Williams-Sonoma(WSM) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements, including earnings, balance sheets, cash flows, and notes on key policies and impacts Condensed Consolidated Statements of Earnings (Thirteen Weeks Ended) | In thousands, except per share amounts | August 2, 2020 | August 4, 2019 | | :--- | :--- | :--- | | Net revenues | $1,490,777 | $1,370,814 | | Gross profit | $551,202 | $483,861 | | Operating income | $185,361 | $86,165 | | Net earnings | $134,564 | $62,648 | | Diluted earnings per share | $1.70 | $0.79 | Condensed Consolidated Balance Sheet Highlights | In thousands | August 2, 2020 | February 2, 2020 | | :--- | :--- | :--- | | Total assets | $4,487,296 | $4,054,042 | | Cash and cash equivalents | $947,760 | $432,162 | | Merchandise inventories, net | $1,042,340 | $1,100,544 | | Total liabilities | $3,154,374 | $2,818,182 | | Total stockholders' equity | $1,332,922 | $1,235,860 | Condensed Consolidated Statements of Cash Flows (Twenty-six Weeks Ended) | In thousands | August 2, 2020 | August 4, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $216,400 | ($26,636) | | Net cash used in investing activities | ($75,882) | ($76,719) | | Net cash provided by (used in) financing activities | $377,910 | ($113,471) | | Net increase (decrease) in cash and cash equivalents | $515,598 | ($218,487) | Note A: Basis of Presentation and COVID-19 Impact This note details the unaudited financial statements' basis, highlighting significant asset impairment charges and inventory write-offs due to COVID-19, with no goodwill impairment - Due to the COVID-19 pandemic and resulting store closures, the company recorded significant asset impairment charges during the twenty-six weeks ended August 2, 2020[33] COVID-19 Related Charges (Twenty-six weeks ended Aug 2, 2020) | Charge Type | Amount (in thousands) | | :--- | :--- | | Store Asset Impairment (Property & Equipment) | $16,514 | | Store Asset Impairment (Operating Lease ROU) | $5,461 | | Inventory Write-offs | $11,378 | - The company evaluated goodwill for impairment due to the pandemic but concluded that no impairment charge was necessary as of the second quarter of fiscal 2020[35][36] Note B: Borrowing Arrangements This note details the company's credit facility, including a $500 million revolver and $300 million term loan, amended in May 2020, and a new $200 million revolving line of credit - In May 2020, the company amended its credit facility, extending the maturity of its $300 million term loan to January 8, 2022[44] - A new $200 million 364-Day Credit Agreement for an additional unsecured revolving line of credit was entered into during the second quarter of fiscal 2020[48] - As of August 2, 2020, the company had $300 million outstanding under its term loan and had borrowed $487.8 million under its revolver during fiscal 2020[45][47] Note E: Segment Reporting This note explains the aggregation of operating segments into a single reportable segment, detailing net revenues by brand, with Pottery Barn and West Elm as top contributors Net Revenues by Brand (Thirteen Weeks Ended) | Brand | August 2, 2020 (in thousands) | August 4, 2019 (in thousands) | | :--- | :--- | :--- | | Pottery Barn | $563,276 | $524,847 | | West Elm | $380,552 | $357,574 | | Williams Sonoma | $243,133 | $191,374 | | Pottery Barn Kids and Teen | $235,987 | $227,853 | | Other | $67,829 | $69,166 | | Total | $1,490,777 | $1,370,814 | Note G: Stock Repurchase Program and Dividends This note states no stock repurchases occurred in H1 2020, with $575 million remaining for repurchases, and $0.48 cash dividends per share declared - No shares of common stock were repurchased during the thirteen and twenty-six weeks ended August 2, 2020[65] - As of August 2, 2020, $574.982 million remained available under the company's stock repurchase program[65] - The company declared cash dividends of $0.48 per common share during the second quarter of 2020, the same amount as in the second quarter of 2019[68] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 financial results, highlighting an 8.8% net revenue increase driven by e-commerce, improved liquidity, and anticipated higher shipping and safety costs - Q2 2020 net revenues increased 8.8% to $1.49 billion, with comparable brand revenue growth of 10.5%, driven by strong e-commerce sales which offset declines from temporary retail store closures[101] - Diluted EPS for Q2 2020 was $1.70, a significant increase from $0.79 in Q2 2019. This included a $0.06 impact from store asset impairments[104] - The company bolstered its financial flexibility by extending its $300 million term loan and obtaining an additional $200 million in borrowing capacity through a new credit line[103] - Looking