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EXHIBIT 13
1998 ANNUAL REPORT TO SHAREHOLDERS
This is available as a separate document. It is included as Exhibit 13 only in
the electronic filing format.
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EXHIBIT 13
FIVE-YEAR SELECTED FINANCIAL DATA
Dollars and amounts in thousands except percentages,
per share amounts and retail stores data
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997(2) Jan. 28, 1996 Jan. 29, 1995
------------- ------------ --------------- ------------- -------------
RESULTS OF OPERATIONS
Net Sales $1,103,954 $ 933,257 $ 811,758 $ 644,653 $ 528,543
Earnings before income taxes 90,745 70,022 39,197 4,373 33,435
Net earnings 54,897 41,347 22,742 2,536 19,572
Basic net earnings per share(1) 1.01 .81 .45 .05 .39
Diluted net earnings per share(1) $ .96 $ .75 $ .43 $ .05 $ .37
Financial Position
Working capital $ 172,866 $ 134,524 $ 96,568 $ 39,076 $ 49,506
Long-term debt and other liabilities 44,649 89,789 89,319 46,757 6,781
Total assets 576,245 477,229 404,417 319,096 217,878
Shareholders' equity per share (book value)(1) $ 5.42 $ 3.74 $ 2.86 $ 2.39 $ 2.35
Debt-to-equity ratio 16.9% 46.5% 61.2% 38.4% 5.7%
Retail Stores
Store Count
Williams-Sonoma 163 152 145 139 120
Classic 65 78 89 97 105
Grand Cuisine 98 74 56 42 15
Pottery Barn 96 88 76 67 57
Classic 19 34 43 47 53
Design Studio 77 54 33 20 4
Hold Everything 33 32 32 32 35
Outlets 6 4 3 2 2
Number of stores at year-end 298 276 256 240 214
Comparable store sales growth 5.0% 2.8% 4.6% 3.4% 16.5%
Store selling area at year-end (sq. ft.) 1,217,047 1,015,778 839,112 690,256 537,969
Gross leasable area at year-end (sq. ft.) 1,887,560 1,553,137 1,264,531 1,023,003 746,683
Catalog Sales
Catalogs mailed in year 163,067 154,475 136,489 131,800 126,833
Catalog sales growth 15.7% 11.2% 19.1% 16.2% 55.0%
Catalog sales as percent of total sales 34.8% 35.5% 36.7% 38.8% 40.8%
(1) Per share amounts have been restated to reflect the 3-for-2 stock splits
in February 1994 and September 1994, as well as reflect the 2-for-1 stock
split in May 1998.
(2) The year ended February 2, 1997 includes 53 weeks.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
NET SALES
Net sales consist of the following components:
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
--------------------------- ------------------------- ----------------------------
Dollars in thousands Jan. 31, 1999 % Total Feb. 1, 1998 % Total Feb. 2, 1997 % Total
------------- ------- ------------ ------- ------------ -------
Retail Sales $ 720,320 65.2% $601,738 64.5% $513,592 63.3%
Catalog Sales 383,634 34.8% 331,519 35.5% 298,166 36.7%
Total net sales $1,103,954 100.0% $933,257 100.0% $811,758 100.0%
Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 52
weeks ended January 31, 1999 (fiscal 1998) were $1,103,954,000--an increase of
$170,697,000 (18.3%) over net sales for the 52 weeks ended February 1, 1998
(fiscal 1997). Net sales for fiscal 1997 increased 15.0% over net sales for the
53 weeks ended February 2, 1997 (fiscal 1996).
RETAIL SALES
Year Ended
---------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Retail sales $ 720,320 $ 601,738 $ 513,592
Retail growth percentage 19.7% 17.2% 30.3%
Comparable store sales growth 5.0% 2.8% 4.6%
Number of stores - beginning of year 276 256 240
Number of new stores 57 44 30
Number of closed stores 35 24 14
Number of stores - end of year 298 276 256
Store selling square footage at year-end 1,217,047 1,015,778 839,112
Store leased square footage at year-end 1,887,560 1,553,137 1,264,531
Retail sales for fiscal 1998 increased 19.7% over retail sales for fiscal 1997
primarily due to new store openings. During fiscal 1998, the Company opened 57
stores (25 large-format Williams-Sonoma, 23 large-format Pottery Barn, 6 Hold
Everything and 3 outlets), and closed 35 stores (14 Williams-Sonoma, 15 Pottery
Barn, 5 Hold Everything and 1 outlet). Pottery Barn accounted for 65.5% of the
growth in selling square footage from fiscal year-end 1997 to fiscal year-end
1998, and 60.2% of retail sales growth as measured for the same period. For the
comparable periods of fiscal 1997 and fiscal 1996, Pottery Barn accounted for
77.7% of the growth in selling square footage and 72.0% of the growth in retail
sales. Total retail sales in fiscal 1997 increased 17.2% over retail sales in
fiscal 1996, principally due to a net increase of 20 stores.
Comparable stores are defined as those whose gross square feet did not
change by more than 20% in the previous twelve months and which have been open
for at least 12 months. Comparable store sales are compared monthly for purposes
of this analysis. Comparable store sales grew 5.0% in fiscal 1998 and 2.8% in
fiscal 1997. Same-store sales growth in Pottery Barn and Williams-Sonoma, the
Company's primary concepts, were similar in fiscal 1998, with both being above
4.7%. Large-format stores accounted for 63% of comparable store sales in fiscal
1998, as compared to 50% in fiscal 1997 and 30% in fiscal 1996.
The prototypical 1998 large-format stores range from 5,800-10,500 selling
square feet (9,500-16,000 gross square feet) for Pottery Barn stores and
2,800-4,500 selling square feet (4,200-7,300 gross square feet) for
Williams-Sonoma, and are intended to enable the Company to display merchandise
more effectively. As of the end of fiscal 1998, 175 stores (98 Williams-Sonoma
and 77 Pottery Barn) were in the large format, comprising 73.8% of the Company's
total selling square footage. Large-format stores accounted for 68% of retail
sales in fiscal 1998, as compared to 58% in fiscal 1997 and 34% in fiscal 1996.
In fiscal 1999, the Company plans to increase leased square footage by
approximately 21%.
