Williams-Sonoma, Inc. (WSM) Q1 2020 Earnings Report, Transcript and Summary

Good day. Welcome to the Williams-Sonoma, Inc. First Quarter 2020 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 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. Good afternoon, everyone, and thank you all for joining us. 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 we get started on our Q1 results, we hope you and your families sincerely are safe and healthy during this time, and our deep gratitude goes to all of the people who are taking care of our communities in the fight against this pandemic. I want to also thank all of our Williams-Sonoma, Inc. associates for their incredible agility, commitment and partnership in responding to this crisis. Our people are at the heart of our company, and we are inspired by how they've adapted to serve our customers in these times. In the first quarter, we are proud to deliver an overall company comp growth of 2.6% despite having all of our 616 stores closed for more than half the quarter. Our teams maximized demand online, leaning into new and innovative ways to engage and serve our customers virtually, driving DTC comps over 31% in the first quarter. These results reflect our powerful digital-first platform and the relevance of our high-quality, sustainable products and superior customer service. The strategic investments that we have made over the years give us a competitive advantage in this disrupted environment that favors digital. Nothing makes me prouder, though, than to have achieved our results while staying true to our company's core value of taking care of our people, customers and communities. From the onset of this pandemic, safety and pay continuation for our people have been key priorities. In mid-March, we acted swiftly to close our stores and institute work-from-home policies for our corporate employees. And we made the decision to provide pay and benefits to all of our store associates who've been regularly working more than 12 hours weekly for the entire time our stores have been closed. To support our local communities, we have donated food, personal care kits and surgical masks to health care workers on the frontline. We've also raised more than $800,000 across our brands for the relief efforts of No Kid Hungry. We take our responsibility to all of our stakeholders very seriously, and we feel fortunate to be in a position to take care of our people and our communities. We are also very focused on our financial health. In addition to maximizing e-commerce, we have made aggressive cuts across the company in expenses, inventory and capital expenditures, and we'll continue to strengthen our financial position while prioritizing investments in strategic priorities. Julie will share with you in detail the actions we've taken to bolster our balance sheet. As we mentioned on our last call, we entered the new fiscal year in a strong position. For the month of February through March 11, when the health crisis began to accelerate, we delivered high single-digit comp growth in line with our long-term outlook. After the outbreak escalated and the closure of our retail stores went into effect on March 17, our e-commerce business had breakout comp growth and has continued to accelerate. Total comp growth, including the impact from our closed stores, was positive across nearly all brands, with particular strength in our Pottery Barn children's business, which drove 8.5% comp, and the Williams-Sonoma brand with a comp of 5.4%. West Elm delivered a comp of 3.3%, while our emerging brands, Rejuvenation and Mark and Graham, drove a combined comp of 2.4%. Pottery Barn's e-commerce demand was extremely strong and gained momentum throughout the quarter. We also reduced our level of promotions across our brands, which led to an improvement in our product margins for the quarter. Our ability to grow our business in this time speaks to the power of our multichannel platform and our organizational agility rooted in a long-standing culture of innovation. To maximize demand online, we've enhanced our digital experience even further. We've expanded our services online, including Design Chat, Virtual Design Appointment and Ask the Expert, leveraging our Outward, Inc. 3D visualization technology. And we redeployed our retail associates to serve our customer in these new ways. These virtual services leverage the knowledge and expertise of our store associates for an important source of differentiation for our brands and enables them to connect with our customers and deliver superior experience online. Also, a key part of our success is our omni services, including Buy Online Pickup In Store, which we launched in early 2018. We've also accelerated our speed to market in a number of digital innovations to enhance the convenience of shopping online. These innovations include improvements in product discovery, site merchandising and the search experience as well as e-mail and site personalization, and we have a faster checkout. With the pivot to digital -- excuse me, someone has their line unmuted. I'm not sure who that is, perhaps it's the operator. Sorry. Sorry, guys. I'll keep going. With the pivot to digital, we've also deployed more resources to digital content creation. As consumers spend increasingly more time on social media while sheltering in place, we are leaning into this trend by publishing more user-generated content and campaigns in our social channels. We are also producing more live events to engage and interact with our customers in real time. These digital initiatives have contributed to a dramatic acceleration in our online KPIs, such as traffic, conversion and customer growth across our brands. We're particularly encouraged to see our new customer counts up substantially and previously retail-only customers shopping with us online. This gives us even more confidence in our DTC growth trajectory