standard, future minimum lease payments under

non-cancellable

operating leases as of February 3, 2019 were as follows:


In thousands
Fiscal 2019	$	292,387
Fiscal 2020		262,429
Fiscal 2021		225,755
Fiscal 2022		190,263
Fiscal 2023		160,308
Thereafter		559,802
Total	$	1,690,944

Memphis-Based Distribution Facility

In fiscal 2015, we entered into an agreement with a partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties to lease a distribution facility in Memphis, Tennessee through July 2017.

n fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additional

one-year

renewal options. Rental payments under this agreement including applicable taxes, insurance and maintenance expenses were not material to us for the thirteen or thirty-nine weeks ended November 3, 2019 or October 28, 2018.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form

10-Q

contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: our strategic initiatives; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash; our future compliance with the financial covenants contained in our credit facilities; our belief that our cash

on-hand,

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

10-K

for the year ended ~~January 28, 2018,~~February 3, 2019, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

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OVERVIEW

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

e-commerce

websites, direct-mail catalogs and ~~633~~626 stores. These brands are also part of The Key Rewards, our

free-to-join

loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as

e-commerce

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

3-D

imaging and augmented reality platform for the home furnishings and décor industry.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended ~~October 28, 2018~~November 3, 2019 (“third quarter of fiscal ~~2018”~~2019”), as compared to the thirteen weeks ended October ~~29, 2017~~28, 2018 (“third quarter of fiscal ~~2017”~~2018”) and the thirty-nine weeks ended ~~October 28, 2018~~November 3, 2019

(“year-to-date

fiscal ~~2018”~~2019”), as compared to the thirty-nine weeks ended October ~~29, 2017~~28, 2018

(“year-to-date

fiscal ~~2017”~~2018”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto.

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

Third ~~quarter~~Quarter of Fiscal ~~2018~~2019 Financial Results

West Elm’s results this quarter were driven by strong growth strategies and effective execution. Comparable revenue growth accelerated to 14.1% this quarter with strength across all product categories and channels. The Pottery Barn brands also maintained their strong momentum from last quarter. In Pottery Barn, comparable revenue growth was 3.4% driven by our initiatives, including our curated Pottery Barn Marketplace assortment and ~~Williams Sonoma, with particular strength~~our Apartment assortment of smaller space solutions. Their performance was also driven by strong digital growth including double-digit increases in ~~furniture,~~traffic and ~~a 0.2% increase in retail net revenues primarily due to growth in West Elm partially offset by a decline in our franchise operations and~~product engagement. In Pottery Barn Kids and ~~Teen. Total net~~Teen, comparable revenue growth ~~for~~was 4.0%. We continue to see strong growth in both our baby business and our high quality dorm room bedding, furniture and

no-nails

decoration solutions. In the Williams Sonoma brand, the 2.1% comparable revenue decline was primarily driven by sales shortfalls in electrics, bakeware, housewares and our Halloween assortments. Despite this, we were encouraged that execution against our transformation plan has shown improved profitability, and our Williams Sonoma branded products continued to gain momentum. Our emerging brands, Rejuvenation and Mark & Graham, drove another quarter of strong, profitable growth as they continue to scale and attract new customers.

Gross profit in the third quarter of fiscal 2019 decreased to 35.9% of revenues versus 36.5% in the third quarter of fiscal 2018, ~~also included a double-digit net revenue increase in our company-owned international operations,~~primarily driven by the incremental impact from the China tariffs, as well as increased shipping costs due to a higher mix of furniture sales. Despite the ~~favorable~~tariff impact almost doubling from the second quarter of fiscal 2019, our margins sequentially improved because of the ~~adoption~~continued success we are seeing from all of ~~ASU2014-09~~ ~~primarily associated~~our mitigation efforts.

We have been executing against an aggressive tariff mitigation plan which includes cost reductions from vendors, moving production out of China to South East Asia and to the United States, cost savings in other areas of the business, as well as select price increases. These efforts combined with ~~the reclassification of other income from~~our higher product margins,

on-going

occupancy leverage, overall selling, general and administrative ~~expenses into net revenues (see Note L to~~leverage from higher sales and the continued benefits of our ~~Condensed Consolidated Financial Statements). Net revenue growth was unfavorably impacted by an unexpected delay in product receipts~~cost savings initiatives across the business, offset the financial impact from ~~China, which impacted our ability to fill customer orders placed in the third quarter, as well as a higher than expected amount of drop-ship sales which take longer to fulfill.~~

these increased costs.

In the third quarter of fiscal ~~2018,~~2019, diluted earnings per share was ~~$1.00~~$0.94 (which included a ~~$0.13 benefit associated with U.S. tax legislation,~~$0.07 impact from acquisition-related compensation expense, amortization of intangible assets, and the operations of Outward, Inc.) versus $1.00 in the third quarter of fiscal 2018 (which included a $0.06 impact related to Outward, Inc., a $0.02 impact ~~related to~~from employment-related ~~expense associated with aone-time~~ ~~special equity grant, and~~expenses, a $0.01 impact ~~primarily associated with~~related to impairment and early lease termination ~~charges) versus $0.84 in~~charges, and a $0.13 net tax benefit from the Tax Cuts and Jobs Act). We also returned $78,289,000 to our stockholders through dividends and stock repurchases.

Operationally during the third quarter of fiscal ~~2017. We also returned $80,726,000 to our stockholders through stock repurchases and dividends.~~

~~In the third quarter of fiscal 2018,~~2019, we also made progress across our strategic initiatives of driving growth through cross-brand initiatives and improving the customer experience through technology innovation and operational improvements.