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CATALOG SALES
Catalog sales in fiscal 1998 and fiscal 1997 increased 15.7% and 11.2%,
respectively, over those of the prior year. The total number of catalogs mailed
in these periods increased 5.6% in fiscal 1998, and 13.2% in fiscal 1997. The
increased circulation in these periods was primarily in markets with stores. The
purpose of this strategy is to build brand recognition and support new store
openings. Typically, mailings into these areas generate less revenue for the
catalog division than mailings into non-store markets.
The following table reflects catalog sales growth (loss) percentages by concept:
Year Ended
-------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Williams-Sonoma (0.6%) 13.0% 13.4%
Pottery Barn 38.0% 18.1% 27.6%
Hold Everything 5.5% 11.7% 12.3%
Gardeners Eden (12.8%) (5.3%) 8.7%
Chambers (5.1%) (7.8%) 22.7%
Total catalog 15.7% 11.2% 19.1%
In fiscal 1998, Pottery Barn accounted for 51.8% of total catalog sales as
compared to 43.4% for fiscal 1997. The growth of Pottery Barn over the last
several years reflects the Company's development of its assortment and the
enhanced consumer brand recognition achieved through the Pottery Barn catalog
and Design Studio stores. Additionally, the page count of the Pottery Barn
catalogs has been increasing. For Williams-Sonoma, the Company's other primary
concept, the number of catalogs mailed in fiscal 1998 and fiscal 1997 increased
2.8% and 8.9% respectively, over the same periods of the respective prior years.
In 1999, in order to continue to build and strengthen the Williams-Sonoma brand,
the Company intends to redesign this catalog.
In January of 1999, the Company debuted an extension of the Pottery Barn
brand, Pottery Barn Kids, and was extremely pleased with the initial customer
response.
COST OF GOODS SOLD AND OCCUPANCY
Cost of goods sold and occupancy expenses expressed as a percent of net sales in
fiscal 1998 declined 0.7 percentage points to 59.0% from 59.7% in fiscal 1997.
Merchandise margin improved 0.6 percentage points, principally due to lower cost
of merchandise. Occupancy expenses expressed as a percentage of net sales
improved slightly as a result of increased sales volume.
In fiscal 1997, cost of goods sold and occupancy expenses expressed as a
percent of net sales decreased 1.1 percentage points, principally due to lower
cost of merchandise. Occupancy expense as a percent of net sales remained
relatively flat in fiscal 1997 as compared to fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses expressed as a percent of net sales
increased 0.3 percentage points in fiscal 1998 to 32.7% from 32.4% in fiscal
1997. The increase is principally due to higher employment costs in the stores
and distribution center, partially offset by an improved advertising expense
rate. In fiscal 1997, selling, general and administrative expenses as a percent
of net sales decreased 1.4 percentage points, from 33.8% in fiscal 1996 to
32.4%. This improvement was due to improvements in the advertising expense rate,
and lower employment and shipping expense rates in the catalog division.
Fiscal 1997 selling, general and administrative expenses includes a
fourth-quarter pre-tax charge of $2,335,000 for employment costs associated with
the January 1998 closing of the the Company's San Francisco call center. A new
call center opened in Oklahoma City, Oklahoma in the third quarter of 1998.
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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 information technology ("IT") and non-IT systems
to identify those areas that could be affected by the Year 2000 issue, and has
developed a comprehensive, risk-based plan. This plan addresses both IT and
non-IT systems and products, as well as dependencies on those with whom the
Company does significant business.
In connection with the plan, the Company has completed an inventory and
risk-assessment of its computer systems and related technology, and has
remediated all programs known to be non-compliant. The Company has begun its
comprehensive testing process which is expected to be completed by mid-1999. The
Company cannot guarantee that its compliant systems will not encounter
difficulties when attempting to interface or interconnect with third party
systems, whether or not those systems are claimed to be"compliant", and the
Company can not guarantee that such failure to interface or interconnect will
not have a materially adverse effect on the Company's operations.
With regard to outside vendors, the Company believes the greatest Year 2000
exposure is with its service providers (customs broker, logistics providers,
etc.). The Company believes the Year 2000 risk with its merchandise suppliers is
low because no vendor accounts for more than 3% of purchases and many of the
vendors are small artisan manufacturers with simple business systems. As of
January 31, 1999, the Company has completed its compliance review of major
vendors and will resolve any outstanding issues by the end of the third quarter
1999. Despite this approach, 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 is using both internal and external resources to complete this
project. The estimated maximum cost for the remediation and testing of computer
applications and related products in fiscal 1999 is $.5 million. Approximately
$2.1 million has been expensed to date.
The Company presently believes, with modification to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational risk. While the Company can not accurately predict a "worst case
scenario" with regard to its Year 2000 issues, 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. In order to minimize the
potential adverse impact of such risks, the Company is in the process of
updating its contingency procedures consistent with its disaster recovery plan.
These procedures include: completion of business impact analysis for major
systems, developing work-around procedures, defining emergency roles and
responsibilities and implementing hotlines to handle problem escalation and
resolution procedures.
INTEREST EXPENSE
Net interest expense decreased $2,427,000, from $3,790,000 in fiscal 1997 to
$1,363,000 in fiscal 1998, primarily as a result of the conversion of the
Company's $40,000,000 Convertible Notes, discussed below. Also contributing to
the decrease in net interest expense in fiscal 1998 was an increase in the
Company's short-term investment income. Net interest expense in fiscal 1997
decreased $1,175,000 over net interest expense in fiscal 1996, principally due
to an increase in short-term investment income.
INCOME TAXES
The Company's effective tax rate was 39.5% for fiscal 1998, as compared to 41%
in fiscal 1997 and 42% in fiscal 1996. These reductions in the effective tax
rate over the last several years reflect the Company's commitment to legal
entity restructuring in order to minimize its state tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in fiscal 1998 was $79,727,000, an
increase of $3,854,000 from the $75,873,000 of cash generated by operating
activities in fiscal 1997. The $40,709,000 increase in merchandise inventories
from February 1, 1998 to January 31, 1999 is in line with the Company's expected
first-quarter 1999 sales.
Net cash used in investing activities for fiscal 1998 was $76,728,000.
