Item 1. FINANCIAL STATEMENTS (UNAUDITED)

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

			For the Thirteen Weeks Ended												For the Thirty-nine Weeks Ended
(In thousands, except per share amounts)			October 30, 2022						October 31, 2021						October 30, 2022						October 31, 2021
Net revenues			$	2,192,574					$	2,047,539					$	6,221,338					$	5,744,907
Cost of goods sold			1,282,048						1,152,054						3,553,455						3,238,181
Gross profit			910,526						895,485						2,667,883						2,506,726
Selling, general and administrative expenses			570,893						565,218						1,639,248						1,578,182
Operating income			339,633						330,267						1,028,635						928,544
Interest (income) expense, net			(370)						121						(877)						1,954
Earnings before income taxes			340,003						330,146						1,029,512						926,590
Income taxes			88,280						80,622						256,601						203,194
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:
Basic			66,704						74,010						68,578						74,865
Diluted			67,617						75,943						69,782						76,975

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

			For the Thirteen Weeks Ended												For the Thirty-nine Weeks Ended
(In thousands)			October 30, 2022						October 31, 2021						October 30, 2022						October 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, 2022						January 30, 2022						October 31, 2021
ASSETS
Current assets
Cash and cash equivalents			$	113,058					$	850,338					$	656,898
Accounts receivable, net			125,842						131,683						139,511
Merchandise inventories, net			1,687,895						1,246,372						1,272,028
Prepaid expenses			104,208						69,252						85,433
Other current assets			29,729						26,249						22,852
Total current assets			2,060,732						2,323,894						2,176,722
Property and equipment, net			1,009,088						920,773						892,226
Operating lease right-of-use assets			1,277,064						1,132,764						1,159,315
Deferred income taxes, net			54,247						56,585						61,768
Goodwill			85,245						85,354						85,392
Other long-term assets, net			107,631						106,250						101,901
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 expenses			275,381						319,924						273,722
Gift card and other deferred revenue			488,771						447,770						431,446
Income taxes payable			45,879						79,554						38,320
Operating lease liabilities			220,012						217,409						218,348
Other current liabilities			103,821						94,517						91,418
Total current liabilities			1,854,720						1,771,686						1,691,625
Deferred lease incentives			13,918						16,360						17,268
Long-term operating lease liabilities			1,208,074						1,066,839						1,095,290
Other long-term liabilities			104,361						106,528						129,771
Total liabilities			3,181,073						2,961,413						2,933,954
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, respectively			666						720						734
Additional paid-in capital			553,698						600,942						585,449
Retained earnings			877,157						1,074,084						963,840
Accumulated other comprehensive loss			(17,848)						(10,828)						(5,942)
Treasury stock, at cost: 1, 4 and 4 shares as of October 30, 2022, January 30, 2022 and October 31, 2021, respectively			(739)						(711)						(711)
Total stockholders’ equity			1,412,934						1,664,207						1,543,370
Total liabilities and stockholders’ equity			$	4,594,007					$	4,625,620					$	4,477,324

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

			Common Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Treasury Stock						Total Stockholders’ Equity
(In thousands)			Shares						Amount
Balance at January 30, 2022			71,982						$	720					$	600,942					$	1,074,084					$	(10,828)					$	(711)					$	1,664,207
Net earnings			—						—						—						254,113						—						—						254,113
Foreign currency translation adjustments			—						—						—						—						(1,514)						—						(1,514)
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						93						—						93
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						(18)						—						(18)
Conversion/release of stock-based awards 1			617						6						(78,142)						—						—						(372)						(78,508)
Repurchases of common stock			(3,380)						(33)						(18,590)						(482,452)						—						—						(501,075)
Reissuance of treasury stock under stock-based compensation plans 1			—						—						(344)						—						—						344						—
Stock-based compensation expense			—						—						28,339						—						—						—						28,339
Dividends declared			—						—						—						(55,893)						—						—						(55,893)
Balance at May 1, 2022			69,219						$	693					$	532,205					$	789,852					$	(12,267)					$	(739)					$	1,309,744
Net earnings			—						—						—						267,075						—						—						267,075
Foreign currency translation adjustments			—						—						—						—						(1,385)						—						(1,385)
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						26						—						26
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						(5)						—						(5)
Conversion/release of stock-based awards 1			26						—						(767)						—						—						—						(767)
Repurchases of common stock			(2,188)						(22)						(12,519)						(252,808)						—						—						(265,349)
Stock-based compensation expense			—						—						22,976						—						—						—						22,976
Dividends declared			—						—						—						(54,036)						—						—						(54,036)
Balance at July 31, 2022			67,057						$	671					$	541,895					$	750,083					$	(13,631)					$	(739)					$	1,278,279
Net earnings			—						—						—						251,723						—						—						251,723
Foreign currency translation adjustments			—						—						—						—						(5,158)						—						(5,158)
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						1,069						—						1,069
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						(128)						—						(128)
Conversion/release of stock-based awards1			13						—						(1,156)						—						—						—						(1,156)
Repurchases of common stock			(514)						(5)						(3,010)						(71,516)						—						—						(74,531)
Stock-based compensation expense			—						—						15,969						—						—						—						15,969
Dividends declared			—						—						—						(53,133)						—						—						(53,133)
Balance at October 30, 2022			66,556						$	666					$	553,698					$	877,157					$	(17,848)					$	(739)					$	1,412,934

