Welcome to the Williams-Sonoma, Inc., Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] This call is being recorded. And I would now like to turn the call over to Gabrielle Rabinovitch, Vice President Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, Matt. Good afternoon. This call should be considered in conjunction with the press releases 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. In the fourth quarter of 2014, we recognized non-GAAP income associated with the Visa/MasterCard antitrust litigation settlement. This income was recognized as corporate unallocated income and did not impact the e-commerce and retail reportable segments. Additionally, as a reminder, when we discuss our fiscal year numbers, we recognized non-GAAP expense of $0.02 in the first quarter of fiscal 2013, which was also recognized in corporate unallocated. The remainder of the discussion today will relate to results excluding these non-GAAP items. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which addressed the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2015 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 results.

Thank you, Gabrielle. Good afternoon, and thank you, all, for joining us today. On the call with me are Julie Whalen, our Chief Financial Officer; and Pat Connolly, our Chief Strategy and Business Development Officer. I'm pleased to report today on our strong brand performance for the fourth quarter and the year and share our opportunities for the future. In 2014, we delivered EPS of $3.20 per share on top of $2.84 last year, exceeding guidance that we had raised twice during the year. We experienced growth in all of our brands and across our channel, highlighted by our highly profitable e-commerce business, which grew to over 50% of total revenue. We achieved these results while also continuing to invest in our strong brands and multichannel platform. We implemented technology enhancements to improve customer service and advance the flexibility and capacity of our e-commerce platform. We completed the insourcing of our foreign buying officers -- offices, which will not only reduce costs but improve quality and strengthen our supplier relationships. And we continued to refine our domestic supply chain by insourcing more of our furniture delivery operations. We also made significant progress in automating aspects of our personalization capability. In the fourth quarter, we exceeded the high end of our expectations despite challenges relating to the West Coast port disruption. The prolonged slowdown negatively impacted our results and will continue to impact us to an even greater degree in the beginning of this year. Mitigating this situation is a key priority, and we are intently focused on the strategies and tactics to ensure the availability of merchandise in our stores and on our website. Julie will talk in more detail about the impact of the port disruption on our business later in the call. Before I go through our holiday…

Thank you, Laura, and good afternoon, everyone. Before I walk you through our results in more detail, I would like to begin with a few financial highlights for the year. For the full year, comparable brand revenues grew 7.1% with 12.1% growth in our e-commerce business. This year for the first time, e-commerce revenues surpassed 50% of our revenue and Pottery Barn passed the $2 billion threshold for brand net revenues. Williams-Sonoma delivered 3.8% comparable brand revenue growth, the highest it has been since 2010 and more than double last year. And West Elm delivered comparable brand revenue growth of 18.2%, the fifth year of double-digit increases. Operating margin reached a record 10.5%. The strength of our operating model gives us the ability to deliver this year-over-year operating margin expansion while continuing to invest in our infrastructure, develop new brands and expand the reach of our brands globally. And our EPS for the full year grew 12.7%, consistent with our longer-term outlook. We also returned approximately $350 million to stockholders while investing in the long-term growth of our business. Now I would like to comment further on our fourth quarter performance. For the fourth quarter, net revenues grew to $1,542,000,000 or a year-over-year increase of 5.2% with comparable brand revenues increasing 5.1%. Net revenues in our e-commerce channel represented 49.9% of total company net revenues, a mix increase of 170 basis points over last year and grew 9% to $770 million. Net revenues in our retail channel grew 1.6% to $772 million. Gross margin for the fourth quarter was 40.1% versus 40.6% last year, including occupancy costs of $155 million in the fourth quarter of 2014 versus $149 million in the fourth quarter of 2013. We are pleased with our gross margin performance in Q4. We had a very carefully…

Thank you, Julie. Before we move to Q&A, I'd like to discuss our key initiatives and objectives. Back in early October, I was in Sonoma, California, and we were opening our -- reopening a Williams-Sonoma store in the original location of Chuck Williams' first store opened in 1956. Went to great lengths to replicate the original store, including much of the merchandise assortment. The look and feel and the customer experience was surprisingly relevant. The next morning, we cooked breakfast, inviting the entire town of Sonoma to join us in the plaza. About 2,000 people showed up to show their appreciation of us returning to our roots, and of course, to eat the pancakes. This experience made me realize once again how far this company has come in its 58-year life and the 20 years I've been with it, how fortunate we've been to attract such outstanding associates and supplier partners that have accepted the responsibility of stewardship of a great brand while constantly seeking ways to be relevant to the needs and desires of today's consumer, the importance and rewards of staying true to your values. Of course, today, we're a strong portfolio of brands. We have 8 brands, 7 of which we have developed ourself. And in each brand, we have passionate stewards that are constantly responding to the customers' needs and desires of products and services that meet those needs. Our mission is to enhance our customers' lives at home, and our associates always put the customer first. They also deliver daily results while staying focused on the long-term goal of being the leading home furnishings and housewares retailer in the world. And we believe that the growth opportunities we see ahead of us are greater than any in our history. You may be asking what makes…

[Operator Instructions] At this time, we will take a question from Matthew Fassler with Goldman Sachs.

The question I want to focus on today is the impact that the port strike had on the fourth quarter. You sized the impact fairly precisely for the first half of the year. You alluded directionally to some pressure on revenues and also to some degree on gross margin as you worked to expedite shipments that were otherwise delayed. So can you take a shot at the different line items of impact that you saw on Q4?

Sure, Matt. This is Julie. I'll take that. So first of all, I want to make sure we're all clear [ph] on the fact that this West Coast port disruption have impacted all retailers, all with varying impacts depending on size, their container volume, the type of goods they sell and their levels of in-stock and available-for-sale inventory in particular just prior to the disruption and during the disruption. Managing the flow of goods has been and still is our #1 operational priority. And early on, we began redirecting shipments and prioritizing receipts and expediting, et cetera, to serve our customers. And this is more expensive, unfortunately, in the short term but is the right thing to do for our customers. No one expected, including us, that the West Coast port disruption would last as long as it did. And as we started moving through the fourth quarter, those brands with the lowest inventory-on-hand growth, primarily across the portfolio of PB brands, were the most impacted as evidenced in Q4 by demand comps that Laura alluded to across the Pottery Barn brands that were more than double the net comps. Pottery Barn brands, our largest brand of course, ended the year down 9% year-over-year on inventory on hand, and unfortunately, has since deteriorated to currently down approximately 14.5% year-over-year inventory on hand. However, to your question of the impact on the fourth quarter, given the size of the fourth quarter as compared to, say, the first quarter or first half of 2015 and the mix of sales, including a higher mix of Williams-Sonoma sales, which gets the majority of their inventory from domestic vendors and were less impacted, the Q4 impact of the West Coast port slowdown was much less severe on the quarter. Also, given that Q4 includes the…

So just by way of quick follow-up and I promise on the same topic, acknowledging that you guys did everything you said you would do despite this, do you feel like the margins would have been measurably better without the port strike?

They would have been better, for sure, yes.

At this time, we'll move to Peter Benedict with Robert W. Baird & Co.

I guess my question is on the store growth -- or the store outlooks that you're giving in West Elm and for Williams-Sonoma. In West Elm, the acceleration to 19 openings, glad to see that. Is that an opportunistic increase? Or something that we think should continue as we look beyond this year? And could it accelerate even further? And similarly on Williams-Sonoma, the closures, net 5 closures the last couple years, this next year, it looks like you're going to be closing 8 net. Is that a new level that we should be thinking about?

