Williams-Sonoma, Inc. (WSM) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Williams-Sonoma Third Quarter 2016 Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Ms. Beth Potillo-Miller, Senior Vice President, Finance and Corporate Treasurer, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, Katherine. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our discussion will contain non-GAAP results and guidance, including non-GAAP EPS and operating margin, which excludes the impact of unusual business events. 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 release. During the first and third quarters of 2016, we incurred severance-related organization charges due to the reduction of headcount, primarily in our corporate functions, totaling approximately $13 million or $0.09 per diluted share and $1 million or $0.01 per diluted share, respectively. These charges were recorded as SG&A expense within the unallocated segment. The remainder of the discussion today will reference third quarter results and full year guidance related to EPS and operating margin on a non-GAAP basis, excluding this unusual item. 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 statements to reflect events or circumstances that may arise after the date of this call. I would now like to turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our third quarter 2016 results.

Good afternoon, and thank you all for joining us today. On the call with me today are Julie Whalen, our Chief Financial Officer; and John Strain, our Chief Digital and Technology Officer. In the third quarter, we delivered revenue growth of 1.1% and earnings per share of $0.79. Growth was fueled by strong year-over-year revenue increases at West Elm; our newer businesses, Rejuvenation and Mark and Graham; and our international company-owned businesses. Comp brand revenues in Williams-Sonoma were essentially flat, up 0.1% with the Pottery Barn brand declining 4.5%. Although the current environment is less certain, we remain focused on what we can control and we are confident that the ongoing progress on our strategic initiative will improve service for our customers and will drive long-term sustainable profitable growth for our shareholders. As we look to the balance of the year, we believe that the customer is resilient and will spend money on the holidays, especially for their home and with brands that they love. And we are entirely focused on delivering a better experience for our customers this holiday season. We continue to make great progress on our customer-centric initiatives, which include supply chain and inventory improvements, innovative products at the best value, marketing strategies to increase new customer acquisition and enhancements of the retail experience. The improvements resulting from these initiatives are the reason that, even with sales not as strong as we'd like, we delivered Q3 earnings at the higher end of our guidance and we delivered this earnings performance without cutting investments in our future growth strategies. And most importantly, these initiatives improve service to our customers. In our supply chain, we made significant progress in our home delivery experience in the third quarter with measurable improvements in pieces per delivery. This was driven by better positioning of inventory resulting in fewer out-of-market shipments and improved order completeness. Additionally, we are working hard in our upholstery manufacturing operations to ensure multi-unit orders are shipping together. As a result, we've significantly reduced our delivery occurrences resulting in more customers receiving complete orders in 1 delivery. These types of improvements are particularly important as they simultaneously provide a better customer experience while also reducing freight costs. Our new Southeastern distribution center in Georgia is now approximately 75% full and is shipping approximately 60% of our Southeastern volume. Average delivery time to customers in this region have improved 3 to 5 days. As inventory levels continue to ramp up in this facility and the fulfillment percentage growth, we should realize further improvements in delivery time and service as well as reduce out-of-market shipments and freight costs. As we enter the 2016 holiday season, we expect shopping will occur late in the quarter and we have prepared for the season with investments in process improvements and employee training in our distribution centers and believe we are well positioned for improved holiday fulfillment performance relative to last year. In our Memphis and Olive Branch operations, we have invested considerable time and effort in SKU rationalization and reengineering of our picking process flows and technologies over the past year. These enhancements and efficiencies will help drive faster order fulfillment in our DCs for this holiday season, as well as improve efficiencies and the overall customer experience by reducing the shipment of multiple cartons to the customer's home to fulfill a complete order. We are spending more time investing in improved training for our seasonal and full-time associates while simultaneously revamping our talent sourcing approach to provide candidates with more flexible options to make us the employer of choice. This is particularly important as the labor markets become more competitive in various areas of the country where our distribution sites are located. We have strategically built our staffing plan to get ahead of the hiring ramp and also to optimize our staffing to accommodate the later Christmas e-commerce order curve as we expect to see this year. In retail, as I mentioned to you on our last call, we are taking a very aggressive approach to our retail and real estate strategies to improve the experience in our stores. We are underway with an extensive analysis of our stores, reviewing locations and looking at ways to optimize our fleet. As the results of our analysis, we have identified stores that may close upon natural lease expiration. And at the same time, we are also investing in store remodels and are seeing good results. In Pottery Barn, we continue to drive year-over-year improvement -- improved results in our remodels in Corte Madera and South Coast Plaza and we have 3 other store refreshes opened in early November including, Mission Viejo, Columbus, Ohio and Broomfield, Colorado. We'll also continue to open stores in select markets such as Nashville, Tennessee and Wichita, Kansas, which have -- both of which are exceeding our expectations. In Williams-Sonoma, we are pleased with our Ponce City store in Atlanta Georgia, which opened last year and our recently remodeled stores in South Coast Plaza and San Diego, California. In Q3, we rolled out 4 stores in the new Williams-Sonoma format in San Luis Obispo and San Mateo, California, Toronto, Canada and in Troy, Michigan, all including Williams-Sonoma Home products. We also added Home products to another 6 stores in Q3 bringing our total installations to 36. In these locations, we are seeing positive growth in sales driven by conversion in average transaction size, validating