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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 30, 2022.
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-14077
_________________________
WILLIAMS-SONOMA, INC.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
3250 Van Ness Avenue, San Francisco, CA
(Address of principal executive offices)
94-2203880
(I.R.S. Employer
Identification No.)
94109
(Zip Code)
Registrant’s telephone number, including area code: (415) 421-7900
(Former name, former address and former fiscal year, if changed since last report)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | | | | | | | |
Title of each class: | | Trading Symbol(s): | | Name of each exchange on which registered: |
Common Stock, par value $.01 per share | | WSM | | New York Stock Exchange, Inc. |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 27, 2022, 66,567,436 shares of the registrant’s Common Stock were outstanding.
WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 30, 2022
TABLE OF CONTENTS
| | | | | | | | |
| PART I. FINANCIAL INFORMATION | |
| | PAGE |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II. OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Thirteen Weeks Ended | | For the Thirty-nine Weeks Ended |
(In thousands, except per share amounts) | October 30, 2022 | | October 31, 2021 | | October 30, 2022 | | October 31, 2021 |
Net revenues | $ | 2,192,574 | | | $ | 2,047,539 | | | $ | 6,221,338 | | | $ | 5,744,907 | |
Cost of goods sold | 1,282,048 | | | 1,152,054 | | | 3,553,455 | | | 3,238,181 | |
Gross profit | 910,526 | | | 895,485 | | | 2,667,883 | | | 2,506,726 | |
Selling, general and administrative expenses | 570,893 | | | 565,218 | | | 1,639,248 | | | 1,578,182 | |
Operating income | 339,633 | | | 330,267 | | | 1,028,635 | | | 928,544 | |
Interest (income) expense, net | (370) | | | 121 | | | (877) | | | 1,954 | |
Earnings before income taxes | 340,003 | | | 330,146 | | | 1,029,512 | | | 926,590 | |
Income taxes | 88,280 | | | 80,622 | | | 256,601 | | | 203,194 | |
Net earnings | $ | 251,723 | | | $ | 249,524 | | | $ | 772,911 | | | $ | 723,396 | |
Basic earnings per share | $ | 3.77 | | | $ | 3.37 | | | $ | 11.27 | | | $ | 9.66 | |
Diluted earnings per share | $ | 3.72 | | | $ | 3.29 | | | $ | 11.08 | | | $ | 9.40 | |
Shares used in calculation of earnings per share: | | | | | | | |
Basic | 66,704 | | | 74,010 | | | 68,578 | | | 74,865 | |
Diluted | 67,617 | | | 75,943 | | | 69,782 | | | 76,975 | |
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Thirteen Weeks Ended | | For the Thirty-nine Weeks Ended |
(In thousands) | October 30, 2022 | | October 31, 2021 | | October 30, 2022 | | October 31, 2021 |
Net earnings | $ | 251,723 | | | $ | 249,524 | | | $ | 772,911 | | | $ | 723,396 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (5,158) | | | 792 | | | (8,057) | | | 970 | |
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $378, $(19), $420, and $(235) | 1,069 | | | (54) | | | 1,188 | | | (654) | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $45, $(131), $53, and $(312) | (128) | | | 369 | | | (151) | | | 859 | |
Comprehensive income | $ | 247,506 | | | $ | 250,631 | | | $ | 765,891 | | | $ | 724,571 | |
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | | | | | | | |
| As of |
(In thousands, except per share amounts) | October 30, 2022 | | January 30, 2022 | | October 31, 2021 |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | $ | 113,058 | | | $ | 850,338 | | | $ | 656,898 | |
Accounts receivable, net | 125,842 | | | 131,683 | | | 139,511 | |
Merchandise inventories, net | 1,687,895 | | | 1,246,372 | | | 1,272,028 | |
Prepaid expenses | 104,208 | | | 69,252 | | | 85,433 | |
Other current assets | 29,729 | | | 26,249 | | | 22,852 | |
Total current assets | 2,060,732 | | | 2,323,894 | | | 2,176,722 | |
Property and equipment, net | 1,009,088 | | | 920,773 | | | 892,226 | |
Operating lease right-of-use assets | 1,277,064 | | | 1,132,764 | | | 1,159,315 | |
Deferred income taxes, net | 54,247 | | | 56,585 | | | 61,768 | |
