UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 1996.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 2-83992
WILLIAMS-SONOMA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
California 94-2203880
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA 94109
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 421-7900
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
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As of September 5, 1996, 25,496,898 shares of the Registrant's Common Stock
were outstanding.
WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 28, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
July 28, 1996, January 28, 1996, and July 30, 1995
Condensed Consolidated Statements of Operations
Thirteen weeks ended July 28, 1996, and July 30, 1995
Twenty-six weeks ended July 28, 1996, and July 30,
1995
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended July 28, 1996, and July 30,
1995
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
July 28, January 28, July 30,
1996 1996 1995
-------- ----------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 6,176 $ 4,166 $ 5,233
Accounts receivable (net) 9,737 13,157 5,779
Merchandise inventories 101,284 121,603 127,644
Prepaid expenses and other assets 12,957 6,506 8,546
Prepaid catalog expenses 11,342 15,613 13,797
Deferred income taxes 139 139 259
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Total current assets 141,635 161,184 161,258
Property and equipment (net) 163,453 147,302 102,872
Investments and other assets (net) 7,867 6,570 6,242
Deferred income taxes 4,040 4,040 4,021
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$ 316,995 $ 319,096 $ 274,393
========= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $47,824 $ 58,295 $ 39,622
Accrued expenses 8,308 8,323 3,067
Accrued salaries and benefits 8,747 8,666 7,108
Line of credit -- 29,600 75,900
Current portion of long-term debt 125 125 125
Customer deposits 9,846 9,587 6,033
Other liabilities 2,870 5,565 2,911
Income taxes payable -- 1,947 --
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Total current liabilities 77,720 122,108 134,766
Deferred lease credits 33,213 28,578 15,656
Long-term debt and other liabilities 46,854 46,757 6,718
Convertible debt 40,000 -- --
Shareholders' equity 119,208 121,653 117,253
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$ 316,995 $ 319,096 $ 274,393
========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $155,499 $127,733 $312,895 $245,893
Costs and expenses:
Cost of goods sold and occupancy 101,644 84,105 204,419 157,883
Selling, general and administrative 53,451 44,144 110,631 88,728
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Total costs and expenses 155,095 128,249 315,050 246,611
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Earnings (loss) from operations 404 (516) (2,155) (718)
Interest expense (net) 1,476 888 3,017 1,238
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Loss before income taxes (1,072) (1,404) (5,172) (1,956)
Income taxes (benefit) (450) (590) (2,172) (816)
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Net loss $ (622) $ (814) $ (3,000) $(1,140)
========= ======== ========= ========
Loss per share:
Primary and fully diluted $ (0.02) $ (0.03) $ (0.12) $ (0.04)
Average number of common shares outstanding:
Primary and fully diluted 25,460 25,359 25,442 25,348
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Twenty-six Weeks Ended
July 28, July 30,
1996 1995
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Cash flows from operating activities:
Net loss $ (3,000) $ (1,140)
Adjustments to reconcile net loss
to net cash provided by(used in) operating activities:
Depreciation and amortization 10,917 7,236
Amortization of deferred lease credits (1,493) (631)
Change in allowance for doubtful accounts 50 55
Change in deferred rents (257) (120)
Loss on disposal of assets -- 466
Change in:
Accounts receivable 3,371 (440)
Merchandise inventories 20,319 (39,694)
Prepaid expenses and other assets (6,451) (7)
Prepaid catalog 4,271 (2,592)
Accounts payable (8,507) (5,608)
Accrued expenses and other liabilities (1,371) (1,457)
Deferred lease credits 6,385 2,246
Income taxes payable (1,947) (10,351)
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Net cash provided by (used in) operating activities 22,287 (52,037)
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Cash flows from investing activities:
Purchases of property and equipment (28,038) (32,915)
Proceeds from sale of property and equipment -- 797
O Other investments -- 20
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Net cash used by investing activities (28,038) (32,098)
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Cash flows from financing activities:
Change in cash overdrafts (1,964) (4,127)
Borrowings under line of credit 119,180 105,300
Repayments under line of credit (148,780) (29,400)
Proceeds from convertible debt 40,000 --
Long term debt issuance costs (1,327) --
Repayment of long term debt (31) (63)
Proceeds from exercise of stock options 555 177
Change in other long term liabilities 128 --
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Net cash provided by financing activities 7,761 71,887
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Net increase (decrease) in cash and cash equivalents 2,010 (12,248)
Cash and cash equivalents at beginning of period 4,166 17,481
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Cash and cash equivalents at end of period $ 6,176 $ 5,233
========= ========
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six Weeks Ended July 28, 1996 and July 30, 1995
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The condensed consolidated balance sheets as of July 28, 1996, and July 30,
1995, the condensed consolidated statements of operations for the thirteen
and twenty-six week periods ended July 28, 1996, and July 30, 1995, and con-
densed consolidated statements of cash flows for the twenty-six week periods
ending July 28, 1996, and July 30, 1995, have been prepared by Williams-Sonoma,
Inc., (the Company) without audit. In the opinion of management, the
financial statements include all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position at
the balance sheet dates and the results of operations for the thirteen and
twenty-six weeks then ended. These financial statements include Williams-
Sonoma, Inc., and its wholly owned subsidiaries. Significant intercompany
transactions and accounts have been eliminated. The balance sheet at January
28, 1996, presented herein, has been prepared from the audited balance sheet
of the Company.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report to Shareholders for the fiscal year ended January 28, 1996.
Certain reclassifications have been made to the prior year financial statements
to conform to classifications used in the current period.
The results of operations for the thirteen and twenty-six weeks ended July 28,
1996, are not necessarily indicative of the operating results of the full year.
NOTE B. DEBT
On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25%
convertible, subordinated notes (Convertible Notes) due April 15, 2003. Net
proceeds from the transaction amounted to $38,673,000 and will be used to
provide the Company with a long-term source of working capital. Interest is
payable semi-annually beginning in October 1996. The Convertible Notes are
convertible into shares of common stock at any time on or after July 15, 1996,
at a conversion price of $26.10 per share (equivalent to a conversion rate of
38.3 shares per $1,000 principal amount). The conversion price is subject to
adjustment in certain events, including stock splits, and stock dividends. In
the event of a change in control, holders of the Convertible Notes may, at
their option, require the Company to repurchase all or any portion of the
principal amount. The agreement does not restrict the Company from incurring
additional indebtedness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
NET SALES
Net sales consists of the following components (dollars in thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
July 28, 1996 July 30, 1995 July 28, 1996 July 30, 1995
Catalog sales $ 55,721 35.8% $ 52,892 41.4% $ 122,032 39.0% $ 105,857 43.0%
Retail sales 99,778 64.2% 74,841 58.6% 190,863 61.0% 140,036 57.0%
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$ 155,499 100.0% $ 127,733 100.0% $ 312,895 100.0% $ 245,893 100.0%
========== ====== ========== ====== ========== ====== =========== ======
SALES
Net sales for Williams-Sonoma, Inc. and its subsidiaries (the Company) for the
twenty-six and thirteen weeks ended July 28, 1996 (Year-to-Date and Second
Quarter of 1996,respectively) increased 27.2% and 21.7%, respectively, over
the same periods of the prior year.
Year-to-Date catalog sales increased 15.3% over the comparable period of the
prior year and grew 5.4% in the Second Quarter of 1996 as compared to the same
period of 1995. In these periods, the total number of catalogs mailed remained
relatively flat compared to similar periods of the prior year. For the Year-to-
Date and Second Quarter 1996, Pottery Barn sales accounted for 74.5% and 47.0%,
respectively, of the growth in catalog sales. In the third quarter of 1996,
Pottery Barn will be changing the focus of its merchandise from country living
to a sleeker, more urban design.
Year-to-Date and Second Quarter 1996 retail sales increased 36.3% and 33.3%,
respectively, over the comparable periods of 1995. The Company operated 246
stores at the end of the Second Quarter 1996--a net increase of 11% since July
30, 1995. Comparable store sales for the Year-to-Date and Second Quarter 1996
increased 4.8% and 2.6% over the same periods of the prior year. Pottery Barn
accounted for 63.4% and 65.3% of the growth in Year-to-Date and Second Quarter
retail sales, respectively, primarily due to new store openings and expansions.
The Company plans to open or expand 28 stores in fiscal 1996 (12 of which were
opened during the Year-to-Date period) which will increase store selling square
footage by approximately 19% over selling square footage as of January 28,
1996.
COST OF GOODS SOLD AND OCCUPANCY
Cost of goods sold and occupancy expense as a percent of net sales decreased
0.4 percentage points to 65.4% in the Second Quarter of 1996 as compared to
65.8% for the same period of the prior year, principally due to an improvement
in the merchandise margin which was partially offset by increased occupancy
expense. For the Year-to-Date, the cost of goods sold and occupancy expense
rate increased as a percentage of net sales by 1.1 percentage points to 65.3%
from 64.2%, primarily as a result of merchandise markdowns taken in the first
quarter to bring inventory levels in line with planned sales as well as
increased occupancy expense.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales
decreased 0.7 percentage points for the Year-to-Date, to 35.4% from 36.1% in
the comparable period of 1995, and decreased 0.2 percentage points in the
Second Quarter of 1996 to 34.4% compared to 34.6% for the same period of the
prior year. Most of the improvement in both periods is due to lower advertising
costs due to the accelerating growth in retail sales as compared to catalog
sales, partially offset by higher employment expenses.
INTEREST EXPENSE
Interest expense for the Year-to-Date and Second Quarter 1996 increased by
$1,779,000 and $588,000, respectively, over the same periods of the prior year
principally due to higher borrowings used to fund store openings and
expansions, and the Memphis distribution center expansion. The Company borrowed
$40,000,000 for ten years at 7.2% on August 14, 1995, and sold $40,000,000 of
5.25% convertible subordinated notes due 2003 on April 15,1996. Proceeds were
used to reduce bank line borrowings which had averaged $33,055,000 during the
first half of 1995 versus $20,704,000 for the comparable period in 1996.
INCOME TAXES
The Company's effective tax rate was 42.0% for both the Second Quarter of 1996
and the twenty-six weeks ended July 28, 1996, compared to 42.0% and 41.6% for
the same periods of the prior year, respectively. The increase in tax rates in
1996 is a result of higher aggregate state tax rates based on the mix of retail
and catalog sales in the various states where the Company has sales or conducts
business.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 28, 1996, increased by $37,423,000 over that at July
30, 1995, primarily due to a reduction in the Company's bank line borrowings
(discussed below) partially offset by reductions in merchandise inventory and
increases in accounts payable. Net cash provided from operating activities for
the Year-to-Date was $22,287,000, as compared to an operating usage of cash of
$(52,037,000) for the same period of the prior year-- an improvement of
$74,324,000 primarily attributable to reduced inventory levels. The reduction
in inventory levels is partially due to improvements in planning processes.
Net cash used in investing activities of $(28,038,000) for the Year-to-Date
includes expenditures of $18,636,000 for store openings and expansions, and
$7,264,000 for the Memphis distribution center. On April 15,1996, the Company
sold $40,000,000 of 5.25% convertible subordinated notes due 2003 which will be
convertible at any time on or after July 15,1996, into shares of the Company's
common stock at a conversion price of $26.10 per share (or 38.3 shares per
$1,000 of principal amount). The proceeds from the sale of the notes were used
to reduce bank borrowings.
Capital expenditures of $14,959,000 made in the Second Quarter of 1996 are the
continuation of an expansion program begun in 1995, when the Company invested
$86,513,000 principally on store openings and expansions, and the expansion of
its Memphis distribution facility. The 1995 expenditures were financed through
$16,224,000 of landlord construction allowances and the issuance of $40,000,000
ten-year notes at 7.2% and increased bank borrowings. The Company is planning
net capital expenditures in 1996 of approximately $30,000,000. The expansion
of the Memphis distribution facility was completed in the third quarter of
1996.
The Company's existing credit agreement was renewed on March 29,1996, with a
360-day, combined letter of credit and credit facility. The aggregate principal
amount available under the renewed line of credit varies according to seasonal
requirements from a high of $90,000,000 ( $80,000,000 for cash advances) to a
low of $60,000,000 ($35,000,000 for cash advances). This represents a lower
overall commitment of funds for the Company than was available under the prior
credit agreement. At July 28, 1996, the Company had no outstanding borrowings
under this credit agreement.
SEASONALITY
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and net income have
been realized during the period from October through December, and levels of
net sales and net income have generally been significantly lower during the
period from February through July. The Company believes this is the general
pattern associated with the mail order and retail industries. In anticipation
of its peak season, the Company hires a substantial number of additional
employees in its retail stores and mail order processing and distribution
areas, and incurs significant fixed catalog production and mailing costs.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in
this document are forward-looking statements that are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, the Company's ability to improve
planning and control processes and other infrastructure issues, the potential
for construction and other delays in store openings, the Company's dependence
on external funding sources, a limited operating history for the Company's new,
large-format stores, the potential for changes in consumer spending patterns,
consumer preferences and overall economic conditions, the Company's dependence
on foreign suppliers and increasing competition in the specialty retail
business. Other factors that could cause actual results to differ materially
from those set forth in such forward-looking statements include the risks and
uncertainties detailed in the Company's most recent Form 10-K and its other
filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is, however,involved in routine litigation arising in the ordinary
course of its business, and, while the results of the proceedings cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a materially adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on June 19, 1996.
(b) At the Company's 1996 Annual Meeting of Shareholders, the shareholders
took the following actions:
(I) Each of the following persons was re-elected by the vote indicated
to serve as a director of the Company until the next Annual
Meeting of Shareholders or until his successor is elected and
qualified:
Name For Withheld
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Charles E. Williams 22,746,555 129,466
W. Howard Lester 22,768,380 107,641
James A. McMahan 22,752,258 123,763
Nathan Bessin 22,752,495 123,526
Patrick J. Connolly 22,770,117 105,904
Gary G. Friedman 22,768,843 107,178
F. Warren Hellman 22,771,592 104,429
James M. Berry 22,768,367 107,654
Millard S. Drexler 21,220,573 1,655,448
John E. Martin 21,220,588 1,655,433
(II) A proposal was approved to ratify the selection of Deloitte &
Touche as the independent accountants for the Company's fiscal
year ending February 2, 1997:
For Against Withheld
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22,843,096 21,978 10,947
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION
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11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule
(b) There have been no reports on Form 8-K filed during the quarter for which
this report is being filed.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS-SONOMA, INC.
By: /s/Dennis A. Chantland
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Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Acting Principal Financial Officer
Dated: September 5, 1996