Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Elise Wang, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you, James. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Our discussion today will relate to results and guidance based on certain non-GAAP measures. 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 Exhibit 1 of 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 conditions, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2018 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 release and SEC filings, including the most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

Thank you. Good afternoon, and thank you all for joining us. With me today are Julie Whalen, our Chief Financial Officer; Yasir Anwar, our Chief Technology Officer; and Felix Carbullido, our Chief Marketing Officer. In 2017, we made significant progress against our strategic priorities to strengthen our competitive advantages and drive accelerated growth. As a result, we saw new customer growth, improved traffic and conversion and accelerated revenue growth in both retail and e-commerce. We ended the year as one of the few retailers of our scale to consistently deliver sustainable top line growth, bottom line profitability and robust cash flow. In 2018, we will aggressively pursue significant growth opportunities across all areas of the business and particularly in our global operations and new business initiatives, which have demonstrated significant potential. We will also continue to strategically invest in digital advertising, technology and our customer experience while driving efficiencies and cost savings throughout our business. We are confident in our strategies and our proven track record to further extend our leadership in home furnishings and housewares industry in 2018 and beyond. In the context of our overall performance and plan for 2018 and given the benefits of the recent tax reform, we have made the decision to invest in our associates and our customers and in our returns to our shareholders. We'll be raising the hourly wage for associates to $12 per hour in the United States and significantly improving maternity leave benefits. We will also accelerate our digital and supply chain investments to improve the customer experience, which we believe will result in increased sales and reduced costs that are not reflected in our 2018 guidance. And as we announced this morning, we will also enhance return to shareholders as double-digit increase in quarterly dividends and an increase to…

Absolutely. Thank you, Laura. I'm very excited to have joined the Williams-Sonoma team. Looking ahead, we are focused on unleashing the power of technology to propel our business forward with the hyper focus on customer experience. We plan to shift our culture from output to outcome, to use efficiencies that can be reinvested towards the business growth. We will tap into and leverage important technology trends like augmented reality, virtual reality, artificial intelligence and machine learning as the underpinning of everything we do in technology, cloud computing and robotics. We are already at the edge of the 3D visualization technology through our recent acquisition of Outward, Inc. We work closely with our Outward team to scale and innovate and to help define industry standards around 3D visualization and its application across AR and VR and other mixed reality applications. We are exploring ways to automate and remove friction in all applicable areas of our business to become faster, nimble and more efficient by commoditizing machine learning throughout our company. Our immediate focus for 2018 will be on mobile excellence; friction-free shopping; supply chain optimization, doubling down on buy online, pick up in store; and increased personalization and relevancy through content and visualization techniques. I look forward to collaborating with our talented team to achieve these goals. Laura, back to you.

Thanks, Yasir. As you know, the retail landscape is rapidly changing, and we will continue to build upon our competitive strength to take advantage of the opportunities that market disruption has created. The progress we made against our strategic priorities in 2017 gives us confidence that our investments are paying off in the form of a stronger business that's better positioned for long-term growth. We look forward to continuing the momentum in 2018 and further extending our leadership in the home furnishings industry. Before I pass the call over to Julie, I want to thank our associates who are one of the key reasons why I'm very optimistic about our future.

Thank you, Laura, and good afternoon, everyone. Our fourth quarter results demonstrate our ability to execute against our growth and operational initiatives while maintaining strong financial discipline to drive further efficiencies across the business. And we are pleased that, once again, we were able to outperform both our top line and bottom line financial commitments. Before I walk you through our financial results for the fourth quarter in more detail, I would like to review some financial and operational highlights for fiscal year 2017. Fiscal year 2017 was another year of solid accomplishments. For the full year, we delivered net revenue growth of 4.1%, including comparable brand revenue growth of 3.2%, which was an acceleration of 250 basis points year-over-year. Pottery Barn returned to growth with revenue comps accelerating 450 basis points year-over-year following our aggressive efforts to revitalize the brand. The Williams-Sonoma brand performance was strong for the full year and particularly, over the holiday period. Their revenue comp on the year of 3.2% more than doubled from last year and was driven by a thriving e-commerce business and the strong momentum we are seeing in Williams-Sonoma Home. West Elm continued on its strong growth trajectory, crossing the $1 billion revenue threshold in 2017 and delivering its eighth consecutive year of double-digit comp growth at 10.2%. And our newer businesses, Rejuvenation and Mark and Graham, along with our company-owned global businesses, all generated another year of double-digit profitable growth. By channel, our e-commerce revenues accelerated almost 100 basis points to 5% growth, expanding to 52.5% of our total revenues. And our retail channel also improved, accelerating over 400 basis points from a negative 3.2% comp last year to a positive 0.9% comp this year despite a nationwide decline in mall traffic of 7.3%. From an earnings perspective, we generated…

[Operator Instructions] And we'll take our first question today from Michael Lasser with UBS.

It's on the margin profile of the business. So it sounds like a lot of the investments that you're making because of the tax benefit are in areas like e-com, supply chain and wages. Does that mean you won't be making investments like you made last year in some of the revenue-driving activities like promotions and acquiring new customers? And then my second question, just on the recapture rate that you've assumed from these closed doors and what benefit that might -- on your comp in the upcoming year.

So as far as the investments, we're going to continue to make the necessary investments to drive the top line. What we're highlighting is those areas where we're going to accelerate investments, and those are particularly associated with e-commerce. And so -- but obviously, we have the fact that we are lapping some of the investments. This year, they're going to be less pronounced as we move throughout next year. But we have this benefit from the tax reform that has allowed us to accelerate some additional investments which, by the way, we haven't fully baked all of that into our guidance. And so depending on how those test and measure over time, we could see upside associated with those. As far as the store closures and what that impact is, I had said that in my prepared remarks. Ultimately, based on this list of stores that we are aggressively going after, all depends, of course, on what the outcome is with each particular landlord. But in the situation where we were to shut these stores, the year following, a full year benefit would be worth about 20 basis points of operating margin expansion to us.

And in terms of the question around whether we're investing in acquiring new customers, we absolutely are. When we say digital leadership, e-commerce, that includes everything from the technology supporting a friction-free shopping experience to our investment in driving new customer acquisition and engagement online.

[Operator Instructions] We'll now hear from Peter Benedict with Baird.

So I guess, I'll follow up a little bit on Michael's question. What have you seen with respect to market demand when you guys do close stores? Do the sales just generally transfer directly online? Do they go to other stores kind of in the market? And as you think about that 20 basis point of operating margin improvement, if you do accelerate the closing of these stores, what's the revenue implication of getting rid of those stores?

Yes, thank you. So we see -- it depends is the answer, depends on how many stores are in the market. And we will often see some transfers to stores in the market if there are multiple stores in the market. Sometimes we don't see any transfer, and we see some pickup online. You have to remember that we have a very profitable fleet. We've been pruning it for years. And so the stores that we've outlined really are not contributors to much. And in terms of quantifying that in the top line, it's really hard to do because it depends on what we do and when we do it, and there's a lot of variables there.

Next, we'll hear from Matt Fassler with Goldman Sachs.

I also have a question about the retail fleet, and it's kind of a two-part question. Number one, you intimated that you would close about 1/3 of the 250 stores with lease expirations over the next several years. Presumably, that's a gross number. I know you have 20 gross openings planned for the year, I believe, against 30 gross closings. So the net change in the fleet is not quite as severe. Are you thinking about the outlook for store count that way on a multiyear basis? And then also out of curiosity, of the stores that you're closing, has this been a dynamic list? In other words, a year or 2 ago, would these have been stores that might have been suitable for closing? Or has the retail landscape evolved to the point where this is something you need to take more seriously today?

So a couple things there. Let's make sure we have all the numbers correct. There's definitely some moving parts. So first of all, there is about 250 stores that come up for renewal, if you will, over the next 3 years across our entire fleet. What we're saying is there's about 80 of those, so 1/3 of them that we'd like to shut. All else being equal today, if we're looking at the list, we'd like to shut them. And so we're going to be shutting them at the end of their natural lease termination unless we get some better deal with a landlord. There is a smaller group that if we could shut them today, it makes sense because of the 20 basis point improvement in op margin that we spoke to. And so those are the ones we're going after. Obviously, this list is dynamic. To your question, we are constantly evaluating which stores should be on that list and which stores don't -- no longer need to because maybe the landlord showed up and gave us the right deal. And so it definitely is a moving target. As far as the number of closures that we've put into the press release for the guidance, the 30 closures, to be clear, have nothing to do with the ones that we are looking to accelerate. That's part of the normal set of store closures. That's within our numbers. And yes, there's about 20 that we are opening at the same time. So there will always be stores that we're going to have on the other side that open. I don't know if I can tell you it's going to be that exact ratio for the foreseeable future, but we'll definitely have some offset to those store closures.

[Operator Instructions] We'll now hear from Simeon Gutman with Morgan Stanley.

Okay, I'll make my one question. It might have 1.5 parts. First, maybe for Laura. On the top line, how do you distinguish between merchandise wins, merchandise leading the improvement versus the value proposition, whether it's price, the speed to market or maybe the free delivery? And then if we look at the EBIT dollars for next year, including the 53rd week, at the midpoint, it looks like they're up maybe slightly, so that implies that may be down. And I get you're accelerating investments, but I guess, trying to understand where this model flushes out maybe in the out year. Does the business grow EBIT dollars or leverage on, let's say, a 3-ish sort of comp? Or is the profile a little -- you need a little bit of a higher comp than that?

Okay, Simeon, so I'm going to try to answer your question without answering it for the competition. In terms of what works for customers, it's clear when you have a bestseller that it's the merchandise. And we see bestsellers in the high end as well of our pricing tiers in all of our brands, for that matter, including in Pottery Barn. So there's the obvious bestsellers. When we look at value proposition, we can look at core programs, high-volume programs over time and see the elasticity of demand based on changing of price. And so that is very clear, whether it's working or not, and we study that constantly. And believe it or not, it's different by category; it's different by product. And I think that has a lot to do with the competition. One of the things that really makes us different from a lot of people out there, particularly those that are copying us, is that we are one of the very few retailers that own exclusive designs. Our product finishes, our vendor community is very loyal. And as a result, because of our vertical integration, our quality is far superior. And we're going to be very competitive this year or, I should say, aggressive about protecting our design assets because this is where we really win, and there's a lot more we can do on that than we've done in the past in terms of protecting our assets.

And as far as the EBIT question, yes, you're right, but obviously, we've indicated that next year is a year of investment because we are reinvesting the tax savings. So whether we like it or not, the tax savings goes below the line and the investments go above the line, so depending on which line you're measuring against, right, it's going to show less growth than we'd like. But this is a special situation. We have tax reform once every 30 years, and because we make earnings, we're taking this opportunity to drive a competitive advantage that we think we have of others that don't generate the same amount of income. So it's a onetime thing. It's a reset. And we believe going forward from that perspective, that we are 100% committed to driving EBIT dollar growth in line with revenue growth and EPS even faster than revenue growth, and we have -- we believe that our operating margins will stabilize and they will expand post this next year.

Our next question comes from Brian Nagel with Oppenheimer.

So I wanted to jump back to the topic of the store closing or repositioning the fleet as well. And Julie, you had mentioned in your prepared comments, you've -- just about mall traffic being weak across the board, which is obviously not news to us. But as you look at these store closures and potentially accelerate them, is that also reflective of the business you have in the weaker malls? Is that playing into this?

I mean, our traffic is better than the mall and it has been. We drive a lot of traffic because of our store experience. Clearly, there are some areas that have not been performing, malls that is. And then there are some where we just deal -- the rent deal's too high. I mean, so there's a tale of 2 different stories when you look under the -- into the detail.

Christopher Horvers with JPMorgan has our next question.

This is Tami Zakaria on for Chris Horvers. It seems that the international segment of your business has become more profitable with scale. So could you give us color on how much the international segment helped gross margin in the fourth quarter and the year overall? And are you currently profitable internationally?

Thank you for asking the question. I do believe that is something that tends to be underappreciated with our company. We saw tremendous growth in both the top line and the bottom line from a profitability perspective and in particular in the fourth quarter. And so that's really exciting for us as we're continuing to generate momentum globally and have all kinds of opportunity to grow that. And I think Laura alluded to it even in her prepared remarks as to where we're headed for 2018, but that also has the double benefit that I always like to articulate because we've earned it of generating even further tax benefit, which, believe it or not, even with the reduced tax rate that the federal government has provided us, is still lower outside of the United States. And so this is something that we're going to continue to talk about. It certainly did have some impact on our op margin, gross margin, but it's still relatively immaterial. But as that continues to gain momentum, we think this could be significant to our company both on the top line and bottom.

We have time for one last question that will come from Adrienne Yih-Tennant with Wolfe Research.

Laura, I wanted to know about some of your competition is talking about owning the last mile, that white-glove delivery and investing in transportation and logistics. I was wondering if kind of when you look at the business, if that's an area where you foresee having to invest more as we get through 2017 -- or I'm sorry, 2018.

For more than 60 years from Chuck Williams and our first Williams-Sonoma store, we have been focused on customer experience, and his attention to the customer is deeply embedded in our culture today. Our service platform extends from online and how we talk to our customers there and all the way through the last mile. We have been relentlessly focused on driving efficiencies and cost savings, particularly in the supply chain, where we see substantial opportunities. And as I said in my prepared remarks, over the next year, we're going to focus on inventory management, order visibility and the speed and quality of delivery. But at the same time, we want to be in stock. So we don't want to just take the inventory down without maintaining. Part of the service is to be in stock when the customer wants it. And technology, of course, is going to play a critical role as we drive these process improvements and automation throughout the supply chain. I want to let Yasir talk a little bit today, put him right on the spot in his first 6 weeks on how technology will support these cost efficiencies.

Yes. I think I strongly believe that the current availability of technology frameworks in the industry, especially the artificial intelligence and application of machine learning for these type of activities, which is supply chain, inventory optimization and distribution center optimization, is going to be very powerful for us. I'm personally very passionate about powering up the machines and getting them to do the work instead of a lot of manual work, which takes a lot of cost into the system. So we believe we're going to drive our top line growth also by applying machine learning in supply chain world, would also deliver a lot of cost efficiencies, which can then be invested in the top line growth. So looking forward to that.

So Yasir, just from your experience, should we expect the investment in shipping and handling logistics to, in the near term, hurt gross margin but result in a much more robust EBIT op -- EBIT margin for the e-commerce side of the business?

No. I wouldn't say that you're going to see a significant difference in the short term. I think what is exciting to know and having known Yasir, I guess, for 6 weeks, I have learned a lot about what he believes he can drive from both from a strategic perspective but also from a cost efficiency perspective. So I think the exciting part is, in the not-too-distant future, we should hopefully be able to be talking to you about substantial cost savings that he's been able to create out of the supply chain organization and elsewhere.

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.

Well, I want to thank all of you for joining us and for your support, and we look forward to talking to you after the first quarter.

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