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: gross margin pressures, supply chain challenges; product, freight and distribution center costs; the macroeconomic environment; our operating model; our revenue growth; expanding our sales and operating margin; inflationary pressures; 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 fiscal year ended January 29, 2023, 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 nine brands – Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Williams Sonoma Home, Rejuvenation, Mark and Graham and GreenRow – 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 values-based culture and commitment to achieving our sustainability goals.

The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended October 29, 2023 (“third quarter of fiscal 2023”), as compared to the thirteen weeks ended October 30, 2022 (“third quarter of fiscal 2022”) and thirty-nine weeks ended October 29, 2023 (“first thirty-nine weeks of fiscal 2023”), as compared to the thirty-nine weeks ended October 30, 2022 (“first thirty-nine weeks of fiscal 2022”), 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 2023 Financial Results

Net revenues in the third quarter of fiscal 2023 decreased $338.9 million or 15.5%, with company comparable brand revenue ("company comp") decline of 14.6%. This was driven by lower consumer demand for high-ticket discretionary items, partially offset by relative strength in certain other categories, including kitchen electrics, textiles and seasonal offerings. Company comp decreased 6.5% on a two-year basis and increased 34.8% on a four-year basis.

In the third quarter of fiscal 2023, Pottery Barn, our largest brand, saw 16.6% comparable brand revenue ("brand comp") decline, 3.0% brand comp growth on a two-year basis and 43.0% brand comp growth on a four-year basis. The third quarter decline was driven by reduced furniture demand, partially offset by relative strength from our textile and seasonal decorating categories. The Pottery Barn Kids and Teen brands saw 6.9% brand comp decline in the third quarter of fiscal 2023, 11.7% brand comp decline on a two-year basis, and 29.0% brand comp growth on a four-year basis. The third quarter decline resulted from pressure in certain of our children's furniture categories, but saw strength from our dorm and baby offerings and new product collaborations.

West Elm saw 22.4% brand comp decline in the third quarter of fiscal 2023, 18.2% brand comp decline on a two-year basis, and 26.1% brand comp growth on a four-year basis. West Elm continued to be the brand most affected by the customer pull back in furniture as a result of the brand's high percentage of its assortment in the furniture category, but saw relative strength from new furniture forms and innovation in textiles.

The Williams Sonoma brand saw 1.9% brand comp decline in the third quarter of fiscal 2023, 3.4% brand comp decline on a two-year basis and 34.6% brand comp growth on a four-year basis. The third quarter decline resulted from our home business, partially offset by strength in the kitchen business driven by high-end electrics, particularly in espresso and coffee.

For the third quarter of fiscal 2023, diluted earnings per share was $3.66, compared to $3.72 in the third quarter of fiscal 2022.

As of October 29, 2023, we had $698.8 million in cash and cash equivalents and generated operating cash flow of $1.0 billion in the first thirty-nine weeks of fiscal 2023. 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 $134.8 million in capital expenditures in the first thirty-nine weeks of fiscal 2023, and to provide stockholder returns of $487.6 million in the first thirty-nine weeks of fiscal 2023 through stock repurchases and dividends.

Looking Ahead

As we look forward to the balance of the year, we believe our key differentiators, growth initiatives and unique operating model will set us apart from our competition and allow us to drive long-term growth and profitability. However, the current uncertain macroeconomic environment with the weak housing market, interest rates, layoffs and inflationary pressure may continue to impact our results in the near term. Additionally, we expect our exit and reduction-in-force initiatives to result in approximate pre-tax annualized savings of $42 million, primarily in selling, general and administrative ("SG&A") expenses. For information on risks, please see “Risk Factors” in Part II, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2023.

NET REVENUES

Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, retail stores and direct-mail catalogs, and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our business-to-business customers and franchisees, 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 2023 vs. Third Quarter of Fiscal 2022

Net revenues in the third quarter of fiscal 2023 decreased $338.9 million or 15.5%, with company comp decline of 14.6%. This was driven by lower consumer demand for high-ticket discretionary items, partially offset by relative strength in certain other categories, including kitchen electrics, textiles and seasonal offerings. Company comp decreased 6.5% on a two-year basis and increased 34.8% on a four-year basis.

First Thirty-nine Weeks of Fiscal 2023 vs. First Thirty-nine Weeks of Fiscal 2022

Net revenues for the first thirty-nine weeks of fiscal 2023 decreased by $749.6 million, or 12.0%, with company comp decline of 11.1%. This was driven by lower consumer demand for high-ticket discretionary items, partially offset by relative strength in certain other categories including kitchen electrics, textiles and seasonal offerings. Company comp decreased 1.5% on a two-year basis and increased 39.3% on a four-year basis.