that the strategy is working. All of these stores are performing above our expectations. Importantly, when we add Home installations to our stores, we not only see increased sales in these stores, but we also see an increase in online sales of WS Home product in the surrounding areas. And in West Elm, we are seeing excellent results in our new stores, including our relocated Empire Store in Brooklyn New York, and we now have a total of 98 West Elm stores. We will continue to update you on the progress we are making across our retail fleet. In marketing, we continue to shift our investments from catalog to digital to acquire new customers cost efficiently. A key reason we have been a leader in online sales is our almost 60 years of experience building and nurturing our house file of customers who have shopped with us in our stores, over the phone and on our websites. We continue to capitalize on that heritage as we enhanced our house file with more information about our customer, allowing us to deliver even more relevant messaging in e-mail, and our sites on mobile, on social platforms and through direct mail. Expansion of our digital identity capabilities has allowed us to understand our customers' behavior across devices and our channels, as well as across our brands. The leverage of our house file and expansive range of product offerings across differentiated brands are areas of significant competitive advantage. We've identified even more creative and cost-efficient programs to market across our brands. For example, in Q3, we went to market with a premier shopping event, our first overt cross-brand marketing initiative. The event was a success and we learned that our customers appreciated the cross-brand offerings as a way to introduce them to different products and aesthetics, while still delivering on the same great value and quality standards. We are not only able to generate our own demand, but we also acquired significant new-to-brand customers. Following this cross-brand success, we have also recently introduced The Key, our first brand -- our first cross-brand loyalty program. The Key is designed to showcase our brands and reward our customers for shopping across our portfolio. Over the next 24 months, we will continue to expand The Key with elevated technology, services and experiences including integration with West Elm hotels and other new businesses we may develop. In addition to providing value and fun to our customers, The Key will improve our ability to deliver a more relevant experience across all of our brands. In addition to the progress we have made on our corporate-wide strategic initiatives, we believe we are well poised for this holiday season. We've been working on our personalization capabilities and site visibility and have made many improvements to our customer experience. All the supply chain progress we've made this year has prepared us to efficiently fulfill peak volumes in whatever channel our customers want to shop. We have great talent and a focus on outstanding customer service in our stores and we have early positive reads on our holiday products across our brands. I would also like to take a moment to discuss our community engagement this holiday season. 2016 will mark our 12th-year of partnership with Saint Jude's Children's Research Hospital on the Thanksgiving campaign. Over the past 11 years, we have raised more than $34 million for research and the care of children and families facing childhood cancer and other life-threatening diseases. This year, we're especially excited about the give-back programs from each of our brands that are specifically designed for this campaign. In addition to Saint Jude, each of our brands has product offerings and programs that support other organizations that are meaningful to them and the communities they serve. In summary, while the environment is challenging, we are prepared and believe we are well positioned to service our customers by delivering the inspiration and the value they expect. Now I'd like to discuss the key results within our brand portfolio, beginning with the Pottery Barn brands. Across the Pottery Barn brands, including Pottery Barn Kids and Teen, comp brand revenues declined 4.5% with Pottery Barn declining 4.6%, Kids declining 1% and PBteen down 10.9%. As you know, we have been very focused on reestablishing growth across the Pottery Barn brands. Last quarter, I spoke to you about the Pottery Barn brand diagnostic work that we began in July with a third-party agency. This work included extensive customer research and showed that for our brand loyalists, Pottery Barn is a loved brand that is known for its comfortable style and high-quality products. For others, less familiar with Pottery Barn, we are perceived as expensive, too predictable and not for them. We see clear opportunity to broaden our customer base without alienating our current brand loyalists by adding more diversity of aesthetics and scale and increasing value through more accessible price points. And we are very aligned around our brand positioning and opportunity to be the most inspiring American home design resource. We are beginning to see the results of these initiatives with sequential progress in the Pottery Barn brands through the third quarter across several categories, including our new furniture collections and textiles. In the coming seasons, you will see the methodical rollout of our product strategies across all core categories. We're also encouraged by our early holiday reads, with an especially strong response to our holiday decorating and seasonal bedding offerings. In our stores, we are increasing the density of gifting and easy-entry decorating items that also fuel new customer acquisition. We have approved the assortment of key gift items making it easy for our guests to solve their gifting needs. Our holiday newness also includes a collaboration with renowned Indian fashion designer, Sabyasachi. The collection features an elegant -- an eclectic array of colorful, globally inspired textiles and decor. We have received great press in the international media and we believe collaborations of this nature will help us attract new customers and expand our global reach. In Pottery Barn Kids, although we have had a slightly negative revenue comp, we saw improved trends across key categories. Furniture was an area of strength driven by excellent customer response to our new furniture introductions and finishes. Our seasonal business is a highlight in the third quarter with record Halloween and back-to-school results. These strengths were offset by continued softness in the textile category. We plan to strengthen this category through increased collaborations and the evolution of our core aesthetic. During the third quarter, we launched our holiday collection and we believe we have a very compelling lineup for the season. We're encouraged by our early holiday reads across key gifting categories. We are expanding on the success of our Star Wars collection to include new categories with additional playroom and seasonal items. We've delivered new and innovative gifts for