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

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

			Common Stock												Additional Paid-in Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Treasury Stock						Total Stockholders’ Equity
(In thousands)			Shares						Amount
Balance at January 31, 2021			76,340						$	764					$	638,375					$	1,019,762					$	(7,117)					$	(599)					$	1,651,185
Net earnings			—						—						—						227,802						—						—						227,802
Foreign currency translation adjustments			—						—						—						—						3,700						—						3,700
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						(665)						—						(665)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						153						—						153
Conversion/release of stock-based awards 1			686						7						(97,958)						—						—						(500)						(98,451)
Repurchases of common stock			(1,791)						(18)						(9,239)						(306,272)						—						—						(315,529)
Reissuance of treasury stock under stock-based compensation plans 1			—						—						(344)						(44)						—						388						—
Stock-based compensation expense			—						—						25,471						—						—						—						25,471
Dividends declared			—						—						—						(46,370)						—						—						(46,370)
Balance at May 2, 2021			75,235						$	753					$	556,305					$	894,878					$	(3,929)					$	(711)					$	1,447,296
Net earnings			—						—						—						246,070						—						—						246,070
Foreign currency translation adjustments			—						—						—						—						(3,522)						—						(3,522)
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						65						—						65
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						337						—						337
Conversion/release of stock-based awards 1			25						—						(1,709)						—						—						—						(1,709)
Repurchases of common stock			(834)						(8)						(4,358)						(131,493)						—						—						(135,859)
Stock-based compensation expense			—						—						19,496						—						—						—						19,496
Dividends declared			—						—						—						(45,455)						—						—						(45,455)
Balance at August 1, 2021			74,426						$	745					$	569,734					$	964,000					$	(7,049)					$	(711)					$	1,526,719
Net earnings			—						—						—						249,524						—						—						249,524
Foreign currency translation adjustments			—						—						—						—						792						—						792
Change in fair value of derivative financial instruments, net of tax			—						—						—						—						(54)						—						(54)
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax			—						—						—						—						369						—						369
Conversion/release of stock-based awards1			20						—						(2,322)						—						—						—						(2,322)
Repurchases of common stock			(1,120)						(11)						(5,921)						(195,379)						—						—						(201,311)
Stock-based compensation expense			—						—						23,958						—						—						—						23,958
Dividends declared			—						—						—						(54,305)						—						—						(54,305)
Balance at October 31, 2021			73,326						$	734					$	585,449					$	963,840					$	(5,942)					$	(711)					$	1,543,370

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

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			For the Thirty-nine Weeks Ended
(In thousands)			October 30, 2022						October 31, 2021
Cash flows from operating activities:
Net earnings			$	772,911					$	723,396
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			157,410						145,897
Loss on disposal/impairment of assets			5,738						887
Amortization of deferred lease incentives			(2,442)						(3,345)
Non-cash lease expense			169,602						159,757
Deferred income taxes			(10,494)						(11,440)
Tax benefit related to stock-based awards			11,172						10,838
Stock-based compensation expense			67,797						70,566
Other			272						4
Changes in:
Accounts receivable			5,288						4,941
Merchandise inventories			(443,812)						(264,094)
Prepaid expenses and other assets			(39,737)						(10,078)
Accounts payable			98,103						74,181
Accrued expenses and other liabilities			(34,157)						24,400
Gift card and other deferred revenue			42,005						58,189
Operating lease liabilities			(177,855)						(164,569)
Income taxes payable			(33,276)						(31,191)
Net cash provided by operating activities			588,525						788,339
Cash flows from investing activities:
Purchases of property and equipment			(234,378)						(141,010)
Other			100						97
Net cash used in investing activities			(234,278)						(140,913)
Cash flows from financing activities:
Repurchases of common stock			(840,955)						(652,699)
Payment of dividends			(165,254)						(135,201)
Tax withholdings related to stock-based awards			(80,431)						(102,482)
Repayment of long-term debt			—						(300,000)
Debt issuance costs			—						(777)
Net cash used in financing activities			(1,086,640)						(1,191,159)
Effect of exchange rates on cash and cash equivalents			(4,887)						294
Net decrease in cash and cash equivalents			(737,280)						(543,439)
Cash and cash equivalents at beginning of period			850,338						1,200,337
Cash and cash equivalents at end of period			$	113,058					$	656,898

