Welcome to the Williams-Sonoma, Inc. Fourth Quarter 2019 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. 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 condition, results of operations, business initiatives, trends, growth plans and prospects of the company in fiscal year 2020 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, and good afternoon, everyone. Also 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. Before I discuss our financial results from 2019, I want to start by addressing the rapidly evolving and unprecedented time we are in and the actions that we are taking at Williams-Sonoma, Inc. From the day this company was started over 60 years ago, taking care of our customers and our employees has been our top priority. Over the past few weeks, all of our lives have been impacted by the spread of the coronavirus, and as the situation continues to evolve, we are following the recommendations of public health officials and government agencies to ensure that we are doing all that is possible for our employees and communities to remain protected while continuing to serve our customers in creating a comfortable and functional home as they spend more time in their homes. I'm so moved by our strong experience and agile teams who are working in new ways to accomplish this. I'm sure by now you've read that our corporate associates in the San Francisco Bay Area are working from home until April 7 as mandated by the shelter-in-place order that went into effect. And across our other corporate offices and distribution centers, we are following the CDC guidelines and, of course, increased sanitation measures and cleaning frequency, and we've implemented a voluntary work-from-home option where situations allow. As you know, we also made the difficult decision to temporarily close our stores in North America with a plan -- and Canada, with a plan to reopen on April 2. It also goes without saying that are we extremely focused on our financial health. We believe…

Thank you, Laura, and good afternoon, everyone. I want to start by discussing what our team is doing to navigate the challenges in the wake of the coronavirus outbreak. As Laura said, we are making changes to the way we operate to ensure that we maintain our strong financial health to continue to support our associates and customers during this time of heightened uncertainty. We are preparing all aspects of our business for a number of macro scenarios. We are cutting all nonessential operating expenses, for example, in advertising, we are focusing only on high ROI initiatives that drive e-commerce traffic and conversion. In technology, we are prioritizing business-critical projects and deferring all other spend in the short term. And in real estate, we are delaying store remodels and relocations and working with our landlord partners to reduce rents and other expenses. We have also eliminated all business travel and other discretionary spend for the foreseeable future. To preserve our strong liquidity, we are working with our vendor partners to substantially cut and push out our inventory purchases on the year. We are also suspending all capital expenditures that are non business-critical in the short term, with our current plan being to cut our CapEx by approximately half of what it was last year. During this time of increasing volatility, it is hard to overstate the importance of our strong cash position, resilient balance sheet and proven cost discipline. With over $430 million in cash at year-end on our balance sheet and our $500 million line of credit, we believe we are in a strong position to address the short-term challenges ahead. At the same time, our financial strength and flexibility enable us to opportunistically invest during a market recovery and emerge as a stronger and more resilient business, just…

[Operator Instructions] We will take our first question from Adrienne Yih from Barclays.

And let me say, great performance in the fourth quarter. The momentum has been tremendous coming into this year. Laura, my question is on the e-commerce versus the store channel. So 56% is in e-commerce and you talk about not yet seeing any impact to that. Does that include sort of -- I know in the past sort of 5 to 10 days when people have started to actually see demand impact in the impacted regions, if you can talk about that regionally? And then Julie, very quickly, would you be able to give us any color on sort of the merchandise margin flow-through of perhaps the lost sales? And the way I'm taking a look at it as we looked at your rent occupancy depreciation as reported in your 10-K that was about 12%. So I just want to make sure we have that correct. That's total rent occupancy and depreciation and then sort of adding that back to your gross margin. So we're getting to about 50% for merch margins. Just wondering if we're in the ballpark.

Thanks, Adrienne. So let me clarify my comment about e-commerce. So we had a great Q4 and then February was just strong. And pre corona comp was what, 9.6%, Julie? I mean...

It was, 9.7%.

