Welcome to the Williams-Sonoma Inc. Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. [Operator Instructions] This call is being recorded. 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, Melissa. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our discussion will relate to results and guidance, excluding non-GAAP items. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press releases. 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 2016 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 statement 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. 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. Today we are reporting record revenue and earnings per share for the year as a result of the strength of our portfolio of outstanding brands, our balanced multichannel model and solid execution. We delivered top and bottom line performance within our guidance range despite a challenging end to the year. Disciplined management allowed us to meet our commitments as we adjusted to an evolving consumer and competitive landscape. Our brands are highly aspirational and relatable at the same time and create a platform for growth. As we look forward in all of our brands, we have targeted strategies and opportunities that we believe will allow us to profitably grow market share. We will improve our competitive positioning across product, service and value for our customers. We are expanding our brands into new products and market segments through the expansion of proprietary products. We are developing cross-brand initiatives to more fully engage with our customer and to leverage innovative marketing channels, and we are also investing in our high-growth newer brands, particularly West Elm. The brand's current growth trajectory, entry into the commercial furniture market with West Elm Workspace and international growth potential position it to become a $2 billion brand. And we are rapidly expanding our global reach through existing and new franchise relationships and other opportunities, such as the John Lewis shop-in-shop model. In addition to executing against our growth initiatives, we see the opportunity to do business differently. We have identified 4 key strategies that will drive improvements across the organization. We are confident that between our growth opportunities and these strategies, we'll double…

Thank you, Laura. Good afternoon, everyone. Before I walk you through the fourth quarter financial results in more detail, I would like to begin with a few fiscal year 2015 financial and operational highlights. Despite a challenging environment, 2015 was a year of solid accomplishments with record revenue and earnings. For the full year, we delivered net revenue growth of 5.9%, taking our total revenues to nearly $5 billion. And we delivered EPS growth of 5.3% to $3.37, consistent with our guidance. Our revenue growth on the year once again exceeded the home furnishings market and allowed us to capture additional market share. Our e-commerce revenues grew to be 51% of the total and retail revenue growth accelerated 300 basis points, growing 5.4% to almost $2.5 billion. West Elm delivered another year of outstanding growth, with revenue increasing more than $152 million or 22.7% and comparable brand revenue growth increasing 14.8%, a double-digit increase for the sixth consecutive year. We also experienced close to 40% growth for the year in both our emerging brands, Rejuvenation and Mark and Graham. And in our international operations, we saw more than 25% growth. Our pure merchandise margins were flat on the year, demonstrating the direct sourcing advantage we have over other retailers. Our SG&A leveraged 60 basis points, highlighting our strong financial discipline. And we generated $544 million in operating cash flow, returned $353 million to stockholders and invested in our long-term initiatives with $203 million in capital expenditures. Now I would like to discuss our fourth quarter financial results. In the fourth quarter, net revenues grew to $1,586,000,000, a year-over-year increase of 2.9% with comparable brand revenues increasing 0.8%. Growth was balanced between channels, with net revenues in both our e-commerce and retail channels growing 2.9% and representing 50% of total revenues.…

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

Just wanted to follow up a little bit on the near-term guidance and then kind of square that a little bit, just bridge a little bit to the longer-term view, which sounds like it's in line with what it has been. For 2016, I know you'll have the absence of certain, let's say, drags related to the port. I guess, can you help us think about how much of a drag that was last year and then how much the incremental investments are in total this year? And then, again, maybe help us, just if there's 1 or 2 most important things, whether it's supply chain rolling off over the next few years or something, some other aspects of it, that kind of bridge to that higher rate of longer-term growth, that would be helpful.

Sure. And I think as we said in our prepared remarks, we anticipate our 2016 earnings growth to be lower than our 3-year outlook because of the investments that I just highlighted, particularly in our supply chain. In short term, though, those offset the "port benefit" that may have been expected this year. Longer term, those are strategic initiatives for us. As far as it bridging it to the 3-year outlook, we believe that after we anniversary the investment in this additional Southeast DC, particularly this year, and as we move through the year, as we've seen a lot of our shipping performance metrics improve and we get out of offsite DCs, et cetera, all of that will allow us to leverage our supply chain operations. And that, plus the additional opportunities for growth that I highlighted, obviously, across West Elm with their $2 billion in -- growing to $2 billion in revenues, the scaling of our global initiatives, our emerging brands, who have had 40% growth just this past year alone, all of that happening at the same time and not investing in additional DCs over the next 3 years should allow us to take a step up in '17 and '18 to where our longer-term 3-year outlook implies on the earnings line.

We will next go to Peter Benedict with Robert Baird.

A couple of times, Laura, you mentioned kind of appealing to a broader base, customer base, and I was just curious, are you speaking about age demographics, millennials, et cetera? Or are you talking more income demographics?

One of the, I think, the greatest advantages of our multibrand company is that we have differing aesthetics, appeal to different types of customers at different life stages. And that, I think, is a really good place to be. You would like to see them all go up at the same time, but the reality is it gives us, like I'm sure in your portfolios, a hedge, if there's one certain area that is trending or not trending. And so what we're always looking for is the white space, both areas where none of the brands are covering or within a brand where we may not be performing to the level we think we should be. And so specifically, there's -- I think there's no brand that better understands the millennial customer than West Elm. And we've learned a lot through studying the -- what they're buying and how they're buying it and when they're buying it and what is appealing to them. And so that allows us to think, I think, really specifically about how to appeal to that customer in the other brands. And so we see a lot of opportunity, without losing our core customer, to appeal to a wider range of customers and to be very accessible to people. And as I've said earlier, accessibility is, I think, key and it's also important that you are providing inspiration, but you don't want to be so inspirational that you -- that people don't relate to you. And so that is a really key attribute of the way we're approaching our brand aesthetics and thinking about the future and thinking about stores that are extremely welcoming and energetic and new and fresh in great markets, and then how that translates to the websites.

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

Could you both size this investment in the Southeast DC, in particular? It seems like it's a pretty big item for this year. And then just to the extent that '15 and '16 are going to be below the algorithm and the world is changing, what will get easier to enable you to get back on that track? It feels like the competitive environment probably has been somewhat dynamic. Do you expect that to abate or have you incorporated those ongoing challenges in your thought process?

Matt, I'll start. Basically, we haven't per se quantified it except to say that clearly, you can see that it's more than offsetting the related port benefit I think everyone expected us to get back. We are investing in some very long-term strategic areas for us to continue to drive our leadership position. So we're investing and supply chain, which is the new Southeast regional DC, which is going to allow us to get out of off-site which allows us to reduce occupancy, allows us to reduce labor and allows us to reduce labor on productivity. We're also investing in new systems to be able to get our inventory balanced correctly, which, obviously, drives efficiencies. And we're also investing in higher labor costs, which I think we can't underestimate, and we are not alone here. I don't know if other retailers have talked about it, but there's -- everybody is facing this. As the world is moving more to e-commerce, the -- getting distribution center talent, good talent is getting more and more competitive. So that is a reality that all retailers are facing right now. And so we are investing in that as well. With that said, as we sort of move throughout this year, I think some of the key things to know is that as we entered the end of the fourth quarter and as we entered into 2016, we saw out-of-markets improve, we saw better fulfill rates, we saw better back-order positioning and we saw reduced shipping costs. So all the things we were working on in the back half of the year are starting to pan out. Unfortunately, we have this offset with the -- short-term offset with the incremental costs of this DC, but as we move throughout the year, that also will start to leverage. And so when we enter the back half, definitely when we get into 2017, we will have supply chain efficiencies that we'll begin to leverage in a big way, plus when you add in these other areas that we've been investing in. So West Elm, again, great trajectory. I mean, we can't underestimate how strong that brand is and what that does to our bottom line. You can't underestimate the fact that our international is growing 25%. It's growing to $300 million this year, and we talked about how when that starts to leverage, that's a big influence on our op margin. We've talked about our smaller businesses, Rejuvenation and Mark and Graham, same thing, they grew 40%, and when those start to grow that leverages the bottom line. So you put all that together, by '17 and '18, we think we're back to the races with our 3-year outlook.

And the second part of your question about what's going on in the world, and clearly, there's a lot of external factors, and many people have pointed to them, and frankly, we would prefer to be self-critical. We'd rather look at every area of our company that we can improve so that we can outperform no matter what environment is, hence, the 4 areas of focus that I reviewed in my prepared remarks. And also, we believe that the promotional environment will not recede and that no matter how you package a discount, a discount is a discount. And so we continue to go through a systematic category review so we can be sure that we are well positioned versus the competition, offer price on like items, and that we have superior quality. And so in summary, we have the changes we're making, and we have several structural advantages that we will continue to flex, including our exclusive design capabilities, our direct sourcing advantage, our sophisticated marketing capability. And we believe we'll see margin upside over time as we reduce less productive SKUs and fully rollout our new sophisticated inventory management system.

We'll next go to Chris Horvers with JPMorgan.

So you're guiding to a much better trend in the first quarter than what you just put up in the fourth quarter. Can you talk about what's changing? What happened in the fourth quarter? Was it the screaming promotional level on the mall? Was it the tough traffic on the mall? Was it the consumer reacting to the stock market? Is it your improved in-stocks? So just give us some perspective on what seems to be a big difference between last quarter and the current quarter.