children of all ages that represent the unique design and lasting quality that Pottery Barn Kids stands for and we will be the destination for kid-friendly holiday decorating from stockings to ornaments, tabletop and decor. Lastly, we introduced our first Fair Trade Certified product, a holiday hand-felted collection from Nepal and we are committed to supporting the artists in our vendor community more robustly in 2017. In Pottery Barn Kids, collaborations that celebrate inspirational talent in the design community are a key component of our product strategy. We are thrilled to announce our collaboration with Italian designer and mother of 2, Margherita Missoni, which will launch in mid-January. The collection thoughtfully mixes vibrant colors, inviting textures and playful prints and captures Margherita's joyful and imaginative design aesthetic. Now I'd like to talk about Pottery Barn Teen. Pottery Barn Teen results were disappointing. After a strong start to back-to-school and a successful dorm season, we saw softening in our core furniture and textile businesses. Demand was sequentially better than in Q2, but inventory issues impacted our net comp more severely in Q3 than in Q2. Areas that we remain focused on are innovation and product categories, increased value proposition, improved inventory accuracy and enhanced marketing strategies to raise brand awareness. We have specific strategies each quarter across all of these initiatives. We've also made leadership changes in both merchandising and inventory over the last 6 months and the team is highly focused on delivering upon these key strategies. Our expanded dorm offering was a highlight of the quarter driven by quality textiles and runaway hits and easy decorating ideas. We believe that dorm represents a major opportunity for future growth and we plan to significantly increase this business. In the fourth quarter, we are highlighting our offering of innovative high-quality gifts. Here, we've expanded upon our successful occasional seating category with new beanbags, media chairs and sectionals. We recently launched our Gifts That Give Back shop where we have partnered with many of our collaborators to donate a portion of sales proceeds to the charity of their choice. Our collaborations remain an important strategy and continue to perform well. We have several more in the pipeline for 2017 that we believe will bring new customers into the brand. Our upcoming spring collection will highlight many important product initiatives and the work of our new leadership team. We'll introduce new furniture collections and finishes, increase value in textile and compelling decorating solutions at a great price. We're excited to offer our customers new ways to update their teens' rooms and solve their decorating needs. I would now like to talk about Williams-Sonoma. In the third quarter, Williams-Sonoma comp brand revenues were essentially flat, up 0.1 on top of 1.2 in 2015. We continue to execute against our growth strategies, delivering high-quality products, acquiring new customers and transforming our retail and customer experience. Our product strategy is centered around 4 primary efforts: a strong core business built on the best brands in the industry; the expansion and growth of our branded Williams-Sonoma line; exclusive product offerings from our key branded partners; and accelerated growth of Williams-Sonoma Home. Our core business remains healthy including cookware, bakeware and cutlery. We did experience some softness in electric but our early read on new product launches are strong as we enter Q4. Our own Williams-Sonoma branded merchandise has been proven to be incremental. Offering well-designed and affordable products has expanded the reach of our business and continues to be a sizable opportunity. During Q4, we will continue to launch new Williams-Sonoma product as key elements of our assortment strategy. Our new customer acquisition efforts are focused not only in our stores and online, but also outside of our 4 walls. Registry remains a success and we saw increases in registry creation, particularly from our stores. All Williams-Sonoma stores have launched a new series of themed classes that include a product to take home. This series will run through the upcoming months with an exciting lineup of classes. In addition, Williams-Sonoma is promoting its successful cookbook club series with a celebrity chef lineup for fall including Alton Brown, Mario Batali and Ina Garten. Last month, Williams-Sonoma launched its Cookbook Club e-gift Card, just in time for the holiday season. Williams-Sonoma also announced several key sweepstakes teaming up with American Girl, POPSUGAR and Clean Plates to present the ultimate American Girl party sweepstakes. Williams-Sonoma will also present a holiday London calling sweepstakes in partnership with Fortnum & Mason that will include a trip for 2 to London, an exclusive tour of the original Fortnum & Mason store and a Fortnum & Mason prize package. During the third quarter, we participated in 2 phenomenal food festivals, Portland Feast and National Food and Wine Festival. This type of participation enables deeper relationships with both our professional and domestic cooking communities. Also in Q3, we relaunched our Williams-Sonoma credit card program with a great new partner Alliance Data Systems. The launch has been a huge success. With ADS we've been able to offer our customers improved benefits that will result in greater customer engagement. The program offers enhanced loyalty rewards for our customers, as well as a new private label Williams-Sonoma credit card in addition to our existing co-branded credit card. We're seeing great response to our card and the average transactions size on initial card purchases has increased. At retail, we remain committed to improving our customer experience through elevated service, new store management tools and reengineered processes. And as I mentioned earlier, our new store formats are working. Being a part of the community is deeply rooted in our culture and for the sixth straight year, Williams-Sonoma held its annual fundraising campaign benefiting No Kid Hungry. Through the efforts of our employees, our vendor community and our partners at No Kid Hungry, we were able to raise $1.5 million, more than double last year's contribution. The Williams-Sonoma team has worked all year long to prepare for the holidays. We are entering Q4 well positioned with our inventory and early indications are that we are off to a solid start. We have implemented new in-store strategies that we believe will provide a great customer experience. We have a strong seasonal lineup of gifts with many of our favorites returning, as well as some innovative new items and we are ready to execute online, in-store anytime our customers want to shop. Now I'd like to provide an update on West Elm. In the third quarter, West Elm delivered double-digit growth with comp brand revenues increasing 12% compared to last year's 15.7%. The brand continues to experience gains across core segments, but was particularly strong in both furniture and lighting. In