Welcome to the Williams-Sonoma, Inc. Second Quarter 2019 Earnings Conference Call. [Operator Instructions] This call is being recorded. I'd now like to turn call the over to Elise Wang, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, 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 2019 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, Elise. Good afternoon, everyone. On the call with me today are: Julie Whalen, our Chief Financial Officer; Felix Carbullido, our Chief Marketing Officer; and Yasir Anwar, our Chief Technology Officer. We continue to deliver very strong results. In the second quarter, comp revenue growth accelerated to 6.5%, operating margin expanded 10 basis points and EPS grew double digits for the sixth consecutive quarter. The growth strategy that we outlined at the beginning of the year is driving results and giving us the competitive advantage to continue to outperform. West Elm, our biggest growth opportunity, continues to accelerate. The Pottery Barn brands have returned to strength, and our cross-brand initiatives, such as The Key and Business-to-Business, are becoming more impactful levers of growth. We're also improving the customer experience through innovation and experimentation, and we are seeing the results of this work fuel brand-level performance across our portfolio. In addition, our data-driven performance marketing is producing outsized returns on our digital media investments. Our performance year-to-date demonstrates that our initiatives are successfully driving consistent profitable growth across the business, and we are confident that we'll build on our market share gains in the second half and longer term. As a result, we are raising our full year guidance for net revenues, comp revenue growth and EPS. I would now like to discuss in more detail the underlying drivers of our second quarter performance across our brands, starting with the first pillar of our growth strategy and our biggest growth opportunity, West Elm. West Elm had an outstanding quarter, with comp growth accelerating to 17.5% on top of 9.5% last year. The brand is hyper-focused on delivering on the promise of helping our customers elevate their everyday, combining industry-leading design value and the quality that comes from our vertically integrated…

Thank you, Laura, and good afternoon, everyone. Our second quarter results reflect the continued acceleration we are seeing in our business and our ability to drive both top line and bottom line outperformance. Executing upon our road map for growth and our operational initiatives has resulted in strong revenue growth, which, along with the ongoing success we are seeing with our cost savings initiatives, drove another quarter of operating margin expansion, double-digit EPS growth and is fueling our confidence in our outlook for the rest of 2019 and beyond. During the second quarter, we generated net revenues of $1,371,000,000 for a year-over-year increase of 7.5%. Comparable brand revenue growth accelerated 300 basis points from the first quarter to 6.5% on top of 4.6% last year. This growth was led by another quarter of outperformance from West Elm with a comp growth of 17.5%, strong acceleration across our Pottery Barn brands, including Pottery Barn, at a 4.2% comp, solid growth from our emerging brands, Rejuvenation and Mark and Graham had another quarter almost 9% growth from our international operations. Gross margin for the second quarter was 35.4% versus 36.5% last year. Gross margin was impacted by higher shipping costs, which are primarily driven by a larger mix of furniture sales, the incremental impact of the implementation of the List 3 China tariffs as well as a growing share of our business coming from franchise and trade, which is dilutive to the gross margin but accretive to the operating margin. This was partially offset by another quarter of occupancy leverage of approximately 50 basis points, which resulted from our ongoing retail optimization initiatives and the corresponding benefits we see from reduced rent and other occupancy-related costs. Occupancy costs increased 3.5% or $6 million to $176.8 million compared to $170.8 million at last…

[Operator Instructions] And we'll take our first question today from Kate McShane with Goldman Sachs.

I wanted to follow up on some of the tariffs commentary, if that's okay. Julie, I wondered if you could quantify how much it did impact gross margins in the second quarter. And I think originally, you had said 15% of your COGS were exposed to Lists 1 through 3, but that was coming down. I wondered if you had an updated number in terms of what that represented today and how we should think about Q4 and how much that represents in COGS?