See Notes to Condensed Consolidated Financial Statements.

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WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of October 30, 2022 and October 31, 2021, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks then ended and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks then ended, have been prepared by us, and have not been audited. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. Intercompany transactions and accounts have been eliminated in our consolidation. The balance sheet as of January 30, 2022, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

The results of operations for the thirteen and thirty-nine weeks ended October 30, 2022 are not necessarily indicative of the operating results of the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

During fiscal 2021 and continuing through the first thirty-nine weeks of fiscal 2022, global supply chain disruptions, including COVID-19 related factory closures and increased port congestion, caused delays in inventory receipts and backorder delays, increased raw material costs, and higher shipping-related charges. We expect these supply chain challenges to continue through the first half of fiscal 2023, which could negatively impact our business.

New Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. We may elect to apply the provisions of the new standard prospectively through December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. We have yet to elect an adoption date, but do not believe the adoption would have a material impact on our financial condition, results of operations or cash flows.

NOTE B. BORROWING ARRANGEMENTS

Credit Facility

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 Revolver matures on September 30, 2026, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may elect to extend the maturity date, subject to lender approval.

The interest rate applicable to our Revolver is variable and may be elected by us as: (i) the LIBOR (or future alternative rate) plus an applicable margin based on our leverage ratio ranging, from 0.91% to 1.775% or (ii) a base rate as defined in our Credit Facility, plus an applicable margin based on our leverage ratio, ranging from 0% to 0.775%.

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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.

NOTE C. STOCK-BASED COMPENSATION

Equity Award Programs

Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights, restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 42.7 million shares. As of October 30, 2022, there were approximately 6.8 million shares available for future grant. Awards may be granted under our Plan to officers, employees and non-employee members of the Board of Directors of the Company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.

Stock Awards

Annual grants of stock awards are limited to one million shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses which cover events including, but not limited to, retirement, disability, death, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member). Non-employee directors may also elect, on terms prescribed by the Company, to receive all of their annual cash compensation to be earned in respect of the applicable fiscal year (or the last two quarters thereof in the case of fiscal 2021) either in the form of (i) fully vested stock units or (ii) fully vested deferred stock units.

Stock-Based Compensation Expense

During the thirteen and thirty-nine weeks ended October 30, 2022, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $16.1 million and $67.8 million, respectively. During the thirteen and thirty-nine weeks ended October 31, 2021, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $24.3 million and $70.6 million, respectively.

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NOTE D. EARNINGS PER SHARE

Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards to the extent their inclusion would be dilutive.

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

(In thousands, except per share amounts)			Net Earnings						Weighted Average Shares						Earnings Per Share
Thirteen weeks ended October 30, 2022
Basic			$	251,723					66,704						$	3.77
Effect of dilutive stock-based awards									913
Diluted			$	251,723					67,617						$	3.72
Thirteen weeks ended October 31, 2021
Basic			$	249,524					74,010						$	3.37
Effect of dilutive stock-based awards									1,933
Diluted			$	249,524					75,943						$	3.29
Thirty-nine weeks ended October 30, 2022
Basic			$	772,911					68,578						$	11.27
Effect of dilutive stock-based awards									1,204
Diluted			$	772,911					69,782						$	11.08
Thirty-nine weeks ended October 31, 2021
Basic			$	723,396					74,865						$	9.66
Effect of dilutive stock-based awards									2,110
Diluted			$	723,396					76,975						$	9.40

The effect of anti-dilutive stock-based awards was not material for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.

NOTE E. SEGMENT REPORTING

We identify our operating segments according to how our business activities are managed and evaluated. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.

