Good day, everyone and welcome to the Williams-Sonoma Incorporated First Quarter 2015 Earnings Conference Call. [Operator Instructions] The call is being recorded. And now I would like to turn the call over to Gabrielle Rabinovitch, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, Tori [ph]. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. This call contains non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why these non-GAAP financial measures are 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 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 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 first quarter fiscal 2015 results.

Thank you, Gabrielle. Good afternoon, everyone, and thank you 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. We are pleased to be discussing our first quarter 2015 results with you. In the first quarter, we delivered comp brand revenue growth of 4.6% and EPS of $0.48. Our first quarter earnings results were better than we expected driven by West Elm and our new businesses as well as strong operational and financial execution across all of our brands. Our supply chain and inventory teams did an excellent job managing through the logistical complexity created by the West Coast port disruption. That said, we did incur additional costs largely in shipping and fulfillment as well as lost demand especially in our Pottery Barn brand due to lower-than-normal inventory levels. This short-term issue will continue to impact us to a lesser extent in the second quarter as Julie will explain in a few minutes, but we are pleased to see sales trends improving as stock levels rebound. Our growth strategies, consistent execution and operational discipline put us on track to deliver another record year. We believe we have a strong lineup for the back half, with product introductions and innovative collaborations in all of our brands. We believe that our recently completed supply chain initiative will give us greater flexibility to be more competitive on price and deliver greater value to our customers, that our technology initiatives will improve customer order visibility and further differentiate our service levels and that we have significant opportunity to improve our peak season execution this year. Our strong brands and profitable multichannel strategy create a competitive advantage and we remained focused on executing our long-term growth initiatives. Our mission…

Thank you, Laura, and good afternoon, everyone. We are pleased with our first quarter results. Strong operational execution and financial discipline allowed us to deliver these better-than-expected results as we absorbed the reduction in revenue and additional costs attributable to the West Coast port slowdown. Before I review our financial details, I would like to give you an update on what we experienced in the first quarter and what we are seeing early in the second quarter as it relates to our inventory positions and the financial effect of the West Coast port slow down. As expected, in the first quarter, we lost sales demand and saw a higher backorder creation as a result of the port disruption. We also incurred incremental shipping and fulfillment-related costs. While our inventory flow improved throughout the first quarter, we did not see meaningful improvement in our in-stock and available-for-sale inventory positions until April, and we have seen our sales trends get better as we improve our in-stock positions, particularly in the Pottery Barn brand. That said, lingering effects exist from the port slowdown that are continuing to impact our business in the second quarter, particularly due to higher shipping costs for fulfilling out-of-market demand as we rebound inventory levels across our distribution centers. Our view of the financial impact of the West Coast port slowdown has not changed. In March, we estimated the impact of the ports to be a reduction in net revenues of approximately $30 million to $40 million and a reduction in EPS of approximately $0.10 to $0.12 in fiscal year 2015, predominantly impacting the first quarter. The vast majority of the sales and earnings impact was sustained in the first quarter with some residual impact to be realized in the second quarter. Though it is difficult to estimate the…

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

Just wanted to talk a little bit about some of the expanded clienteling/service offerings in your furniture businesses, and then just hear a little bit more about that. And then find out kind of how some of the similar initiatives that you're -- that you've been rolling out over the last year in the Williams-Sonoma brand, how that's progressing and what you're learning there?

This is Laura. We really believe that relevant offers are the most effective, and so we're so lucky that we have such a robust history of our customers' purchase behavior and the portfolio of brands that we have allow us to understand what the customers are looking for. And we use this information to not only target and personalize our offers online, but also to better connect with our customers in the stores. And so actually our store associates will understand more clearly what the different customers already previously purchased and what they are looking for. And we really believe in building that one-on-one connection in our stores and using our stores for that really high-touch service. And then, of course, they go online and they often -- they go to the store, they visit in the store, then they go online and make the purchase. And so it's a very effective way to target and give our customers offers that are relevant in a sea of I think a lot of offers out there that are less relevant. As it relates to our initiatives in Williams-Sonoma, we've been working hard over the last several years to really develop much more proprietary products, both within our own Williams-Sonoma branded product line, but also with our vendor partners who've been amazing with us in developing those lines. And we've made very good progress, as you see by the positive comps we've been running consecutively, and we also recognize that there's a lot more that we can do and we're testing a lot of new things. We talked last call about our wonderful South Coast Plaza store and the integration of Williams-Sonoma Home into that store, and we see that as an interesting opportunity. We're testing a few different things in that space. It's competitive so I don't want to go too much into it, but I think there's something very exciting there about that interaction.