Yes, 9.7%. So when you look at it post corona, it came down, but it's still mid-single-digits positive. And I'm sure that the teams have the information by market, but it's -- regardless of how you slice it, it's holding up. And there's been some categories people have wondered about our type of business in times like this. And we're selling stuff for people's homes. Our food business, obviously, is way up, our cleaning business, our baby business. And it's, I think, much more resilient than other types of industries, and we happen to have a lot online. So it's not -- who knows what's going to happen in terms of where that consumer demand goes, but I think we're in a pretty good position with a channel split that we have and also the categories of business that we're in.

And then from a -- to answer your question on the merchandise margins, yes, that's the right way to look at it, take out the occupancy cost, which does include rents and depreciation and all of those costs you list. Then you get to the selling margin, which we've talked about in the past. But one thing I would caveat there, however, is the selling margin includes shipping costs. So you have to come up -- we have not disclosed our actual shipping cost amount, but that would be the one assumption you'd have to pull out which would get you to a higher merch margin.

We'll take our next question from Chuck Grom with Gordon Haskett.

Just a follow-up on the P&L geography. Just can you remind us how much of your SG&A cost structure is fixed versus variable?

I don't think we've given that in the past. Obviously, you could probably take a look at the trajectory in the fourth quarter when we have a lot more of the variable costs come into play and come up with an assumption on that. But certainly, there's the labor associated with retail sales, there's the advertising dollars that are variable. And so those are probably the biggest buckets that I would say.

Just make sure, though, is that the assumption that we're going to have retail payroll, even if we don't have retail sales. So it's not -- you can't look at you can't use everything in the past as a proxy for that. And we haven't made any decisions past the 2 weeks of what we're going to do. But just -- you can think about that -- and what -- in different models based on extended closure. That's what we're doing.

Okay. And just to clarify, you said February was up 9.6%, but to date, you're running up mid-single digits, and that includes both your store business and online?

I said -- no, no, no, I didn't say. I said that for e-commerce -- so total comp with stores and e-commerce was 9.7%. And then what I said is e-commerce post corona has been strong and in the mid-single digits.

And in my remarks, I said high single digits pre March 11.

We normally don't give all that detail. But we figured we'll give it to you because it's real, and I think it helps eliminate what's going on with our business at least.

No, your business is very solid. So I was just coming over from 5 below. So I'm a little bit late. And then just, Laura, just stepping back, I mean, you've been at the company for a long time. I mean, when you take a step back and think about the consumer's ability to recover from here, how are you thinking about it? How quickly do you think the consumer will come back? Or do you think the damage is going to take some time here? Just curious, when you think about 9/11, when you think about '08, how do you think about today?

So I mean, ask me next hour, I might have a different opinion. So therefore, we're running multiple scenarios. So we have scenario one, which was what our budget was going to be, what our guidance was going to be, in that beautiful scenario. That's unlikely now, but that would be full recovery. And the question then becomes, when does that happen? Does it happen this year, next year? Then you look at a very severe short-term scenario, and then you can make a decision about that recovery after that. And then you look at prolonged recession. And so we're looking at all of them. We're cutting the cost to the most serious scenario immediately, so that we can be ready for the worst and then have the flexibility if things are better.

And we'll take our next question from Kate McShane with Goldman Sachs.

I just was curious if you could give any more insight into the supply chain. If you knew how much was disrupted when the virus was more prevalent in that area of the world? What you are still seeing? And how much of an impact do you think it has to your inventory in Q1 and maybe into Q2?

Yes. It's amazing, I think, how quickly they recovered. The teams were very focused. They had worked out, worked from home very quickly. And we're very committed to our business, and we're seeing almost regular operations there now. We had a couple of weeks of delayed products. And at one point, it was really scary about how long the delay would happen and how would it affect back-to-school. But a lot of that has abated now.

And we'll take our next question from Peter Benedict with Baird.

