WILLIAMS-SONOMA, INC.

REPORT ON FORM

10-Q

FOR THE QUARTER ENDED NOVEMBER ~~3, 2019~~1, 2020

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


			~~PAGE~~

~~Item 1.~~	~~Financial Statements~~			1 PAGE

Item 1.	Financial Statements				1

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

Item 3.
~~Item 3.~~	Quantitative and Qualitative Disclosures About Market Risk			22 23

Item 4.	Controls and Procedures				24
~~Item 4.~~		~~Controls and Procedures~~				22

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings			25

Item 1A.	Risk Factors
~~Item 1.~~	~~Legal Proceedings~~			23 25

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

~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds			23 26

Item 3.
~~Item 3.~~	Defaults Upon Senior Securities			23 26

Item 4.	Mine Safety Disclosures			26

Item 5.	Other Information			26

Item 4.6.	~~Mine Safety Disclosures~~Exhibits			23

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

~~Item 6.~~	~~Exhibits~~			24 27

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

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


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
In thousands, except per share amounts	November 1, 2020			November 3, 2019		November 1, 2020		November 3, 2019
Net revenues	$	1,764,536		$	1,442,472	$	4,490,516	$	4,054,418
Cost of goods sold		1,058,953			924,300		2,819,471		2,608,054
Gross profit		705,583			518,172		1,671,045		1,446,364
Selling, general and administrative expenses		430,979			416,281		1,162,435		1,184,176
Operating income		274,604			101,891		508,610		262,188
Interest expense, net		5,344			2,564		13,967		7,486
Earnings before income taxes		269,260			99,327		494,643		254,702
Income taxes		67,488	��		24,614		122,884		64,685
Net earnings	$	201,772		$	74,713	$	371,759	$	190,017
Basic earnings per share	$	2.60		$	0.96	$	4.80	$	2.43
Diluted earnings per share	$	2.54		$	0.94	$	4.71	$	2.39
Shares used in calculation of earnings per share:
Basic		77,487			77,897		77,511		78,356
Diluted		79,332			79,191		79,012		79,465

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

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


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
In thousands	November 1, 2020			November 3, 2019			November 1, 2020			November 3, 2019
Net earnings	$	201,772		$	74,713		$	371,759		$	190,017
Other comprehensive income (loss):
Foreign currency translation adjustments		(745	)		1,783			716			(2,477	)
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $21, $97, $146 and $163		54			5			403			77
Reclassification adjustment for realized gain on derivative financial instruments, net of tax of $85, $187, $136 and $221		(231	)		(8	)		(375	)		(235	)
Comprehensive income	$	200,850		$	76,493		$	372,503		$	187,382

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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, except per share amounts	November 1, 2020			February 2, 2020			November 3, 2019
ASSETS
Current assets
Cash and cash equivalents	$	773,170		$	432,162		$	155,025
Accounts receivable, net		129,782			111,737			110,131
Merchandise inventories, net		1,125,475			1,100,544			1,258,541
Prepaid expenses		84,974			90,426			115,288
Other current assets		23,556			20,766			20,260
Total current assets		2,136,957			1,755,635			1,659,245
Property and equipment, net		869,092			929,038			915,740
Operating lease right-of-use assets		1,091,649			1,166,383			1,194,061
Deferred income taxes, net		42,185			47,977			41,763
Goodwill		85,402			85,343			85,355
Other long-term assets, net		85,394			69,666			67,660
Total assets	$	4,310,679		$	4,054,042		$	3,963,824
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	562,294		$	521,235		$	444,279
Accrued expenses		194,985			175,003			140,789
Gift card and other deferred revenue		349,671			289,613			296,157
Income taxes payable		36,037			22,501			13,182
Current debt		—			299,818			—
Borrowings under revolving line of credit		—			—			100,000
Operating lease liabilities		217,448			227,923			225,530
Other current liabilities		99,691			73,462			68,973
Total current liabilities		1,460,126			1,609,555			1,288,910
Deferred rent and lease incentives		21,858			27,659			29,388
Long-term debt		299,173			—			299,769
Long-term operating lease liabilities		1,027,142			1,094,579			1,127,403
Other long-term liabilities		100,478			86,389			86,461
Total liabilities		2,908,777			2,818,182			2,831,931
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; 76,697, 77,137 and 77,612 shares issued and outstanding at November 1, 2020, February 2, 2020 and November 3, 2019, respectively		768			772			777
Additional paid-in capital		623,379			605,822			594,991
Retained earnings		792,196			644,794			550,774
Accumulated other comprehensive loss		(13,843	)		(14,587	)		(13,708	)
Treasury stock, at cost: 8, 14 and 14 shares as of November 1, 2020, February 2, 2020 and November 3, 2019, respectively		(598	)		(941	)		(941	)
Total stockholders’ equity		1,401,902			1,235,860			1,131,893
Total liabilities and stockholders’ equity	$	4,310,679		$	4,054,042		$	3,963,824

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 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


	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance at February 2, 2020		77,137		$	772		$	605,822		$	644,794		$	(14,587	)	$	(941	)	$	1,235,860
Net earnings		—			—			—			35,423			—			—			35,423
Foreign currency translation adjustments		—			—			—			—			(5,276	)		—			(5,276	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			549			—			549
Reclassification adjustment for realized (gain) on derivative financial instruments, net of tax		—			—			—			—			(37	)		—			(37	)
Conversion/release of stock-based awards 1		622			6			(28,747	)		—			—			(171	)		(28,912	)
Reissuance of treasury stock under stock-based compensation plans 1		—			—			(499	)		(14	)		—			513			—
Stock-based compensation expense		—			—			19,608			—			—			—			19,608
Dividends declared		—			—			—			(38,286	)		—			—			(38,286	)
Balance at May 3, 2020		77,759		$	778		$	596,184		$	641,917		$	(19,351	)	$	(599	)	$	1,218,929
Net earnings		—			—			—			134,564			—			—			134,564
Foreign currency translation adjustments		—			—			—			—			6,737			—			6,737
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			(200	)		—			(200	)
Reclassification adjustment for realized (gain) on derivative financial instruments, net of tax		—			—			—			—			(107	)		—			(107	)
Conversion/release of stock-based awards 1		37			—			(677	)		—			—			—			(677	)
Stock-based compensation expense		—			—			13,385			—			—			—			13,385
Dividends declared		—			—			—			(39,709	)		—			—			(39,709	)
Balance at August 2, 2020		77,796		$	778		$	608,892		$	736,772		$	(12,921	)	$	(599	)	$	1,332,922
Net earnings		—			—			—			201,772			—			—			201,772
Foreign currency translation adjustments		—			—			—			—			(745	)		—			(745	)
Change in fair value of derivative financial instruments, net of tax		—			—			—			—			54			—			54
Reclassification adjustment for realized (gain) on derivative financial instruments, net of tax		—			—			—			—			(231	)		—			(231	)
Conversion/release of stock-based awards 1		20			1			(968	)		—			—			1			(966	)
Repurchases of common stock		(1,119	)		(11	)		(5,640	)		(103,397	)		—			—			(109,048	)
Stock-based compensation expense		—			—			21,095			—			—			—			21,095
Dividends declared		—			—			—			(42,951	)		—			—			(42,951	)
Balance at November 1, 2020		76,697		$	768		$	623,379		$	792,196		$	(13,843	)	$	(598	)	$	1,401,902

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.

Table of Contents

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
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 Notes to Condensed Consolidated Financial Statements.