for the balance of the year and our ability to continue to take share. The majority of our first-time online customers are now also members of The Key, our cross-brand loyalty program. We have always understood the importance of retention in cross-brand shopping and The Key is at the center of our strategy. As an indication of the power of this program in driving incremental growth, in the second half of the quarter, online sales from existing Key members nearly doubled compared to last year, while they also maintained their pre-COVID total sales growth levels despite store closures. We've also seen shopping across our brands increase as customers realize the breadth of our offering across our portfolio and are eager to earn rewards wherever they shop with us. Our efforts to optimize our digital experience during this time could not have been realized without the ingenuity and thoughtfulness of our brand and tech teams. In the Williams-Sonoma brand, we saw significant growth in nearly all merchandise categories, with particular strength in electrics, cookware, food and houseware. Our content strategy across our digital channels pivoted to relevant topics for more quality time at home, such as recipes, live demonstrations and family activities. Our online growth was driven by a change in our customer profile, which was dominated by new retail primary and cross-channel customers. We also achieved traffic and conversion rates that were similar to our peak holiday season. Growth in Pottery Barn Kids and Teen also accelerated even further this quarter. As a business that's already predominantly online, we are primed to meet the surge in demand for children's home furnishing as schools and child care centers closed nationwide and parents turned to us for study and playroom solutions. We also saw continued strength in our baby business and our offering of GREENGUARD Gold certified furniture and organic cotton bedding. At a time when health and safety is more important than ever, we are focused on further amplifying our leadership in the children's home furnishings market in offering sustainable products that are safe for kids and good for the planet. In West Elm, we also continue to see strong results. Furniture continued to lead our growth in the first quarter with strong demand for our expanded outdoor assortment as well as home office furniture. To meet the material acceleration in e-commerce growth, we have introduced new social engagement tools and enhanced our editorial experiences and room inspiration content in our digital channels. In the Pottery Barn brand, we began the quarter with positive trends in all product divisions and channels. Despite the retail closures, we saw demand accelerate materially through the quarter in our furniture offerings in home office, outdoor, bedding and functional accessories. Our DTC-oriented growth initiative, curated marketplace and apartment assortment also continue to contribute incrementally. The quarter also benefited from our continuous optimization of our digital experience, including improvements in product discovery and site merchandising. As we look to the rest of the year, we are optimistic that there are significant lifestyle changes that favor our business. However, there also remains considerable uncertainty. Some of the factors that we are modeling for include the prolonged economic impact this pandemic could have and the incremental cost of doing business in whatever form of reopening the economy takes for the rest of 2020 and the foreseeable future. As a result, we are not issuing full year guidance today. However, I would like to give you an update on second quarter to date. We continue to see robust trends in e-commerce and acceleration across all of our brands. Since May 1, we have reopened a total of 364 stores, consistent with government regulations. In these stores, we have in place strict safety protocols such as frequent sanitization, limitation on the number of customers and associates in store, shopping by appointment and a supply of masks and gloves for our associates. We're also fulfilling customer orders through curbside pickup, which has now been launched in 475 of our retail locations nationwide. Customer response has been strong so far in our reopened stores, driven by appointment-only shopping. However, with strict social distancing measures in place, customer limits will continue to constrain sales in our stores. For locations where retail restrictions have not been lifted, we will keep those stores closed through June 14 and continue to provide pay and benefits for this extended period of closure for associates who have been regularly working more than 12 hours weekly. Reflecting on the longer term, this crisis has accelerated our industry shift to e-commerce and given rise to a newfound appreciation for the home. We believe that with our differentiated value proposition of high-quality, design-led sustainable products and our large e-commerce business, we are well positioned. Our resilience during this turbulent time exemplifies the advantage of our unique multi-brand, multichannel platform and our commitment to all of our stakeholders. We will continue to invest to strengthen our digital-first model, enhancing the convenience of our online channels. We also continue to prioritize the growth initiatives that we laid out at the beginning of the year, including West Elm and our cross-brand initiatives, The Key and Business to Business. We entered this crisis in a strong financial position and with clear momentum across our brands. It's moments like these that set us apart from the competition and reinforce our ability to outperform. We are confident that we will emerge from this crisis an even stronger company. Thank you for your continued support. I wish you and your families the best. And now I will turn this call over to Julie for more of the financial details.