Sure. Thanks for the question. As far as the quantification of how much was the tariff piece of the gross margin, I put it in order. We haven't quantified the exact or provided the exact basis point amount, but it's in order. So we started with the higher shipping cost, and then said that it was the tariff impact. What we have said about the total impact is that we are taking the amount that we're producing out of China and taking it down to half next year. We have not disclosed the total dollar impact of what this means to us, but obviously, it's material, and obviously continues to be a moving target. But given the strength of our underlying business and our proactive mitigation strategies that are clearly working and the fact that we are able to cover that cost within the P&L in the second quarter, obviously you still have margin expansion and the fact that we've now covered it within our future guidance gives us a lot of confidence in our ability to do that. And so as we've said before, the fact that we have been executing on this tariff mitigation strategy and continuing to move product out of China, accelerating tariff-related receipts, driving incremental cost renegotiations, implementing select price increases and all of the material cost reductions that we're seeing with SG&A at 120 basis points leverage, we feel very confident in our ability to cover the impact of these going forward.

Okay. Great. And if I could just follow up with one question on prices. I think you mentioned, too, that you did raise prices slightly because of the impact from tariffs. I just wondered in your guidance for the rest of the year, how much you're contemplating with regards to unit degradation as you had to increase some price.

Sure, Kate. It's Laura. When it comes to price increases, every brand, every category, every product is different. And what's reflected in our guidance is based on the extent of testing we've been doing on pricing, elasticity with our customers and also the cost savings we've identified in the P&L. And of course, we're doing everything else we can to protect our customers and not raise prices, including, as Julie went through, resourcing and renegotiating costs with our vendors and finding cost opportunities in other areas of the business. Because, as you know, our focus remains on providing the best value to our customer and we're always testing, we're always refining our pricing strategy. And the good news is we've been able to take select price increases because our value is so strong, and we've also, as Julie said, move products out. We've renegotiated with our current vendors, and we're also adding more value-oriented collections across the brand, which are going to allow us to continue to offer our customers top quality at the best value.

Next, we'll hear from Michael Lasser with UBS.

The last week, you probably had a plan in place that was going to influence what your guidance for the full year is, and then Friday, the new tariffs were announced. So what changed within your plan from last week prior to the announcement of the new tariff to today?

Thanks for the question. This is Julie. Our guidance would have been higher is the short answer to that. So clearly, given the news that we got on Friday afternoon, it made us rethink about our guidance and the fact that we're committed to absorbing the List 4 tariffs and the List 3 tariffs going from 25% to 30%, now List 4 going to 15% , that made us rethink our guidance. But for those tariffs, it would have been much higher.

And I'd say that we're -- as much as there's a lot of macro uncertainty and we're well aware of what's going on the world, we're not seeing any weakness with our customer, with our brands. We're seeing very strong metrics across the board from traffic to the websites, new customer accounts and really strong reaction to our introductions and our big bet. So we don't want to be overly conservative either. We're seeing really strong results and we're very optimistic about the balance of the year. And let's hope that we get to a trade agreement that is a benefit and more upside.

My follow-up question is, if you look within the Pottery Barn business, how much of the 4.2% comp has been driven by new product launches, some of the new concepts and how much is just business that had been in place for a long time?

I'd say that the big unifier in all the growth is furniture, both new and core. What's great about furniture is that once you find something that's working, it has a longer life than you do in fashion apparel, or even in textile. So it's really, it shows you that you have the same opportunity for quarters to come because you can build on the collections. And oftentimes, we'll bring in one piece of a collection and test the new finish, and then we bring in the whole suite. So that is a really good indicator of future business, and then we maximize it by adding to the collections.

Next, we hear from Simeon Gutman with Morgan Stanley.

This is Josh Kamboj on for Simeon Gutman. Can you talk about the relationship between top line growth and maybe the inventory you bought ahead of time in the quarter like how much of the comp growth was tied to inventory purchases you made ahead of tariffs and did you find yourself needing to maybe promote a little bit more than usual to sell-through some of that? Or is that merch margin on those sales pretty healthy?

No. So first of all, the inventory that we're talking about pulling forward is ahead of the List 4 tariffs. And so those would've been items that we sold in future quarters. So there was no need to take inventory that we pulled forward and sell through it quicker. In fact, from a gross margin perspective, if you back out a lot of the fairly -- so, a lot of big noise, but if you back out the noise associated with the shipping costs and the China tariffs and the higher franchise and trade volume that I went through in the prepared remarks, our merch margins were actually slightly up. So just to be clear, the gross margin decline has nothing to do with the fact that we had to get through a bunch of inventories. We feel the health of our inventory is pretty good. If you look at it from a 8% growth perspective, our top line growth grew 7.5, so it's in theory, 50 basis points above. But if you factor in the impact from the tariffs absolutely and then the impact from the tariffs we pulled forward, it's actually below our revenue growth. So that was not a driver of our gross margin results.

