Q4 2024 Earnings Call Transcript

Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our fourth quarter earnings call. Before we get started, I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including annual guidance for fiscal '25 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations.

The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure appears in Exhibit 1 to the press release we issued earlier this morning.

This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our results today. Before we get into our results, I'd like to acknowledge the accomplishments of the entire team at Williams-Sonoma, Inc.

The results we are about to share with you today reflect their creativity, focus and hard work. We are proud with our strong finish to 2024. In Q4, our comp came in above expectations at positive 3.1%. Also in the quarter, we exceeded profitability estimates with an operating margin of 21.5% and earnings per share of $3.28. In Q4, we saw acceleration in our comp trend despite no material improvement in the housing market. After many quarters of running negative comps, our total comp was positive.

And I want to say it again, our total comp was positive 3.1% in Q4, and we outperformed the industry decline of 2% in the quarter. This outperformance was driven by a strong seasonal assortment, effective collaborations and improvement in furniture sales and strong performance in both retail and online. Turning to the full year. Our comp ran down 1.6% with a 5-year comp at 34% positive.

In 2024, we delivered a record annual operating margin of 17.9% with full year earnings per share of $8.50. We hit our 2024 annual guidance, which we raised twice in 2024, and we beat Wall Street estimates on both the top and bottom lines. This performance was due to the strength of our operating model, our supply chain efficiencies, our focus on full price selling and cost control from our company-wide financial discipline. As we enter 2025, we are confident that we've laid the foundation for growth and profitability. Even though there are significant macro and geopolitical uncertainties, we are focused on our strategies to deliver in 2025 and beyond.

Now let's talk about what those strategies include. First, we believe we will deliver core brand growth due to increased levels of newness and exciting innovation. We are able to differentiate ourselves competitively through our in-house design capabilities and vertically integrated sourcing organization. These differentiators give us a unique ability to offer high-quality products at compelling price points.

Also, we recognize housing may not improve this year, and therefore, a key component of our growth strategy is our robust non-furniture assortment that includes inspirational, seasonal and decorative accessories, textiles and housewares. We believe this puts us in a much better competitive position than our peers who are overly dependent on furniture. A key part of our strategy is our outside partnerships and collaborations. These exciting partnerships like Monique Lhuillier in Pottery Barn, LoveShackFancy in our Children's business, Stanley Tucci in our Williams-Sonoma Kitchen business and Marcus Samuelsson in West Elm attract new customers and drive sales with our current customers.

Next, B2B is an important growth driver. B2B leverages our strength in design and commercial-grade product offerings. And we have built an incredible book of business the last few years in the commercial space and several industry verticals. Our product offering of design to delivery services is a competitive advantage as we continue to build our project pipeline.

And we are off to a strong start with new customers this year. Another component of our growth will come from expansion of our emerging brands, Rejuvenation, GreenRow, Williams Sonoma Home and Mark and Graham. We have the in-house competency and ability to incubate and build new brands. And let me remind you that all of our brands, even our largest, Pottery Barn, were once emerging brands.

In addition to these growth strategies, we are focused on offering the best channel experiences. A key investment we are making is in our next generation of design services. The new tools we have launched online and in stores assist our customers in developing design plans for any style or size of home. And we continue to improve these tools.

For example, in Q4, we launched our proprietary Shop by Style functionality, which we'll be rolling out across all of our brands. We are also incorporating AI into our digital capabilities like personalized e-mails and customized homepages. We believe we'll be a leader in the use of AI in our operations and in our industry and that AI will be a key component in driving record sales and margin. Also, we are continuing to see improved performance in our stores.

Our positive comp in Q4 was primarily driven by retail as a result of our enhanced in-store experience with inspiring new products, improved in-stock inventory levels and next-level design services and events. We continue to unlock the power of our omni-channel services, and this is another area where we are using AI to optimize sales, cost and delivery speed. In 2025, we will also continue our progress in delivering world-class customer service, the perfect order, damage-free, on time, every time. Even with metrics better than before the pandemic and in some cases, record-breaking, our supply chain team continues to challenge the status quo and come up with new ways to reduce costs.

In 2025, we will continue to limit out-of-market and multiple shipments to reduce customer accommodations, to lower returns and damages and to reduce replacements. This part of retail execution is often overlooked, but is the key to profitability and customer satisfaction. We believe 2025 will be a year of additional optimization and efficiency, particularly in our new distribution center in Arizona, where we have more to go in terms of unlocking the benefits of cost efficiencies and faster, more automated deliveries. Moving to other earnings drivers.

We will be tight on employment in 2025 with a focus on using AI to offset headcount growth. Also in marketing, there is opportunity this year to leverage spend by using efficiencies in our in-house marketing program. In total, we are optimistic for 2025. We are focused on driving positive comps and expanding operational improvements. Even in a difficult environment, our initiatives are gaining momentum, and we are optimistic and confident about our business.