The following table summarizes our net revenues by brand for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.

			For the Thirteen Weeks Ended 1												For the Thirty-nine Weeks Ended 1
(In thousands)			October 30, 2022						October 31, 2021						October 30, 2022						October 31, 2021
Pottery Barn			$	935,045					$	788,732					$	2,588,798					$	2,200,110
West Elm			599,802						579,668						1,744,013						1,636,621
Williams Sonoma			261,820						272,361						762,651						793,423
Pottery Barn Kids and Teen			299,112						316,417						810,243						826,421
Other 2			96,795						90,361						315,633						288,332
Total 3			$	2,192,574					$	2,047,539					$	6,221,338					$	5,744,907
1**Includes business-to-business net revenues within each brand.
2**Primarily consists of net revenues from Rejuvenation, our international franchise operations and Mark and Graham.
3**Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $94.7 million and $93.1 million for the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively, and approximately $303.0 million and $309.1 million for the thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively.

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Long-lived assets by geographic location are as follows:

			As of
(In thousands)			October 30, 2022 1						October 31, 2021 1
U.S.			$	2,425,600					$	2,154,392
International			107,675						146,210
Total			$	2,533,275					$	2,300,602

1**Includes total goodwill, deferred tax assets and intangibles of $150.0 million and $157.2 million as of October 30, 2022 and October 31, 2021, respectively, of which $137.7 million and $145.7 million, respectively, is related to the U.S.

NOTE F. COMMITMENTS AND CONTINGENCIES

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

NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS

Stock Repurchase Program

During the thirteen weeks ended October 30, 2022, we repurchased 513,940 shares of our common stock at an average cost of $145.02 per share for a total cost of $74.6 million. During the thirty-nine weeks ended October 30, 2022, we repurchased 6,081,708 shares of our common stock at an average cost of $138.28 per share for a total cost of $841.0 million. As of October 30, 2022, there was $729.0 million remaining under our current stock repurchase program. During the thirteen weeks ended October 31, 2021, we repurchased 1,119,748 shares of our common stock at an average cost of $179.78 per share for a total cost of $201.3 million. During the thirty-nine weeks ended October 31, 2021, we repurchased 3,744,767 shares of our common stock at an average cost of $174.30 per share for a total cost of $652.7 million.

Stock repurchased by the Company is typically cancelled after purchasing. However, we hold some shares in treasury to satisfy future stock-based award settlements in certain foreign jurisdictions. We held treasury stock of $0.7 million as of October 30, 2022 and October 31, 2021.

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.

Dividends

We declared cash dividends of $0.78 and $0.71 per common share during the thirteen weeks ended October 30, 2022 and October 31, 2021, respectively. We declared cash dividends of $2.34 and $1.89 per common share during the thirty-nine weeks ended October 30, 2022 and October 31, 2021, respectively. Our quarterly cash dividend may be limited or terminated at any time.

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NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS

We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with the derivative financial instruments are measured at fair value and recorded in either other current assets or other current liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with ASC 815, Derivatives and Hedging.

Cash Flow Hedges

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

Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of October 30, 2022, our reclassification of pre-tax gains or losses from OCI to cost of goods sold over the next 12 months is not expected to be material.

We had foreign currency forward contracts outstanding (in U.S. dollars) with notional amounts of $19.5 million as of October 30, 2022 and October 31, 2021.

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.

The effect of derivative instruments in our Condensed Consolidated Financial Statements from gains or losses recognized in income was not material for the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.

The fair values of our derivative financial instruments are presented in other current assets and/or other current liabilities in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.

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

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NOTE I. FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

Foreign Currency Derivatives and Hedging Instruments

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

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

Long-lived Assets

We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We measure right-of-use assets on a nonrecurring basis using Level 2 inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk.

The significant unobservable inputs used in the fair value measurement of our store assets are sales growth/decline, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation and the overall economics of the retail industry. Significant fluctuations in any of these inputs individually could significantly impact our measurement of fair value.

During the thirteen weeks ended October 30, 2022, no impairment charges were recognized. During the thirty-nine weeks ended October 30, 2022, we recognized impairment charges of $2.6 million related to the impairment of property and equipment and $2.6 million related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from underperforming stores in Australia. During the thirteen and thirty-nine weeks ended October 31, 2021, no impairment charges were recognized.