Goodwill | 85,245 | | | 85,354 | | | 85,392 | |
Other long-term assets, net | 107,631 | | | 106,250 | | | 101,901 | |
Total assets | $ | 4,594,007 | | | $ | 4,625,620 | | | $ | 4,477,324 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities | | | | | |
Accounts payable | $ | 720,856 | | | $ | 612,512 | | | $ | 638,371 | |
Accrued expenses | 275,381 | | | 319,924 | | | 273,722 | |
Gift card and other deferred revenue | 488,771 | | | 447,770 | | | 431,446 | |
Income taxes payable | 45,879 | | | 79,554 | | | 38,320 | |
| | | | | |
| | | | | |
Operating lease liabilities | 220,012 | | | 217,409 | | | 218,348 | |
Other current liabilities | 103,821 | | | 94,517 | | | 91,418 | |
Total current liabilities | 1,854,720 | | | 1,771,686 | | | 1,691,625 | |
Deferred lease incentives | 13,918 | | | 16,360 | | | 17,268 | |
| | | | | |
Long-term operating lease liabilities | 1,208,074 | | | 1,066,839 | | | 1,095,290 | |
Other long-term liabilities | 104,361 | | | 106,528 | | | 129,771 | |
Total liabilities | 3,181,073 | | | 2,961,413 | | | 2,933,954 | |
| | | | | |
Stockholders’ equity | | | | | |
Preferred stock: $0.01 par value; 7,500 shares authorized; none issued | — | | | — | | | — | |
Common stock: $0.01 par value; 253,125 shares authorized; 66,556, 71,982 and 73,326 shares issued and outstanding at October 30, 2022, January 30, 2022 and October 31, 2021, respectively | 666 | | | 720 | | | 734 | |
Additional paid-in capital | 553,698 | | | 600,942 | | | 585,449 | |
Retained earnings | 877,157 | | | 1,074,084 | | | 963,840 | |
Accumulated other comprehensive loss | (17,848) | | | (10,828) | | | (5,942) | |
Treasury stock, at cost: 1, 4 and 4 shares as of October 30, 2022, January 30, 2022 and October 31, 2021, respectively | (739) | | | (711) | | | (711) | |
Total stockholders’ equity | 1,412,934 | | | 1,664,207 | | | 1,543,370 | |
Total liabilities and stockholders’ equity | $ | 4,594,007 | | | $ | 4,625,620 | | | $ | 4,477,324 | |
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity |
(In thousands) | Shares | | Amount | |
Balance at January 30, 2022 | 71,982 | | | $ | 720 | | | $ | 600,942 | | | $ | 1,074,084 | | | $ | (10,828) | | | $ | (711) | | | $ | 1,664,207 | |
Net earnings | — | | | — | | | — | | | 254,113 | | | — | | | — | | | 254,113 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (1,514) | | | — | | | (1,514) | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 93 | | | — | | | 93 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | (18) | | | — | | | (18) | |
Conversion/release of stock-based awards 1 | 617 | | | 6 | | | (78,142) | | | — | | | — | | | (372) | | | (78,508) | |
Repurchases of common stock | (3,380) | | | (33) | | | (18,590) | | | (482,452) | | | — | | | — | | | (501,075) | |
Reissuance of treasury stock under stock-based compensation plans 1 | — | | | — | | | (344) | | | — | | | — | | | 344 | | | — | |
Stock-based compensation expense | — | | | — | | | 28,339 | | | — | | | — | | | — | | | 28,339 | |
Dividends declared | — | | | — | | | — | | | (55,893) | | | — | | | — | | | (55,893) | |
Balance at May 1, 2022 | 69,219 | | | $ | 693 | | | $ | 532,205 | | | $ | 789,852 | | | $ | (12,267) | | | $ | (739) | | | $ | 1,309,744 | |
Net earnings | — | | | — | | | — | | | 267,075 | | | — | | | — | | | 267,075 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (1,385) | | | — | | | (1,385) | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 26 | | | — | | | 26 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | (5) | | | — | | | (5) | |
Conversion/release of stock-based awards 1 | 26 | | | — | | | (767) | | | — | | | — | | | — | | | (767) | |
Repurchases of common stock | (2,188) | | | (22) | | | (12,519) | | | (252,808) | | | — | | | — | | | (265,349) | |
Stock-based compensation expense | — | | | — | | | 22,976 | | | — | | | — | | | — | | | 22,976 | |
Dividends declared | — | | | — | | | — | | | (54,036) | | | — | | | — | | | (54,036) | |
Balance at July 31, 2022 | 67,057 | | | $ | 671 | | | $ | 541,895 | | | $ | 750,083 | | | $ | (13,631) | | | $ | (739) | | | $ | 1,278,279 | |
