Williams-Sonoma 10-Q 2022-10-30

Filed 2022-12-02. 8 sections, 111K characters. Original on sec.gov · Markdown · JSON

Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 30, 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

WILLIAMS-SONOMA, INC.

(Exact name of registrant as specified in its charter)

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)

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 shareWSMNew 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 November 27, 2022, 66,567,436 shares of the registrant’s Common Stock were outstanding.

Table of Contents

WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 30, 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 Operations14
Item 3.Quantitative and Qualitative Disclosures About Market Risk20
Item 4.Controls and Procedures20
PART II. OTHER INFORMATION
Item 1.Legal Proceedings21
Item 1A.Risk Factors21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds21
Item 3.Defaults Upon Senior Securities21
Item 4.Mine Safety Disclosures21
Item 5.Other Information21
Item 6.Exhibits22

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Item 1. FINANCIAL STATEMENTS (UNAUDITED)

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

For the Thirteen Weeks EndedFor the Thirty-nine Weeks Ended
(In thousands, except per share amounts)October 30, 2022October 31, 2021October 30, 2022October 31, 2021
Net revenues$2,192,574$2,047,539$6,221,338$5,744,907
Cost of goods sold1,282,0481,152,0543,553,4553,238,181
Gross profit910,526895,4852,667,8832,506,726
Selling, general and administrative expenses570,893565,2181,639,2481,578,182
Operating income339,633330,2671,028,635928,544
Interest (income) expense, net(370)121(877)1,954
Earnings before income taxes340,003330,1461,029,512926,590
Income taxes88,28080,622256,601203,194
Net earnings$251,723$249,524$772,911$723,396
Basic earnings per share$3.77$3.37$11.27$9.66
Diluted earnings per share$3.72$3.29$11.08$9.40
Shares used in calculation of earnings per share:
Basic66,70474,01068,57874,865
Diluted67,61775,94369,78276,975

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

For the Thirteen Weeks EndedFor the Thirty-nine Weeks Ended
(In thousands)October 30, 2022October 31, 2021October 30, 2022October 31, 2021
Net earnings$251,723$249,524$772,911$723,396
Other comprehensive income (loss):
Foreign currency translation adjustments(5,158)792(8,057)970
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $378, $(19), $420, and $(235)1,069(54)1,188(654)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $45, $(131), $53, and $(312)(128)369(151)859
Comprehensive income$247,506$250,631$765,891$724,571

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)October 30, 2022January 30, 2022October 31, 2021
ASSETS
Current assets
Cash and cash equivalents$113,058$850,338$656,898
Accounts receivable, net125,842131,683139,511
Merchandise inventories, net1,687,8951,246,3721,272,028
Prepaid expenses104,20869,25285,433
Other current assets29,72926,24922,852
Total current assets2,060,7322,323,8942,176,722
Property and equipment, net1,009,088920,773892,226
Operating lease right-of-use assets1,277,0641,132,7641,159,315
Deferred income taxes, net54,24756,58561,768
Goodwill85,24585,35485,392
Other long-term assets, net107,631106,250101,901
Total assets$4,594,007$4,625,620$4,477,324
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$720,856$612,512$638,371
Accrued expenses275,381319,924273,722
Gift card and other deferred revenue488,771447,770431,446
Income taxes payable45,87979,55438,320
Operating lease liabilities220,012217,409218,348
Other current liabilities103,82194,51791,418
Total current liabilities1,854,7201,771,6861,691,625
Deferred lease incentives13,91816,36017,268
Long-term operating lease liabilities1,208,0741,066,8391,095,290
Other long-term liabilities104,361106,528129,771
Total liabilities3,181,0732,961,4132,933,954
Stockholders’ equity
Preferred stock: $0.01 par value; 7,500 shares authorized; none issued———
Common stock: $0.01 par value; 253,125 shares authorized; 66,556, 71,982 and 73,326 shares issued and outstanding at October 30, 2022, January 30, 2022 and October 31, 2021, respectively666720734
Additional paid-in capital553,698600,942585,449
Retained earnings877,

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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 October 30, 2022 (“third quarter of fiscal 2022”), as compared to the thirteen weeks ended October 31, 2021 (“third quarter of fiscal 2021”) and the thirty-nine weeks ended October 30, 2022 (“first thirty-nine weeks of fiscal 2022”), as compared to the thirty-nine weeks ended October 31, 2021 (“first thirty-nine weeks 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.

Third Quarter of Fiscal 2022 Financial Results

Net revenues in the third quarter of fiscal 2022 increased by $145.0 million or 7.1%, compared to the third quarter of fiscal 2021, with comparable brand revenue growth of 8.1%. This was driven by performance in both retail and e-commerce, primarily due to an increase in furniture sales, and strong backorder fulfillment. On a two-year basis, comparable brand revenues increased 25.0%.

Pottery Barn, our largest brand, delivered 19.6% comparable brand revenue growth during the quarter, and 35.5% comparable brand revenue growth on a two-year basis, driven by our high-quality proprietary furniture business. In West Elm, comparable brand revenue growth was 4.2%, on top of 22.5% growth last year, resulting in a 26.7% comparable brand revenue growth on a two-year basis. Growth was driven by improved in-stock positions. The Williams Sonoma brand and Pottery Barn Kids and Teen brands saw comparable brand revenue declines during the quarter of 1.5% and 4.8%, respectively, as these brands continue recovery in their in-stock inventory position.

For the third quarter of fiscal 2022, diluted earnings per share was $3.72, compared to $3.29 in the third quarter of fiscal 2021 (which included a $0.03 impact related to acquisition-related compensation expense and amortization of acquired intangibles of Outward, Inc.).

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As of October 30, 2022, we had $113.1 million in cash and generated operating cash flow of $588.5 million in the first thirty-nine weeks of fiscal 2022. In addition to our cash balance, we also ended the quarter with no outstanding borrowings under our revolving line of credit. Our liquidity position allowed us to fund the operations of the business by investing $234.4 million in capital expenditures in the first thirty-nine weeks of fiscal 2022, and to provide stockholder returns of $1.0 billion in the first thirty-nine weeks 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, the current macroeconomic environment is uncertain and 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 to negatively impact our inventory levels through 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.

Third Quarter of Fiscal 2022 vs. Third Quarter of Fiscal 2021

Net revenues in the third quarter of fiscal 2022 increased by $145.0 million or 7.1%, compared to the third quarter of fiscal 2021, with comparable brand revenue growth of 8.1%. This was driven by performance in both retail and e-commerce, primarily due to an increase in furniture sales, and strong backorder fulfillment. On a two-year basis, comparable brand revenues increased 25.0%.

First Thirty-nine Weeks of Fiscal 2022 vs. First Thirty-nine Weeks of Fiscal 2021

Net revenues for the first thirty-nine weeks of fiscal 2022 increased by $476.4 million, or 8.3%, compared to the first thirty-nine weeks of fiscal 2021, with comparable brand revenue growth of 9.6%. This was driven by strength in both retail and e-commerce, primarily due to an increase in furniture sales, and strong backorder fulfillment. On a two-year basis, comparable brand revenues increased 37.3%.

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. Business-to-business revenues are included in comparable brand revenue for each of our 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 1For the Thirty-nine Weeks Ended 1
Comparable brand revenue growth (decline)October 30, 2022October 31, 2021October 30, 2022October 31, 2021
Pottery Barn19.6%15.9%18.7%27.5%
West Elm4.222.57.339.5
Williams Sonoma(1.5)7.6(1.1)15.1
Pottery Barn Kids and Teen(4.8)16.9(1.0)20.2
Total 28.1%16.9%9.6%27.7%
1 Comparable brand revenue includes business-to-business revenues within each brand.
2 Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.

STORE DATA

Store CountAverage Leased Square Footage Per Store
July 31, 2022OpeningsClosingsOctober 30, 2022October 31, 2021October 30, 2022October 31, 2021
Pottery Barn1892(2)18919514,80014,500
Williams Sonoma175——1751946,8006,800
West Elm1212(1)12212113,20013,100
Pottery Barn Kids52——52577,7007,800
Rejuvenation9——9109,4008,700
Total5464(3)54757711,10010,900
Store selling square footage at period-end3,879,0003,978,000
Store leased square footage at period-end6,088,0006,263,000

COST OF GOODS SOLD

For the Thirteen Weeks EndedFor the Thirty-nine Weeks Ended
(In thousands)October 30, 2022% Net RevenuesOctober 31, 2021% Net RevenuesOctober 30, 2022% Net RevenuesOctober 31, 2021% Net Revenues
Cost of goods sold 1$1,282,04858.5%$1,152,05456.3%$3,553,45557.1%$3,238,18156.4%

1**Includes total occupancy expenses of $202.3 million and $183.1 million for the third quarter of fiscal 2022 and the third quarter of fiscal 2021, respectively, and $581.7 million and $534.8 million for the first thirty-nine weeks of fiscal 2022 and the first thirty-nine weeks 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.

Third Quarter of Fiscal 2022 vs. Third Quarter of Fiscal 2021

Cost of goods sold increased $130.0 million, or 11.3%, in the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. Cost of goods sold as a percentage of net revenues increased to 58.5% in the third quarter of fiscal 2022 from 56.3% in the third quarter of fiscal 2021. This increase was primarily driven by higher shipping costs attributable to increased furniture mix, higher backorder fulfillment and incremental freight costs, including out-of-market and redundant shipping costs as a result of making multiple deliveries to the same customer. Our merchandise margins were flat in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021.

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First Thirty-nine Weeks of Fiscal 2022 vs. First Thirty-nine Weeks of Fiscal 2021

Cost of goods sold increased by $315.3 million, or 9.7%, for the first thirty-nine weeks of fiscal 2022, compared to the first thirty-nine weeks of fiscal 2021. Cost of goods sold as a percentage of net revenues increased to 57.1% for the first thirty-nine weeks of fiscal 2022 from 56.4% for the first thirty-nine weeks of fiscal 2021. This increase was primarily driven by higher shipping costs attributable to increased furniture mix, higher backorder fulfillment and incremental freight costs, partially offset by merchandise margin expansion.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the Thirteen Weeks EndedFor the Thirty-nine Weeks Ended
(In thousands)October 30, 2022% Net RevenuesOctober 31, 2021% Net RevenuesOctober 30, 2022% Net RevenuesOctober 31, 2021% Net Revenues
Selling, general and administrative expenses$570,89326.0%$565,21827.6%$1,639,24826.3%$1,578,18227.5%

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.

Third Quarter of Fiscal 2022 vs. Third Quarter of Fiscal 2021

Selling, general and administrative expenses increased $5.7 million, or 1.0%, in the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.0% in the third quarter of fiscal 2022 from 27.6% in the third quarter 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. In the third quarter of fiscal 2022, we recorded a benefit of $7.2 million as a result of the forfeiture of certain stock-based awards.

First Thirty-nine Weeks of Fiscal 2022 vs. First Thirty-nine Weeks of Fiscal 2021

Selling, general and administrative expenses increased by $61.1 million, or 3.9%, for the first thirty-nine weeks of fiscal 2022, compared to the first thirty-nine weeks of fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 26.3% for the first thirty-nine weeks of fiscal 2022 from 27.5% for the first thirty-nine weeks 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 24.9% for the first thirty-nine weeks of fiscal 2022 compared to 21.9% for the first thirty-nine weeks 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 statutes of limitation related to 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, enacted on August 16, 2022, 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 in the third quarter of fiscal 2022, 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, the payment of income taxes, property and equipment purchases, rental payments on our leases, dividend payments and stock repurchases.

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 capital expenditures, dividends, stock repurchases 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 October 30, 2022, we held $113.1 million in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts, and of which $78.3 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 thirty-nine weeks ended October 30, 2022 and October 31, 2021, we had no borrowings under our Revolver. Additionally, as of October 30, 2022, issued but undrawn standby letters of credit of $11.1 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 October 30, 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 October 30, 2022, the aggregate amount outstanding under our letter of credit facilities was $3.4 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 thirty-nine weeks of fiscal 2022, net cash provided by operating activities was $588.5 million compared to $788.3 million for the first thirty-nine weeks of fiscal 2021. For the first thirty-nine weeks of fiscal 2022, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, partially offset by higher spending on merchandise inventories (as a result of our efforts to improve our in-stock position). Net cash provided by operating activities for the first thirty-nine weeks of fiscal 2022 decreased compared to the first thirty-nine weeks of fiscal 2021, primarily due to higher spending on merchandise inventories, partially offset by an increase in net earnings adjusted for non-cash items.

Cash Flows from Investing Activities

For the first thirty-nine weeks of fiscal 2022, net cash used in investing activities was $234.3 million compared to $140.9 million for the first thirty-nine weeks 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 thirty-nine weeks of fiscal 2022, net cash used in financing activities was $1.1 billion compared to $1.2 billion for the first thirty-nine weeks of fiscal 2021, primarily driven by repurchases of common stock. Net cash used in financing activities for the first thirty-nine weeks of fiscal 2022 decreased compared to the first thirty-nine weeks of fiscal 2021, primarily due to the repayment of debt in the first quarter of fiscal 2021 that did not recur in fiscal 2022, partially offset by an increase in repurchases of common stock.

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 third 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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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 third 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 October 30, 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 third quarter of fiscal 2022 or the third 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 third 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).

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of October 30, 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 third 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.

Item 1A. RISK FACTORS

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 October 30, 2022 with respect to shares of common stock we repurchased during the third 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 PeriodTotal Number of Shares Purchased 1Average Price Paid Per ShareTotal Number of Shares Purchased as Part of a Publicly Announced Program 1Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
August 1, 2022 - August 28, 2022345,800$156.03345,800$749,620,000
August 29, 2022 - September 25, 202213,340$156.2113,340$747,536,000
September 26, 2022 - October 30, 2022154,800$119.45154,800$729,044,000
Total513,940$145.02513,940$729,044,000

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.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS

(a) Exhibits

Exhibit NumberExhibit Description
31.1Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1Certification 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
32.2Certification 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 October 30, 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/ Jeffrey E. Howie
Jeffrey E. Howie
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By:/s/ Jeremy Brooks
Jeremy Brooks
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)

Date: December 2, 2022