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 October 29, 1995. [ ] 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 2-83992 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) <TABLE> <S> <C> California 94-2203880 - -------------------------------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 3250 Van Ness Avenue, San Francisco, CA 94109 - -------------------------------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) </TABLE> 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 December 12, 1995, there were 25,383,764 shares of the Registrant's Common Stock outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED OCTOBER 29, 1995 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE ------ <S> <C> <C> Item 1. Financial Statements: (1) Condensed Consolidated Balance Sheets October 29, 1995, January 29, 1995, and October 30, 1994 Condensed Consolidated Statements of Operations Thirteen weeks ended October 29, 1995, and October 30, 1994 Thirty-nine weeks ended October 29, 1995, and October 30, 1994 Condensed Consolidated Statements of Cash Flows Thirty-nine weeks ended October 29, 1995, and October 30, 1994 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and (6) Financial Condition PART II. OTHER INFORMATION Item 1. Legal Proceedings (8) Item 5. Other Information (8) Item 6. Exhibits and Reports on Form 8-K (8) </TABLE>
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> October 29, January 29, October 30, 1995 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 8,215 $ 17,481 $ 5,957 Accounts receivable 10,449 5,394 5,196 Merchandise inventories 164,827 87,949 109,372 Prepaid expenses and other assets 11,907 5,849 6,838 Prepaid catalog expenses 16,608 11,205 13,611 Deferred income taxes 259 259 2,617 ---------- ---------- ---------- Total current assets 212,265 128,137 143,591 Deferred income taxes 4,021 4,021 2,968 Investments and other assets 6,210 6,325 3,964 Property and equipment (net) 127,423 79,395 71,120 ---------- ---------- ---------- $349,919 $217,878 $221,643 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 56,993 $ 49,357 $ 44,806 Accrued expenses 3,475 4,407 4,499 Accrued salaries and benefits 8,348 8,138 4,958 Line of credit 87,300 -- 35,800 Current portion of long-term debt 125 141 141 Customer deposits 6,890 5,631 3,872 Other liabilities 2,775 2,628 2,587 Income taxes payable -- 8,329 2,569 ---------- ---------- ---------- Total current liabilities 165,906 78,631 99,232 Deferred lease credits and other liabilities 23,625 14,250 12,940 Long-term debt 46,721 6,781 6,832 Shareholders' equity 113,667 118,216 102,639 ---------- ---------- ---------- $349,919 $217,878 $221,643 ========== ========== ========== </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 Thirty-Nine Weeks Ended October 29, October 30, October 29, October 30, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales $138,363 $113,443 $384,256 $324,299 Costs and expenses: Cost of goods sold and occupancy 90,233 70,459 248,116 201,067 Selling, general and administrative 52,665 38,536 141,394 111,552 ---------- ---------- ---------- ---------- Total costs and expenses 142,898 108,995 389,510 312,619 ---------- ---------- ---------- ---------- Earnings (loss) from operations (4,535) 4,448 (5,254) 11,680 Interest expense - net 1,695 520 2,932 1,001 ---------- ---------- ---------- ---------- Earnings (loss) before income taxes (6,230) 3,928 (8,186) 10,679 Income taxes (benefit) (2,561) 1,646 (3,377) 4,485 ---------- ---------- ---------- ---------- Net earnings (loss) $ (3,669) $ 2,282 (4,809) 6,194 ========== ========== ========== ========== Earnings (loss) per share: Primary $(0.14) $.09 $(0.19) $.24 Fully diluted * $.09 * $.24 Average number of common shares outstanding Primary 25,378 26,156 25,354 26,114 Fully diluted * 26,189 * 26,147 </TABLE> Note: 1994 shares and per share amounts have been restated to reflect the 3-for-2 stock split in September 1994. * Incremental shares from assumed exercise of stock options are antidilutive for primary and fully diluted loss per share, and therefore not presented. 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> Thirty-Nine Weeks Ended October 29, October 30, 1995 1994 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net earnings (loss) $ (4,809) $ 6,194 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 11,333 8,428 Store closing reserve 2 (445) Reserve for termination of corporate headquarter leases (605) -- Amortization of deferred lease incentives (1,271) (707) Change in allowance for doubtful accounts 95 7 Change in deferred rents (3) (211) Loss on disposal of assets 477 147 Change in: Accounts receivable (5,150) (2,242) Merchandise inventories (76,877) (39,933) Prepaid catalog expenses (5,403) (7,892) Prepaid expenses and other assets (5,391) (1,960) Accounts payable 2,202 19,414 Accrued expenses and other liabilities 1,749 (2,506) Deferred lease incentives 10,746 333 Income taxes payable (8,329) (7,030) ---------- --------- Net cash used in operating