Net earnings | — | | | — | | | — | | | 251,723 | | | — | | | — | | | 251,723 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (5,158) | | | — | | | (5,158) | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 1,069 | | | — | | | 1,069 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | (128) | | | — | | | (128) | |
Conversion/release of stock-based awards1 | 13 | | | — | | | (1,156) | | | — | | | — | | | — | | | (1,156) | |
Repurchases of common stock | (514) | | | (5) | | | (3,010) | | | (71,516) | | | — | | | — | | | (74,531) | |
Stock-based compensation expense | — | | | — | | | 15,969 | | | — | | | — | | | — | | | 15,969 | |
Dividends declared | — | | | — | | | — | | | (53,133) | | | — | | | — | | | (53,133) | |
Balance at October 30, 2022 | 66,556 | | | $ | 666 | | | $ | 553,698 | | | $ | 877,157 | | | $ | (17,848) | | | $ | (739) | | | $ | 1,412,934 | |
1Amounts are shown net of shares withheld for employee taxes.
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity |
(In thousands) | Shares | | Amount | |
Balance at January 31, 2021 | 76,340 | | | $ | 764 | | | $ | 638,375 | | | $ | 1,019,762 | | | $ | (7,117) | | | $ | (599) | | | $ | 1,651,185 | |
Net earnings | — | | | — | | | — | | | 227,802 | | | — | | | — | | | 227,802 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 3,700 | | | — | | | 3,700 | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | (665) | | | — | | | (665) | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 153 | | | — | | | 153 | |
Conversion/release of stock-based awards 1 | 686 | | | 7 | | | (97,958) | | | — | | | — | | | (500) | | | (98,451) | |
Repurchases of common stock | (1,791) | | | (18) | | | (9,239) | | | (306,272) | | | — | | | — | | | (315,529) | |
Reissuance of treasury stock under stock-based compensation plans 1 | — | | | — | | | (344) | | | (44) | | | — | | | 388 | | | — | |
Stock-based compensation expense | — | | | — | | | 25,471 | | | — | | | — | | | — | | | 25,471 | |
Dividends declared | — | | | — | | | — | | | (46,370) | | | — | | | — | | | (46,370) | |
Balance at May 2, 2021 | 75,235 | | | $ | 753 | | | $ | 556,305 | | | $ | 894,878 | | | $ | (3,929) | | | $ | (711) | | | $ | 1,447,296 | |
Net earnings | — | | | — | | | — | | | 246,070 | | | — | | | — | | | 246,070 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | (3,522) | | | — | | | (3,522) | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 65 | | | — | | | 65 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 337 | | | — | | | 337 | |
Conversion/release of stock-based awards 1 | 25 | | | — | | | (1,709) | | | — | | | — | | | — | | | (1,709) | |
Repurchases of common stock | (834) | | | (8) | | | (4,358) | | | (131,493) | | | — | | | — | | | (135,859) | |
| | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | 19,496 | | | — | | | — | | | — | | | 19,496 | |
Dividends declared | — | | | — | | | — | | | (45,455) | | | — | | | — | | | (45,455) | |
Balance at August 1, 2021 | 74,426 | | | $ | 745 | | | $ | 569,734 | | | $ | 964,000 | | | $ | (7,049) | | | $ | (711) | | | $ | 1,526,719 | |
Net earnings | — | | | — | | | — | | | 249,524 | | | — | | | — | | | 249,524 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | 792 | | | — | | | 792 | |
Change in fair value of derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | (54) | | | — | | | (54) | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax | — | | | — | | | — | | | — | | | 369 | | | — | | | 369 | |
Conversion/release of stock-based awards1 | 20 | | | — | | | (2,322) | | | — | | | — | | | — | | | (2,322) | |
Repurchases of common stock | (1,120) | | | (11) | | | (5,921) | | | (195,379) | | | — | | | — | | | (201,311) | |
| | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | 23,958 | | | — | | | — | | | — | | | 23,958 | |
Dividends declared | — | | | — | | | — | | | (54,305) | | | — | | | — | | | (54,305) | |
Balance at October 31, 2021 | 73,326 | | | $ | 734 | | | $ | 585,449 | | | $ | 963,840 | | | $ | (5,942) | | | $ | (711) | | | $ | 1,543,370 | |
| | | | | | | | | | | | | |
1Amounts are shown net of shares withheld for employee taxes.
