Q1 2025 Earnings Call Transcript

Welcome to the Williams-Sonoma, Inc. First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the conclusion of the prepared remarks. 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 first 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. Also, with respect to year-over-year comparisons for the first quarter, we will make reference to our Q1 results last year, both with and without a benefit of $49 million, related to an out of period adjustment we recorded last year.

We believe providing these disclosures is useful to understanding our quarterly financial results. 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 this morning about our first quarter. Before we get into our results, I want to take a minute to recognize our team for their contributions.

Their contributions, their passion, dedication, and talent continue to drive our results. We are proud to deliver strong results in the first quarter of 2025, driven by a positive top-line comp and continued strength in our profitability. In Q1, our comp came in above expectations at positive 3.4% with all brands running positive comps, and we exceeded profitability estimates with an operating margin of 16.8% and earnings per share of a $1.85 with earnings growth of 8.8%. In the quarter, we saw an acceleration of the positive comp trend coming out of Q4, despite consumer distraction with tariffs, continued geopolitical uncertainty, and no material improvement in housing market, and we continue to outperform the industry which declined 3% in Q1. Our growing outperformance was driven by an improvement in furniture sales, effective collaborations, and strong performance in our retail and e-commerce channels.

As we continue into 2025, we are confident that we have laid the foundation for growth and profitability. Even though there are significant macro and geopolitical uncertainties, we are focused on our three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. Now let's review our strategies to continue our positive momentum from Q1 and deliver growth during the remainder of this year and beyond. First, we remain confident in delivering core brand growth supported by a strong pipeline of newness and compelling innovation.

Our ability to differentiate through in-house design and a vertically integrated sourcing model continues to be a key advantage, enabling us to offer high-quality products and exceptional value. We recognize that the housing market, and therefore the furniture industry, may remain soft this year as interest rates are still high. Therefore, our growth strategy emphasizes a broad and inspirational non-furniture assortment, including seasonal and decorative accessories, textiles, and housewares. Also, strategic collaborations are another critical part of our plan.

These collaborations continue to expand new customer growth and drive sales, and most importantly, they drive relevance and excitement for our brands and customers. Our B2B program is also a key growth engine. B2B started the year strong, growing 8%, delivering another record-breaking quarter, leveraging our design experience and commercial-grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator, and we are seeing continued momentum.

We're also seeing positive traction and strong comps in our emerging brands Rejuvenation, Mark and Graham, and Green Row. With our proven ability to incubate and scale brands in-house, we're confident in the continued growth of these concepts and their ability to deliver profitably to our results. Alongside these growth drivers, we're focused on elevating every customer touchpoint and our channel experiences. One area of continued investment is our next generation of design services.

We've introduced new tools both online and in stores to help customers visualize and plan their spaces. We're also making meaningful progress in integrating AI across our digital platforms. From personalized emails to tailored homepages, we are enhancing the customer journey with smart data-driven experiences. We believe AI will be a transformational force in our business, and we'll be a leader in the use of AI in our industry.

In our retail stores, momentum continues. Our strong Q4 retail comps continued into Q1 and were driven by an improved in-store experience with more inventory availability, fresh product assortments, enhanced design services and engaging events. Our omni-channel capabilities are another core strength, and we are further optimizing them with AI. This includes improvements in sales performance, cost efficiency, and delivery speed.

Looking ahead to the balance of the year, we are focused on delivering exceptional customer service with perfect orders that are on time, damage-free from start to finish. Our operational metrics are surpassing pre-pandemic levels and we are working to optimize these metrics even further. That includes reducing split shipments, lowering returns and damages and streamlining our fulfillment processes. From a cost perspective, we are committed to staying lean on headcount using AI tools to drive productivity gains in areas that make sense.

And in marketing, our in-house teams are finding ways to maximize ROI and deliver a strong impact with less investment. In summary, there is no doubt that existing macroeconomic and geopolitical uncertainties are a focal point for the market, but volatility is not new in our industry, and we are confident in our ability to adapt and navigate whatever lies ahead. Therefore, we are optimistic about 2025. We are planning to gain market share, enhance the customer experience, and deliver strong earnings. Our commitment to our three key priorities remains unwavering.

Turning to guidance, I'd like to take a moment to walk through our current assumptions. We are reiterating the same outlook that we shared with you last quarter. Our guidance reflects that which we know today, and we are not assuming any significant upside or downside from broader macroeconomic factors. As we said last quarter, our guidance incorporates our current initiatives and the existing tariff environment, which includes the tariffs that we discussed in March and now the additional China tariff at 30% and the global reciprocal tariff at 10%.