All right. That's very helpful. And just a quick follow-up. Can you talk about the trajectory of Outward? How do you expect the top line bottom line growth to evolve in that segment and if it's still going to be consolidated into financials next year? And if so, it's been kind of run rating at a maybe 25% EPS headwind for the full year. Is that how we should think about modeling it next year?

Obviously, we're not providing guidance for next year. But as far as what our plans are for the non-GAAP side of it, we will be rolling through the operational piece of it. You have to remember that within that non-GAAP number, however, is also the amortization of the acquisition costs, and that's a sizable piece of it. So I don't think you can take the run rate of what you're seeing from a non-GAAP perspective and assume that's going to roll through from that perspective because the amortization of the acquisition cost will continue for 2 more years since the operational piece that will come through.

Our next question comes from Chuck Grom with Gordon Haskett.

This is actually John Parke on for Chuck. I guess given the 2Q gross margin performance, understanding that compares a little bit easier, how should we kind of think about gross margins here for the balance of the year?

Well, as we've said before, we certainly don't give per se guidance like gross margin. But as we've said before, we do expect there to be continued pressure as we move throughout the year, particularly associated with the tariffs. Now obviously, it depends on the mix of the products that we sold, which ones are still on China, which ones have the relative negotiation we've had with those particular vendors. And so you'll see some pressure from that and certainly directionally with the fact that we've got a full quarter of the List 3 tariffs, the 25% moving to 30% and then the List 4 layered in. However, at the same time, what you will continue to see is incredible occupancy leverage. We've had one of the lowest occupancy rates we've had as we continue to optimize our occupancy cost. And as we committed to, we may have some geography play where you have pressure on gross margin, but we're making up for within SG&A. And you saw again that we have a second quarter row, some of the best SG&A leverage we've ever had and so we're committed to doing that going forward.

Got it. And then I guess, just how does, I guess, calendar shift impact sales in 2Q? and any way to parse out the headwinds here in the back half year?

It wasn't material. It was a slight piece of the noncomp, call it 70 basis points. It wasn't material piece of it. In Q3, we don't expect it to be even as much as that. In Q4, obviously it will be a drag because that is the quarter where we have the 53rd week. And so you can do the math on that from to some degree on the $85 million that we committed to you or told you it was worth last year. You can do the math on it for the fourth quarter. On the year, the $85 million is worth 160 basis points.

Next, we'll hear from Jonathan Matuszewski with Jefferies.

I guess just to start off for West Elm, you mentioned expanding into product white space. Could you just elaborate on a few examples of new categories that could be contributing to some of that visible acceleration we saw this quarter?

Sure. Great question. We've extended into the bathroom area again. We have been in that business previously and we gotten out. And in fact, we've really had great response in all channels through our bath assortment, and we've just begun on that. We also continue to see opportunity to build on our children's business with the West Elm PBK collaboration which is, interestingly enough, driving almost equal amounts of volume, both in West Elm and PBK. And again, very -- just the beginning innings of that work. And then the other area, older children dorm business, very important business and one that there's no one person really leading. We've had great results this quarter in Pottery Barn teen in our dorm business. But we also see opportunity because of the store base of West Elm to even better service that customer that is near a West Elm store. So those are some of the areas that we're building on. I would say that the other things that's happening with West Elm is that we continue to see it really work in different parts of the world and different suburban and urban areas. And so diversity of scale and aesthetic becomes very important. And while the West Elm look is pretty original and people know when it's West Elm, the truth is there's a lot of the varieties within that in different ways to refresh your home with the brand. And as we expand on that, we're getting more customers, which is really exciting. And the thing also to remember is that although it's doing this well, we think the runway is so much greater because the market awareness is so low still. So as we look at market awareness at only 20 now and you think about that versus the mature brand, you can do the math on why we are certain that this brand is very large.