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| For the Thirty-nine Weeks Ended |
(In thousands) | October 30, 2022 | | October 31, 2021 |
Cash flows from operating activities: | | | |
Net earnings | $ | 772,911 | | | $ | 723,396 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 157,410 | | | 145,897 | |
Loss on disposal/impairment of assets | 5,738 | | | 887 | |
Amortization of deferred lease incentives | (2,442) | | | (3,345) | |
Non-cash lease expense | 169,602 | | | 159,757 | |
Deferred income taxes | (10,494) | | | (11,440) | |
Tax benefit related to stock-based awards | 11,172 | | | 10,838 | |
Stock-based compensation expense | 67,797 | | | 70,566 | |
Other | 272 | | | 4 | |
Changes in: | | | |
Accounts receivable | 5,288 | | | 4,941 | |
Merchandise inventories | (443,812) | | | (264,094) | |
Prepaid expenses and other assets | (39,737) | | | (10,078) | |
Accounts payable | 98,103 | | | 74,181 | |
Accrued expenses and other liabilities | (34,157) | | | 24,400 | |
Gift card and other deferred revenue | 42,005 | | | 58,189 | |
Operating lease liabilities | (177,855) | | | (164,569) | |
Income taxes payable | (33,276) | | | (31,191) | |
Net cash provided by operating activities | 588,525 | | | 788,339 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (234,378) | | | (141,010) | |
Other | 100 | | | 97 | |
Net cash used in investing activities | (234,278) | | | (140,913) | |
Cash flows from financing activities: | | | |
Repurchases of common stock | (840,955) | | | (652,699) | |
Payment of dividends | (165,254) | | | (135,201) | |
Tax withholdings related to stock-based awards | (80,431) | | | (102,482) | |
Repayment of long-term debt | — | | | (300,000) | |
Debt issuance costs | — | | | (777) | |
| | | |
| | | |
Net cash used in financing activities | (1,086,640) | | | (1,191,159) | |
Effect of exchange rates on cash and cash equivalents | (4,887) | | | 294 | |
Net decrease in cash and cash equivalents | (737,280) | | | (543,439) | |
Cash and cash equivalents at beginning of period | 850,338 | | | 1,200,337 | |
Cash and cash equivalents at end of period | $ | 113,058 | | | $ | 656,898 | |
See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of October 30, 2022 and October 31, 2021, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks then ended and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks then ended, have been prepared by us, and have not been audited. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. Intercompany transactions and accounts have been eliminated in our consolidation. The balance sheet as of January 30, 2022, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.
The results of operations for the thirteen and thirty-nine weeks ended October 30, 2022 are not necessarily indicative of the operating results of the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.
During fiscal 2021 and continuing through the first thirty-nine weeks of fiscal 2022, global supply chain disruptions, including COVID-19 related factory closures and increased port congestion, caused delays in inventory receipts and backorder delays, increased raw material costs, and higher shipping-related charges. We expect these supply chain challenges to continue through the first half of fiscal 2023, which could negatively impact our business.
New Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. We may elect to apply the provisions of the new standard prospectively through December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. We have yet to elect an adoption date, but do not believe the adoption would have a material impact on our financial condition, results of operations or cash flows.
NOTE B. BORROWING ARRANGEMENTS
Credit Facility
We have a credit facility (the "Credit Facility") which provides for a $500 million unsecured revolving line of credit (the “Revolver”). Our Revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders’ option, to increase the Revolver by up to $250 million to provide for a total of $750 million of unsecured revolving credit.
During the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, we had no borrowings under our Revolver. Additionally, as of October 30, 2022, issued but undrawn standby letters of credit of $11.1 million were outstanding under our Revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs. Our Revolver matures on September 30, 2026, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may elect to extend the maturity date, subject to lender approval.
The interest rate applicable to our Revolver is variable and may be elected by us as: (i) the LIBOR (or future alternative rate) plus an applicable margin based on our leverage ratio ranging, from 0.91% to 1.775% or (ii) a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio, ranging from 0% to 0.775%.
Our Credit Facility contains certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for operating lease liabilities to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of October 30, 2022, we were in compliance with our financial covenants under our Credit Facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.
Letter of Credit Facilities
We have three unsecured letter of credit reimbursement facilities aggregating to $35.0 million. Our letter of credit facilities contain covenants that are consistent with our Credit Facility. Interest on unreimbursed amounts under our letter of credit facilities accrues at a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio. As of October 30, 2022, the aggregate amount outstanding under our letter of credit facilities was $3.4 million, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. On August 19, 2022, we renewed all three of our letter of credit facilities on substantially similar terms. Two of the letter of credit facilities totaling $30.0 million mature on August 19, 2023, and the latest expiration date possible for future letters of credit issued under these facilities is January 16, 2024. One of the letter of credit facilities totaling $5.0 million matures on September 30, 2026, which is also the latest expiration date possible for future letters of credit issued under the facility.
NOTE C. STOCK-BASED COMPENSATION
Equity Award Programs
Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights, restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 42.7 million shares. As of October 30, 2022, there were approximately 6.8 million shares available for future grant. Awards may be granted under our Plan to officers, employees and non-employee members of the Board of Directors of the Company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.
Stock Awards
Annual grants of stock awards are limited to one million shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses which cover events including, but not limited to, retirement, disability, death, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member). Non-employee directors may also elect, on terms prescribed by the Company, to receive all of their annual cash compensation to be earned in respect of the applicable fiscal year (or the last two quarters thereof in the case of fiscal 2021) either in the form of (i) fully vested stock units or (ii) fully vested deferred stock units.
Stock-Based Compensation Expense
During the thirteen and thirty-nine weeks ended October 30, 2022, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $16.1 million and $67.8 million, respectively. During the thirteen and thirty-nine weeks ended October 31, 2021, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $24.3 million and $70.6 million, respectively.
NOTE D. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards to the extent their inclusion would be dilutive.
The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:
| | | | | | | | | | | | | | | | | |
(In thousands, except per share amounts) | Net Earnings | | Weighted Average Shares | | Earnings Per Share |
Thirteen weeks ended October 30, 2022 | | | | | |
Basic | $ | 251,723 | | | 66,704 | | | $ | 3.77 | |
Effect of dilutive stock-based awards | | | 913 | | |
Diluted | $ | 251,723 | | | 67,617 | | $ | 3.72 | |
Thirteen weeks ended October 31, 2021 | | | | | |
Basic | $ | 249,524 | | | 74,010 | | | $ | 3.37 | |
Effect of dilutive stock-based awards | | | 1,933 | | | |
Diluted | $ | 249,524 | | | 75,943 | | $ | 3.29 | |
Thirty-nine weeks ended October 30, 2022 | | | | | |
Basic | $ | 772,911 | | | 68,578 | | | $ | 11.27 | |
Effect of dilutive stock-based awards | | | 1,204 | | | |
Diluted | $ | 772,911 | | | 69,782 | | | $ | 11.08 | |
Thirty-nine weeks ended October 31, 2021 | | | | | |
Basic | $ | 723,396 | | | 74,865 | | | $ | 9.66 | |
Effect of dilutive stock-based awards | | | 2,110 | | | |
Diluted | $ | 723,396 | | | 76,975 | | | $ | 9.40 | |
The effect of anti-dilutive stock-based awards was not material for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.
NOTE E. SEGMENT REPORTING
We identify our operating segments according to how our business activities are managed and evaluated. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.
