Q1 2007 Williams-Sonoma Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the Williams-Sonoma Incorporated First Quarter 2007 Earnings Call. At this time, all participants are in a listen only mode. We will conduct a question and answer session after the presentation. (OPERATOR INSTRUCTIONS) This conference is being recorded.

I would now like to turn the call over to Stephen Nelson, Director of Investor Relations at Williams-Sonoma Incorporated to discuss non-GAAP measures and forward-looking statements.

STEPHEN NELSON, IR, WILLIAMS-SONOMA: Good morning. This mornings conference call should be considered in conjunction with the press release that we issued earlier today. I would first like to discuss the non-GAAP financial measures that are included in this mornings press release and today's conference call. In our press release, we announced operating results for the first quarter of 2007 that included and excluded a $0.005 diluted earnings per share impact of the new accounting pronouncement FIN 48. FASB Interpretation Number 48 accounting for uncertainty in income taxes. The press release also contained comparison that included and excluded a $0.02 per diluted share net impact from unusual business events in the first quarter of fiscal year 2006.

In the guidance section of the press release, we included and excluded a projected $0.03 per diluted share impact of FIN 48 for fiscal year 2007 and a $0.006 per diluted share impact for the second quarter of 2007. We also compared our fiscal year 2007 guidance to our fiscal year 2006 operating results that included and excluded a $0.03 per diluted share net benefit from unusual business events. For the remainder of today's call, we will be discussing our first quarter 2007 results, our quarterly and fiscal year 2007 guidance, and our fiscal year 2006 results excluding the impact of these items and will refer to these results as non-GAAP. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparison. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management are discussed in Exhibit 1 of the press release. I would now like to discuss our forward-looking statements. The forward-looking statements included in this mornings call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the financial condition, results of operations, business initiatives, guidance, growth plans and prospects of the Company in 2007 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the Company's current press release and SEC filings including reports on Forms 10-K, 10-Q, and 8-K for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the conference call over to Howard Lester, our Chairman and Chief Executive Officer.

HOWARD LESTER, CHAIRMAN, CEO, WILLIAMS-SONOMA: Good morning, and thanks for joining us. With me today is Laura Alber, our President, Pat Connolly, our Chief Marketing Officer, Sharon McCollam, our Chief Operating and Chief Financial Officer and Dave DeMattei, our Group President for the Williams-Sonoma, Williams-Sonoma Home and West Elm Brands. I'll begin today with an overview of our first quarter 2007 business results and then a high level outlook for the balance of the year, Sharon, Dave, and Laura will then follow-up with the financial and brand level details, although the macro environment in the Home Furnishing sector in the first quarter continued to be very challenging , we aggressively drove our business and delivered year-over-year revenue growth of 5.2% excluding Hold Everything and non-GAAP diluted earnings per share of a better than expected $0.17. We were particularly pleased with the performance of our merging brands and our progress to date on our strategic long-term initiatives. In our core brands which include Williams-Sonoma, Pottery Barn And Pottery Barn Kids, net revenues for the first quarter increased 1.8% with positive growth in all brands. In our emerging brands which include West Elm, Williams-Sonoma Home and PBteen, revenues increased a better than expected 38.9% despite the overall softness in the Home Centered retail environment. During the quarter, we continue to make strategic advancements in our supply chain infrastructure.

In information technology, we successfully implemented a new retail inventory management system in our Pottery Barn brand. This system was launched in the Williams-Sonoma and Pottery Barn Kids brands in 2006 and we're beginning to see early benefits from enhanced store level allocation and replenishment functionality that the system provides. In the supply chain organization, we in sourced all of our European sourcing activities in order to establish greater control over vendor selection and product quality. The third party agent previously managed those activities for us. As we look forward to the second quarter and balance of the year, we're continuing to focus on the execution of two of our most important strategic initiative, driving top line revenue growth across all of our brands and optimizing our pre-tax operating margin through operational advancements and cost containment initiatives. Within these initiatives, and our top priority is the revitalization of the Pottery Barn brand which Laura will update you on later in today's call. Consistent with our strategic initiative to drive profitable top line revenue growth, we are investing in the growth opportunities that we believe will provide the greatest returns in both our core and emerging brands.

In the retail channel we expect to add 11 net new retail locations in 2007, seven of which are in our emerging brands. We're also expanding the square footage of 19 of our existing stores and remodeling three additional stores in place. Additionally in the Pottery Barn brand, we're developing a new fixturing and modernization program for our first generation design studio stores that have been opened since 1995. Similar to the Stone Towns project in the Williams-Sonoma brand. We anticipate that we will begin to rollout this program in late 2007 and through 2008. In the direct to customer channel, we expect to increase catalog circulation in both our core and emerging brands, including an expansive rollout of the Pottery Barn Outdoor catalog in the second quarter. We're also intensifying the marketing behind our fastest growing channel, E-commerce, including the launch of a new website in the Williams-Sonoma brand in the fourth quarter.

To support all these growth initiatives, we're continuing to invest in our supply chain infrastructure, including the second quarter expansion of our West Coast Furniture Distribution Center and Memphis Returns operation. We're also intensifying our Company managed sourcing and quality control operations in Asia and expanding our in source Domestic Furniture delivery program as part of our ongoing effort to reduce furniture returns, replacements, and damages. Although these initiatives put pressure on short-term earnings results, we believe that they will be more than offset over time by our continued ability to drive greater efficiencies in our supply chain operations and overhead cost structure. As for our thoughts on the macro environment for the second quarter and the balance of the year, we believe an ongoing cautious outlook is appropriate. We continue to see higher inventory levels among many of our competitors as their first quarter sales fell short of expectations and we're concerned about the ongoing pressure of industry wide markdowns and rising raw material costs. Both of these factors could lead to further deterioration in the overall macro environment and lower gross margins. Therefore, we're reducing our second quarter non-GAAP diluted EPS guidance by $0.02 to $0.14 to $0.18 to reflect where we believe there could be short-term risk. We are; however, …