the third quarter, West Elm successfully opened 10 new locations across the United States and many of these store sites were carefully selected as part of the brand's commitment to honor and preserve historical buildings and neighborhoods, including a 1930s-era post office arena, a 19th-century coffee warehouse in Brooklyn and a midcentury building in the historic center of Savannah, Georgia. In each location, we also continue to broaden our partnerships with local makers and designers through our West Elm LOCAL program, garnering big interest from both customers and communities. Great experiential retail continues to be central to our overall customer engagement strategy and is a competitive advantage for the West Elm brand. In addition to relocating the brand's Brooklyn, New York store, West Elm moved their headquarters, the historic Empire Stores building in Dumbo, New York. The new Brooklyn store and office further solidifies West Elm's commitment to the neighborhood it has called home since its inception in 2002. Over the past 2 years, West Elm has expanded its scope from home furnishings to designs that impact everyday life at home, work and away. In June 2015, the brand entered the $25 billion commercial furnishings market with West Elm Workspace. This past September, we announced our entry into the hospitality industry with West Elm Hotels. In partnership with hotel operator DDK, West Elm Hotels create a unique venue to fully experience the brand and provides a rich opportunity to help change the future of hospitality. We believe there's a growing desire among modern travelers to have a more immersive and rewarding experience in the places they are visiting. West Elm Hotels will offer a differentiated experience by being wholly focused on the unique character of each location and its surrounding community. West Elm will drive the design and brand experience of each location and will lead brand marketing. DDK will lead property development with local developers and will be our exclusive operator. Neither West Elm nor Williams-Sonoma, Inc. will have any real estate investments in West Elm Hotels. The first hotels are expected to open in late 2018. Importantly, these types of initiatives provide innovative ways for customers to experience our brand offerings outside of visiting a traditional retail store. Because of our online competitive advantage, we are uniquely poised to convert these innovative brand experiences into sales. In September, West Elm also announced Sonos as its home sound system partner in all West Elm stores and online. West Elm is now the exclusive home retailer where customers can experience and purchase Sonos speakers and components as they consider other home furnishing decisions. Participating stores will provide sound as part of West Elm's style and service program and select locations will feature a dedicated Sonos listening lab. Additionally, West Elm announced product collaboration with Whole Foods Market, an exclusive holiday collection to benefit Whole Planet Foundation, a nonprofit organization that alleviates poverty around the globe. In partnerships, Guatamelan textile group, The New Denim Project, West Elm and Whole Foods Market introduced a 12-piece limited time collection of kitchen and tabletop items crafted from premium up-cycled denim. By delivering deeper and more meaningful customer experiences in all aspects of their lives, at home, work and now while they travel, we believe West Elm is well positioned to maintain its momentum on its journey to becoming a $2 billion brand. Now I'd like to discuss our newer brands, Rejuvenation, Mark and Graham and our global businesses. In our Rejuvenation brand, we delivered another strong third quarter with double-digit growth in both the e-commerce and retail channels. Performance in our Rejuvenation stores is exceeding our expectations and we are excited to continue the success as we open our new Lincoln Park, Chicago store this week. Successful retail expansion in key markets is an important step in developing this brand and we look forward to sharing the results with you. Also key to the Rejuvenation brand is our focus on domestic manufacturing. In addition to much of our lighting, which is manufactured by skilled craftspeople at our factory in Portland, we are focused on building new partnerships across the country, including partnerships with one of the last family-owned glass manufacturers in West Virginia, furniture makers in West Virginia, North Carolina and New York, metal workers in Connecticut and basket makers in Massachusetts. Domestic manufacturing is a key component of Rejuvenation's brand and we're excited about how we're expanding it into new categories. We are very optimistic about the strong trends we see in Rejuvenation with our product line extension. Our expansion into new aesthetics and product categories, including chandeliers, furniture and functional accessories, continues to drive increased spend with our existing customers and to accelerate the acquisition of new customers. Now I'd like to talk about Mark and Graham. Mark and Graham's growth in the third quarter came from new fall offerings in personal accessories and category expansions. Revenue was driven by innovative tech gifts and new key fashion handbags. During the quarter, we saw success in offering affordable, customizable luxury across diverse product categories and we're excited going into the holiday season. We also continue to build momentum in our global business. Growth, in the third quarter, was driven primarily by strong performance in our company-owned businesses in Australia and the U.K., as well as new store openings in our existing franchise and wholesale markets. During the third quarter, our global partners opened 8 new locations: 2 stores in Mexico; 1 new store in Saudi Arabia; and 5 additional shop-in-shop locations within John Lewis department stores in the United Kingdom. We are on track to end the year with over 70 franchise and wholesale points of sale. While we seek opportunities to continue the growth of our existing partnerships, we maintain our focus to improve our operations to support new partners and market expansion in the upcoming year. In summary, despite a challenging retail environment, we are optimistic about the future because of our strong portfolio of brands and customers, our strong and profitable e-commerce business generating over 50% of our revenue, our growth opportunities, our financial discipline and our very experienced team. We are completely focused on exceeding our customers' needs and our investments and supply chain are key to both our current and future success. We will continue to optimize all aspects of our business that we can control by executing against our strategic initiatives and we are confident that this will allow us to continue to deliver long-term shareholder value regardless of the short-term uncertainty. I look forward to updating you again next quarter on our progress. I will now turn the call over to Julie Whalen to discuss our Q3 results in more detail and the guidance for the remainder of the year.