The following table summarizes our net revenues by brand for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Thirteen Weeks Ended 1 | | For the Thirty-nine Weeks Ended 1 |
(In thousands) | October 30, 2022 | | October 31, 2021 | | October 30, 2022 | | October 31, 2021 |
Pottery Barn | $ | 935,045 | | | $ | 788,732 | | | $ | 2,588,798 | | | $ | 2,200,110 | |
West Elm | 599,802 | | | 579,668 | | | 1,744,013 | | | 1,636,621 | |
Williams Sonoma | 261,820 | | | 272,361 | | | 762,651 | | | 793,423 | |
Pottery Barn Kids and Teen | 299,112 | | | 316,417 | | | 810,243 | | | 826,421 | |
| | | | | | | |
| | | | | | | |
Other 2 | 96,795 | | | 90,361 | | | 315,633 | | | 288,332 | |
Total 3 | $ | 2,192,574 | | | $ | 2,047,539 | | | $ | 6,221,338 | | | $ | 5,744,907 | |
1Includes business-to-business net revenues within each brand. |
2Primarily consists of net revenues from Rejuvenation, our international franchise operations and Mark and Graham. |
3Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $94.7 million and $93.1 million for the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively, and approximately $303.0 million and $309.1 million for the thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively. |
Long-lived assets by geographic location are as follows:
| | | | | | | | | | | |
| As of |
(In thousands) | October 30, 2022 1 | | October 31, 2021 1 |
U.S. | $ | 2,425,600 | | | $ | 2,154,392 | |
International | 107,675 | | | 146,210 | |
Total | $ | 2,533,275 | | | $ | 2,300,602 | |
1Includes total goodwill, deferred tax assets and intangibles of $150.0 million and $157.2 million as of October 30, 2022 and October 31, 2021, respectively, of which $137.7 million and $145.7 million, respectively, is related to the U.S.
NOTE F. COMMITMENTS AND CONTINGENCIES
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Condensed Consolidated Financial Statements taken as a whole.
NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS
Stock Repurchase Program
During the thirteen weeks ended October 30, 2022, we repurchased 513,940 shares of our common stock at an average cost of $145.02 per share for a total cost of $74.6 million. During the thirty-nine weeks ended October 30, 2022, we repurchased 6,081,708 shares of our common stock at an average cost of $138.28 per share for a total cost of $841.0 million. As of October 30, 2022, there was $729.0 million remaining under our current stock repurchase program. During the thirteen weeks ended October 31, 2021, we repurchased 1,119,748 shares of our common stock at an average cost of $179.78 per share for a total cost of $201.3 million. During the thirty-nine weeks ended October 31, 2021, we repurchased 3,744,767 shares of our common stock at an average cost of $174.30 per share for a total cost of $652.7 million.
Stock repurchased by the Company is typically cancelled after purchasing. However, we hold some shares in treasury to satisfy future stock-based award settlements in certain foreign jurisdictions. We held treasury stock of $0.7 million as of October 30, 2022 and October 31, 2021.
Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.
Dividends
We declared cash dividends of $0.78 and $0.71 per common share during the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively. We declared cash dividends of $2.34 and $1.89 per common share during the thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively. Our quarterly cash dividend may be limited or terminated at any time.
NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS
We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with the derivative financial instruments are measured at fair value and recorded in either other current assets or other current liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with ASC 815, Derivatives and Hedging.
Cash Flow Hedges
We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 12 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold.
Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of October 30, 2022, our reclassification of pre-tax gains or losses from OCI to cost of goods sold over the next 12 months is not expected to be material.
We had foreign currency forward contracts outstanding (in U.S. dollars) with notional amounts of $19.5 million as of October 30, 2022 and October 31, 2021.
Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.
The effect of derivative instruments in our Condensed Consolidated Financial Statements from gains or losses recognized in income was not material for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.
The fair values of our derivative financial instruments are presented in other current assets and/or other current liabilities in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.
We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.
NOTE I. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:
•Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;
•Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and
•Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.
The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.
Foreign Currency Derivatives and Hedging Instruments
We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.
The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts we entered into are subject to credit risk-related contingent features or collateral requirements.
Long-lived Assets
We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We measure right-of-use assets on a nonrecurring basis using Level 2 inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk.