Approximately $62,502,000 was spent on stores and approximately $11,998,000 was
used for information systems. The Company is planning approximately $116,000,000
of gross capital expenditures in fiscal 1999, which includes approximately
$57,000,000 for new stores, $22,000,000 for information systems (including
Internet), and $21,000,000 for warehouse equipment in a new leased distribution
facility in Olive Branch, Mississippi.
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Cash provided by financing activities in fiscal 1998 and fiscal 1997 was
$7,095,000, and $1,685,000, respectively, most of which was provided through
exercises of stock options.
In 1998, in a non-cash transaction, the Company's Convertible Notes were
converted into shares of common stock. 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. 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 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 Notes, net of
$995,000 of related unamortized debt issuance costs. See Note C to the
consolidated financial statements.
On June 1, 1998, the Company renewed its syndicated line of credit facility
and entered into a second amended and restated credit agreement which expires on
May 31, 2001. The amended facility provides for $50,000,000 in cash advances,
and contains certain restrictive loan covenants, including minimum tangible net
worth, a minimum out-of-debt period, fixed charge coverage requirements and a
prohibition on payments of cash dividends. Additionally, the Company has a
one-year $50,000,000 letter-of-credit agreement expiring on May 31, 1999 with
its lead bank. The Company is currently in negotiations with its lead bank and
expects to replace the letter of credit facility prior to its expiration with a
new agreement having similar terms.
On January 31, 1999, the Company had $33,849,000 of outstanding letters of
credit and no borrowings outstanding under the line of credit facility.
IMPACT OF INFLATION
The impact of inflation on results of operations has not been significant.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
Interest Rate Risk: The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market interest rates. If interest rates on existing variable rate debt rose .78
percentage points (a 10% change from the bank's reference rate as of January 31,
1999), the Company's results from operations and cash flows would not be
materially affected. In addition, the Company has fixed and variable income
investments consisting of cash equivalents and short-term investments, which are
also affected by changes in market interest rates. The Company does not use
derivative financial instruments in its investment portfolio.
Foreign Currency Risks: The Company enters into a significant amount of
purchase obligations outside of the U.S. which are settled in U.S. Dollars and,
therefore, has only minimal exposure to foreign currency exchange risks. The
Company does not hedge against foreign currency risks and believes that foreign
currency exchange risk is immaterial.
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 January through July. The Company believes this is the general pattern
associated with the catalog and retail industries. In anticipation of its peak
season, the Company hires a substantial number of additional employees in its
retail stores and catalog 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 Annual Report to Shareholders 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
continue to improve planning and control processes and other infrastructure
issues, the potential for construction and other delays in store openings, 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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CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended
Dollars and shares in thousands, -----------------------------------------------------
except per share amounts Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Net Sales $1,103,954 $933,257 $811,758
Costs and expenses
Cost of goods sold and occupancy 650,942 556,776 493,179
Selling, general and administrative 360,904 302,669 274,417
Interest expense - net 1,363 3,790 4,965
Earnings before income taxes 90,745 70,022 39,197
Income taxes 35,848 28,675 16,455
Net earnings $ 54,897 $ 41,347 $ 22,742
Basic earnings per share $ 1.01 $ .81 $ .45
Diluted earnings per share $ .96 $ .75 $ .43
Average number of common shares outstanding
Basic 54,267 51,297 50,927
Diluted 57,655 56,666 55,001
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
------------------------- Retained
Dollars and shares in thousands Shares Amount Earnings Total
------ -------- --------- --------
Balance at January 28, 1996 50,854 $ 48,317 $ 73,336 $121,653
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 234 1,643 -- 1,643
Net earnings -- -- 22,742 22,742
Balance at February 2, 1997 51,088 49,960 96,078 146,038
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 592 5,813 -- 5,813
Net earnings -- -- 41,347 41,347
Balance at February 1, 1998 51,680 55,773 137,425 193,198
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 1,028 14,931 -- 14,931
Issuance pursuant to conversion of Convertible Notes 3,064 39,004 -- 39,004
Net earnings -- -- 54,897 54,897
Balance at January 31, 1999 55,772 $109,708 $192,322 $302,030
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
Year Ended
----------------------------------
Dollars in thousands, except per share amounts Jan. 31, 1999 Feb. 1, 1998
------------- -------------
ASSETS
Current asset
Cash and cash equivalents $107,308 $ 97,214
Accounts receivable (less allowance for doubtful accounts of $230 and $206) 20,082 15,238
Merchandise inventories 173,160 132,451
Prepaid expenses and other asset 8,985 7,991
Prepaid catalog expenses 13,154 13,596
Deferred income taxes 4,077 3,680
Total current assets 326,766 270,170
Property and equipment - net 243,119 201,020
Investments and other assets (less accumulated amortization of $544 and $1,448) 6,360 6,039
Total assets $576,245 $477,229
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 70,964 $ 58,496
Accrued expenses 7,182 15,619
Accrued salaries and benefits 16,821 15,863
Customer deposits 26,659 19,617
Income taxes payable 19,529 17,216
Current portion of long-term obligations 6,368 125
Other liabilities 6,377 8,710
Total current liabilities 153,900 135,646
Deferred lease credits 72,327 56,157
Long-term debt and other liabilities 44,649 89,789
Deferred tax liability 3,339 2,439
Commitments and contingencies -- --
Shareholders' equity
Preferred stock, $.01 par value, authorized 7,500,000 shares, none issued -- --
Common Stock, $.01 par value, authorized 253,125,000 shares,
issued and outstanding, 55,771,935 and 51,680,718 shares, respectively 109,708 55,773
Retained earnings 192,322 137,425
Total shareholders' equity 302,030 193,198
Total liabilities and shareholders' equity $576,245 $477,229
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
--------------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Cash flows from operating activities:
Net earnings $ 54,897 $ 41,347 $ 22,742
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 33,021 28,871 24,332
Loss (gain) on disposal of assets and store closing reserve 289 (132) 1,826
Amortization of deferred lease incentives (6,605) (4,853) (3,462)
Change in deferred income taxes 503 3,238 (300)
Tax benefit from sale of optioned stock by employees 7,221 3,507 619
Reserve for termination of San Francisco call center -- 2,335 --