Table of Contents

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


	Thirty-nine Weeks Ended
In thousands	November 1, 2020			November 3, 2019
Cash flows from operating activities:
Net earnings	$	371,759		$	190,017
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		140,340			140,495
(Gain) loss on disposal/impairment of assets		26,220			682
Amortization of deferred lease incentives		(4,538	)		(5,985	)
Non-cash lease expense		162,767			160,138
Deferred income taxes		(6,969	)		(10,937	)
Tax benefit related to stock-based awards		13,143			13,648
Stock-based compensation expense		54,671			49,516
Other		(9	)		14
Changes in:
Accounts receivable		(18,017	)		(2,842	)
Merchandise inventories		(22,990	)		(133,637	)
Prepaid expenses and other assets		(4,807	)		(24,157	)
Accounts payable		54,279			(92,101	)
Accrued expenses and other liabilities		58,539			(24,148	)
Gift card and other deferred revenue		59,953			5,848
Operating lease liabilities		(171,245	)		(168,308	)
Income taxes payable		13,532			(8,293	)
Net cash provided by operating activities		726,628			89,950
Cash flows from investing activities:
Purchases of property and equipment		(124,885	)		(121,154	)
Other		506			470
Net cash used in investing activities		(124,379	)		(120,684	)
Cash flows from financing activities:
Borrowings under revolving line of credit		487,823			100,000
Repayments under the revolving line of credit		(487,823	)		—
Payment of dividends		(116,761	)		(113,159	)
Repurchases of common stock		(109,048	)		(112,714	)
Tax withholdings related to stock-based awards		(30,555	)		(26,623	)
Debt issuance costs		(3,645	)		—
Net cash used in financing activities		(260,009	)		(152,496	)
Effect of exchange rates on cash and cash equivalents		(1,232	)		(699	)
Net increase (decrease) in cash and cash equivalents		341,008			(183,929	)
Cash and cash equivalents at beginning of period		432,162			338,954
Cash and cash equivalents at end of period	$	773,170		$	155,025

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~ 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 weeks and thirty-nine weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of February ~~3, 2019,~~2, 2020, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form

10-K

for the fiscal year ended February ~~3, 2019.~~2, 2020.

The results of operations for the thirteen and thirty-nine weeks ended November ~~3, 2019~~1, 2020 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 February 2, 2020.

COVID-19

On March 11, 2020, the World Health Organization declared a novel strain of the coronavirus

(COVID-19)

to be a global pandemic and recommended containment and mitigation measures worldwide. In March 2020, we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the

COVID-19

pandemic. The preventative or protective actions that governments and businesses around the world have taken to contain the spread of

COVID-19

have resulted in a period of disruption that has materially reduced customer store traffic, and thus our retail store revenues, which comprised approximately 44%

of our net revenues in fiscal 2019. As of November 1, 2020, all of our retail stores had reopened. However, subsequent to quarter-end, given the continued uncertainty around COVID-19 due to rising rates of infections in certain geographies, state and local officials have reinstated closures or restrictions on retail capacity, which will continue to negatively impact our store traffic and retail revenues, and may result in future store impairments. Throughout the fiscal year, we have continued to operate our e-commerce sites and distribution centers and have continued to deliver products to our customers. However, governmental mandates, illness or the absence of a substantial number of distribution center employees may require in the future that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers from delivering packages to our customers and our stores, which could complicate or prevent us from fulfilling e-commerce orders and could complicate or prevent our ability to supply merchandise to our stores. We also expect to incur incremental costs associated with keeping our people and customers safe during the pandemic, as well as additional supply chain employment costs and higher shipping costs due to the various surcharges that have been announced by third party shippers on retailers. These higher costs affected us in the third quarter of 2020 and will affect us more so in the fourth quarter as a result of peak surcharges during the holiday season and could continue to affect us thereafter. Further, COVID-19 related containment efforts and illnesses could also impact our vendors who manufacture or deliver our merchandise to us or our customers, which could adversely affect our ability to acquire and sell our merchandise and could negatively impact our revenues and results of operations.

As a result of the COVID-19 pandemic and the prolonged impact on our retail locations

we identified certain assets whose carrying value was deemed to have been impaired. Given the material reductions in our retail store revenues and operating income during fiscal 2020, we evaluated our estimates and assumptions related to our stores’ future sales and cash flows, and performed a comprehensive review of our stores’ long-lived assets for impairment, including both property and equipment and operating lease right-of-use assets, at an individual store level. Key assumptions used in estimating fair value of our store assets in connection with our impairment analyses are sales growth, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation, and the overall economics of the retail industry. Our assumptions account for the estimated impact on future cash flows from the recent temporary store closures

and capacity restrictions

, including reduced store traffic and longer recovery times in those stores we have re-opened, as well as

the reinstatement of

closures

restrictions

on retail capacity in certain areas. We did

record any store asset impairment charges within selling, general and administrative expenses

during the thirteen

weeks ended November 1, 2020. During the

thirty-nine weeks ended November 1, 2020, we recorded store asset impairment charges within selling, general and administrative expenses of approximately

$16,514,000

related to property and equipment and

$5,461,000

related to operating lease right-of-use assets.

Table of Contents

During

the thirty-nine weeks ended November 1, 2020, we recorded charges of approximately $11,378,000

related to

write-offs for inventory with minor damage that we could not liquidate through our outlets due to store closures resulting from

COVID-19.

During the thirteen weeks ended November 1, 2020, we did 0t record any charges related to such inventory write-offs.

We test goodwill for impairment annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. As of November 1, 2020 and November 3, ~~2019.~~2019, we had goodwill of $85,402,000 and $85,355,000, respectively, primarily related to our fiscal 2017 acquisition of Outward and our fiscal 2011 acquisition of Rejuvenation, Inc. As a result of the

COVID-19

pandemic and the resulting closure of our retail locations, we evaluated the need to test goodwill for potential impairment. Our most recently completed qualitative goodwill impairment assessment indicated that the fair values of our reporting units significantly exceeded their carrying values. Further, we currently do not expect the impact of

COVID-19

to significantly affect the long-term estimates or assumptions of revenue and operating income growth, nor the long-term

strategies

of our brands, considered in our most recently completed goodwill assessment. Therefore, we have not tested our goodwill for impairment between annual tests and, accordingly, have not recorded any goodwill impairment charges during the third quarter of fiscal 2020.

As of the end of the quarter, we had finalized rent concession negotiations with a portion of our store landlords and we expect the remaining outstanding lease concession negotiations to be finalized throughout the remainder of fiscal 2020.

In response to

COVID-19,

the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The CARES Act provides tax provisions and other

stimulus

measures to affected companies. The impact of the CARES Act was not material to our result of operations for the

third

quarter of fiscal 2020.

These events and changes in circumstances, including a more prolonged and/or severe COVID-19 pandemic

and the reinstatement of closures or restrictions on retail capacity

, may lead to increased impairment risk in the future; therefore, we will continue to monitor events and changes in circumstances that may indicate the need to test our long-lived assets, including goodwill, for potential impairment.

New Accounting Pronouncements

In ~~February~~June 2016, ~~the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)~~

~~2016-02,~~

~~Leases~~

~~, which requires lessees to recognize a~~

~~right-of-use~~

asset and an operating lease liability for virtually all leases. This ASU, as amended, was 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 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. 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~~

~~right-of-use~~

~~asset and a lease liability for short-term leases. The adoption of this ASU did not materially impact our Condensed Consolidated Statement of Earnings.~~

~~In August 2017,~~ the FASB issued ASU

~~2017-12,~~2016-13,

~~Derivatives and Hedging: Targeted Improvements~~Financial Instruments—Credit Losses

(Topic 326): Measurement of Credit Losses on Financial Instruments. This standard is intended to ~~Accounting for Hedging Activities (Topic 815),~~

~~which expands and refines hedge accounting for both~~

~~non-financial~~

~~and financial risk components and aligns~~introduce a revised approach to the recognition and ~~presentation~~measurement 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. 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 earningscredit losses, emphasizing an updated model based 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.~~expected losses rather than incurred losses. This ASU was effective for us in the first quarter of fiscal ~~2019.~~2020. 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~~

(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 iswas effective for us in the first quarter of fiscal 2020. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12,

Simplifying the Accounting for Income Taxes

(Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 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.

Table of Contents

NOTE B. ~~BORR~~

~~WING~~BORROWING ARRANGEMENTS

Credit Facility

We have a credit facility which provides for a $500,000,000 unsecured revolving line of cr

~~dit (the “revolver”~~credit (“revolver”) and a $300,000,000 unsecured term loan facility ~~(the “term~~(“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, at such lenders’ option, to increase the revolver by up to $250,000,000 ~~at such lenders’ option,~~ to provide for a total of $750,000,000 of unsecured revolving credit.

In May 2020, we entered into an amendment to our credit facility (the “Credit Facility Amendment”), which, among other changes, extends the maturity date and amends the interest rate of the term loan, modifies covenants under the credit facility, and maintains the maturity date and interest rate of the revolver. The term loan now matures on January 8, 2022, at which time all outstanding principal and any accrued interest must be repaid. Under the Credit Facility Amendment, the interest rate applicable to the credit facility is variable, and may be elected by us as: (i) the LIBOR plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.75% to 2.5% for the term loan, or (ii) a base rate as defined in the credit facility, plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0.75% to 1.5% for the term loan.

We had no borrowings during the third quarter of fiscal 2020, and for

year-to-date

fiscal 2020, we had borrowings of $487,823,000 under the revolver (at a

year-to-date

weighted average interest rate of 2.47

%), all of which were repaid in the third quarter of fiscal 2020.

Additionally, as of November 1, 2020, $12,486,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were

primarily

issued to secure the liabilities associated with workers’ compensation and other insurance programs. During the third quarter and 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 3.12%). 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 January 8, 2020,~~ elect to extend the maturity date for an additional year, subject to lender approval.

~~During the third quarter~~

~~fiscal 2019, we had borrowings of $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 3.12%), all of which was outstanding as of 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 November 3, 2019, $12,402,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

As of November ~~3, 2019,~~1, 2020, we had $300,000,000 outstanding under our term loan (at a

year-to-date

weighted average interest rate of ~~3.47%~~2.88%). ~~The~~Costs incurred in connection with the issuance of the term loan ~~matures on January 8, 2021, at which time all outstanding principal and any accrued~~are presented as a reduction to the carrying value of the debt in our Condensed Consolidated Balance Sheet.

In addition to the Credit Facility Amendment, during the second quarter of fiscal 2020 we entered into a new agreement (the

“364-Day

Credit Agreement”) for an additional $200,000,000 unsecured revolving line of credit. Under the

364-Day

Credit Agreement, the interest ~~must be repaid.~~

~~The interest rates under the credit facility are~~rate is variable and may be elected by us as: (i) ~~the London Interbank Offer Rate~~LIBOR plus an applicable margin based on our leverage ratio ranging from ~~0.91%~~1.75% to ~~1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan;~~2.5% or (ii) a base rate as defined in the ~~credit facility~~agreement, plus an applicable margin ranging from 0%0.75% to ~~0.775%~~1.5%. The

364-Day

Credit Agreement matures on May 10, 2021.

During the third quarter and for year-to-date fiscal 2020, we

had no borrowings under the

364-Day

Credit Agreement.

The Credit Facility Amendment and the

364-Day

Credit Agreement contain certain restrictive loan covenants, including, among others, a ~~revolver borrowing,~~financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and 0%rent expense to ~~1.0% for the term loan.~~

earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of November ~~3, 2019,~~1, 2020, we were in compliance with our ~~financial~~ covenants under ~~the~~our credit ~~facility~~facilities and based on current projections, we expect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

~~We have~~

On August 23

, 2020

renewed all

three ~~unsecured~~

of our

letter of credit ~~reimbursement~~facilities

and reduced the aggregate credit available under these facilities ~~for a total~~ from

$70,000,000

to $35,000,000 due to our lower level

of ~~$70,000,000~~

,usage, and extended each ~~of which matures on~~ facility’s maturity date until

August ~~23, 2020~~22, 2021

. The letter of credit facilities contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As of November ~~3, 2019,~~1, 2020, an aggregate of ~~$8,221,000~~$9,075,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we ~~have~~had not taken legal title. The latest expiration date possible for any future letters of credit issued under the facilities is January ~~20, 2021.~~19, 2022.

Table of Contents

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 November ~~3, 2019,~~1, 2020, there were approximately ~~5,367,000~~2,465,000 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 must 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

~~which are triggered upon certain~~ resulting from events including, but not limited to, retirement, merger or a ~~merger or~~ similar corporate event.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses ~~which are triggered upon certain~~resulting from events including, but not limited to, retirement, disability, death,

merger or a ~~merger or~~ 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).

~~Table of Contents~~

Stock-Based ~~Compe~~

~~sation~~Compensation Expense

During the thirteen and thirty-nine weeks ended November 1, 2020, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $21,276

,000

and $54,671

,000

, respectively. 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.

Restricted Stock Units

The following table summarizes

ur our restricted stock unit activity during the thirty-nine weeks ended November ~~3, 2019:~~1, 2020:



	Shares
Balance at February ~~3, 2019~~2, 2020		~~3,012,923~~
		2,884,194
Granted		~~1,036,010~~ 1,132,649
Granted, with vesting subject to performance conditions		~~238,786~~ 267,000
Released ~~Released~~ 1		~~(985,540~~	(1,030,199	)
Cancelled		(~~347,205~~ 98,603	)

Balance at November ~~3, 2019~~1, 2020		~~2,954,974~~
		3,155,041
Vested plus expected to vest at November ~~3, 2019~~1, 2020		~~3,115,488~~
		2,340,530

1	Excludes 170,308 incremental shares released due to achievement of performance conditions above target.

~~Excludes~~

~~105,436~~

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

Table of Contents

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 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


In thousands, except per share amounts	Net Earnings		Weighted Average Shares		Earnings Per Share
Thirteen weeks ended November 1, 2020
Basic	$	201,772		77,487	$	2.60
Effect of dilutive stock-based awards				1,845
Diluted	$	201,772		79,332	$	2.54
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
Thirty-nine weeks ended November 1, 2020
Basic	$	371,759		77,511	$	4.80
Effect of dilutive stock-based awards				1,501
Diluted	$	371,759		79,012	$	4.71
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

Stock-based awards of 229 and 19,295 were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended November 1, 2020, respectively, as their inclusion would be anti-dilutive. 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, respectively,~~ as their inclusion would be anti-dilutive.

~~Table of Contents~~

NOTE E. SEGMENT ~~REP~~

~~RTING~~

REPORTING

We identify our operating segments according to how our business activities are managed and evaluated.

~~Prior to fiscal 2019, we managed~~

~~e-commerce~~

merchandise strategies, which included the results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, separately from our retail business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the

~~e-commerce~~

reportable segment. Also, prior to fiscal 2019, we managed retail merchandise strategies, which included the results of our retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, separately from our

~~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 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. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.

The following table summarizes our net revenues by brand for the thirteen and thirty-nine weeks ended November 1, 2020 and November 3, ~~2019 and October 28, 2018. We have updated fiscal 2018 results to conform with the current year presentation~~

.2019.

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


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
In thousands	November 1, 2020		November 3, 2019		November 1, 2020		November 3, 2019
Pottery Barn	$	684,029	$	556,985	$	1,726,920	$	1,573,958
West Elm		474,959		390,341		1,170,941		1,057,398
Williams Sonoma		259,725		205,493		702,160		591,761
Pottery Barn Kids and Teen		277,598		228,051		702,137		632,950
Other 1		68,225		61,602		188,358		198,351
Total 2	$	1,764,536	$	1,442,472	$	4,490,516	$	4,054,418

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

Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately ~~$86.2~~ $87.1

million and ~~$79.0~~$86.2 million for the thirteen weeks ended November 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~ respectively, and approximately ~~$260.5~~ $219.8

million and ~~$239.1~~$260.5 million for the thirty-nine weeks ended November 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~ 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


In thousands	November 1, 2020		November 3, 2019
U.S.	$	2,025,140	$	2,140,505
International		148,582		164,074
Total	$	2,173,722	$	2,304,579

Table of Contents

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.

