Good day, and welcome to the Williams-Sonoma Third Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gabrielle Rabinovitch. Please go ahead.

Thank you, Kevin. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our earnings press release and this call may contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of any of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why these non-GAAP financial measures may be useful are discussed in our release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2014 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases and SEC filings, including the most recent 10-K and 10-Q, for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our third quarter fiscal 2014 results.

Thank you, Gabrielle. Good afternoon, and thank you, all, for joining us today. On the call with me today are Julie Whalen, our Chief Financial Officer; and Pat Connolly, our Chief Strategy and Business Development Officer. We're pleased to be discussing our third quarter with you. Solid performance across our brands allowed us to deliver these results with revenue growth of 8.7%, operating margin expansion and earnings per share growth of 17.2%. These achievements reflect our product leadership, lifestyle merchandising, iconic brands and strong execution. We also believe that this third quarter further demonstrates that our multichannel model, with more than 51% of revenues now coming from the e-commerce channel, represents a distinct competitive advantage. We continue to focus on serving our customers and investing for sustainable long-term growth. This holiday season, we believe we have a strong lineup of beautiful gifts, entertaining and decorating collections across all of our brands. And most importantly, we are ready to provide the best service to our customers with the launch of some new functionality and programs we'll be discussing this afternoon. Since the beginning of the year, we've been preparing our supply chain for the holiday peak season with operations, consolidation projects and material handling improvements in our distribution center. We've worked diligently on upgrading our distribution and delivery networks so that we're able to meet and exceed our customers' expectations. Our supply chain is a competitive differentiator, and we continue to make investments to increase agility and flexibility, allow for greater throughput and reduce delivery time. Our new Dallas distribution center opened in May, allowing us to add capacity and shorten delivery times during peak. The productivity of the Dallas facility has exceeded our expectations. In addition, we are enabling next-day service on all but large cube orders. Sutter Street, our…

Thank you, Laura, and good afternoon, everyone. We are pleased with the results we are reporting today, with top line revenue growth of 9% and bottom line EPS growth of 17%, including 40 basis points of operating margin expansion. We believe these results demonstrate the power of our multichannel business and our ability to successfully execute against our initiatives. Our performance year-to-date gives us confidence in our ability to deliver sustained long-term growth. In the third quarter, net revenues exceeded our expectations, increasing 8.7% to $1,143,000,000, with comparable brand revenues increasing 8.7% on top of 8.2% in the third quarter of 2013. Net revenues in our e-commerce channel have, once again, generated double-digit growth, growing 14.7% to $587 million, and represented 51.3% of total company net revenues for the quarter. A 260-basis-point increase over last year. And in the retail channel, net revenues grew 3.1% to $556 million. Gross margins for the third quarter was 37.7% versus 38.6% last year. With occupancy costs as a percentage of net revenues flat year-over-year at 13.5% of net revenues or $154 million, the 90-basis-point decrease was primarily driven by lower selling margin in the e-commerce's channel. Selling margins in the retail channel were essentially flat year-over-year and sequentially, total company merchandise margins improved. Our disciplined approach to marketing effectiveness continues to result in productivity gains. We are relentless about acquiring new customers profitably and increasing the lifetime value of our customers. Our strategic levers again provided us with the flexibility to offer more value to our customers and, at the same time, drive operating margin expansion. In the third quarter, we offset our reduced selling margins within gross margin with greater advertising efficiency within SG&A. SG&A in the third quarter improved 120 basis points to 28.6% versus 29.8% in 2013. The improvement in…

[Operator Instructions] And we'll take our first question from Daniel Hofkin with William Blair & Company.

Just quick question. First, on the guidance for the fourth quarter. If my math is right, it looks like pretty similar revenue guidance is what was implied before, but maybe a little bit moderated on the EPS side. Just wondering, is that correct? And if so, what are the factors behind that? And then I just have a follow-up question on kind of the Williams-Sonoma brand itself and where you think you are in the 9-inning game, both in terms of merchandising and in terms of kind of upping your service-level game.

Great. I'll take the first part, Dan. We feel great about our Q3 and year-to-date results and obviously the guidance we have now provided for Q4 and fiscal year, which will put us at another record year of revenue and earnings. But it's still early in the quarter and this is one of our biggest quarters, so you have to remember that. And for Q4, another thing to remember is that our guidance is up against a tough year-over-year compare, and yet at the high end of our range for comp brand revenue, we're guiding a 6 comp on top of the 10 last year. And for EPS, we're guiding 9% growth after absorbing all of our investments. And on the year, we are guiding comp brand revenue growth at the high end to be almost 7 on top of 9 last year. And we raised our EPS guidance. So we think this guidance is strong. And really, we are focused on the long-term growth of our company on our way to doubling our revenues over time, and this guidance is consistent with our 3-year outlook.