Thanks for the question, Peter. We've always had a very disciplined approach to retail, but we've also been innovators at retail. Our West Elm stores this year were very carefully chosen, and we were thrilled to see the results higher than we even had expected. When we started putting together our road map for retail openings, we had a long list of areas we should be. And sometimes, the amount of stores that you get in any given year is dependent on landlord availability. We're so lucky to have such strong partners with very, very creative, forward-thinking landlords, and we have 19 wonderful stores opening this year. And beyond that, we do have other stores we're working on. Obviously, this is a particularly large number for this year, and we think it's a huge opportunity to continue to increase the mind -- the awareness of the West Elm brand, which while done so well, so many people still don't know the brand. And when they see a store come to their market, it really improves their perception, then they also buy more online. So that is a great opportunity for us. In terms of Williams-Sonoma, we've been closing in markets where we're -- where we are either too heavy in the market with stores or where there is a better location. So we have closed to open in some areas, and then in other areas, we've decided to let the sales go to a store in the area. But that said, we see also a new era of growth for retail productivity in the Williams-Sonoma brand. As I mentioned in my prepared remarks, we opened a store at South Coast Plaza, tried a lot of new things that we had carefully really discussed, and we're seeing so many of those things work. And it's not that we'll open a bunch of stores that look like South Coast Plaza necessarily, but there are pieces and parts of that model that we can roll out to a larger amount. And some of it is not fixture and remodel but simply merchandising ideas. So we're very excited about this new era for Williams-Sonoma at retail. And like West Elm, we have some very exciting projects going on this year that you'll see us really push the interactivity at the store level in the brand and also bring new merchandising ideas to the floor.

We'll take a question from Daniel Hofkin with William Blair & Company.

Just, I guess, putting the port issue to some degree aside and with regard to what you feel like you can control in that part of the business or just merchandising, marketing, et cetera, anything that you would call out in terms of that you feel like executionally you could have done better during the period. And then I guess I had a question about the potential margin benefit from the insourcing. How much do you think that could benefit margins? How much do you think you might reinvest, let's say, in traffic or transaction-driving initiatives, if you will?

Okay. Dan, I'll take the second question, and Laura will take the first question you had. But on the second question on gross margins, I think that is actually one of the exciting moments that we're starting to see. We started to see a little bit in Q3. We definitely saw it in Q4. We did have lower selling margins by 50 basis points, which was technically an improvement over the prior year, which was down 70. But the lower selling margins this time, the pure product margin was essentially flat, which in a very promotional time period we know is pretty tricky to do. And so clearly, it highly demonstrates both. We have carefully planned promotions, but we also were starting to see the benefits from the insourcing of our foreign agents that are helping to offset that. And so as we continue to roll out through the year, we should expect to see those improvements continue to come through. So it's nice to see these investments that we speak to you guys about in the past that we've invested in these things that are starting to come to fruition.

And your first question, which is a great one, what could we have done better. We always have a mindset of continuous improvement. And we are in the midst of a major multiyear technology transformation, which is focused largely on our supply chain. We know that our customer wants increased visibility of where their order is, and we also know that there's a great opportunity to regionalize our assortments. We have put together our big, as we call them, rock projects for the year, and all of these help us remove blind spots in the supply chain, if you will. We have many of them focused on reducing costs and improving service through -- whether it's scheduling, routing systems, communications delivery dates. We're focused on long-term inventory optimization as a key strategic initiative as we know how important staying in stock but avoiding getting overstocked is to our business. And we're thrilled we started this project last year, and we're kicking it off now with a lot of great participation throughout the company, similar to what we did with insourcing our Asian operations. So I believe this is one of the biggest things we're going to do over the next couple years. Of course, we're investing in e-commerce. You can always make it more intuitive for the customer to shop. I think actually, Pat, could you comment a little bit on some of the exciting things that we're working on to improve the customer experience?

Sure, sure. Dan, great question. And I think what's exciting to me is really the investments we're continuing to make to enhance the platform and will allow us to continue to grow our revenues while maintaining our high e-commerce profitability and at the same time enriching the customer experience. We're focused on mobile. Our mobile sales were up 100% year-over-year last year, and a big part of that was the improvements we made in the site experience. We're making great strides in site personalization, both in customer recognition and then delivering them personalized content and also improving the postpurchase experience. In marketing, we've made -- and you'll see more of it this year, some strategic decisions to drive customer acquisition across the entire conversion funnel. We're shifting more of our marketing spend toward digital as we're implementing the results of all this marketing effectiveness work that we've talked to you about before and increasing marketing messages. We're really just continuing to strengthen the technology foundation and respond to the ways that customers now want to interact with us and without ever compromising a site experience that really enhances the lifestyle we project with each of our brands. So it's pretty exciting.

And now we'll move to Chris Horvers with JPMorgan.

So I wanted to follow up on a couple prior questions. So is it fair to say that PB given the mixup in Sonoma is, say, 1/3 of revenues and if comps are cut in half, that means you would have an increment of 1 point of comp brand revenue at the enterprise level? And then also, you mentioned selling margins were down 50. Is it also fair to say that, that decline was wholly related to the port issue?

So we don't disclose how the exact breakout is for the quarter from a revenue perspective. But I think I'll reiterate the point that Williams-Sonoma is a significant piece of the operations during the holiday time period. And clearly, having comps -- that demand comps that were more than double that did convert into net had a substantial impact on our top line. Regarding the gross margin, what I -- what the -- the reality is what I was saying is that it's lower selling margins, particularly in e-commerce, that drove that decline. The pure product margin was healthy. The lower selling margins were almost solely due to higher shipping costs, but there's 2 reasons for that. One is because we made a decision as a company to make sure to meet our customer demand and get them their product in time for the holidays. Nothing is more important to us than making sure to keep our customers happy, and so we made the decision as the customer continues to order later and later in the peak to ship things to them in whatever way possible to get it to them in time for the holidays. That's one. The second thing is yes, the West Coast port slowdown where, unfortunately, again, to meet our customers' demand, we had to get product from the East Coast to, in some cases, customers on the West Coast. And so when you're shipping things like furniture, obviously, that's much more expensive.

And then would you care to break it down between those 2 factors?

We have not disclosed that.

Jessica Mace with Nomura Securities has the next question.

My question is on the 2015 operating margin guidance. And I was wondering if you could help us think about if you put aside the port issue and also the foreign insourcing, which you've already discussed. Can you talk about some of the other moving pieces that should impact the operating margin and specifically what kind of assumptions you have for the promotional and competitive environment?

Okay. So from the operating margin perspective, first, from a guidance perspective, we're really pleased to be able at the high end to once again match our new record operating margin level of 10.5%, and that includes the impact from the West Coast port disruption at the beginning of the year. But it also includes our investments. And some of them, as we mentioned earlier, are in the -- insourcing of our foreign agents are starting to leverage, and others will take longer to do that. For example, as we've said before, some of our global initiatives, particularly in company-owned global where it's going to take about 3 to 5 years to get to scale and start to leverage that infrastructure, is something that keeps the operating margin not expanding as high as we'd like it to at this point. Excluding global, our operating margin expansion is strong with our domestic business.

And any assumptions on the promotional or competitive environment that go into that outlook?

We said all along that we know that it will be promotional. Our goal is always to offer a very competitive price, but more importantly, exclusive, innovative product with a very high-touch service model.

So we don't think there's anything different from last year from that perspective.

At this time, we'll move to Seth Sigman with Crédit Suisse.

I wanted to follow up on the 2015 margin question, specifically focused on advertising. You guys have done a great job of improving the efficiency there. Can you just elaborate on what's been changing there, the future opportunity? What do you view as kind of the optimal level for advertising? And in that margin outlook, would you assume further benefits from advertising efficiency?

Yes. So we're constantly evaluating that. I mean, every quarter, that's a decision that we make from an advertising efficiency perspective, whether we do an extra promotion that hits at gross margin or whether we send more emails or send out more catalogs, which hits SG&A. And that's something that's ongoing. It's not something that comes to sort of a bottom, if you will, that we then no longer can have that opportunity to do it. It's always something that we take a look at and make the operational decision on a daily basis as to what the right move is. Obviously, any of that is already factored into the guidance within our operating margin at this time.

We'll take a question from Simeon Gutman with Morgan Stanley.

One quick follow-up on EBIT margin, not to belabor this, and then a strategic question. On operating margin, Julie, you mentioned that even with some of the port issues, you're still able to match the EBIT margin. If we were just -- I guess you said it's hard to disentangle the fourth quarter, but there was probably some drag. And if you remove the first quarter drags, I guess what would have been -- had we not even had any port issues, I guess what would have been the midpoint or so of EBIT margin year-over-year increase embedded in the guidance? And then my follow-up or the strategic question was you mentioned the life cycles in terms of thinking about the customer through different stages of your businesses. Can you shed some light on the profitability of the customer, where that customer is most profitable to you at what stage?