It does not assume any other tariffs. If there are material changes in future tariffs, we will revisit our guidance. For fiscal 2025, we continue to guide comp brand revenue growth of flat to positive 3% and operating margin in the range of 17.4% to 17.8%. As it relates to tariffs, we have been actively and aggressively managing through these additional costs with our six-point plan, which includes several key actions.

First, we are successfully obtaining cost concessions from our strong vendor community. This includes reductions on current product pricing, but also reductions in price on the newness that we are bringing in and developing in the future. Second, we are actively resourcing goods to lower-tariff countries, including further reductions from China. Third, we are identifying further supply chain efficiencies in our network.

Fourth, we are reducing SG&A expense through tight cost control and financial discipline. Fifth, we are expanding our made in the USA assortment, production, and partnerships. And lastly, we are carefully taking select price increases on products to offer strong value with a focus on maintaining competitive pricing. We believe the six-point plan will allow us to absorb the additional tariffs since we last spoke, and yet still reiterate our annual guidance today.

Now, let's review our brands. Pottery Barn ran a positive to comp in Q1. Now, on a five-year basis, the brand ran a 46.7% comp. Pottery Barn continues to increase innovation in their product lines and to launch more collaborations. The brand launched four strategic collaborations in the quarter with partnership with Cravis, LoveShackFancy, Monique Lhuillier, and Mark Sykes.

We continue to strengthen our proprietary designs with the focus on new and innovative furniture and easy decorating, entertaining updates for the home. The Pottery Barn continues to see outside strength in seasonal offerings, and we are pleased with the Easter and Valentine's Day results that the brand delivered. We believe we are well-positioned for the balance of 2025 due to increased newness, exciting brand collaborations, focus on seasonal decorating and entertaining. and strong design services. I'd like to talk to you about our Pottery Barn Children's business, which ran a 3.8% comp in Q1, representing the fifth straight quarter of positive comps, and on a five-year basis, Pottery Barn Kids and Team together ran 27.8% comps.

These life-stage businesses continued to show resilience in a tough macro environment. Newness and product introductions from baby to dorm was a key lever in the quarter and drove most of its growth. Customers are responding to news-worthy introductions from our latest collection of Modern Baby to our best-ever Easter baskets and décor, and our expanded offering in dorm. Collaborations continue to be an area of growth, and we are pleased to have expanded our collection with Aaron Lauder across the Kids and team brands.

Additionally, our LoveShackFancy collections continue to gain popularity with new styles in nursery and dorm. Innovation for us is more than product, it is in the channel experience too. We have revamped tools that help inspire baby registry online and have increased our take at Home Today products in our stores. We've also expanded in-store and online offerings and services for dorm, including pickup near campus at over 450 participating Williams Sonoma Inc.

Stores, along with a first-of-its-kind concierge service for dorm deliveries. We're encouraged by the customer response to our product and service innovations and have a robust pipeline ahead to fuel continued growth. Now let's review West Elm. The brand ran positive 0.2% in Q1 with a five-year comp of 44%.

We continue to make progress against the brand's four key pillars: product brand, heat channel excellence, and operational efficiencies. The West Elm brand continues to focus on its non-furniture categories as a percent to the total assortment, driving positive comps in lighting, bath, kids, and textiles. The brand continues to see success in new product introductions across all categories, with both spring and summer newness driving double-digit positive comp to last year, and in March, West Elm launched a very exciting collaboration with award-winning designers Pearson Ward featuring 165 pieces across furniture, textiles, and decorative accessories.

The co-design line received widespread acclaim, earning top-tier press coverage including an editorial feature in Arch Digest, and articles and leading publications such as Vogue, Domino, Better Homes and Garden and New York Magazine. The line is on track to be one of West Elm's most commercially successful collaborations to date. Now, let's review the Williams-Sonoma brand. We're thrilled to report another strong quarter for the brand, which ran a positive 7.3% comp.

On a five-year basis, the brand ran a 36.9% comp. Our customers at Williams-Sonoma continue to respond well to products that are both highly functional and aesthetically pleasing. We're excited to see that our curation and our creation of these items is working. We saw particular strength in the cookware, entertaining and housewares department, which outperformed.