~~Table of Contents~~

NOTE G. STOCK REPURCHASE PR

~~GRAM~~PROGRAM AND DIVIDENDS

Stock Repurchase Program

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

,000

. As of November 1, 2020, there was $465,934

,000

remaining under our current stock repurchase program. As of November 1, 2020, we held treasury stock of $598

,000

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 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~~

$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~~

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

Dividends

In October 2020, our Board of Directors authorized a $

0.05

, or

10.4

%, increase in our quarterly cash dividend, from $

0.48

to $

0.53

per common share.

We declared cash dividends of ~~$0.48~~$0.53 and ~~$0.43~~$0.48 per common share during the thirteen weeks ended November 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~ respectively. We declared cash dividends of ~~$1.44~~$1.49 and ~~$1.29~~$1.44 per common share during the thirty-nine weeks ended November 1, 2020 and November 3, 2019, ~~and October 28, 2018, respectively.~~ respectively

Our quarterly cash dividend may be limited or terminated at any time.

NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail and

e-commerce

businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with ~~these~~the derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with ~~Accounting Standards Codification (“ASC”)~~the ASC 815,

Derivatives and Hedging

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of

goods sold.

Table of Contents

Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of November ~~3, 2019,~~1, 2020, we expect to reclassify a net

pre-tax

gain of approximately ~~$37,000~~

$46,000 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.

~~Table of Contents~~

As of November 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~ we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

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


In thousands	November 1, 2020		November 3, 2019
Contracts designated as cash flow hedges	$	28,200	$	19,700

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. NoNaN 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 1, 2020 and November 3, ~~2019 and October 28, 2018.~~2019.

The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and thirty-nine weeks ended November 1, 2020 and November 3, 2019, ~~and October 28, 2018,~~

pre-tax,

was as follows:

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


	Thirteen Weeks Ended									Thirty-nine Weeks Ended
	November 1, 2020					November 3, 2019				November 1, 2020					November 3, 2019
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	$	1,058,953	$	430,979		$	924,300	$	416,281	$	2,819,471	$	1,162,435		$	2,608,054	$	1,184,176
Gain (loss) recognized in income
Derivatives designated as cash flow hedges	$	315	$	—		$	204	$	—	$	510	$	—		$	499	$	—
Derivatives not designated as hedging instruments	$	—	$	(22	)	$	—	$	6	$	—	$	(20	)	$	—	$	24

Table of Contents

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

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


In thousands	November 1, 2020			November 3, 2019
Derivatives designated as cash flow hedges:
Other current assets	$	181		$	132
Other current liabilities	$	(7	)	$	—

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.

~~Table of Contents~~

TENOTE 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 November ~~3, 2019,~~1, 2020, the fair value of our ~~long-term~~ debt, which consists of outstanding borrowings under our revolver and term loan, approximates its carrying value, as the instruments are relatively short-term in nature and the interest rate under the term loan is based on observable Level 2 inputs, which consist primarily of quoted market interest rates for instruments with similar maturities.

Foreign Currency Derivatives and Hedging Instruments

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

mid-market

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

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

non-performance

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

Long-lived Assets

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

right-of-use

assets on a nonrecurring basis using Level 2 ~~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 commensurate with the risk.

Table of Contents

The significant unobservable inputs used in the fair value measurement of our store assets are sales growth/decline, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation and the overall economics of the retail industry. Significant fluctuations in any of these inputs individually could significantly impact our measurement of fair value.

During the thirteen

weeks ended November 1, 2020, 0 impairment charges were recognized. During

the

thirty-nine weeks ended November 1, 2020, we recognized impairment charges of $16,514,000

related to the impairment of property and equipment and $

5,461,000

related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from the impact of COVID-19. During the thirteen and thirty-nine weeks ended November 3, 2019,

0 impairment charges were recognized.

There were no transfers ~~between~~in and out of Level ~~1, 2 or~~ 3 categories during the thirteen and thirty-nine weeks ended November 1, 2020 or November 3, ~~2019 or October 28, 2018.~~2019.

Table of Contents

NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in ~~accum~~

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

In thousands

Foreign Currency
Translation

Cash Flow
Hedges

Accumulated Other
Comprehensive
Income (Loss)

Balance at 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
)


In thousands	Foreign Currency Translation			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at February 2, 2020	$	(14,593	)	$	6		$	(14,587	)
Foreign currency translation adjustments		(5,276	)		—			(5,276	)
Change in fair value of derivative financial instruments		—			549			549
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1		—			(37	)		(37	)
Other comprehensive income (loss)		(5,276	)		512			(4,764	)
Balance at May 3, 2020		(19,869	)		518			(19,351	)
Foreign currency translation adjustments		6,737			—			6,737
Change in fair value of derivative financial instruments		—			(200	)		(200	)
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1		—			(107	)		(107	)
Other comprehensive income (loss)		6,737			(307	)		6,430
Balance at August 2, 2020	$	(13,132	)	$	211		$	(12,921	)
Foreign currency translation adjustments		(745	)		—			(745	)
Change in fair value of derivative financial instruments		—			54			54
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1		—			(231	)		(231	)
Other comprehensive income (loss)		(745	)		(177	)		(922	)
Balance at November 1, 2020	$	(13,877	)	$	34		$	(13,843	)
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 1		—			(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 1		—			(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 1		—			(8	)		(8	)
Other comprehensive income (loss)		1,783			(3	)		1,780
Balance at November 1, 2019	$	(13,736	)	$	28		$	(13,708	)

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.

Table of Contents

NOTE K. ~~ACQUISITION OF OUTWARD, INC.~~

~~On December 1, 2017, we acquired Outward, Inc., 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.~~

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 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.~~

~~NOTE L.~~ REVENUE

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

e-commerce

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

co-branded

credit cards.

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

See Note E for ~~a discussion~~

the

disclosure

of our net revenues by operating segment.

Merchandise Sales

Revenues from the sale of our merchandise through our

e-commerce

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~~

that

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 exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

~~Table of Contents~~

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. While the rate of estimated future returns has remained relatively flat, the increase in

e-commerce

sales has driven an increase in estimated sales returns. As of November 3,

~~2019~~1, 2020 and ~~October 28, 2018,~~November 3, 2019, we recorded a liability for expected sales returns of approximately ~~$23,447,000~~ $37,678

,000

and ~~$25,555,000~~ $23,447,000

, respectively,

within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately ~~$9,221,000~~ $12,347

,000

and ~~$9,567,000~~ $9,221,000

, respectively,

within other current assets in our Condensed Consolidated Balance Sheet.

Stored-value Cards

We issue stored-value cards that may be redeemed on future merchandise purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards ~~(“breakage”)~~(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. 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

Table of Contents

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 November 1, 2020 and November 3, 2019, we held

~~approximately~~

$349,671,000 and $300,354,000 in gift card and other deferred revenue on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized asinto revenue within the next 12 months.

~~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

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

The 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 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 calculation of lease liabilities. Our variable lease payments include: rent payments that are based on a percentage of sales; contingent payments until the resolution of the contingency is reasonably certain; and rent increases based on a future index.

~~Table of Contents~~

~~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 an amount equal to the 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 future minimum lease payments occurs. Key assumptions and judgments included in the determination of 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.

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

~~right-of-use~~

~~assets upon commencement as exercise of 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 an amount equal to the lease payments, over a similar term and in a similar economic environment.

~~The components of lease costs for the thirteen and thirty-nine weeks ended 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 and short-term lease costs were not material to us 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~~	%

~~Table of Contents~~

~~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: the impact of the

COVID-19

pandemic on our business, results of operations and financial condition; merchandise margins, occupancy leverage and expanded operating margin; our strategic initiatives; our beliefs regarding customer behavior and industry trends; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of ~~cash;~~cash, including our commitment to continue or increase quarterly dividend payments; 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 and tariffs and related mitigation efforts;~~fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form

10-K

for the year ended February ~~3, 2019,~~2, 2020, 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.

