1
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 May 3, 1998.
[ ] 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 000-12704
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 (I.R.S. Employer
of Incorporation or Organization) 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 [ ]
As of June 10, 1998, 55,560,741 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 MAY 3, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (3)
Condensed Consolidated Balance Sheets
May 3, 1998, February 1, 1998 and May 4, 1997
Condensed Consolidated Statements of Operations
Thirteen weeks ended May 3, 1998 and May 4, 1997
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 3, 1998 and May 4, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (8)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (13)
Item 6. Exhibits and Reports on Form 8-K (13)
3
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
May 3, February 1, May 4,
1998 1998 1997
-------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 52,241 $ 97,214 $ 26,664
Accounts receivable (net) 18,227 15,238 14,625
Merchandise inventories 140,679 132,451 128,935
Prepaid expenses and other assets 8,741 7,991 9,952
Prepaid catalog expenses 12,938 13,596 8,842
Deferred income taxes 3,680 3,680 4,028
-------- -------- --------
Total current assets 236,506 270,170 193,046
Property and equipment (net) 200,038 201,020 173,992
Investments and other assets (net) 5,591 6,039 6,102
Deferred income taxes -- -- 451
-------- -------- --------
Total assets $442,135 $477,229 $373,591
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43,484 $ 58,496 $ 49,404
Accrued expenses 10,549 15,619 10,993
Accrued salaries and benefits 12,390 15,863 13,060
Customer deposits 18,340 19,617 12,861
Income taxes payable 1,053 17,216 1,765
Current portion of long-term obligations 125 125 125
Other liabilities 5,721 8,710 6,496
-------- -------- --------
Total current liabilities 91,662 135,646 94,704
Deferred lease credits 58,059 56,157 41,592
Deferred tax liability 2,439 2,439 --
Long-term debt and other liabilities 50,437 89,789 89,566
Shareholders' equity 239,538 193,198 147,729
-------- -------- --------
Total liabilities and shareholders' equity $442,135 $477,229 $373,591
======== ======== ========
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
May 3, May 4,
1998 1997
-------- --------
Net sales $206,210 $176,535
Costs and expenses:
Cost of goods sold and occupancy 127,924 110,027
Selling, general and administrative 74,358 63,342
-------- --------
Total costs and expenses 202,282 173,369
-------- --------
Earnings from operations 3,928 3,166
Interest expense (net) 289 774
-------- --------
Earnings before income taxes 3,639 2,392
Income taxes 1,492 1,004
-------- --------
Net earnings $ 2,147 $ 1,388
======== ========
Earnings per share (see Notes C and D):
Basic and diluted $ 0.04 $ 0.03
Weighted average number of common shares
outstanding:
Basic 52,193 51,098
Diluted 54,549 53,173
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)
Thirteen Weeks Ended
May 3, May 4,
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings $ 2,147 $ 1,388
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 7,699 6,861
Amortization of deferred lease incentives (1,455) (1,078)
Other 192 --
Change in:
Accounts receivable (2,989) (2,707)
Merchandise inventories (8,227) (18,233)
Prepaid catalog expenses 658 3,083
Prepaid expenses and other assets (750) (1,278)
Accounts payable (15,012) (15,003)
Accrued expenses and other liabilities (10,110) (4,694)
Deferred lease incentives 3,357 3,091
Income taxes payable (16,163) (13,951)
-------- --------
Net cash used in operating activities (40,653) (42,521)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (9,351) (9,453)
Other investments -- (362)
-------- --------
Net cash used in investing activities (9,351) (9,815)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit -- 3,900
Repayments under line of credit -- (3,900)
Repayment of long-term obligations (157) (103)
Proceeds from exercise of stock options 5,188 301
-------- --------
Net cash provided by financing activities 5,031 198
-------- --------
Net decrease in cash and cash equivalents (44,973) (52,138)
Cash and cash equivalents at beginning of period 97,214 78,802
-------- --------
Cash and cash equivalents at end of period $ 52,241 $ 26,664
======== ========
Non-cash transaction: Conversion of Convertible Notes to equity $ 39,004 --
(See Note B)
See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended May 3, 1998 and May 4, 1997
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The condensed consolidated balance sheets as of May 3, 1998 and May 4, 1997 and
the condensed consolidated statements of operations and cash flows for the
thirteen week periods ended May 3, 1998 and May 4, 1997 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 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 February 1, 1998, presented herein,
has been derived from the audited balance sheet of the Company included in the
Company's Form 10-K for the fiscal year ended February 1, 1998.
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 February 1, 1998.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
The results of operations for the thirteen weeks ended May 3, 1998 are not
necessarily indicative of the operating results of the full year.
NOTE B. DEBT
On April 15, 1996, the Company issued 5 1/4% Convertible Subordinated Notes due
April 15, 2003 in the principal amount of $40,000,000 (the "Convertible Notes").
In March of 1998, the Company notified the holders of the Convertible Notes of
the Company's intention to redeem the Convertible Notes on April 21, 1998. Prior
to such redemption, substantially all of the Convertible Notes were converted
into approximately 3,064,000 shares (post-split) of the Company's common stock.
As a result, the Company recorded a net increase to paid-in capital of
$39,004,000, representing $39,999,000 from the conversion of the Convertible
Notes, net of $995,000 of related unamortized debt issuance costs. There was no
income statement impact as a result of this conversion.
The Company's syndicated line of credit facility expired on May 29, 1998, and
was renewed until June 30, 1998. The Company expects to replace this facility
with a 3-year agreement providing for up to $50,000,000 in cash advances,
depending on seasonal requirements. The Company anticipates that the new
agreement will have restrictive loan covenants which will include minimum
tangible net worth requirements, a minimum out-of-debt period, fixed charge
coverage requirements, and a prohibition on payment of cash dividends. In
connection with the new line of credit facility, the Company expects to
obtain a separate $50,000,000 letter-of-credit agreement with its primary bank.
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NOTE C. EARNINGS PER SHARE
Basic earnings per share is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities. Prior
year share and earnings per share amounts in these financial statements have
been restated to reflect such presentation.
NOTE D. STOCK SPLIT
A two-for-one stock split was announced on March 12, 1998 and was effected on
May 15, 1998. All share and earnings-per-share amounts have been restated to
give retroactive recognition to this stock split.
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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
May 3 , 1998 May 4, 1997
------------ -----------
Retail Sales $129,017 62.6% $106,257 60.2%
Catalog Sales 77,193 37.4% 70,278 39.8%
-------- ----- -------- -----
Total Net Sales $206,210 100.0% $176,535 100.0%
======== ===== ======== =====
Net sales for Williams-Sonoma, Inc. and its subsidiaries (the Company) for the
thirteen weeks ended May 3, 1998 (First Quarter of 1998), were $206,210,000 - -
an increase of $29,675,000 (16.8%) over net sales for the thirteen weeks ended
May 4, 1997 (First Quarter of 1997).
RETAIL SALES
Thirteen Weeks Ended
(Dollars in thousands) May 3, 1998 May 4, 1997
----------- -----------
Total retail sales $ 129,017 $ 106,257
Retail growth percentage 21.4% 16.7%
Comparable store sales growth 5.0% -0.3%
Number of stores - beginning of period 276 256
Number of new stores 9 6
Number of closed stores 9 2
Number of stores - end of period 276 260
Store selling area at quarter-end (sq. ft.) 1,022,719 865,354
Retail sales for the First Quarter of 1998 increased 21.4% over retail sales for
the First Quarter of 1997 primarily due to a net increase of 16 stores. During
the First Quarter of 1998, the Company opened 9 stores (4 Williams-Sonoma, 2
Pottery Barn, 2 Hold Everything and 1 clearance center store) and closed 9
stores (3 Williams-Sonoma, 5 Pottery Barn and 1 clearance center store). Pottery
Barn, with 30.8% of the store locations at the end of the First Quarter of 1998,
accounted for 66.1% and 61.4% of retail sales growth in the First Quarter of
1998 and the First Quarter of 1997, respectively. In the First Quarter of 1997,
total retail sales grew 16.7% over the same period of the prior year,
principally due to new store openings.
Comparable store sales are defined as sales from stores whose gross square feet
did not change by more than 20% in the previous twelve months and which have
been open for at least twelve months. Comparable store sales are compared
monthly for purposes of this analysis. In any given period, the set of stores
comprising comparable stores may be different than the comparable stores in the
previous period, depending on store opening and closing activity. Comparable
store sales grew 5.0% in the First Quarter of 1998 as compared to the same
period of the prior year, and were positive for all retail concepts.
First-Quarter 1997 comparable store sales decreased 0.3% over the same period of
1996, primarily due to increased sales in the first quarter of 1996 as a result
of promotional activity.
