Williams-Sonoma 10-Q 2022-07-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2022.

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-14077

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WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

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Delaware

(State or other jurisdiction of

incorporation or organization)

3250 Van Ness Avenue, San Francisco, CA

(Address of principal executive offices)

94-2203880

(I.R.S. Employer

Identification No.)

94109

(Zip Code)

Registrant’s telephone number, including area code: (415) 421-7900

(Former name, former address and former fiscal year, if changed since last report)

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class:									Trading Symbol(s):						Name of each exchange on which registered:
Common Stock, par value $.01 per share									WSM						New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☒			Accelerated filer			¨
Non-accelerated filer			¨			Smaller reporting company			☐
Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 28, 2022, 66,711,363 shares of the registrant’s Common Stock were outstanding.

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WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JULY 31, 2022

TABLE OF CONTENTS

			PART I. FINANCIAL INFORMATION
						PAGE
Item 1.			Financial Statements (Unaudited)			1
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			20
Item 4.			Controls and Procedures			20
			PART II. OTHER INFORMATION
Item 1.			Legal Proceedings			21
Item 1A.			Risk Factors			21
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3.			Defaults Upon Senior Securities			21
Item 4.			Mine Safety Disclosures			21
Item 5.			Other Information			21
Item 6.			Exhibits			22

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

			For the Thirteen Weeks Ended												For the Twenty-six Weeks Ended
(In thousands, except per share amounts)			July 31, 2022						August 1, 2021						July 31, 2022						August 1, 2021
Net revenues			$	2,137,537					$	1,948,339					$	4,028,764					$	3,697,368
Cost of goods sold			1,208,728						1,089,951						2,271,407						2,086,127
Gross profit			928,809						858,388						1,757,357						1,611,241
Selling, general and administrative expenses			563,288						535,288						1,068,355						1,012,964
Operating income			365,521						323,100						689,002						598,277
Interest (income) expense, net			(344)						(39)						(507)						1,833
Earnings before income taxes			365,865						323,139						689,509						596,444
Income taxes			98,790						77,069						168,321						122,572
Net earnings			$	267,075					$	246,070					$	521,188					$	473,872
Basic earnings per share			$	3.92					$	3.29					$	7.50					$	6.29
Diluted earnings per share			$	3.87					$	3.21					$	7.36					$	6.11
Shares used in calculation of earnings per share:
Basic			68,180						74,786						69,516						75,293
Diluted			69,081						76,584						70,844						77,516

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

			For the Thirteen Weeks Ended												For the Twenty-six Weeks Ended
(In thousands)			July 31, 2022						August 1, 2021						July 31, 2022						August 1, 2021
Net earnings			$	267,075					$	246,070					$	521,188					$	473,872
Other comprehensive income (loss):
Foreign currency translation adjustments			(1,385)						(3,522)						(2,899)						178
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $9, $25, $42, and $(216)			26						65						119						(600)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $2, $(126), $8, and $(181)			(5)						337						(23)						490
Comprehensive income			$	265,711					$	242,950					$	518,385					$	473,940

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

			As of
(In thousands, except per share amounts)			July 31, 2022						January 30, 2022						August 1, 2021
ASSETS
Current assets
Cash and cash equivalents			$	124,944					$	850,338					$	655,211
Accounts receivable, net			133,500						131,683						141,814
Merchandise inventories, net			1,542,428						1,246,372						1,170,561
Prepaid expenses			102,312						69,252						85,587
Other current assets			25,537						26,249						20,537
Total current assets			1,928,721						2,323,894						2,073,710
Property and equipment, net			973,676						920,773						875,295
Operating lease right-of-use assets			1,174,354						1,132,764						1,052,617
Deferred income taxes, net			52,897						56,585						58,848
Goodwill			85,269						85,354						85,421
Other long-term assets, net			104,257						106,250						99,146
Total assets			$	4,319,174					$	4,625,620					$	4,245,037
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable			$	680,097					$	612,512					$	601,879
Accrued expenses			244,559						319,924						224,089
Gift card and other deferred revenue			498,354						447,770						403,409
Income taxes payable			87,159						79,554						61,335
Operating lease liabilities			206,931						217,409						213,784
Other current liabilities			93,945						94,517						74,331
Total current liabilities			1,811,045						1,771,686						1,578,827
Deferred lease incentives			14,725						16,360						18,359
Long-term operating lease liabilities			1,115,501						1,066,839						994,165
Other long-term liabilities			99,624						106,528						126,967
Total liabilities			3,040,895						2,961,413						2,718,318
Stockholders’ equity
Preferred stock: $0.01 par value; 7,500 shares authorized; none issued			—						—						—
Common stock: $0.01 par value; 253,125 shares authorized; 67,057, 71,982 and 74,426 shares issued and outstanding at July 31, 2022, January 30, 2022 and August 1, 2021, respectively			671						720						745
Additional paid-in capital			541,895						600,942						569,734
Retained earnings			750,083

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This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: supply chain challenges; backorder levels and inventory constraints; the continuing impact of the COVID-19 pandemic on our business, results of operations and financial condition; our revenue growth; expanding our sales and operating margin; the impact of inflation and measures to control inflation on consumer spending; our strategic initiatives; our beliefs regarding customer behavior and industry trends; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash, including our commitment to continue or increase quarterly dividend payments; our future compliance with the financial covenants contained in our credit facility; our belief that our cash on-hand, in addition to our available credit facility, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended January 30, 2022, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

OVERVIEW

Williams-Sonoma, Inc. ("Company", "we", or "us") is a specialty retailer of high-quality sustainable products for the home. Our products in our portfolio of eight brands – Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, at our retail stores and through our direct-mail catalogs. These brands are also part of The Key Rewards, our loyalty and credit card program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico, South Korea, and India as well as e-commerce websites in certain locations. We are also proud to be a leader in our industry with our Environmental, Social and Governance efforts.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended July 31, 2022 (“second quarter of fiscal 2022”), as compared to the thirteen weeks ended August 1, 2021 (“second quarter of fiscal 2021”) and the twenty-six weeks ended July 31, 2022 (“first half of fiscal 2022”), as compared to the twenty-six weeks ended August 1, 2021 (“first half of fiscal 2021”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude.

Second Quarter of Fiscal 2022 Financial Results

Net revenues in the second quarter of fiscal 2022 increased by $189.2 million or 9.7%, compared to the second quarter of fiscal 2021, with comparable brand revenue growth of 11.3% and growth in all brands. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales. On a two-year basis, comparable brand revenues increased 41.1%.

Pottery Barn, our largest brand, delivered 21.5% comparable brand revenue growth during the quarter, and 51.1% comparable brand revenue growth on a two-year basis. All channels and product divisions contributed, with growth primarily driven by our high-quality proprietary furniture business. In West Elm, comparable brand revenue growth was 6.1%, on top of 51.1% growth last year, resulting in a 57.2% comparable brand revenue growth on a two-year basis. Growth was driven by improved in-stock positions. The Williams Sonoma brand saw a comparable brand revenue growth of 0.5% during the quarter, an acceleration from the first quarter of fiscal 2022, driven by an improved in-stock position, newness in product assortment, as well as higher conversion on the website powered by our ongoing ecommerce initiative. In our Pottery Barn Kids and Teen brands, we saw comparable brand revenue growth of 5.3% during the quarter, driven by an improvement in inventory receipts out of Vietnam which followed factory closures that occurred in the second half of fiscal 2021, allowing us to fulfill orders.

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For the second quarter of fiscal 2022, diluted earnings per share was $3.87, compared to $3.21 in the second quarter of fiscal 2021 (which included a $0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.).

As of July 31, 2022, we had $124.9 million in cash and generated operating cash flow of $383.6 million in the first half of fiscal 2022. In addition to our strong cash balance, we also ended the quarter with no outstanding borrowings under our revolving line of credit. This strong liquidity position allowed us to fund the operations of the business by investing $148.5 million in capital expenditures in the first half of fiscal 2022, and to provide stockholder returns of $879.1 million in the first half of fiscal 2022 through stock repurchases and dividends.

L**ooking Ahead

Looking forward to the balance of the year, we believe our operating model, which includes our key differentiators – our in-house design, our digital-first channel strategy, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. However, we continue to experience delays and increased costs across our global supply chain, including higher product costs, elevated backorders, higher freight and incremental distribution center costs for additional space to support our overall growth and our ongoing mix shift to furniture. It is hard to predict with certainty when these supply chain challenges will be fully resolved and we currently expect these supply chain challenges, combined with our strong demand, to negatively impact our inventory levels through the second half of fiscal year 2022 and into the first half of 2023. Despite these challenges, we believe the demand for our proprietary and sustainably-sourced products, our growth strategies and the efficiencies of our operating model leave us well-positioned to mitigate these costs in both the short- and long-term. For more information on risks, please see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, at our retail stores and through our direct mail catalogs, and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, incentives received from credit card issuers in connection with our private label and co-branded credit cards, and breakage income related to our stored-value cards. Revenue from the sale of merchandise is reported net of sales returns.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

Net revenues in the second quarter of fiscal 2022 increased by $189.2 million or 9.7%, compared to the second quarter of fiscal 2021, with comparable brand revenue growth of 11.3% and growth in all brands. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales. On a two-year basis, comparable brand revenues increased 41.1%.

First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Net revenues for the first half of fiscal 2022 increased by $331.4 million, or 9.0%, compared to the first half of fiscal 2021, with comparable brand revenue growth of 10.5%. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales. On a two-year basis, comparable brand revenues increased 45.1%.

Comparable Brand Revenue

Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months, and which have been open for at least 12 consecutive months without closure for more than seven consecutive days within the same fiscal month. Comparable stores that were temporarily closed due to COVID-19 were not excluded from the comparable brand revenue calculation. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.

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			For the Thirteen Weeks Ended									For the Twenty-six Weeks Ended
Comparable brand revenue growth (decline)			July 31, 2022			August 1, 2021						July 31, 2022			August 1, 2021
Pottery Barn			21.5		%	29.6		%				18.2		%	35.0		%
West Elm			6.1			51.1						9.1			51.0
Williams Sonoma			0.5			6.4						(0.9)			19.4
Pottery Barn Kids and Teen			5.3			18.0						1.4			22.3
Total 1			11.3		%	29.8		%				10.5		%	34.6		%
1 Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.

STORE DATA

			Store Count																														Average Leased Square Footage Per Store
			May 1, 2022						Openings						Closings						July 31, 2022						August 1, 2021 1						July 31, 2022						August 1, 2021 1
Pottery Barn			188						2						(1)						189						195						14,600						14,600
Williams Sonoma			175						1						(1)						175						196						6,800						6,800
West Elm			121						1						(1)						121						123						13,200						13,100
Pottery Barn Kids			52						—						—						52						57						7,700						7,800
Rejuvenation			9						—						—						9						10						9,400						8,500
Total			545						4						(3)						546						581						11,100						10,900
Store selling square footage at period-end																																	3,856,000						3,994,000
Store leased square footage at period-end																																	6,044,000						6,319,000

1**Retail store data for fiscal 2021 includes stores temporarily closed due to COVID-19. All stores were reopened as of the end of fiscal 2021.

COST OF GOODS SOLD

			For the Thirteen Weeks Ended																								For the Twenty-six Weeks Ended
(In thousands)			July 31, 2022						% Net Revenues						August 1, 2021						% Net Revenues						July 31, 2022						% Net Revenues						August 1, 2021						% Net Revenues
Cost of goods sold 1			$	1,208,728					56.5		%				$	1,089,951					55.9		%				$	2,271,407					56.4		%				$	2,086,127					56.4		%

1**Includes total occupancy expenses of $193.0 million and $176.0 million for the second quarter of fiscal 2022 and the second quarter of fiscal 2021, respectively, and $379.4 million and $351.7 million for the first half of fiscal 2022 and the first half of fiscal 2021, respectively.

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 replacements, damages, obsolescence and shrinkage. Occupancy expenses consist of rent, other occupancy costs (including property taxes, common area maintenance and utilities) and depreciation. Shipping costs consist of third-party delivery services and shipping materials.

Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution related administrative expenses, are recorded in selling, general and administrative expenses.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

Cost of goods sold increased $118.8 million, or 10.9%, in the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Cost of goods sold as a percentage of net revenues increased to 56.5% in the second quarter of fiscal 2022 from 55.9% in the second quarter of fiscal 2021. This increase was primarily driven by higher freight costs resulting from strong furniture demand, high backorder fulfillment and global supply chain disruptions, partially offset by merchandise margin expansion.

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First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Cost of goods sold increased by $185.3 million, or 8.9%, for the first half of fiscal 2022, compared to the first half of fiscal 2021. Cost of goods sold as a percentage of net revenues was 56.4% for both the first half of fiscal 2022 and the first half of fiscal 2021. This was primarily driven by higher freight costs resulting from strong furniture demand, high backorder fulfillment and global supply chain disruptions, offset by merchandise margin expansion.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

			For the Thirteen Weeks Ended																								For the Twenty-six Weeks Ended
(In thousands)			July 31, 2022						% Net Revenues						August 1, 2021						% Net Revenues						July 31, 2022						% Net Revenues						August 1, 2021						% Net Revenues
Selling, general and administrative expenses			$	563,288					26.4		%				$	535,288					27.5		%				$	1,068,355					26.5		%				$	1,012,964					27.4		%

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution and manufacturing facilities, 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.

Second Quarter of Fiscal 2022 vs. Second Quarter of Fiscal 2021

Selling, general and administrative expenses increased $28.0 million, or 5.2%, in the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.4% in the second quarter of fiscal 2022 from 27.5% in the second quarter of fiscal 2021. This decrease in rate was primarily driven by the leverage of advertising expenses and employment costs from higher sales and overall cost discipline.

First Half of Fiscal 2022 vs. First Half of Fiscal 2021

Selling, general and administrative expenses increased by $55.4 million, or 5.5%, for the first half of fiscal 2022, compared to the first half of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.5% for the first half of fiscal 2022 from 27.4% for the first half of fiscal 2021. This decrease in rate was primarily driven by the leverage of employment costs and advertising expenses from higher sales and overall cost discipline.

INCOME TAXES

The effective tax rate was 24.4% for the first half of fiscal 2022 compared to 20.6% for the first half of fiscal 2021. The increase in the effective tax rate is primarily due to less excess tax benefit from stock-based compensation in fiscal 2022 compared to fiscal 2021, the tax effect of earnings mix change between the two fiscal years, the statute of limitation of uncertain tax positions expiring in fiscal 2021 and the change in permanent reinvestment assertion on Canadian earnings in 2022.

Since the Tax Cuts and Jobs Act of 2017, we have elected not to provide for income taxes with respect to the earnings of Canada after fiscal 2017. In the second quarter of fiscal 2022, we assessed the overall cash needs and financial position of our foreign subsidiaries, and management decided to no longer assert its intent to indefinitely reinvest undistributed earnings in Canada. As a result of this change in assertion, we recorded $2.4 million of tax expense mainly related to Canadian withholding taxes.

The Inflation Reduction Act was enacted on August 16, 2022, and includes a new 15% minimum tax on “adjusted financial statement income” beginning with the Company’s fiscal year 2023, and a new 1% excise tax on stock repurchases after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, we will continue to evaluate its impact as further information becomes available.

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LIQUIDITY AND CAPITAL RESOURCES

Material Cash Requirements

There were no material changes during the quarter to the Company’s material cash requirements, commitments and contingencies that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2022, which is incorporated herein by reference.

Stock Repurchase Program and Dividends

See Note G to our Condensed Consolidated Financial Statements, Stock Repurchase Program and Dividends, within Item 1 of this Quarterly Report on Form 10-Q for further information.

Liquidity Outlook

For the remainder of fiscal 2022, we plan to use our cash resources to fund our inventory and inventory-related purchases, employment-related costs, advertising and marketing initiatives, stock repurchases, the payment of income taxes, property and equipment purchases, rental payments on our leases and dividend payments.

We believe our cash on hand, cash flows from operations, and our available credit facilities will provide adequate liquidity for our business operations as well as stock repurchases, capital expenditures, dividends and other liquidity requirements associated with our business operations over the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

Sources of Liquidity

As of July 31, 2022, we held $124.9 million in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts, and of which $96.1 million was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.

In addition to our cash balances on hand, we have a credit facility (the "Credit Facility") which provides for a $500 million unsecured revolving line of credit (the “Revolver”). Our Revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders’ option, to increase the Revolver by up to $250 million to provide for a total of $750 million of unsecured revolving credit.

During the thirteen and twenty-six weeks ended July 31, 2022 and August 1, 2021, we had no borrowings under our Revolver. Additionally, as of July 31, 2022, issued but undrawn standby letters of credit of $11.3 million were outstanding under our Revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs.

Our Credit Facility contains certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for operating lease liabilities to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of July 31, 2022, we were in compliance with our financial covenants under our Credit Facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.

Letter of Credit Facilities

We have three unsecured letter of credit reimbursement facilities aggregating to $35.0 million. Our letter of credit facilities contain covenants that are consistent with our Credit Facility. Interest on unreimbursed amounts under our letter of credit facilities accrues at a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio. As of July 31, 2022, the aggregate amount outstanding under our letter of credit facilities was $6.4 million, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. On August 19, 2022, we renewed all three of our letter of credit facilities on substantially similar terms. Two of the letter of credit facilities totaling $30.0 million mature on August 19, 2023, and the latest expiration date possible for future letters of credit issued under these facilities is January 16, 2024. One of the letter of credit facilities totaling $5.0 million matures on September 30, 2026, which is also the latest expiration date possible for future letters of credit issued under the facility.

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Cash Flows from Operating Activities

For the first half of fiscal 2022, net cash provided by operating activities was $383.6 million compared to $475.7 million for the first half of fiscal 2021. For the first half of fiscal 2022, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, an increase in accounts payable, and an increase in gift card and other deferred revenue (as a result of an increase in sales), partially offset by higher spending on merchandise inventories (as a result of the strong customer demand for our products) and decreases in operating lease liabilities and accrued expenses and other liabilities. Net cash provided by operating activities for the first half of fiscal 2022 decreased compared to the first half of fiscal 2021, primarily due to increases in merchandise inventories and prepaid expenses and other assets, and a decrease in accrued expenses and other liabilities, partially offset by an increase in net earnings adjusted for non-cash items.

Cash Flows from Investing Activities

For the first half of fiscal 2022, net cash used in investing activities was $148.5 million compared to $78.2 million for the first half of fiscal 2021, and was primarily attributable to purchases of property and equipment related to technology and supply chain enhancements.

Cash Flows from Financing Activities

For the first half of fiscal 2022, net cash used in financing activities was $958.4 million compared to $942.6 million for the first half of fiscal 2021, primarily driven by repurchases of common stock. Net cash used in financing activities for the first half of fiscal 2022 increased compared to the first half of fiscal 2021, primarily due to an increase in repurchases of common stock, partially offset by the repayment of debt in the first quarter of fiscal 2021 that did not recur in the first quarter of fiscal 2022.

Seasonality

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, distribution facilities and customer care centers.

CRITICAL ACCOUNTING ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements 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 significantly from these estimates. During the second quarter of fiscal 2022, there were no significant changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

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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 Revolver has a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During the second quarter of fiscal 2022, we had no borrowings under our Revolver.

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 July 31, 2022, our investments, made primarily in interest-bearing demand deposit accounts, are stated at cost and approximate their fair values.

Foreign Currency Risks

We purchase the majority of our inventory from vendors outside of the U.S. in transactions that are primarily denominated in U.S. dollars and, as such, any foreign currency impact related to our international purchase transactions was not significant to us during the second quarter of fiscal 2022 or the second quarter of fiscal 2021. 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 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 the second quarter of fiscal 2022 or fiscal 2021, 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 H to our Condensed Consolidated Financial Statements).

Evaluation of Disclosure Controls and Procedures

As of July 31, 2022, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the second quarter of fiscal 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is contained in Note F to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information as of July 31, 2022 with respect to shares of common stock we repurchased during the second quarter of fiscal 2022. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

Fiscal Period			Total Number of Shares Purchased 1						Average Price Paid Per Share						Total Number of Shares Purchased as Part of a Publicly Announced Program 1						Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
May 2, 2022 - May 29, 2022			457,400						$	122.30					457,400						$	1,012,987,000
May 30, 2022 - June 26, 2022			745,647						$	120.56					745,647						$	923,088,000
June 27, 2022 - July 31, 2022			984,990						$	121.33					984,990						$	803,576,000
Total			2,188,037						$	121.27					2,188,037						$	803,576,000

1 Excludes shares withheld for employee taxes upon vesting of stock-based awards.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

None.

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(a) Exhibits

Exhibit Number						Exhibit Description
31.1						Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2						Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1						Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*						The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted under Exhibit 101).

*			Filed herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WILLIAMS-SONOMA, INC.
By:						/s/ Julie Whalen
						Julie Whalen
						Duly Authorized Officer and Chief Financial Officer

Date: September 2, 2022