Good to hear business great in 4Q and holding up reasonably well here. As you are starting to see some of the slowing, any concentration regionally or by brand or product category to the extent that you're seeing this start to set in? What kind of color can you give us on where it's showing up?

Yes. So I think we're still early days. Remember, we just closed all of our stores. So one thing you can bet is we have no store sales. So that's real. We are going to -- where the stores where people can operate, we're going to do some service to our customers because they may have to pick something up in-store that was already previously shipped. So we want to be careful. We're going to do that in a very sanitary way to keep everyone safe, but that is something that we're going to provide through this time because people need things in our stores, and so we can get them out in some areas right now. So that's the biggest impact. Everything else, what I would tell you today could change tomorrow. So I'd say that and it's been moving so quickly. I could -- if I had told you what happened 2 days ago, it might not be the same for what happened yesterday. But there are some categories that are extremely strong. The ones I mentioned earlier are -- I'm hesitant to go much further with details just because of competition. So I hope you can respect that, but we are seeing some very interesting trends, and they're not surprising trends, when you think about what's going on there -- it's relevant stuff. People are -- they're eating at home. So they're going to be thinking about that space and how to have that be as pleasurable as possible during these times.

We'll take our next question from Brian Nagel with Oppenheimer.

First of all, I'd like to congratulate -- add my congratulations. Great last year, great start to this year. So congrats, nice job. The question I have, as we look at this period now with the store closures -- the stores closed and not knowing really how long it could last, maybe a 2-part question. How much -- if you look at the capacity or maybe operations of your online business, which are obviously very powerful, how much could that flex up to sort of say, offset what are likely to be very weak sales in stores? And then the second part is to what extent could you shift your marketing just to almost advertise to consumers that this new, hopefully very temporary, the new operating structure of your company, which is much more online focused?

Yes, sure. So the stores are closed, right? So I just want to make sure, when you're modeling that they're closed, you can make assumptions based on your crystal ball and when they'll open. And that's what we've done. We've done a few scenarios there. And so, of course, online is really important, and it's our key channel, and I'm going to let Felix, who's actually on the call, answer the marketing question.

Sure. So to your question, as Laura mentioned, we are aggressively cutting nonessential expenses throughout the company, including a number of marketing line items. That said, some are more obvious than others. That said, we are still continuing to invest in our D2C business, where we see strong results. How flexible are we? As a reminder, over the past few years, we've built our own in-house advertising team, which allows us to react quickly to changing dynamics in the market and consumer behavior and even during these times. So we feel very confident of cutting back where we understand, it's not business-critical and for investing where we see an efficient ROI.

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

First for Laura. What signposts are you going to be looking for to reopen your stores? And second for Julie, it looks like in 2008, you experienced about a 45% decremental margin on the comp declines that you experienced. Should we be using a similar run rate for decremental margins as we model your business this year?

Signpost to reopen. I think the obvious ones, are we -- how do we feel about the safety in running stores and how do our people feel? What are the malls doing? You just saw that Simon announced mall closures today. So it's also not totally in our control. It also could be that the government makes the decision. So this -- it is my opinion, but I think a lot of this is out of our control.

And I think for modeling and obviously, this is a difficult time to do models. This is not necessarily exactly like '08 and '09. We have a situation, obviously, where we've got closed stores here, which is relatively unique. However, we also have a situation. We've got strong e-commerce, and we're much bigger on the e-commerce side. And you've got people that are staying at home. So again, there could be many different scenarios that come out. I wouldn't simply model what '08 and '09 had from a flow-through perspective.

So are you saying it should be better or worse than that?

I mean...

We're not -- that's exactly why we're not giving guidance at this time.

And we'll take our next question from Curtis Nagle with Bank of America.

Just a quick first one, I guess, on capital. So you're cutting the CapEx a little bit, at least for the time being or, I guess, by half, which makes sense. Have you made any decisions on the buyback? Would that be suspended or perhaps pulled back?