Comparable Brand Revenue

Comparable brand revenue includes comparable e-commerce sales, including through our direct-mail catalog, and store sales, 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 days within the same fiscal month. Comparable stores that were temporarily closed during fiscal 2021 due to the pandemic were not excluded from the comparable brand revenue calculation. Outlet comparable store 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 for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.

			For the Thirteen Weeks Ended 1									For the Thirty-nine Weeks Ended 1
Comparable brand revenue growth (decline)			October 29, 2023			October 30, 2022						October 29, 2023			October 30, 2022
Pottery Barn			(16.6)		%	19.6		%				(9.7)		%	18.7		%
West Elm			(22.4)			4.2						(19.8)			7.3
Williams Sonoma			(1.9)			(1.5)						(2.3)			(1.1)
Pottery Barn Kids and Teen			(6.9)			(4.8)						(6.7)			(1.0)
Total 2			(14.6)		%	8.1		%				(11.1)		%	9.6		%
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 Count																														Average Leased Square Footage Per Store
			July 30, 2023						Openings						Closings						October 29, 2023						October 30, 2022						October 29, 2023						October 30, 2022
Pottery Barn			190						2						(1)						191						189						15,000						14,800
Williams Sonoma			164						1						(2)						163						175						6,900						6,800
West Elm			123						—						—						123						122						13,200						13,200
Pottery Barn Kids			46						—						—						46						52						7,800						7,700
Rejuvenation			9						1						—						10						9						8,200						9,400
Total			532						4						(3)						533						547						11,400						11,100
Store selling square footage at period-end																																	3,905,000						3,879,000
Store leased square footage at period-end																																	6,061,000						6,088,000

COST OF GOODS SOLD

			For the Thirteen Weeks Ended																								For the Thirty-nine Weeks Ended
(In thousands)			October 29, 2023						% Net Revenues						October 30, 2022						% Net Revenues						October 29, 2023						% Net Revenues						October 30, 2022						% Net Revenues
Cost of goods sold 1			$	1,031,290					55.6		%				$	1,282,048					58.5		%				$	3,216,729					58.8		%				$	3,553,455					57.1		%

1**Includes occupancy expenses of $200.4 million and $202.3 million for the third quarter of fiscal 2023 and the third quarter of fiscal 2022, respectively, and $606.3 million and $581.7 million for the first thirty-nine weeks of fiscal 2023 and the first thirty-nine weeks of fiscal 2022, 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 SG&A expenses.

Third Quarter of Fiscal 2023 vs. Third Quarter of Fiscal 2022

Cost of goods sold decreased $250.8 million, or 19.6%, compared to the third quarter of fiscal 2022. Cost of goods sold as a percentage of net revenues decreased to 55.6% from 58.5% in the third quarter of fiscal 2022. This decrease in rate was primarily driven by (i) improvement in input costs resulting from lower ocean freight, detention and demurrage, (ii) lower customer shipping and other inventory costs, including reductions in out-of-market shipments, multiple shipments, returns, replacements, damages, and accommodations and (iii) higher pricing power of our proprietary products and our focus on full-price selling, partially offset by (iv) deleveraged occupancy costs resulting from lower revenues.

First Thirty-nine Weeks of Fiscal 2023 vs. First Thirty-nine Weeks of Fiscal 2022

Cost of goods sold decreased $336.7 million, or 9.5%, compared to the first thirty-nine weeks of fiscal 2022. Cost of goods sold as a percentage of net revenues increased to 58.8% from 57.1% for the first thirty-nine weeks of fiscal 2022. This increase in rate was primarily driven by (i) higher input costs resulting from ocean freight, detention and demurrage in the first half of fiscal 2023, which improved in the third quarter of fiscal 2023 and (ii) higher occupancy costs resulting from incremental costs from our new distribution centers on the East and West Coasts to support our long-term growth, partially offset by (iii) higher pricing power of our proprietary products and our focus on full-price selling.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

			For the Thirteen Weeks Ended																								For the Thirty-nine Weeks Ended
(In thousands)			October 29, 2023						% Net Revenues						October 30, 2022						% Net Revenues						October 29, 2023						% Net Revenues						October 30, 2022						% Net Revenues
Selling, general and administrative expenses			$	507,283					27.4		%				$	570,893					26.0		%				$	1,468,884					26.8		%				$	1,639,248					26.3		%

SG&A expenses consists 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, impairment and other general expenses.