The prototypical 1998 large-format stores range from 5,800 - 10,400 selling
square feet (7,000 - 15,200 leased square feet) for Pottery Barn stores and
2,900 - 4,500 selling square feet (4,100 - 6,400 leased square feet) for
Williams-Sonoma stores, and enable the Company to display merchandise more
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effectively. At the end of the First Quarter of 1998, 132 stores (76
Williams-Sonoma and 56 Pottery Barn) were in the large format, comprising 65.9%
of the Company's total selling square footage. Large-format stores accounted for
63.7% of total retail sales in the First Quarter of 1998 and 52.4% in the First
Quarter of 1997. By the end of fiscal 1998, the Company plans to increase leased
square footage by approximately 21% as compared to leased square footage as of
the 1997 fiscal year-end.
CATALOG SALES
Catalog sales in the First Quarter of 1998 and First Quarter of 1997 increased
9.8% and 6.0%, respectively, as compared to the same period of the respective
prior years. The total number of catalogs mailed in these periods, as compared
to the same period of the respective prior years, increased 6.0% in the First
Quarter of 1998 and 5.5% in the First Quarter of 1997. The increased circulation
in these periods was in markets with stores. Management believes that the
mailing of catalogs into markets with stores builds brand recognition and
supports new store openings. Typically, these mailings generate less revenue for
the catalog division than mailings into non-store markets.
The following table reflects catalog sales growth percentages by concept:
Thirteen Weeks Ended
May 3, 1998 May 4, 1997
----------- -----------
Williams-Sonoma 1.2% 20.4%
Pottery Barn 23.3% 0.2%
Hold Everything 10.6% 6.2%
Gardeners Eden -26.3% -2.1%
Chambers -4.9% 13.2%
Total catalog 9.8% 6.0%
Combined sales for Williams-Sonoma and Pottery Barn, the Company's primary
concepts, comprised approximately 70.1% and 66.2% of total catalog sales in the
First Quarter of 1998 and 1997, respectively. The number of Pottery Barn and
Williams-Sonoma catalogs mailed in the First Quarter of 1998 as compared to the
same period of the prior year increased 15.3% and 5.6%, respectively. Pottery
Barn, which represented 50.7% of total catalog sales in the First Quarter of
1998, accounted for virtually all of the catalog sales growth in the First
Quarter of 1998 as compared to the same period of 1997. This reflects the
Company's development of the Pottery Barn merchandise assortment over the last
several years and the enhanced consumer brand recognition achieved through the
Pottery Barn catalog and Design Studio stores. First-Quarter 1998
Williams-Sonoma sales were relatively flat compared to the First Quarter of
1997. Sales for Gardeners Eden and Chambers decreased in the First Quarter of
1998, in part because of a 12.5% decrease in the number of catalogs mailed for
each of these concepts.
Pottery Barn sales in the First Quarter of 1997 grew 0.2% as compared to the
same period of 1996, primarily as a result of increased sales as a result of
promotional activity in the first quarter of 1996. Williams-Sonoma sales
increased 20.4% in the First Quarter of 1997 as compared to the same period of
1996.
COST OF GOODS SOLD AND OCCUPANCY EXPENSE
Cost of goods sold and occupancy expenses expressed as a percentage of net sales
in the First Quarter of 1998 decreased 0.3 percentage points to 62.0% from 62.3%
in the same period of the prior year. Merchandise margins improved 0.6
percentage points, primarily as a result of a lower cost of merchandise. Retail
occupancy expenses expressed as a percentage of retail net sales decreased in
the First Quarter of 1998. However, due to the growth of the retail business and
the resultant increase in retail occupancy
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costs, total company occupancy expenses expressed as a percent of net sales
increased 0.3 percentage points in the First Quarter of 1998 as compared to the
same period of 1997.
Cost of goods sold and occupancy expenses expressed as a percentage of net sales
in the First Quarter of 1997 decreased 3.0 percentage points to 62.3%.
Merchandise margins improved 3.4 percentage points, primarily as a result of
markdowns taken in the First Quarter of 1996 which significantly reduced
overstocks and slow-moving items. The occupancy expense rate in the First
Quarter of 1997 increased slightly as compared to the prior year, primarily as a
result of increased depreciation rates in the Company's Memphis distribution
center and the Pottery Barn retail stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses expressed as a percent of net sales
increased 0.2 percentage points in the First Quarter of 1998 to 36.1% from 35.9%
in the First Quarter of 1997. The increase is primarily attributable to
increased operating expenses associated with systems development, including the
work related to the Year 2000 issue. Selling, general and administrative
expenses for the First Quarter of 1997 decreased 0.4 percentage points as
compared to the prior year. The majority of the improvement was due to lower
advertising expense rates.