A key driver of our growth this quarter was the focus on our ~~four strategic priorities~~portfolio of ~~digital leadership, product innovation, retail transformation~~brands. The Key Rewards continues to be an impactful driver of revenues and ~~operational excellence.~~

~~In digital leadership, we~~customer acquisition as total membership continued to ~~leverage~~grow during the ~~power~~quarter. Our cross-brand

Business-to-Business

division also delivered another strong quarter of ~~our multi-brand portfolio, launching two new cross-brand initiatives,~~revenue growth and marked the ~~customer-facing version~~successful relaunch of our ~~professional design tool, Design Crew Room Planner,~~

business-to-business

membership program.

Also, during the quarter, we made substantial progress on our ongoing efforts to improve the customer experience. In technology innovation, we have improved our product information page, site speed, enhanced the search experience, and added new capabilities to display lifestyle room imagery and product information, as well as

add-to-cart

functionality in our ~~cross-brand registry program that allows customers~~shoppable rooms. In our supply

Table of Contents

chain this quarter, technology is facilitating faster and more streamlined order processing through a number of enhancements and, to ~~create~~further improve order visibility, we are continually building on our framework to provide more accurate, data-driven delivery estimates to customers. Further, within our

in-home

furniture delivery network, we’ve expanded the rollout of a ~~registry across~~same day delivery order tracking program. Additionally, our brands all in one place. In addition to these initiatives, our cross-brand loyalty program, The Key, continued to gain momentum. We also expanded our cross-channel shopping capabilities with Buy Online~~Pick-up~~ ~~in Store in the Pottery Barn and~~ West Elm ~~brands.~~

~~In product innovation we expanded~~West Coast distribution center in Fontana, California is now fully operational, facilitating growth for our partnership with the Harry Potter franchise and coordinated the releases of our One Home collection to all three Pottery Barn brands. We also introduced Design Crew Basics, a proprietary collection of low price, high quality essentials for the home. In addition, our incremental growth initiatives, such as PB Apartment and Modern Baby, continued to attract new customers. In Williams Sonoma, our customers continued to respond to unique innovations only available through our brand, and West Elm brand on the West Coast.

We believe that our continued ~~to see customers respond positively to the brand’s aesthetic, scale~~focus on evolution and ~~price point.~~

Under our strategic priority of retail transformation, we continued to execute on our remodel strategy while selectively investing in new stores. In our global business we continued to expand our presence with the introduction of Pottery Barn Kids in three new~~shop-in-shop~~ ~~locations as well ase-commerce~~ ~~in the United Kingdom. We also entered into a new franchise partnership in India for entry in early 2020.~~

We also remain committed to operational excellence. During the third quarter, we continued to drive efficiency improvements and cost reductions throughout the supply chain. Production shipments from our domestic manufacturing facility increased during the quarter, and we further reduced company-wide damages. We made progress on our multi-year transition to One Inventory, which will allow us to~~re-engineer~~ inventory flow processes, better allocate inventory cross-channel, optimize inventory levels, improve our distribution center efficiency and bring down costs in the supply chain. And, despite tightness in the labor market, we are aheadinnovation is reflected in our ~~seasonal hiring compared to last year, helped by the recent increase in hourly wage and incentive pay in~~business results. Our value proposition of high quality,

design-led,

sustainable products combined with our ~~distribution centers.~~

multi-brand, digital-first operating model is a strong combination.

NET REVENUES

Net revenues primarily consist of~~e-commerce~~ ~~net revenues and retail net revenues.E-commerce~~ ~~net revenues include~~ sales of merchandise to our customers through our

e-commerce

websites, ~~and our~~direct mail catalogs, ~~as well as shipping fees. Retail net revenues include sales of merchandise to customers~~and at our retail stores and ~~to our franchisees, as well as~~include 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~~Our revenues also include sales ~~returns~~to our franchisees and ~~other discounts.~~

   Thirteen Weeks Ended Thirty-nine Weeks Ended
In thousands
October 28,
2018
   % Total
October 29,
2017
   % Total
October 28,
2018
   % Total
October 29,
2017
   % Total
E-commerce net revenues
   $ 746,716    55.0 % $ 690,045    53.1 % $ 2,079,838    54.2 % $ 1,901,348    52.6 %
Retail net revenues
   610,267    45.0 % 609,291    46.9 % 1,755,319    45.8 % 1,711,101    47.4 %
Net revenues
   $ 1,356,983    100.0 % $ 1,299,336    100.0 % $ 3,835,157    100.0 % $ 3,612,449    100.0 %
wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and

co-branded

credit cards.

Net revenues in the third quarter of fiscal ~~2018~~2019 increased by ~~$57,647,000,~~$85,489,000, or ~~4.4%~~6.3%, compared to the third quarter of fiscal ~~2017,~~2018, with comparable brand revenue growth of ~~3.1%~~5.5%. ~~The increase in net revenues was driven by an 8.2% increase in oure-commerce~~ net revenues primarily driven by West Elm, Pottery Barn and Williams Sonoma, with particular strength in furniture, and a 0.2% increase in retail net revenues primarily due to growth in West Elm partially offset by a decline in our franchise operations and Pottery Barn Kids and Teen. Total net revenue growth for the third quarter of fiscal 2018 also included a double-digit net revenue increase in our company-owned international 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 L to our Condensed Consolidated Financial Statements). Net revenueThis growth was unfavorably impacted by an unexpected delay in product receipts from China, which impacted our ability to fill customer orders placed in the third quarter, as well as a higher than expected amount of drop-ship sales which take longer to fulfill.

