Williams-Sonoma(WSM) - 2021 Q4 - Annual Report

Part I Business Williams-Sonoma is an omni-channel specialty retailer of high-quality home products, operating a portfolio of distinct brands with significant foreign sourcing and Q4 seasonality - The company operates as a digital-first, design-led, and sustainable home retailer with eight core merchandise strategies[21] - As of January 31, 2021, the company operates 581 stores globally, complemented by 136 franchised locations[31] - Approximately 65% of merchandise purchases in fiscal 2020 were sourced from foreign vendors, primarily in Asia and Europe[33] - The business is highly seasonal, with a significant portion of net revenues and earnings realized during the fourth quarter[35] - As of January 31, 2021, the company had approximately 21,000 employees, including 12,200 full-time and 10,000 temporary holiday staff[36] Risk Factors The company faces diverse risks including pandemic impacts, economic downturns, supply chain disruptions, cybersecurity threats, foreign vendor dependence, and financial management challenges Risks Related to our Business Business risks include COVID-19 impacts, sensitivity to consumer spending, challenges in inventory and trend management, intense competition, and complexities of the omni-channel, multi-brand model - The COVID-19 pandemic has materially impacted the business through temporary store closures, largely offset by e-commerce growth, though future impacts on supply chains and costs remain uncertain[63][65][66] - Business performance is sensitive to consumer discretionary spending, influenced by economic conditions, unemployment, and consumer confidence[73][74] - The e-commerce channel, accounting for over 70% of net revenues in fiscal 2020, is critical, with management failures potentially harming operating results[91][92] - The omni-channel, multi-brand structure poses risks, including potential cannibalization of retail sales by e-commerce or new brands[101] Risks Related to Technology Technology risks include cybersecurity threats, data privacy compliance with evolving laws like GDPR and CCPA, and potential business disruption from ongoing core information system replacements - A security breach involving online customer data could lead to loss of consumer confidence, litigation, and regulatory investigations[112] - Non-compliance with evolving global data privacy laws like GDPR and CCPA/CPRA could result in substantial financial penalties and reputational harm[115][116][117] - Significant system changes, including new ERP system implementation in fiscal 2020, carry inherent risks of disrupting core operations[118][120] Risks Related to our Vendors and Global Operations Reliance on foreign vendors and global expansion expose the company to risks from currency fluctuations, trade restrictions, political instability, and supply chain disruptions - Approximately 65% of merchandise sourced from foreign vendors in fiscal 2020 creates exposure to currency fluctuations, trade restrictions, political unrest, and supply chain disruptions[122][123] - Global expansion efforts, including company-owned stores and franchise operations, face risks from lack of foreign market experience, differing consumer preferences, and political or economic instability[130] - The company's results depend on franchisee performance, with potential brand reputation harm if standards are not adhered to[132] Risks Related to Taxes and Tariffs Financial results are vulnerable to changes in tax and trade policies, including import tariffs on foreign-manufactured goods and volatility in income tax obligations - Tariffs on items sourced from China could increase cost of goods, force price increases, and adversely affect operating results despite mitigation efforts[141] - Income tax provision is subject to volatility from changes in earnings mix across jurisdictions, tax examination resolutions, and tax law changes[142] Risks Related to our Financial Statements and Liquidity Financial risks include liquidity challenges, seasonality impacts on operating results, dependence of capital allocation on cash flow, and the importance of effective internal controls and accounting estimates - Quarterly operating results fluctuate due to seasonality, with a significant portion of net revenues and earnings realized in the fourth quarter[151] - The ability to pay quarterly dividends and repurchase stock depends on sufficient cash flow, with a new $1 billion share repurchase authorization approved in March 2021[155] - Failure to maintain effective internal controls, as required by Sarbanes-Oxley Act Section 404, could impair financial statement accuracy and harm investor confidence[156] - Changes in cash flow projection estimates could lead to impairment charges on long-lived assets, adversely affecting operating results[160] Unresolved Staff Comments No unresolved staff comments are reported for this period - None[161] Properties The company primarily leases its 581 store locations and facilities, totaling approximately 6.3 million square feet, while owning 471,000 square feet for corporate headquarters Occupied Square Footage by Location (Approximate) | Location | Occupied Square Footage (Approximate) | | :--- | :--- | | Distribution and Manufacturing Facilities | | | Mississippi | 2,258,000 | | New Jersey | 2,103,000 | | California | 2,030,000 | | Texas | 1,298,000 | | Georgia | 1,075,000 | | Tennessee | 603,000 | | North Carolina | 442,000 | | Corporate Facilities | | | California | 269,000 | | New York | 238,000 | - As of January 31, 2021, the company owned 471,000 square feet of space, primarily in California, for corporate headquarters and data center operations[165] Legal Proceedings The company is involved in ordinary course legal proceedings, which management believes will not materially affect consolidated financial statements - The company is involved in ordinary course lawsuits and claims, with management believing their ultimate resolution will not materially affect consolidated financial statements[166] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[167] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under WSM, with $150 million in repurchases in fiscal 2020 and a new $1 billion program authorized in March 2021 - During fiscal 2020, the company repurchased 1,496,100 shares for $150 million, followed by a new $1 billion stock repurchase program authorization in March 2021[175] Issuer Purchases of Equity Securities | Fiscal period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program | | :--- | :--- | :--- | :--- | | Nov 2, 2020 – Nov 29, 2020 | 125,310 | $98.91 | 125,310 | | Nov 30, 2020 – Dec 27, 2020 | 116,800 | $108.75 | 116,800 | | Dec 28, 2020 – Jan 31, 2021 | 134,655 | $117.75 | 134,655 | | Total | 376,765 | $108.69 | 376,765 | Selected Financial Data This section presents a five-year summary of key financial and operational data, highlighting trends in net revenues, profitability, financial position, and store count Selected Financial and Operational Data | In thousands, except per share amounts | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | :--- | | Net revenues (in thousands) | $6,783,189 | $5,898,008 | $5,671,593 | | Net revenue growth | 15.0% | 4.0% | 7.2% | | Comparable brand revenue growth | 17.0% | 6.0% | 3.7% | | Gross margin | 38.9% | 36.3% | 37.0% | | Operating margin | 13.4% | 7.9% | 7.7% | | Net earnings (in thousands) | $680,714 | $356,062 | $333,684 | | Diluted earnings per share (per share) | $8.61 | $4.49 | $4.05 | | Net cash provided by operating activities (in thousands) | $1,274,848 | $607,294 | $585,986 | | Number of stores at year-end (number of stores) | 581 | 614 | 625 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses fiscal 2020 financial results, highlighting 15.0% net revenue growth and 17.0% comparable brand revenue growth driven by e-commerce, significant operating margin expansion, and a strong $1.2 billion cash liquidity position Results of Operations Fiscal 2020 saw 15.0% net revenue growth to $6.78 billion and 17.0% comparable brand revenue growth, driven by e-commerce, with improved gross and operating margins due to cost leverage Net Revenues by Brand (in thousands) | In thousands | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Pottery Barn | $2,526,241 | $2,214,397 | | West Elm | 1,682,254 | 1,466,537 | | Williams Sonoma | 1,242,271 | 1,032,368 | | Pottery Barn Kids and Teen | 1,042,531 | 908,561 | | Other | 289,892 | 276,145 | | Total | $6,783,189 | $5,898,008 | Comparable Brand Revenue Growth | Comparable brand revenue growth | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Pottery Barn | 15.2% | 4.1% | | West Elm | 15.2% | 14.4% | | Williams Sonoma | 23.8% | 0.4% | | Pottery Barn Kids and Teen | 16.6% | 4.5% | | Total | 17.0% | 6.0% | - Cost of goods sold as a percentage of net revenues decreased to 61.1% in fiscal 2020 from 63.7% in fiscal 2019, driven by higher merchandise margins and occupancy leverage[212] - Selling, general and administrative expenses as a percentage of net revenues decreased to 25.4% in fiscal 2020 from 28.4% in fiscal 2019, driven by lower advertising and employment cost leverage[215] Liquidity and Capital Resources The company ended fiscal 2020 with strong liquidity, including $1.2 billion in cash and $1.27 billion in operating cash flow, with a $300 million term loan repaid in February 2021 - As of January 31, 2021, the company held $1.2 billion in cash and cash equivalents, a significant increase from $432.16 million at the end of fiscal 2019[217] - Net cash provided by operating activities was $1.27 billion for fiscal 2020, more than double the $607.29 million generated in fiscal 2019, primarily due to higher net earnings[225] - The company had a $300 million outstanding term loan as of January 31, 2021, fully repaid in February 2021 prior to maturity[221] Contractual Obligations (in thousands) | In thousands | Fiscal 2021 | Fiscal 2022 to Fiscal 2024 | Fiscal 2025 to Fiscal 2026 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Current debt | $300,000 | — | — | — | $300,000 | | Operating leases | 267,760 | 605,121 | 263,192 | 