1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 4, 1997. [ ] 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 000-12704 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) California 94-2203880 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 3250 Van Ness Avenue, San Francisco, CA 94109 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (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. Indicate by check X 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 X No ----- ----- As of June 3, 1997, 25,568,440 shares of the Registrant's Common Stock were outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 4, 1997 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE ---- <S> <C> <C> Item 1. Financial Statements (1) Condensed Consolidated Balance Sheets May 4, 1997, February 2, 1997, and April 28, 1996 Condensed Consolidated Statements of Operations Thirteen weeks ended May 4, 1997, and April 28, 1996 Condensed Consolidated Statements of Cash Flows Thirteen weeks ended May 4, 1997, and April 28, 1996 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (6) PART II. OTHER INFORMATION Item 1. Legal Proceedings (10) Item 6. Exhibits and Reports on Form 8-K (10) </TABLE>
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> May 4, February 2, April 28, 1997 1997 1996 -------- -------- -------- ASSETS Current assets: <S> <C> <C> <C> Cash and cash equivalents $ 26,664 $ 78,802 $ 2,930 Accounts receivable (net) 14,625 11,918 13,824 Merchandise inventories 128,935 110,702 113,440 Prepaid expenses and other assets 9,952 8,674 11,576 Prepaid catalog expenses 8,842 11,925 10,873 Deferred income taxes 4,028 4,028 139 -------- -------- -------- Total current assets 193,046 226,049 152,782 Property and equipment (net) 173,992 172,093 154,378 Investments and other assets (net) 6,102 5,824 7,517 Deferred income taxes 451 451 4,040 -------- -------- -------- $373,591 $404,417 $318,717 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 49,404 $ 64,409 $ 42,269 Accrued expenses 10,993 12,514 7,095 Accrued salaries and benefits 13,060 16,116 9,013 Customer deposits 12,861 13,801 9,034 Income taxes payable 1,765 15,715 -- Line of credit -- -- 10,900 Current portion of long-term obligations 125 125 125 Other liabilities 6,496 6,801 3,543 -------- -------- -------- Total current liabilities 94,704 129,481 81,979 Deferred lease credits and other liabilities 41,592 39,579 30,580 Long term debt 89,566 89,319 86,806 Shareholders' equity 147,729 146,038 119,352 -------- -------- -------- $373,591 $404,417 $318,717 ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements.
4 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended May 4, April 28, 1997 1996 --------- --------- <S> <C> <C> Net sales $ 176,535 $ 157,396 Costs and expenses: Cost of goods sold and occupancy 110,027 102,775 Selling, general and administrative 63,342 57,180 --------- --------- Total costs and expenses 173,369 159,955 --------- --------- Earnings (loss) from operations 3,166 (2,559) Interest expense (net) 774 1,541 --------- --------- Earnings (loss) before income 2,392 (4,100) taxes Income taxes (benefit) 1,004 (1,722) --------- --------- Net earnings (loss) $ 1,388 $ (2,378) ========= ========= Earnings (loss) per share: Primary and fully diluted $ 0.05 $ (0.09) Average number of common shares outstanding: Primary 26,587 25,432* Fully diluted **26,694 25,432* </TABLE> * Incremental shares from assumed exercise of stock options and convertible debt are antidilutive for primary and fully diluted loss per share. ** Incremental shares from assumed conversion of convertible debt are antidilutive for fully diluted earnings per share. See Notes to Condensed Consolidated Financial Statements.
5 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended May 4, April 28, 1997 1996 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings (loss) $ 1,388 $ (2,378) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 6,861 5,294 Amortization of deferred lease incentives (1,078) (715) Change in: Accounts receivable (2,707) (667) Merchandise inventories (18,233) 8,163 Deferred rents 115 61 Prepaid catalog expenses 3,083 4,740 Prepaid expenses and other assets (1,278) (5,071) Accounts payable (15,003) (16,025) Accrued expenses and other liabilities (5,044) (2,701) Deferred lease incentives 2,976 2,655 Income taxes payable (13,951) (1,947) -------- -------- Net cash used in operating activities (42,871) (8,591) -------- -------- Cash flows from investing activities: Purchases of property and equipment (9,453) (13,079) Other investments (362) 8 -------- -------- Net cash used in investing activities (9,815) (13,071) -------- -------- Cash flows from financing activities: Borrowings under line of credit 3,900 67,180 Repayments under line of credit (3,900) (85,880) Proceeds from issuance of long-term debt -- 40,000 Debt issuance costs -- (1,000) Repayments of long-term debt (103) (31) Proceeds from exercise of stock options 301 77 Change in other long-term liabilities 350 80 -------- -------- Net cash provided by financing activities 548 20,426 -------- -------- Net decrease in cash and cash equivalents (52,138) (1,236) Cash and cash equivalents at beginning of period 78,802 4,166 -------- -------- Cash and cash equivalents at end of period $ 26,664 $ 2,930 ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements.