Other -- 687 --
Change in:
Accounts receivable (4,844) (3,320) 1,239
Merchandise inventories (40,709) (21,749) 10,901
Prepaid catalog expenses 442 (1,671) 3,688
Prepaid expenses and other asset (994) 683 (2,168)
Accounts payable 12,468 (5,913) 6,114
Accrued expenses and other liabilities (1,050) 9,911 16,980
Deferred lease incentives 22,775 21,431 14,463
Income taxes payable 2,313 1,501 13,768
Net cash provided by operating activities 79,727 75,873 110,742
Cash flows from investing activities:
Purchase of property and equipment (78,934) (59,299) (47,627)
Proceeds from the disposition of property and equipment 2,206 -- --
Other -- 153 1,615
Net cash used in investing activities (76,728) (59,146) (46,012)
Cash flows from financing activities:
Borrowings under line of credit 53,825 41,000 192,480
Repayments under line of credit (53,825) (41,000) (222,080)
Proceeds from issuance of long-term debt -- -- 40,000
Debt issuance cost -- -- (1,393)
Repayments of long-term debt (615) (621) (125)
Proceeds from exercise of stock options 7,710 2,306 1,024
Net cash provided by financing activities 7,095 1,685 9,906
Net increase in cash and cash equivalents 10,094 18,412 74,636
Cash and cash equivalents at beginning of year 97,214 78,802 4,166
Cash and cash equivalents at end of year $ 107,308 $ 97,214 $ 78,802
Non-cash financing transaction (see Note C):
Conversion of convertible notes to common stock $ 39,004 $ -- $ --
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Williams-Sonoma, Inc. and its subsidiaries (the Company) are specialty retailers
of products for the home, which are merchandised through five direct-mail
catalogs and three retail businesses: Williams-Sonoma, Pottery Barn, Hold
Everything, Chambers (catalog only) and Gardeners Eden (catalog only). Based on
net sales, retail accounts for 65.2% of the business and catalog accounts for
34.8%. The principal concepts in both retail and catalog are Williams-Sonoma and
Pottery Barn, which sell cookware essentials and contemporary tableware and home
furnishings, respectively. The catalogs reach customers throughout the United
States, while the three retail businesses currently operate 298 stores in 39
states and Washington, D.C. Significant intercompany transactions and accounts
have been eliminated.
The Company's fiscal year ends on the Sunday closest to January 31, based on
a 52/53-week year. Fiscal years 1998, 1997 and 1996 ended on January 31, 1999,
February 1, 1998 and February 2, 1997, respectively. The years ended January 31,
1999, February 1, 1998 and February 2, 1997, include 52 weeks, 52 weeks and 53
weeks, respectively.
Cash equivalents consist of short-term investments with original maturities
of 90 days or less.
Merchandise inventories are stated at the lower of cost (weighted-average
method) or market. Approximately 42% of the Company's payments for merchandise
are to foreign vendors, most of which are located in Europe and Asia.
Prepaid catalog expenses consist of the cost to produce, print and
distribute catalogs. Such costs are amortized over the expected sales life of
each catalog. Typically, over 90% of the cost of a catalog is amortized in the
first four months. At January 31, 1999, and February 1, 1998, $13,154,000 and
$13,596,000, respectively, of prepaid advertising was reported as current
assets. Catalog advertising expenses amounted to $108,425,000, $94,169,000 and
$87,699,000 in fiscal 1998, 1997 and 1996, respectively.
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated remaining useful lives of the
assets ranging from 3 to 49 years. Depreciation of improvements to leased
properties is based upon the shorter of the remaining term of the applicable
lease or the estimated useful lives of such assets. Whenever events or changes
in circumstances have indicated that the carrying amount of assets might not be
recoverable, the Company, using its best estimates based on reasonable and
supportable assumptions and projections, has reviewed the carrying value of its
long-lived assets for impairment.
Investments and other assets include long-term deposits, lease rights and
interests, which are being amortized over the life of the respective leases (5
to 49 years), and debt-issuance costs which are amortized over the life of the
debt.
Deferred lease incentives include construction allowances received from
landlords, which are amortized on a straight-line basis over the initial lease
term. For leases which contain fixed escalations of the minimum annual lease
payment during the original term of the lease, the Company recognizes rental
expense on a straight-line basis and records the difference between rent expense
and the amount currently payable as deferred lease incentives.
The carrying value of cash and cash equivalents, accounts receivable,
investments, accounts payable and debt approximates their estimated fair values.
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion (APB )NO.
25, Accounting for Stock Issued to Employees.
Basic net earnings per share (EPS) is computed as net income divided by the
weighted average number of common shares outstanding for the period. Diluted net
earnings per share is computed based on the weighted average number of common
shares outstanding during the year, plus common stock equivalents consisting of
shares subject to stock options and shares from assumed conversion of
convertible debt. Earnings per share, number of shares and stock options for all
periods have been restated to reflect a 2-for-1 stock split in May 1998.
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In 1998, the Company implemented Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Comprehensive income consists of net
income or loss for the current period and other comprehensive income (income,
expenses, gains and losses that currently bypass the income statement and are
reported directly as a separate component of equity). The Company's
comprehensive income equals net income for all periods presented. In June 1998,
the FASB issued Statement of Financial Account Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets for liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for years beginning after June 15, 1999 and is not applied
retroactively to financial statements for prior periods. The Company believes
that this statement will not have a material effect on its financial statements.
Management estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain items in the prior years' consolidated financial
statements have been reclassified to conform to the fiscal 1998 presentation.
NOTE B: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998
------------- -------------
Land and buildings $ 12,689 $ 11,046
Leasehold improvements 201,170 169,280
Fixtures and equipment 122,861 100,959
Software 23,625 15,074
Work in progress 11,242 9,910
371,587 306,269
Less accumulated depreciation and amortization 128,468 105,249
Total property and equipment - net $243,119 $201,020
NOTE C: BORROWING ARRANGEMENTS
Long-term debt consists of the following:
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998
------------- ------------
Convertible notes -- $40,000
Senior notes $40,000 40,000
Mortgage 6,404 6,530
Obligations under capital leases and
other liabilities 4,613 3,384
51,017 89,914
Less current maturities 6,368 125
Total long-term debt $44,649 $89,789
12
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 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 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.