~~Table of Contents~~

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, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through

e-commerce

websites, direct-mail catalogs and ~~626~~614 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 November ~~3, 2019~~1, 2020 (“third quarter of fiscal ~~2019”~~2020”), as compared to the thirteen weeks ended ~~October 28, 2018~~November 3, 2019 (“third quarter of fiscal ~~2018”~~2019”) and the thirty-nine weeks ended November ~~3, 2019~~1, 2020

(“year-to-date

fiscal ~~2019”~~2020”), as compared to the thirty-nine weeks ended ~~October 28, 2018~~November 3, 2019

(“year-to-date

fiscal ~~2018”~~2019”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude.

COVID-19

On March

11, 2020, the World

Health Organization declared a novel strain of the coronavirus

(COVID-19)

Table of Contents

COVID-19 pandemic. As of November 1, 2020, all of our retail stores had reopened. However, subsequent to quarter end, given the continued uncertainty around COVID-19 due to rising rates of infections in certain geographies, state and local officials have reinstated closures or restrictions on retail capacity, which will continue to impact our store traffic and retail revenues, and may result in future store impairments. Throughout fiscal 2020, we have continued to operate our e-commerce sites and distribution centers and continued to deliver products to our customers. However, governmental mandates, illness or the absence of a substantial number of distribution center employees may require in the future that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers from delivering packages to our customers and our stores, which could complicate or prevent us from fulfilling e-commerce orders and could complicate or prevent our ability to supply merchandise to our stores.

Third Quarter of Fiscal ~~2019~~2020 Financial Results

Net revenues in the third quarter of fiscal ~~2019~~2020 increased by ~~$85,489,000,~~$322,064,000 or ~~6.3%~~22.3%, compared to the third quarter of fiscal ~~2018,~~2019, with comparable brand revenue growth of ~~5.5%.~~24.4% and double-digit comparable revenue growth across all our brands. This ~~growth~~increase was primarily driven by an increase in e-commerce revenues, partially offset by a decrease in retail revenues driven by reduced customer store traffic and limited capacity in stores due to COVID-19.

For the third quarter of fiscal 2020, we delivered double-digit comparable brand revenue growth in all of our brands. The Williams Sonoma brand delivered 30.4% comparable brand revenue growth. Our initiatives in e-commerce and our real estate optimization strategies have been driving a shift to increased on-line sales, and we are encouraged with the performance of our stores in this brand. The Pottery Barn brand delivered 24.1% comparable brand revenue growth for the quarter, driven by double-digit growth in all divisions. Growth initiatives including PB Apartment and Marketplace continued to build in momentum. In West Elm, ~~and Pottery Barn. Net~~we continued to deliver strong comparable brand revenue growth ~~included a 9.2% increase in international revenue across both our company-owned and franchise operations.~~

~~West Elm’s results this~~of 21.8% during the quarter, ~~were~~ driven by strong growth ~~strategies~~in all major categories, as well as the traditional retail-dominant categories of textiles 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.decorative accessories. In ~~Pottery Barn, comparable revenue growth was 3.4% driven by~~ our initiatives, including our curated Pottery Barn Marketplace assortment and our Apartment assortment of smaller space solutions. Their performance was also driven by strong digital growth including double-digit increases in traffic and product engagement. In Pottery Barn Kids and Teen business, we delivered a 23.8% comparable brand revenue growth, ~~was 4.0%. We continue~~where we saw a longer tail to ~~see~~the Back to School business with our Gear and Study at Home solutions delivering a strong ~~growth in both our baby business and our high quality dorm room bedding, furniture and~~

~~no-nails~~

~~decoration solutions. In~~finish to 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.season.

~~Gross profit~~

As of November 1, 2020, we had approximately $773,170,000 in cash and generated positive operating cash flow of $726,628,000 year-to-date. Our liquidity position throughout fiscal 2020 allowed us to fund the operations of the business, to invest nearly $125,000,000 in capital expenditures in support of our future growth, and to return nearly $117,000,000 in the form of continued quarterly dividend payments to our shareholders. Additionally, as previously announced this quarter, we also repaid in full our short-term borrowings of $487,823,000 under our $500,000,000 revolver, reinstated our share repurchase program - repurchasing $109,048,000 in the third quarter of fiscal ~~2019 decreased~~2020, and committed to ~~35.9%~~a quarterly dividend increase of ~~revenues~~10.4%, effective with our dividend payment in the fourth quarter of fiscal 2020.

For the third quarter of fiscal 2020, diluted earnings per share was $2.54 (which included a $0.02 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.), versus ~~36.5%~~$0.94 in the third quarter of fiscal 2018, 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 tariff impact almost doubling from the second quarter of fiscal 2019 ~~our margins sequentially improved because of the continued success we are seeing from all of 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 our higher product margins,

~~on-going~~

occupancy leverage, overall selling, general and administrative leverage from higher sales and the continued benefits of our cost savings initiatives across the business, offset the financial impact from these increased costs.

~~In the third quarter of fiscal 2019, diluted earnings per share was $0.94~~ (which included a $0.07 impact from acquisition-related compensation expense, amortization of ~~intangible assets,~~acquired intangibles, and the operations of Outward, Inc.).

Looking Ahead

Looking forward to the fourth quarter, we believe we are well positioned for the future. We believe we will continue to see robust

e-commerce

trends throughout the rest of the fiscal year, and we plan to expand into white space and support the growth of new business opportunities within our brands. We expect merchandise margins to continue to expand year-over-year and occupancy leverage to continue, driven by cost savings from the leases that we have already renegotiated as well as the closure of unprofitable stores and final rent abatement negotiations. Due to our strong performance to date and anticipated continuation of robust

e-commerce

trends through the balance of the fiscal year, we remain confident in our ability to drive significant operating margin expansion versus ~~$1.00~~last year. However, operationally, we expect to continue to incur higher shipping costs in the ~~third~~fourth quarter, given the anticipated elevated levels of

e-commerce

sales and peak surcharges that will come into effect during the holiday peak season. In addition, we expect to incur incremental costs associated with keeping our people and customers safe during the pandemic, as well as additional supply chain employment costs. Further, given the continued uncertainty around

COVID-19

and the reinstatement of ~~fiscal 2018 (which included a $0.06 impact related~~closures or restrictions on retail capacity by state and local officials, we have experienced and may continue to ~~Outward, Inc., a $0.02 impact from employment-related expenses, a $0.01 impact related to impairment~~experience reduced store traffic. In the longer term, we anticipate that the behavioral changes and ~~early lease termination charges, and a $0.13 net tax benefit~~industry shifts that have emerged from the ~~Tax Cuts~~pandemic will persist and ~~Jobs Act). We also returned $78,289,000~~continue to favor our ~~stockholders through dividends~~business, and ~~stock repurchases.~~we remain confident in our ability to drive strong net revenue results while continuing to expand our operating margins. Although we are optimistic in our ability to drive strong net revenues and expand our operating margin versus last year, overall, the long-term impact of

COVID-19

on our business, results of operations and financial condition still remains uncertain. A prolonged pandemic could further interrupt our operations, our vendors’ operations, the economy and overall consumer spending,

Operationally during the third quarter of fiscal 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 portfolio of brands. The Key Rewards continues to be an impactful driver of revenues and customer acquisition as total membership continued to grow during the quarter. Our cross-brand

~~Business-to-Business~~

~~division also delivered another strong quarter of revenue growth and marked the successful relaunch of our~~

~~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 shoppable rooms. In our supply~~

Table of Contents

~~chain this quarter, technology is facilitating faster and more streamlined order processing through~~

which could have a ~~number of enhancements and, to further improve order visibility, we are continually building~~material impact on our ~~framework~~revenues, results of operations, and cash flows. For more information on risks associated with

COVID-19,

please see “Risk Factors” in Part I, Item 1A of our Annual Report on Form

10-K

for the fiscal year ended February 2, 2020, as well as Note A to ~~provide more accurate, data-driven delivery estimates to customers. Further, within~~ our

~~in-home~~

~~furniture delivery network, we’ve expanded the rollout~~ Condensed Consolidated Financial Statements and Part II, Item 1A of ~~a same day delivery order tracking program. Additionally, our West Elm West Coast distribution center in Fontana, California is now fully operational, facilitating growth for our West Elm brand~~this Quarterly Report on ~~the West Coast.~~Form

10-Q.