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirteen Weeks Ended May 4, 1997 and April 28, 1996 NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of May 4, 1997 and April 28, 1996, the condensed consolidated statements of operations for the thirteen week periods ended May 4, 1997 and April 28, 1996, and condensed consolidated statements of cash flows for the thirteen week periods ended May 4, 1997 and April 28, 1996 have been prepared by Williams-Sonoma, Inc., (the Company) without audit. In the opinion of management, 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 weeks then ended. These financial statements include Williams-Sonoma, Inc., and its wholly-owned subsidiaries. Significant intercompany transactions and accounts have been eliminated. The balance sheet at February 2, 1997, presented herein, has been prepared from the audited balance sheet of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report to Shareholders for the fiscal year ended February 2, 1997. Certain reclassifications have been made to the prior year financial statements to conform to classifications used in the current period. The results of operations for the thirteen weeks ended May 4, 1997 are not necessarily indicative of the operating results of the full year. NOTE B. DEBT On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25% convertible, subordinated notes due April 15, 2003 (Convertible Notes). Net proceeds from the transaction amounted to $38,607,000 and were used to provide the Company with a long-term source of working capital. Interest is payable semi-annually and began in October 1996. The Convertible Notes are convertible into shares of common stock at a conversion price of $26.10 per share (equivalent to a conversion rate of 38.3 shares per $1,000 principal amount). The conversion price is subject to adjustment in certain events, including stock splits and stock dividends. Except as discussed below, the Convertible Notes are redeemable at the option of the Company in the form of cash or common stock, on or after April 15, 1998, in whole or in part, at redemption prices (expressed as a percentage of principal amount) ranging from 103.75% to 100% in the last year. For the period of April 15, 1998 through April 14, 2000, redemption may not occur unless the ratio of the stock price to the conversion price has achieved a minimum as defined in the Convertible Note agreement. In the event of a change in control, holders of the Convertible Notes may, at their option, require the Company to repurchase all or any portion of the principal amount. The agreement does not restrict the Company from incurring additional indebtedness. The Company's credit agreement expired on May 31, 1997, and has been replaced with a new 364-day syndicated line of credit facility which provides for $60,000,000 to $90,000,000 in cash advances, depending on seasonal requirements. The agreement contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period, and a prohibition on payment of cash dividends. Additionally, the Company has a $35,000,000 letter-of-credit agreement with its primary bank.
7 NOTE C. NEW ACCOUNTING STANDARDS In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share, was issued. SFAS No. 128 requires dual presentation of basic EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The pro forma effect assuming adoption of SFAS No. 128 at the beginning of each period is presented below: <TABLE> <CAPTION> Quarter Ended May 4, 1997 April 28, 1996 ------------ -------------- <S> <C> <C> Pro forma earnings (loss) per share Basic $ .05 $(.09) Diluted $ .05 $(.09) </TABLE>
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET SALES Net sales consists of the following components (dollars in thousands): <TABLE> <CAPTION> Thirteen Weeks Ended May 4, 1997 April 28, 1996 ----------- -------------- <S> <C> <C> <C> <C> Retail Sales $106,257 60.2% $ 91,085 57.9% Catalog Sales 70,278 39.8% 66,311 42.1% -------- ------ -------- ------ Total Net Sales $176,535 100.0% $157,396 100.0% ======== ====== ======== ====== </TABLE> Net sales for Williams-Sonoma, Inc. and its subsidiaries (the Company) for the thirteen weeks ended May 4, 1997 (First Quarter of 1997), were $176,535,000 - - an increase of $19,139,000 (12.2%) over net sales for the thirteen weeks ended April 28, 1996 (First Quarter of 1996). RETAIL SALES <TABLE> <CAPTION> Thirteen Weeks Ended (Dollars in thousands) May 4, 1997 April 28, 1996 ----------- -------------- <S> <C> <C> Total retail sales $ 106,257 $ 91,085 Retail growth percentage 16.7% 39.7% Comparable store sales growth -0.3% 7.5% Number of stores - beginning of year 256 