The electrics category benefited from the launch of Breville Brass, an exclusive line of kitchen countertop appliances that combine Breville's cutting-edge technology with bold brass colored trim and accents. The category also saw success with the launch of KitchenAid's new butter yellow stand mixer, another Williams-Sonoma exclusive. Our in-house product design teams developed the new Williams-Sonoma Thermo-Clad Copper Pro Cookware Collection, which launched in early Q1. This best-in-class high-performance cookware combines the heat conduction and control of copper with the durability and easy care of stainless, quickly becoming a best seller.

Also, our stores hosted several successful book events for celebrities and celebrity chefs like Alton Brown, Morimoto, and Michael Symon. We look forward to continuing to invite our customers to meet their culinary heroes at our retail locations across the country throughout the rest of the year. We're also making progress in our Williams-Sonoma home brand. We continued our refresh and integration of our furniture assortment into our Williams-Sonoma stores.

Also, we have increased the offer of in-house design textile, printed bedding, novelty pillows, and occasional furniture pieces. Also, the brand benefited from an expansion of our popular collaboration with Aaron Motor. We continue to believe we have an opportunity with Williams-Sonoma Home to disrupt the high-end furniture market. Now, I'd like to update you on B2B.

We continue to gain momentum in the hospitality space, including an impressive roster of Q1 projects with St. Regis, Hendry, Auberge, Sheraton, Hilton, Tapestry, Hyatt House, Weston, SpringHill Suites, and Elamet brands. In addition to the wins in the hospitality space, the team is focused on expanding our book of business, including wins in the education space with Tulane University, sports and entertainment with Gaylord Opryland Waterpark and Live Nation and a wide range of restaurant projects coast-to-coast, including Bagatelle and Montauk to Regis Ova in Yountville. Now, I'd like to update you on our emerging brands, which continue to drive strong growth and profitability.

Our Rejuvenation brand continues to exceed our expectations with another quarter of double-digit comps. Growth was fueled by continued strength in our core categories cabinet hardware, lighting and bath, all supported by our commitment to design forward high quality products that meet the needs of home renovation and refresh projects. At Rejuvenation, product innovation continues to drive results. In Q1, we introduced heritage brass, a new finish inspired by the warmth of naturally aged metal across lighting, hardware , and bath, generating a strong customer response.

We also expanded into new categories, including closet hardware and outdoor pillows, while vanities and seasonal textiles delivered double-digit comps. As we look to the rest of 2025, we're confident in Rejuvenation's continued momentum and long-term potential. At Mark and Graham, the brand is leaning into more frequent gifting occasions and milestones as a key strategy. And the brand's two newest incremental businesses, Pet and Baby, have been very successful and are driving new customer acquisition.

Turning to our newest brand GreenRow, the brand delivered strong growth in Q1, driven by demand for vintage-inspired, beautiful, colorful products. This year, we're excited to watch GreenRow continue to grow through new and innovative products and materials, as well as some exciting partnerships. Last, I'd like to talk about our global business. We continue to see strong growth across our strategic global markets.

In Canada, we are driving growth through our compelling product offerings, complemented by our design and trade services. In Mexico, we are expanding our footprint with four new store openings this quarter: West Elm in Porto Vallarta and Pottery Barn, Pottery Kids, and West Elm in [indiscernible]. We're also seeing continued growth across both existing retail and e-commerce channels. Our UK business is gaining momentum, particularly in the trade segment, and we're excited to have announced the upcoming launch of the Pottery Barn brand this fall online.

In summary, we are proud of our strong execution and out performance in the first quarter. There's no doubt that uncertainty is top of mind for all of us, but we at Williams Sonoma, Inc. have been and will continue to be focused on our industry-leading channel experiences and our cultivation of a strong portfolio of brands. We are a house of innovation, fueling a product development machine that positions us as an industry leader with strong financial results. With our focus on our three key priorities, returning to growth, enhancing our world-class customer service, and driving earnings, we are set up well to continue executing in 2025. Before I hand it over to Jeff, I also want to take a minute to thank you again, our associates, but also to thank our vendors and our shareholders whose partnerships are very much appreciated.

And with that, I'll 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 Q1 results exceeding expectations on both the top and bottom lines. Our results reflect the three key priorities we outlined for 2025. First, returning to growth, our top line accelerated to a positive 3.4% comp in Q1, driven by innovation and newness across our core brands, double-digit comps in our emerging brands, and strong growth in business-to-business. Second, elevating our world-class customer service, our supply chain team yet again produced efficiencies and, most importantly, improved customer service.