We'll move next to Peter Benedict with Robert Baird.

I guess, so one question. How are you planning the advertising expense, Julie, within your full year outlook? I mean, it's been -- if you look back, I mean, the last 5 or 6 years, it's been a nice source of leverage, I think it's comped like 10% of sales to about 7% last year. I know that's part of the strategy in how you guys play, but how much further can you go on that? And is that something that you think will continue to be a source of leverage over the next couple of years?

We're going to let Pat Connolly actually answer that question.

Great. Peter, I think we've made improvements, as you say, over the last couple of years, actually over a pretty sustained period of time. And I think we've made fairly significant investments here over the last 12 months in improving the functionality in our websites, which has really improved conversion. Our mobile site sales are almost up 80% year-over-year and a big part of that has been improving our mobile site experience. We're continuing to make strides in personalization and improving in the post-purchase experience for our customers with a focus on order tracking and visibility. We're -- in the marketing, specifically, where we've made strategic decisions to drive customer acquisition across the entire conversion funnel; we're spending more on digital, particularly, in acquiring new customers and we've increased our content syndication and grown our blogger outreach to support the brands. But I think it really begs the bigger question is, "How were you able to do that and still be so profitable?" And that's what's probably the most unique thing about us. Growing to this size, we're the 21st largest e-commerce retailer, over 50% and yet very, very profitable. I think we have a 20-year head start. We have $50 million-name -- 50 million household customer base that have bought from us, but I think fundamentally across the company, we understand that e-commerce, first and foremost, is a retail business and it just happens to be conducted online. And lastly, brands matter and the strength of your brand is really measured by the trust and customers trust us. They've built that trust over many years, in many cases, through experiences in our stores and through buying through the catalog. So I think all of those together are going to allow us to continue to drive further efficiencies in our advertising.

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

The question I want to ask relates to the impact of the port strike and measuring it financially, particularly on the margin side. If you do the math on the numbers that you gave us with the sales hit and the EPS hit, you get essentially implied 50% margin flow-through, which I would imagine is pretty close to your merchandise margin -- your pure merch margin of the sales that you lost. Is there a way for us to understand the impact to gross margin rate from the extra shipping costs and other additional expenses associated with the port strike?

Sure, Matt, this is Julie. I'll take that. I think the way to think about it, obviously, we hadn't quantified it necessarily or disclosed it by line item, but the reality is the biggest impact is to gross margin. And so when I said in my prepared remarks that our gross margin is effectively down due to lower selling margins primarily from the increased shipping and fulfillment-related costs due to the West Coast port disruption, it's primarily due to that. So that's one way to quantify it. I think the other way to think about it is that the pure merchandise margin was down year-over-year. This was also due to the fact that we had to fill promotional holiday products that was held up at the port at the end of the year and so we basically didn't get to recognize that in Q1 which also impacted the margins. So really the story is that the gross margin was almost entirely impacted by the West Coast port.

And then how do you feel about the merch -- the pure merch margin trajectory, which I know started to make headway in Q4? And I know you have some initiatives that are directed at shoring that up. Do you feel like those initiatives are still on track and that number could ultimately start to flatten out?

Absolutely. So I mean, we expect that there will be a short-term shipping pressure, of course, as we go into Q2, given there's still the residual impact from the port that will happen in Q2, but as we move longer term throughout the balance of the year and, obviously, post this year, all of the initiatives that we've been working on, in particular, the in-sourcing of our foreign agents and the regionalization of our distribution centers, lower costs for us. So I mean, the in-sourcing as you know, got -- was completed last year in June so this is our first full year of that. And just alone by the fact that we don't have the overhead structure with a third-party has reduced cost on that line. So we do expect longer term to see margin expansion.

And next we have Greg Melich with Evercore.

I think my question really followed on, I think, from the last one. When you think about that in-sourcing and how the inventory is growing, even though we're -- we've had the port problems and not been in stock, what should we expect a normal merchandise inventory number to be now that once we get the port thing cleared out, should we still be growing at, say, 10% to 12%, but that the in-stock or the available inventory is now 10% or 12%? Or how should we think about that?