Our focus will remain on our 3 key priorities: returning to growth, enhancing customer service and driving earnings. Turning to guidance. Let's spend a minute talking about our assumptions. We aren't planning for any significant upside or downside from the external macro environment.

Our guidance reflects what we know today, incorporating our initiatives and the current tariffs of China at 20%, Mexico and Canada at 25% and the additional tariffs on metals and aluminum of 25%. Our guidance does not include any additional tariffs nor does it include a housing recovery. For 2025, we are guiding our comps to be flat to a positive 3% with operating margin between 17.4% and 17.8%. Now let's review our brands.

Pottery Barn ran a negative 0.5% comp in Q4, substantially improving over Q3. On a 5-year basis, the brand ran a positive 37.6% comp. In 2024, Pottery Barn significantly reduced promotional activity, improving margin and setting the groundwork for growth with new product introductions and increased collaborations. Looking to 2025, the brand has an exciting lineup of newness and noteworthy collaborations with industry leaders like LoveShackFancy that launches very soon, and we are building on our successful new furniture launches and have an expanded outdoor assortment. Also, we are uniquely positioned in the market with our leading products in seasonal decorating and entertaining and our innovation in textiles and our strength in print and pattern continues.

In 2025, another competitive advantage for Pottery Barn is to leverage our domestic upholstery capabilities located in the Southeastern United States. Our Sutter facilities offer high-quality manufacturing with industry-leading delivery times. Sutter services all of our brands, but Pottery Barn has the highest percent to total. Now I'd like to talk to you about our Pottery Barn Children's Home furnishings brands, which ran a positive 3.5% comp in Q4 with a 5-year comp of 24.6%.

In 2024, Kids and Teen together ran positive comps every quarter. Success has been driven by our key growth drivers, dorm, baby and collabs. In Q4, we saw record results from our expanded seasonal decor offering as customers came to our children's brands to celebrate the holidays, give gifts and decorate nurseries and dorm rooms. Product collaborations were another highlight with particular strength in the LoveShackFancy, Chris Loves Julia and Rifle Paper collections.

Looking to 2025, we have built a powerful pipeline of newness and newsworthy launches. We recently launched Modern Baby in Pottery Barn Kids, offering a fresh aesthetic to the brand. In the weeks ahead, our Pottery Barn Dorm collection will also launch with new looks and a dramatically expanded assortment. Now let's review West Elm.

We are thrilled to report a substantial improvement in comp to positive 4.2% in Q4. On a 5-year basis, the brand ran a 21.7% comp. We have made strong progress against our 4 key pillars: product, brand heat, channel excellence and operational efficiencies. In Q4, holiday newness drove double-digit positive comps with strength in both furniture newness and holiday seasonal textiles and decorative accessories and tabletop. We saw improvement in furniture as high-performing new collections came back in stock.

Also, lighting was a particular strength for West Elm in Q4. Now let's review the Williams-Sonoma brand. We are thrilled to report a substantial improvement in comp to positive 5.7%. On a 5-year basis, the brand ran a 35.5% comp. The Williams-Sonoma brand built on last year's success with another strong year, driven by retail execution, product innovation, dynamic marketing and collaborations.

In Q4, the product assortment for Williams-Sonoma was stacked with great gifts and a complete offering for holiday hosting and entertaining. We saw strength in the cookware, cutlery and electrics categories, led by newness and the popularity of key core items. Our seasonal and decorative accessories also drove results for the bakeware, tabletop, housewares, food and garden businesses. We continued to welcome customers into our stores with exciting events like Celebrity Chef Book Signings.

The 100th book signing event of 2024 for Williams-Sonoma was held in Q4 at our Columbus Circle store, and it was coincidentally a sold-out launch party for Martha Stewart's 100th cookbook. Our team was also on site managing the book sales at sold-out auditoriums across the country for Ina Garten's book tour, and we're excited for even more events with our amazing chef partners in 2025. In 2025, we'll continue to celebrate food from around the world. A great example is our Japanese-inspired tabletop collection currently in store, along with our new food collaboration with Celebrity Chef Morimoto.

Now I'd like to update you on B2B. Business-to-business had an exciting and record-breaking year, driving more than $1 billion in revenues with a 10% comp with both trade and contract growing in both Q4 and the full year. Q4 represented contract's largest quarter history to date, driving a 12% comp for the quarter. Our multichannel program and our leading assortment of contract-grade products have been key drivers in our accelerated large project growth.