That's helpful. And leads into my next question. I guess I know that the partnership with Rent the Runway is still very early, but any comments there in terms of what you've been learning from that partnership and whether you'd be open to pursuing other alternative distribution channels for that brand or other brands?

Thanks. It's really too early to comment. I'd say that there's been tremendous customer interest in that, and we've had some great events with them and a lot more to come. And we're open to try new things and being where the customer wants us to be. and sustainability is really important to us. And so sometimes people don't want to buy things forever. They are moving often, and we're going to be there to serve them.

Next, we'll hear from Oliver Wintermantel with Evercore ISI.

Julie, it's a follow-up question for what you described on your gross margin and SG&A leverage. So looking at the first half, we had leverage in operating margins. And you said there's continued pressure on gross margins to leverage on SG&A. But looking at your full year guidance, it looks like it's flat year-over-year. So should we expect the margins to be down in the second half? And is that more driven by more deleverage from gross margins or less leverage on SG&A?

I think on the year, we've guided to essentially flat to last year, which could be higher. I mean we're seeing relatively in line with last year, so I wouldn't necessarily guide your op margin to be below last year. You will see pressure, as I said earlier, on the gross margin, and that should be offset with SG&A. And so we're still committed to delivering op margins that are flat or higher to last year.

Got it. And then the follow-up on working capital. That seems to be a bigger outflow this year in the first half on working capital than last year. So free cash flow was down in the first half. Can you help us with the flow-through for the rest of the year maybe on working capital or free cash flow?

Yes. That's primarily associated with accounts payable, and it's really due to timing. We had elevated levels at year-end in comparison to the prior year. So when you compare it to the Q2 year-to-date, it's just distorted it. And so it's all timing, and so you should see that come back in the back half. I wouldn't read anything more into it.

Next, we'll hear from Bobby Griffin with Raymond James.

Congrats on a good revenue quarter. First, I just wanted to unpack a little bit more detail about the price increases. When you look across your portfolio, maybe just on average, what is the ultimate price increase the consumer is seeing from the tariffs? Is it mid-single digits? High single digits or low double digits? Anything to help us frame what the consumer might be seeing.

It's not even close to that.

So it's like low single digits when you translate all the impact from Lists 1 through 3 in? And then would it maybe move a little bit higher with List 4?

Yes. Remember, it's not -- every season, we bring in a lot of newness. And so it's not the same product necessarily. And there's also different value equations as I said earlier, but it's not a material change in pricing. It's one that we feel very comfortable with. And the most important thing, as I said earlier, is to make sure that an item by item basis, the value equation is still better than anyone else, including when you add the shipping in. And that's how we think about it. So it's not -- to do any averages on this wouldn't be appropriate.

Okay. And then is it possible given that it's such a -- that it's not as meaningful as maybe some of us would have thought originally that there really may not be that much unit degradation? Or have you seen any change in unit volumes really at all?

That's an interesting question. We haven't seen material degradation, no, in unit selling based on these slight price increases.

Okay. And then lastly for me for me is just a further-out type question. When you look at the long-run revenue targets of mid- to high single-digit revenue growth, how does new store growth start to play into that after you get through some of the closings here?

On the stores, we have seen very strong results from our new stores and our relos. I mean the relos have been really materially incremental. And the West Elm stores have been better than planned, as I said earlier, and we still haven't even really started to open Rejuv stores. Not to say that, that's our focus, but retail is really the motor around our business. And we are a direct-to-consumer company with a retail motor. That's where I want you to think about it. And whenever we open a store, we see awareness go up, it gives them confidence in buying online, and it's a great ecosystem. We're also really working with the lifestyle centers to open in these great new centers where people can just park their car, maybe go grocery shopping and come into our stores. And that's really exciting new, kind of real estate strategy for us and to think about in the future.

Brad Thomas with KeyBanc Capital Markets has our next question.

Good quarter. Wanted to ask about SG&A. It's been very well controlled the last few quarters here. And I guess as you all think about the business the next few years, is this low single-digit growth rate something that you think is sustainable and would be enough to plant enough seeds to continue to drive the long-term financial targets you're outlining because it's really been some impressive control here these last few quarters?