On August 8, 1995, the Company issued $40,000,000 principal amount of Senior
Notes to reduce the Company's dependency on short-term bank borrowings and to
fund new store and corporate infrastructure expansion. The Senior Notes are due
on August 8, 2005, and interest is payable semi-annually at 7.2%. Annual
principal payments of $5,714,000 begin on August 8, 1999, and continue through
August 8, 2004. The remaining principal amount is due and payable upon maturity.
The Senior Notes contain certain restrictive loan covenants, including minimum
net-worth requirements, fixed-charge coverage ratios and limitations on current
and funded debt.
On April 1, 1994, the Company entered into an agreement with a bank for a
$7,000,000 mortgage at LIBOR plus 1.25%. The Company then fixed the mortgage
interest rate at 7.8% for the full-term by entering into an interest-rate swap
agreement with the bank. Interest and principal payments are due quarterly
through March 2001. The mortgage is secured by the new corporate headquarters
building purchased by the Company in December 1993.
On June 1, 1998, the Company renewed its syndicated line of credit facility
and entered into a second amended and restated credit agreement which expires on
May 31, 2001. The amended facility provides for $50,000,000 in cash advances,
and contains certain restrictive loan covenants, including minimum tangible net
worth, a minimum out-of-debt period, fixed charge coverage requirements and a
prohibition on payment of cash dividends. Additionally, the Company has a
one-year $50,000,000 letter of credit agreement expiring on May 31, 1999 with
its primary bank. The Company is currently in negotiations with its lead bank
and expects to replace the letter of credit facility prior to its expiration
with a new agreement having similar terms.
At January 31, 1999, the Company had $33,849,000 of outstanding letters of
credit and no borrowings outstanding under the line of credit facility.
Interest expense was $4,093,000, $5,705,000 and 5,795,000 for fiscal 1998,
1997 and 1996, respectively, excluding capitalized interest of $0 in fiscal
1998, $348,000 in fiscal 1997 and $695,000 in fiscal 1996. Interest paid was
$4,568,000, $5,828,000 and $5,404,000 for the same periods.
Accounts payable at January 31, 1999, and February 1, 1998, includes cash
overdrafts of $17,109,000 and $16,640,000, respectively, for checks issued and
not presented to the bank for payment.
As of January 31, 1999, the Company's debt is scheduled to mature as
follows: $6,368,000 in fiscal year 1999, $6,244,000 in fiscal year 2000,
$12,054,000 in fiscal year 2001, $5,878,000 in fiscal year 2002, $5,811,000 in
fiscal year 2003 and $14,662,000 thereafter.
NOTE D: INCOME TAXES
The provision for income taxes consists of the following:
Year Ended
------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Current payable
Federal $29,182 $20,261 $ 12,020
State 6,163 5,176 4,735
Total current 35,345 25,437 16,755
Deferred
Federal 336 2,609 146
State 167 629 (446)
Total deferred 503 3,238 (300)
Total provision $35,848 $28,675 $ 16,455
13
Income taxes paid were $26,371,000, $20,702,000 and $3,510,000 for fiscal 1998,
1997 and 1996, respectively. A reconciliation of income taxes at the federal
statutory corporate rate to the effective rate is as follows:
Year Ended
-----------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Federal income taxes at the statutory rate 35.0% 35.0% 35.0%
State income tax rate, less federal benefit 4.5% 5.5% 6.5%
Other 0.0% 0.5% .5%
39.5% 41.0% 42.0%
Significant components of the Company's deferred tax accounts are as follows:
Jan. 31, 1999 Feb. 1, 1998
-------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Dollars in thousands Tax Assets Tax Liabilities Tax Assets Tax Liabilities
---------- --------------- ---------- ---------------
Current:
Compensation $ 3,437 -- $ 3,607 --
Inventory 4,284 -- 3,026 --
Accrued liabilities 1,773 $ 182 2,738 $ 185
Deferred catalog costs -- 5,235 -- 5,506
Total current 9,494 5,417 9,371 5,691
Non-current:
Depreciation -- 1,648 160 --
Deferred rent 773 -- 752 --
Deferred lease incentives -- 2,464 -- 3,351
Capital loss 5,160 -- 5,160 --
Valuation allowance (5,160) -- (5,160) --
Total non-current 773 4,112 912 3,351
Total $ 10,267 $9,529 $ 10,283 $9,042
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has a
valuation allowance as of January 31, 1999 and February 1, 1998, due to the
uncertainty of realizing future tax benefits from its capital loss
carryforwards.
14
NOTE E: LEASES
The Company leases store locations, its warehouses, call centers and certain
equipment under operating and capital leases for original terms ranging from 3
to 23 years extending through 2022, except for one store lease with a 49 year
term extending though 2040. Most store leases require the payment of minimum
rentals against percentage rentals based on store sales. Certain leases contain
renewal options for periods of up to 20 years.
On January 2, 1996, the Company entered into an agreement to lease a 35,867
square-foot build-to-suit call center in Summerlin, Nevada. The lease covers a
ten year term with three optional five-year renewals. Rent commenced in August
1996 at an annual basic rent amount of $529,000 for each of the first five years
of the lease and will increase to $598,000 annually for the remaining five
years. In the event that the Company should require more space to support
growth, the agreement includes an option to expand into an additional 17,920
square feet.
In July 1996, the Company secured an additional 400,232 square-foot
warehouse in Memphis, Tennessee, to more efficiently process non-conveyable
merchandise. The lease for the warehouse covers a nine-year term with
termination rights available after the third and sixth years, subject to penalty
fees. At this point, the Company has no intention of exercising its right to
terminate. Rent commenced in July 1996 at a rate of $60,000 a month for the
first ten months of the lease and increased to $92,000 a month for the following
26 months. For the remainder of the term, the rent will increase based on a rate
to be determined using the Consumer Price Index but not to exceed five percent
of the minimum rental payments.
On February 13, 1998, the Company entered into an agreement to lease a
35,862 square-foot build-to-suit call center in Oklahoma City, Oklahoma. The
lease covers a ten-year term with three optional five-year renewals. Rent
commenced in August 1998 at an annual basic rent of $506,000 for each of the
first five years of the lease, and will increase to $550,000 annually for the
remaining five years. In the event that the Company should require more space to
support growth, the agreement includes an option to expand into an additional
15,000 square feet.