activities (81,234) (28,403) ---------- --------- Cash flows from investing activities: Purchases of property and equipment (61,748) (17,689) Proceeds from sale of subsidiary, net of $541 cash sold -- 18 Other investments 20 67 Proceeds from sale of property and equipment 797 1 ---------- --------- Net cash used in investing activities (60,931) (17,603) ---------- --------- Cash flows from financing activities: Change in cash overdrafts 5,433 (2,570) Borrowings under line of credit 173,500 94,700 Repayments under line of credit (86,200) (58,900) Proceeds from issuance of long-term debt-private placement 40,000 -- Proceeds from issuance of long-term debt -- 7,000 Repayment of long-term debt (94) (157) Proceeds from exercise of stock options 260 1,133 ---------- --------- Net cash provided by financing activities 132,899 41,206 ---------- --------- Net decrease in cash and cash equivalents (9,266) (4,800) Cash and cash equivalents at beginning of period 17,481 10,757 ---------- ---------- Cash and cash equivalents at end of period $ 8,215 $ 5,957 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements.
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED During the thirty-nine weeks ended October 30, 1994, in a non-cash transaction, the Company received a $2.1 million note as partial proceeds from the sale of a subsidiary. See Notes to Condensed Consolidated Financial Statements.
7 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirty-nine Weeks Ended October 29, 1995 and October 30, 1994 NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of October 29, 1995, and October 30, 1994, the condensed consolidated statements of operations for the thirteen and thirty-nine week periods ended October 29, 1995, and October 30, 1994, and condensed consolidated statements of cash flows for the thirty-nine week periods ended October 29, 1995, and October 30, 1994, 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 for the thirteen and thirty-nine 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 January 29, 1995, 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 January 29, 1995. 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 and thirty-nine weeks ended October 29, 1995, are not necessarily indicative of the operating results of the full year.
8 PART I -- FINANCIAL INFORMATION, CONTINUED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table shows the results of operations for the periods indicated as a percentage of total net sales: <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended October 29, October 30, October 29, October 30, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales Catalog 41.2% 43.2% 42.4% 42.2% Retail 58.8 56.8 57.6 56.0 California Closets 0.0 0.0 0.0 1.8 ---------- ---------- ---------- ---------- Total net sales 100.0 100.0 100.0 100.0 Costs and expenses Cost of goods sold and occupancy 65.2 62.1 64.6 62.0 Selling, general and administrative 38.1 34.0 36.8 34.4 ---------- ---------- ---------- ---------- Earnings (loss) from operations (3.3) 3.9 (1.4) 3.6 Interest expense - net 1.2 .4 .8 .3 ---------- ---------- ---------- ---------- Earnings (loss) before income taxes (4.5) 3.5 (2.2) 3.3 Income taxes (benefit) (1.8) 1.5 (.9) 1.4 Net earnings (loss) (2.7)% 2.0% (1.3)% 1.9% ========== ========== ========== ========== </TABLE> SALES Net Sales in the thirty-nine weeks and thirteen weeks ended October 29, 1995 (the "Year-to-Date" and "Third Quarter", respectively), increased 18.5% and 22.0%, respectively, over the same periods in the prior year. Catalog sales increased 19.0% for the Year-to-Date and grew 16.3% in the Third Quarter. Pottery Barn catalog sales for the same periods increased 42.4% and 42.7%, respectively, over comparable periods in the prior year and accounted for 92.1% of the increase in catalog sales in the Third Quarter. Retail sales for the Year-to-Date and Third Quarter increased 21.8% and 26.3%, respectively, over the same periods in the prior year, primarily as a result of store openings and store expansions. Comparable store sales increased 1.6% for the Year-to-Date and decreased .2% in the Third Quarter. Williams-Sonoma and Pottery Barn reported a change of .3% and (3.2)%, respectively, in comparable store sales in the Third Quarter. COST OF GOODS SOLD AND OCCUPANCY Total cost of goods sold and occupancy expense for the Year-to-Date and Third Quarter (expressed as a percentage of sales) increased 2.6 and 3.1 percentage points, respectively, over the same periods in the prior year. Cost of goods sold for the Year-to-Date and Third Quarter (expressed as a percentage of sales) increased 1.5 percentage points from the same periods of the prior year, principally due to clearance markdowns taken in the second and third quarters of fiscal 1995. Occupancy expense (expressed as a percentage of sales) increased 1.7 and 1.1 percentage points for the Year-to-Date and Third Quarter, respectively, due to higher occupancy expense in the Williams-Sonoma stores and non-selling locations.