240 Number of new stores 6 5 Number of closed stores 2 1 Number of stores - end of quarter 260 244 Store selling area at quarter-end (sq. ft.) 865,354 721,313 </TABLE> Retail sales for the First Quarter of 1997 increased 16.7% over retail sales in the First Quarter of 1996 due to a net increase of 16 stores. During the First Quarter of 1997, the Company opened 6 stores (2 Williams-Sonoma and 4 Pottery Barn) and closed 2 stores (1 Williams-Sonoma and 1 Pottery Barn). Comparable store sales were down .3% in the First Quarter of 1997 as compared to an increase of 7.5% in the First Quarter of 1996, primarily due to markdowns taken to reduce overstocks and slow-moving items. Total retail sales in the First Quarter of 1996 grew 39.7% over the same period of the prior year, principally due to a net increase of 25 stores. Pottery Barn, with 30.4% of the store locations at the end of the First Quarter of 1997, accounted for 61.4% of the retail sales growth in both the First Quarter of 1997 and First Quarter of 1996. The Company opened its first large-format store in fiscal year 1994. As leases on older stores are expiring, the Company is closing the older stores and replacing them with large-format stores in the same markets. The prototypical large-format stores range from 5,400 - 8,100 selling square feet for Pottery Barn stores, and 3,000 -3,800 selling square feet for Williams-Sonoma stores, and enable the Company to more clearly display merchandise. Large-format stores accounted for 52.4% of total retail sales in the First Quarter of 1997 and 42.1% in the First Quarter of 1996. As of May 4, 1997 and April 28, 1996, the Company operated 95 and 68 large-format stores, respectively. The Company plans to open 39 new large-format stores in fiscal 1997 (20 Pottery Barn and 19 Williams-Sonoma) and close 14 smaller stores.
9 Comparable store sales are defined as those whose gross square feet did not change by more than 20% in the previous twelve months and which have been open for at least twelve months. Comparable store sales are compared monthly for purposes of this analysis. CATALOG SALES Catalog sales in the First Quarter of 1997 increased 6.0% over the same period of the prior year. The following table reflects catalog sales growth percentages by concept: <TABLE> <CAPTION> Thirteen Weeks Ended May 4, 1997 April 28, 1996 ----------- -------------- <S> <C> <C> Williams-Sonoma 20.4% 4.3% Pottery Barn 0.2% 51.2% Hold Everything 6.2% 15.8% Gardeners Eden -2.1% 7.3% Chambers 13.2% 5.5% Total catalog 6.0% 25.2% </TABLE> Combined sales for Williams-Sonoma and Pottery Barn, the Company's primary concepts, comprised approximately 66.2% of total catalog sales in both the First Quarter of 1997 and 1996. The number of Pottery Barn catalogs mailed in the First Quarter of 1997 decreased 2.7% from the prior year, partially due to the elimination of the Winter Sale catalog circulated in the First Quarter of 1996 to reduce overstocks and slow-moving items. Circulation for Williams-Sonoma catalogs increased 3.2% for the First Quarter of 1997 as compared to the previous year. The total number of catalogs mailed, which remained relatively flat for the First Quarter of 1996 as compared to the same period of the prior year, increased 5.5% for the First Quarter of 1997. COST OF GOODS SOLD AND OCCUPANCY EXPENSE Cost of goods sold and occupancy expenses expressed as a percentage of net sales in the First Quarter of 1997 decreased 3.0 percentage points to 62.3% from 65.3% in the same period of the prior year. Merchandise margins improved 3.4 percentage points, primarily as a result of markdowns taken in the First Quarter of 1996 which significantly reduced overstocks and slow-moving items. Occupancy expense expressed as a percent of net sales increased slightly, primarily as a result of increased depreciation rates for the Company's Memphis distribution center and the Pottery Barn retail stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses expressed as a percent of net sales decreased 0.4 percentage points in the First Quarter of 1997 to 35.9% from 36.3% in the First Quarter of 1996. The majority of the improvement is due to lower advertising expense rates due to improved profitability of the mail order catalogs and the accelerated growth in retail sales as compared to catalog sales. INTEREST EXPENSE Interest expense for the First Quarter of 1997 decreased $767,000, to $774,000 from $1,541,000 for the First Quarter of 1996. This is primarily due to the Company's record earnings and operating cash flow in the fourth quarter of 1996 and the replacement of short-term debt with long-term debt in April of 1996.