So I mean, obviously we don't guide per se inventory levels other than to say, which I think Laura mentioned in the call, that to be in stock, this whole West Coast port slowdown has really validated for us the criticality of being in stock. And so we are going to be focused on improving our in-stock inventory levels, obviously throughout Q2, but to set us up really for the back half of the year. And so we expect that our inventory will not only be replenished by the end of the second quarter, but that we'll grow it faster than our revenue growth as we are investing in inventory to set us up for the back half of the year and longer term.

So if inventory is up 11% year-over-year, we should expect it to still be up 11% at the end of the second or third quarter and just that the in-stock availability is better?

So obviously, I'm not going to be able to give you a number, but your expectation should be higher than that if I'm referencing in-stock inventory is going to be growing higher than revenue growth because the 10.9% relates to the balance sheet inventory level.

Got it. And the payables that haven't been growing, I guess should we expect payables to start to grow as you -- as that inventory normalizes so that the working capital cost isn't as great?

Absolutely.

And next we have Jessica Mace with Nomura Securities.

My question is on West Elm. I'm just wondering if you could talk about in the strong results you saw this quarter, what initiatives have gone into place that are beginning to impact that and maybe some of the timing on some of the other initiatives such as contract or the partnership with Inscape that we should expect throughout the rest of the year.

Thanks for the question. We've talked about choice, consciousness, community. What does that mean? Choice is in the product offer and we have great aesthetic choices for our customer. Mid-century and industrial aesthetics continue to work well. And we are seeing growth across all categories, honestly, with outsized growth coming from furniture. We continue to bring in new flows of product and stocks in Q2. We're really excited, we have a pre-fall assortment we've never had before. It helps us break the monotony of the end-of-season sale and buoy the margin up when a lot of other people are on sale. We also -- as you think about the other 2 initiatives, we realize that customers don't just want to buy things. They want to know where they're from. They want people to source products sustainability, and West Elm has really embraced this idea and has such a big footprint in the area of consciousness because of all the wonderful things that they're doing. Jim Brett and his team actually were the #1 people to raise money for the AIDS Walk last week in New York, which we were very, very proud of. It's just one small example of how involved West Elm is in every single local community. And as far as it goes to new initiatives in West Elm, Workspace is a big one, right around the corner. We're going to launch at NeoCon on June 15 in Chicago. For those who don't know, NeoCon is the largest commercial interior show in North America, takes place in Chicago and it's the premier platform for connecting learning and doing business in the industry. And we're going to be opening, in conjunction with that, our permanent 2,500 square-foot showroom at The Merchandise Mart, and we are on track to have dealer representation in all key metropolitan areas. So West Elm Workspace is more than on track and it includes more than 75 furniture pieces for offices, cross desks, benching systems, private office and common lounge spaces. And we see this area as one that is really underserved in the market.

And next we'll move to Simeon Gutman with Morgan Stanley.

One follow-up to Matt's question and then a separate one. If we look at the financial impact, maybe a slightly different way, just in terms of what the EBIT margin would have expanded, our math is getting us to about 20 basis points, Julie, and I don't know if there's anything wrong with that math. And then, if that's right, is that largely -- is that mostly gross margin-driven?

I think it would be higher. I'm obviously not going to give you that number exactly, but it would be higher margin expansion on the bottom, and it is largely -- predominantly, gross margin.

Okay, that's helpful. And then just one, maybe for Laura, can you remind us if you commented on this, how big the outdoor furniture category is for you; the time frame that the bulk of the sales get done and then any early read on how that business is performing?

It is so competitive, I'm sorry, that I'm not going to give you the number. I will tell you that it is off to a great start.

Next we'll move to Seth Sigman with Crédit Suisse.

Can you guys update us on the International business? I think you mentioned improving margins there this quarter. Can you elaborate what's driving that? And I realize you're probably still somewhat in investment mode there, but how do you think about the potential to close the margin gap at that business and your U.S. business?

Okay. I'll take that. It's Julie. Yes, we're very excited about this opportunity, as you know, we believe this could be a huge growth opportunity for us long term, and I think as we said to many of you that this is a long-term model to get it to be the level we want it to be, anywhere from 3 to 5 years from when we enter the country. And so we're just starting to get to a level of scale that we can start to see some of these benefits. But it's still in the beginning stages and one of the biggest things we did, as an example, that's improving the margins is we renegotiated our distribution center deal there, and that generated some substantial savings. And so it's little things like that, one after another that we're looking at and pulling apart and just becoming more operationally efficient. And so as we move through and get more scale, we're going to see more of those opportunities.