I mean, yes. Obviously, we're not giving guidance for the outyears on the SG&A line, but it's certainly something that we are very focused on, and we've demonstrated that we've been able to do. And the good part is that it's across multiple lines. It's not one particular line that we've been working towards. So in particular this quarter, last quarter, we've seen incredible leverage on employment. Even though it's a sensitive subject, we have the reduction of force in Q1, and that has really helped us and that will continue to help us with the lower employment costs. We've already lapped some of the higher hourly wages. Some of that will come back, but we've lapped a big piece of the higher hourly wages that we needed to. And so that's helping drive leverage as well. And then from an advertising perspective, we're continuing to shift more advertising dollars away from catalog into digital advertising that is much more efficient. And so we think that's an opportunity to continue to do that. Maybe Felix, do you want to talk a little bit more about that.

Yes. I think as Julie said, we will continue to find higher-performing marketing vehicles. And our growth in our customer base is in line with the sales growth we reported for the quarter. And I think even though we're getting more efficient with our marketing spend, what gives us confidence is that we began the year with a record-high number of actives. And for the past 2 quarters, we continue to grow on top of that base, resulting in an all-time high as we head into the back half of the year. So we're very excited about the customer growth and the momentum it gives us for the next 2 quarters and for the years ahead.

That's very helpful. And if I could ask a follow-up on trends in Williams-Sonoma. That business becomes seasonally more important when you get into the fourth quarter. I was hoping you could give us an early look on maybe what you could do to try to drive positive comps in that brand in 4Q.

Sure. I -- we obviously recognize how important it is in Q4, and so we've been going through everything that we have in place to ensure that we have the big buys on the right stuff. And I think really important thing that will allow us to even further differentiate us is to really return to more content messaging and more recipes and experience in our stores, but also digitally and to really take the next step in digital reinvention about how we really expand our food education of our customers, which is the thing that the brand has always been famous for. And so we have some really nice launches coming up. We're seeing good early bites on, and we are going to continue to reduce our promotional activity. We've done a good job reducing clearance in the stores. We're also going to continue to exit these stores that are not performing as well, which is a good thing to do, and we have some closures at the end of the year that, as we talked about, are coming up. So that's going to give us more leverage on the occupancy. But really, the growth here is going to be online. And so we're going to continue to focus on the PIP,, the conversions, content storytelling, our messaging to our customers. And we believe that, that's going to drive improve business, not just long term, but in the back half.

Next, we'll hear from Brian Nagel with Oppenheimer.

Nice quarter. So a question, right? Is part of the strategy, you're continuing to tweak your store base? So as this occurs -- or these efforts occur, any update on the sales recapture rate as you're shedding stores and presumably helping to drive those sales through other stores or your e-commerce effort?

There is some, but it's not as material as I'd like it to be, honestly. What it does is, it helps make that neighboring store even more profitable, but you're not picking up the whole thing and nor do we need to because in some cases, those sales are not profitable anyway.

Okay. Okay.

Did that answer your question?

I get it. I get it. Because I know in the past, other retailers have talked about specific number, but it sounds like that's not really how you...

It kind of depends. So for example, if you're in a store market where the store is 15 minutes away, you're going to get more pickup than if the store is 45 minutes away. So we have models that tell us exactly on that store how much we pick up. And generally speaking, we're doing better than those models. But it can be anywhere from 5% to 25%, depending. But it's certainly not in the 75% ranges. I wish.

Got it. And then a second question, a bigger picture. You and others are talking about tariffs and the efforts you -- with your vendors to mitigate the impact in price. Have you considered -- as you think about the balance of this year, what impact -- again, it's obviously very fluid with tariffs, but what impact does tariffs could have on the consumer broadly? And with your business being discretionary in nature, could that be some type of sale -- a bigger sales headwind?

I'm not seeing that. I mean the customer -- we're in the business of home. And people is our biggest asset. And they've shown us that it continues to be the thing they value the most. And home prices are still up. We've seen the good numbers. We've seen the good customer confidence numbers. And we're continuing to take share from really the mom-and-pops, the retail people who had all these little stores. In our business, 50% comes from all these small players and 80% of whole industry is actually done at retail. So we're one of those special disruptors who's going to be able to benefit from that disruption from retail to online. And the advantage we have -- actually, it's funny, the advantage we have is that we’re a great online player, but we also have these retail stores to give the customer the confidence about the quality and allows them to go visit things somewhere near them so they can buy a whole home full of furniture. So we're actually -- I actually see the future as really in our favor as people shop more and more online and we take share from all these mom-and-pop, on the street people who - people who are not shopping with us much anymore.