Thank you, Laura, and good afternoon, everyone. Our third quarter results once again reflect our ability to execute against our long-term strategic growth and operational initiatives. And we are pleased that despite a challenging retail environment, the continued success of these initiatives has allowed us to generate year-over-year positive revenue growth, improved gross margins and almost flat operating margins and earnings per share at the high end of our guidance range. For the third quarter, net revenues increased 1.1% to $1,245,000,000 with comparable brand revenues declining 0.4% compared to 4.5% growth last year. Revenue growth was driven by West Elm, our newer businesses and our international company-owned businesses, all of which experienced double-digit year-over-year revenue growth. This strong revenue growth was partially offset by the top-line softness we are seeing particularly across the Pottery Barn brands, which we believe have been most impacted by the overall softening of the retail environment. During the quarter, we did, however, see improved trends across the brands and in Pottery Barn, in particular, we saw sequential improvement across several key categories. And as a result, we believe this is why, in October, our home furnishings brands outperformed the home furnishings industry. In our e-commerce channel, net revenues grew 3.3% to $649 million, driven by the continued growth in West Elm, Williams-Sonoma and Rejuvenation. E-commerce net revenues represented 52.1% of total company net revenues, 110 basis-point increase over last year. Our retail channel net revenues decreased 1.2% to $597 million in the third quarter. Strong growth across West Elm, our international company-owned businesses and Rejuvenation was offset by the declines we saw in the Pottery Barn brands. Gross margins for the third quarter improved 20 basis points year-over-year to 36.8% versus 36.6% last year despite occupancy cost deleverage of 60 basis points to $168 million versus $159 million last year. We saw substantial improvements in our selling margins. Our focus on our supply chain initiatives has generated reduced shipping and fulfillment-related costs and our direct sourcing advantage continues to drive material cost reductions, allowing us to provide value to our customers and still maintain merchandise margins that are only slightly down to last year despite continued pressure from a promotional retail environment. SG&A for the third quarter was 27.9% versus 27.6% last year. The 30 basis points of deleverage was primarily associated with higher advertising costs from our decision to incrementally invest in e-marketing as a result of our increased focus on new customer acquisition, as well as general expense deleverage. These increases were partially offset by lower employment costs as a result of our 2016 corporate reduction in force. Operating margin for the third quarter was 8.9% versus 9% last year. By channel, the operating margin in the e-commerce channel was 23.1% versus 21.9% last year. The 120-basis point improvement was primarily associated with higher gross margins resulting from improved year-over-year shipping and fulfillment-related costs as a result of our focus on all of our supply chain and inventory initiatives. This was partially offset by an increase in SG&A, primarily driven by higher advertising costs from the incremental e-marketing investments in new customer acquisition. We are pleased that this e-commerce operating margin puts us relatively back in line with the highest third quarter e-commerce operating margin we have seen. The operating margin in the retail channel was 7.9% during the third quarter versus 8.1% last year. The 20-basis point decline in the retail operating margin was primarily associated with lower gross margins from occupancy deleverage, partially offset by SG&A leverage from strong financial discipline across advertising, general expenses and employment. This retail operating margin also reflects substantial sequential improvement in the second quarter as last quarter, our retail margins were impacted by our decision to more aggressively liquidate less productive SKUs and aged inventory to our retail outlets as part of our supply chain and inventory initiatives. Corporate unallocated expenses, as a percentage of net revenues, were 6.9% versus 6.2% in 2015. The 70 basis-point deleverage was driven by occupancy and general expenses partially offset by lower employment costs as a result of our 2016 corporate reduction-in-force. We are pleased that despite lower revenues and planned incremental investments in digital marketing, we were able to minimize the margin and earnings impact with our supply chain efficiencies and our overall expense discipline resulting in diluted earnings per share for the third quarter of $0.79 versus $0.77 last year. On the balance sheet, we ended the quarter with a cash balance of $75 million. As a reminder, given the seasonality of our business, our cash levels reach their lowest point at this time of year as we fund our business ahead of the holiday selling season. Year-to-date, we have invested $127 million in our business with an additional $49 million this quarter alone and we have returned over $216 million to our shareholders, of which $72 million was in the third quarter, consisting of $39 million in stock repurchases and $33 million in dividends. Merchandise inventories on the balance sheet decreased 3.5% to $1,064,000,000 at the end of the third quarter, which includes a decrease in inventory on hand and available for sale of 6.3%. This decrease once again reflects our commitment to bring inventory growth below sales growth. Our inventory initiatives continue to drive these reduced inventory levels as well as improved efficiencies in our supply chain. Although inventory is down, primarily from reduced and less productive SKUs and aged inventory, we continue to have opportunity to improve our in-stock positions with fewer understocks in key categories, which has been driving back orders higher than we would like, particularly at Pottery Barn and Pottery Barn Teen. Our new inventory optimization tool will allow us to improve accuracy in our inventory purchases for our core products. And in 2017, we should be able to measure our success. I would now like to discuss our fourth quarter and fiscal year 2016 guidance. For the fourth quarter, we expect net revenues to be in the range of $1,570,000,000 to $1,650,000,000 with comparable brand revenue growth in the range of negative 1% to 4%. We expect our fourth quarter operating margin to be slightly below last year and we are guiding earnings per share to be in the range of $1.45 to $1.55. For the full year, we are tightening our full year guidance ranges by lowering the high end of the ranges to reflect our most recent third quarter results and our fourth quarter guidance. As a result, our full year revenue guidance is expected to grow in the range of 2% to 3% to a range of $5,070,000,000 to $5,150,000,000 with comparable brand revenue growth of 1% to 2%. We expect our operating margin to be in the range of 9.4% to 9.6% and our diluted earnings per share to be in the range of $3.35 to $3.45 per share. All other financial guidance within the press release remains unchanged from the previous guidance. It is important to note that this guidance reflects our best estimate less than 3 weeks into our largest quarter and at a time when there is uncertainty. The recent presidential election and the unpredictable impact on the consumer and the retail environment have made providing future guidance difficult at this time. The guidance we are providing today does not contemplate any further changes, better or worse, in the retail landscape or consumer sentiment. From a capital allocation perspective, there are no changes to our plan. Given our strong operating cash flow, we plan to continue to invest in the business to support our growth and operational initiatives in the range of $200 million to $220 million. We also plan to continue to return capital to our shareholders in the form of share repurchases and dividends. We have approximately $447 million remaining and available for share repurchases which, as we said at the beginning of the year, we intend to repurchase over the next 3 years. We are also committed to continuing to pay a dividend. In summary, we believe we are well positioned to deliver for our customers and our shareholders. Our well-known brands, our multichannel model, our opportunities for growth and the success of all of our initiatives to date, as well as our solid balance sheet and strong financial discipline give us confidence in our ability to deliver great customer service and long-term sustainable growth for our shareholders. I would now like to open the call for questions. But before I do, I would like to wish all of you happy holidays.