At this time, we're continually monitoring the situation to determine our best use of cash. Obviously, in light of the increasing uncertainty from the coronavirus, our priority in the short-term is to maintain our strong liquidity for the needs of our business operations. However, given the significant dislocation of our stock price relative to our outperformance pre-coronavirus, and our expected accelerated long-term growth outlook of our business, we are prepared to opportunistically buy back our shares under our remaining $575 million share repurchase authorization, when appropriate and when we have more certainty.

All right. That makes sense. And then just a quick one on the business. Specifically looking at the Sonoma brand, we saw a really nice turn in the business, and 4Q seemed to happen fairly quick just looking the past few quarters. I know you guys have had a bunch of initiatives kind of in place to reaccelerate the business. But could you maybe parse a little bit more what drove that? Was it predominantly, again, internal measures? Was it fallback in competition, strong gifting season, anything you could point to?

Yes, I think we really -- the big difference is we really clarified our messaging and focused on few or more important things and improved our content stories and made them very relevant for the holiday season. I think we had a strong lineup of exclusive products this holiday season and people respond well to strong merchandising. So they also had a nice start to the year. And although they have a larger percent in-store than online than the other brands, we expect to see resilience in Sonoma. We saw a lot of resilience in Sonoma in '08. So it's an interesting dynamic for that brand as well.

We'll take our next question from Marni Shapiro with Retail Tracker.

Congratulations. It was an outstanding holiday and a really strong start to spring, and glad to hear about the people eating at home and hopefully, then they're going to bed and making babies, and will buy Pottery Barn Kids stuff in the future. Could you talk a little bit about -- I know it's hard to think about store openings and closings for next year, but the landlords seem to be very, I would say, understanding at the moment is the best word. There seems to be a lot of leverage here. And could you remind us what percentage of your stores are in malls? And what your plan is for openings and closings next year as of today?

Yes. I do think in this time of heightened uncertainty, it's important for us to work together with our business partners and we're fortunate. We have a portfolio of very high-quality brands and the landlords, I think they realize that not one person can shoulder the burden of this. And so we'll be looking and working aggressively with them to mitigate this retail store closure. Because we will be back. And we're in great malls, and we have great stores. I'd say that we are delaying remodels as much we can, and we are also delaying our relocations so that we are also not doing that right now.

Were there any stores that were on -- that were scheduled to open, say, in the first quarter that you're still moving ahead with during the second quarter because they're pretty complete? Or are all openings and closures for the year kind of on hold for now?

There are some that are almost done. They're not opening, but they're complete. And then we're moving out as much as we can, say the least, dynamic situation.

Yes, say the least.

We'll take our next question from Jonathan Matuszewski with Jefferies.

Nice quarter. Appreciate the color on the February performance. I imagine traffic was the primary driver of the comp slowdown, probably for the first few weeks of March, but any color in terms of average ticket or units per transaction or anything like that? Basically trying to get a sense of whether the slowdown for when the stores were open, was traffic driven or maybe basket related with the consumer uncertainty?

Yes, sure. So pre-corona, everything was strong, right? So I'm talking about when the outbreak really became clearly a crisis, which is about 3/11, to some extent, and then you have the store closure that happened after that. We saw pretty serious reductions in store traffic. But in talking to other retailers, our total sales were still -- there's a lot of value there, there was a lot more than you would expect. It certainly wasn't positive or even close, but it wasn't nothing either. That's why it was such a hard decision to close because we were holding up pretty well.

Got you. Helpful. And then just on the B2B business, that's been a nice contribution to comps recently. Just update us on kind of your outreach efforts. And kind of how that may be impacted in an environment with some of those channels experiencing struggles in terms of hospitality or sporting venues and things like that? Just any update there would be helpful.

People are still proceeding with projects, and we have a lot of things in the pipeline, haven't heard much displacement there yet. I mean, new quote requests are actually way up. And we're actively staying connected. But if you look at the last recession actually, the impact on the B2B market was minimal. It was down less than 1% over 2008 to 2010 because some of their businesses, they have their needs. The needs remain to buy furniture and we have an aggressive plan to adapt and continue to accelerate growth and gain market share in this market.

We'll take our next question from Seth Basham with Wedbush.

The question is around your ability to cut costs. You talked about planning to cut a lot of costs, but if you could provide a little bit more clarity, that would be helpful. First of all, in terms of your retail employees. I think I understood that you're paying them for these 2 weeks and you haven't decided what to do thereafter if your stores closed. And secondly, if you look at the rest of your major SG&A buckets beyond advertising, how much cost do you think you can take out near term?

Sure. I'm going to pass the plan over to Yasir Anwar to talk about how he's approaching our tech spend.

So I think the good news is that we have been -- proactively, we had some time to be able to plan some scenarios for our capital and expense reduction across the technology works throughout the company. And as an immediate step, we are aggressively reducing all the capital and expense, which is nonessential. And focusing on our customers, on primarily e-commerce websites, care centers, supply chain, to keep the things flowing and the business running. And at the same time, we are going to be balancing. So that when we come out of this scenario and the community is back up, we are going back to our gear of growth. So that's the plan -- technology is doing. We have created a very agile project and financial model to be able to respond by week, by month as needed to be able to work with our flexible workforce we have in technology.

Thank you, Yasir. In terms of other areas, I think we've talked about the ad costs already. We talked about our real estate approach. The other area is inventory. And while that's capital, you have to receive it when you have to spend money on that, when you bring it in and put it away. And we're working with our vendor partners to delay a lot of the shipments that haven't left yet. So we could have a little break and have the appropriate amount for the sales demand that we think we'll see. We're making good progress there.

We'll take our next question from Oliver Wintermantel with Evercore ISI.

Just a question regarding the fourth quarter again. If you could maybe give us the comp trends throughout the quarter, if it accelerated into the holidays? And then secondly, on your Buy Online Pickup In Store or buy online ship from store, where are we in that rollout? And how has that impacted now that the stores are closed? Is that completely going away? Or do you still ship from some of the stores or people can pick it up?

As far as the comp trends, they're actually pretty strong for every month during the quarter. So it was a really, really strong Q4 for us. And then in terms of BOPUS, we're still working this out. We made the decision very recently, but our intention is to keep this running for as long as we can, the BOPUS, Buy Online Pickup In Store, unless there's regulations that you can't operate. It'll be picked up, as you would imagine, outside curbside.

We'll take our next question from Steven Forbes with Guggenheim Securities.

I wanted to revisit a prior question, right, regarding the potential sales transfer between the channels, you think about stores, the e-commerce during the next couple of weeks. So I think we spoke about it in the past, but can you remind us what the sales transfer has been when you permanently closed a location in the past in a particular region? And whether that's sort of a good baseline expectation for us, right, as we begin to conceptualize and model out this year?

So I think that -- I'll give you the information in the past, which is not much transversed, but I don't know that that's as relevant now because it's a totally different situation. So we'll see if we become the best option to buy those products and there's no other store online. I mean, there's no other store to go to. The difference was, there was probably a store in the market, another store you could go to. And then there's convenience play of stores. But if all stores are closed, it totally changes the game. So we'll see how well the consumer holds up. I mean, my guess is we're going to get a lot of market share out of this, because of our strong e-commerce platform and our brands and our cross-brand work and the relationship we have with our customers. I think it's times like these where a lot of loyalty is built and people remember how you treated them during tough times. And that's what we're really focused on.

That concludes today's question and answer session.

Well, thank you. I appreciate the good questions and your support and your care. And I really wish you the best with your families and your communities to stay healthy and strong, and strong for everybody around you. We know these are very difficult times, and I promise you we'll get through this. And we will come out the other side learning a lot of things about how to run the business even better than before. Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.