~~We believe that our continued focus on evolution and innovation is reflected in our business results. Our value proposition of high quality,~~

~~design-led,~~

~~sustainable products combined with our multi-brand, digital-first operating model is a strong combination.~~

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through our

e-commerce

websites, direct mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and

co-branded

credit cards.

Net revenues in the third quarter of fiscal ~~2019~~2020 increased by ~~$85,489,000,~~$322,064,000, or ~~6.3%~~22.3%, compared to the third quarter of fiscal ~~2018,~~2019, with comparable brand revenue growth of ~~5.5%.~~24.4% and double-digit comparable revenue growth across all our brands. This increase was primarily driven by an increase in e-commerce revenues, partially offset by a decrease in retail revenues driven by reduced customer store traffic and limited capacity in stores due to COVID-19.

Net revenues for year-to-date fiscal 2020 increased by $436,098,000, or 10.8%, compared to year-to-date fiscal 2019, with comparable brand revenue growth of 13.1% and double-digit comparable revenue growth across all our brands. This growth was primarily driven by ~~West Elm and Pottery Barn. Net revenue growth included a 9.2%~~an increase in e-commerce revenues, partially offset by a decrease in retail revenues, including international ~~revenue across both~~revenues related to our company-owned 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 5.2%. This growth was primarily~~operations, driven by ~~West Elm~~temporary retail store closures and ~~Pottery Barn. Net revenue growth included a 8.9% increase~~limited capacity in ~~international revenue across both our company-owned and franchise operations.~~stores due to COVID-19.

Comparable Brand Revenue

Comparable brand revenue includes comparable store sales and

e-commerce

sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are typically defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Comparable stores that were temporarily closed during the year due to

COVID-19

were not excluded from the comparable stores calculation. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and

e-commerce

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

Thirteen
Weeks Ended

Thirty-nine
Weeks Ended

Comparable brand revenue growth (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
%


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
Comparable brand revenue growth (decline)	November 1, 2020			November 3, 2019			November 1, 2020			November 3, 2019
Pottery Barn		24.1	%		3.4	%		10.9	%		3.1	%
West Elm		21.8	%		14.1	%		11.4	%		14.5	%
Williams Sonoma		30.4	%		(2.1	%)		21.9	%		(1.6	%)
Pottery Barn Kids and Teen		23.8	%		4.0	%		12.7	%		3.1	%
Total 1		24.4	%		5.5	%		13.1	%		5.2	%

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

~~STORE DATA~~

Store Count

Average Leased Square
Footage Per Store

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

Table of Contents

STORE DATA


	Store Count											Average Leased Square Footage Per Store
	August 2, 2020 1		Openings 2		Closings 2			November 1, 2020		November 3, 2019		November 1, 2020		November 3, 2019
Williams Sonoma		210		1		(1	)		210		218		6,800		6,900
Pottery Barn		201		1		(1	)		201		205		14,400		14,400
West Elm		121		2		(1	)		122		114		13,100		13,100
Pottery Barn Kids		72		—		(1	)		71		79		7,800		7,500
Rejuvenation		10		—		—			10		10		8,500		8,500
Total		614		4		(4	)		614		626		10,700		10,600
Store selling square footage at period-end													4,143,000		4,154,000
Store leased square footage at period-end													6,569,000		6,622,000

1	Store counts as of August 2, 2020 includes stores temporarily closed due to COVID-19.

2	Store count data excludes temporary closures and re-openings of our stores due to COVID-19.

COST OF GOODS SOLD

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
%


	Thirteen Weeks Ended										Thirty-nine Weeks Ended
In thousands	November 1, 2020		% Net Revenues			November 3, 2019		% Net Revenues			November 1, 2020		% Net Revenues			November 3, 2019		% Net Revenues
Cost of goods sold 1	$	1,058,953		60.0	%	$	924,300		64.1	%	$	2,819,471		62.8	%	$	2,608,054		64.3	%

Includes total occupancy expenses of ~~$179,237,000~~$174,189,000 and ~~$177,261,000~~$179,237,000 for the third quarter of fiscal ~~2019~~2020 and the third quarter of fiscal ~~2018,~~2019, respectively, and $515,284,000 and $529,905,000 ~~and $521,544,000~~ for

year-to-date

fiscal 2020 and

year-to-date

fiscal 2019, ~~and~~

~~year-to-date~~respectively.

~~fiscal 2018, 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.

Third Quarter of Fiscal ~~2019~~2020 vs. Third Quarter of Fiscal ~~2018~~2019

Cost of goods sold increased by ~~$62,301,000,~~$134,653,000, or ~~7.2%~~14.6%, in the third quarter of fiscal ~~2019~~2020 compared to the third quarter of fiscal ~~2018.~~2019. Cost of goods sold as a percentage of net revenues ~~increased~~decreased to 60.0% in the third quarter of fiscal 2020 from 64.1% in the third quarter of fiscal ~~2019~~2019. This decrease was primarily driven by higher merchandise margins from ~~63.5% in~~reduced promotional activity during the third quarter of fiscal ~~2018.~~2020, and the leverage of occupancy costs, primarily due to higher sales and a reduction in occupancy costs, which includes the impact of reduced rent and operating costs from fewer stores year-over-year. This ~~increase~~decrease was ~~primarily driven~~partially offset by ~~the incremental impact from the China tariffs, as well as increased~~higher shipping costs due to a ~~higher mix~~significantly greater portion of ~~furniture sales, partially offset by the leverage of occupancy costs.~~our total revenues being generated from

e-commerce

and surcharges from our third-party shippers.

~~Year-to-Date~~

Year-to-date

Fiscal 2020 vs.

Year-to-date

Fiscal 2019 ~~vs.~~

~~Year-to-Date~~

~~Fiscal 2018~~

Cost of goods sold increased by ~~$163,987,000,~~$211,417,000, or ~~6.7%~~8.1%, for

year-to-date

fiscal ~~2019~~2020, compared to

year-to-date

fiscal ~~2018.~~2019. Cost of goods sold as a percentage of net revenues ~~increased~~decreased to 62.8% for

year-to-date

fiscal 2020 from 64.3% for

year-to-date

fiscal ~~2019 from 63.7% for~~

~~year-to-date~~

~~fiscal 2018.~~2019. This ~~increase~~decrease was primarily driven by higher merchandise margins from reduced promotional activity for

year-to-date

fiscal 2020, and the ~~incremental~~leverage of occupancy expenses primarily due to higher sales and a reduction in occupancy costs, which includes the impact of reduced rent and operating costs from ~~the China tariffs~~fewer stores year-over-year, as well as ~~increased~~reduction from

COVID-19-related

rent abatements. This decrease was partially offset by higher shipping costs due to a ~~larger mix~~significantly greater portion of ~~furniture sales, partially offset by~~our total revenues being generated from

e-commerce

and surcharges from our third-party shippers, as well as inventory write-offs of approximately $11,378,000 due to the ~~leverage~~closure of ~~occupancy costs.~~our outlet stores in the first quarter of fiscal 2020.

Table of Contents

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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
%


	Thirteen Weeks Ended										Thirty-nine Weeks Ended
In thousands	November 1, 2020		% Net Revenues			November 3, 2019		% Net Revenues			November 1, 2020		% Net Revenues			November 3, 2019		% Net Revenues
Selling, general and administrative expenses	$	430,979		24.4	%	$	416,281		28.9	%	$	1,162,435		25.9	%	$	1,184,176		29.2	%

Selling, general and administrative expenses consist of

non-occupancy

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

Third Quarter of Fiscal ~~2019~~2020 vs. Third Quarter of Fiscal ~~2018~~2019

Selling, general and administrative expenses increased by ~~$15,681,000,~~$14,698,000, or ~~3.9%~~3.5%, in the third quarter of fiscal ~~2019~~2020, compared to the third quarter of fiscal ~~2018.~~2019. Selling, general and administrative expenses as a percentage of net revenues decreased to 24.4% in the third quarter of fiscal 2020 from 28.9% in the third quarter of fiscal ~~2019 from 29.5% in the third quarter of fiscal 2018.~~2019. This decrease ~~as a percentage of net revenues~~ was primarily driven by significant advertising leverage as we further optimized our digital spend on those initiatives that drove higher returns in traffic and conversion, and the leverage of employment costs and ~~advertising costs~~other general expenses from higher sales performance, lower variable store payroll, and ~~the continued benefits of our cost savings initiatives across the business, as well as our overall expense~~

on-going

strong financial discipline.

~~Year-to-Date~~

Year-to-date

Fiscal 2020 vs.

Year-to-date

Fiscal 2019 ~~vs.~~

~~Year-to-Date~~

~~Fiscal 2018~~

Selling, general and administrative expenses ~~increased~~decreased by ~~$28,186,000,~~$21,741,000, or ~~2.4%~~1.8%, for

year-to-date

fiscal ~~2019~~2020, compared to

year-to-date

fiscal ~~2018.~~2019. Selling, general and administrative expenses as a percentage of net revenues decreased to 25.9% for

year-to-date

fiscal 2020 from 29.2% for

year-to-date

fiscal ~~2019 from 30.1% for~~

~~year-to-date~~

~~fiscal 2018.~~2019. This decrease ~~as a percentage of net revenues~~ was primarily driven by lower advertising costs as we further optimized our digital spend on those initiatives that drove higher returns in traffic and conversion, and the leverage of employment ~~and advertising~~ costs from higher ~~sales~~topline performance and lower variable store payroll. This decrease was partially offset by store asset impairment charges of approximately $21,975,000 for

year-to-date

fiscal 2020 due in part to the ~~continued benefits~~impact of

COVID-19

on our ~~cost savings initiatives across the business, as well as our overall expense discipline.~~retail stores.

~~Table of Contents~~

INCOME TAXES

The effective tax rate was 24.8% for the

year-to-date

fiscal 2020, and 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~~2019. The decrease in the Securities and Exchange Commission in December 2017 provided us with up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act on our fiscal year ended January 28, 2018. The lower effective tax rate ~~in fiscal 2018 was~~is primarily due to ~~SAB 118 adjustments~~an excess tax benefit from stock-based compensation in fiscal 2020 compared to the

~~re-measurement~~

deficiency of ~~our deferred~~the tax ~~assets recorded~~benefit in fiscal 2019, partially offset by the ~~third quarter~~tax effect of ~~2018.~~an earnings mix change between the two fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

As of November ~~3, 2019,~~1, 2020, we held ~~$155,025,000~~$773,170,000 in cash and cash equivalents, the majority of which was held in ~~interest bearing~~interest-bearing demand deposit accounts and money market funds, and of which ~~$130,194,000~~$120,714,000 was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

InFor the remainder of fiscal ~~2019,~~2020, we plan to use our cash resources to fund our inventory and ~~inventory related~~inventory-related purchases, employment-related costs, advertising and marketing initiatives, property and equipment purchases, ~~stock repurchases~~dividend payments and ~~dividend payments. In addition to our cash balances on hand, we~~share repurchases. We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“~~the~~ revolver”), and a $300,000,000 unsecured term loan facility (“~~the~~ term loan”). The revolver may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. During the first quarter of fiscal 2020, we drew down $487,823,000 on our revolving line of credit, all of which was repaid as of November 1, 2020. No additional borrowings were made under the revolver during the second or third quarters of fiscal 2020. 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. As of 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.revolver. Additionally, as of November ~~3, 2019,~~1, 2020, a total of ~~$12,402,000~~$12,486,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs.

Table of Contents

In order to further strengthen our liquidity position, maximize our balance sheet and maintain financial flexibility, in May 2020, we entered into an amendment to our credit facility, which, among other changes, extends the maturity date and amends the interest rate of the term loan, modifies covenants under the credit facility, and maintains the maturity date and interest rate of the revolver. Under the credit facility amendment, the term loan now matures on January 8, 2022, at which time all outstanding principal and any accrued interest must be repaid. Additionally, in May 2020, we entered into a new agreement for an additional $200,000,000 unsecured

364-day

revolving line of credit.

On August 23, 2020, we renewed all three of our letter of credit facilities and reduced the aggregate credit available under these facilities from $70,000,000 to $35,000,000 due to our lower level of usage, and extended each facility’s maturity date until August 22, 2021. As of November ~~3, 2019, we had~~1, 2020, an aggregate of $9,075,000 was outstanding under these three ~~unsecured~~ letter of credit ~~reimbursement facilities for a total of $70,000,000, of which $8,221,000 was outstanding.~~facilities. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we have not taken legal title.

The Credit Facility Amendment and the

~~We are currently~~364-Day

Credit Agreement contain certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and rent expense to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of November 1, 2020, we were in compliance with ~~all of~~ our financial covenants under ~~the~~our credit ~~facility~~facilities 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 ~~2019,~~2020, net cash provided by operating activities was ~~$89,950,000~~$726,628,000 compared to ~~$179,501,000~~$89,950,000 for

year-to-date

fiscal ~~2018.~~2019. For

year-to-date

fiscal ~~2019,~~2020, net cash provided by operating activities was primarily attributable to net earnings adjusted for

non-cash

items, ~~partially offset~~as well as increases in gift card and other deferred revenue, accrued expenses and other liabilities and accounts payable. Net cash provided by ~~an increase in merchandise inventories and a decrease in accounts payable . The decrease in~~operating activities for

year-to-date

fiscal 2020 compared to net cash provided by operating activities for

year-to-date

fiscal 2019 ~~compared to~~

~~year-to-date~~

~~fiscal 2018~~ was primarily due to an increase in net earnings, a year-over-year reduction in merchandise inventories, and increases in accounts payable, ~~due to the timing of payments.~~accrued expenses and other liabilities and gift card and other deferred revenue.

Cash Flows from Investing Activities

For

year-to-date

fiscal ~~2019,~~2020, net cash used in investing activities was ~~$120,684,000~~$124,379,000 compared to ~~$126,522,000~~$120,684,000 for

year-to-date

fiscal ~~2018,~~2019, and was primarily attributable to purchases of property and equipment.

Cash Flows from Financing Activities

For

year-to-date

fiscal ~~2019,~~2020, net cash used in financing activities was ~~$152,496,000~~$260,009,000 compared to ~~$279,781,000~~net cash used in financing activities of $152,496,000 for

year-to-date

fiscal ~~2018.~~2019. For

year-to-date

fiscal ~~2019,~~2020, net cash used in financing activities was primarily attributable to the payment of dividends and repurchases of our common ~~stock and tax withholdings related to stock-based awards, partially offset by borrowings under our revolver.~~stock. The ~~decrease~~increase in net cash used in financing activities for

year-to-date

fiscal 2020 compared to net cash used in financing activities for

year-to-date

fiscal 2019 ~~compared to~~

~~year-to-date~~

~~fiscal 2018~~ was primarily attributable to ~~a decrease in repurchases~~the repayment of ~~common stock, as well as an increase in~~all outstanding borrowings under our ~~revolver.~~revolving line of credit in the third quarter of fiscal 2020.

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.

~~Table of Contents~~

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 ~~2019, other than those discussed in Notes H, I and M to our Condensed Consolidated Financial Statements,~~2020, there ~~have been~~were no significant changes to the critical accounting policies discussed in our Annual Report on Form

10-K

for the year ended February ~~3, 2019.~~2, 2020.

Table of Contents

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.

Contractual Obligations, Commitments, Contingencies and

Off-balance

Sheet Arrangements

Except as described in Note B of Part I, Item 1, there were no material changes during the quarter to the Company’s contractual obligations, commitments, contingencies and

off-balance

sheet arrangements that are described in Part II, Item 7 of the Company’s Annual Report on Form

10-K

for the fiscal year ended February 2, 2020, which is incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our revolver 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

~~year-to-date~~

the third quarter of fiscal ~~2019,~~2020, we had outstanding borrowings of ~~$100,000,000~~$487,823,000 under the revolver, all of which ~~was~~were repaid in the third quarter of fiscal 2020. Additionally, we have $300,000,000 outstanding asunder our term loan and a $200,000,000 unsecured revolving line of ~~November 3, 2019.~~credit that has not been drawn upon. 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 November ~~3, 2019,~~1, 2020, our investments, made primarily in ~~interest bearing~~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~~the majority of our 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~~dollars and, as such, any foreign currency impact related to ~~these~~our international purchase transactions was not significant to us during the third quarter of fiscal ~~2019~~2020 or the third quarter of fiscal ~~2018.~~2019. 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 ~~could~~would 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 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 or

~~year-to-date~~

of fiscal ~~2019~~2020 or the third quarter or

~~year-to-date~~

of fiscal ~~2018,~~2019, 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).

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of November ~~3, 2019,~~1, 2020, 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

~~Table of Contents~~

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~~We substantially completed the implementation of our new Enterprise Resource Planning (“ERP”) system during the third quarter of fiscal 2020. The implementation of that ERP system is expected to, among other things, improve user access security and automate a number of accounting and reporting processes and activities, thereby decreasing the amount of manual processes previously required. Except for the implementation of the new ERP system, there were no ~~change~~significant changes in our internal control over financial reporting that occurred during ~~our most recent~~the third quarter of fiscal ~~quarter~~2020, that ~~has~~ materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Form

10-Q.

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report

on Form

10-K for

~~for~~ the fiscal year ended February ~~3, 2019~~2, 2020 for a description of the risks and uncertainties associated with our business. ~~There were~~We are providing the following information regarding changes that have occurred to the previously disclosed risk factors in our

Form 10-K. Except

for such additional information, we believe there have been no material changes ~~to such~~from the risk factors previously disclosed in our

Form 10-K.

Our business has been and may continue to be materially impacted by the

COVID-19

pandemic, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

Our business has been and may continue to be materially impacted by the

COVID-19

pandemic, which has negatively affected the U.S. and global economies, disrupted businesses and financial markets, and led to significant travel and transportation restrictions, mandatory closures of

non-essential

retailers and other businesses, and orders to

“shelter-in-place”.

On March 11, 2020, the World Health Organization declared a novel strain of the coronavirus

(COVID-19)

COVID-19

pandemic. The preventative or protective actions that governments and businesses around the world have taken to contain the spread of

COVID-19

have resulted in a period of disruption that has and may continue to negatively impact our retail store revenues which comprised approximately 44% of our net revenues in fiscal 2019. As of November 1, 2020, all of our retail stores had reopened. However, subsequent to quarter end, given the continued uncertainty around

COVID-19

due to rising rates of infections in certain geographies, state and local officials have reinstated closures or restrictions on retail capacity, which will continue to negatively impact our store traffic and retail revenues. Additionally, federal, state and local governments may impose new restrictions on retail operations, which will affect our ability to operate our retail stores until such restrictions are lifted. Such reduced traffic and store closures have and may continue to result in material reductions in our retail store revenues and operating income as well as store asset impairment charges and write-offs, which have and may continue to negatively affect our operating results. Further, while we have implemented strict safety protocols based on Center for Disease Control and Prevention and government recommendations in stores that we have

re-opened,

there is no guarantee that such protocols will be effective, and any virus-related illnesses linked or alleged to be linked to our stores, whether accurate or not, may negatively affect our reputation, operating results and/or financial condition.

Although to date, the impact of our store closures on our retail store revenues has been more than offset by growth in our

e-commerce

business, there is no guarantee that such growth will continue if the current recession continues over a prolonged period of time or worsens due to the

COVID-19

pandemic, and results in decreased consumer spending in the ~~current quarterly reporting period.~~markets in which we operate.

We have also implemented work-from-home policies for certain employees, which continue to be in effect. While such policies have not significantly impacted productivity or disrupted our business to date, over a prolonged period of time, such policies could adversely impact our ability to conduct our business in the ordinary course.

Governmental mandates, illness or the absence of a substantial number of distribution center employees may require in the future that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers from delivering packages to our customers and our stores, which could complicate or prevent us from fulfilling

e-commerce

orders and could complicate or prevent our ability to supply merchandise to our stores. As of the date of this report, all our distribution centers remain open and operational, and we are not experiencing material disruptions in the delivery of our products.

We also have incurred and expect to continue to incur higher shipping costs due to the various surcharges that have been announced by third party shippers on retailers, which are related to the increased shipping demand resulting from the

COVID-19

pandemic. These higher costs affected us in the third quarter of 2020 and will affect us more so in the fourth quarter as a result of peak surcharges during the holiday season and could continue to affect us thereafter.

Table of Contents

Further,

COVID-19

related containment efforts and illnesses could also impact our vendors who manufacture or deliver our merchandise to us or our customers, which could adversely affect our ability to acquire and sell our merchandise, thus adversely affecting our results of operations, cash flows and liquidity.

While the extent of the economic impact of

COVID-19

and the duration of that impact may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which adversely impacted the value of our common stock in the first quarter. In addition, a prolonged recession or long-term market correction, could in the future adversely impact the value of our common stock over the long-term, impact our access to capital and affect our business in the near and long-term.

We currently believe that our available cash, cash equivalents and cash flow from operations will be sufficient to finance our operations and expected capital requirements for at least the next 12 months unless we experience a material decline in revenue relating to the

COVID-19

pandemic. However, we might experience periods during which we encounter additional cash needs, and we might need additional external funding to support our operations. If we are unable to access additional credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results. Further, additional borrowings on our revolving line of credit has resulted or will result in us incurring additional interest expense, which would negatively affect our earnings.

The

COVID-19

pandemic continues to rapidly evolve. The ultimate impact of the

COVID-19

pandemic on our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, such as the transmission rate of the disease, the extent and effectiveness of containment actions, particularly as areas are reopened, and the impact of these and other factors on our stores, offices, employees, distributors, vendors and customers. If we are not able to respond to and manage the impact of such events effectively, our business, operating results, financial condition and cash flows could be adversely affected.

Please see Note A to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about the potential impact of the

COVID-19

pandemic on our business, and the actual operational and financial impacts that we have experienced to date.

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

The following table provides information as of November ~~3, 2019~~1, 2020 with respect to shares of common stock we repurchased during the third quarter of fiscal ~~2019~~2020 under our stock repurchase program. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form

10-Q.

Fiscal period

Total Number
of Shares
Purchased
1

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of a Publicly
Announced Program
1

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

August 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


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 3, 2020 – August 30, 2020		—		—		—	$	574,982,000
August 31, 2020 – September 27, 2020		—		—		—	$	574,982,000
September 28, 2020 – November 1, 2020		1,119,335	$	97.42		1,119,335	$	465,934,000
Total		1,119,335	$	97.42		1,119,335	$	465,934,000

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.

Table of Contents

ITEM 6. EXHIBITS

(a) Exhibits


Exhibit Number		Exhibit Description

10.1*		~~Sixth~~Seventh Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 23, ~~2019~~2020

10.2*		~~Sixth~~Seventh Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 23, ~~2019~~2020

10.3*		~~Sixth~~Seventh Amendment to Reimbursement Agreement between Williams-Sonoma, Inc., Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 23, ~~2019~~2020

31.1*		Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.2*		Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

32.1*		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*
	101*		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended November ~~3, 2019,~~1, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags

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

*	Filed herewith.

Table of Contents

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 ~~12, 2019~~ 4, 2020


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)


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.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐


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	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

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


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


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


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


	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