There were no transfers in and out of Level 3 categories during the thirteen and thirty-nine weeks ended October 30, 2022 and October 31, 2021.

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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(In thousands)			Foreign Currency Translation						Cash Flow Hedges						Accumulated Other Comprehensive Income (Loss)
Balance at January 30, 2022			$	(10,886)					$	58					$	(10,828)
Foreign currency translation adjustments			(1,514)						—						(1,514)
Change in fair value of derivative financial instruments			—						93						93
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1			—						(18)						(18)
Other comprehensive income (loss)			(1,514)						75						(1,439)
Balance at May 1, 2022			$	(12,400)					$	133					$	(12,267)
Foreign currency translation adjustments			(1,385)						—						(1,385)
Change in fair value of derivative financial instruments			—						26						26
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1			—						(5)						(5)
Other comprehensive income (loss)			(1,385)						21						(1,364)
Balance at July 31, 2022			$	(13,785)					$	154					$	(13,631)
Foreign currency translation adjustments			(5,158)						—						(5,158)
Change in fair value of derivative financial instruments			—						1,069						1,069
Reclassification adjustment for realized (gain) loss on derivative financial instruments1			—						(128)						(128)
Other comprehensive income (loss)			(5,158)						941						(4,217)
Balance at October 30, 2022			$	(18,943)					$	1,095					$	(17,848)
Balance at January 31, 2021			$	(6,398)					$	(719)					$	(7,117)
Foreign currency translation adjustments			3,700						—						3,700
Change in fair value of derivative financial instruments			—						(665)						(665)
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1			—						153						153
Other comprehensive income (loss)			3,700						(512)						3,188
Balance at May 2, 2021			$	(2,698)					$	(1,231)					$	(3,929)
Foreign currency translation adjustments			(3,522)						—						(3,522)
Change in fair value of derivative financial instruments			—						65						65
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1			—						337						337
Other comprehensive income (loss)			(3,522)						402						(3,120)
Balance at August 1, 2021			$	(6,220)					$	(829)					$	(7,049)
Foreign currency translation adjustments			792						—						792
Change in fair value of derivative financial instruments			—						(54)						(54)
Reclassification adjustment for realized (gain) loss on derivative financial instruments1			—						369						369
Other comprehensive income (loss)			792						315						1,107
Balance at October 31, 2021			$	(5,428)					$	(514)					$	(5,942)

1**Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income.

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NOTE K. REVENUE

Merchandise Sales

The majority of our revenues are generated from 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. The remainder of our revenues are primarily generated from sales to our franchisees and wholesale transactions, incentives received from credit card issuers in connection with our private label and co-branded credit cards and revenue from estimated unredeemed stored-value cards (“breakage”).

Revenues from sales of merchandise are recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the customer. For merchandise delivered to the customer, control is transferred either when delivery has been completed, or when we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.

Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of October 30, 2022 and October 31, 2021, we recorded a liability for expected sales returns of approximately $52.3 million and $41.0 million, respectively, within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $15.8 million and $12.1 million, respectively, within other current assets in our Condensed Consolidated Balance Sheet.

See Note E for the disclosure of our net revenues by operating segment.

Gift Card and Other Deferred Revenue

We defer revenue and record a liability when cash payments are received in advance of satisfying performance obligations, primarily associated with our merchandise sales, stored-value cards, customer loyalty programs, and incentives received from credit card issuers.

We issue stored-value cards that may be redeemed on future merchandise purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Breakage is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately four years, the majority of which is recognized within one year of the card issuance. Breakage revenue is not material to our Condensed Consolidated Financial Statements.

We have customer loyalty programs, which allow members to earn points for each qualifying purchase. Customers can earn points through spend on both our private label and co-branded credit cards, or can earn points as part of our non-credit card related loyalty program. Points earned through both loyalty programs enable members to receive certificates that may be redeemed on future merchandise purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points or certificates earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be issued and redeemed, based on historical patterns. This measurement is applied to our portfolio of performance obligations for points or certificates earned, as all obligations have similar economic characteristics. We believe the impact to our Condensed Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within six months from issuance.

We enter into agreements with credit card issuers in connection with our private label and co-branded credit cards, whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to customers. These separate non-loyalty program related services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term.

As of October 30, 2022 and October 31, 2021, we had recorded $492.0 million and $435.2 million, respectively, for gift card and other deferred revenue in our Condensed Consolidated Balance Sheets, substantially all of which is expected to be recognized into revenue within the next 12 months.

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