Williams-Sonoma, Inc. (WSM) Q4 2020 Earnings Report, Transcript and Summary

Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 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 2021 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.

Good afternoon, everyone, and thank you all for joining us. 2020 was a year of challenges and dramatic changes in the way we live. It was also a year where we were pushed to adapt and clarify what is important to us. I could not be prouder of the accomplishments of the team here at Williams-Sonoma. Their dedication was a vital part of our ability to substantially outperform the industry and gain market share. In Q4, despite shipping constraints and low retail traffic, we delivered another quarter of accelerating revenue and profitability with 26% comp growth, our highest quarterly comp of the year, and 85% EPS growth. This strong end to the year, combined with our outperformance throughout 2020, drove record fiscal year revenue growth, substantial operating margin expansion and EPS that was almost double that of last year. As we look forward to the year ahead and the longer-term future of our company, we are confident in our ability to drive growth and improve our profitability. We have big goals and good reasons to believe that we will achieve them. Today, I want to spend the bulk of our time talking about our 3 key differentiators, which set us apart and have become increasingly relevant. They are, first, our in-house design; second, our digital-first channel strategy; and third, our values. Let's start with our in-house design capability. Our in-house teams design our own products, create original aesthetics and work with our talented vendors to bring quality, sustainable products to market. Given that the bulk of our products cannot be found elsewhere and the design quality value equation is so strong, we have pricing power that others do not. Throughout this year, we have been very deliberate in reducing promotions in all of our brands. This is a very significant and material change to our model. We have tested into this change, replacing site-wide promotions with inspiring content. And the effectiveness of this change is clear in our results, including consecutive quarters of product margin expansion compared to last year. In Pottery Barn, the multiyear work to improve our value proposition is paying off. We are increasing brand relevance aesthetically with the successful launch of our proprietary rustic modern furniture collections and our famous casual lifestyle point of view. Our value-engineered products are attracting new customers. We have introduced significantly more opening price points, and our multistep finished, high-quality furniture pieces are the best value in the market. We will continue to develop assortments and proven adjacent categories to drive incremental growth. One example of this is bath renovation. The bath renovation market is $80 billion or 20% of the U.S. home improvement market. Through in-house product development and our new marketplace model, our bath renovation business is growing at a rate of nearly 30% per year and is projected to contribute an incremental $100 million over the next 3 years. In Pottery Barn Kids and Teen, we have amplified our leadership in design and sustainability in the children's home furnishings business. We are proud to say that 100% of our wooden furniture offering is now GREENGUARD Gold certified, aligned with our promise of products that are good for kids and good for the planet. In addition to strong core introductions of furniture, we have added a new modern aesthetic that is growing at over 50% and attracting new customers to our brands. Another example of growth is our baby business. Our baby business saw 23% growth last year, and we are actively targeting the 2 billion-plus baby registry market. West Elm has truly become the home furnishing brand of choice for millennials and millennial-minded people. We continue to build the business with original design and by filling out white space in underdeveloped categories. For example, this year, we materially expanded into seasonal decor, a historically small business for the brand. In the holiday season, we sold out with many of the products within the first couple of weeks of launch, which built a strong foundation for further incremental volume in the years to come. Another category we are aggressively going after is outdoor. Currently, West Elm's outdoor business is less than half the size of Pottery Barn's, and doubling this business will drive an incremental 6% growth for the West Elm brand. Now I'd like to talk about Williams-Sonoma. This year marked a dramatic change in strategy for the brand. We implemented a content-driven marketing strategy that featured exclusive products and relevant lifestyle stories instead of promotions. We also grew our exclusive products to 70% of our total business. This has been one of our key strategic initiatives to increase the mix of product only available at Williams-Sonoma, which has grown from 50% to 70% in the last 5 years. Looking ahead, we'll be even more aggressive in growing our exclusive product, which we expect to reach over 80% of our total business by the end of FY '21. We also see significant opportunities in categories that are underdeveloped, including the high-end luxury furniture market. Our Williams-Sonoma Home brand is significantly underrepresented in this market and represents a substantial opportunity to drive growth and gain market share for the Williams-Sonoma brand. In addition to growth in our brands, we also have growth in new customer segments such as Business-to-Business and the global home category. We are building our mighty Business-to-Business team, and we are accelerating in sales volume across multiple industry verticals. Last year, we drove over $350 million of revenues, and we expect this business to surpass $500 million this year. In our global business, our strategy for growth is through the capital-light franchise model. We plan to double our revenues globally in the next 5 years, led by the continued expansion of West Elm, growth in our franchise operations as well as in our Canada e-commerce business. Our second differentiator is our digital-first channel strategy. One of the key reasons we outperformed was because our e-commerce platform was able to serve our customers at scale. We are uniquely positioned to take market share as the home industry shifts online. We are already the #1 non-pure-play e-commerce retailer in home furnishing and the top 25 e-commerce retailer in the U.S. across all industries. And today, our business is over 70% e-commerce. In our digital channels, we have been acquiring new customers at record rates all year, and our customer retention metrics continue to improve among new customers. We have a platform, the supply chain infrastructure, the tech stack and the talent to push our growth in e-commerce even higher. We are digital-first but not digital-only. Our stores are competitive advantage that support our online business for customers who want to experience our products in person as well as for those who prefer the convenience of our omnichannel services. In the past quarter, we increased our total Buy Online Pickup In Store and ship from store sales by over 130% as we leverage our retail network as fulfillment hubs. This is a huge unlock for our distribution operations, and it is one of the reasons we were able to fulfill higher-than-expected volumes this holiday season despite gridlock issues that impacted the industry. As we look ahead, our future growth will be driven predominantly by e-commerce. One of the key advantages of having built our tech platform in-house is that we are able to implement and test new initiatives quickly and adjust based on customer feedback. We already have several initiatives planned to further enhance customer engagement and conversion online. You also see our 3D visualization capability come to life as we introduce new functionalities to our Design Crew Room Planner, including immersive, multiproduct AR room layouts and 360-degree experiences. These enhancements are important because this tool drives sales. We saw a significant increase in the usage of this tool by our design associates and customers this year, with total plans created up 55% compared to last year. Also, those who utilize this tool currently generate twice as many sales as non-users. In our supply chain, we are aggressively expanding our U.S. manufacturing and fulfillment capability by over 20% to 30% next year, including adding close to 2 million square feet of distribution space to our delivery network. This will support our elevated demand, particularly in furniture. To help mitigate industry-wide shipping constraints and higher costs, we will test and expand our in-home delivery to include small packages in addition to leveraging our omnichannel network. Being digital-first also enables us to explore new offerings and business models such as Marketplace. Our Marketplace assortment is of the same superior quality as the rest of our products, often exclusive and sourced from our trusted socially responsible vendor base. Marketplace also leverages our website reach and is capital light. This year, Marketplace was just over 4% of our total business, and we are planning to almost triple its size in the next 5 years. Our third differentiator is our values. We care deeply about sustainability, equity action and supporting our associates and the communities where we work. Our commitment to sustainability is one of the main reasons our customers choose us over our competitors. For example, a recent survey found that our Pottery Barn customers are 3x more likely to be in the top environmentally focused households. There's a direct correlation between the good work we are doing in the world and our increasing relevance with our customers. And we are thrilled to be recognized for the work in this area. Just last month, we were ranked at #16 on Barron's 100 Most Sustainable Companies, up from 32 last year. And we are continuing our recognition as the only home furnishings retailer on the entire Barron's list. As we look to the future, we will deepen our sustainability commitments further. Our Pottery Barn brand kicked off the new year with a commitment to plant 3 million trees in 3 years, where we will plant a tree for every piece of indoor wooden furniture we sell. Company-wide, we will meet our 100% responsibly sourced cotton and 50% responsibly sourced wood goals and grow our selection of sustainably made products. Most exciting is our upcoming announcement of an ambitious public goal for carbon reduction across our operations and throughout our entire supply chain. Diversity, equity, inclusion is also central to who we are as a company. We continue to lead in gender equity, and we are proud to be included in Bloomberg's Gender Equality Index this year for our gender equity achievements across talent, pay culture and workplace policies. We also lead in LGBTQ equity and continue to score 90% or higher in the Human Rights Campaign's Corporate Equality Index. In order to improve racial equity, we have established our Equity Action Plan. And although there is still a lot more to do, we have made measurable progress. We have committed our ongoing support to over 25 national and local nonprofit organizations that advocate for racial justice and equity and have increased our Black/African American representation through hiring, partnerships and collaborations. And of course, we cannot overemphasize the value of our associates. Our people are at the heart of our business. In 2020, we continue to pay our associates during the initial months of COVID while our stores and offices were closed and provided several pandemic bonuses and hourly wage increases to our frontline workers throughout the year. To help protect the safety of our associates and our communities, we continue to provide personal protective gear and COVID testing to our store and supply chain associates. And through our Williams-Sonoma, Inc. Foundation, we have given financial assistance to over 850 associates experiencing COVID hardship this year. In addition to these COVID-related benefits, we also enhanced our parental leave policy to provide more paid time off for primary -- both primary and secondary caregivers. The positive impact of all these initiatives was evident in our team's unwavering dedication throughout the year, including the best holiday execution we have ever had. We will continue to follow through on our Equity Action Plan commitments to advance racial equity, both inside our company and in the communities we serve. We have set aggressive goals to further diversify our workforce, vendor partners and collaborators, and we are committed to providing transparency on our progress. In summary, our business excelled in 2020 despite the extremely difficult operating environment. We believe this reflects the power of our 3 key differentiators, which we'll continue to invest in to drive growth and gain market share. Looking ahead to 2021 and beyond, we are very optimistic about our runway for growth and profitability. But before I give our financial outlook, let me provide some insight into what we are currently seeing in our business. All of our brands are starting the year strong. We're seeing higher-than-expected e-commerce traffic and sales and continuing recovery in our retail comps. Our entertaining-related categories such as Easter and outdoor are driving very strong results for us, giving us the confidence that this entertaining lifestyle trend will accelerate post pandemic as people welcome friends and families back into their home. Our B2B business sales trends also continue to accelerate week after week. Growth in our global business is also building momentum, driven by strong demand from our franchise partners and our e-commerce business in Canada. In addition, our merchandise margins continue to expand as we have substantially reduced promotions. We will continue to chase inventory. And unfortunately, we are experiencing additional delays due to COVID-related slowdowns, foam shortage due to the inclement February weather in the South and delays due to port congestion and a shipping container shortage. We are doing all that we can to expedite inventory flow for our customers, but our in-stock recovery is now most likely pushed to Q3. And while this is a challenge, it is also one related to our very strong demand. We expect this strong demand to continue through 2021 and beyond based on a number of factors. First is the ongoing strength of our growth initiatives and our 3 key differentiators that will continue to set us apart from the competition and allow us to take market share. Second, it is the recovery in our retail traffic and the replenishment of our inventory levels as we move throughout the year and beyond that will drive additional growth. And third, it is the favorable macro trends that we believe will continue to benefit our business. These include high consumer confidence, a strong housing market, a continuing shift to e-commerce, the expected continuation of working from home, hybrid work and the importance of sustainability and values to the customer. This gives us the confidence that we can deliver mid- to single high -- mid- to high single-digit revenue growth and operating margin expansion in 2021. Longer term, our 3 key differentiators, our in-house design, our digital-first channel strategy and our values, will drive profitable market share gains, accelerating our path to $10 billion of revenues and 15% operating margins in the next 5 years. Julie will speak to this financial outlook in more detail. But before I turn the call over to her, I want to express my sincere gratitude to our associates, particularly our frontline workers in manufacturing and distribution who worked tirelessly around the clock through the pandemic. Our incredible performance over the past year could not have been achieved without our team's innovation, collaboration and hard work. I could not be prouder of our associates and all that they have accomplished in taking care of each other, our customers and our communities. And with that, I would now like to pass the call over to Julie.

Thank you, Laura, and good afternoon, everyone. I also want to begin by thanking all of our associates for their resilience and hard work over the past year as we navigated an extremely challenging environment, for making operational changes at the onset of the pandemic to preserve liquidity and maintain strong financial health, to managing the impact of widespread store closures while continuing to pay our people, to fulfilling higher-than-expected online volumes as we grappled with parcel shipping caps and supply chain disruptions. We stayed relentlessly focused on taking care of all of our stakeholders, our associates, our customers and our shareholders. And it was this focus that enabled us to report record fourth quarter and fiscal year results today. In the fourth quarter, net revenues reached approximately $2.3 billion with net comparable brand revenue growth of 25.7% and an even higher demand comp of nearly 30%, which includes orders placed but not yet filled in the quarter. E-commerce grew at a comp of 47.9%, and our retail stores continued to improve sequentially, ending the quarter with a negative comp of 7.6%. This outperformed our expectations given the substantial COVID restrictions that were in place throughout the quarter and the overall decline in national store traffic of over 30%. All brands drove strong revenue growth in the fourth quarter. Williams-Sonoma delivered a 26.2% comp. Pottery Barn accelerated to a comp of 25.7%. West Elm accelerated to a 25.2% comp on top of last year's 13.9% comp. And Pottery Barn Kids and Teen accelerated to a comp of 25.7%. And in our emerging brands, Rejuvenation and Mark and Graham combined, we delivered another quarter of over 20% growth. Moving down the income statement. Gross margin expanded 450 basis points to 42.1% in the fourth quarter, driven by another quarter of substantially higher merchandise margins and occupancy leverage. Higher merchandise margins resulted from a significantly reduced promotional activity as we replaced site-wide promotions with relevant content across all of our brands. Occupancy leveraged 190 basis points in the quarter, resulting from higher sales and relatively flat year-over-year occupancy dollars at approximately $181 million. Our efforts to renegotiate rent and to close less profitable stores have enabled us to minimize our occupancy dollar growth and to deliver this occupancy leverage. While we did incur higher shipping costs year-over-year from a higher mix of e-commerce sales and peak shipping surcharges from our third-party shippers, we are pleased to see our selling margins, which include these higher shipping costs, sequentially improve again this quarter, expanding 260 basis points year-over-year and 110 basis points from the third quarter. SG&A in the fourth quarter was 24.2% of net revenues compared to 26.1% last year, leveraging 190 basis points year-over-year and sequentially improving 10 basis points as a rate from the third quarter. SG&A dollars grew 15.5% compared to last year, primarily driven by higher employment costs from increased incentive compensation given our fiscal year outperformance, higher hourly variable pay, particularly in our supply chain as our teams work to fulfill higher-than-expected volumes during the quarter, and incremental pandemic-related costs such as bonuses for our frontline workers, work-from-home stipend for our corporate associates and increased levels of PPE and cleaning across our facilities. Despite these incremental costs, we were able to maintain a low SG&A rate due to the strength of our sales volume and our overall strong financial discipline, which kept SG&A growth substantially below sales growth. As a result, we delivered another quarter of record profitability with operating income growth of 92% to $410 million and operating margin expansion of 630 basis points to 17.9%. This resulted in diluted earnings per share of $3.95 or 85% higher than that of 2019 at $2.13. These fourth quarter results, combined with the outperformance we have seen throughout 2020, allowed us to deliver record financial performance on the year. Some of our fiscal year 2020 highlights include net revenues at all-time highs in 2020 at nearly $6.8 billion, including comparable brand revenue growth of 17%. Our e-commerce business grew at a comp of 44.5% this year, taking our e-commerce mix to over 70% or $4.8 billion of our total revenues. In retail, we delivered a negative 22.5% comp despite substantial COVID disruptions with our stores closed or severely limited throughout the year and an overall national decline in store traffic of about 45%. In addition, our stores this year played an integral role in supporting our online growth through virtual design and omni-fulfillment services. By brand, we delivered double-digit growth and significant acceleration across all brands. Across the Pottery Barn brands, comps accelerated 15.6% on top of 4.2% last year, with Pottery Barn at a 15.2% comp and our children's business, Party Barn Kids and Teen, at a 16.6% comp. Williams-Sonoma accelerated to a 23.8% comp, driven by e-comm comps well above 70%. West Elm, our largest growth initiative, delivered their 11th consecutive year of double-digit revenue growth and another year of double-digit comp at 15.2% on top of last year's 14.4% comp. Our emerging brands, Rejuvenation and Mark and Graham combined, delivered another year of double-digit growth. Additionally, our cross-brand initiatives continue to gain scale and momentum. Most notably is our Business-to-Business division, which delivered approximately $360 million in revenues for the year, up 15% over last year and contributing an incremental 140 basis points to our total company comp. In our cross-brand loyalty program, The Key, we enrolled nearly 4 million customers, bringing our total membership to almost 12 million members or 23% over 2019. And our complementary Design Crew services accounted for almost 50% of our FY '20 in-store revenue. This top line performance, along with our strong financial discipline all year, enabled us to generate operating income of over $960 million, which was over 90% higher than 2019. This resulted in record operating margin expansion of 560 basis points to 14.2% and EPS of $9.04, almost double that of 2019. Additionally, this level of earnings growth allowed us to substantially increase our return on invested