Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations, and the effects of economic uncertainty which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

Our revolving line of credit has a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During fiscal 2015, we had borrowings of $200,000,000 under the credit facility, all of which were repaid in the fourth quarter of fiscal 2015. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instrument would not materially affect our results of operations or cash flows.

In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of January 31, 2016, our investments, made primarily in demand deposit accounts and money market funds, are stated at cost and approximate their fair values.

Foreign Currency Risks

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 1% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any foreign currency impact related to these international purchase transactions was not significant to us during fiscal 2015 or fiscal 2014. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.

In addition, our retail and/or e-commerce businesses in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in fiscal 2015, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note M to our Consolidated Financial Statements).

ITEM 8. FINANCIAL	STATEMENTS AND SUPPLEMENTARY DATA

Williams-Sonoma, Inc.

Consolidated Statements of Earnings


In thousands, except per share amounts	Fiscal 2015	Fiscal 2014	Fiscal 2013
E-commerce net revenues	$ 2,522,580	$ 2,370,694	$ 2,115,022
Retail net revenues	2,453,510	2,328,025	2,272,867
Net revenues	4,976,090	4,698,719	4,387,889
Cost of goods sold	3,131,876	2,898,215	2,683,673
Gross profit	1,844,214	1,800,504	1,704,216
Selling, general and administrative expenses	1,355,580	1,298,239	1,252,118
Operating income	488,634	502,265	452,098
Interest (income) expense, net	627	62	(584	)
Earnings before income taxes	488,007	502,203	452,682
Income taxes	177,939	193,349	173,780
Net earnings	$ 310,068	$ 308,854	$ 278,902
Basic earnings per share	$ 3.42	$3.30	$ 2.89
Diluted earnings per share	$ 3.37	$3.24	$ 2.82
Shares used in calculation of earnings per share:
Basic	90,787	93,634	96,669
Diluted	92,102	95,200	98,765

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Comprehensive Income


In thousands	Fiscal 2015		Fiscal 2014		Fiscal 2013
Net earnings	$ 310,068		$ 308,854		$ 278,902
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(7,958	)	(9,305	)	(7,850	)
Change in fair value of derivative financial instruments	1,074		806		870
Reclassification adjustment for realized gains on derivative financial instruments	(1,184	)	(573	)	(129	)
Comprehensive income	$ 302,000		$ 299,782		$ 271,793

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Balance Sheets


In thousands, except per share amounts	Jan. 31, 2016			Feb. 1, 2015
ASSETS
Current assets
Cash and cash equivalents		$ 193,647			$ 222,927
Accounts receivable, net		79,304			67,465
Merchandise inventories, net		978,138			887,701
Prepaid catalog expenses		28,919			33,942
Prepaid expenses		44,654			36,265
Deferred income taxes, net		—			130,618
Other assets		11,438			13,005
Total current assets		1,336,100			1,391,923
Property and equipment, net		886,813			883,012
Non-current deferred income taxes, net		141,784			4,265
Other assets, net		52,730			51,077
Total assets		$ 2,417,427			$ 2,330,277
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$ 447,412			$ 397,037
Accrued salaries, benefits and other		127,122			136,012
Customer deposits		296,827			261,679
Income taxes payable		67,052			32,488
Current portion of long-term debt		—			1,968
Other liabilities		58,014			46,764
Total current liabilities		996,427			875,948
Deferred rent and lease incentives		173,061			166,925
Other long-term obligations		49,713			62,698
Total liabilities		1,219,201			1,105,571
Commitments and contingencies – See Note J
Stockholders’ equity
Preferred stock: $.01 par value; 7,500 shares authorized; none issued		—			—
Common stock: $.01 par value; 253,125 shares authorized;
89,563 and 91,891 shares issued and outstanding at January 31, 2016 and February 1, 2015, respectively		896			919
Additional paid-in capital		541,307			527,261
Retained earnings		668,545			701,214
Accumulated other comprehensive loss		(10,616	)		(2,548	)
Treasury stock – at cost: 29 and 35 shares as of January 31, 2016 and February 1, 2015, respectively		(1,906	)		(2,140	)
Total stockholders’ equity		1,198,226			1,224,706
Total liabilities and stockholders’ equity		$ 2,417,427			$ 2,330,277

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Stockholders’ Equity


	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
In thousands	Shares			Amount

Balance at February 3, 2013		97,734		$	977		$	503,616		$	790,912		$	13,633		$	—		$	1,309,138

Net earnings		—			—			—			278,902			—			—			278,902
Foreign currency translation adjustments		—			—			—			—			(7,850	)		—			(7,850	)
Change in fair value of derivative financial instruments		—			—			—			—			870			—			870
Reclassification adjustment for realized gains on derivative financial instruments		—			—			—			—			(129	)		—			(129	)
Exercise of stock-based awards and related tax effect		201			2			15,339			—			—			—			15,341
Conversion/release of stock-based awards_1_		459			5			(18,101	)		—			—			—			(18,096	)
Repurchases of common stock		(4,345	)		(43	)		(17,047	)		(219,083	)		—			(3,101	)		(239,274	)
Stock-based compensation expense		—			—			38,788			—			—			—			38,788
Dividends declared		—			—			—			(121,688	)		—			—			(121,688	)
Balance at February 2, 2014		94,049			941			522,595			729,043			6,524			(3,101	)		1,256,002

Net earnings		—			—			—			308,854			—			—			308,854
Foreign currency translation adjustments		—			—			—			—			(9,305	)		—			(9,305	)
Change in fair value of derivative financial instruments		—			—			—			—			806			—			806
Reclassification adjustment for realized gains on derivative financial instruments		—			—			—			—			(573	)		—			(573	)
Exercise of stock-based awards and related tax effect		116			1			31,021			—			—			—			31,022
Conversion/release of stock-based awards_1_		1,058			10			(56,053	)		—			—			—			(56,043	)
Repurchases of common stock		(3,332	)		(33	)		(13,776	)		(210,568	)		—			—			(224,377	)
Reissuance of treasury stock under share-based compensation plans_1_		—			—			(1,158	)		(737	)		—			961			(934	)
Stock-based compensation expense		—			—			44,632			—			—			—			44,632
Dividends declared		—			—			—			(125,378	)		—			—			(125,378	)
Balance at February 1, 2015		91,891			919			527,261			701,214			(2,548	)		(2,140	)		1,224,706

Net earnings		—			—			—			310,068			—			—			310,068
Foreign currency translation adjustments		—			—			—			—			(7,958	)		—			(7,958	)
Change in fair value of derivative financial instruments		—			—			—			—			1,074			—			1,074
Reclassification adjustment for realized gains on derivative financial instruments		—			—			—			—			(1,184	)		—			(1,184	)
Exercise of stock-based awards and related tax effect		68			1			17,238			—			—			—			17,239
Conversion/release of stock-based awards_1_		554			6			(31,411	)		—			—			—			(31,405	)
Repurchases of common stock		(2,950	)		(30	)		(12,646	)		(212,319	)		—			—			(224,995	)
Reissuance of treasury stock under share-based compensation plans_1_		—			—			(492	)		(128	)		—			234			(386	)
Stock-based compensation expense		—			—			41,357			—			—			—			41,357
Dividends declared		—			—			—			(130,290	)		—			—			(130,290	)
Balance at January 31, 2016		89,563		$	896		$	541,307		$	668,545		$	(10,616	)	$	(1,906	)	$	1,198,226

1	Amounts are shown net of shares withheld for employee taxes.

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Consolidated Statements of Cash Flows


In thousands	Fiscal 2015			Fiscal 2014			Fiscal 2013
Cash flows from operating activities:
Net earnings	$	310,068		$	308,854		$	278,902
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		167,760			162,273			149,795
Loss on disposal/impairment of assets		4,339			2,410			2,764
Amortization of deferred lease incentives		(24,721	)		(24,419	)		(25,382	)
Deferred income taxes		(7,436	)		(248	)		(28,344	)
Tax benefit related to stock-based awards		14,592			26,952			8,817
Excess tax benefit related to stock-based awards		(14,494	)		(26,560	)		(8,743	)
Stock-based compensation expense		41,357			44,632			38,788
Other		149			595			—
Changes in:
Accounts receivable		(12,849	)		(9,366	)		786
Merchandise inventories		(92,647	)		(76,964	)		(174,664	)
Prepaid catalog expenses		5,022			(386	)		3,675
Prepaid expenses and other assets		(9,245	)		(61	)		(13,649	)
Accounts payable		60,507			4,455			135,095
Accrued salaries, benefits and other current and long-term liabilities		(135	)		8,867			43,635
Customer deposits		35,877			34,400			21,578
Deferred rent and lease incentives		31,334			23,297			13,238
Income taxes payable		34,548			(17,034	)		7,478
Net cash provided by operating activities		544,026			461,697			453,769
Cash flows from investing activities:
Purchases of property and equipment		(202,935	)		(204,800	)		(193,953	)
Restricted cash receipts		—			14,289			1,766
Proceeds from insurance reimbursements		683			1,644			1,518
Other		86			267			45
Net cash used in investing activities		(202,166	)		(188,600	)		(190,624	)
Cash flows from financing activities:
Repurchase of common stock		(224,995	)		(224,377	)		(239,274	)
Payment of dividends		(127,636	)		(125,758	)		(111,581	)
Borrowings under revolving line of credit		200,000			90,000			—
Repayments of borrowings under revolving line of credit		(200,000	)		(90,000	)		—
Tax withholdings related to stock-based awards		(31,790	)		(56,977	)		(18,096	)
Excess tax benefit related to stock-based awards		14,494			26,560			8,743
Net proceeds related to stock-based awards		2,647			4,077			6,614
Repayments of long-term obligations		(1,968	)		(1,785	)		(1,724	)
Other		(135	)		(760	)		(58	)
Net cash used in financing activities		(369,383	)		(379,020	)		(355,376	)
Effect of exchange rates on cash and cash equivalents		(1,757	)		(1,271	)		(2,203	)
Net decrease in cash and cash equivalents		(29,280	)		(107,194	)		(94,434	)
Cash and cash equivalents at beginning of year		222,927			330,121			424,555
Cash and cash equivalents at end of year	$	193,647		$	222,927		$	330,121
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	1,989		$	1,269		$	1,270
Cash paid during the year for income taxes, net of refunds	$	134,478		$	172,305		$	186,968
Non-cash investing activities:
Purchases of property and equipment not yet paid for at end of period	$	2,715		$	4,808		$	9,034

See Notes to Consolidated Financial Statements.

Williams-Sonoma, Inc.

Notes to Consolidated Financial Statements

Note A: Summary of Significant Accounting Policies

We are a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams-Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 618 stores. We have retail and/or e-commerce businesses in the U.S., Canada, Australia and the United Kingdom, and ship our products to customers worldwide. Our catalogs reach customers throughout the U.S. and Australia. In addition, we have unaffiliated franchisees that operate stores and/or e-commerce websites in the Middle East, the Philippines and Mexico.

Intercompany transactions and accounts have been eliminated.

Fiscal Year

Our fiscal year ends on the Sunday closest to January 31, based on a 52 or 53-week year. Fiscal 2015, a 52-week year, ended on January 31, 2016; Fiscal 2014, a 52-week year, ended on February 1, 2015; and fiscal 2013, a 52-week year, ended on February 2, 2014.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less. As of January 31, 2016, we were invested primarily in demand deposit accounts and money market funds. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable.

Restricted Cash

Restricted cash represents deposits held in trusts to secure our liabilities associated with our workers’ compensation and other insurance programs. During fiscal 2014, we redeemed restricted cash deposits of $14,289,000 previously held under collateralized trust agreements. We held no restricted cash during fiscal 2015.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at their carrying values, net of an allowance for doubtful accounts. Accounts receivable consist primarily of credit card, franchisee and landlord receivables for which collectability is reasonably assured. Receivables are evaluated for collectability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. Our allowance for doubtful accounts was not material to our financial statements as of January 31, 2016 and February 1, 2015.

Merchandise Inventories

Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost, we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends, aging reports, specific identification and our estimates of future sales and selling prices.

Reserves for shrinkage are estimated and recorded throughout the year, as a percentage of net sales based on historical shrinkage results, expectations of future shrinkage and current inventory levels. Actual shrinkage is

recorded at year-end based on the results of our physical inventory counts and can vary from our estimates due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution centers, off-site storage locations, and with our third party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end.

Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. As of January 31, 2016 and February 1, 2015, our inventory obsolescence reserves were $9,782,000 and $10,244,000, respectively.

Advertising and Prepaid Catalog Expenses

Advertising expenses consist of media and production costs related to catalog mailings, e-commerce advertising and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily of third party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit. Each catalog is generally fully amortized over a six to nine month period, with the majority of the amortization occurring within the first four to five months. Prepaid catalog expenses are evaluated for realizability on a monthly basis by comparing the carrying amount associated with each catalog to the estimated future profitability (net revenues less merchandise cost of goods sold, selling expenses and catalog-related costs) of that catalog. If the estimated future profitability of the catalog is below its carrying amount, the catalog is impaired accordingly.

Total advertising expenses (including catalog advertising, e-commerce advertising and all other advertising costs) were approximately $333,276,000, $330,070,000 and $325,708,000 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Property and Equipment

Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives:


Leasehold improvements		Shorter of estimated useful life or lease term (generally 3 – 22 years)
Fixtures and equipment		2 – 20 years
Buildings and building improvements		10 – 40 years
Capitalized software		2 – 10 years

We review the carrying value of all long-lived assets for impairment, primarily at a store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. Impairment may result when the carrying value of the asset exceeds the estimated undiscounted future cash flows over its remaining useful life. For store impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, historical operations of the stores and estimates of future store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment rates, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the asset’s net carrying value and its fair value. Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the

fair value hierarchy. The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.

During fiscal 2015, fiscal 2014 and fiscal 2013, we recorded expense of approximately $2,100,000, $241,000 and $561,000, respectively, associated with asset impairment charges related to our retail stores, all of which is recorded within selling, general and administrative expenses.

For any store or facility closure where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the cease use date.

Goodwill

Goodwill is not amortized, but rather is subject to impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. The first step of the impairment test requires determining the fair value of the reporting unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future, such as sales growth, gross margins, employment rates, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, is in excess of its fair value, goodwill may be impaired, and we must perform a second step of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge, if any. At January 31, 2016 and February 1, 2015, we had goodwill of $18,703,000 and $18,740,000, respectively, included in other assets, primarily related to our fiscal 2011 acquisition of Rejuvenation Inc. We did not recognize any goodwill impairment in fiscal 2015, fiscal 2014 or fiscal 2013.

Self-Insured Liabilities

We are primarily self-insured for workers’ compensation, employee health benefits and product and general liability claims. We record self-insurance liabilities based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’ compensation liability and product and general liability claims reserves based on an actuarial analysis of historical claims data. Self-insurance reserves for employee health benefits, workers’ compensation and product and general liability claims were $25,290,000 and $24,901,000 as of January 31, 2016 and February 1, 2015, respectively.

Customer Deposits

Customer deposits are primarily comprised of unredeemed gift cards and merchandise credits and deferred revenue related to undelivered merchandise. We maintain a liability for unredeemed gift cards and merchandise credits until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our gift cards being redeemed beyond four years from the date of issuance is remote. Income from unredeemed gift cards and merchandise credits, which is recorded in other income within selling, general and administrative expense, is not material to our consolidated financial statements. Our gift cards and merchandise credits have no expiration dates.

Deferred Rent and Lease Incentives

For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rental expense on a straight-line basis over the lease term, including the construction period, and record the difference between rent expense and the amount currently payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term, including the construction period.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and debt approximate their estimated fair values. We use derivative instruments to hedge against foreign currency exchange rate fluctuations. The assets or liabilities associated with our derivative financial instruments are recorded at fair value in either other current assets or other current liabilities. The fair value of our foreign currency derivative instruments is measured using the income approach whereby we use observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. These observable inputs include spot rates, forward rates, interest rates and credit derivative market rates (refer to Notes M and N for additional information).

Revenue Recognition

We recognize revenues and the related cost of goods sold (including shipping costs) at the time the products are delivered to our customers. Revenue is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and, for home-delivered merchandise and e-commerce sales, when the merchandise is delivered to the customer. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to the customer. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Sales Returns Reserve

Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product returns, net of cost of goods sold, based on historical return trends together with current product sales performance. A summary of activity in our sales returns reserve is as follows:


In thousands	Fiscal 2015_1_			Fiscal 2014_1_			Fiscal 2013_1_
Balance at beginning of year	$	14,782		$	15,954		$	14,397
Provision for sales returns		321,421			311,911			293,929
Actual sales returns		(317,090	)		(313,083	)		(292,372	)
Balance at end of year	$	19,113		$	14,782		$	15,954

1	Amounts are shown net of cost of goods sold.

Vendor Allowances

We receive allowances or credits from certain vendors for volume rebates. We treat such volume rebates as an offset to the cost of the product or services provided at the time the expense is recorded. These allowances and credits received are recorded in both cost of goods sold and in selling, general and administrative expenses.

Cost of Goods Sold

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third party delivery services and shipping materials.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.

Stock-Based Compensation

We account for stock-based compensation arrangements by measuring and recognizing compensation expense in our Consolidated Financial Statements for all stock-based awards using a fair value based method. Restricted

stock units are valued using the closing price of our stock on the date prior to the date of grant. The fair value of each stock-based award is amortized over the requisite service period.

Foreign Currency Translation

Some of our foreign operations have a functional currency other than the U.S. dollar. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within stockholders’ equity. Gains and losses are included in selling, general and administrative expenses (except for those discussed in Note M).

Earnings Per Share

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events.

In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. In addition, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. These ASUs are effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We are currently assessing the potential impact of these ASUs on our Consolidated Financial Statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities to present both deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This ASU is effective for fiscal years and interim periods within those years beginning after

December 15, 2016; however, early adoption is permitted. We early adopted this ASU prospectively and have presented both deferred tax assets and deferred tax liabilities as noncurrent in our Consolidated Balance Sheet as of January 31, 2016. Prior balance sheets have not been retrospectively adjusted. For the significant components of our deferred tax accounts, see Note D.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. We are currently assessing the potential impact of this ASU on our Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. We are currently assessing the potential impact of this ASU on our Consolidated Financial Statements.

Note B: Property and Equipment

Property and equipment consists of the following:


In thousands	Jan. 31, 2016			Feb. 1, 2015
Leasehold improvements	$	861,852		$	852,372
Fixtures and equipment		714,911			691,001
Capitalized software		455,954			431,259
Land and buildings		172,782			192,841
Corporate systems projects in progress 1		115,296			91,885
Construction in progress 2		20,325			10,119
Total		2,341,120			2,269,477
Accumulated depreciation		(1,454,307	)		(1,386,465	)
Property and equipment, net	$	886,813		$	883,012

1	Corporate systems projects in progress as of January 31, 2016 and February 1, 2015 include approximately $77.6 million and $56.8 million, respectively, for the portion of our new inventory and order management system currently under development and not ready for its intended use.

2	Construction in progress primarily consists of leasehold improvements and furniture and fixtures related to new, expanded or remodeled retail stores where construction had not been completed as of year-end.

Note C: Borrowing Arrangements

Long-term debt consists of the following:


In thousands		Jan. 31, 2016				Feb. 1, 2015
Memphis-based distribution facility obligation (see Note F)		$	—			$	1,968

Credit Facility

We have a $500,000,000 unsecured revolving line of credit (“credit facility”) that may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the credit facility by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. As of January 31, 2016, we were in compliance with our financial covenants under the credit facility and based on current projections, we expect to remain in compliance throughout fiscal 2016. The credit facility matures on November 19, 2019, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.

We may elect interest rates calculated at (i) Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent, or a rate based on LIBOR plus one percent) plus a margin based on our leverage ratio or (ii) LIBOR plus a margin based on our leverage ratio. During fiscal 2015, we had borrowings of $200,000,000 under the credit facility (at a weighted average interest rate of 1.11%), all of which were repaid in the fourth quarter of fiscal 2015, and no amounts were outstanding as of January 31, 2016. During fiscal 2014, we had borrowings of $90,000,000 under the credit facility (at a weighted average interest rate of 1.05%), all of which were repaid in the fourth quarter of fiscal 2014, and no amounts were outstanding as of February 1, 2015. Additionally, as of January 31, 2016, $13,367,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 27, 2016. The letter of credit facilities contain covenants that are consistent with our unsecured revolving line of credit. Interest on unreimbursed amounts under the letter of credit facilities accrues at the lender’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent) plus 2.0%. As of January 31, 2016, an aggregate of $6,088,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 24, 2017.

Note D: Income Taxes

The components of earnings before income taxes, by tax jurisdiction, are as follows:


In thousands	Fiscal 2015		Fiscal 2014		Fiscal 2013
United States	$	462,701	$	482,739	$	448,764
Foreign		25,306		19,464		3,918
Total earnings before income taxes	$	488,007	$	502,203	$	452,682

The provision for income taxes consists of the following:


In thousands	Fiscal 2015			Fiscal 2014			Fiscal 2013
Current
Federal	$	156,812		$	157,227		$	173,686
State		22,969			31,959			25,748
Foreign		5,594			4,411			2,690
Total current		185,375			193,597			202,124
Deferred
Federal		(6,093	)		2,719			(26,324	)
State		1,258			(2,547	)		(1,277	)
Foreign		(2,601	)		(420	)		(743	)
Total deferred		(7,436	)		(248	)		(28,344	)
Total provision	$	177,939		$	193,349		$	173,780

We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. As of January 31, 2016, the accumulated undistributed earnings of all foreign subsidiaries were approximately $66,500,000 and are sufficient to support our anticipated future cash needs for our foreign operations. We currently intend to utilize those undistributed earnings for an indefinite period of time and will only repatriate such earnings when it is tax effective to do so. If we did not consider these earnings to be indefinitely reinvested, the deferred tax liability would have been in the range of $8,000,000 to $12,000,000 at January 31, 2016.

A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:


	Fiscal 2015			Fiscal 2014			Fiscal 2013
Federal income taxes at the statutory rate		35.0%			35.0%			35.0%
State income tax rate		3.2%			4.0%			3.7%
Other		(1.7%	)		(0.5%	)		(0.3%	)
Effective tax rate		36.5%			38.5%			38.4%

Significant components of our deferred tax accounts are as follows:


Deferred tax assets (liabilities), in thousands	Jan. 31, 2016			Feb. 1, 2015
Customer deposits	$	64,742		$	60,989
Merchandise inventories		31,752			30,328
Stock-based compensation		21,365			19,857
Deferred rent		19,952			18,925
Accrued liabilities		17,028			28,866
Compensation		15,776			15,968
State taxes		6,723			7,061
Executive deferral plan		6,003			5,437
Deferred lease incentives		(36,475	)		(37,098	)
Prepaid catalog expenses		(10,883	)		(12,753	)
Depreciation		(4,527	)		(9,888	)
Other		11,451			8,759
Valuation allowance		(1,123	)		(1,568	)
Total deferred tax assets, net	$	141,784		$	134,883

As of January 31, 2016, we adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We have adopted this ASU prospectively and have presented both deferred tax assets and deferred tax liabilities as noncurrent in our Consolidated Balance Sheet as of January 31, 2016. Prior balance sheets have not been retrospectively adjusted (see Note A).

The following table summarizes the activity related to our gross unrecognized tax benefits:


In thousands	Fiscal 2015			Fiscal 2014			Fiscal 2013
Balance at beginning of year	$	14,359		$	10,765		$	8,990
Increases related to current year’s tax positions		2,765			3,093			3,351
Increases related to prior years’ tax positions		101			2,007			328
Decreases related to prior years’ tax positions		(341	)		(138	)		(42	)
Settlements		(2,912	)		(1,144	)		(170	)
Lapses in statute of limitations		(682	)		(224	)		(1,692	)
Balance at end of year	$	13,290		$	14,359		$	10,765

As of January 31, 2016, we had $13,290,000 of gross unrecognized tax benefits, of which $8,948,000 would, if recognized, affect the effective tax rate.

We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of January 31, 2016 and February 1, 2015, our accruals for the payment of interest and penalties totaled $2,649,000 and $2,412,000, respectively, primarily related to the payment of interest.

Due to the potential resolution of state issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0 to $2,100,000.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (IRS) has concluded examination of our U.S. federal income tax returns for years prior to fiscal 2011 without any significant adjustments. Substantially all material state, local and foreign income tax examinations have been concluded through fiscal 2004.

Note E: Accounting for Leases

Operating Leases

We lease store locations, distribution centers, customer care centers, corporate facilities and certain equipment for original terms ranging generally from 3 to 22 years. Certain leases contain renewal options for periods up to 20 years. The rental payments for our store leases are typically structured as either: minimum rent; rent based on a percentage of store sales; minimum rent plus additional rent based on a percentage of store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. Contingent rental payments, including rental payments that are based on a percentage of sales, cannot be predicted with certainty at the onset of the lease term. Accordingly, such contingent rental payments are recorded as incurred each period and are excluded from our calculation of deferred rent liability.

Total rent expense for all operating leases was as follows:


In thousands	Fiscal 2015			Fiscal 2014			Fiscal 2013
Rent expense	$	224,564		$	215,221		$	201,727
Contingent rent expense		33,985			32,699			34,608
Rent expense before deferred lease incentive income		258,549			247,920			236,335
Deferred lease incentive income		(24,679	)		(24,420	)		(25,385	)
Less: sublease rental income		(608	)		(560	)		(536	)
Total rent expense_1_	$	233,262		$	222,940		$	210,414

1	Excludes all other occupancy-related costs including depreciation, common area maintenance, property taxes and utilities.

The aggregate future minimum annual cash rental payments under non-cancelable operating leases in effect at January 31, 2016 were as follows:


In thousands			Lease Commitments_1_
Fiscal 2016			$ 257,805
Fiscal 2017			242,036
Fiscal 2018			218,381
Fiscal 2019			197,055
Fiscal 2020			168,046
Thereafter			650,585
Total			$ 1,733,908

Projected cash payments include only those amounts that are fixed and determinable as of the reporting date and are not necessarily representative of future expected rent expense. We currently pay rent for certain store locations based on a percentage of store sales. As future store sales cannot be predicted with certainty, projected payments for these locations are based on minimum rent, which is generally higher than rent based on a percentage of store sales. We incur other lease obligation expenses, such as common area maintenance and other executory costs, which are not fixed in nature and are thus not included in the future projected cash payments reflected above. In addition, projected cash payments do not include any benefit from deferred lease incentive income, which is reflected within “Total rent expense” above.

Note F: Memphis-Based Distribution Facilities

Our Memphis-based distribution facility includes an operating lease entered into in August 1990 for a distribution facility in Memphis, Tennessee. The lessor is a general partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder, and two unrelated parties. The partnership does not have operations separate from the leasing of this distribution facility and does not have lease agreements with any unrelated third parties. The terms of the lease automatically renewed until the bonds that financed the construction of the facility were fully repaid during the second quarter of fiscal 2015. Simultaneously, we entered into an agreement with the partnership to lease the facility through July 2017. We made annual rental payments

of approximately $3,050,000, $2,432,000 and $2,448,000 including applicable taxes, insurance and maintenance expenses in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Prior to August 2, 2015, the partnership described above qualified as a variable interest entity and was consolidated by us due to its related party relationship and our obligation to renew the lease until the bonds were fully repaid. Accordingly, as of August 2, 2015, this facility was no longer being consolidated by us.

Note G: Earnings Per Share

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:


In thousands, except per share amounts	Net Earnings		Weighted Average Shares		Earnings Per Share
Fiscal 2015
Basic	$	310,068		90,787	$	3.42
Effect of dilutive stock-based awards				1,315
Diluted	$	310,068		92,102	$	3.37
Fiscal 2014
Basic	$	308,854		93,634	$	3.30
Effect of dilutive stock-based awards				1,566
Diluted	$	308,854		95,200	$	3.24
Fiscal 2013
Basic	$	278,902		96,669	$	2.89
Effect of dilutive stock-based awards				2,096
Diluted	$	278,902		98,765	$	2.82

Stock-based awards of 12,000 and 21,000 were excluded from the computation of diluted earnings per share in fiscal 2015 and fiscal 2014, respectively, as their inclusion would be anti-dilutive. There were no stock-based awards excluded from the computation of diluted earnings per share in fiscal 2013.

Note H: Stock-Based Compensation

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 32,310,000 shares. As of January 31, 2016, there were approximately 9,439,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Option Awards

Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards is not less than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event.

Stock Awards

Annual grants of stock awards are limited to 1,000,000 shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, vest three years from

the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member).

Stock-Based Compensation Expense

During fiscal 2015, fiscal 2014 and fiscal 2013, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $41,357,000, $44,632,000 and $38,788,000, respectively. As of January 31, 2016, there was $52,481,000 of unrecognized stock-based compensation expense (net of estimated forfeitures), which we expect to recognize on a straight-line basis over a weighted average remaining service period of approximately two years. At each reporting period, all compensation expense attributable to vested awards has been fully recognized.

Stock Options

The following table summarizes our stock option activity during fiscal 2015:


	Shares			Weighted Average Exercise Price		Weighted Average Contractual Term Remaining (Years)		Intrinsic Value_1_
Balance at February 1, 2015 (100% vested)		107,000		$	39.05
Granted		—			—
Exercised		(68,500	)	$	38.64
Cancelled		—			—
Balance at January 31, 2016 (100% vested)		38,500		$	39.80		0.31	$	457,000

1	Intrinsic value for outstanding and vested options is based on the excess of the market value of our common stock on the last business day of the fiscal year (or $51.66) over the exercise price.

No stock options were granted in fiscal 2015, fiscal 2014 or fiscal 2013. The total intrinsic value of stock options exercised was $2,722,000 for fiscal 2015, $3,564,000 for fiscal 2014 and $3,834,000 for fiscal 2013. Intrinsic value for options exercised is based on the excess of the market value over the exercise price on the date of exercise.

Stock-Settled Stock Appreciation Rights

A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the grant date and the conversion date for the number of shares converted.

The following table summarizes our stock-settled stock appreciation right activity during fiscal 2015:


	Shares			Weighted Average Conversion Price_1_		Weighted Average Contractual Term Remaining (Years)		Intrinsic Value_2_
Balance at February 1, 2015		1,159,948		$	29.36
Granted		—			—
Converted into common stock		(521,913	)		31.26
Cancelled		(3,426	)		35.10
Balance at January 31, 2016 (100% vested)		634,609		$	27.76		2.23	$	15,165,000

1	Conversion price is equal to the market value on the date of grant.

2	Intrinsic value for outstanding and vested rights is based on the excess of the market value of our common stock on the last business day of the fiscal year (or $51.66) over the conversion price.

No stock-settled stock appreciation rights were granted in fiscal 2015, fiscal 2014 or fiscal 2013. The total intrinsic value of awards converted to common stock was $24,465,000 for fiscal 2015, $26,837,000 for fiscal 2014 and $18,046,000 for fiscal 2013. Intrinsic value for conversions is based on the excess of the market value on the date of conversion over the conversion price.

Restricted Stock Units

The following table summarizes our restricted stock unit activity during fiscal 2015:


	Shares			Weighted Average Grant Date Fair Value		Weighted Average Contractual Term Remaining (Years)		Intrinsic Value_1_
Balance at February 1, 2015		2,313,477		$	52.47
Granted		821,072			76.19
Released		(656,452	)		51.34
Cancelled		(189,139	)		57.45
Balance at January 31, 2016		2,288,958		$	60.89		2.50	$	118,248,000
Vested plus expected to vest at January 31, 2016		1,436,810		$	61.20		2.35	$	74,226,000

1	Intrinsic value for outstanding and unvested restricted stock units is based on the market value of our common stock on the last business day of the fiscal year (or $51.66).

The following table summarizes additional information about restricted stock units:


	Fiscal 2015		Fiscal 2014		Fiscal 2013
Weighted average grant date fair value per share of awards granted	$	76.19	$	63.18	$	53.59
Intrinsic value of awards released_1_	$	50,773,000	$	101,189,000	$	24,568,000

1	Intrinsic value for releases is based on the market value on the date of release.

Tax Effect

We present tax benefits resulting from the settlement of stock-based awards as operating cash flows in our Consolidated Statements of Cash Flows. Tax deductions in excess of the cumulative compensation cost recognized for stock-based awards settled are presented as a financing cash inflow and an operating cash outflow. During fiscal 2015, fiscal 2014 and fiscal 2013, net proceeds related to stock-based awards was $2,647,000, $4,077,000 and $6,614,000, respectively, and the current tax benefit related to stock-based awards totaled $30,352,000, $52,798,000 and $17,940,000, respectively.

Note I: Williams-Sonoma, Inc. 401(k) Plan and Other Employee Benefits

We have a defined contribution retirement plan, the Williams-Sonoma, Inc. 401(k) Plan (the “401(k) Plan”), which is intended to be qualified under Internal Revenue Code sections 401(a), 401(k), 401(m) and 4975(e)(7). The 401(k) Plan permits eligible employees to make salary deferral contributions up to 75% of their eligible compensation each pay period (7% for highly-compensated employees). Employees designate the funds in which their contributions are invested. Each participant may choose to have his or her salary deferral contributions and earnings thereon invested in one or more investment funds, including our company stock fund.

Our matching contribution is equal to 50% of each participant’s salary deferral contribution, taking into account only those contributions that do not exceed 6% of the participant’s eligible pay for the pay period. Each participant’s matching contribution is earned on a semi-annual basis with respect to eligible salary deferrals for those employees that are employed with the company on June 30th or December 31st of the year in which the deferrals are made. Each associate must complete one year of service prior to receiving company matching contributions. For the first five years of the participant’s employment, all matching contributions vest at the rate of 20% per year of service, measuring service from the participant’s hire date. Thereafter, all matching contributions vest immediately. Our contributions to the plan were $6,915,000, $6,038,000 and $5,538,000 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

The 401(k) Plan consists of two parts: a profit sharing plan portion and a stock bonus plan/employee stock ownership plan (the “ESOP”). The ESOP portion is the portion that is invested in the Williams-Sonoma, Inc. Stock Fund. The profit sharing and ESOP components of the 401(k) Plan are considered a single plan under Internal Revenue Code section 414(l).

We also have a nonqualified executive deferred compensation plan that provides supplemental retirement income benefits for a select group of management. This plan permits eligible employees to make salary and bonus deferrals that are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. As of January 31, 2016 and February 1, 2015, $15,929,000 and $14,446,000, respectively, is included in other long-term obligations related to these deferred compensation liabilities. Additionally, we have purchased life insurance policies on certain participants to potentially offset these unsecured obligations. The cash surrender value of these policies was $17,112,000 and $17,422,000 as of January 31, 2016 and February 1, 2015, respectively, and is included in other assets, net.

Note J: Commitments and Contingencies

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows larger. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole.

Note K: Stock Repurchase Program and Dividends

During fiscal 2015, we repurchased 2,950,438 shares of our common stock at an average cost of $76.26 per share and a total cost of approximately $224,995,000 under our $750,000,000 stock repurchase program. In addition, in March 2016, we announced that our Board of Directors had authorized a new stock repurchase program to purchase up to $500,000,000 of our common stock that we intend to execute over the next three years. As of January 31, 2016, we held treasury stock of $1,906,000 which represents the cost of shares available for issuance in certain foreign jurisdictions as a result of future stock-based award settlements.

During fiscal 2014, we repurchased 3,331,557 shares of our common stock at an average cost of $67.35 per share and a total cost of approximately $224,377,000. During fiscal 2013, we repurchased 4,344,962 shares of our common stock at an average cost of $55.07 per share and a total cost of approximately $239,274,000.

Stock repurchases under these programs may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase programs do not have an expiration date and may be limited or terminated at any time without prior notice.

Total cash dividends declared in fiscal 2015, fiscal 2014 and fiscal 2013, were approximately $130,290,000, or $1.40 per common share, $125,378,000, or $1.32 per common share and $121,688,000, or $1.24 per common share, respectively. In March 2016, we announced that our Board of Directors had authorized a 6% increase in our quarterly cash dividend, from $0.35 to $0.37 per common share, subject to capital availability. Our quarterly cash dividend may be limited or terminated at any time.

Note L: Segment Reporting

We have two reportable segments, e-commerce and retail. The e-commerce segment has the following merchandising strategies: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams-Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through our e-commerce websites and direct-mail catalogs. Our e-commerce merchandising strategies are operating segments, which have been aggregated into one reportable segment, e-commerce. The retail segment has the following merchandising strategies: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, which sell our products through our retail stores. Our retail merchandising strategies are operating segments, which have been aggregated into one reportable segment, retail. Management’s expectation is that the overall economic characteristics of each of our operating segments will be similar over time based on management’s judgment that the operating segments have had similar historical economic characteristics and are expected to have similar long-term financial performance in the future.

These reportable segments are strategic business units that offer similar products for the home. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Based on management’s best estimate, our operating segments include allocations of certain expenses, including advertising and employment costs, to the extent they have been determined to benefit both channels. These operating segments are aggregated at the channel level for reporting purposes due to the fact that our brands are interdependent for economies of scale and we do not maintain fully allocated income statements at the brand level. As a result, material financial decisions related to the brands are made at the channel level. Furthermore, it is not practicable for us to report revenue by product group.

We use operating income to evaluate segment profitability. Operating income is defined as earnings (loss) before net interest income (expense) and income taxes. Unallocated costs before interest and income taxes include corporate employee-related costs, occupancy expenses (including depreciation expense), administrative costs and third party service costs, primarily in our corporate administrative and systems departments. Unallocated assets include corporate cash and cash equivalents, deferred income taxes, the net book value of corporate facilities and related information systems, and other corporate long-lived assets.

Income tax information by reportable segment has not been included as income taxes are calculated at a company-wide level and are not allocated to each reportable segment.

Segment Information


In thousands	E-commerce		Retail		Unallocated			Total
Fiscal 2015
Net revenues_1_	$	2,522,580	$	2,453,510	$	—		$	4,976,090
Depreciation and amortization expense		32,056		83,027		52,677			167,760
Operating income		562,081		239,288		(312,735	)		488,634
Assets_2_		625,951		1,049,892		741,584			2,417,427
Capital expenditures		22,293		102,717		77,925			202,935
Fiscal 2014
Net revenues_1_	$	2,370,694	$	2,328,025	$	—		$	4,698,719
Depreciation and amortization expense		32,116		80,154		50,003			162,273
Operating income		560,396		248,535		(306,666	)		502,265
Assets_2_		600,503		1,028,293		701,481			2,330,277
Capital expenditures		41,633		97,247		65,920			204,800
Fiscal 2013
Net revenues_1_	$	2,115,022	$	2,272,867	$	—		$	4,387,889
Depreciation and amortization expense		25,588		78,423		45,784			149,795
Operating income		502,143		248,894		(298,939	)		452,098
Assets_2_		517,086		975,994		843,654			2,336,734
Capital expenditures		38,195		89,331		66,427			193,953

1	Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $298.9 million, $235.8 million and $215.5 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

2	Includes long-term assets related to our international operations of approximately $61.7 million, $58.3 million and $61.4 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.

Note M: Derivative Financial Instruments

We have retail and/or e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes.

The assets or liabilities associated with the derivative instruments are measured at fair value and recorded in either other current assets or other current liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative instrument is designated as a hedge and qualifies for hedge accounting in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

Cash Flow Hedges

We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to 12 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded immediately

in other income (expense), net. Based on the rates in effect as of January 31, 2016, we expect to reclassify a net gain of approximately $1,171,000 from OCI to cost of goods sold over the next 12 months.

We also enter into non-designated foreign currency forward contracts (to sell Australian dollars and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains (losses) related to these contracts are recognized in other income (expense), net.

As of January 31, 2016, and February 1, 2015, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:


In thousands	Jan. 31, 2016		Feb. 1, 2015
Contracts designated as cash flow hedges	$	24,500	$	15,900
Contracts not designated as cash flow hedges	$	40,000	$	21,000

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for fiscal 2015, fiscal 2014 and fiscal 2013.

The effect of derivative instruments in our Consolidated Financial Statements, pre tax, was as follows:


In thousands	Fiscal 2015			Fiscal 2014			Fiscal 2013
Net gain recognized in OCI	$	1,454		$	1,153		$	870
Net gain reclassified from OCI into cost of goods sold	$	1,605		$	573		$	129
Net foreign exchange gain (loss) recognized in other income (expense):
Instruments designated as cash flow hedges_1_	$	(66	)	$	(155	)	$	(109	)
Instruments not designated or de-designated_2_	$	2,838		$	(1,795	)	$	906

1	Changes in fair value of the forward contract related to interest charges (or forward points).

2	Changes in fair value for instruments not designated as cash flow hedges as well as de-designated instruments.

The fair values of our derivative financial instruments are presented below. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note N.


In thousands	Balance sheet location	Jan. 31, 2016			Feb. 1, 2015
Derivatives designated as hedging instruments:
Cash flow hedge foreign currency forward contracts	Other current assets	$	866		$	1,015
Cash flow hedge foreign currency forward contracts	Other current liabilities		(115	)		(9	)
Total, net		$	751		$	1,006
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	—		$	427
Foreign currency forward contracts	Other current liabilities		(471	)		—
Total, net		$	(471	)	$	427

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.

Note N: Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:

•		Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;

•		Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

•		Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.

The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.

Foreign Currency Derivatives and Hedging Instruments

We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.

The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements.

Property and Equipment

We review the carrying value of all long-lived assets for impairment, primarily at a store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure these assets at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. The fair value is based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital.

There were no transfers between Level 1, 2 or 3 categories during fiscal 2015 and fiscal 2014.

Note O. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:


In thousands	Foreign Currency Translation			Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
Balance at February 3, 2013	$	13,633		$	—		$	13,633
Foreign currency translation adjustments		(7,850	)		—			(7,850	)
Change in fair value of derivative financial instruments		—			870			870
Reclassification adjustment for realized gains on derivative financial instruments_1_		—			(129	)		(129	)
Other comprehensive income (loss)		(7,850	)		741			(7,109	)
Balance at February 2, 2014		5,783			741			6,524
Foreign currency translation adjustments		(9,305	)		—			(9,305	)
Change in fair value of derivative financial instruments		—			806			806
Reclassification adjustment for realized gains on derivative financial instruments_1_		—			(573	)		(573	)
Other comprehensive income (loss)		(9,305	)		233			(9,072	)
Balance at February 1, 2015		(3,522	)		974			(2,548	)
Foreign currency translation adjustments		(7,958	)		—			(7,958	)
Change in fair value of derivative financial instruments		—			1,074			1,074
Reclassification adjustment for realized gains on derivative financial instruments_1_		—			(1,184	)		(1,184	)
Other comprehensive income (loss)		(7,958	)		(110	)		(8,068	)
Balance at January 31, 2016	$	(11,480	)	$	864		$	(10,616	)

1	Refer to Note M for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Consolidated Statements of Earnings.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Williams-Sonoma, Inc.:

We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the “Company”) as of January 31, 2016 and February 1, 2015, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2016. We also have audited the Company’s internal control over financial reporting as of January 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of January 31, 2016 and February 1, 2015, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for deferred income taxes in 2015 due to the adoption of ASU 2015-17, “Balance Sheet Classifications of Deferred Taxes.”

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

March 31, 2016

Quarterly Financial Information

(Unaudited)


In thousands, except per share amounts
Fiscal 2015	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Full Year
Net revenues	$1,030,676	$	1,127,028	$	1,232,082	$	1,586,304	$	4,976,090
Gross profit	378,841		406,625		451,188		607,560		1,844,214
Operating income	71,928		83,343		110,683		222,680		488,634
Net earnings	44,790		53,668		70,482		141,128		310,068
Basic earnings per share_1_	$ 0.49	$	0.59	$	0.78	$	1.57	$	3.42
Diluted earnings per share_1_	$ 0.48	$	0.58	$	0.77	$	1.55	$	3.37
Fiscal 2014	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Full Year
Net revenues	$ 974,330	$	1,039,102	$	1,143,162	$	1,542,125	$	4,698,719
Gross profit	368,408		382,098		431,407		618,591		1,800,504
Operating income	74,326		85,336		104,720		237,883		502,265
Net earnings	46,162		50,747		64,908		147,037		308,854
Basic earnings per share_1_	$ 0.49	$	0.54	$	0.70	$	1.60	$	3.30
Diluted earnings per share_1_	$ 0.48	$	0.53	$	0.68	$	1.57	$	3.24

1	Due to differences between quarterly and full year weighted average share count calculations, and the effect of quarterly rounding to the nearest cent per share, full year earnings per share may not equal the sum of the quarters.

Previous: Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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