Key project wins include our first furniture order for a cruise ship, Royal Caribbean's Utopia of the Seas, Hospitality Work for the Ritz-Carlton, Kimpton, W Hotels and Sheraton and continued momentum in the multifamily space with related companies and Korman Communities. We're excited about the opportunity that B2B has to disrupt an underserved and highly fragmented market. Lastly, I'd like to update you on our emerging brands. As I mentioned earlier, Williams-Sonoma has a long history of creating brands and building them into big businesses.

Like we did with West Elm from a concept in 2002 to an almost $2 billion business today, we are pleased with the performance of our smaller emerging brands like Mark and Graham and GreenRow, which had strong positive comps in the quarter. But today, I want to focus on Rejuvenation. Our Rejuvenation brand continues to exceed our expectations with another quarter of double-digit growth. In fact, in the last 5 years, Rejuvenation has driven positive comps in 17 of those 20 quarters, and the business has almost doubled since 2020. In 2024, Rejuvenation's growth was driven by innovative domestically designed handmade products.

Core categories, including cabinet hardware, bath hardware and lighting performed exceptionally well. And growth categories such as bath vanities, plumbing, window hardware and organization delivered double-digit comps. Looking ahead to 2025 and beyond, Rejuvenation is well positioned for continued momentum. We currently have 11 stores and are actively looking for new locations.

We believe Rejuvenation will be our next $1 billion brand. We are also encouraged by the improvement of the Williams Sonoma Home business. We continue to expand products across categories with introductions of exclusive in-house designs in lighting, textiles and accessories as well as collaborations. We see an opportunity to disrupt the high-end home furnishings market where no key players offer print and pattern like we do.

Last, I'd like to talk about our global business. We continue to see strength in our key growth markets, including Canada, Mexico and India. The Canada business continues to grow, fueled by our commitment to enhancing the customer experience, both online and in retail. In Mexico, the holiday season saw continued growth in sales and market share, driven by our inspiring product assortments and personalized service.

Our business in India continues to grow, driven by excellence in design services for both retail and e-commerce. And our U.K. business continues to grow as we strengthen our partnerships with John Lewis for West Elm, Pottery Barn Kids and Fortnum & Mason for Williams-Sonoma. In summary, we are proud of our strong execution and outperformance in 2024. Despite an uncertain backdrop, we have been and will continue to be focused on returning growth, enhancing our world-class customer service and driving earnings. We are innovators and operators, and we are set up for a great 2025. Before I hand it over to Jeff, I also want to take a minute to say thank you again to our associates, but also to our vendors and to you, our shareholders.

Your continued dedication and support is appreciated. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. We are proud to have delivered a strong finish to fiscal year '24, with both Q4 and full year '24 earnings exceeding expectations. Our results reflect the 3 key priorities we focused on in '24. First, returning to growth, as our top line improved to a positive 3.1% comp in Q4, driven by innovation and newness across our core brands, strong comps in our emerging brands and double-digit growth in business to business. Second, elevating our world-class customer service as our supply chain team once again produced efficiencies and most importantly, improved customer service.

And third, our focus on driving earnings as we delivered record operating margin and double-digit EPS growth in both Q4 and the full year. Our results this quarter demonstrate the flexibility, strength and durability of our operating model to drive market share gains and deliver highly profitable earnings in almost any environment. Now let's dive into the numbers. I'll start with our Q4 results, followed by our full fiscal year '24 results, then provide guidance for '25. As a reminder, 2024 is a 53-week year for Williams-Sonoma, Inc.

So our fourth quarter consisted of 14 weeks. We are reporting our comps on a 14-week versus 14-week comparable basis. All other year-over-year compares are 14 weeks versus 13 weeks. In Q4, the additional week contributed 510 basis points to revenue growth and 60 basis points to operating margin.

Q4 net revenues finished at $2.5 billion with a positive 3.1% comp. Our revenues came in above the high end of our expectations, driven primarily by strong holiday performance across our portfolio of brands and substantially improved trends in our furniture business. During the quarter, we gained market share even as we increased our penetration of full-price selling. From a channel perspective, our retail stores delivered a positive 7% comp and e-commerce, a positive 1.3% comp.

Moving down the income statement. Q4 gross margin came in at 47.3%, 130 basis points higher than last year. There were 3 main drivers behind this: merchandise margins, supply chain efficiencies and occupancy. First, merchandise margins improved 40 basis points year-over-year, reflecting lower input costs and our continued focus on full price selling.

Second, supply chain efficiencies delivered another 10 basis points of savings in Q4. We continue to realize expense savings across the supply chain from our focus on the customer experience and efficiency in manufacturing, warehousing and delivery. Key metrics, including returns, accommodations, replacements, out-of-market shipping and multiple deliveries per order continued to improve year-over-year. And third, occupancy costs were down 2% from last year and leveraged 80 basis points. Our higher top line leveraged occupancy across both retail and e-commerce.