And third, our focus on driving earnings. We tightly managed SG&A to deliver strong operating margin and EPS growth. 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 Q1 results and then touch on guidance for ’25. Q1 net revenues finished at 1.73 billion at a positive 3.4% comp, with all brands delivering positive comps in the quarter. Our revenue comps came in above the high end of our expectations, driven by positive comps in our furniture business and continued strength in our non-furniture categories. With the home furnishings industry contracting approximately 3% in Q1, we gained market share, even as we maintained our penetration of full price selling. From a channel perspective, both the retail and e-commerce channels delivered positive comps, with retail up 6.2% comp and e-commerce up 2.1% comp.

As we move down the income statement to gross margin, I'd like to remind everyone that last year in the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment, related to prior year's freight accruals. This benefited margin results by approximately 300 basis points in Q1 '24. Q1 '25's gross margin of 44.3% was 360 basis points lower than last year, when including last year's 300 basis point out-of-period adjustment. Without last year's out-of-period adjustment, our gross margin was 60 basis points lower than last year. There were three main drivers behind the 60 basis point decline: merchandise margins, supply chain efficiencies, and occupancy.

First, merchandise margins declined 220 basis points due to higher year-over-year input costs, including higher ocean freight and tariff mitigation costs. Second, supply chain efficiencies delivered 120 basis points of savings in Q1. We continue to realize expense savings across manufacturing, warehousing, and delivery from our focus on customer experience and efficiency. Key metrics, including returns, accommodations, damages, replacements, and outbound shipping expense continued to improve year-over-year. And third, occupancy costs were essentially flat year-over-year in dollars and leveraged 40 basis points from our revenue growth.

Overall, our gross margin this quarter was in line with our expectations. Turning now to SG&A. Our Q1 SG&A ran at 27.5% of revenues, 130 basis points lower than last year, as we kept a tight lid on expenses. Employment expense levered 60 basis points due to higher revenues and lower incentive compensation.

Q1 advertising expense was 60 basis points lower year-over-year. Our in-house marketing team is finding ways to drive more with less spend and is delivering a strong impact, while leveraging ad cost. Moving to the bottom line. We delivered earnings exceeding expectations.

Including last year's 300 basis point out-of-period adjustment, Q1's operating margin of 16.8% came in 230 basis points below last year, with EPS of $1.85, $0.14 lower than last year. Without last year's out-of-period adjustment, Q1 16.8% operating margin finished 70 basis points higher than last year, with earnings per share of 8.8% year-over-year. On the balance sheet, we ended the quarter with a cash balance of $1 billion with no outstanding debt. This was after we invested $58 million in capital expenditures supporting our long-term growth and returned $165 million to our shareholders through share repurchases and quarterly dividends.

Merchandise inventories stood at $1.3 billion, up 10% to last year. Included in our inventory levels is a strategic pull forward of receipts to reduce the potential impact of higher tariffs in fiscal year '25. Without this pull forward, our inventory levels would have been materially in line with revenue growth. Summing up our Q1 results. We've once again delivered strong earnings for our shareholders.

I'd like to thank our talented, dedicated, and nimble team at Williams-Sonoma Inc., for delivering the outstanding results in a remarkably uncertain environment. Now let's turn to our '25 outlook. First, some housekeeping. 2024 was a 53-week year for Williams-Sonoma, Inc. In fiscal year '25, we will 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 prior year's freight accruals. This benefited operating margin results by approximately 300 basis points in Q1 and 70 basis points for the full year.

Our guidance for fiscal year '25 will use fiscal year '24 results without the out-of-period adjustment as a comparable basis. As we turn to guidance for fiscal year '25, our message is the same as last quarter. The tariff policy and macroeconomic environment is uncertain. Our focus is on what we can control, executing our three key priorities: Returning growth, elevating our world-class customer 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. As a result, we are reiterating our guidance for fiscal year '25. We expect 2025 net revenue comps to be in the range of flat to positive 3%, with total net revenues in a 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%, which is materially flat, excluding the 20 basis points impact from the 53rd week in fiscal year '24. Regarding tariffs, we are reiterating our guidance even with absorbing incremental costs from the existing tariff environment.

Season costs include the new tariffs in China of 30% and the reciprocal tariffs of 10%, along with the tariffs we spoke about in March, including a 25% tariff on steel and aluminum and the 25% tariffs in Mexico and Canada. It did not assume any other tariffs. The strength of our operating model, combined with our six-point tariff mitigation plan, enables us to maintain our guidance despite the addition of the reciprocal tariffs. Our guidance reflects our best estimates of the tariff impact based upon the tariff outlook as of this call.

The current tariff policy is uncertain and has been subject to multiple surprises and revisions. If tariff policy changes, we may need to revisit our guidance estimates. Turning now to capital allocation. Our plans for '25 prioritize funding our business operations and investing in long-term growth.

We expect to spend between $250 million and $275 million in capital expenditures in fiscal year '25. This represents a decrease of approximately 10% from prior guidance, as we keep a tight range on all expenditures due to the tariff and macroeconomic uncertainty. We intend to invest 85% of this capital spend in our e-commerce channel, 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 dividend, we will continue to pay our quarterly dividend of $0.56 per share, which is a 16% increase year-over-year.

We are proud to say that fiscal year '25 is the 16th consecutive year of increased dividend payouts. For share repurchases, we have $1.1 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're proud to have delivered another quarter of strong results for our shareholders that exceeded expectations.

While tariff policy has produced uncertainty, we are encouraged by the momentum we see in our business. Our focus remains on our three key priorities: returning to growth, elevating our world class customer service and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth for these five reasons that I've articulated before. 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 resilience of our fortress balance sheet, with that, I'll open the call for questions.

[Operator Instructions] Our first question comes from Brad Thomas from KeyBanc Capital Markets. Please go ahead. Your line is open.

I wanted to ask about merchandise margins, and I was hoping you could just address the decline from last year. And for one, just clarify that there has been no change in your high-level promotional strategy? And then perhaps talk a little bit more about how you think about promotions and clearance going forward? Thanks so much.

Thanks, Brad.

Thank you, Brad. Yes, let's do not, I'm going to talk about MMU, and really gross margin as a whole, and I'll do that, and then I'll turn it over to Laura to talk about pricing. Our gross margin in Q1 was 60 basis points lower than last year, but it was in line with our expectations. Our MMU itself was lower from higher input costs, but was largely offset by supply chain savings and occupancy leverage.

Two things I'd like to point out regarding the merchandise margin this quarter. First, we continue to see a very high level of full-price selling. Our promotional stance has not changed. We do not do site-wide promotions.

In fact, our penetration of full-price selling slightly increased in the quarter. Second, our input costs were higher year-over-year from higher ocean freight and tariff mitigation costs. On ocean freight, we did not see a quarter-over-quarter increase in those costs. Q1 costs were basically the same as Q4, but what we were up against was lapping a very low period in Q1 of '24. On tariff mitigation costs, when the reciprocal tariffs were announced on quarter two, we took extremely aggressive action to get ahead of the tariff impact, and those actions impacted us in the quarter.

We will start to see the impact of our six-point mitigation plan later this year. Offsetting this merchandise margin pressure where supply chain efficiencies and occupancy leverage. Supply chain efficiencies delivered 120 basis points of savings in Q1. We continue to realize expense savings across manufacturing, warehousing, and delivery. As I mentioned in my prepared remarks, key metrics, including returns, accommodations, damages, replacements, and outbound shipping expense continued to improve year-over-year.

Occupancy costs of $198 million were essentially flat and leveraged 40 basis points from our revenue growth. Here's the key point, Brad. Our Q1 results are why we believe we will be able to withstand the margin pressure from the current tariff policy that's ahead of us, especially given that our six-point tariff mitigation plan won't yield savings until future quarters, and it's why we are reiterating our guidance.

I think Jeff more than covered it.If you're waiting for me, thank you for answering the question. Jeff, what's the next question, please?

Our next question comes from Peter Benedict from Baird. Please go ahead. Your line is open.

I guess first question would just be on when you are taking price, obviously, recognizing it's kind of the last resort here, but -- how -- what's the philosophy that you try to cover and maintain kind of growth profit dollars on the item? Is there a view on gross margin rate? Just kind of trying to understand the philosophy when you -- and how you're going to deal with tariffs from a pricing perspective. That's my first question.

Yes. I think as we think about pricing, it's not really only about tariffs. You know that over the last 5 years, we've had a really big change in the way we think about pricing, and we've substantially reduced the amount of commercial activity in our company, which has done important on a lot of levels, both for margin but also for the customer because they can count on price being the same and not have to try to time their purchases based on different seasonal promotions. When we think about value to the consumer, it isn't just about price, it's about design.

It's about quality, it's about the brand, it's about the service in that brand, and price is a factor, but it is not the only factor, and because of our innovation machine, as you will, our design prowess, our vertically integrated structure, we are able to bring unique and exclusive markets -- products to market that no one else has, and we also are able to get better pricing from our vendors because we're going direct. We don't have an agent. We go direct to our vendors, and we buy usually in larger quantities than a lot of people, which also gives us a lot of opportunity. As we look at where we are today, it's no different than last year.

We're always looking at our entire assortment to see where we are actually too high at price and to low in price. And we make adjustments item by item. We don't make large sweeping margin target adjustments. We don't price based on cost.

We price based on the environment. And what we're seeing today is we're seeing our newness, which is the big strategy, as you know, Peter, has been really selling, and that product is coming in at margins that, in most cases, are really good. In some cases, there's more opportunity because we priced it too low and we're overselling. And so we've taken some very carefully selected price increases on those things.

Now, in addition to that, we still see an opportunity to improve our margins over time because we can improve our markdown margin. The rate at which our markdowns are -- the margin rate where our clearance and promotions are sold can improve, and a percent of that bucket to the total can also improve. In other words, what I'm saying is even more reg price business and even higher margin on the sale bucket. I'm really excited that we're going into this year very clean on seasonal inventory.

So that's a really good thing as we head into this year.

Our next question comes from Maksim Rakhlenko from TD Cowen. Please go ahead. Your line is open.

So, can you just provide more color on how we should think about merch margins for the rest of the year? Should we assume that the 220 basis point headwind was a high watermark, then it should ease as some of these tailwinds get going? Or is it a rise run rate for us to consider ahead?

As you know, we do not guide the top -- we do not guide to specific lines, we guide the top and bottom line because it gives us flexibility to respond to changes in the business. And you've seen us know the levers to pull to deliver results. We are reiterating our guidance for fiscal year '25, which has operating margins materially flat on the full year, excluding the impact of the 53rd week from last year. What we have said, and I said this on the last call, is with inside of this, we do believe that we will see some lower gross margin from headwind on the tariffs, but that will be offset by SG&A.

But here's the thing. We have a lot of levers to pull. We have a very effective tariff mitigation plan and we feel confident in our ability to be able to offset the tariff impact as we execute that plan, which is why we are reiterating guidance today including absorbing the incremental tariffs from the last time we gave guidance in March, and that includes the 30% tariff on China and a 10% global reciprocal tariffs that now apply to almost every country across the globe. So, given our Q1 results and how we were able to expand EBIT margin by 70 basis points, it's given us confidence in what we're seeing in the business that we believe we can maintain our guidance while absorbing the incremental tariff costs.

Our next question comes from Jonathan Matuszewski from Jefferies. Please go ahead. Your line is open.

I was hoping if you could add some more context to how demand trended throughout the quarter? I think demand for some peers in the industry was down as much as double digits in April. So, curious how your exit rate looked and if you're willing to share any color in terms of how the first few weeks of May are shaping up?

Yes, Jonathan, I think everyone knows we don't go into the puts and takes of how our comps -- what the comp cadence was across the quarter. What we will say is we saw really strong results across all our brands during the quarter. In fact, every brand positive comp. And the really important nugget is Furniture comp for the first time since Q4 '22, so the first time in nine quarters, and what we're seeing is our consumer is responding to our products, our assortments, our marketing and our strategies, and we are taking market share because of this positive consumer response.

And there's a lot of headlines out there, there's a lot of uncertainty, but at Williams-Sonoma Inc, we're focused on what we can control, which is on executing our three key priorities, which is what is allowing us to deliver these excellent results and exceed expectations. Those three key priorities are: number one, returning to growth, which you saw on the top line this quarter; number two, elevating our world-class customer service, which you saw through, we once again delivered supply chain efficiencies; and three, driving earnings, which we can do by tightly managing SG&A.

Our next question comes from Cristina Fernandez from Telsey Advisory Group. Please go ahead. Your line is open.

Cristina Fernández: I wanted to see if you can talk about resourcing. So, China was 23% of your goods last year. How are you thinking about reducing that exposure? Is there any targets you have by year-end or by next year? Can you share where that product’s going? And do you expect any changes to your assortment as a result of resourcing?

Thanks, Cristina. We've been very focused on being proactive and responding to changes in the trade environment forever, and even before the tariffs, we've already significantly reduced our China source of goods from 50% to 23% over the last few years, and even then, when we said that, we've made significant reductions, I think there are some categories, China does really well, and what is going to happen with the trade environment is yet to be seen. But what's good news for us is we have the flexibility now because we resource double source, triple sourced many of our products to move depending on what is the long term -- what the long-term tariff environment becomes.

So, there's a lot of things that are still up in the air, I think, for all of us to know, but yes, we've already reduced it from the 23% substantially, and where it settles will depend on what other announcements are made.

Our next question comes from Seth Sigman from Barclays. Please go ahead. Your line is open.

So, I wanted to ask again about inventory position up 10%. It sounds like some of that is strategic, pulling some of the orders in early. Can you talk a little more about the complexion of that today? And I guess, more importantly, to what extent do you think that may be helping drive conversion and sales, obviously, in-stock can be pretty important to the consumer here, given typical lag time?

So, just any color on that would be helpful.

Yes, our inventory ended the year -- ended the quarter at $1.3 billion, up 10% to last year. And as I mentioned in our prepared remarks, included in our inventory levels is a strategic pull forward of receipts to reduce the potential impact of higher tariffs in fiscal year '25. To quantify that, it's about $60 million to $70 million that we pulled forward. If you back out that out, our inventory levels would have been materially in line with revenue growth. And without divulging our playbook, we were very aggressive when we saw the impact of the tariffs, particularly after the reciprocal tariffs, and we gave our inventory teams the authority to go out and grab whatever they could, and that's both foreign goods and domestic goods.

So what we could ship early from overseas that had already been produced, but maybe we intended to flow later in the year, we brought in. And then domestically, where we could obtain goods, we aggressively pursued that, and we think that will give us a benefit later in the year, and those goods are now on our books territory. I think it's important to note, if you take a step back, even with this 10% increase, our inventory levels are only up 23% versus 2019, and our revenue growth was up 40% over that time, and I'll also point out to everyone that unlike the fashion brands, unlike apparel, unlike footwear, the majority of what we sell is core and not seasonal.

So, we don't have the same markdown risks as many other retailers. If sales go down, we can pull some leverage elsewhere, but we think by pulling this forward, it will really help us over the year, help mitigate the tariffs, and it's almost, Lauren and I were debating, it's almost that there's the 7-point to our tariff mitigation plan.

So, Seth, you nailed it. Being in stock is really important to the consumer right now. People don't want to wait, they don't have to wait. Our in-stocks are great and even more importantly, our on-time deliveries are great.

So when you have the right inventory in the right place, you're able to reduce costs, it's all part of the supply chain excellence that we're driving through the P&L that you see in the margin line is part of because the inventory is in much better shape and is in the right places, and we're able to deliver full orders, customers are happy. In fact, the on-time numbers are at an all-time high right now, which is wonderful. It's a customer metric, but customer metrics are the most important metrics to us. On-time delivery is a key part.

And then as it relates to in-store, we've been stocking more take at home today, product in all of our brands, and it's driving substantial comp. So we're very pleased with that initiative, we thought it would work, it's working even better than expected. And as we said earlier, at the same time, our regular price business is strong, and our clearance inventory as well. So we're sitting in a good place from an inventory perspective as a summary.

Our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead. Your line is open.

I guess I'll make it two-parts. The first, the shape of the year with comps even before this quarter is 3.4%. Did you always -- did you expect it to improve throughout the year? That's the first question.

And the second, tariff mitigation costs, maybe paraphrase or trying to interpret this, so you're paying higher today for product because of the tariff. Has that product sold or it's just capitalized cost that's affecting cost of goods base, and, therefore, it actually doesn't get any worse from here, depending on where tariffs go? If you can just explain that.

Yes. Let's talk about our growth posture, first and foremost. We've been working hard to strengthen our brands, incubate new brands, build our B2B business drive our design services, improve our operations for customer service, all because we know that we need to grow, we want to grow, and our brands have incredible loyalty and they are loved, and it's been the hangover of the housing market that has hit the industry on furniture. This is the year that we have set our number one initiative is return to growth, okay.

We laid it out last year, we are here. We are driving positive homes, and that is everybody's focus. So there's a lot going on outside of our brands. But what we see is the customer is really responding to newness, innovation, collaborations, as I said, the experience -- and I don't think there's many people doing what we're doing with the design quality value relationship.

And so, as we think about our expectations, our expectations are that we will outperform, our expectations are that we will take market share this year, and we believe we can grow this year despite the difficult macro backdrop. As it relates to quarters, less focused on the quarter-by-quarter, more focused on the long term both the full year and also the opportunity even longer than that to more than double our total company.

And as part of your -- to answer your second part of your question about the tariff mitigation costs, these were specific costs that we expensed in the quarter because they were related to things we took when the reciprocal tariffs were announced in quarter two, as I mentioned before, we have very aggressive actions, and these were short-term expenses. We halted shipments from China. That comes with an expense. We added to assortments, so that comes from an expense.

All the different things we did expecting all that comes with an expense, we do believe it will pay back in future quarters. As we just talked about on the inventory, we've front-loaded a lot of goods. Those have now come in with zero tariff, and we'll be able to enjoy that benefit throughout the year. So all of these actions we're taking is why we are confident that we are able to absorb the incremental tariffs typically the 30% China tariff and the 10% global reciprocal tariffs into our guidance without changing it.

That's why we are reiterating our guidance today.

Our next question comes from Christopher Horvers from JPMorgan. Please go ahead. Your line is open.

So, can you talk a little bit about how you think about the quarter in terms of all the puts and takes at a later spring? You have a consumer that does react to the stock market, which went through a tough period, but then furniture turned positive, and maybe there were some pull forward in some categories where the consumer got concerned about tariff pricing. So, to what extent do you think the strong comp that you posted was affected directionally to the positive or to the negative? And what do you think is driving furniture that flipped furniture turning positive finally?

There's a lot in there. I'm going to let Jeff start.

Yes. So, my simple answer to the question is what we saw in the quarter is our consumer responding to our strategies, our product assortments, our marketing. We outperformed the industry and gained market share, and that trend has been consistent for several quarters. We don't necessarily think there's pull forward.

I mean, there could be, but there's no way for us to quantify that. So, we don't necessarily think that's a big factor here. We are executing on our priorities. We are executing on what we said we have to do.

We saw that in the performance across all our brands newness and innovation is driving performance in our core brands. Our emerging brands delivered double-digit growth. B2B had a very strong quarter as well. It's our continuing execution on our initiatives and the consumer is responding to it.

Chris, is there an additional question you want to ask there that we didn't answer or does that give you enough information?

I think that gives me enough. I did have a follow-up on the input cost side, Jeff. I think you said that you had an easy compare sort of last year. And so some of the headwinds to merch margins this year was an easy compare last year, your weighted average cost.

So, as you proceeded through last year, was that sort of easy compare got less easy such that lap gets easier and the headwind on selling or merch margins because of that, and the mitigation efforts in 1Q, '25 that diminishes as you look forward?

That's correct, Chris. Yes. And that's embedded in our guidance. And if you take a look, we're guiding on the full year operating margin is materially flat ex-the 53rd week, inclusive of absorbing all of these tariffs. So, we do see that we can maintain that. That's why we're reiterating our guidance today.

Our next question comes from Kate McShane from Goldman Sachs. Please go ahead. Your line is open.

Hi, this is Emily Gosh on for Kate. I wanted to ask about supply chain efficiencies. It looks like the benefit from supply chain efficiencies this quarter was greater than that of the fourth quarter, could you guys provide detail around what drove this acceleration, and then how should we think about the impact for the remainder of the year?

Yes. I mean supply chain efficiency is, another words for customer service. And if you think about Williams-Sonoma, the first thing that comes to mind is service and product, right? That's what you see is smell of amazing aromas in our stores and the incredible displays, and that's who we are.

Supply chain efficiencies means that we're able to execute that dream all the way from the inspiration in the store to the product in your home, and we're seeing lower returns and replacements. We're seeing better on-time delivery, less out-of-market share, all the things that have cost to them, and we've been after this for years; we're making great progress. The supply chain team continues to outperform to their expectations, our expectations and there's still more to go because we all know that delivering furniture is very difficult. It's much easier to deliver bathing suits, and those who are going to continue to do it the best will own this category, and I think that people really now trust us and they can count on this, and it’s not only a cost saver, it’s a sales driver.

Our next question comes from Robby Ohmes from Bank of America. Please go ahead. Your line is open.

This is [Maddie Zschech] on for Robby Ohmes. I was just curious if you could share how much B2B is expected to contribute to comp this year? And maybe any potential update on how you view the size of your B2B opportunity long-term as you expand your book?

Sure. Yes. B2B had nice momentum. We're continuing to build our pipeline with new customers and give our existing customers, great new things to buy. We're always developing great new projects and we see this as a $2 billion opportunity. Thank you for the question.

We are out of time for questions today. I'd like to turn the call back over to Laura Alber for any closing remarks.

Yes. Thank you all so much. Really appreciate your support and being here today, and I hope you have a great Memorial Day weekend.

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