I'm going to start and then I'm going to let Pat finish. Yes, Q4 was tough across retail, and our top line came in lighter than we had planned. We got -- we had gotten off to a stronger start, and it was -- the toughest part of our quarter was the high-gifting time period. It was December. And Pottery Barn brands were the most affected, but frankly, we expected to see stronger performance in all of our brands as well. And if -- and so there was a lot of pressures on price points, there's the nature of gift-giving, and what I am very pleased to see is that we get -- as we get past that gift-giving period and people start to purchase for themselves and for their home, we're seeing better results. And Pat, you want talk about some of the marketing?

Yes, sure. Chris, specifically, on the direct side of the business, we did see a decline over the single -- high single-digit performance we'd had all year. And although we're only about halfway through Q1, we are seeing a significant positive change compared to Q4, and I think we're confident in our ability to take market share, especially direct, and in all of our channels. We're focusing on improved product marketing to better communicate our product quality and differentiation. We're introducing more products in categories that perform particularly well online. We're accelerating, in particular, in our marketing, our personalized marketing efforts, our personalization, where we've had excellent results so far, and we're advancing these programs. And we're reallocating more of our marketing mix with an increased focus on digital and new customer acquisition marketing programs where we've seen good performance across the range of programs. So I think we can -- the combination of all those activities are driving positive results, and I think we'll continue -- we're going to continue to expand on them in the coming quarters.

Just one follow-up to that. I mean, do you think there were some questions about the high-end consumer? Obviously, you saw Resto [ph] and Nordstrom had made some commentary last summer. So was any of this element maybe a solidification of the -- your core customer? Now maybe the stock market's back in a better spot?

As I said earlier, we believe if we stay focused on the areas where we know we win, we will continue to be able to grow and -- across multiple customer areas because every customer is looking for value and great quality, and there's a lot of work that we can do to improve those areas for us. So we prefer to be self-critical, as I said earlier, than to look at these external factors.

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

My question is on the real estate strategy that you talked about. I was wondering if you could quantify the opportunity on some of the lower-traffic malls. I think you said 27 openings for 2016. If there's any guidance you can give us on repositions or closings as well, that would be helpful.

The closures that are in our store guidance that we've provided to you guys today are not associated with any early terminations, and at this point, it's really too early to comment on specific leases and landlords and -- but I think the key is that we want to make clear our approach is changing. Our customers are driven by the experience. They want to engage. They feel a sense of community. So it needs to be local and it must be relevant. So we are looking carefully at our portfolio of leases, and we have very strong partnerships with our landlords, and that is leading to opportunities. But as far as the change and what has been provided to you in the guidance is our standard process of shutting those stores down at the end of their natural lease terminations because they don't meet our profitability hurdles or for whatever reason, plus the additions, which are 27, which are particularly in the West Elm brand, our fastest-growing brand.

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

I want to go back to the top line for a second. I know the comp was about 1, and we know in the industry grew a little bit faster than that. And I appreciate you being very self-critical, but I'm curious again to just try to focus on if it was a high-end customer that slowed, I mean, there was clearly some share shift. Are you seeing anything change from a consumer behavior perspective? Were they more item focused? Are they becoming -- are they not buying the full rooms as they once were? Just try to diagnose, and I guess, it may be moot if it's improving already this quarter, but it was a relative anomaly from a share perspective. And I'm just trying to understand it a little bit better.

I guess another way to maybe answer your question is that we continue to see very strong furniture growth. Where we saw weakness was in some of the gifting categories. West Elm is predominantly a furniture brand.

Right.

And we have -- our top customers are doing really well with us. We do look at the whole file, and it's really important to us that we have retention and that we have new customer growth as well, and we're always focused on both, all the way down the customer curve. But there isn't one standout piece other than we want more customers and we want them to shop more frequently with us and buy more and have great experiences.

We'll next go to Brad Thomas with KeyBanc Capital Markets.

I wanted to ask about West Elm and sort of the bigger topic of revenues. You're clearly doing very well in growing the West Elm business. And to some extent you just answered this with your reference to still seeing strong furniture growth in Pottery Barn. So I guess, could you just give us your latest thoughts on what you're seeing in terms of overlap of customers between West Elm and some of your other brands, namely Pottery Barn, and how you're thinking about that dynamic evolving as you continue to grow the West Elm business?

It's a great question. We love to study those things, and we are very -- always concerned about any cannibalization. In fact, we haven't seen it. We've seen that when we do cross-brand work, whether it's catalog mailings or e-mails or digital marketing, we are seeing lift because it's related. And we do not see cannibalization. In terms of the crossover, it's highly competitive, so I'd rather not give you that information right now. But it's additive and it's incremental is what I would answer question on.

Great. And if I could squeeze in a housekeeping item for Julie, could you quantify for us perhaps how the growth of international may affect margins or operating income in 2016 relative to 2015?