In December, 1998 the Company entered into an agreement to lease a 750,000
square-foot retail distribution facility located in Olive Branch, Mississippi.
The lease covers a 22.5 year term with two optional five-year renewals. Rent
will commence upon completion of the facility, currently anticipated to be
approximately July 1, 1999. Rental payments for the primary term are estimated
to average $3.1 million annually. These estimated rental payments are subject to
adjustment upon completion of construction and finalization of costs. The rental
payments have been included in the lease commitment table below.
Total rental expense for all operating leases was as follows:
Year Ended
--------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Minimum rent expense $43,320 $35,431 $30,363
Equipment rent 8,056 6,767 6,065
Contingent rent expense 6,138 5,584 6,702
Total rent expense $57,514 $47,782 $43,130
The aggregate minimum annual rental payments under noncancelable operating
leases in effect at January 31, 1999 were as follows:
Dollars in thousands
Fiscal 1999 $ 64,407
Fiscal 2000 62,190
Fiscal 2001 58,677
Fiscal 2002 56,067
Fiscal 2003 53,461
Later years 314,673
Total minimum lease commitment $609,475
15
NOTE F: RELATED PARTY LEASE TRANSACTIONS
The Company's warehouse and distribution center is located in Memphis,
Tennessee, and leased from two partnerships whose partners include directors,
executive officers and/or significant shareholders of the Company. The
distribution center consists of two separate facilities--one for mail-order
operations and one for retail store operations.
Mail-Order Operating Facility - In July 1984, the Company entered into an
agreement to lease a 243,000-square-foot distribution center. The lessor is a
partnership comprised of W. Howard Lester, chairman, chief executive officer and
significant shareholder of the Company and James A. McMahan, a director and
significant shareholder of the Company and member of the Compensation and Audit
Committees. The partnership financed the construction through the sale of
$6,300,000 principal amount of industrial development bonds due June 2008. The
lease had an initial, noncancelable term of ten years expiring on June 30, 1994,
with two optional five year renewals by the Company. In December 1985, the
partnership financed the construction of an additional 190,000 square feet of
space through the sale of $2,900,000 principal amount of industrial development
bonds due 2010. The Company's lease with the partnership was amended to include
additional rent plus interest on the new bonds for the same lease term as the
original lease. In December 1993, the Company exercised the two five year
renewal options and is now obligated to lease the space until June 30, 2004.
Effective July 1, 1994, the fixed basic monthly rent is $51,500. Rental payments
consist of the basic monthly rent, plus interest on the bonds (a floating rate
equal to 55% of the prime rate of a designated bank), applicable taxes,
insurance and maintenance expenses. In connection with the December 1993
transaction, both the partnership and the Company provided to an unaffiliated
bank an indemnity against certain environmental liabilities.
Retail Store Operating Facility - In August 1990, the Company entered into a
separate agreement to lease a second distribution center, consisting of
approximately 307,000 square feet adjacent to the existing distribution center
in Memphis, Tennessee. The lessor is a partnership that includes Messrs. Lester
and McMahan. The partnership financed the construction of the distribution
center through the sale of $10,550,000, 10.36% principal amount of industrial
development bonds due August 2015. In September 1994, this lease was amended to
include an approximately 306,000-square-foot expansion of the facility. The
expansion was completed in October 1995. The lessor financed the construction of
the expansion through a $500,000 capital contribution from its partners and the
sale of $9,825,000, 9.01% principal amount of industrial development bonds due
in August 2015. The amended lease has an initial, non-cancelable term of 15
years beginning in August 1991 and ending in July 2006, with three optional five
year renewals. Rentals (including interest on the bonds, sinking fund payments
and fees) for the primary term are payable at an average rate of $711,000 per
quarter plus applicable taxes, insurance and maintenance expenses.
Both facilities are constructed to the Company's specifications. After the
option periods, the Company is obligated to renew each lease annually so long as
the bonds which financed the specific projects remain outstanding. The facility
leases qualify as operating leases for accounting purposes. The Company believes
that the facility leases are on terms no less favorable than the Company could
have obtained from third parties in arms-length transactions.
16
NOTE G: EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if options to issue common
stock were exercised or the Convertible Notes were converted into common stock.
EPS for all periods presented has been restated to reflect the adoption of
SFAS128.
The following is a reconciliation of net earnings (numerator) and the number of
shares (denominator) used in the basic and diluted EPS computations:
Dollars and shares in thousands Net Weighted Per-Share
except per share amounts Earnings Average Shares Amount
-------- -------------- ----------
1998
Basic $54,897 54,267 $1.01
Effect of assumed conversion of Convertible Notes 212 1,021
Effect of dilutive stock options -- 2,367
Diluted 55,109 57,655 .96
1997
Basic 41,347 51,297 .81
Effect of assumed conversion of Convertible Notes 1,239 3,065
Effect of dilutive stock options -- 2,304
Diluted 42,586 56,666 .75
1996
Basic 22,742 50,927 .45
Effect of assumed conversion of Convertible Notes 981 2,429
Effect of dilutive stock options -- 1,645
Diluted $23,723 55,001 $ .43
Options for which the exercise price was greater than the average market price
of common shares for the period were not included in the computation of diluted
earnings per share. These options to purchase shares were as follows:
Year Ended
------------------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ----------------- ------------------
Options to purchase shares of common stock 9,500 15,000 23,000
Exercise prices $32.50-$40.31 $21.38-$24.50 $16.69- $18.19
Expiration dates Jan 2009 Jun 2007-Jan 2008 Nov 2006-Dec 2006
17
NOTE H: STOCK OPTIONS
The Company's 1993 Stock Option Plan (the 1993 Plan), which provides for grants
of incentive and non-qualified stock options up to an aggregate of 4,500,000
shares, was approved and adopted in 1993 and amended to authorize the grant of
an additional 1,000,000 shares in 1997 and 3,000,000 shares in 1998. The 1993
Plan replaces the 1976 non-qualified plan which was terminated and the 1983
Incentive Stock Option Plan, which expired on March 27, 1993. Options granted
under the 1976 and 1983 Plans remain in force until they are exercised or
expire. All incentive stock option grants made under the 1993 Plan have a
maximum term of ten years, except those issued to 10% shareholders which have a
term of five years. The exercise price of all incentive stock options shall be
100% of the fair market value of the stock at the option grant date or 110% for
a 10% shareholder. The exercise price for non-qualified options shall not be
less than 75% of the fair market value of the stock at the option grant date.