ahead, the company expects robust sales but anticipates higher shipping costs due to third-party surcharges and incremental costs for safety measures related to the pandemic[106] Net Revenues Net revenues for Q2 2020 increased 8.8% to $1.20 billion, driven by 10.5% comparable brand revenue growth and strong e-commerce, offsetting retail declines Comparable Brand Revenue Growth | Brand | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Pottery Barn | 8.1% | 4.2% | | West Elm | 7.0% | 17.5% | | Williams Sonoma | 29.4% | (1.1%) | | Pottery Barn Kids and Teen | 4.8% | 3.7% | | Total | 10.5% | 6.5% | Cost of Goods Sold COGS as a percentage of net revenues decreased to 63.0% in Q2 2020, driven by higher merchandise margins and occupancy leverage, partially offset by increased shipping costs - COGS as a percentage of net revenues decreased by 170 basis points in Q2 2020 compared to Q2 2019, driven by higher merchandise margins and occupancy leverage[119] - The decrease in COGS percentage was partially offset by higher shipping costs due to a shift to e-commerce and surcharges from third-party shippers related to COVID-19[119] Selling, General and Administrative Expenses SG&A expenses decreased by 8.0% in Q2 2020, falling to 24.5% of net revenues due to advertising and employment cost leverage, partially offset by $6.355 million in impairment charges - SG&A as a percentage of net revenues decreased by 450 basis points in Q2 2020 compared to Q2 2019[123] - The improvement was driven by leverage on advertising and employment costs, partially offset by $6.355 million in store asset impairment charges[123] Liquidity and Capital Resources As of August 2, 2020, the company held $947.8 million in cash, bolstered liquidity by drawing $487.8 million on its credit line, and generated $216.4 million in operating cash flow - Cash and cash equivalents stood at $947.76 million as of August 2, 2020[126] - As a precautionary measure, the company drew down $487.823 million on its revolving line of credit during the first quarter of fiscal 2020[127] - Net cash provided by operating activities for year-to-date fiscal 2020 was $216.4 million, compared to net cash used of $26.636 million for the same period in 2019[132] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates and foreign currency exchange rates, managing foreign currency risk with forward contracts - The company is subject to interest rate risk on its variable-rate revolver and term loan. As of Q2 2020, it had borrowings of $487.8 million under the revolver and $300 million outstanding on the term loan[140] - Foreign currency risk is present due to operations in Canada, Australia, and the UK. The company mitigates this risk by hedging a portion of its exposure with foreign currency forward contracts[143] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of August 2, 2020, with no material changes in internal control over financial reporting - Management concluded that as of August 2, 2020, the company's disclosure controls and procedures were effective[144] - No changes occurred during the recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[145] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various lawsuits and claims incidental to its ordinary course of business, with management believing no material adverse effect on financial statements - Information regarding legal proceedings is contained in Note F to the Condensed Consolidated Financial Statements[147] Risk Factors This section updates risk factors, focusing on the uncertain impact of the COVID-19 pandemic, including reduced store traffic, supply chain disruptions, and increased shipping costs - The COVID-19 pandemic continues to materially impact the business, with the full duration and extent of its effect on future operations remaining uncertain[149] - Reduced store traffic and closures have negatively impacted retail revenues and may continue to do so, potentially leading to further asset impairment charges[151] - The company has incurred and expects to continue to incur higher shipping costs due to surcharges from third-party shippers, especially during the peak holiday season[155] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during Q2 fiscal 2020, and its stock repurchase program has no expiration date - There were no repurchases of common stock in the second quarter of fiscal 2020[161] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, CEO and CFO certifications, and financial statements in Inline XBRL - Filed exhibits include the First Amendment to the Credit Agreement and the new 364-Day Credit Agreement[165] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Securities Exchange Act and Sarbanes-Oxley Act were also filed[165]