Next, we'll hear from Marni Shapiro with Retail Tracker.

Congrats on a great quarter. Can you give us a little bit of an update on the international business? You have some exposure in the U.K., and I know with Brexit, things have been a little up and down there; and then just in Australia. And then could you also give us a little guidance about furniture is going very well and has been for quite a while. And you talked quite a bit about moving furniture back to the U.S. and things like that. Can you just talk about where the company stands today as far as furniture production here versus China versus other countries in general?

Sure. Our total international business continued to show strength. Our -- we see a lot of strength in Canada, actually, in our franchise business, and our franchise business continues to accelerate in the same -- on a same-store basis. And that's despite a challenging business environment across the globe. And as you know, we're going into one of the biggest markets. We're so excited to go into India. And our U.K. business is solid. Our Australia business is probably the weakest, honestly, but they were able to continue to reduce costs as we change our operating model there. So that is a good thing, too. And we are, in general, very optimistic about our ability to really grow in these international markets and do it profitably. As it relates to furniture, we are always looking for the best quality and the best place to make things. And as we've said before, the shipping costs overseas on upholstery offsets the labor increase in America. And so you're able -- we're able to move a lot here and we've been doing it for a long time. It also gives us the ability to do more made-to-order. And we've opened another location in Tupelo, and we already need more space. So we're going to continue to grow here carefully, and we're making a beautiful product with great value for the customer. And clearly, through the sales, they recognize it. We have not moved case goods. Our case goods are in many places, but mostly Vietnam now and China. And we have a lot of flexibility there with double sourced and triple sourced many of our products in our case pieces, but that continues to be overseas, with the exception of some Rejuvenation and Williams-Sonoma Home product that we make domestically.

And as you guys have moved stuff out of China to place like Vietnam and other countries, have you been able to get the same kind of efficiencies and product quality and shipping? Because China is a very mature manufacturing market and the others are fairly mature but not quite the same level. Are you finding that it's been a fairly seamless transition?

I mean, I say -- I don't want to make it sound too seamless because our teams have worked so hard to get there. It's not pleasant. I'd rather be working on other things, but they have done a beautiful job. And we're not having any quality degradation. We're not seeing any disruption in shipments. The vendors are great. They've been our partners, and our team was amazing.

We'll move on to Seth Basham with Wedbush Securities.

My question is a follow-up. Laura, you mentioned that you haven't seen any material degradation in the unit space on the slight price increases that you're taking because of tariffs. In your guidance, are you planning for any unit demand pressure in the second half? And if so, how much?

Let me understand your question a little bit more. For some reason, it was muffled. Did you say am I planning for demand degradation?

Yes. Any demand -- unit demand decline because of price increases in the second half in your guidance?

Absolutely not. No.

Got it. Okay. That's helpful. And then secondly -- I'm sorry, did you want to say something.

No. No. I just want to make sure I'm getting your question right.

Sure. And then secondly, Julie, in recent quarters, you talked about trends in product margin. Can you give us some color on how much product margin declined this quarter and confirming the outlook is for declines in product margin in the back half of the year?

Yes. So what I did say is that if you take out the impact from the higher shipping costs, then obviously the China tariffs, which is relatively new, especially going to 25% this quarter, and the impact from the higher franchise and trade volume, the pure merch margins, the health of the business of what we're selling the product at, if you will, is up slightly. And that's how I qualified it.

Okay. In that context, how that compared to the first quarter of the year?

It's relatively similar. And obviously,, it will ebb and flow as it moves to the back half. But certainly, we're holding that level of merch margin, which makes us feel really great about our promotional strategy and the fact that it's working. And we're being more thoughtful about how we're promoting products and being more relevant and personalized with our marketing strategy. So we feel good about it.

Next, we'll hear from Cristina Fernández with Telsey Advisory Group.