In October of 1998, the Board of Directors adopted a resolution to reprice
all outstanding stock options with an exercise price greater than $19.31, the
market price at the time of the resolution. Accordingly, approximately 1,225,000
options, granted between June 1997 and October 1998, were repriced to $19.31.
The following table reflects the aggregate activity under the Company's stock
option plans, including the repricing:
Weighted Average
Options Exercise Price
--------- ---------------
Balance at January 28, 1996 3,382,176 $ 5.94
Granted (weighted average fair value of $5.59) 1,028,900 10.74
Exercised 234,354 4.66
Canceled 216,404 8.60
Balance at February 2, 1997 3,960,318 7.12
Granted (weighted average fair value of $9.70) 1,364,700 15.01
Exercised 593,382 3.77
Canceled 155,526 9.70
Balance at February 1, 1998 4,576,110 9.82
Granted (weighted average fair value of $13.53) 2,558,350 22.57
Exercised 1,028,630 29.29
Canceled 1,558,848 23.06
Balance at January 31, 1999 4,546,982 $13.00
Exercisable, year-end 1996 1,768,436 $ 5.13
Exercisable, year-end 1997 1,939,598 6.71
Exercisable, year-end 1998 1,752,638 $ 8.22
Options to purchase 3,181,088 shares were available for grant at year-end 1998.
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with APB NO. 25: "Accounting for Stock Issued to Employees," and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS NO. 123"), requires the disclosure of pro forma net
earnings and earnings per share as if the Company had adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS NO. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
18
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. However, the impact of outstanding
unvested stock options granted prior to fiscal 1995 has been excluded from the
pro forma calculation, accordingly, the fiscal 1996, 1997 and 1998 pro forma
adjustments are not indicative of future periods pro forma adjustments. Had
compensation cost been determined consistent with SFAS NO. 123, the Company's
net earnings and earnings per share would have been changed to the pro forma
amounts indicated below:
Year Ended
Dollars in thousands, ---------------------------------------------------
except per share amounts Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------- ------------
Net earnings
As reported $54,897 $41,347 $22,742
Pro Forma - Basic 50,058 38,639 21,647
Pro Forma - Diluted 50,270 39,878 22,627
Basic Earnings Per Share
As Reported 1.01 .81 .45
Pro forma .92 .76 .43
Diluted Earnings Per Share
As Reported .96 .75 .43
Pro Forma $ .88 $ .71 $ .42
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
Year Ended
-------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
Dividend yield -- -- --
Volatility 60.0% 61.0% 50.0%
Risk-free interest 5.63% 6.49% 6.26%
Expected term (years) 5.7 6.0 5.0
The following table summarizes information about fixed stock options outstanding
at Jan. 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Contractual Exercise Exercisable at Exercise
Jan. 31, 1999 Life (Years) Price Jan. 31, 1999 Price
------------- ------------ -------- -------------- ---------
Range of exercise prices
$ 2.56- $ 7.06 989,432 4.27 $ 4.89 989,432 $ 4.89
$ 7.38- $11.63 1,015,960 6.50 10.00 489,440 10.24
$12.38- $14.06 934,740 8.08 14.01 114,020 14.04
$14.34- $19.25 253,750 8.26 17.48 84,648 17.87
$19.31- $40.31 1,353,100 9.31 19.65 75,098 19.31
$ 2.56- $40.31 4,546,982 7.28 $13.00 1,752,638 $ 8.22
19
NOTE I: ASSOCIATE STOCK-INCENTIVE PLAN
In fiscal 1989, the Company established a defined contribution retirement plan
for eligible employees, which is intended to be qualified under Internal Revenue
Code Sections 401(a) and 401(k). The plan permits employees to make salary
deferral contributions in accordance with Internal Revenue Code Section 401(k).
Each participant may choose to have his/her salary deferral contributions and
earnings thereon invested in one or more of a money market reserve fund, a
balanced mutual fund, or a fund investing in stock of the Company. All amounts
contributed by the Company are invested in stock of the Company. In fiscal 1997,
the Company amended the plan in the following respects:
The Company changed the name of the plan from the "Williams Sonoma, Inc.
Employee Profit Sharing and Stock Incentive Plan" to the "Williams Sonoma,
Inc. Associate Stock Incentive Plan."
The Company amended the plan's eligibility rules so that all associates
other than "limited employees" will be eligible to participate after 30 days
of service and reaching the age of 21 years. "Limited Employees" will still
need to complete 1,000 hours of service in a year and reach the age of 21
years.
The Company increased its matching contribution from 50% to 100% of the
first 6% of a participant's pay which the participant elects to contribute
as salary deferral contributions and to have invested in the Company stock
fund. The Company announced that it no longer intends to make profit sharing
contributions to the plan.
The Company amended the plan's vesting schedule so that the Company's
contributions vest over a five year period rather than a six year period.
In fiscal 1998, the Company amended the plan to increase the amount of
salary deferred contributions a participant may elect to make from 10% of
the participant's compensation to 15% of the participant's compensation,
subject to certain limitations of the Internal Revenue Code.
NOTE J: COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have an adverse material effect on the Company's financial condition.
20
NOTE K: SEGMENT REPORTING
Williams-Sonoma, Inc. has two reportable segments: retail and catalog. The
retail segment sells products for the home through its three retail concepts:
Williams-Sonoma, Pottery Barn and Hold Everything. The catalog segment sells
similar products through its five direct-mail catalogs: Williams-Sonoma, Pottery
Barn, Hold Everything, Chambers and Gardeners Eden.
These reportable segments are strategic business units that offer similar
home-centered products. They are managed separately because each business unit
utilizes a distinct distribution and marketing strategy.
The accounting policies of the segments, where applicable, are the same as
those described in the summary of significant accounting policies.
Williams-Sonoma uses earnings before unallocated corporate overhead, interest
and taxes to evaluate segment profitability. Unallocated assets include
corporate cash and equivalents, the net book value of corporate facilities and
related information systems, deferred tax amounts and other corporate long-lived
assets.
SEGMENT INFORMATION
Dollars in thousands Retail Catalog Unallocated Total
-------- -------- ----------- -----------
1998
Revenues $720,320 $383,634 -- $1,103,954
Depreciation and amortization expense 24,054 3,954 $ 5,013 33,021
Earnings before income taxes 88,670 58,045 (55,970) 90,745
Assets 335,882 91,585 148,778 576,245
Expenditures for assets 65,374 8,930 4,630 78,934
1997
Revenues 601,738 331,519 -- 933,257
Depreciation and amortization expense 20,146 3,489 5,236 28,871
Earnings before income taxes 77,151 41,916 (49,045) 70,022
Assets 272,610 73,742 130,877 477,229
Expenditures for assets 50,077 3,468 5,754 59,299
1996
Revenues 513,592 298,166 -- 811,758
Depreciation and amortization expense 16,534 1,988 5,810 24,332
Earnings before income taxes 60,754 25,088 (46,645) 39,197
Assets 214,783 73,272 116,362 404,417
Expenditures for assets $ 33,737 $ 13,051 $ 839 $ 47,627
21
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF WILLIAMS-SONOMA, INC.:
We have audited the accompanying consolidated balance sheets of
Williams-Sonoma, Inc. and subsidiaries (the Company) as of January 31, 1999 and
February 1, 1998, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three fiscal years in the
period ending January 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Williams-Sonoma, Inc. and
subsidiaries as of January 31, 1999, and February 1, 1998, and the results of
its operations and its cash flows for each of the three fiscal years in the
period ending January 31, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 24, 1999
22
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
Quarter Ended
Fiscal 1998 --------------------------------------------------------
Dollars in thousands, except per share amounts May 3 August 2 November 1 January 31
-------- -------- ---------- ----------
Net sales $206,210 $215,262 $241,298 $441,184
Gross profit 78,286 80,014 94,804 199,907
Earnings before income taxes 3,639 6,515 8,470 72,121
Net earnings 2,147 3,844 4,998 43,908
Basic earnings per share(1) $ .04 $ .07 $ .09 $ .79
Diluted earnings per share(2) $ .04 $ .07 $ .09 $ .75
Quarter Ended
Fiscal 1997 --------------------------------------------------------
Dollars in thousands, except per share amounts May 4 August 3 November 2 February 1
-------- -------- ----------- ----------
Net sales $176,535 $182,427 $203,863 $370,432
Gross profit 66,508 65,760 77,338 166,875
Earnings before income taxes 2,392 4,169 5,595 57,865
Net earnings(3) 1,388 2,417 3,245 34,296
Basic earnings per share(1) $ .03 $ .05 $ .06 $ .66
Diluted earnings per share $ .03 $ .05 $ .06 $ .61
(1) The sum of the quarterly basic earnings per share does not agree to the
year-to-date amount due to rounding differences.
(2) The sum of the quarterly diluted earnings per share amounts does not agree
to the year-to-date amount due to the effect of assumed conversion of the
Convertible Notes in the year-to-date calculation.
(3) The fourth quarter ended February 1, 1998, includes an after-tax charge to
net earnings of $1,378,000 ($.02 per share) related to the reserve for the
closure of the San Francisco call center.
COMMON STOCK
Williams-Sonoma's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol WSM. The following table sets forth the high and low closing
prices on the NYSE for the periods indicated.
On March 15, 1999, there were 546 shareholders of record, excluding
shareholders whose stock is held in nominee or street name by brokers. The
Company's present policy is to retain its earnings to finance future growth, and
it does not intend to pay cash dividends. In addition, the Company's bank line
of credit prohibits payment of cash dividends (see Note C of Notes to
Consolidated Financial Statements).
Fiscal 1998 High Low
------- ---------
1st Quarter 31 1/2 20 3/8
2nd Quarter 36 1/2 25 7/8
3rd Quarter 31 7/8 17 9/16
4th Quarter 40 5/16 27 9/16
Fiscal 1997(1) High Low
------- ---------
1st Quarter 16 1/2 12 19/32
2nd Quarter 22 3/4 15 1/32
3rd Quarter 24 7/8 18 1/4
4th Quarter 23 1/32 18 1/4
(1) These amounts have been restated to reflect the 2-for-1 stock split in May
1998.
23
DIRECTORS AND OFFICERS
W. Howard Lester
Director, Chairman of the Board
and Chief Executive Officer
of the Company
Charles E. Williams
Director, Founder and Vice Chairman
of the Board of the Company
Adrian Bellamy
Director, Chairman, Airport
Group International Holdings, L.L.C.
and Gucci Group N.V.
James M. Berry
Director, Executive Vice President,
Finance, Belk Stores Services, Inc.
Nathan Bessin
Director, Managing Partner, J. Arthur
Greenfield and Company, Certified
Public Accountants
Dennis A. Chantland
Executive Vice President, Chief
Administrative Officer of the Company
and Secretary to the Board
Patrick J. Connolly
Director, Executive Vice President
of the Company,
General Manager, Catalog
Janet Emerson
Director, President and Chief Executive
Officer, Learningsmith
Gary Friedman
Director, Chief Merchandising Officer
of the Company and President,
Retail Division
Richard Hunter
Senior Vice President of the Company,
International Operations and
Development
John E. Martin
Director, Chairman and
Chief Executive Officer,
PepsiCo Casual Restaurants
International
James A. McMahan
Director, Chairman of the
Compensation Committee of
the Board of the Company
John S. Bronson
Senior Vice President of the Company,
Human Resources
WILLIAMS-SONOMA, INC.
Corporate Headquarters
Williams-Sonoma, Inc.
3250 Van Ness Avenue
San Francisco, CA 94109
Distribution Center
4300 Concorde Road
Memphis, TN 38118
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
50 California Street, 10th Floor
San Francisco, CA 94111
Independent Auditors
Deloitte & Touche, LLP,
50 Fremont Street
San Francisco, CA 94105
Trademarks
A Catalog for Cooks, Chambers,
Gardeners Eden, Hold Everything and
Pottery Barn are trademarks
of Williams-Sonoma, Inc.