Dan, it's Laura. To your question on Williams-Sonoma. We're very pleased with the performance that the Williams-Sonoma brand has posted year-to-date. A couple of years ago, we outlined a plan for you to reimagine the brand, bringing more proprietary, exclusive and innovative products and making the retail stores more exciting. And we've made a lot of progress across both of those. We've also continued to invest in our online capabilities in the Williams-Sonoma brand, spent a lot of time on the on-site search and reorganizing the site so that it is easily shoppable both on a desktop and also mobile-y, and we're seeing great results from all of that. In terms of innings, we continue to see a lot of opportunity, honestly. We're pleased with what we've seen, but we have a lot more work to do. And we see this as one of the preeminent iconic brands out there. And we believe that it can have a much bigger presence globally then it has today, and that also there's new categories that we can expand into in the future.

We'll go next to Chris Horvers with JPMorgan.

Can you talk about the -- I think there's been a lot of debate out there about the promotional environment. Can you talk about what you're seeing online? And in the mall? And how that's evolving as we head into the holidays? And also, we're getting closer to Thanksgiving, so any thoughts you could share on what you're seeing around the Williams-Sonoma brand would be really great.

Sure. There's no question, the holiday season will be even more competitive than last year, but I also believe e-commerce will set new sales records. And with over 50% of our revenue in e-commerce, I believe we have a competitive advantage. Our marketing drives traffic to all of our channels, and our in-store experience and services give our customers the confidence to order online. Another competitive advantage that we have is our innovative proprietary product. And the holidays are the time when a customer wants to give a gift from a great brand, and I believe we are really well positioned with all of our brands this holiday season.

Okay. So it doesn't sound like you're necessarily worried directionally about how the promotional environment is setting up in November and into Thanksgiving and Christmas?

When we say we're going to be competitive this holiday, it's far more than just price. We believe that our in-store and our online services will continue to lead the industry, and our proprietary product line is outstanding. We've also worked all year, and you've heard me say this, to ensure our offers are compelling. And we believe that combination continues to allow us to gain market share.

Understood. And then just one quick last one. Can you talk about the in-stock levels at Pottery Barn and Pottery Barn Teen and how that improved over the quarter? And how much do you think is still to catch up on?

So we feel really good about our inventory levels. As we said on the call, strong inventory execution resulted in inventory levels that are now back in line with revenue growth. We are focused on inventory optimization, and on both improving our in-stock position as well as reducing our overstocks, and we continue to make progress against these initiatives. We feel very good about the level of inventory. If you're referencing, in particular, Pottery Barn Teen from last time, obviously, we had that outage back in Q2, and we are predominantly back in with that inventory as of this point.

[Operator Instructions] We'll take our next question from Greg Melich with Evercore ISI.

I wanted to talk a little bit more about the inventory, particularly the gross margin dynamic and customer service. It sounds like we're normal now. How do you guys think about inventory turns or days on hand as a more normal level? Have you made the adjustments for the port slowdown? And when will we start to see the benefit of the inventory changes showing up in gross margin?

Greg, this is Julie. I'll take that. So as I was just saying before, we feel really good about our inventory levels. Obviously, there is always a delicate relationship between service levels and inventory, especially the more that our sales are coming from the e-commerce channel, the more important it is to be in stock. We feel really good that we are back now in line with revenue growth. But we have strong inventory disciplines in place at the company, and we believe we are well positioned as we enter the holiday season with the right level of inventory to support the business and the guidance we are providing today. The bigger concern is obviously if this West Coast port slowdown continues or deteriorates. We do have strategies in place to help mitigate the potential impact. And of course, our teams have been watching the slowdown and planning for it since before the labor contract actually even expired. And although we are 100% confident in our team's ability to navigate this to help minimize its impact on our inventory, we are hopeful that there will be a solution soon, because given the volume of goods that pass through the West Coast ports longer term, this isn't good for anybody. From a margin perspective, and some of our long-term initiatives, the gross margin, you'll start to see some of those benefits as we enter 2015. And some of those benefits, I think, where you're referring to is the insourcing of our foreign agents. That was completed mid of second quarter and all of that gets costed into the inventory and sold through. Starting really in 2015, you'll start to see some benefit there. And then the regionalization of our distribution centers, you'll start to see the full benefit of that as we enter 2015. But with that said, obviously, being competitive from a promotion standpoint is important. And if that's what the customer wants, then the difference between us and other retailers is we're able to offset that with advertising efficiency within SG&A, like we did in this quarter, and still have 40 basis points of operating margin expansion.