Overall, our higher gross margin this quarter exceeded our expectations. Turning now to SG&A. Our Q4 SG&A ran at 25.8% of revenues, 10 basis points lower than last year. Q4 employment expense was 80 basis points higher year-over-year, primarily from higher performance-based incentive compensation due to our strong EPS performance.

In Q4, we continue to manage variable employment costs across our retail stores, distribution centers and care centers, in line with revenues. Q4 advertising expense was 30 basis points higher year-over-year. Our multi-brand portfolio allows us to test into incremental spending, while our data-driven marketing team maximizes the effectiveness of our investment and keeps valuable insights in-house. Our advertising model is a powerful competitive advantage.

Q4 general expenses drove the balance of the leverage in SG&A due to our resolution of an indirect tax matter and a favorable insurance settlement. On the bottom line, our Q4 operating margin came in at a record 21.5% or 140 basis points above last year. Q4 diluted earnings per share of $3.28 increased 20.6% above last year. Turning now to our full year results, which again exceeded expectations.

Full year net revenues finished at $7.7 billion with a full year comp of negative 1.6%. Importantly, our comp trends gained momentum across the year. That was driven by the ongoing strength in our non-furniture categories, coupled with the improved trend in our furniture business. From a channel perspective, our retail stores delivered a positive 0.2% comp and e-commerce, a negative 2.5% comp.

E-commerce on the full year continued to constitute nearly 66% of total revenues. Full year gross margin ended at 46.5%, a 380 basis point improvement over last year. As a reminder, in the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment related to freight accruals that benefited operating margin results by approximately 70 basis points on the full year. Without the Q1 out-of-period adjustment, full year gross margin ended at 45.8%.

This 310 basis point improvement was driven by higher merchandise margins, supply chain efficiencies and occupancy leverage. Full year SG&A expense increased to 27.9%, up 160 basis points year-over-year. Higher employment and advertising expense was partially offset by slightly lower general expenses on the full year. On the bottom line, we delivered earnings exceeding expectations.

Including the out-of-period adjustment in Q1, full year operating margin finished at 18.6% with full year diluted earnings per share of $8.79. Without the out-of-period adjustment in Q1, full year operating margin finished at a record 17.9% and full year diluted earnings per share increased to $8.50, up 14.4% year-over-year. On the balance sheet, we ended the year with a cash balance of $1.2 billion with no debt outstanding. Merchandise inventory stood at $1.3 billion, up 6.9% to last year. Included in our year-end inventory levels is a strategic pull forward China receipts to reduce the potential impact of higher tariffs in fiscal year '25. Now turning to capital allocation.

In 2024, we generated free cash flow of $1.1 billion and returned nearly $1.1 billion to our shareholders through share repurchases and dividends. Share repurchases in '24 totaled $807 million or 4.6% of our outstanding shares. And we paid $280 million in dividends to our shareholders, a 20% increase year-over-year. Capital expenditures in '24 totaled $222 million as we continue to invest in our long-term growth.

Speaking of returns, our fiscal year '24 return on invested capital of 54% is among the best in the retail industry. Summing up our '24 results, we are proud to have delivered strong earnings for our shareholders. These results reflect the efforts of the entire team at Williams-Sonoma, Inc., and I'd like to thank our talented team for delivering these outstanding results. Now let's turn to our '25 outlook.

First, some housekeeping. As I've mentioned, 2024 was a 53-week year for Williams-Sonoma, Inc. In fiscal year '25, we'll report comps on a 52-week versus 52-week comparable basis. All other year-over-year compares will be 52 weeks versus 53 weeks.

The additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin to full year '24 results. Additionally, in the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment related to freight accruals that benefited operating margin results by approximately 290 basis points in Q1 and 70 basis points on the full year. Our guidance for fiscal year '25 will use our fiscal year '24 results without the out-of-period adjustment as a comparable basis. Looking ahead to fiscal '25, the macroeconomic and policy environment is unpredictable.

Our focus is on what we can control, executing on our 3 key priorities: returning to growth, elevating our world-class service and driving earnings. We're confident in our growth strategies, and we see opportunity to drive earnings from additional supply chain efficiencies and savings across SG&A. Our guidance assumes no meaningful changes in the macroeconomic environment or interest rates or housing turnover. We expect 2025 net revenue comps to be in the range of flat to positive 3% with total net revenues in the range of down 1.5% to positive 1.5% due to the 53rd week impact from '24. We anticipate operating margins will be between 17.4% and 17.8%, inclusive of the 20 basis points impact from the 53rd week.

Regarding tariffs, our operating margin guidance includes the tariff increases implemented as of this call. Specifically, our guidance includes the additional 20% China tariffs, the 25% Mexico and Canada tariffs and the 25% tariff on steel and aluminum. With these tariffs included, we expect operating margin for fiscal year '25 to be in the range of 17.4% to 17.8%. If tariff policy changes, we may need to revisit our guidance estimates.