~~Net revenues foryear-to-date~~ ~~fiscal 2018 increased by $222,708,000, or 6.2%, compared toyear-to-date~~ ~~fiscal 2017, with comparable brand revenue growth of 4.4%. The increase in net revenues was driven by a 9.4% increase in oure-commerce~~ ~~net revenues with growth across all brands and a 2.6% increase in our retail net revenues~~ primarily driven by West Elm and Pottery ~~Barn, with particular strength in furniture.~~Barn. Net revenue growth ~~also~~ included a ~~double-digit net revenue~~9.2% increase in international revenue across both our company-owned ~~international operations, as well as the favorable impact~~and franchise operations.

Net revenues for

year-to-date

fiscal 2019 increased by $219,261,000, or 5.7%, compared to

year-to-date

fiscal 2018, with comparable brand revenue growth of ~~the adoption of ASU2014-09~~5.2%. This growth was primarily ~~associated with the reclassification of other income from selling, general~~driven by West Elm and ~~administrative expenses into net revenues (see Note L to our Condensed Consolidated Financial Statements).~~Pottery Barn. Net revenue growth ~~was unfavorably impacted by an unexpected delay~~included a 8.9% increase in ~~product receipts from China, which impacted~~international revenue across both our ~~ability to fill customer orders placed in the third quarter, as well as a higher than expected amount of drop-ship sales which take longer to fulfill.~~

company-owned and franchise operations.

Comparable Brand Revenue

Comparable brand revenue includes ~~retail~~ comparable store sales and

e-commerce

sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and

e-commerce

websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.

   Thirteen
Weeks Ended Thirty-nine
Weeks Ended
Comparable brand revenue growth (decline)
October 28,
2018

October 29,
2017

October 28,
2018

October 29,
2017

Pottery Barn
   1.4 % (0.3 %) 2.0 % (0.2 %)
West Elm
   8.3 % 11.5 % 8.9 % 9.4 %
Williams Sonoma
   2.1 % 2.3 % 3.1 % 2.5 %
Pottery Barn Kids and Teen¹
   0.0 % 0.9 % 3.4 % (3.0 %)
Total
   3.1 % 3.3 % 4.4 % 2.1 %


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
Comparable brand revenue growth (decline)	November 3, 2019			October 28, 2018			November 3, 2019			October 28, 2018
Pottery Barn		3.4	%		1.4	%		3.1	%		2.0	%
West Elm		14.1	%		8.3	%		14.5	%		8.9	%
Williams Sonoma		(2.1	%)		2.1	%		(1.6	%)		3.1	%
Pottery Barn Kids and Teen		4.0	%		0.0	%		3.1	%		3.4	%
Total 1		5.5	%		3.1	%		5.2	%		4.4	%

1	~~The performance~~Total comparable brand revenue growth includes the results of ~~the Pottery Barn Kids~~Rejuvenation and ~~PBteen brands are being reported on a combined basis as Pottery Barn Kids~~Mark and ~~Teen.~~ Graham.

STORE DATA

   Store Count    Average Leased Square
Footage Per Store

July 29,
2018
   Openings    Closings
October 28,
2018

October 29,
2017

October 28,
2018

October 29,
2017

Williams Sonoma
   226    —      —   226    233    6,800    6,700
Pottery Barn
   205    —      —   205    202    13,900    13,900
West Elm
   109    3    —   112    105    13,200    13,100
Pottery Barn Kids
   84    —      (2 ) 82    88    7,500    7,400
Rejuvenation
   8    —      —   8    8    8,800    8,800
Total
   632    3    (2 ) 633    636    10,300    10,200
Store selling square footage atperiod-end

      4,084,000    4,031,000
Store leased square footage atperiod-end

      6,551,000    6,468,000


	Store Count										Average Leased Square Footage Per Store
	August 4, 2019		Openings		Closings		November 3, 2019		October 28, 2018		November 3, 2019		October 28, 2018
Williams Sonoma		218		—		—		218		226		6,900		6,800
Pottery Barn		205		—		—		205		205		14,400		13,900
West Elm		112		2		—		114		112		13,100		13,200
Pottery Barn Kids		78		1		—		79		82		7,500		7,500
Rejuvenation		10		—		—		10		8		8,500		8,800
Total		623		3		—		626		633		10,600		10,300
Store selling square footage at period-end												4,154,000		4,084,000
Store leased square footage at period-end												6,622,000		6,551,000

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COST OF GOODS SOLD

   Thirteen Weeks Ended Thirty-nine Weeks Ended
In thousands
October 28,
2018

% Net
Revenues

October 29,
2017

% Net
Revenues

October 28,
2018

% Net
Revenues

October 29,
2017

% Net
Revenues

Cost of goods sold¹
   $ 861,999    63.5 % $ 832,269    64.1 % $ 2,444,067    63.7 % $ 2,326,911    64.4 %


	Thirteen Weeks Ended										Thirty-nine Weeks Ended
In thousands	November 3, 2019		% Net Revenues			October 28, 2018		% Net Revenues			November 3, 2019		% Net Revenues			October 28, 2018		% Net Revenues
Cost of goods sold 1	$	924,300		64.1	%	$	861,999		63.5	%	$	2,608,054		64.3	%	$	2,444,067		63.7	%

Includes total occupancy expenses of ~~$177,261,000~~$179,237,000 and ~~$171,161,000~~$177,261,000 for the third quarter of fiscal ~~2018~~2019 and the third quarter of fiscal ~~2017,~~2018, respectively, and $529,905,000 and $521,544,000 for
year-to-date
fiscal 2019 and ~~$507,013,000 for~~
year-to-date
fiscal 2018, ~~andyear-to-date~~ ~~fiscal 2017,~~ respectively.

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

freight-to-store

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

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

non-occupancy

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

~~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.~~

Third ~~quarter~~Quarter of Fiscal ~~2018~~2019 vs. Third ~~quarter~~Quarter of Fiscal ~~2017~~

2018

Cost of goods sold increased by ~~$29,730,000,~~$62,301,000, or ~~3.6%~~7.2%, in the third quarter of fiscal ~~2018~~2019 compared to the third quarter of fiscal ~~2017.~~2018. Cost of goods sold as a percentage of net revenues ~~decreased~~increased to 64.1% in the third quarter of fiscal 2019 from 63.5% in the third quarter of fiscal ~~2018 from 64.1% in the third quarter of fiscal 2017.~~2018. This ~~decrease~~increase was primarily driven by the incremental impact from the China tariffs, as well as increased shipping costs due to a higher ~~selling margins and~~mix of furniture sales, partially offset by the leverage of occupancy ~~costs, 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~~costs.

Year-to-Date

Fiscal 2019 vs.

Year-to-Date

Fiscal 2018

Cost of goods sold ~~as a percentage of net revenues decreased in the third quarter of~~ increased by $163,987,000, or 6.7%, for

year-to-date

fiscal ~~2018~~2019 compared to ~~the third quarter of~~

year-to-date

fiscal ~~2017, primarily driven by higher selling margins.~~

~~In the retail channel, cost~~2018. Cost of goods sold as a percentage of net revenues increased ~~in the third quarter of~~ to 64.3% for

year-to-date

fiscal ~~2018 compared to the third quarter of fiscal 2017, primarily driven by occupancy expense deleverage, partially offset by higher selling margins.~~

~~Year-to-Date~~ ~~Fiscal 2018 vs.Year-to-Date~~ ~~Fiscal 2017~~

~~Cost of goods sold increased by $117,156,000, or 5.0%, foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ ~~fiscal 2017. Cost of goods sold as a percentage of net revenues decreased to~~2019 from 63.7% for

year-to-date

fiscal ~~2018 from 64.4% foryear-to-date~~ ~~fiscal 2017.~~2018. This ~~decrease~~increase was primarily driven by the ~~leverage of occupancy costs and higher selling margins and includes the favorable~~incremental impact from the ~~adoption~~China tariffs as well as increased shipping costs due to a larger mix 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 foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ ~~fiscal 2017, primarily driven~~furniture sales, partially offset by ~~higher selling margins.~~

~~In the retail channel, cost of goods sold as a percentage of net revenues decreased foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ ~~fiscal 2017, primarily driven by higher selling margins and~~ the leverage of occupancy costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   Thirteen Weeks Ended Thirty-nine Weeks Ended
In thousands
October 28,
2018

% Net
Revenues

October 29,
2017

% Net
Revenues

October 28,
2018

% Net
Revenues

October 29,
2017

% Net
Revenues

Selling, general and administrative expenses
   $ 400,600    29.5 % $ 356,254    27.4 % $ 1,155,990    30.1 % $ 1,030,667    28.5 %


	Thirteen Weeks Ended										Thirty-nine Weeks Ended
In thousands	November 3, 2019		% Net Revenues			October 28, 2018		% Net Revenues			November 3, 2019		% Net Revenues			October 28, 2018		% Net Revenues
Selling, general and administrative expenses	$	416,281		28.9	%	$	400,600		29.5	%	$	1,184,176		29.2	%	$	1,155,990		30.1	%

Selling, general and administrative expenses consist of

non-occupancy

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

~~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.~~

Third ~~quarter~~Quarter of Fiscal ~~2018~~2019 vs. Third ~~quarter~~Quarter of Fiscal ~~2017~~

2018

Selling, general and administrative expenses increased by ~~$44,346,000,~~$15,681,000, or ~~12.4%~~3.9%, in the third quarter of fiscal ~~2018~~2019 compared to the third quarter of fiscal ~~2017.~~2018. Selling, general and administrative expenses as a percentage of net revenues ~~increased~~decreased to 28.9% in the third quarter of fiscal 2019 from 29.5% in the third quarter of fiscal ~~2018 from 27.4% in the third quarter of fiscal 2017.~~2018. This ~~increase~~decrease as a percentage of net revenues was driven by ~~lower incentive compensation~~the leverage of employment and advertising costs ~~last year~~ from ~~a reduction in performance-related compensation that was not earned, increased hourly wages from~~higher sales and the ~~reinvestment~~continued benefits of ~~tax~~our cost savings ~~an increase in general expenses primarily from~~initiatives across the ~~reclassification of other income from selling,~~business, as well as our overall expense discipline.

Year-to-Date

Fiscal 2019 vs.

Year-to-Date

Fiscal 2018

Selling, general and administrative expenses ~~into net revenues due to the adoption of ASU2014-09,~~ ~~and the impact from our acquisition of Outward in the fourth quarter of~~ increased by $28,186,000, or 2.4%, for

year-to-date

fiscal ~~2017. 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 the third quarter of fiscal 2018~~2019 compared to ~~the third quarter of~~

year-to-date

fiscal 2017, primarily driven by an increase in general expenses primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues, and the impact from our acquisition of Outward, partially offset by the optimization of catalog advertising costs.