Yes. As far as the operating margin question, we're not disclosing based on our earlier response, the Q4 impact of that. I guess my advice would be to take from the West Coast port impact perspective, for 2015, take the amount that we quantified from the EPS and back it out so you'd be able to calculate what that gross margin on the high end would be excluding that.

It's an interesting question which customer is most valuable. I think it depends on what they're doing. We know that our best customers shop multiple brands and, particularly when they're beginning to set up a home or they're moving, you see an initial spike. But you have the cooking enthusiasts that are very specific to cooking or baking, and then -- and they can spend a lot of money frequently and may not shop other brands. So the best customers, if you're asking me that question, are the ones that cross over all brands and all channels.

And at this time, we'll take a question from Neely Tamminga with Piper Jaffray.

Julie, just a point of clarification on this West Coast port situation. So obviously, there's a revenue impact because of how you guys account for revenue, and if you don't have product to ship, then that could be delayed. Are you seeing order cancellations? It sounded like your demand comps are actually quite strong. So you're not actually seeing cancellations. So should we see like a snap back up in revenue in Q2? How should we be thinking about that?

We are. We are seeing -- it's small, but we are seeing some order cancellations. The bigger issue is what is the lost customer demand that we never -- they never actually pushed the button to get it because when they went through the chain, they were able to see that the back order is going to be longer than what they wanted. And/or there's something in the category that they're buying, one item is back ordered, they decided not to buy the whole category. And so we're starting to see some of those. I think from a Q2 perspective, we're not going to be in stock 100% until the end of Q2. And so even if we have back orders that could roll in that are assumed in our guidance for Q1 and they get filled, you've got the new back orders that are created by inventory that's going to come subsequently and get filled. So it's going to take a period of time to really see some of that come through.

At this time, we'll go to David Magee with SunTrust Robinson Humphrey.

Just a couple of questions about the promotional environment. And I'm just sort of curious, which brand is maybe most impacted there? Is it more of an online phenomenon? Or is it more in the stores? Both? And do you think it's a longer-term issue from a structural headwind now that we have that -- has to be alleviated by some capacity to be taken out at some point in time? Just any thoughts there would be helpful.

This is Laura. There's no question all retail is still very promotional. And we have said that we don't believe it's going to change. So we have built some structural savings into our supply chain to offset it that make us more competitive. The first thing, the insourcing of our foreign agents, which is a big deal to us and allows us to both reduce costs but also, where we need to, step up the competitive pricing to gain market share. So it is across all brands. We're also working on in Williams-Sonoma, as you know, the shift from a higher percentage of nonbranded products to the Williams-Sonoma branded products, which because of their vertical design, sourcing are higher margin, de facto. So while there are -- we tend to be very aware of the promotional cadence, we have worked on things to offset it that give us a competitive edge versus others, I think, who may not think it's going to -- who may think is going to change in the short term.

Is it more being caused by online players do you think at this point?

No, I think it's widespread. When you walk the malls over Black Friday or the last week, I mean, it's the new norm to see the signs. But where we win is when we give our customers exclusive, innovative product at a great price with great service. That's what we have been focused on. That's what we are focused on. When those things come together then the customer buys from the retail that has the best product at the end of the day, and they want the price to be fair. And that's -- we're lucky to be in the business that we're in. I mean, buying for your home is a considered purchase. It's very important. There's really nowhere to hide on quality. And our customers have some great -- there's some great stats on the economy that I think will allow them to continue to spend more on their homes. It's always been very important to them, but our particular customer base, I think there's some real benefits that are going to happen this year because of the stronger economy.

And that concludes our question-and-answer session for today. I'll now turn the conference back over to Ms. Alber for any additional or closing remarks.

I just want to thank you, all, and we look forward to updating you again next quarter.

And again, that does conclude today's conference call. Thank you, all, for your participation.