[Operator Instructions] We'll go to Matt Lasser with UBS.

On the Pottery Barn business, can you describe a little bit more by category where you saw the weakness? And how you think the competitive landscape is playing into that? And let me just add a quick follow-up, it sounds like you're going after new customer acquisition, what's been the outcome thus far? Have you been able to be successful with that?

Thanks, Matt. So by category, that really doesn't tell the story as much as it does when you look at what's selling and where we have fatigue. And we're really pleased to see that what we thought would sell is selling. I mean, that sounds like a very simplistic thing but it's a good indication that we're on the right track. And you can see with a brand the size of Pottery Barn that there's a lot of differences of aesthetic and styles that people relate to. There's some core aesthetics and there's emerging aesthetics and so we are very cognizant of keeping our current and loyal customers, who love the brand, top of mind and not changing what they come to the brand for but at the same time, we have an opportunity to attract new customers and we're doing that very carefully by looking at what they're buying and building other things in the future that are in the same aesthetic of what they've already purchased. We also know that there's opportunity to design into lower price points. Price points where we used to be when we started the brand. And so it's a natural place to go to look at things that are smaller in scale, they are still great quality, but that are cheaper than some of the best sellers that we've gotten accustomed selling. Also, just in terms of our stores and the whole experience, we know that new customers are usually attracted to the brand by lower price points. You don't often wake up in the morning and the first time you go to brand, buy a bed. You might go in buy a candle or a decorative item. So the holiday season in particular is a very important time of year to bring new customers in through smaller ticket items. And if you go to our stores, and I hope you do, you'll see that we have a lot of great gifts, we have a beautiful plaid collection and a paisley collection. And we have not just the textiles, we have a lot of scent and home decor in those categories that is both beautiful but also positioned to attract new customers.

We'll take our next question from Matt Fassler with Goldman Sachs.

So I guess, my question, my primary question relates to operating margin in the fourth quarter last year. If I'm not mistaken, your operating margin was around 14%. And so far this year, your margin has been down very mildly, kind of anywhere from 1 to 21 basis points, and kind of in the middle there in the third quarter. In the fourth quarter, your revenue guidance isn't really worse than what you noted in Q3 -- what you experienced in Q3 in terms of comparable brand revenue. But it seems like the implied EBIT margin decline is greater. So if you could please talk about what's leading that to happen? Which line item is more stubborn, whether it's fixed cost or whether it's promotional pressure to get those sales? What's factoring into your thought process there?

Matt, this is Julie. I'll take that. So a couple of things. First of all, when we gave guidance last time from the implied Q4 perspective, it was already implied that margins will be down for the fourth quarter but to walk you kind of through it, there is an impact to the revenue guidance depending on where you believe will come out, in that range, and obviously it causes you to deleverage occupancy and some of the fixed costs more so, but really a couple of things that are in play is the incremental investments in e-marketing, and we also are investing in supply chain labor to better serve our customers this holiday season. As you recall, you have to really attract, train and retain some of the best in this holiday season in order to serve the customer and it's getting more and more competitive to get those people. So we are going for it and so there's a little bit of an investment there. Also, we believe that it's going to be a promotional environment and probably more promotional than it's been. We have seen that the customer is shopping later and later and there's a lot of retailers that haven't had very good results. They've got a lot of extra inventory and they've got to get rid of it in a very short time period. So we were also counting on a little bit of some promotional pressure. Also, though, we still will have the supply chain benefits rolling through. They have less of an impact when it's on our largest quarter. And so we don't have as much of an ability to offset as we have in the past. And so I think those are some of the biggest puts and takes there.

We'll continue on to Christopher Horvers with JPMorgan.

I wanted to follow up on Matt's questions. Talking about the confidence in your sales outlook, you said a few things that perked my interest. So comps deteriorated sequentially from 2Q to 3Q despite an easier compare but yet you're sort of implying that, at the midpoint, it's going to be better. You mentioned that October for the home furnishings brands, which I would assume includes Pottery Barn, outperformed the industry. So what was the industry performance in October? Are you benchmarking against the census retail sales data? And then related to that, you did mention the election, you do have a high income customer base that tends to sit on the coasts. So is it our interpretation that November is off to a choppier start given what's gone on in the world?

Chris, I'll take that, that's Julie. As far as October, the data that just came out showed that it was down, I think, negative 1.7 and that's that NAICS 442, I believe, that is home furnishings industry. And so we specifically called that out in the script, because I think a couple of things. We typically, as you know, don't give color throughout the quarter because we are working on specific initiatives with Pottery Barn and we saw that these trends sequentially improved, so much so that when we saw the results of the home furnishing industry relative to our home furnishings brand and the fact that we outperformed, give us a lot of confidence in the long-term for our Pottery Barn brand. So I thought it was important to tell you that. Secondly, I think you're picking up on the clues that we're saying about the timing of when we're giving guidance. Obviously, there is a -- we believe every retailer is going through, whether they're discussing it or not, there's a little bit of a time period where there are cautious consumers as a result of the election and so it's a difficult time to set guidance. With that said, we also have a little bit of an easier compare year-over-year. And so when you look at Q4 last year, we were at a 0.8 versus last Q3, it was a 4.5. So it's a different hurdle to get over. The way we set the guidance, which I'm sure you guys can do your own math and figure out, is, basically, at the low end of the negative 1 is sort of holding it relatively close to where our 1-year trend is for Q3 and at the high end at 4, it's holding it relatively close, slight improvement to the 2-year trend relative to Q3. And we think at this time, that is the right guidance to provide.

And we'll go to Greg Melich with Evercore ISI.

I had a quick follow-up on that one and my real question was about inventory. Did I get that right, Julie, that your sales in October were better than negative 1.7 or better than positive 1.7?

The industry, in my recollection, is a negative 1.7 so I'm saying that we outperformed the industry in October.

Better than that in the home furnishing brands?

Correct.

Right. So then what I really want to talk about was inventory. Looks like you're down a little over 3% year-over-year. And I know you, Laura, went through a lot of the things you've done on the merchandising front to get positioned for holiday. And I remember from last quarter, you talked about not having enough, I think, opening price point items or maybe not marketing to that enough. Could you help us, give us an update on where we are with that in the context of inventory being less now than it was last year? Are you where you want to be? Is it the right inventory? Is it not enough? Is it -- have we shifted to that [indiscernible]

I would tell you we're never going to be where we want to be because inventory is one of the most difficult things retailers do. We've made a lot of improvements and we still see tons of opportunity in the future. What we've done is we've reduced our overstocks substantially versus last year and that's allowed us to better serve our customers because we can more quickly, efficiently get to what they've purchased versus carrying and storing a bunch of things that aren't selling and that's been really positive. We've also, as you know, regionalized at the same time, which on the one hand makes things more complicated for inventory management. On the other hand it's better for your customer. So we're balancing that. And then at the same time, within each brand there's different strategies and so what I've talked about in terms of lower price points is not really an inventory in-stock opportunity, it's more of mix of what you're carrying and so it's really important in all these home furnishings businesses to have a great combination of considered purchase and also traffic drivers and things that allow customers to have a piece of the brand without spending $2,000. And so in terms of the cash and carry that you see in our stores and the lower ticket, we're in pretty good stock position going into the holidays. There are some pockets of things, as there always will be, it's a high-class problem of where you have oversold and you're chasing inventory. I guess the good news, bad news is that we have quite a few pockets of those in Pottery Barn. The big opportunity for us to better predict those items in the future and these are the things we've been chasing since the beginning of Q3, so we expect to be able to get them in at the very least at the end of Q4, if not the very beginning of Q1 and then once you're in stock, these cycles on these best sellers last longer than they do in apparel so we should see our in-stock go up next year as we get -- as we catch up with these best sellers.

So just to make sure, I've got to write that down, through [ph] inventory, you're comfortable with where you are now with that, but we might see that actually go up a little bit as we get ready for Q1?

That's not really what I was implying.

Okay. So the down 3% in inventory, now that we're there...

I think, you can look at a total number but really, the quality of the inventory is by brand and there's a lot of things going on. We said -- what we said is that we're going to grow inventory slower than sales and who knows how low you can go and be in stock at the same time. But it's not just about taking inventory down, it's also about being in stock.

And our next question comes from Peter Benedict with Robert Baird.

I had a question, just on the fleet optimization efforts that Laura, you had mentioned. Just, can you give us a sense of maybe what really is working in some of these remodels? And what, potentially, could be the pace of remodel effort as you look into next year?

Sure. Like anything else, we're very measured about looking at ROI and so -- in each of our brands I've mentioned new [indiscernible]. So particularly in the brands with a more mature fleet, Williams-Sonoma and Pottery Barn. And so you saw in Williams-Sonoma bring in a new look at Ponce, a new look at South Coast Plaza last year, those worked and that's what all new stores are getting. And then we're doing selective remodels and that's what I mentioned early in my script, where we're really reading the results of those remodels to make sure we get our investment back and we're going to continue through the balance this year and get through holiday and then make an assessment for next year. Same approach for Pottery Barn except we have a bit of a different test going on. We have the full remodel like we did in Corte Madera and some other locations. But then we also have these mini refreshes and we just tried 4 more of those to see if we can't give the stores a bit of a paint job and some other new fixturing pieces and have them look really fresh and new without doing a full remodel. So we're really reading the results too early to come out and say how many we're going to do next year but we're pleased, very pleased with our initial results.

And we'll continue on to Brad Thomas with KeyBanc Capital Markets.

Hoping to ask about international and how that's been affecting profitability of the business and then, well, it may be a little bit early and you might not want to give comments on 2017, any puts, takes you might highlight in terms of investments such as international or supply chain as we think about 2017?

Brad, it's Julie, to give you an update on global and where we are, it grew -- just so you guys know, you'll see it in the Q, obviously, it grew 3.5% in total to about $83 million. We did specifically call out, though, you'll see in the script, that our company-owned, our owned stores and our owned websites did phenomenally well during the quarter. Strong double digits and we continue to see that. And so it's really exciting. From a profitability perspective, at the same time, the loss that we incur on the company-owned stores has come down by half and so we're making considerable progress there. We are profitable in total and have been all year. From a margin perspective, profitability, because there was less franchise revenue, you saw less of an impact on the gross margin but obviously, that is accretive to the op margin so there was an impact on the bottom, but the net result you should take from it is it's going very strong and it's improving profitability as we continue to move through the years. Regarding 2017, yes, we're not prepared today to give any future outlook on '17.

And Dan Binder with Jefferies, please go ahead.

Just wanted to ask you a question on the promotional environment. Obviously, it's been pretty promotional, I was just curious, when you look at what seems to be resonating with customers, are they the same things that were before? How is that changing? And then curious how your friends and family promotion went recently. I saw you had extended it a couple of days.

We haven't seen any pullback in the promotional environment. As Julie said, we think, in fact because of some people having more inventory than they like, that it could get more promotional. The customers are just smart. They're looking for the best value but not at the expense of quality. And we have also tested some different shipping offers because we want to see if they're more price-sensitive to shipping versus total price and we haven't come to any conclusion on that yet. But we know that customers are definitely interested in the best price they can get. And what we feel great about is that our exclusive design capabilities, direct sourcing advantages allows us to deliver outstanding quality at a great value.

If I could just ask a related question, you talked about the merchandise margins only being down slightly. When you look across the brand portfolio, is that the case across each brand? Or is there big differences when you look at each brand?

We don't really give it by brand but I wouldn't say there's much difference across.

We have time for one more question. We'll go to Budd Bugatch with Raymond James.

Just if you could give us an update on Braselton, how that's operating? And maybe what that impact has been to improve deliveries and where you've seen that?

Thanks for the question. Braselton has been a great addition to our company. As Laura said in her script, that it's about 75% full and it's reducing freight costs and, even more importantly, it's getting our goods to our customers 3 to 5 days quicker. So it's been a huge win for our company.

Our team's done a great job there. So while we have the question, I just want to do a shout out to the Atlanta team, Braselton team for doing a wonderful job serving our customers there.

When do you think it will be full? And what do you think it will impact on -- how will it impact margins or how will we see it in the financials?

As we continue to move through 2017, we'll expect it will get a little fuller. Obviously, we don't want to be at 100%. That's not necessarily the target you want, you want to have a little bit capacity room within the DC, so shooting for 85 to 90 or something like that. And we're already seeing the benefits, so obviously as we continue to get a little bit more full with having less freight costs and quicker shipping delivery times, we'll see that benefit continue to grow as we move through 2017.

Thank you. 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.

Well I want to say thank you all for your interest and your support, and as Julie said, happy holidays.

Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again, for your participation.