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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
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 October 27, 1996.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 2-83992
WILLIAMS-SONOMA, INC.
(Exact Name of Registrant as Specified in Its Charter)
California 94-2203880
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3250 Van Ness Avenue, San Francisco, CA 94109
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 421-7900
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 | |
As of December 5, 1996, 25,539,814 shares of the Registrant's Common
Stock were outstanding.
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WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 27, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 27, 1996, January 28, 1996, and October 29,
1995
Condensed Consolidated Statements of Operations
Thirteen weeks ended October 27, 1996, and October 29,
1995, Thirty-nine weeks ended October 27, 1996, October
29, 1995
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended October 27, 1996, and October
29, 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 6. Exhibits and Reports on Form 8-K
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
October 27, January 28, October 29,
1996 1996 1995
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,882 $ 4,166 $ 4,085
Accounts receivable (net) 17,038 13,157 14,579
Merchandise inventories 119,016 121,603 164,827
Prepaid expenses and other assets 11,044 6,506 11,907
Prepaid catalog expenses 16,870 15,613 16,608
Deferred income taxes 139 139 259
-------- -------- --------
Total current assets 166,989 161,184 212,265
Property and equipment (net) 168,667 147,302 127,423
Investments and other assets (net) 7,518 6,570 6,210
Deferred income taxes 4,040 4,040 4,021
-------- -------- --------
$347,214 $319,096 $349,919
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,600 $ 58,295 $ 56,993
Accrued expenses 5,540 8,323 3,475
Accrued salaries and benefits 10,642 8,666 8,348
Line of credit 15,400 29,600 87,300
Current portion of long-term debt 125 125 125
Customer deposits 10,539 9,587 6,891
Other liabilities 3,456 5,565 2,774
Income taxes payable -- 1,947 --
-------- -------- --------
Total current liabilities 100,302 122,108 165,906
Deferred lease credits 40,328 28,578 23,625
Long-term debt and other liabilities 46,884 46,757 46,721
Convertible debt 40,000 -- --
Shareholders' equity 119,700 121,653 113,667
-------- -------- --------
$347,214 $319,096 $349,919
======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
---- ----- ---- ----
Net sales $171,154 $ 138,363 $ 484,050 $ 384,256
Costs and expenses:
Cost of goods sold and occupancy 108,522 90,233 312,942 248,116
Selling, general and administrative 60,917 52,665 171,549 141,394
-------- --------- --------- ---------
Total costs and expenses 169,439 142,898 484,491 389,510
-------- --------- --------- ---------
Earnings (loss) from operations 1,715 (4,535) (441) (5,254)
Interest expense (net) 1,317 1,695 4,334 2,932
-------- --------- --------- ---------
Earnings (loss) before income taxes 398 (6,230) (4,775) (8,186)
Income taxes (benefit) 167 (2,561) (2,005) (3,377)
-------- --------- --------- ---------
Net earnings (loss) $ 231 $ (3,669) $ (2,770) $ (4,809)
======== ========= ========= =========
Earnings (loss) per share:
Primary and fully diluted $ 0.01 $ (0.14) $ (0.11) $ (0.19)
Average number of common shares outstanding:
Primary 26,453 25,378(*) 25,453(*) 25,354(*)
Fully Diluted 26,511(**) 25,378(*) 25,453(*) 25,354(*)
* Incremental shares from assumed exercise of stock options and convertible
debt are antidilutive for primary and fully diluted loss per share.
** Incremental shares from conversion of convertible debt are
antidilutive for fully diluted earnings per share.
See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
October 27, October 29,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,770) $ (4,809)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 17,333 11,333
Reserve for termination of corporate headquarter leases -- (605)
Amortization of deferred lease credits (2,444) (1,271)
Change in allowance for doubtful accounts (56) 95
Change in deferred rents (157) (3)
Loss on prepayment of CA Closets note receivable 225 --
Loss on disposal of assets 6 477
CHANGE IN:
Accounts receivable (4,050) (7,862)
Merchandise inventories 2,587 (76,877)
Prepaid catalog expenses (1,257) (5,403)
Prepaid expenses and other assets (4,538) (5,391)
Accounts payable (2,630) 2,202
Accrued expenses and other liabilities (960) 1,751
Deferred lease incentives 14,352 10,746
Income taxes payable (1,947) (8,329)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,694 (83,946)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (39,482) (61,341)
Other investments 156 20
Proceeds from sale of property and equipment -- 797
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (39,326) (60,524)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts (1,065) 5,433
Borrowings under line of credit 160,480 173,500
Repayments under line of credit (174,680) (86,200)
Proceeds from issuance of long-term debt -- 40,000
Proceeds from issuance of convertible debt 40,000 --
Debt issuance costs (1,330) (407)
Repayment of long-term obligations (94) (94)
Proceeds from exercise of stock options 816 260
Change in other long-term liabilities 221 --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,348 132,492
--------- ---------
Net decrease in cash and cash equivalents (1,284) (11,978)
Cash and cash equivalents at beginning of period 4,166 16,063
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,882 $ 4,085
========= =========
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Thirty-nine Weeks Ended October 27, 1996 and October 29, 1995
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The condensed consolidated balance sheets as of October 27, 1996 and October 29,
1995, the condensed consolidated statements of operations for the thirteen and
thirty-nine week periods ended October 27, 1996 and October 29, 1995, and
condensed consolidated statements of cash flows for the thirty-nine week periods
ending October 27, 1996 and October 29, 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
thirty-nine 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 thirty-nine weeks ended October
27, 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 $38,670,000 and will be used to
provide the Company with a long-term source of working capital. Interest is
payable semi-annually in April and October. 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
38.31 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.