I had a big-picture question. You have a lot of initiative to drive the accelerated comp at West Elm and Pottery Barn, whether it's product marketing, improvement to the website. If you were to rank these initiatives, how would you feel about their contribution to the comp?

The contribution to the comp? You mean this quarter?

Yes. The acceleration you're seeing this quarter.

Yes, I mean we -- you can see that comps in PB and West Elm were -- PB was even better than we expected. West Elm was also better than we expected. I would say the other thing that's embedded that you can't see that we can see is how material this Business-to-Business is to us. And I'll say that out loud. It drove almost a full comp point Business-to-Business this quarter, and that's all incremental. It's an accelerator. It makes me think about what -- how much more can we add in the future because we're still only sort of gathering, we're not hunting yet. We're taking calls in, and we're not ready yet to go get them. And so can you imagine if we're driving almost a full comp point now in Business-to-Business, what that could be worth. We said that -- we laid out a strategy in the beginning of the year, and we talked about West Elm, cross-brand initiatives, Pottery Barn restored to growth. We're delivering in all of them. And in some cases, they are bigger than we thought. So that's what gives us a lot of confidence in the future beyond one quarter, but really in the future.

And as it relates to the cost savings that you've been able to pull out of SG&A, how should we think about the incremental cost saving to offset the List 4 tariffs versus what you've done for List 3? And what areas are those coming from?

We should expect them to continue, quite frankly, in all lines. But remember that it's not just an absolute increase from the fact we're adding List 3 and List 4. We're still proactively addressing those costs themselves. So whether it's again, continuing with the resourcing of the product out of China or going back and getting -- being more aggressive with negotiations, I mean, with the devaluation of yuan certainly, we've opened up the door again with our vendors to say, "Hey, how about some more money please?" And they've been great about it. And so we're attacking it from every angle, and so it's not just an SG&A play that we need to do. But I have absolute confidence in our ability to continue with our cost-cutting initiatives and drive up for the back half of the year.

We're actually -- think of it this way. We've identified a lot of things, and we have some cost savings, but some things are just in the works that haven't yielded the cost savings yet. And you may remember, I think it was a quarter ago that we talked about this big bucket that we call indirect vendor savings, which are all the other non-product vendors. And we've actually pulled that altogether with a team specifically dedicated to cutting costs, renegotiating, doing things differently to be an additional offset to tariffs. And so that does come in the form of SG&A, but it is real as a vendor savings that comes from a product vendor.

Next, we'll hear from Anthony Chukumba with Loop Capital Markets.

So I'll keep this quick given that it's just under the wire. I just wanted to talk a little bit about or delve a little bit more into West Elm. And I know you talked a little bit about this in response to one of your earlier questions. But you just saw such a nice sequential comp acceleration there including on a two-year's back basis -- actually a little bit better on a two-year's back basis. I was just wondering if you could just talk a little bit more about what specifically is driving that. I know you talked about the new product introductions, line extensions, e-commerce, sounds like B2B. But if you can just give us a little bit more color on that, that would be great.

Sure. I mean you do have the list right. So thank you for recapping that. But our Q2 performance was strong across the board, success in all of our key growth strategies. Our design in values leadership is probably the most important thing about this brand. It's very accessible to people, and the design, the product quality is great. And we're one of the few people you can do the whole home. I mean, it's not just a single chair that's well-priced that you can find if you're hunting on-site on the Internet. This is a full lifestyle brand. As I said earlier, we expand it into new product white space like the bath. We enhanced our strategies, our digital strategies to drive new customer acquisition, which is working. And we had growth across all of our channels, new stores and including B2B. But really, the biggest growth is the notable acceleration in our e-commerce performance, which continues to really climb and feed on itself. And that is not just because of all things I had mentioned earlier, but because of the technology advancements we're making online and all the testing and experimentation we're doing across all of our brands to put the best experience online for our customers. And so it's been a big priority this year to double down on West Elm, give it more resources, give it more attention from all of us. We have a great team in place, and they are really executing.

That will conclude today's question-and-answer session. I will now turn the conference over to Laura Alber, CEO, for any additional or closing remarks.

Thank you, you guys. I really appreciate all the questions today and your support, and I look forward to talking to you again soon.

Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect.