Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS

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.

Table of Contents

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.

Table of Contents

			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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents