Ladies and gentlemen, welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the conference over to 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, Ashley. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our discussion today will relate to results based on certain non-GAAP measures, including non-GAAP SG&A, operating margin, effective tax rate and diluted EPS, all of which exclude the impacts of the following unusual business events. During the first and third quarters of 2016, we incurred reorganization charges related to the reduction of headcount primarily in our corporate function, 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. During the fourth quarter of 2016, we realized the benefit of approximately $0.08 per diluted share from a onetime favorable tax adjustment, which is recorded in income taxes. 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. 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 2017 and beyond, and are subject to risk and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases and SEC filings, including the most recent 10-K and 10-Q for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

Good afternoon, and thank you all for joining us today. Before we get started, I wanted to talk about the important leadership change that we announced earlier. Sandra Stangl, President of the Pottery Barn brands has decided to resign. Sandra has been with the company for 23 years, and over that time, she has been incredibly dedicated and provided strong leadership of the Pottery Barn brands. I want to thank Sandra for all of her contributions and wish her the very best. In light of her resignation, we are making the following organizational changes: Marta Benson, currently Executive Vice President, has become President of the Pottery Barn brands. Marta joined Williams-Sonoma in 2011 and successfully led the acquisition and growth strategies for both Rejuvenation and Mark and Graham. Prior to joining Williams-Sonoma, Inc., Marta has served as CEO of Gumps. Jennifer Keller, Executive -- currently Executive Vice President, has become President of the Pottery Barn Kids and Pottery Barn Teens brands. Jennifer has been with the Pottery Barn brands for 20 years and has proven her ability to grow business and build strong teams. Jeff Howie, currently Executive Vice President of Pottery Barn brands, Inventory Management and Brand Finance, has become Executive Vice President, Chief Administrative Officer of the Pottery Barn brands. Jeff has been with the company for 15 years, serving across several brands, most recently at Williams-Sonoma. Jeff will be instrumental in helping us drive operational excellence and deliver great customer service. Please join me in thanking Sandra and congratulating our executives on their expanded roles. Now I'd like to discuss our 2016 results and plans for 2017. On the call with me are Julie Whalen, our Chief Financial Officer; and John Strain, our Chief Digital and Technology Officer. In 2016, with net revenues at over $5 billion,…

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 2016 financial and operational highlights. Fiscal year 2016 was another year of solid accomplishments. For the full year, we delivered net revenue growth of 2.2%, taking our total revenues to over $5 billion, and our earnings per share grew to $3.43. Our e-commerce revenues grew to almost 52% of total revenues. West Elm delivered another year of outstanding growth, with revenue increasing more than $150 million or 18.3% and comparable brand revenue growth increasing 12.8%, a double-digit increase for the seventh consecutive year. Our emerging brands, Rejuvenation and Mark and Graham, together grew 27%. And in our company-owned international operations, we saw another year of double-digit growth at 32.5%. Our gross margins at 37% were relatively flat to last year. Occupancy deleverage of approximately 40 basis points was offset by improved selling margins primarily resulting from the progress we have made in our supply chain initiatives as well as the direct sourcing advantage we have over other retailers. Operating income was down only 20 basis points to 9.6% due to SG&A deleverage from our decision to invest in digital advertising to drive new customer acquisition. On the balance sheet, merchandise inventories were flat year-over-year, demonstrating our commitment to hold inventory growth below sales growth. And we generated $525 million in operating cash flow, allowing us to invest in the business in our long-term initiatives, with almost $200 million in capital expenditures and returned $285 million to stockholders in the form of share buybacks and dividends. Now I would like to discuss our fourth quarter financial results. In the fourth quarter, net revenues were relatively flat to last year at $1,582,000,000, with…

[Operator Instructions] And we'll take our first question from Jessica Mace with Nomura.

My question is about the supply chain efficiency that seems like a very significant part of the gross margin expansion in the fourth quarter. I was just wondering if you could give us a sense of how much of the benefit from those supply chain initiatives is still remaining?

Yes. So we are really confident in our ability to continue to generate supply chain efficiencies. It's, quite honestly, one of the things inside our company that we're most passionate about. We have a team that is dedicated to this, and we have a ton of opportunity to continue to drive supply chain efficiencies. First off, this past year, a lot of it has been lapping what occurred in the prior year. But as part of that process -- profits, we've seen the ability to be able to generate even more next year. So I think the important piece to take away from that, though, is to not necessarily assume that we're going to have 100 basis points of gross margin expansion every quarter throughout the rest of the year, but we're going to continue to see a lot of these supply chain initiatives move forward throughout the year and help mitigate some of the commercial environments.

And we'll take our next question from Chris Horvers with JPMorgan.

I wanted to focus on Pottery Barn a little bit. How much do you think of the issue is an advertising issue versus a sort of generational issue where baby boomers, where Pottery Barn was the quintessential brand for them and perhaps the millennials is not picking up that? And so is that the idea with the increased advertising and the shift to lower price points? And as a follow-up to that, as you think about PB comps, I know you don't provide by quarter or, excuse me, by brand, but do PB comps recover in the near term, especially considering that tough compare overall? Or is this something that stages over the year and you expect a much bigger back half?

Thanks, Chris. The research that we did showed us that our brand loyalists love us, and Pottery Barn is top of their list. There isn't a big complaint from them that it's a problem to solve. It's more the opportunity to reach more new customers and also to force reconsideration of customers who may say, "I know Pottery Barn, but it's not my style." And so it was very good for us to do the work because it became very clear what a powerful brand we have and that what we need to do is to give them more entry points to the brand. And we talked earlier about the focus on what we are calling the candy, the things that you buy impulsively because you love them. And when brands have those kinds of products, they attract new customers, and often after that life stage is they buy furniture. We didn't see a big change across different age groups. There's a lot of millennials who love more traditional furniture. We know that the opportunity is often size because as people move to smaller living arrangements and the urbanization happens, the large-scale furniture is difficult. And we've done small spaces before, but we actually haven't gone small enough, and we haven't altered our value creation, which is really important to us so that, again, we reach those customers who may be moving into their first apartment. And we're seeing that these couple strategies are really working to drive the new customer acquisition. In terms of advertising, we continue to make the shift from catalog to digital advertising, and we are focused on digital storytelling. We know that one of the key differentiators in our Pottery Barn product is our quality and the way things are made and the importance of toxin-free materials. We know the customers care about these things, and so we're focusing on our marketing to tell these stories and also to give them more content because we know that decorating is hard, and they've always seen us as the source of inspiration. So you'll see us continue to push on that kind of marketing and to invest more there than we have previously.

And we'll take our next question from David Magee with SunTrust.

Just, I guess, a 2-part questions as well. One, just bigger picture, with the environment being difficult and/or in flux, what do you think it's going to take for sort of the tailwind to improve for your business? And then secondly, more specifically, what is your current furniture delivery times versus your -- what the industry averages right now?

Sure. Thanks, David. We are seeing the sales react short term to various news events. We saw it during the election. We see it whenever there's anything big in the media. However, we're focused on the longer-term trends versus this daily or weekly choppiness. And comping metrics were solid. Employment numbers have been improving, and these strong housing fundamentals are supportive of the home improvement industry. And we typically see that customers spend on furnishings after these home improvement projects. So the customer appears to be getting healthier, and I believe all of these fundamentals are favorable and should support industry growth. And we believe that if we continue to provide differentiated products at a great value and a superior customer service, we'll be able to continue to take share. Now, in terms of our furniture deliveries, we have a lot of different types of furniture. We have furniture that's in stock, and we can deliver that faster than most. We've done this measurement. We have furniture that's custom, and we are continually working those numbers down. And our Sutter Street manufacturing in North Carolina allows us to do that because we're running it ourselves, and we are continually making improvements. And we measure every week how much is on time, so there's also the idea of how long it takes but also how do you deliver on your promise. And this is an area that we're very focused on, and we continue, although we've made improvements, to not be satisfied with where we are and realize that our competitive advantage will continue to be to outperform, particularly in large cheap furniture.

And we'll take our next question from Peter Benedict with Robert Baird. And we'll move next to Matt Fassler with Goldman Sachs.

At the risk of asking a banal question about the first quarter, if we look at the comp -- mix month comp sets in Q4, obviously, Sonoma tends to be more important in Q4. If you just roll that mix forward or rather adjust for the mix in the first quarter, maintaining those trends would probably drive a brand comp of below the low end of your range. Obviously, you're guiding here at the outset of Q1, 3 or 4 weeks deeper into the quarter than you usually do, so you probably have some pretty good visibility. So is there implied in here some intrinsic improvement implied in some of the brands outside Sonoma?

Well, obviously, we don't give by-brand guidance, Matt. But what I would say is, obviously, the low end of the guidance is sort of saying we're going to hold to where the trend was in Q4, and the high end of the guidance assumes improvement. And so certainly, we believe as we move throughout the year that we're going to have the Pottery Barn brands return to growth, and so that's a factor of it. But there isn't anything else that's sort of a step change across the other bands.

And we have next, Peter Benedict with Robert W. Baird.

Recognize you prefer to get both here. Just how are you thinking about the trade-off between margin stability and expansion with market share? I mean, is -- it -- obviously, you guys have -- are guiding to stable margins, but the growth isn't too big on the top line, so just curious at what point. You've got a lot of savings coming in supply chain, the decision points to kind of reinvest more in that to drive market share. Just curious how you're thinking about that from a big-picture perspective.

Thanks, Peter. We're obviously focused on both top line performance and earnings growth, and so certainly, long term could we have op margin expansion? Potentially. But to your point, what we think is the most important thing to do is to drive the top line growth, and so we're reinvesting a lot of those savings right back into it with digital advertising investments this year. We also have the annualization of our Southeast DC, which is very competitive from an advantage perspective. And so that is definitely what we're focused on. You could be penny wise and pound foolish and take all the savings and be a hero for a day and have op margin expansion, but that's not going to drive you in the long term. So yes, at the high end of our op margin guidance, we're flat to last year. We have slight deleverage, but we think with our investments offset by our supply chain efficiencies, that's the right spot to date.

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

It's on the portfolio of brands. Historically, you've used M&A as a strategy to buy small brands and grow them organically over time. A, are you comfortable with your portfolio of brands are right now? And B, are you looking at M&A as a strategy along those lines? Or would you consider to use that as a tool in a different way?

We're always looking at M&A. I mean, we're always looking at ideas and saying what's the right choice for the company. If we think there's a good opportunity to pursue, we will. So it's not a matter of having an opinion right now as to whether we're doing M&A or not. It's a matter of what the opportunity is. We've obviously done a very good job of growing our own brands internally, and we've had incredible success now with Rejuvenation that we think can grow to be a very large brand for us. So as you can imagine, there's lots of opportunities that come our way, and we evaluate all of them. And if it's a good idea, we'll do it.

And next, we have Greg Melich with Evercore ISI.

Actually, I want to do one question on margins with a follow-up. If you look at the supply chain savings now, are we back to a point where the decline in the shipping costs actually mean we're covering the costs to the end consumer? In other words, are we still losing money trying to deliver stuff to people? Or you've at least gotten the cost to a point that now it's a full baked and it's covered?

Yes -- no, we're not losing money delivering to people at this point.

Great. And then the follow-up and maybe moving to SG&A a little bit. You talked a little bit about marketing and advertising and where it goes and how the shift is continuing from, I guess, catalog to more digital. Could you help us understand where that shows up in the P&L and by the segments, like where we should be thinking about the bulk of the advertising budget going now at this point?

I mean, what are you saying -- geography on the P&L, it's still within the advertising line within SG&A. Is that what you're asking?

Right. But like, if you think about it between the e-commerce business and the retail business, how do you guys think about it?

Let's let John -- John's here. John, do you want to answer that question for us?

Yes, absolutely. I mean, the marketing environment is competitive. It always has been. And we're fortunate enough to have a heritage of being a direct response retailer where at home, the discipline is really associated with making balanced trade-offs between high RI driving conversion programs and strategic brand building top-of-funnel investments. I mean, great news for us is that while the medium may have changed over time, from yesterday's discussion about being catalog so I can page productivity to today's digitally oriented discussions about emerging social channels, video, syndicating our content. We love this stuff. We have a passion for driving marketing effectiveness, and we have a customer analytics team, a customer experience team, customer insights team. They all partner and assess that marketing mix on a multi-touch attribution model, it's really based on identifying opportunities to go broader and deeper where appropriate and also to make appropriate trade-outs. So we're part of great companies like Google to assess our Brand Arc and develop the strategies to really expand that brand awareness. So this is part of our DNA. We've developed this through decades, and it's not the kind of thing that comes naturally to the pure players and startups. So understanding how to do this in a long-term sustainable profitable way, for us is the key advantage.

And our customer acquisition costs, are they higher or lower than they were, say, a couple of years ago, as you do the transition?

Our customer acquisition costs are up, and we're finding great opportunities in the context of digital marketing. This is one where we're really driving a large percentage of our new customers. So we're excited about that.

And we'll take our next question from Dan Binder with Jefferies.

I was just wondering if you could talk a little bit about the comp store sales at West Elm. They've seen some deceleration although still healthy. I was curious, is that a function of just tough comparisons, a slowdown in the industry? Or is it product-driven? And how are the oldest stores comping versus the newer stores?

Sure. It's Laura. We're really pleased with the growth in West Elm. Growth in Q4 was almost 11%. Full year was over 18%. And as I said, including revenue from our franchise partners, the brands now reached a $1 billion threshold. And the good news is that when we measure the brand awareness, it's really low. So that tells us there's a lot more room for growth. And the new stores have been successful. We have a lot of growth plans in place for the brand, including hospitality and workspace, and you're going to see those growth opportunities become even more meaningful next year as well as relentless focus on our store business and our direct channel.

And West Elm in the fourth quarter, like the other brands, was also impacted by the retail environment, specifically in the first month of the quarter, like everybody spoke to. So you saw that impacts probably more of the comp business than the non-comp. So that's why there's a delta between the non-comp and the comp. The non-comp from the newer stores are doing phenomenally well. I wouldn't read anything into that.

Okay. And then just on store remodels, it sounds like you're pretty pleased with them. Anything holding you back from accelerating it?

We're just -- we continue to read them. We don't want to get ahead of ourselves. We've always had a really high hurdle rate for profitability in our real estate, and there's a lot changing there now. So you do a couple, you do some more, you make sure it works in multiple markets. And we have some great landlord partnerships going on and long-term relationships that are going to help us continue to evolve our stores but also not get ourselves in a situation where our retail profitability declines because of the investments.

Next, we have Brian Nagel with Oppenheimer.

I want to touch on -- Julie, you talked about, in your prepared comments, the e-commerce investments here in 2017. So the question I have is, as we look at these investments that we made this year, are they more, I guess, transformative or more maintenance? I mean, going out, and I know you haven't given guidance really beyond 2017, but is there a point at which the investments, and particularly that which pertains to online, begins to tail off?

Yes, there's several different things that we're investing in. We do think it's a transformative year with the amount of -- it is our prioritization for the year is to invest in e-commerce and digital leadership. That's why it was the first thing that I mentioned from an investment perspective. We're looking at everything to give the customer experience the best thing possible, so whether it's the next-generation product page, whether it's 3D product visualization, whether it's more investment in mobile, whether it's better on-site search experience. We're also looking at buy online, pick up in the store, which has seen it in the Williams-Sonoma brand. It's across the gamut of all the things that we are investing in, and we do think this is incredibly important. Obviously, we have 52% -- we're different than other retailers. We're already at the 52% hurdle rate from e-commerce perspective, but we do think the growth is going to continue to grow there. And so it's important with our level of profitability at, what, this past was 23.7%, the more we grow that channel, the better returns we get. And so it's going to be a very strong focus for us.

Then just regarding -- looking out beyond '17, I mean, it sounds -- again, it sounds like there's some significant investments you're making here in '17. But as you look out beyond that, should we expect ongoing online investments?

Yes, absolutely.

Our next question is from Simeon Gutman with Morgan Stanley.

I want to ask -- it's a follow-up somewhat to Matt's question earlier, maybe asked a little differently. So in the fourth quarter, the comparable brand comps are strong, and then the guidance for next year is modest growth. So I wanted to get a sense -- the biggest changes you mentioned, I don't know if it's environment. You mentioned some changes at Pottery Barn. I'm wondering -- we have a couple of data points we saw, we -- not that the customer deposits are a perfect gauge, but they look flattish year-over-year at least coming into this quarter. Can you also tie into that answer any timing on the digital customer acquisition? I would assume that, that should respond rather quickly but curious on the timing. And just what gives you confidence in the forecast for next year on top line?

Well, there's a lot of questions in there, but I can tackle it. I think the first and foremost thing you have to realize is that we're giving guidance today, and we're coming out of Q4 where, quite honestly, we had a negative 1, right? And we still see softness across the Pottery Barn brands, and the environment is a little bit choppy, the current retail environment. With that said, as you move throughout the year, we have absolutely factored in the Pottery Barn brands returning to growth. We've also factored in the fact that all of our growth initiatives under the covers are still growing double digits. So whether it's West Elm, whether it is our newer businesses, whether it's the global company-owned businesses, all of that is going to continue. And so I think when you look at those growth initiatives, combined with the fact that Pottery Barn returning to growth, that is what gives us the confidence in our top line guidance. I think you need to remember that if you look back in time with the Pottery Barn brands, from the time we've owned them, they have only been negative one other time, was during the recessionary period, '08 and '09; the first time they've been negative. And if you look back the last, I don't know, 6 years or so, they had an average 6 comp. So it's a matter of when they turn around, but they will. And so that, plus these other growth initiatives, gives us confidence in our guidance.

I think also, you asked the question about customer acquisition, and we're happy to report that we saw a very solid growth in GDC new to corp [ph] customers in Q4, with our investment in digital marketing paying off. And this is, I think, what you're referring to in terms of a nice positive as we go into the new year.

And just to clarify something, I don't want to put words in your mouth, but did you say -- you said growth initiatives and you said double digits and you mentioned West Elm. I don't know if you meant growth initiatives within West Elm or the West Elm comp should get back to double digits for the full year for next year.

Well, revenue growth, they grew 10.8% in Q4. So they're still double digit. And on the year, they're still double digit. So I'd still count them as double digit.

And that is all the time we have for questions today. I'd like to turn the conference back over to Laura for any additional or closing remarks.

Well, thank you all for joining us. We appreciate your support, and we look forward to talking to you next time.

Once again, that does conclude today's presentation. We thank you for your participation, and you may now disconnect.