Well, it always depends, obviously, in the mix of the revenues. Clearly, in Q4, in particular, because we had much higher mix of international, in particular, franchise operations, relative to the domestic business given the softness we saw in Pottery Barn, it has a much bigger impact then on the gross margin. But as we continue to grow it, and to the extent the growth becomes -- or comes into the franchise, you'll see a negative impact on gross margin but a positive impact on the op margin. It's accretive, actually, to op margin. And from a top-level perspective, the more volume we have in international, regardless of where it comes from, is a positive because it starts to leverage our entire infrastructure. And so I think that's a real key takeaway and a great question. The fact that we've grown it by 25%, we're now at $300 million, and we're continuing to grow in every metric we're looking at looks for a continued improvement, that could be a huge driver for us as we move into the out years.

We'll next go to Dan Binder with Jefferies.

It's Dan Binder. On West Elm, yes, just looking at the comp store sales growth, still very strong, a little bit below where you had been earlier in the year, but you're also slowing -- it looks like you're slowing the store growth rate in closing 2 stores. I'm just curious, as you thought about your real estate strategy, what your thoughts were on West Elm specifically and the number of stores you think you ultimately could get to and whether there was some sort of significant change in the thought process.

We are very pleased with our new store performance and learning a lot about how big this brand can be by opening in a lot of different types of markets and putting additional stores in markets. And we're actually finding that probably the slightly bigger model, 13,000 versus 10,000, is better. We are constantly making improvements to the design and the services in our stores, and we'll continue to look for more opportunity. But we're diligent, so we don't want just to open stores to open stores. We're thrilled with the line-up we have for this year and the following year. And there's a lot of room for growth also in our direct business, and as I said earlier, in some other channels of business that we have identified because of the -- how innovative this team is and just seeing opportunity to take categories of furniture that are out there in the world and improve them. And so Workspace is a great example of that and a very big business that is not done through store and is not done through DTC either. It's done through dealers and will be a great brand halo and another way to extend the brand in the coming years.

We'll take our next question from Michael Lasser with UBS.

As you've seen improvement in the business into the first quarter, what have you noticed from the response to your promotions by the consumer? Have they become more effective? Has the overall promotional level within the industry become less intense? And has the improvement been due in part to less-giftable items comprising the first quarter than the fourth quarter?

Thank you. Lots of things. The -- and we do not see the promotional environment receding. There's a lot of people with a lot of different types of promotions, but we know that the customer is looking for the best value. They look at the offered price. They are looking at the quality, and the experience matters. I mean, delivering and receiving furniture is a really important part of the decision and the future purchase decision. And so we have been working on a lot of things for a while, and I think the combination of all of them is causing some improvements. And it's early, you guys, in the quarter, but we did want to tell you we're seeing some improved results, and we are going to build on successes we're seeing. And where we're not getting the results we want, we're incredibly critical, and we have time frames and action plans and people accountable for the improvements in those areas.

We do have time for one last question from Brian Nagel with Oppenheimer.

So if I'm hearing you correctly, yes, it seemed like that the sales weakness in the fourth quarter was much more tied to kind of the giftable categories, and we've had now an improvement here, at least early in the first quarter, but -- so the question I have is if we think about, particularly the Pottery Barn concepts, how much of that product -- how much of a shift in product mix is there through the holidays to giftable items? Those -- are those items -- is the product mix then again shifted now as we head into the spring? So I guess what I'm was asking is this, is there -- was there a category, or a shift that occurred that sort of, say, fueled the sales weakness, and now that category is largely gone?

It's so hard to know, right? I mean, you don't know if someone is buying it for themselves or buying it as a gift. You just know that they're not buying it as a gift when you get out of December, that's it's a self-purchase, and it's a very different dynamic. I mean, I think about ourselves as customers and how we shop. And I think we have to continually provide better services in the holiday season and even more convenient service next year. And then more innovative products because the truth is, our success makes other people look very closely at what we're doing and we need to make sure that we're constantly moving to the next great exciting key item versus being able to rely on past sellers. And that's an important change that we're making. And we already have started working on our holiday assortments for next year and looking at which things we should change and which things we should carry over and ensuring that we have exciting new things to buy. And at the same time, improving the service because that is a sea of a lot of noise at the holiday season, and we want customers to come to the mall and have a great experience with us. And we are pleased with the improvements we made this year, but we think we can do even more in the coming years in store.

Helpful. And if I could just slip in one follow-up. And -- was there any type of geographic difference in sales as we think about this weakness that occurred?

Pat, you studied that. Do you want to answer that?

Yes, I think there have been a number of questions about that, and we have looked at the performance of all of our brands, particularly in areas like Texas, Florida and Canada, and we're seeing no discernible difference in these markets compared to others. This is across all the brands and quite honestly, it really hasn't been a burning issue for us.

And 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.

I want to thank all of you for joining us this afternoon. We really appreciate your time and your continued support, and we look forward to speaking with you again in May.

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