Now turning to capital allocation. Our capital allocation plans for '25 prioritize funding our business operations and investing in long-term growth. We expect to spend between $275 million and $300 million in capital expenditures in fiscal year '25. 85% of this capital spend will be dedicated to driving our leadership in e-commerce, our retail optimization and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases.

For dividends, today, we announced our Board of Directors authorized a 16% increase in our quarterly dividend payout to $0.66 per share. Fiscal year '25 will be the 16th consecutive year of increased dividend payouts, which we are both proud of and remain committed to. For share repurchases, we have $1.2 billion available under our share repurchase authorization through which we will opportunistically repurchase our stock to deliver returns to our shareholders. Looking further into the future beyond '25, we are reiterating our long-term guidance of mid- to high single-digit revenue growth with operating margins in the mid- to high teens.

Wrapping up Laura's and my comments, we are proud to have delivered strong results for our shareholders that exceeded expectations, and we are encouraged by the momentum in our business. Williams-Sonoma, Inc. remains focused on our 3 key priorities: returning to growth, elevating our world-class customer service and driving earnings. We're confident we'll continue to outperform our peers and deliver shareholder growth for these 5 reasons that remain consistent. Our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy, the ongoing strength of our growth initiatives and the resiliency of our fortress balance sheet.

With that, I'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Oliver Wintermantel from Evercore.

I'm looking for -- within your comp guide of 1% to 3%, how do you see SG&A leverage on a flat comp versus a plus 3% comp? We've seen in 4Q now that you had a positive 3% comp, it was occupancy was nicely levered and SG&A, we saw a 10 basis point leverage. So if you could walk through what the breakpoints were with leverage between maybe a flat and a plus 3% comp?

Oli. Thank you for that question. As you know, we don't guide to specific lines or provide guidance by quarter. On the full year, we're guiding operating margin to be in the range of 17.4% to 17.8%.

We do expect to see some leverage in SG&A from expense savings that will partially offset the headwinds in gross margin we anticipate from tariffs. I think there's 3 key points when considering SG&A. First, most of our employment sits in our stores, distribution centers and call centers. So it's variable expense that we can flex with top line trends.

So as we see more sales, we would expect to be able to hold our employment rate. Second, we see opportunity to leverage AI to drive additional savings, especially in our call centers and certain back-office operations. We're starting to deploy some AI here, and we think there's a good opportunity for us to leverage that. Tough to quantify as it's the early innings, but we're very optimistic about what that can bring in terms of savings.

And third, a key competitive advantage of our advertising model is our ability to test across our portfolio of brands and scale or pull back based upon returns. We're constantly evaluating our advertising spend and how we look to spend the next incremental dollar. That's a lever as we see more sales, we can always flex. But here's the key thing.

We guide top line revenues and bottom line operating margin because it gives us the flexibility to respond to any changes in the business. And as you've seen, especially in our Q4 results, we know the levers to pull to deliver results.

Okay. And then just to follow up on the sales growth. How do you see e-comm versus stores performing in 2025?

Yes. Look, we were very pleased with the retail performance in Q4 at a plus 7%. The retail team did a phenomenal job and our brands have great strategies. In terms of the mix between the channels, we don't provide specific guidance, but we do believe that e-commerce will continue to be on the full year, 66% of our total revenues.

We're optimistic about where we see both channels in '25, and that's baked into our guidance.

Your next question comes from the line of Max Rakhlenko from TD Cowen.

Great. Just curious, so on gross margin for 2025, if we were to ignore tariffs, how much further room do you see across supply chain, product margins and occupancy as well?

Yes, Max, a great question. I think that gets to the heart of what's on everybody's mind this morning. Look, our guidance today of 17.4% to 17.8% in operating margin includes the full impact of the tariffs that have been implemented as of this call. That includes the 20% China tariff, the 25% tariffs on Mexico and Canada and the 25% tariff on steel and aluminum.

Our expectation, as we look at it is that we expect to see some erosion in gross margin simply from the headwinds we anticipate from these tariffs. But there will also be offsets from supply chain efficiencies in gross margin and savings in SG&A. On supply chain efficiencies, we have a long way to go. We do big and bulky better than just about anyone in this industry, and we do it at scale.

We make over 2.4 million in-home deliveries per year. That's about 7,000 a day. And like I said, we do it better than anybody, but we still have a lot of opportunity to improve on things like returns, damages, replacements, on time. There's a lot of opportunity in there, and our supply chain team has done a phenomenal job so far, and they see additional savings that they can harness as they approach '25. And then as we think about SG&A, there's additional offsets in there as well.

I just spoke about some of them with Oli's question, but we definitely see opportunity to leverage some employment as we deploy some exciting AI initiatives. And then we see opportunity with ad costs as well. I think the key point here is if you think about the impact of the tariffs, we have covered the full impact within our guidance today of all the tariffs that are implemented as of this call. If it weren't for the tariffs, would the margin be higher?

Perhaps. But that's not the reality of today, and we're guiding based upon the facts and trends that are out there in the environment today.

Your next question comes from the line of Simeon Gutman from Morgan Stanley.

I'm going to ask 2 strategic questions. First, a little related to the prior one. So gross margin structurally is punching at a much higher level than pre-COVID. You were obviously maybe undervalued before.

Can you talk about the structural opportunity for higher product margins? Your business now flipped to positive comp. There's been no real degradation in the structure of margins. So can you talk about it?

I know you just touched on it a little bit, Jeff, but thinking about the mix between price and product margin.

Sure. I'll chime in here. I think Jeff has covered well what our guidance is and what it includes. And I'll repeat what he said in a slightly different way about other opportunities.

So the tariffs are in a way, an opportunity for us because of our scale and our capabilities with our supply chain and our exclusive product line. I think you know we design most of what we sell, and it gives us the competitive advantage of being ahead and not being stuck in price wars with people. We also have long relationships with our vendors overseas and our own sourcing organization on the ground, which I don't think any of our competitors have. So we have been anticipating these tariffs for some time now, details of which we didn't know, of course, but we knew that China was going to be squarely in the sidelines.

You know we've been moving goods away from China. We've cut it substantially. We intend to continue to cut it substantially. That's not just an intention that's in progress and move things to areas that are cheaper and untariffed, easier to do business in, including moving some things back to the United States, which is exciting for us.

I think you remember that we have our Sutter Street manufacturing unit in the southern part of the United States, Southeastern part of the United States, and we make a lot of our upholstery there. We have an incredible workforce, and that product got a lot more appealing now from a margin perspective given these tariffs, and it makes it very hard to compete with us because we have great prices. We have the best quality. Please, if you haven't purchased from Sutter, you should.

And also the most competitive part of that is we can do made-to-order in the shortest time in the marketplace. That's a big advantage, big, big advantage for us. But moving back to pricing. We have been testing, we've told you this before, pricing up, pricing down, where is the sweet spot.

And in addition to getting some relief from our great vendor partners and moving things to areas that are -- that don't have tariffs or we expect to be less tariffed, we have taken some targeted price increases on items that are either underpriced or that we're overselling, and we're seeing good results from that. We need to be very careful because being competitive is very important to us, but being competitive is not just price to price. It's design and it's quality. And it's really important that all those things are considered when we price things either up or down.

But I am pleased to tell you this morning that we are seeing some opportunity in pricing a few things up to cover some of these very extreme costs that have come through as a result to these tariffs. Now on supply chain, the other components of margin, there's all sorts of different beliefs out there about whether ocean comes down from here and whether if demand slows worldwide, that becomes a real tailwind for us. Could be, we haven't baked a lot of that stuff in yet. What we have put in is a nod to what Jeff was talking about in terms of further improvement in returns, replacement damages.

We know there's opportunity there. It's a very large number but we also don't want to get ahead of ourselves. So could there be more on those operating lines? There could be.

Could there be other surprises? There could be. So when you give guidance, you pick your best case -- your best guess with all the puts and takes, and that's what we gave you today. Remember, last year included an extra week.

This year, we obviously don't have that. So that's worth more than I think people expected. But I'm very confident about our ability to outperform this year, especially vis-a-vis our competition. And the truth is whenever there is uncertainty, there is opportunity.

And that's what we're excited about this year.

Your next question comes from the line of Steven Zaccone from Citi.

Well, I'm going to ask 2 in 1 here just for time. First, can you just clarify what is your tariff posture kind of embedded in the guide? Because obviously, the situation is very dynamic. So just help us quantify what is the actual impact to gross margin?

And then the second is, I wanted to focus just on the consumer because we've heard a lot about some weakness in big ticket discretionary spending as of late. Have you seen anything in your business? And it sounds like your guidance doesn't kind of embed any change in the external backdrop. But how do you think through if the consumer kind of weakens the levers to protect operating margin?

Steve, why don't we take the consumer first and Laura will take that, and then I'll take the tariff question.

Okay. I thought you're going to do the opposite, but I'd be happy to, yes. The consumer -- all I can tell you about the consumer is what we see related to our business I can't speak to what others are seeing. I don't want you to take this and apply it to everything that you guys cover.

But what we're seeing is that they are responding to our strategies. And our strategies are to drive our nonfurniture business, which is exciting with our newness across brands and our stepped-up incremental collabs, our non-furniture seasonal holiday decor across brands. We had a double-digit comp on our seasonal holiday decor, and we're off to the races with Easter, which, by the way, there's an Easter shift, which is interesting because it makes things even more confusing, but it is usually good when Easter is later, which it is this year than it was last year, substantially later. And then our emerging brands are clearly outperforming and represent a big opportunity for us.

As I said in my prepared remarks, the other opportunities that we see that our consumers are responding to are B2B. We had our biggest quarter ever in Q4, and we don't see that abating. Our design services continue to be a real area of competitive advantage because we know it's hard to decorate a home and particularly online. And we're giving our sales associates better tools, but also our customers better tools to make decisions to furnish their homes online if they can't go to a store.

And then our channel strategies using our channels to unlock the power of inventory anywhere and get it to customers quickly. And so these are our strategies, but there are strategies that have been approved by our customers based on what we're seeing in terms of response to them. So I can tell you that the consumer is responding to our strategies, and that gives us confidence and optimism in our guidance.

All right. And your other part of your question regarding tariffs and what's in and what's the impact to our operating margin guidance. So our operating guidance of 17.4% to 17.8% includes the full impact of the tariffs implemented as of this call. So just to be super specific because there's a lot of different things bouncing out there.

It includes the 20% China tariff, the 25% Mexico and Canada tariffs and a 25% additional tariffs on metals and aluminum. And here's the thing on tariffs, we've always been a leader in proactively responding to changes in the trade environment. It's not our first time at this. Laura and I were both here in 2018 as were most of our management team.

Since 2018, we've significantly reduced our China sourced goods from back then in 2018, it was about 50% to about 23% today. And Mexico and Canada are not a material source of production for us, but there is an impact from tariffs embedded in our guidance. To offset the tariff impact, we have an effective 6-point plan, and Laura touched on a number of these in the last question. First one is obtaining cost concessions from our vendors.

We're also resourcing goods to lower-cost countries, including out of China. As Laura mentioned, we are passing on targeted price increases to our customers. And I've said earlier in the call, we're identifying further supply chain efficiencies, and we're reducing SG&A expense as well. And finally, we're expanding our Made in USA assortment.

The U.S. is already a major manufacturing hub for us. Laura walked you through that. I want to share that it's our second largest source of goods at 18%. So -- and we see opportunity to expand our Made in USA assortment, production and partnerships.

So here's the thing. There's a lot of noise on the tariffs. Our guidance includes the tariff increases implemented as of this call, and we've really offset most of the impact from those higher tariffs.

Your next question comes from the line of Brian Nagel from Oppenheimer.

Nice quarter, nice year. Congratulations.

Thank you.

So the question -- and the first question I'm going to ask, and I apologize because I think this is a bit of a follow-up to the prior question. But just look, there's a lot of chatter out there, broadly speaking. Clearly, Williams-Sonoma has really elevated itself to one of the best performers within your sector, but a lot of chatter weakening demand out there. So the question I have is, could you be a little more specific on coming off of what was a decidedly solid, decidedly strong fourth quarter, Q4, what you're kind of seeing here in the early part of fiscal '25 in Q1?

And then as a part of that question, again, there's been chatter that maybe there might be some demand pulled forward within the sector to '24 as maybe consumers starting to anticipate tariffs and we're buying ahead of that. Do you think there's any truth to that, so to say?

Brian, so when we think about our quarter-to-date trends, we're about halfway through the quarter and some of our biggest weeks are in front of us. And the Easter shift makes it hard to read the business. I mean Easter is late, very late. It's almost at the end of April, which is, I think, as late as it can fall in the calendar.

So it's a little tough to read trends at the moment because that does impact especially our nonseasonal business. But the trends we are seeing are baked into our guidance. While it might not be as strong as Q4, we are optimistic for Q1 and our full year 2025, and that's reflected in our guidance today. In terms of the question of is demand being pulled forward, we have no hard evidence of this.

It's -- we've talked about it, but we can't tell if there is or there isn't. What we do see, as Laura mentioned before, is the customer responding to our strategies. particularly around our non-furniture business. Our seasonal businesses have been very strong. Our decorating businesses have been strong.

Our collaborations have been strong. And today, we're excited to -- that Pottery Barn is tonight will be launching its collaboration with LoveShackFancy, which is a really buzzworthy brand. And we're also seeing continued strength in Cooking at Home, as demonstrated by the Williams-Sonoma comps. So we can't really tell what is happening with the overall consumer, but we can tell you that our strategies are working, and we have confidence in them as we turn the corner to '25.

The other thing I want to make sure that we get in before the call is over is that we are seeing improvement in our furniture trend. And I don't know that this is because the industry is seeing that. In fact, I'm not hearing that. But because we brought in so much newness in the fall and summer seasons last year, and we told you that the newness was working, especially in West Elm, we were able to maximize and get in-stock in that newness and add more pieces to those collections that are working.

And our proprietary designs allow us to be ahead of what other people are doing. And I think we have a really good handle on the changes in aesthetic that the consumer is looking for across all of our brands. And so that's, I think, really the reason we're seeing furniture improve versus a macro effect on furniture. But it's another reason that we're optimistic about this year.

Your next question comes from the line of Jonathan Matuszewski from Jefferies.

The first one was on just plans for the store base in 2025. I think a couple of years ago, you unveiled plans to close 25% of the store base over time. Curious how you're thinking about net closures in 2025 and whether that 25% framework is still appropriate based on 2019 store counts? That's my first question.

Yes, sure. We love our retail business. Our stores are billboards for our brands, and we operate them as profit centers. And they really are the thing that our customers remember.

When you think of going to the mall at Christmas, you think of Williams-Sonoma and all those incredible smells and tastes that come out of our stores. That said, we always knew we had opportunity to optimize our retail strategy and have our stores in the best locations. And we have some of the strictest ROI criteria, I think, of anyone in the market. And we have continued to close our lowest performing stores that don't meet our profitability thresholds.

In fact, we've closed about 17% of our fleet since 2019. At the same time, we continue to invest in renovations and repositions. And that has been very successful. Our new store remodels are exceeding our expectations. And a good example, if any, I don't know if anyone is from Oklahoma, but our Oklahoma City Pottery Barn store was relocated to a new outdoor lifestyle center.

And since opening, this new location is up double digits to the prior location. And that's what we're talking about when we say retail optimization.

Your next question comes from the line of Kate McShane from Goldman Sachs.

I just wanted to check in on incentive comp growth. I think you mentioned it returned in Q4. Just how should we be thinking about that in fiscal year '25? And then our second question was just around West Elm, given the strong sequential improvement in the comp. Do you have any anecdotes on the performance of the broader assortment of non-furniture offerings specifically or any demographic shifts or trends in that brand?

Kate, I'll take the incentive compensation question, and then I'll turn it over to Laura to talk about West Elm. In terms of incentive compensation as we look forward to 2025, not guiding that it's going to have a specific impact. We don't guide to specific lines, but not anticipating that would have a specific impact. Here's the thing, we have always been and are a pay-for-performance company.

So our incentive compensation ebbs and flows with our performance. If there is an outstanding performance in a year, there may be some impact, but that would mean that we are exceeding our estimates and then therefore, it would be paying for itself. But overall, from a guidance perspective, it's not incorporated, and we'd have to substantially exceed guidance for that to become a factor in the conversation. Let me turn it over to Laura for the West Elm question.

Yes, sure. Thank you for the question. We are very proud to see positive comps in West Elm in Q4, and it's clear that the initiatives we've been talking about for several quarters are gaining traction. Starting with product, we said we'd bring in more new product.

I'm talking double digit, we would go after more collaborations. We have done that and that we'd also go after the seasonal holidays and Christmas, as an example, was quite successful with our relatively small product offer, which begs the question of how much more is there for this year. The second piece is really brand heat, and that comes from just being in the zeitgeist of what people are talking about. And we are doing a lot more with organic social and with our marketing stories and our photography is more beautiful.

We have a lot of influencers talking about us. And of course, these collaborations also bring new customers into the brand. And so we're really driving brand heat. And then in terms of channels, we saw opportunities in both channels, both from a retail perspective where we had gotten to quiet when just only furniture to bringing in more little and things that people buy on a regular basis versus just a considered purchase, and that has really helped us drive traffic.

And then post-COVID, really restocking the stores so that people could take to go product that they want. This is a real competitive advantage for us because our West Elm stores have big backrooms, and there's not a lot of big retailers out there that let you take something to go that's not a small piece of deck. And that is what we're doing. And you're going to see us continue to do more of that this year at retail in all of our brands based on the success that we are seeing.

In terms of digital, we've really substantially improved the photography. Go ahead and look at the imagery on the website, the storytelling, versus a year ago, and you'll see a tremendous change in how we're showing -- we even brought back the catalog last year, which we hadn't mailed in years. And that really is not just for that channel and that piece, but also it makes the brand really hone their storytelling. When you have to put a catalog together, it is my opinion that your site looks better.

And then in terms of profitability and operations, just making sure that everything that we're doing is built to last and that there's no packaging damages and all those things. And that has been a key part adding to our supply chain efficiencies that we talked about. It's every brand. It's not just the supply chain team looking at ways to make their product better and make it stick with the customers and not have it come back.

So we're excited about what we've seen and what is to come for West Elm.

And that concludes our question-and-answer session. I will now turn the call back over to Laura Alber for closing remarks.

Well, thank you all for joining us. Happy shopping, and we look forward to seeing you and talking to you soon. I know Jeff's going to be out and visiting with some of you and look forward to seeing you later in the year myself. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.