~~In the retail channel, selling,~~2018. Selling, general and administrative expenses as a percentage of net revenues decreased ~~in the third quarter of~~ to 29.2% for

year-to-date

fiscal 2018 compared to the third quarter of fiscal 2017, primarily driven by the leverage of employment costs, partially offset by an increase in general expenses primarily associated with the reclassification of other income2019 from ~~selling, general and administrative expenses into net revenues.~~

~~Year-to-Date~~ ~~Fiscal 2018 vs.Year-to-Date~~ ~~Fiscal 2017~~

~~Selling, general and administrative expenses increased by $125,323,000, or 12.2%, foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ ~~fiscal 2017. Selling, general and administrative expenses as a percentage of net revenues increased to~~ 30.1% for

year-to-date

fiscal ~~2018 from 28.5% foryear-to-date~~ ~~fiscal 2017.~~2018. This ~~increase~~decrease as a percentage of net revenues was driven by ~~an increase in general expenses primarily~~the leverage of employment and advertising costs from higher sales and the ~~reclassification~~continued benefits of ~~other income from selling, general and administrative expenses into net revenues due to~~our cost savings initiatives across the ~~adoption of ASU2014-09,~~ ~~lower incentive compensation costs last year from a reduction in performance-related compensation that was not earned,~~business, as well as ~~increased hourly wages from the reinvestment~~our overall expense discipline.

Table of tax savings, the impact from our acquisition of Outward in the fourth quarter of fiscal 2017, 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 foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ fiscal 2017, primarily 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, and the increased hourly wages from the reinvestment of tax savings, partially offset by the optimization of catalog advertising costs.

Contents

~~In the retail channel, selling, general and administrative expenses as a percentage of net revenues increased foryear-to-date~~ ~~fiscal 2018 compared toyear-to-date~~ fiscal 2017, primarily driven by an increase in general expenses primarily associated with the reclassification of other income from selling, general and administrative expenses into net revenues and impairment and early lease termination charges related to underperforming retail stores.

INCOME TAXES

The effective tax rate was 25.4% for

year-to-date

fiscal 2019, and 22.5% for

year-to-date

fiscal 2018. Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the ~~SEC~~Securities and Exchange Commission in December 2017 ~~provides~~provided us with up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act ~~(“U.S. Tax Reform”)~~ on our fiscal year ended January 28, 2018. ~~As of January 28, 2018, we had made reasonable estimates of the income~~The lower effective tax ~~effects of U.S. Tax Reform, including the transition tax under Internal Revenue Code section 965.~~

~~As a result of the issuance of IRS Notice2018-26,~~ ~~we recorded a measurement period adjustment~~rate in ~~the first quarter of~~ fiscal 2018 was primarily due to increase the transition tax by approximately $2,871,000. In the second quarter of fiscal 2018, we finalized our valuation of intangible assets acquired in connection with the acquisition of Outward. As a result, we recorded an increase to tax expense of approximately $1,757,000 representing an adjustment to the~~re-measurement~~ of our deferred tax liabilities. In the third quarter of fiscal 2018, we finalized our measurement of the income tax effect of U.S. Tax Reform for certain items, which resulted in an $11,677,000 tax benefitSAB 118 adjustments from the

re-measurement

of our deferred tax assets ~~and a $2,909,000 tax benefit related to the transition tax.~~

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 U.S. Tax Reform, we are deemed to have distributed all of the post-1986 accumulated earnings of our foreign subsidiaries to the U.S. as of December 31, 2017. In light of the transition tax under U.S. Tax Reform, we made a determination that any undistributed foreign earnings as of January 28, 2018 are no longer indefinitely reinvested, resulting in an accrual of approximately $2,507,000 of foreign withholding tax and additional U.S. income taxrecorded in the third quarter of ~~fiscal~~ 2018. We currently intend to utilize the undistributed earnings of our foreign subsidiaries subsequent to January 28, 2018 in our foreign operations and will only repatriate such earnings when it is tax effective to do so.

~~The effective tax rate was 22.5% foryear-to-date~~ ~~fiscal 2018 and 35.5% foryear-to-date~~ fiscal 2017. The decrease in the effective tax rate was primarily due to the reduction of the U.S. corporate income tax rate from 35% to 21% as a result of U.S. Tax Reform, and the tax benefit from the remeasurement of our deferred tax assets.

~~In fiscal 2018, we are subject to several provisions of U.S. Tax Reform including a tax on global intangiblelow-taxed~~ income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”). We are accounting for GILTI as a periodic expense when the tax arises.

The ultimate impact of U.S. Tax Reform may differ from our provisional amounts due to changes in interpretations and assumptions and/or additional regulatory guidance that may be issued. We expect to revise our U.S. Tax Reform impact estimates as we refine our analysis of the new rules and as new guidance is issued. We expect to finalize accounting for the impact of U.S. Tax Reform under SAB 118 once our 2017 corporate income tax returns are filed in the fourth quarter of fiscal 2018.

LIQUIDITY AND CAPITAL RESOURCES

As of ~~October 28, 2018,~~November 3, 2019, we held ~~$164,414,000~~$155,025,000 in cash and cash equivalents, the majority of which was held in interest bearing demand deposit accounts and money market funds, and of which ~~$104,614,000~~$130,194,000 was held by our ~~foreign~~international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

In fiscal ~~2018,~~2019, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, property and equipment purchases, stock repurchases and dividend payments. In addition to our cash balances on hand, we have a $500,000,000 unsecured revolving line of credit (“the revolver”) ~~under our credit facility.~~and a $300,000,000 unsecured term loan facility (“the 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 revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. For

year-to-date

fiscal 2019, we had borrowings of $100,000,000 under the revolver, all of which was outstanding as of November 3, 2019. For

year-to-date

fiscal 2018, we had borrowings of $60,000,000 under the revolver, all of which was outstanding as of October 28, 2018. ~~Foryear-to-date~~ ~~fiscal 2017, we borrowed $170,000,000 under the revolver, all of which was outstanding as of October 29, 2017.~~ As of ~~October 28, 2018,~~November 3, 2019, we had $300,000,000 outstanding under our term loan. The term loan matures on January 8, 2021, at which point all outstanding principal and any accrued interest must be repaid. Additionally, as of ~~October 28, 2018,~~November 3, 2019, a total of ~~$11,728,000~~$12,402,000 in issued but undrawn standby letters of credit ~~were~~was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of ~~October 28, 2018,~~November 3, 2019, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which ~~$6,330,000~~$8,221,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we ~~had~~have 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 the next 12 months. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.

Cash Flows from Operating Activities

For

year-to-date

fiscal ~~2018,~~2019, net cash provided by operating activities was ~~$179,501,000~~$89,950,000 compared to ~~$112,930,000~~$179,501,000 for

year-to-date

fiscal ~~2017.~~2018. For

year-to-date

fiscal ~~2018,~~2019, net cash provided by operating activities was primarily attributable to net earnings adjusted for

non-cash

items, ~~and an increase in cash received for gift cards and other deferred revenue and deferred rent and lease incentives,~~ partially offset by an increase in merchandise inventories and a decrease in ~~income taxes~~accounts payable ~~and an increase~~. The decrease in ~~prepaid expenses and other assets. Net~~net cash provided by operating activities ~~increased~~for

year-to-date

fiscal 2019 compared to

year-to-date

fiscal ~~2017,~~2018 was primarily due to ~~lower merchandise inventory purchases and an increase~~a year-over-year reduction in ~~accrued expenses and other liabilities.~~

accounts payable due to the timing of payments.

Cash Flows from Investing Activities

For

year-to-date

fiscal ~~2018,~~2019, net cash used in investing activities was ~~$126,522,000~~$120,684,000 compared to ~~$135,363,000~~$126,522,000 for

year-to-date

fiscal ~~2017,~~2018, and was primarily attributable to purchases of property and equipment. ~~Net cash used in investing activities decreased compared toyear-to-date~~ ~~fiscal 2017, primarily due to a decrease in purchases of property and equipment.~~

Cash Flows from Financing Activities

For

year-to-date

fiscal ~~2018,~~2019, net cash used in financing activities was ~~$279,781,000~~$152,496,000 compared to ~~$101,105,000~~$279,781,000 for

year-to-date

fiscal ~~2017.~~2018. For

year-to-date

fiscal ~~2018,~~2019, net cash used in financing activities was ~~primarily~~ attributable to the payment of dividends, repurchases of common stock and ~~the payment of dividends~~tax withholdings related to stock-based awards, partially offset by borrowings under our revolver. ~~Net~~The decrease in cash used in financing activities ~~increased~~for

year-to-date

fiscal 2019 compared to

year-to-date

fiscal ~~2017,~~2018 was primarily ~~due~~attributable to a decrease in ~~borrowings under our revolver,~~repurchases of common stock, as well as an increase in ~~repurchases of common stock.~~

borrowings under our revolver.

Stock Repurchase Program and Dividends

See Note G to our Condensed Consolidated Financial Statements,

Stock Repurchase Program and Dividends,

within Item 1 of this Quarterly Report on Form

10-Q

for further information.

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Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the third quarter of fiscal ~~2018,~~2019, other than those discussed in ~~Note L~~Notes H, I and M to our Condensed Consolidated Financial Statements, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form

10-K

for the year ended ~~January 28, 2018.~~

February 3, 2019.

Seasonality

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, customer care centers and distribution facilities, and incur significant fixed catalog production and mailing costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations, and the effects of economic uncertainty which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

Our revolver and our term loan each have a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During ~~the third quarter of~~

year-to-date

fiscal ~~2018,~~2019, we had ~~$60,000,000 in~~ borrowings of $100,000,000 under ~~our~~the revolver, all of which was outstanding as of ~~October 28, 2018, and $300,000,000 outstanding under the term loan.~~November 3, 2019. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instruments would not materially affect our results of operations or cash flows.

In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of ~~October 28, 2018,~~November 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. Any foreign currency impact related to these international purchase transactions was not significant to us during the third quarter of fiscal ~~2018~~2019 or the third quarter of fiscal ~~2017. However, since~~2018. 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~~could subject us to the 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 ande-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 the third quarter of or

year-to-date

fiscal ~~2018~~2019 or the third quarter of or

year-to-date

fiscal ~~2017,~~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 H to our Condensed Consolidated Financial Statements).

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of ~~October 28, 2018,~~November 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

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communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is contained in Note F to our Condensed Consolidated Financial Statements within Part I of thisForm

10-Q.

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report onForm

10-K

for the fiscal year ended ~~January 28, 2018~~February 3, 2019 for a description of the risks and uncertainties associated with our business. ~~We are providing the following information regarding~~There were no material changes ~~that have occurred~~ to ~~the previously disclosed~~such risk factors in ~~our Form10-K.~~ ~~Except for such additional information, we believe there have been no material changes from~~ the ~~risk factors previously disclosed in our Form10-K.~~

~~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. While we expect there to be minimal financial impact on our fiscal 2018 results of operations, 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, including potential delays in product received from our vendors, our cost of goods sold and results of operations.

current quarterly reporting period.

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

The following table provides information as of ~~October 28, 2018~~November 3, 2019 with respect to shares of common stock we repurchased during the third quarter of fiscal ~~2018~~2019 under our ~~$500,000,000~~ stock repurchase program. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form

10-Q.