The significant unobservable inputs used in the fair value measurement of our store assets are sales growth/decline, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation and the overall economics of the retail industry. Significant fluctuations in any of these inputs individually could significantly impact our measurement of fair value.
During the thirteen weeks ended October 30, 2022, no impairment charges were recognized. During the thirty-nine weeks ended October 30, 2022, we recognized impairment charges of $2.6 million related to the impairment of property and equipment and $2.6 million related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from underperforming stores in Australia. During the thirteen and thirty-nine weeks ended October 31, 2021, no impairment charges were recognized.
There were no transfers in and out of Level 3 categories during the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.
NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Foreign Currency Translation | | Cash Flow Hedges | | Accumulated Other Comprehensive Income (Loss) |
Balance at January 30, 2022 | $ | (10,886) | | | $ | 58 | | | $ | (10,828) | |
Foreign currency translation adjustments | (1,514) | | | — | | | (1,514) | |
Change in fair value of derivative financial instruments | — | | | 93 | | | 93 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1 | — | | | (18) | | | (18) | |
Other comprehensive income (loss) | (1,514) | | | 75 | | | (1,439) | |
Balance at May 1, 2022 | $ | (12,400) | | | $ | 133 | | | $ | (12,267) | |
Foreign currency translation adjustments | (1,385) | | | — | | | (1,385) | |
Change in fair value of derivative financial instruments | — | | | 26 | | | 26 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1 | — | | | (5) | | | (5) | |
Other comprehensive income (loss) | (1,385) | | | 21 | | | (1,364) | |
Balance at July 31, 2022 | $ | (13,785) | | | $ | 154 | | | $ | (13,631) | |
Foreign currency translation adjustments | (5,158) | | | — | | | (5,158) | |
Change in fair value of derivative financial instruments | — | | | 1,069 | | | 1,069 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | | | (128) | | | (128) | |
Other comprehensive income (loss) | (5,158) | | | 941 | | | (4,217) | |
Balance at October 30, 2022 | $ | (18,943) | | | $ | 1,095 | | | $ | (17,848) | |
| | | | | |
Balance at January 31, 2021 | $ | (6,398) | | | $ | (719) | | | $ | (7,117) | |
Foreign currency translation adjustments | 3,700 | | | — | | | 3,700 | |
Change in fair value of derivative financial instruments | — | | | (665) | | | (665) | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1 | — | | | 153 | | | 153 | |
Other comprehensive income (loss) | 3,700 | | | (512) | | | 3,188 | |
Balance at May 2, 2021 | $ | (2,698) | | | $ | (1,231) | | | $ | (3,929) | |
Foreign currency translation adjustments | (3,522) | | | — | | | (3,522) | |
Change in fair value of derivative financial instruments | — | | | 65 | | | 65 | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1 | — | | | 337 | | | 337 | |
Other comprehensive income (loss) | (3,522) | | | 402 | | | (3,120) | |
Balance at August 1, 2021 | $ | (6,220) | | | $ | (829) | | | $ | (7,049) | |
Foreign currency translation adjustments | 792 | | | — | | | 792 | |
Change in fair value of derivative financial instruments | — | | | (54) | | | (54) | |
Reclassification adjustment for realized (gain) loss on derivative financial instruments1 | — | | | 369 | | | 369 | |
Other comprehensive income (loss) | 792 | | | 315 | | | 1,107 | |
Balance at October 31, 2021 | $ | (5,428) | | | $ | (514) | | | $ | (5,942) | |
1Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income.
NOTE K. REVENUE
Merchandise Sales
The majority of our revenues are generated from sales of merchandise to our customers through our e-commerce websites, at our retail stores and through our direct mail catalogs, and include shipping fees received from customers for delivery of merchandise to their homes. The remainder of our revenues are primarily generated from sales to our franchisees and wholesale transactions, incentives received from credit card issuers in connection with our private label and co-branded credit cards and revenue from estimated unredeemed stored-value cards (“breakage”).
Revenues from sales of merchandise are recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the customer. For merchandise delivered to the customer, control is transferred either when delivery has been completed, or when we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.
Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of October 30, 2022 and October 31, 2021, we recorded a liability for expected sales returns of approximately $52.3 million and $