9 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses (expressed as a percentage of sales) for the Third Quarter and Year-to-Date increased 4.1 and 2.4 percentage points, respectively, over the same periods of the prior year. The increase is principally due to higher employment and advertising expense in the form of increased postage and paper costs. INTEREST EXPENSE Interest expense in the thirty-nine weeks and thirteen weeks ended October 29, 1995, increased $1,931,500 and $1,174,800, respectively, from comparable periods in 1994 due to higher borrowings used to fund new stores, higher inventory levels, and the distribution center expansion. INCOME TAXES The Company's effective tax rate for the Year-to-Date and Third Quarter was 41.3% and 41.1%, respectively. The rate declined slightly from the 42.0% in the same periods of 1994 due to the lower aggregate state tax rates based on the mix of retail and catalog sales in the various states where the Company has sales and conducts business. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities in the thirty-nine weeks ended October 29, 1995 was $81,234,000 -- a $52,831,000 increase over the comparable period in 1994. The increase in cash used by operating activities is principally due to an $11,003,000 decline in net earnings and a $36,944,000 increase in merchandise inventories. Selling square feet in 1995 increased 35% and retail inventories at the end of the third quarter increased 45%. Delayed fall store openings and an aggressive mail order holiday sales projection contributed to above plan inventory levels. In the event that holiday sales activity does not result in the desired reduction in overall inventory levels, the Company expects to reduce inventory levels over the normal course of business in the following year. Net cash used in investing activities (primarily net capital expenditures) in the thirty-nine weeks ended October 29, 1995, was $60,931,000 -- a $43,328,000 increase over the same period last year. New stores that are in operation accounted for $28,001,000 and new stores under construction accounted for $9,428,000. The balance is attributable to the distribution center expansion and information systems and other corporate expenditures. Net borrowings under the line of credit have increased to $87,300,000 from $35,800,000 due to capital and merchandise inventory expenditures. During the Third Quarter, the Company issued $40,000,000 in principal amount of unsecured, 7.2% Senior Notes. 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 has 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 September. The Company believes this is the general pattern associated with the catalog and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and catalog processing and distribution areas, and incurs significant fixed catalog production and mailing costs.
10 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 materially adverse effect on the Company's consolidated financial position or results of operations. ITEM 5 - OTHER INFORMATION Dennis Chantland was named Executive Vice President and Chief Administrative Officer of the Company on November 29, 1995. Mr. Chantland also has temporarily assumed the responsibilities of Chief Financial Officer. This position was previously held by Russel E. Solt, who resigned November 30, 1995. The Company expects to appoint a permanent CFO early next year. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------- <S> <C> 3.1 Restated Articles of Incorporation 10.2E Third Amendment to Sublease between the Company and Hewson-Memphis Partners, dated October 24, 1995 10.6K Fourth Amendment to Credit Agreement, dated September 29, 1995 10.6L Fifth Amendment to Credit Agreement, dated October 16, 1995 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 on Form 10-Q is being filed.
11 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 CHANTLAND Dennis Chantland Executive Vice President Chief Administrative Officer Dated: December 12, 1995