10 The Company had an average cash on hand of $48,869,000 for the First Quarter of 1997, versus average short-term borrowings of $35,747,000 for the First Quarter of 1996. On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25% convertible, subordinated notes due April 15, 2003 (Convertible Notes). See Note B to the condensed consolidated financial statements. INCOME TAXES The Company's effective tax rate was 42.0% for the First Quarter of 1997 and 1996. This rate reflects the effect of aggregate state tax rates based on the mix of retail sales and catalog sales in the various states where the Company has sales or conducts business. LIQUIDITY Working capital at May 4, 1997 increased by $1,774,000 over that at February 2, 1997. For the First Quarter of 1997, net cash used in operating activities was $42,871,000, an increase of $34,280,000 from the $8,591,000 used in the First Quarter of 1996. The increase is primarily due to increases in merchandise inventories and the payment of the Company's 1996 income taxes. The Company expects inventory levels to continue to increase in the next two quarters in response to growth and seasonal requirements. Cash flow from investing activities, a use of funds, was $9,815,000 in the First Quarter of 1997, and was principally for new stores. The Company is planning $64,500,000 of capital expenditures in 1997, including $10,000,000 for information systems. For the First Quarter of 1997, cash provided by financing activities was $548,000. On April 15, 1996, the Company issued the Convertible Notes, which are convertible into shares of the Company's common stock at a conversion price of $26.10 per share (or 38.3 shares per $1,000 principal amount). Proceeds from the Convertible Notes were used primarily to reduce bank borrowings. The Company's credit agreement expired on May 31, 1997, and has been replaced with a new 364-day syndicated line of credit facility which provides for $60,000,000 to $90,000,000 in cash advances, depending on seasonal requirements. The line of credit agreement contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period, and a prohibition on payment of cash dividends. Additionally, the Company has a $35,000,000 letter-of-credit agreement with its primary bank. See Note B to the condensed consolidated financial statements. IMPACT OF INFLATION The impact of inflation on results of operations has not been significant. SEASONALITY The Company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through July. The Company believes this is the general pattern associated with the mail order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail order processing and distribution areas, and incurs significant fixed catalog production and mailing costs.
11 FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the matters discussed in this quarterly report are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, the Company's ability to continue to improve planning and control processes and other infrastructure issues, the potential for construction and other delays in store openings, the Company's dependence on external funding sources, a limited operating history for the Company's new large-format stores, the potential for changes in consumer spending patterns, consumer preferences and overall economic conditions, the Company's dependence on foreign suppliers, and increasing competition in the specialty retail business. Other factors that could cause actual results to differ materially from those set forth in such forward-looking statements include the risks and uncertainties detailed in the Company's most recent annual report on Form 10-K and its other filings with the Securities and Exchange Commission.
12 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES FORM 10-Q PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company. The Company is, however, involved in routine litigation arising in the ordinary course of its business, and, while the results of the proceedings cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION <S> <C> 10.1 Amended and Restated Standing Loan Agreement between the Company and Bank of America, NT & SA, dated June 1, 1997 10.2 Credit Agreement between the Company and Bank of America, NT & SA, dated June 1, 1997 10.2 A Agreement Re: Intercreditor Agreement, dated May 22, 1997. 10.2 B Continuing Guaranty from Pottery Barn East Inc. to Bank of America, NT & SA, dated June 1, 1997 10.2 C Continuing Guaranty from Hold Everything, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.2 D Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.2 E Continuing Guaranty from Chambers Catalog Company, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.2 F Continuing Guaranty from Gardener's Eden, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.3 Letter of Credit Agreement between the Company and Bank of America, NT & SA dated June 1, 1997 10.3 A One Bank Guaranty from Pottery Barn East, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.3 B One Bank Guaranty from Hold Everything, Inc. to Bank of America, NT & SA, dated June 1, 1997 </TABLE>
13 <TABLE> <CAPTION> <S> <C> 10.3 C One Bank Guaranty from Williams-Sonoma Stores, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.3 D One Bank Guaranty from Chambers Catalog Company, Inc. to Bank of America, NT & SA, dated June 1, 1997 10.3 E One Bank Guaranty from Gardener's Eden, Inc. to Bank of America, NT & SA, dated June 1, 1997 11 Statement re computation of per share earnings 27 Financial Data Schedule </TABLE> (b) There have been no reports on Form 8-K filed during the quarter for which this report is being filed.
14 SIGNATURE Pursuant to the requirements of the Securities and 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/Dennis A. Chantland ------------------------------ Dennis A. Chantland Executive Vice President Chief Administrative Officer Secretary Dated: June 10, 1997