Thank you, Laura, and good afternoon, everyone. We delivered a solid performance in the first quarter, highlighting the strength and adaptability of our digital-first model, the agility and strong execution of our teams and the resilience of our fortress balance sheet. Most importantly, we are proud to have achieved these results while maintaining an unwavering commitment to all of our stakeholders. Before I go into our financial results in more detail, I wanted to give you an update on how our team has been responding to the impact of the COVID-19 pandemic. While our priority is always health and safety, we are also focused on maintaining our strong financial health in order to continue to support our associates and customers during this period of heightened uncertainty. From a financial perspective, we have been preparing our business for a number of possible macro scenarios. And as part of our response strategy, we have cut all nonessential business expenses, including the elimination of almost all business travel and other discretionary spend for the foreseeable future. In real estate, we have delayed store remodels and relocations and have negotiated various rent reductions with our landlords. And across the business, we have negotiated with our vendors various other expense reductions in technology, in our supply chain and in other professional services. In advertising, we are only investing in those initiatives that drive the highest returns in e-commerce traffic and conversion. And in technology, we are prioritizing business-critical projects that will allow us to further improve our competitive positioning and continue to take market share. These immediate steps we have taken have resulted in our ability to maintain strong profitability despite the incremental operating costs associated with COVID-19 and speaks to our culture of financial discipline. To further bolster our financial flexibility, we have also increased our liquidity position. We now have over $860 million in cash as a result of our strong performance and our decision to draw down on our existing revolver. With the support of our banking partners, we were also able to obtain an additional $0.5 billion of liquidity through the extension of our $300 million term loan to January 2022 and an additional $200 million in an unsecured 364-day revolving credit facility. We believe our current liquidity position will allow us to not only support the operations of our business during this global health crisis, but will also allow us to continue to invest in the business and emerge as an even stronger and more resilient business for the long term. Now turning back to our first quarter performance. Net revenues in the first quarter were relatively in line with last year at $1.235 billion, with total comp growth of 2.6% despite the impact of closing all of our stores for more than half of the quarter. Growth was driven by both the strength in our business prior to the acceleration of the COVID-19 pandemic as well as the overall strength in our e-commerce business, which further accelerated while our stores were closed to end the quarter with a comp of 31.2%. By brand, Williams-Sonoma, despite having the largest number of stores across our fleet, delivered a comp growth of 5.4%. Our Pottery Barn children's home furnishings business accelerated sequentially to a comp growth of 8.5% compared to 7.9% last quarter. West Elm drove a solid comp of 3.3%. And while Pottery Barn had a negative 1.1% comp, their e-commerce business has continued to significantly accelerate, resulting in a positive comp in the second quarter to date. Moving down the income statement. Gross margin for the first quarter was 34.5% compared to 35.9% last year. The gross margin deleverage of 140 basis points was primarily driven by higher shipping costs as a result of the substantial shift to e-commerce sales in the quarter and higher furniture sales, which are more expensive to ship. The year-over-year impact from incremental China tariffs and occupancy deleverage from the closure of all of our stores, along with the incremental cost to board up our stores and clean our facilities that are recorded within occupancy. Their impact on gross margin was partially offset by higher merchandise margins from less promotions in the quarter, reflecting the enduring appeal of our relevant, sustainable and design-led products. Occupancy costs in the first quarter were approximately $174.9 million or 14.2% of total revenues and relatively flat to last year at $173.4 million or 14% of total revenues. SG&A leveraged 80 basis points to 28.1% of net revenues compared to 28.9% of revenues last year, driven by advertising leverage from the ongoing shift in our advertising spend from catalog to more efficient digital initiatives as well as stronger returns on our advertising investments due to the power of our multichannel model. It also reflects the positive impact of the aggressive cost reductions across the business in response to the impact of COVID-19. As previously mentioned, we acted early and quickly to maximize digital and to cut all nonessential spend to ensure that we self-fund our business and continue to support our associates, customers and communities through this difficult time. From a profitability perspective, we drove operating income of $79 million with an operating margin of 6.4% compared to $87 million or 7% last year. This resulted in bottom line diluted earnings per share of $0.74. We are pleased to be able to achieve these levels of profitability while continuing to pay our associates and incurring various incremental costs to help keep our associates and customers safe during this pandemic, including providing protective gear and increased sanitation services across our operations. On the balance sheet, we ended the quarter with a strong cash balance of $861 million compared to $108 million last year. This includes the precautionary measures we took to boost our liquidity during the quarter with a full drawdown on our existing revolving credit facility of approximately $488 million. Excluding this drawdown, we ended the quarter with over $373 million in cash, which was over $265 million higher than last year. This reflects the strength of our cash balance as we enter 2020, along with our strong Q1 performance, resulting in positive operating cash flow of almost $54 million. In addition to funding the operations of the business, this cash balance also reflects investing $42 million in capital expenditures as well as returning over $39 million in the form of continued quarterly dividend payments to our shareholders. Moving down the balance sheet. Merchandise inventories were $1.071 billion for a decrease of 7.3% compared to last year. This reflects our efforts to cut and push out our inventory purchases to preserve our liquidity in response to COVID-19 and the impact of the subsequent outperformance in our e-commerce business. Now turning to our fiscal year outlook. As Laura mentioned, given the uncertainty that exists regarding the impact of this global health crisis on future economic activity and customer demand, we are not providing full year guidance today. This is not a reflection of the current trends that we are seeing in our business, which continue to accelerate, but rather the lack of visibility we have on the full economic impact of this pandemic and the wide range of outcomes this could have for our business in the balance of the year. Longer term, we believe this crisis has given rise to permanent shifts in consumer behavior that will benefit our business. E-commerce adoption has accelerated in our category, and consumers are accustomed to spending more time at home leading to a likely shift in discretionary spending to the home and home-related categories such as cooking. These trends, combined with our digital-first model and unique value proposition in the home category, give us even more confidence in our ability to drive accelerated growth and gain market share in the long term. With regards to capital allocation, while our balanced approach remains unchanged over the long term, in the short term, we will continue to invest in strategic initiatives that fuel our future growth while suspending capital expenditures that are nonbusiness critical. We have also temporarily suspended stock buybacks until we have better visibility into the longer-term impact from COVID-19. But as a testament to the confidence we have in our business as well as our commitment to shareholder returns, we have announced today another quarterly cash dividend of $0.48 per share. Going forward, based on the strength we continue to see in our business, we remain confident in our strategy to drive long-term accelerated growth. As a result, we are maintaining our longer-term financial outlook, with revenue growth expected to be in the mid- to high single digits and operating income growth in line with revenue growth. Before I turn the call over for questions, I want to express my appreciation to our associates who have risen to the challenges presented by this unprecedented crisis and have quickly adapted to serve our customers always with a commitment to health and safety. They are a key reason behind how resilient our business and financial performance has been during these challenging times. Looking ahead, we will continue to manage our business for the long term, staying focused on our competitive strengths, investing in our strategic priorities and always keeping top of mind our stakeholders, our associates, our customers, our communities and our shareholders. Our response to this crisis has demonstrated that with our multi-brand digital-first model, the agility and dedication of our teams, a proven track record of strong financial discipline and our fortress balance sheet, we will emerge as an even stronger company once this pandemic subsides. I would now like to open the call for questions. Thank you.

[Operator Instructions] And we'll go ahead with the first question from Seth Basham of Wedbush.

Congrats on a good quarter. My question is around recent trends. In particular, how have demand comps trended relative to sales comps? And then secondly, have you faced any supply chain fulfillment challenges?

Sure. It's Laura. So demand has been stronger than that, obviously. We are very happy to see accelerating trends, as I mentioned in our prepared remarks, across all of our brands. And we're adapting to how we continue to stay very relevant and sensitive during these times to what our customers are looking for and the right tone and giving them the things that are interesting to them while they're at home. The inventory and the world supply chain is a constant challenge in that a little self-inflicted. We pulled back on some receipts when this first happened because we didn't know what the outcome would be, and we thought that was the right thing to do and better to be chasing inventory than have too much. But now with our long lead times, we are going to be chasing some inventory. And so you're going to see us continue to pull back on promotions and balance that and do the right thing. But there's -- we've gone out -- our vendors are great partners. They're doing all that they can for us, but the demand trends have been quite robust, and that will be the story. We'll have some longer lead times through the back half of the year. We, of course, are pushing the products that we have more stock on, and we're seeing really strong results by doing that, by showing what's in stock. And I've seen more willing to move into this desk versus that than I ever have in the past. I think customers really want our quality sustainable products, and so they are more flexible about which one in particular right now than I've seen them in the past. We have some areas of the world that are still really struggling to open. And of course, we're supporting them as much as we can, but there's some reality to some of these areas where they're just not fully up and running. Most of it is now, but there's some pockets.

[Operator Instructions] And Brian Nagel from Oppenheimer.

So I, too, want to add my congratulations on a really nice quarter in a tough environment.

Thank you.

So the question I have, obviously, we have the comp numbers, and there was clearly a nice acceleration in your online business as your stores closed in the second half of Q1. Then Laura, you've mentioned that a further acceleration here into Q2. Can you help us understand better just the underlying trend there in the e-commerce business? And really what that sort of, say, that exit rate was coming out of Q1? And then, you mentioned opening, I guess, 364 stores so far. I recognize it's early and there's measures in place. You're not getting as many customers into those stores. But how have -- in those markets where stores have opened, how have sales begun to transition, if at all? Or is that between online and in-store?

Yes. I don't think giving you the last 2 weeks' comps is relevant because it's so such a short window, and I wouldn't want you to read too much into it. It is significantly stronger, I'd say that. It's across all brands. So that's good. In terms of stores that are reopened and the impact on e-commerce, results, really again, they vary by location and by brand so it's a little early to draw any conclusions. But we are seeing total strength -- total demand strengthening since the pandemic started. It just continues to strengthen.

And we'll take our next question from Bobby Griffin of Raymond James. Mr. Griffin, if your line is muted, please unmute yourself.

I think let's go to the next person, if you don't mind, operator.

Sure. We'll take Peter Benedict from Baird.

This is Justin Kleber on for Pete. Just given how successful you were at recapturing sales with all the stores closed, I mean, does that change your view of the pace of future store closings and what may be the ultimate size of the store fleet should look like in the future?

That's such a good question. For those of you who are new to our story, newer, we regularly review our store fleet. We make adjustments all the time. We have a very high bar for profitability. And as you know, we've been careful in opening new stores. But stores do continue to be an important part of our company. Customers love to experience our brands and products in person, and our talented associates are extremely helpful in making furnishing decisions with our customers. However, as you can see from our numbers, this pandemic has accelerated the shift to digital, and we have half our fleet up for renewal over the next 3 years. So we'll be looking at each lease that comes up carefully, and we will renew where landlords have partnered with us during this crisis and where the economics make sense. In terms of this year, pre-COVID, we expected to close approximately 32 stores, and we see that number being double now. In the next 3 years, as I said, 293 stores come up for renewal. And over the next 5 years, 416 come up for renewal. So we're going to be able to make a lot of decisions based on the malls, what happens, the partnership and the 4 walls that we have in each and every store. And that is, I think, a very strong position to be in.

[Operator Instructions] And we will take our next question from Oliver Wintermantel of Evercore ISI.

Congratulations also on a good quarter in a tough time. I had a question regarding e-commerce as a percent of sales. How high was that at the end of the quarter? And then you mentioned you introduced curbside pickup and you had Buy Online Pickup In Store. What percent of e-commerce is now Buy Online Pickup In Store into new curbside?

So as far as the percent of total revenues, it jumps from -- as you know, we've been trending about 54% of revenues for e-comm and it jumped to 71% in the first quarter.

And we haven't given our BOPIS numbers yet, so I'd prefer not to give that today. It's not a huge number. I'd just say it's probably lower than you think. It's a lot more than it used to be, and we think it'll continue to trend. As we open BOPIS and people get comfortable, particularly with our safety measures, we'll see BOPIS continue to grow. But it's a pretty small number still.

We'll now take our next question from Cristina Fernández of Telsey Advisory Group.

Congratulations in the quarter. I wanted to ask also on some of the trends you're seeing. Do you think the stimulus money -- the government stimulus is helping your business? And can you talk about performance in urban markets that have been more impacted versus perhaps suburban and other markets where there's more loosening restrictions?

Yes. I mean, certainly, the stimulus money helps everyone. I think the question really becomes how long can they continue to support so much unemployment, which I think is a concern for all of us, particularly in retail, that there's a lot of people who haven't been able to keep paying their teams. And so that has been a good thing for the whole economy. How that affects our demographic specifically, it's harder to say. We are not seeing any specific trends, urban versus suburban. That's not really -- I keep looking at it, trying to glean something, and you'd be surprised how some of the really shut down places are doing and doing very, very well. There's still a lot of demand for our goods, at least in their homes. And we feel very fortunate to be able to fulfill those orders safely.

We'll now take our next question from Simeon Gutman of Morgan Stanley.

A nice quarter. I may have missed this in prepared remarks. Maybe for Julie first. Did you quantify the absolute merch margin change or improvement? And then just as part 2, what have you done with rents and I guess, leases during the quarter in which stores were closed?

We did not quantify the actual pure merch margin, but we did indicate that it was higher than last year, which helped with offsetting some of the higher shipping costs and the incremental impact from the China tariffs that we had within the quarter. So we're being intentionally less promotional, and it's been a big win for us within the gross margin line.

And then in terms of how we're working with our landlord partners, we have been working with them one by each to negotiate what is a fair solution during the times that our stores have been closed. And as the crisis unfolded, we expect partnership from our landlords, the rent relief, as we generated no revenues during the closures in our stores. We're very pleased to see that many of our landlords are willing to do the right thing in sharing this financial impact. And as far as how our rent payments have played out, it really depends on the landlord negotiations. And they -- a lot of the really good ones, they realize that one party alone should not bear the burden. And we very much appreciate them. I want to thank them on this call during what's been a very difficult time for all of us. And there's no doubt that this crisis has given rise to permanent shifts in the customer behavior. And as we look at future decisions regarding openings, relocations, closures of our stores, we're going to take into account how landlords have partnered with us during this crisis as well as whether the economics of the deal makes sense. Simeon, were you -- I think I answered your question, but I want to make sure that you weren't asking a different question.

No. No. You answered what I asked, yes.

[Operator Instructions] And we will go ahead with Chuck Grom of Gordon Haskett.

Just a couple for me. On the SG&A line, just wondering how we should think about your advertising efficiency going forward, how big of an opportunity that could be. And then, Laura, you talked about more customer shopping across banners, utilizing The Key program. Just wondering if you could just put some numbers behind that so we can contextualize it.

Yes. I'm going to let Felix Carbullido answer that. Felix?

Sure. We are -- as Julie said earlier, we aggressively managed expenses throughout the organization, including our marketing spend. So that said, we still are investing where we see the greatest ROI. And that includes, as you know, we look at metrics by channel, by brand, and we adjust spend based on customer behavior. I think, while we did see leverage there, we're also incredibly pleased, as Laura said, with our new customer growth hitting an all-time high. So it's a reflection of the past 16 quarters or more than that of increasing our marketing mix towards digital, where we find the best payback.

Felix, do you want to comment about The Key?

Yes. I think, as Laura mentioned, The Key had some incredible results throughout the quarter. And even with stores closing, they maintained the same level of growth over LY throughout the quarter. And so another critical part of our marketing mix and the reason we can be very efficient and profitable is the number of shoppers who are purchasing across our brands. We know that's an untapped opportunity. We're just now tapping into that opportunity. The Key is at the foundation of that program. But we also have a number of events and promotions where we combined our messaging focused around a particular theme. We have our Design Crew who installs in customers with products from across our portfolio. So I think the other opportunity that we're thrilled about is to see the number of customers shopping during these times across our brands.

And Chuck, just to answer the question about SG&A generally. I mean, certainly, we do expect to continue to see advertising efficiencies. Obviously, with these incredible cost cuts that we've done, we do expect that to continue, similar to where we've been with SG&A for a while.

Okay. And if I could just sneak one more. And you talked about the pace of business significantly stronger here so far in 2Q. Just wondering if that's been across banners. And then within PB, just anything on bigger ticket items quarter-to-date.

Yes. Sure. Yes. It is across banners. And then secondly, what was the second question?

PB.

Big ticket. Big ticket. Yes. It's one of those categories that's been interestingly picking up. And so we're trying to judge where it's going, but it's been very strong, as I mentioned, upholstery, outdoor. Across the board, really, all of our big ticket has been incredibly strong.

[Operator Instructions] And I will take our next question from Bobby Griffin of Raymond James.

I hope you can hear me. Sorry about the issues earlier. There was a -- I don't know how to work my headset still. But congrats on a good quarter. I guess my first question I wanted to ask is when you think about the store openings, if the e-commerce demand levels you're seeing now continue at the strength that they are at, what opportunities do you have to kind of scale up slowly, maybe keep some stores dark or reduce hours or labor or whatnot just because the mix of the business would be vastly different still than full operational with store hours, assuming health and safety requirements allow all stores to open? I'm thinking more distance down the road.

Right now, we're seeing very strong results in our open stores even with appointment-only. So we have some mall areas that we scale back for different reasons here and there, and we let the stores make those decisions, but it's not to manage payroll. Remember, we're paying them anyway. So we might as well have them working, right? We've been paying them the whole time, full bill. And so it's wonderful to have them there and doing the things they're doing and really giving incredible service. It gives us time to do the sanitation really well and get -- we've been getting higher marks from our customers than ever on our service right now, which is such a proud thing to see during this time. And it's definitely -- even if we weren't paying them all, it's definitely worth having them open. I'll tell you, the stores that are doing well are phenomenal. There are a couple, as I said, that are closing. At the end of the year, there are more than a couple that are closing at the end of the year. There's a couple that we're closing early and not reopening. They were dark before the pandemic, and they were planned to close in January. Want to keep them dark. Didn't make sense to reopen those. But that's a very small population.

Okay. That's helpful. And I guess lastly, on the B2B side of things, can you maybe give a little more detail on kind of what you're hearing from those customers and how they're approaching, I mean, coming out of the pandemic and kind of the opportunity there? It was a pretty good success story heading into this fiscal year for you guys.

Yes. So I mean, as you expect, some of our B2B industry verticals have been heavily impacted, i.e., hospitality, and our B2B sales were impacted and were down in Q1. However, we're seeing them come back now, and we're seeing the pipeline build pretty substantially. And people are using this time to get things ready and do some remodels and spruce things up so we're getting a lot of current requests. And we're also -- because we've been operating and we're able to fulfill better than a lot of our competition, we're picking up some of that volume from those who haven't been able to fulfill for whatever reason right now. So we're picking up some other people's business as well.

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

This is Atul Maheswari on for Michael Lasser. So given consumers have probably invested a lot in furniture and home furnishings as they sheltered at home, do you think some of the strong trends that you saw in Williams-Sonoma and PB Teens and Kids is simply demand pull forward that might not necessarily repeat going forward? And if that's the case, would you expect comps to slow even as you open more stores?

I mean, look, anything can happen. We've learned that now. You can't count on anything. I'll tell you, I don't believe that. It's not out of the realm of possibilities. I think people, when they learn how to -- they learn a new skill, they generally get pretty hooked. And cooking is one of those things. It's wonderful to learn how to cook. And often, you see people, they move from a beginner chef to someone who is a -- it's a real passion for. And so it's wonderful that people have taken the cooking more at home and enjoy doing it and have been our brands along the way learning how to cook online and joining all of our different virtual places online to both entertain, but also be educated. So I don't see that -- these things don't come and go that quickly. I think people -- they have time now to think about their homes. We're seeing even -- I mentioned the high ticket, but we're also seeing people want to do small decorating projects. I think there's going to be a continued shift for a while out of travel on some of these other areas into the home. And then I think longer term, we have a very, very strong road map and runway for growth that we had before this began, and I still believe it's very, very positive future and I'd say, even more so now that many people are spending more time in their homes.

And we will take our next question from Marni Shapiro of Retail Tracker.

Congratulations on a really great quarter. And Laura, I do think more people are cooking. I made bagels. But from now on, I'd like to buy my bagels. But they were excellent.

The bagels will be raw. They're always sold out.

They were amazing and everybody loved them, and then they wanted me to make them again, and I was sitting there while I was working, and they're all staring at me. Anyway, I'm curious, as the stores are opening, could you just walk us through a little bit, what does the productivity look like? I was in one of your stores yesterday, a Williams-Sonoma that was open. The mall was quiet so it was a little bit harder to judge, but it does feel like retail right now is a little bit like moving through molasses. Everything is taking a lot longer even just to check out. To do anything is taking a lot longer. So I'm curious, as the stores open, even as you start to bring more people in, is it just a slower process? And then a follow-up or a sort of adjacent question is, I'm curious what products -- like what items people feel compelled to come to your stores to buy because your online experience is very rich. And so I'm curious what the items you're seeing people come in to buy versus them buying it online.

That's a really good question. I asked that question this morning, Marni.

I bugged your office, by the way.

Marni, our stores are -- God, that's scary. Our stores are so -- our store associates are amazing. And they are so proud to be back, and they're working with these customers. I mean I'll tell you one little short-term thing. I'll probably get in trouble for this. Yesterday, our open stores positive comp-ed. Total comp. So that is like the power of the people. And yes, you wouldn't -- it doesn't look like it, right? It looks very quiet, but those customers who are coming in, they know what they want. What they did tell me today when we talked -- and we're having another big store call tomorrow where we get to hear all their wonderful feedback and thank them more importantly. But the thing is that people coming in, they're shorter visits and they're -- but they're very focused and the conversion is extremely high. So it's exciting. Appointment-only is working for us. I think we're at a different kind of business than other stores that -- where you need a lot more traffic. I think the question really becomes what happens during those times of the year like holiday, where traffic is really relevant for everybody. And that's why we pause on getting too excited, and we want to stay careful about our expense structure and not take anything for granted, but we're seeing some phenomenal results in our open stores.

Are they buying across? Like are they looking -- are they coming in to buy a couch? Or is it more the bread makers and new sheets and towels?

Well, they -- I mean, the bread makers, boy, they -- that's been as you can read in any trade journal.

Bad example, but yes.

It's a great category for everybody. So everybody wants a bread maker. They want an ice cream machine. There's those kinds of things. And then there's not one SKU ever that pops out for us. They come in, and depending on what they're looking for, they're -- there's a lot of variation in what they're looking for. Outdoor furniture is a big one. We all know it's safer to be outside, maybe the only way you can see someone other than your own family. And so outdoor furniture has been a big win for us.

Fantastic. Best of luck with the summer.

They like to see things in person. So where they can go to stores for us, they're going.

Yes. I saw it in the mall yesterday. People are like, "COVID be damned, I'm going shopping." And people are very respectful. They're very patient when they're shopping. They will wait for somebody to finish at a display before going to the display. But they don't -- they want to be there, and every person in the mall had a shopping bag.

Yes. That's been our experience, too, that our customers are very respectful of our employees. And we hope in thanking them and it's a very proud moment.

And we will take our next question from Jonathan Matuszewski of Jefferies.

Nice quarter. You mentioned robust new customer growth in the DTC channel. Obviously, strong acceleration there. Can you just comment on the profile of some of the new and maybe reactivated customers who have been shopping with you over the past few weeks? How are they similar or different from your customer base pre-COVID? Any things you're noticing in terms of demographics or household income levels or anything like that would be helpful.

Sure. I'm going to actually let Felix take that question.

Okay. Sure. Great. Yes, I will say, for Q1 -- and I'll take the pre and post differences after. But in general, for the quarter, we are starting to see a younger customer shop at our brands. More millennials, more Gen Xers are becoming more familiar with our brands and our offerings. And our West Elm brands, our PB Apartment offering and Williams-Sonoma Open Kitchen, these are all initiatives that we put in place to capture the shift in the U.S. population, and we're definitely starting to see that. As it relates to store closures and the acceleration of customers online, they're very much similar to our core customer. We did see more Gen Xers than we usually see, which is not surprising because they're in the middle of household formation. We did see a slightly more affluent customer come towards the end of the quarter. And I think regionally, it looked like the West after closures performed a little stronger online, but not significant -- not anything dramatic. But those are some of the demographics that we saw pre and post store closures. Does that answer your question?

Yes. I'll just add to what you said, Felix. I'll just say that we're in a highly fragmented industry, underpenetrated online. We're taking market share digitally as the industry shifts online because of our marketing investments, our content-rich brand presentation, our exclusive products, high service value proposition, but also because of our sustainability and transparency that has become increasingly important to today's customer. And it's really -- you guys, you cannot underestimate what a key differentiator this is for us and why our customers choose us over our competition. And you can see it whether it's in our baby business, and across all of our brands, you can see how important this is becoming. And we are expanding our commitment to sustainably source materials in our supply chain programs, as you know, like fair trade and worker well-being. And so there's a lot of reasons why they're coming to us now, and it's very exciting to see it, but it's not that surprising when you break down the advantages that we've built over the years and why they would come to our brands versus going elsewhere.

[Operator Instructions] And we will now take our next question from Adrienne Yih of Barclays.

And let me add my congratulations. It's a tough environment and you're performing exceptionally well. Laura, I was intrigued by the commentary that you made about promotions. Obviously, merch margins up. And as you moved through the quarter, less and less need for the promotions. Obviously, a higher income customer coming to you. As we go into the back half, it sounds like you're going to be chasing that inventory. What specific categories, or is it broad-based, are you seeing that AUR increase? And is that something specific to Williams-Sonoma and your brands? Or are you seeing kind of a widespread kind - people need to be at home, they want to be at home, so they're just buying it regardless of what the pricing is? And then I have a quick one for Julie afterwards.

Sure. So I just -- the first thing is that our commitment to value remains one of our top priorities. So we have been busy building into our value categories, making sure that our price-design-quality relationship is stronger than the competition. We spend a lot of time working on this and making sure that we're in that winning position to begin. The differences are regular price sell-throughs are higher. We're not having as much clearance as we did previously, and we have more winners. So we've been working on SKU productivity for a while. I mean you've been hearing us talk about it and getting rid of those SKUs that aren't selling, and we've been more effective on that front than previously, and the depth of the promotions is changing. It's too early to call it a success yet because we've just started to do this and we're testing the waters very carefully. But we simply won't be able to drive as much demand as possibly is there because we won't have the inventory in the short term. So that's -- it's going to be an important thing for us to balance the promotions, drive the margin up and get them to buy those things that we do have in stock.

Okay. Very helpful. And Julie, a question about initial markup and I guess, kind of tied into that sourcing from China specifically. I know you were making great in reducing that. And then Asia, in general, freight, I assume, is going down, but then we're hearing of outbound freight coming out of Asia being more expensive. So can you help us with the kind of puts and takes on that cost of goods, the cost of product line, please?

Sure. I mean from where we are with China perspective, we had said before that we were going to reduce by about 50% the production that we do in China by the end of this year. So we're on target to do that. And we're also not developing as many products into China. So nothing has changed from that standpoint. We have not seen higher shipping costs coming out of China. In fact, they're coming down. So from that perspective, obviously, so you have the lower shipping costs. But on the flip side, you still have the China tariffs, which I know is not the topic de jure, but it's still a significant amount that we absorbed in Q1. And so thankfully, we had the higher merchandise margins that we spoke to earlier to be able to offset that. But hopefully, that answers your questions.

And this concludes the Q&A portion of today's call. We do sincerely apologize for today's technical difficulties. I'd like to now hand it back over to Laura Alber for closing remarks. Thank you.

Well, thank you all for joining us today, and I sincerely wish you and your families and friends the very best, and we look forward to giving you another update at the end of Q2.

And this concludes today's call. We thank you for your participation. You may now disconnect your lines, and have a wonderful day, everyone. Take care.