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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 Thirty-Nine Weeks Ended
October 27, 1996 October 29, 1995 October 27, 1996 October 29, 1995
Catalog Sales $ 63,522 37.1% $ 57,034 41.2% $185,555 38.3% $162,891 42.4%
Retail Sales 107,632 62.9% 81,329 58.8% 298,495 61.7% 221,365 57.6%
-------- ----- -------- ----- -------- ----- -------- -----
$171,154 100.0% $138,363 100.0% $484,050 100.0% $384,256 100.0%
======== ===== ======== ===== ======== ===== ======== =====
SALES
Net sales for Williams-Sonoma, Inc. and its subsidiaries (the Company) for the
thirty-nine and thirteen weeks ended October 27, 1996 (Year-to-Date and Third
Quarter, respectively) increased 26.0% and 23.7%, respectively, over the same
periods of the prior year.
Year-to-Date catalog sales increased 13.9% over the comparable period of the
prior year and grew 11.4% in the Third Quarter as compared to the same period of
1995. For these same periods, the number of catalogs mailed increased 2.2% and
5.9%, respectively, over comparable periods of the prior year. Year-to-Date,
Pottery Barn sales accounted for 70.3% of the growth in catalog sales. During
the Third Quarter, Pottery Barn changed its merchandise assortment from country
living to a sleeker, more urban design.
Year-to-Date and Third Quarter 1996 retail sales increased 34.8% and 32.3%,
respectively, over comparable periods of 1995. The Company operated 257 stores
at the end of the Third Quarter--a net increase of 10.3% since October 29, 1995.
Year-to-Date and Third Quarter comparable store sales increased 4.6% and 4.4%,
respectively, over the same periods of the prior year. Pottery Barn accounted
for 64.9% of the growth in Year-to-Date retail sales, primarily due to new store
openings and expansions. As of October 27, 1996, 33 of the Company's 77 Pottery
Barn stores (42.9%) are large-format stores, comprising 71.2% of the total
Pottery Barn leased square footage. During the Year-to-Date period, the Company
opened or expanded 14 Williams-Sonoma and 13 Pottery Barn stores.
COST OF GOODS SOLD AND OCCUPANCY
Cost of goods sold and occupancy expense as a percent of net sales decreased 1.8
percentage points to 63.4% in the Third Quarter as compared to the same period
of the prior year, principally due to an improvement in the merchandise margin.
For the Year-to-Date, the cost of goods sold and occupancy expense rate remained
relatively flat, primarily as a result of modest improvement in merchandise
margins offset by higher occupancy expense rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense as a percentage of net sales
decreased 1.4 percentage points for the Year-to-Date, to 35.4% from 36.8% in the
comparable period of 1995. For the Third Quarter, selling, general and
administrative expense as a percent of net sales improved 2.5 percentage points,
from 38.1% in the same period of 1995 to 35.6% in 1996. The improvement is
primarily due to lower advertising expense rates due to the accelerating growth
in retail sales as compared to catalog sales, and improvements in other general
expenses.
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INTEREST EXPENSE
Interest expense for the Year-to-Date increased by $1,402,000 over the same
period of the prior year principally due to higher borrowings used to fund new
stores 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 borrowings. During the Third Quarter, interest expense
declined $378,000 from the same period of the prior year, primarily due to
reduced bank borrowings as a result of the improvement in the Company's
merchandise inventory levels.
INCOME TAXES
The Company's effective tax rate was 42.0% for both the Third Quarter and the
Year-to-Date compared to 41.1% and 41.3% 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 October 27, 1996, increased by $20,328,000 over that at
October 29, 1995, principally due to a reduction in the Company's merchandise
inventories, the proceeds of which were used primarily to pay down bank
borrowings. Net cash provided by operating activities for the Year-to-Date was
$13,694,000, as compared to an operating usage of cash of $(83,946,000) for the
same period of the prior year -- an improvement of $97,640,000. This is
principally attributable to the Company's program to reduce inventory levels to
bring them more into line with planned sales and increases in deferred lease
credits resulting from landlord construction allowances for new stores and
expansions. Net borrowings under the line of credit for Year-to-Date decreased
$101,500,000 from the same period of the prior year, principally as a result of
the improvement in inventory levels combined with the replacement of certain
short-term borrowings with long-term debt. 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 38.31 shares per
$1,000 of principal amount). The proceeds from the sale of the notes were used
to reduce bank borrowings. Net cash used in investing activities of
($39,326,000) for the Year-to-Date includes expenditures of $27,490,000 for new
or remodeled stores and $7,976,000 for the Memphis distribution center
expansion.
The capital expenditure of $11,444,000 made in the Third Quarter are the
continuation of an expansion program begun in fiscal 1995, when the Company
invested $86,513,000, principally on new stores 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 of $30,000,000 in fiscal 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. As of December 4, 1996, there were no outstanding borrowings under
this 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
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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.
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
FORM 10-Q
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 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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.
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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
_______________________
Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Acting Principal Financial Officer
Dated: December 5, 1996