INTEREST EXPENSE
Net interest expense for the First Quarter of 1998 decreased $485,000, to
$289,000 from $774,000 for the First Quarter of 1997, primarily as a result of
increased interest income. The Company had an average short-term investment
balance of $74,043,000 for the First Quarter of 1998, as compared to $48,869,000
for the First Quarter of 1997. Additionally, interest expense in the First
Quarter of 1998 decreased slightly as compared to the same period of the prior
year, primarily as a result of the conversion of the Company's 5.25%
convertible, subordinated notes.
Net interest expense in the First Quarter of 1997 decreased $767,000, from
$1,541,000 for the first quarter of 1996 to $774,000, primarily as a result of
increased interest income. The increase in interest income was due to the
Company's strong fourth-quarter 1996 performance, which enabled the Company to
start fiscal 1997 with $78,802,000 of cash and equivalents as compared to
$4,166,000 at the beginning of fiscal 1996.
INCOME TAXES
The Company's effective tax rate was 41.0% for the First Quarter of 1998 and
42.0% for the First Quarter of 1997. These rates reflect the effect of aggregate
state tax rates based on the mix of retail sales and catalog sales in the
various states where the Company has sales or conducts business.
LIQUIDITY
For the First Quarter of 1998, net cash used in operating activities was
$40,653,000, as compared to a use of operating cash of $42,521,000 in the First
Quarter of 1997. The First-Quarter 1998 use of cash was principally attributable
to reductions in accounts payable, payment of the Company's 1997 income taxes
and payment of accrued expenses and other liabilities, including sales tax
liabilities.
Cash flow used in investing activities was $9,351,000 in the First Quarter of
1998, and was principally for new stores. The Company is planning approximately
$70,000,000 to $75,000,000 of gross capital expenditures in 1998, including
$10,000,000 for information systems.
For the First Quarter of 1998, cash provided by financing activities was
$5,031,000, comprised primarily of proceeds from exercise of stock options. On
April 15, 1996, the Company had issued 5 1/4% Convertible Subordinated Notes due
April 15, 2003 in the principal amount of $40,000,000 (the "Convertible Notes").
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In March of 1998, the Company notified the holders of the Convertible Notes of
the Company's intention to redeem the Convertible Notes on April 21, 1998. Prior
to such redemption, substantially all of the Convertible Notes were converted
into approximately 3,064,000 shares (post-split) of the Company's common stock.
As a result, the Company recorded a net increase to paid-in capital of
$39,004,000, representing $39,999,000 from the conversion of the Convertible
Notes, net of $995,000 of related unamortized debt issuance costs.
The Company's 364-day syndicated line of credit facility dated May 31, 1997
expired on May 29, 1998 and was renewed until June 30, 1998. The Company expects
to replace this facility with a 3-year agreement providing for up to $50,000,000
in cash advances, depending on seasonal requirements. The Company anticipates
that the new agreement will have restrictive loan covenants, including minimum
tangible net worth requirements, a minimum out-of-debt period, fixed charge
coverage requirements and a prohibition on payment of cash dividends. In
connection with the new line of credit facility, the Company expects to obtain a
separate $50,000,000 letter-of-credit agreement with its primary bank.
IMPACT OF INFLATION
The impact of inflation on results of operations has not been significant.
YEAR 2000 COMPLIANCE
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the "Year 2000" problem. The Company
has conducted a review of its computer systems to identify those areas that
could be affected by the Year 2000 issue and has developed an implementation
strategy.
In addition, the Company has formed a task force which is in the process of
communicating with those with whom it does significant business, to determine
their Year 2000 readiness and the extent to which the Company is vulnerable to
any third-party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company is reliant will be converted
timely, or that a failure by another company to convert would not have a
materially adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram or
replace, and test all of its systems for Year 2000 compliance. The Company
expects to complete the project by mid-1999. The estimated cost for the
remediation and testing of computer applications could range as high as $4.5
million over the two-year period 1998 through 1999. The Company presently
believes, with modification to existing software and converting to new software,
the Year 2000 problem will not pose significant operational risk. Failure by the
Company and/or vendors to complete Year 2000 compliance work in a timely manner
could have a materially adverse effect on the Company's operations.
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 September. 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 quarterly report 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
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include, without limitation, the Company's ability to continue 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
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 annual report on 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 material 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
10.1 Office lease between TJM Properties, L.L.C. and Williams-Sonoma,
Inc., dated as of February 13, 1998 (incorporated by reference
to Exhibit 10.16 to the Company's Annual Report of Form 10-K for
the fiscal year ended February 1, 1998 as filed with the
Commission on April 22, 1998)
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
Secretary
Dated: June 12, 1998