Third Quarter of Fiscal 2023 vs. Third Quarter of Fiscal 2022

SG&A expenses decreased $63.6 million, or 11.1%, compared to the third quarter of fiscal 2022. SG&A expenses as a percentage of net revenues increased to 27.4% from 26.0% in the third quarter of fiscal 2022. This increase in rate was primarily driven by (i) deleverage of employment costs due to a benefit of $7.2 million recorded in fiscal 2022 as a result of the forfeiture of certain stock-based awards, (ii) an increase of general expenses driven by timing of asset disposals and legal settlements and (iii) deleverage due to lower revenues, partially offset by (iv) managed variable employment costs and the cost savings from reduction-in-force actions taken in the first half of fiscal 2023 and (v) leverage of advertising expenses driven by efficient spend aligned with business trends.

First Thirty-nine Weeks of Fiscal 2023 vs. First Thirty-nine Weeks of Fiscal 2022

SG&A expenses decreased $170.4 million, or 10.4%, compared to the first thirty-nine weeks of fiscal 2022. SG&A expenses as a percentage of net revenues increased to 26.8% from 26.3% for the first thirty-nine weeks of fiscal 2022. This increase in rate was primarily driven by (i) exit and reduction-in-force initiatives in the first quarter of fiscal 2023 of $15.8 million and $8.3 million, respectively, totaling $24.1 million and (ii) deleverage due to lower revenues, partially offset by (iii) leverage of advertising expenses driven by efficient spend aligned with business trends.

INCOME TAXES

The effective tax rate was 25.8% for the first thirty-nine weeks of fiscal 2023 compared to 24.9% for the first thirty-nine weeks of fiscal 2022. The increase in the effective tax rate is primarily due to (i) less excess tax benefit from stock-based compensation in fiscal 2023 and (ii) the tax effect of earnings mix change between the two fiscal years, partially offset by (iii) the release of valuation allowance related to a state net operating loss carryforward and (iv) the tax effect of the change in permanent reinvestment assertion on Canada earnings in fiscal 2022. We expect our fiscal year 2023 effective tax rate to be approximately 26.0%.

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. We do not expect to be subject to the minimum tax for fiscal year 2023.

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 29, 2023, 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 2023, 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 29, 2023, we held $698.8 million in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts, and of which $70.6 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 up to $750 million of unsecured revolving credit.

During the thirteen and thirty-nine weeks ended October 29, 2023 and October 30, 2022, we had no borrowings under our Revolver. Additionally, as of October 29, 2023, 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 29, 2023, 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 for a total of $35 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 29, 2023, the aggregate amount outstanding under our letter of credit facilities was $1.2 million, which represents a future commitment to fund inventory purchases to which we had not taken legal title. On August 18, 2023, we renewed two of the letter of credit facilities totaling $30 million on substantially similar terms. The two letter of credit facilities mature on August 18, 2024, and the latest expiration date possible for future letters of credit issued under these facilities is January 15, 2025. One of the letter of credit facilities totaling $5 million matures on September 30, 2026, which is also the latest expiration date possible for future letters of credit issued under the facility.

Cash Flows from Operating Activities

For the first thirty-nine weeks of fiscal 2023, net cash provided by operating activities was $1.0 billion compared to $588.5 million for the first thirty-nine weeks of fiscal 2022. For the first thirty-nine weeks of fiscal 2023, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, accounts payable (as a result of ongoing working capital enhancements) and merchandise inventories (as a result of decreasing customer demand). Net cash provided by operating activities compared to the first thirty-nine weeks of fiscal 2022 increased primarily due to lower spending on merchandise inventories and an increase in accounts payable, partially offset by a decrease in net earnings adjusted for non-cash items.

Cash Flows from Investing Activities

For the first thirty-nine weeks of fiscal 2023, net cash used in investing activities was $134.4 million compared to $234.3 million for the first thirty-nine weeks of fiscal 2022, 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 2023, net cash used in financing activities was $538.7 million compared to $1.1 billion for the first thirty-nine weeks of fiscal 2022, primarily driven by repurchases of common stock and payment of dividends. Net cash used in financing activities for the first thirty-nine weeks of fiscal 2023 decreased compared to the first thirty-nine weeks of fiscal 2022, primarily due to a decrease 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 2023, 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 29, 2023.