Fiscal period
Total Number
of Shares
Purchased¹

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of a Publicly
Announced Program¹

Maximum Dollar Value
of Shares That May
Yet Be Purchased
Under the Program

July 30, 2018 – August 26, 2018
   433,272    $ 58.70    433,272    $ 318,869,000
August 27, 2018 – September 23, 2018
   124,278    $ 68.79    124,278    $ 310,320,000
September 24, 2018 – October 28, 2018
   184,958    $ 61.75    184,958    $ 298,898,000
Total
   742,508    $ 61.15    742,508    $ 298,898,000


Fiscal period	Total Number of Shares Purchased 1		Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program 1		Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
August 5, 2019 – September 1, 2019		193,942	$	65.14		193,942	$	639,050,000
September 2, 2019 – September 29, 2019		186,285	$	66.37		186,285	$	626,687,000
September 30, 2019 – November 3, 2019		230,122	$	67.73		230,122	$	611,101,000
Total		610,349	$	66.49		610,349	$	611,101,000

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a) Exhibits


~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
10.1*
Exhibit Number				Exhibit Description
	10.1*			~~Fifth~~Sixth Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August ~~24, 2018~~23, 2019
	10.2*			~~Fifth~~Sixth Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August ~~24, 2018~~23, 2019
	10.3*			~~Fifth~~Sixth Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August ~~24, 2018~~23, 2019
	31.1*			Certification of Chief Executive Officer, pursuant to Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended
	31.2*			Certification of Chief Financial Officer, pursuant to Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended
	32.1**			Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2**			Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		~~XBRL Instance Document~~
101.SCH*		~~XBRL Taxonomy Extension Schema Document~~
101.CAL*	101*		~~XBRL Taxonomy Extension Calculation Linkbase Document~~	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended November 3, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags
101.DEF*	104*			Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Definition Linkbase Document~~
101.LAB*		~~XBRL Taxonomy Extension Label Linkbase Document~~
101.PRE*		~~XBRL Taxonomy Extension Presentation Linkbase Document~~and contained in the Interactive Data Files submitted under Exhibit 101).

*	Filed herewith.

**	~~Furnished, not filed.~~

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SIGNATURE

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


~~WILLIAMS-SONOMA, INC.~~

~~By:~~
WILLIAMS-SONOMA, INC.

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

Date: December ~~7, 2018~~

12, 2019


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
In thousands	October 28, 2018			October 29, 2017			October 28, 2018			October 29, 2017
Net earnings	$	81,465		$	71,313		$	178,346		$	163,785
Other comprehensive income (loss):
Foreign currency translation adjustments		(1,830	)		40			(5,968	)		1,864
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(23), $133, $378 and $(52)		(65	)		373			1,064			(138	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $43, $45, $19 and $48		(120	)		(128	)		(71	)		(137	)
Comprehensive income	$	79,450		$	71,598		$	173,371		$	165,374


In thousands, except per share amounts	October 28, 2018			January 28, 2018			October 29, 2017
ASSETS
Current assets
Cash and cash equivalents	$	164,414		$	390,136		$	90,779
Accounts receivable, net		113,582			90,119			92,282
Merchandise inventories, net		1,197,554			1,061,593			1,176,941
Prepaid catalog expenses		—			20,517			19,051
Prepaid expenses		94,071			62,204			69,267
Other current assets		21,805			11,876			12,141
Total current assets		1,591,426			1,636,445			1,460,461
Property and equipment, net		931,361			932,283			931,131
Deferred income taxes, net		45,999			67,306			131,793
Goodwill		85,649			18,838			18,769
Other long-term assets, net		64,324			130,877			38,230
Total assets	$	2,718,759		$	2,785,749		$	2,580,384
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	487,733		$	457,144		$	468,566
Accrued expenses		132,398			134,207			101,434
Gift card and other deferred revenue		275,567			300,607			299,031
Borrowings under revolving line of credit		60,000			—			170,000
Income taxes payable		9,903			56,783			48,865
Other current liabilities		71,119			59,082			49,655
Total current liabilities		1,036,720			1,007,823			1,137,551
Deferred rent and lease incentives		205,143			202,134			195,220
Long-term debt		299,571			299,422			—
Other long-term liabilities		85,388			72,804			75,439
Total liabilities		1,626,822			1,582,183			1,408,210
Commitments and contingencies – See Note F
Stockholders’ equity
Preferred stock: $.01 par value; 7,500 shares authorized; none issued		—			—			—
Common stock: $.01 par value; 253,125 shares authorized; 80,282, 83,726 and 84,478 shares issued and outstanding at October 28, 2018, January 28, 2018 and October 29, 2017, respectively		803			837			845
Additionalpaid-in capital		570,924			562,814			557,198
Retained earnings		532,172			647,422			623,170
Accumulated other comprehensive loss		(11,757	)		(6,782	)		(8,314	)
Treasury stock, at cost: 2, 11 and 11 shares as of October 28, 2018, January 28, 2018 and October 29, 2017, respectively		(205	)		(725	)		(725	)
Total stockholders’ equity		1,091,937			1,203,566			1,172,174
Total liabilities and stockholders’ equity	$	2,718,759		$	2,785,749		$	2,580,384


In thousands, except per share amounts	November 3, 2019			February 3, 2019			October 28, 2018
ASSETS
Current assets
Cash and cash equivalents	$	155,025		$	338,954		$	164,414
Accounts receivable, net		110,131			107,102			113,582
Merchandise inventories, net		1,258,541			1,124,992			1,197,554
Prepaid expenses		115,288			101,356			94,071
Other current assets		20,260			21,939			21,805

Total current assets		1,659,245			1,694,343			1,591,426

Property and equipment, net		915,740			929,635			931,361
Operating lease right-of-use assets		1,194,061			—			—
Deferred income taxes, net		41,763			44,055			45,999
Goodwill		85,355			85,382			85,649
Other long-term assets, net		67,660			59,429			64,324

Total assets	$	3,963,824		$	2,812,844		$	2,718,759

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	444,279		$	526,702		$	487,733
Accrued expenses		140,789			163,559			132,398
Gift card and other deferred revenue		296,157			290,445			275,567
Borrowings under revolving line of credit		100,000			—			60,000
Income taxes payable		13,182			21,461			9,903
Operating lease liabilities		225,530			—			—
Other current liabilities		68,973			72,645			71,119

Total current liabilities		1,288,910			1,074,812			1,036,720

Deferred rent and lease incentives		29,388			201,374			205,143
Long-term debt		299,769			299,620			299,571
Long-term operating lease liabilities		1,127,403			—			—
Other long-term liabilities		86,461			81,324			85,388

Total liabilities		2,831,931			1,657,130			1,626,822

Commitments and contingencies – See Note F
Stockholders’ equity
Preferred stock: $.01 par value; 7,500 shares authorized; NaN issued		—			—			—
Common stock: $.01 par value; 253,125 shares authorized; 77,612, 78,813 and 80,282 shares issued and outstanding at November 3, 2019, February 3, 2019 and October 28, 2018, respectively		777			789			803
Additional paid-in capital		594,991			581,900			570,924
Retained earnings		550,774			584,333			532,172
Accumulated other comprehensive loss		(13,708	)		(11,073	)		(11,757	)
Treasury stock, at cost: 14, 2 and 2 shares as of November 3, 2019, February 3, 2019 and October 28, 2018, respectively		(941	)		(235	)		(205	)

Total stockholders’ equity		1,131,893			1,155,714			1,091,937

Total liabilities and stockholders’ equity	$	3,963,824		$	2,812,844		$	2,718,759


In thousands	E-commerce		Retail		Unallocated			Total
Thirteen weeks ended October 28, 2018
Net revenues¹	$	746,716	$	610,267	$	—		$	1,356,983
Depreciation and amortization expense		9,877		21,574		15,907			47,358
Operating income (loss)²		152,204		45,052		(102,872	)		94,384
Capital expenditures		12,068		20,038		16,199			48,305
Thirteen weeks ended October 29, 2017
Net revenues¹	$	690,045	$	609,291	$	—		$	1,299,336
Depreciation and amortization expense		6,870		22,555		16,000			45,425
Operating income (loss)²		142,865		42,804		(74,856	)		110,813
Capital expenditures		13,184		22,066		17,844			53,094
Thirty-nine weeks ended October 28, 2018
Net revenues¹	$	2,079,838	$	1,755,319	$	—		$	3,835,157
Depreciation and amortization expense		26,874		67,067		47,226			141,167
Operating income (loss)²		432,245		101,035		(298,180	)		235,100
Assets³		874,259		1,156,075		688,425			2,718,759
Capital expenditures		26,820		55,728		45,778			128,326
Thirty-nine weeks ended October 29, 2017
Net revenues¹	$	1,901,348	$	1,711,101	$	—		$	3,612,449
Depreciation and amortization expense		20,625		67,282		47,566			135,473
Operating income (loss)²		410,008		99,110		(254,247	)		254,871
Assets³		732,842		1,156,117		691,425			2,580,384
Capital expenditures		24,173		61,851		49,797			135,821


In thousands	October 28, 2018		October 29, 2017
Contracts designated as cash flow hedges	$	13,300	$	23,000
Contracts not designated as cash flow hedges	$	5,200	$	48,000


In thousands	Thirteen Weeks Ended October 28, 2018			Thirteen Weeks Ended October 29, 2017		Thirty-nine Weeks Ended October 28, 2018		Thirty-nine Weeks Ended October 29, 2017
Net gain (loss) recognized in OCI	$	(88	)	$	506	$	1,442	$	(190	)
Net gain (loss) reclassified from OCI into cost of goods sold	$	163		$	173	$	90	$	185
Net foreign exchange gain (loss) recognized in selling, general and administrative expenses:
Instruments designated as cash flow hedges¹	$	16		$	20	$	49	$	75
Instruments not designated orde-designated	$	105		$	1,752	$	4,048	$	(1,096	)


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
Comparable brand revenue growth (decline)	October 28, 2018			October 29, 2017			October 28, 2018			October 29, 2017
Pottery Barn		1.4	%		(0.3	%)		2.0	%		(0.2	%)
West Elm		8.3	%		11.5	%		8.9	%		9.4	%
Williams Sonoma		2.1	%		2.3	%		3.1	%		2.5	%
Pottery Barn Kids and Teen¹		0.0	%		0.9	%		3.4	%		(3.0	%)
Total		3.1	%		3.3	%		4.4	%		2.1	%


	Store Count											Average Leased Square Footage Per Store
	July 29, 2018		Openings		Closings			October 28, 2018		October 29, 2017		October 28, 2018		October 29, 2017
Williams Sonoma		226		—		—			226		233		6,800		6,700
Pottery Barn		205		—		—			205		202		13,900		13,900
West Elm		109		3		—			112		105		13,200		13,100
Pottery Barn Kids		84		—		(2	)		82		88		7,500		7,400
Rejuvenation		8		—		—			8		8		8,800		8,800
Total		632		3		(2	)		633		636		10,300		10,200
Store selling square footage atperiod-end													4,084,000		4,031,000
Store leased square footage atperiod-end													6,551,000		6,468,000


Fiscal period	Total Number of Shares Purchased¹		Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program¹		Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
July 30, 2018 – August 26, 2018		433,272	$	58.70		433,272	$	318,869,000
August 27, 2018 – September 23, 2018		124,278	$	68.79		124,278	$	310,320,000
September 24, 2018 – October 28, 2018		184,958	$	61.75		184,958	$	298,898,000
Total		742,508	$	61.15		742,508	$	298,898,000