We'll go next to Matthew Fassler with Goldman Sachs.

I want to focus, if I could, on the selling margin in e-commerce. Can you talk about the degree to which that related to merchandising pricing and promotions? And how much of it related to shipping?

Sure. As we said in our prepared remarks that it was -- the decrease in gross margin was primarily driven by lower selling margin in the e-commerce channel and not in the retail channel, it was essentially flat. But we did say that, sequentially, the merchandise margins improved. There's a lot of things that are going on in gross margin, as you guys know. I try to make it as least complicated as possible and probably in the end, make it more complicated. But this quarter, in particular, we incurred some incremental costs to support our increased upholstery volumes, the ramping up of our Dallas distribution center, as well as other costs ahead of the holiday selling season. For example, to support our growing personalization business, all of which put additional pressure on the Q3 selling margins. But bottom line, even though these margins were down year-over-year, we were able to still deliver the 40 basis points of operating margin expansion.

So it was more some of those one-off factors than any change in the backdrop, shipping or pricing-wise?

Yes.

We'll go next to Jessica Mace with Nomura Securities.

It seems like it's another example of you being able to flex the gross margin and SG&A to deliver operating margin, as you said. And my question is on, kind of going forward, where we can expect to see further SG&A savings, especially in light of some of the investments and ramped-up services that you talked about?

From a SG&A standpoint, I think you've probably seen every quarter that we've been able to leverage year-over-year, and we don't expect that to change anytime soon. Obviously, the biggest factor that allows us to leverage is the advertising efficiency. And so what we consistently say is that every quarter, we make the call whether to spend that next dollar in advertising or to spend it from a promotion standpoint. And unfortunately, they just hit different lines. And so depending on where the promotional activity is and what is happening in the market from a competitive standpoint, you'll continue to see that SG&A leverage. Also, the more that we drive our revenues, which is consistently happening, to the e-commerce channel, you'll see a lot of our costs continue to leverage. I don't expect that to change anytime soon.

We'll go next to Neely Tamminga with Piper Jaffray.

So question here on West Elm, new store growth trajectory, at what point do we start to think about maybe doubling the store growth? I mean admittedly, we get it that the e-commerce sales are very, very important, but obviously store growth also grows e-commerce. And I think if we recall back to the early days of PB, it's right about now when I think PB was starting to maybe open like 2x the amount of doors that West Elm's been opening? So could you help us think through that time line? And just a real quick housekeeping question for you, Julie. E-commerce, the name change, totally agree with the decision. Were there any financial statement reclassifications or organizational changes behind that name? Or was it just simply renaming it on the P&L?

Go ahead, Julie.

Okay. So I'll take that last question there. No, you shouldn't read anything more into that. I mean the reality is e-commerce has been over 90% of that channel for a while now. We finally just made the decision to rename it, nothing else has changed.

Okay. In terms of West Elm growth, we're really pleased with what we're singing in the new stores. As you heard the list, we've opened in some different types of markets. And all those stores give us confidence in our future plans for West Elm, and we're looking for great stores in great centers that make sense. And we could possibly open more, but we aren't looking to have a race on this because sometimes, you have to wait to get the best real estate. And we also really want to make sure that we really understand the multi-store market dynamic. In every one of our brands, we've worked -- seen and learned different things when we open second and third stores in the market. So we're just hitting that part of the growth cycle now, and we're really optimistic with what we're seeing about the future of this brand, our retail expansion strategy and also our ability to really build the business online. I think you also heard me talk about other legs of growth for West Elm today that we really think are exciting, including the contract furniture.

We'll go next to Michael Lasser with UBS.

Are consumers responding to any different types of promotions that you're finding more successful than before? So take a kind of a broad-based point, 25% off versus a more targeted promotion on a select item? And is that driving incremental success?

It's interesting. I'd say the thing that I'm really noticing is that people have been ready for Christmas earlier this year. And we've seen really nice response to our gifts already, and I think it's proprietary innovative products first. You want to give a wonderful thoughtful gift to people. It's great if you can get a great price on it. But customers are pretty smart. They shop around. They know where the price sits and it's a very efficient market. So I don't think it's any trick per se, other than high-quality, innovative, proprietary product priced fairly.

And my follow-up question is along those lines. Where do you think is the minimum level of catalog distribution? And how far do you think you are from reaching that point?

It's different by brand and we test versions, page count, sizes, it's very complicated and you're always finding new opportunities. We're so lucky to have such a developed house file and a lot of different data points to draw from. It's really, I think, a competitive advantage of ours.

Our next question will come from Seth Sigman with Crédit Suisse.

I was wondering if you could give a little bit more color on the international business and specifically, some of the investments you've been making in Australia, how those stores are performing, and when we should expect to see some of the leverage from those investment show up.

Sure. It's Laura. We're really early on our journey overseas. I was just in Australia and got to see our beautiful stores, and you'd be so proud about how they're executing over there. And of course, like anything else, you need to build scale. So we're really focused on getting these stores opened well, getting the right services and getting the right inventory in line for our customers over there because there are different selling periods -- selling patterns, I'm sorry, and selling periods that we need to adjust for. We're pleased with the amount of business that's coming online and how when we open a new store, we see the online business also grow in that market.

Okay. And just one quick follow-up on a separate topic. Last quarter, you discussed some fashion issues that may have impacted you. Can you discuss what changed? And whether you feel like you're fully through that at this point? Or is there still a tailwind ahead?

I think what you're referring to is in Pottery Barn. I mentioned I thought that the color palette could have been brighter and more fun for the summer season, and fall is a very different time period, so you move quickly out of that. And while the pillows aren't a huge percent of our business, they're sort of the window dressing on all of our sofas. And so we tend to be very self-critical and always looking for merchandising improvements and operational improvements. And as you heard me say, we saw a much stronger response to the fashion textiles this fall.

And we'll take our next question from Simeon Gutman with Morgan Stanley.

I have a couple of questions. I'll ask them upfront so I don't get cut off. First, Williams-Sonoma was so strong in terms of growth, I don't think you'll answer, but I'm going to ask. Can you talk to the traffic in the store versus the business online? And then the second question, a follow up on the expense leverage, given how solid it was, it looks like the point per comp or leverage per point in comp, the flow-through was even better than previous quarters. I think you'd agree. So beyond the leverage that you're getting from the comp, it actually looks like something is getting better in either how the costs are controlled, et cetera. And Julie, just to clarify, did you say that fourth quarter EBIT margin should be in line with last year's margin?

Relatively in line, yes. I'll take the SG&A one first. So I think, yes, we are getting better leverage than you probably have seen, but that's a function of several different things. As I mentioned, it's expense control, but it's also the fact that we're very efficient with the advertising. So that will ebb and flow depending on the quarter and what our new operational decisions are by quarter.

In terms of retail traffic, we don't have traffic counters in our stores. And we have a big outreach program in each of our stores. We're actually building that to a larger extent right now in Williams-Sonoma. It's something we started in Pottery Barn within home design services, and we see a similar opportunity where we can go to your house and redo your kitchen. And we're just getting going on that. So traffic is, of course, really important to us in the malls, and we are really encouraging the mall owners to really do things to drive traffic. But we're also making traffic happen in our stores with all of our great smells and decorating classes and then, of course, reaching out to our customers and pulling them in and going in to their own homes. In terms of the interplay between e-commerce and our stores, we really believe that when you go have a great experience in one of our stores, you're going to be more confident shopping online. And that's something that people who don't have stores, don't have the same advantage, particularly during the gift-giving time of year, where you want to be sure that you're really buying that thoughtful gift for the people on your list.

And our final question today will come from David Magee with SunTrust.

It's David Magee. I just wanted to ask about the comment that you all made earlier about the promotional environment for the holidays, you think it might be more intense than last year. And it just sort of strikes me that, given your customer demographic, [indiscernible] I would think a pretty decent year. I'm surprised that, that would be the case. Is it just sort of a mindset that we have to deal with this as sort of the new, new? Or is there some sort of new competitive dynamic at play?

No, I don't think there's any change. I think this is somewhat sort of the new, new. There's no question, this holiday season will be competitive. We prepare for this all year long. We're ready online and in our stores and every one of our brands. We have an outstanding assortment of gifts, and we're in it to win it and gain market share. And because of our e-commerce scale and our knowledge of our retail customers, we can deliver highly relevant offers digitally or through e-mail that are highly impactful. So we believe we are well positioned for this holiday season to continue to provide our customers what they need for the gift-giving season to outperform our competition and to continue to take market share. We don't believe anything has changed.

And at this time, I'd like to turn the conference back over to your presenters for any additional and/or closing remarks.

Well, thank you, all, for joining us today and we really appreciate your support. And I want to echo what Julie said, which is thank you for shopping with us this holiday season. We hope to provide you and your family and friends outstanding service.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.