291,356 | 1,427,429 | | Purchase obligations | 1,350,121 | 22,456 | — | — | 1,372,577 | | Total | $1,918,423 | $627,577 | $263,192 | $291,356 | $3,100,548 | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for merchandise inventories, long-lived asset impairment, lease accounting, and income taxes, requiring substantial management judgment - Significant estimates are used for inventory valuation, with $9.827 million in obsolescence reserves as of January 31, 2021[242][244] - A comprehensive review of long-lived assets in fiscal 2020, due to COVID-19, resulted in $27.1 million in impairment charges, including $19.2 million for property and equipment and $7.9 million for right-of-use assets[245][247][249] - Lease accounting requires judgment in determining the incremental borrowing rate, which was a weighted average of 3.6% in fiscal 2020[253][352] - Income tax accounting involves estimating reserves for uncertain tax positions and determining the annual effective tax rate, which can be materially impacted by earnings mix across jurisdictions[255][256] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily interest rate risk from variable-rate debt and foreign currency risk from international operations, partially mitigated by hedging strategies - The company's variable rate debt exposes it to interest rate risk, though a hypothetical 1% change in rates would not materially affect results[259] - Foreign currency risk from international operations is partially mitigated by hedging a portion of exposure with foreign currency forward contracts[262] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year ended January 31, 2021, including key statements and accompanying notes Consolidated Financial Statements Consolidated financial statements show fiscal 2020 net earnings of $680.7 million on $6.78 billion net revenues, with total assets at $4.66 billion and strong $1.27 billion operating cash flow Consolidated Statements of Earnings (in thousands, except per share amounts) | In thousands, except per share amounts | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | :--- | | Net revenues (in thousands) | $6,783,189 | $5,898,008 | $5,671,593 | | Gross profit (in thousands) | 2,636,269 | 2,139,092 | 2,101,013 | | Operating income (in thousands) | 910,697 | 465,874 | 435,953 | | Net earnings (in thousands) | $680,714 | $356,062 | $333,684 | | Diluted earnings per share (per share) | $8.61 | $4.49 | $4.05 | Consolidated Balance Sheets (in thousands) | In thousands | Jan. 31, 2021 | Feb. 2, 2020 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $1,200,337 | $432,162 | | Merchandise inventories, net | 1,006,299 | 1,100,544 | | Total current assets | 2,467,080 | 1,755,635 | | Total assets | $4,661,424 | $4,054,042 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | 1,848,000 | 1,609,555 | | Total liabilities | 3,010,239 | 2,818,182 | | Total stockholders' equity | 1,651,185 | 1,235,860 | | Total liabilities and stockholders' equity | $4,661,424 | $4,054,042 | Notes to Consolidated Financial Statements Notes to consolidated financial statements provide detailed information on significant accounting policies, borrowing arrangements, income taxes, leases, stock-based compensation, and segment reporting - The company adopted the new lease accounting standard in fiscal 2019, recognizing approximately $1.2 billion in right-of-use assets and $1.4 billion in lease liabilities[327] - As of January 31, 2021, the company had a $300 million term loan (repaid Feb 2021) and access to $700 million in revolving credit facilities, with no amounts drawn[334][338][339] - The company aggregates its brand-based operating segments into a single reportable segment due to similar economic and qualitative characteristics[374] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported - None[418] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of January 31, 2021, with no significant changes in Q4 fiscal 2020 - Management concluded that the company's disclosure controls and procedures were effective as of January 31, 2021[419] - Management concluded that the company's internal control over financial reporting was effective as of January 31, 2021, based on COSO criteria[422] Other Information No other information is reported for this section - None[425] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's 2021 Proxy Statement[428] Executive Compensation Information on executive compensation, including director and compensation committee details, is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[429] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of principal stockholders and management is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[430] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[431] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[432] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K - This item lists financial statements filed under Item 8 and provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[434][436] Form 10-K Summary No Form 10-K summary is provided for this report - None[449]