Now move on to Michael Lasser with UBS.

I'm wondering about the competitive landscape. Presumably, since you are bigger and have a little more muscle in the marketplace, you were less-impacted -- although you're still very impacted by the port issues, you're probably less impacted, maybe, than some of the smaller players out there. And so do you think that as a result, some of those smaller players or ever medium-sized players, were less promotional because they didn't have the inventory to promote and so that made the environment a little less tense? Because it seems like you were less promotional if all the merchandise margin pressure was related to the West Coast port.

I'll just say it is still promotional out there, but I wouldn't read too much into the comparative number of promotions we run. There are promotions that we didn't comp obviously and there's ones that we changed. And it's part of doing -- executing our strategy, and I wouldn't say it's an elevated level per se in the marketplace. But I think the things that really set us apart in our categories where we compete are that, first of all, we're vertical. We create, design and contract most of what we sell. If you want to buy our products, you have to buy them from us. And this model not only gives us exclusivity and pricing power, that eliminates layers of cost that we can pass onto the customer in the form of outstanding quality at a great value. The other major difference is our model, obviously. We really do operate a different model than most of the people that are out there trying to compete with us, and it's really, I think, beyond multichannel or omni-channel. I think what we're creating is a three-dimensional experience. And when you close your eyes and you think of our brands and you think of our stores and catalogs, they bring our brands to life, and in our categories, I think that's the magic. You can visualize how your home would look, how the meal you will serve to your family and friends will look and then you can go to one of our websites and you can quickly order it, and I think that's what makes us different. And I think that is what is the big part of our continuing success.

Well, that makes sense and that's helpful. Just a quick follow-up on the margin question, do you -- is it -- should we expect as we're forecasting the P&L, that you should get most of the margin pressure that you saw on the first quarter back in the first quarter of next year?

In the first quarter of next year? We're not providing...

Yes, just as you anniversary it, there's nothing that really should be ongoing. It's all kind of onetime-ish, correct?

Well, obviously, we have next quarter as well with the residual impacts that we're going to be experiencing with higher shipping costs that will hit the gross margin as well. But to the extent we've quantified how much is worth the port in that range, that is what we expect is worth in the port in Q1 this year.

And we have time for one last question, and that'll be from David Magee with SunTrust.

I just had a 2-part question. One is can you give us an update in terms of what you expect to do this year in reducing custom furniture delivery times? And at the same time, I'm curious what's happening with regard to your ability to recognize e-commerce visitors and then how that's changing this year as well?

Could you repeat your second part of your question?

Sure. Just the -- your ability to recognize unique visitors to your site. And it's my understanding that, that capability has been improving and -- which is obviously a nice competitive advantage. Any color there would be helpful.

Okay, thanks. On the first one, when you think about our competitive advantages, certainly one is our supply chain. And we believe that speed is another really important new currency in the furniture marketplace. As you know, we've invested in our own furniture, upholstered furniture manufacturing unit, and we are making some strategic changes so that we can significantly improve wait times on our upholstered furniture, which I think is really a game changer because so many other people who are cropping up, they don't even -- it's not their product. They're in a marketplace model. And they don't control the supply chain and we know that we can provide superior service and higher touch service by controlling the whole thing, and this opportunity to reduce the wait times substantially is one that we're extremely focused on. And Pat, I think maybe you should take the second part of the question.

Sure. I think, Dave, you're referring to our ability to identify customers when they come to the site and then offer -- and give them personalized offers based on that and that's really a function of new technology that we implemented last year and we've gone from recognizing 25% of site visitors up to now 60% or 70%. We're actually recognizing and knowing about 15% to 20% of site visitors who've never been to the site before and then being able to, understanding that, give them the right kind of offer and to serve up this personalized content based on their experience with us up to yesterday and do that in less than 20 milliseconds, so it's a big technology enhancement. And I think we're still in the early innings and you'll see throughout this year and in coming years just our ability to personalize virtually every page for the customer. So we're pretty excited about not only what we've been able to do, but what we think what we can do in the future.

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

Well, thank you, all, for joining us this afternoon. We appreciate your time and continued support, and we look forward to speaking with you again in August.

Thank you, everyone. And that does conclude our conference call for today. We thank you for your participation. You may now disconnect.