capital from 22.4% to 38.1%, with all brands substantially improving and significantly outperforming our peer set median. On the balance sheet, we ended the year with a cash balance of over $1.2 billion compared to $432 million in 2019, which reflects our strong financial performance and operating cash flow of almost $1.3 billion, which is more than double last year. In addition to our strong cash balance, we also ended the year with no amount outstanding on our line of credit. This strong liquidity position allowed us to fund the operations of the business, including nearly $170 million in capital expenditures, primarily in technology and supply chain to support our e-commerce growth and to provide shareholder returns of over $300 million through dividends and share repurchases. While many companies suspended their dividends in 2020, we continued to pay dividends to our shareholders all year, including increasing our dividend payout by 10% this past quarter for an annual dividend payout to shareholders of $158 million. We also, after initially suspending share repurchases, repurchased shares at the same level as 2019 or approximately $150 million in the back half of 2020. Moving down the balance sheet. Merchandise inventories were $1.006 billion for a decrease of 8.6% year-over-year, which was a 200 basis point improvement from the third quarter. While we are pleased to see a sequential improvement in our inventory position compared to last quarter and the gradual narrowing of the gap between demand and net cost this quarter, we are continuing to work through our high backorder levels with our vendor partners and expect to be back in stock to more normalized levels in the back half of 2021. Now let me turn to our expectations for the year ahead and beyond. Given the ongoing strength of our business as we enter 2021, the expected recovery in our retail business and inventory levels as we move throughout the year as well as the macro trends that will continue to benefit our business, we expect 2021 to be in line with our previously provided long-term financial outlook of mid- to high single-digit revenue growth or 5% to 9% and year-over-year operating margin expansion. As far as our capital allocation in 2021, we plan to first invest in the business and then return excess cash to our shareholders. We expect to invest approximately $200 million to $250 million in the business with over 85% of the capital spend prioritized on technology and supply chain initiatives that primarily support our e-commerce growth. In technology, we are focused on enhancing customer engagement and conversion online. And in the supply chain, we are planning to spend primarily on the addition of 2 new distribution centers to provide an incremental 2 million square feet in DC capacity to support our elevated growth as well as various investments in automation to drive speed and efficiency throughout our operations. As the consumer and our business continue to shift more online, so have our levels of e-commerce-related capital spend. Over the last 5 years alone, we have shifted from less than 50% e-commerce-related spend to now over 85% of our estimated spend in 2021. And we expect this shift to hold at these levels going forward. We also plan to return excess cash to our shareholders in the form of increased quarterly dividend payouts and increased level of share repurchases. Following the 10% quarterly dividend increase that went into effect last quarter, we announced earlier today another double-digit increase in our quarterly dividend of 11.3% or $0.06 to $0.59 per share. As far as share repurchases, we plan to increase our level of repurchases over last year. Today, we also announced that our Board has approved a new $1 billion share repurchase program, which will supersede the remaining outstanding under our prior authorization. While our stock is hovering around all-time highs, we continue to believe that it remains undervalued given our projections for growth and profitability. As a result, we believe investing in our own stock will also drive long-term financial returns. And finally, given our strong liquidity position and our expectations for another year of robust operating cash flow generation, we paid off our $300 million term loan early and expect to let our $200 million, 364-day line of credit facility naturally expire in May 2021. All of these decisions reflect our confidence in the long-term growth and profitability outlook of our company and our unwavering commitment to maximizing returns for our shareholders. Longer term, as Laura mentioned, given the acceleration in our business, along with the macro trends that should continue to favor our business for the long term, we see a faster path to now reach $10 billion in net revenues and 15% operating margins in the next 5 years. We estimate that Pottery Barn will expand to almost $3.5 billion in revenues, West Elm will grow double digits, almost doubling in size to over $3 billion, Williams-Sonoma will reach almost $1.6 billion in revenues, and our Pottery Barn Kids and Teen business will grow to $1.4 billion. This anticipated top line growth in addition to strong growth in our core business will be fueled by accelerated double-digit growth across a number of our key initiatives, including our B2B business expanding to $1 billion in revenues, our Marketplace business growing to almost 3x the size of today to over $700 million, our emerging brands expanding to a combined revenue of over $600 million and our global operations more than doubling in size to $700 million. From a profitability perspective, further operating margin expansion should predominantly be driven by overall sales leverage from higher sales levels and a continued shift to our more efficient and profitable e-commerce business, reduce occupancy costs from the renegotiation of our lease agreements and the expected closure of approximately 25% of our retail fleet as our leases come up for renewal, continued strength in our product margins from an ongoing focus on more content-led marketing and more value-engineered, high-quality and sustainable products as well as overall strong financial discipline, maintaining expense growth below sales growth. In summary, our record performance this year is a testament to the strength of our teams and the power of our 3 key differentiators: our in-house design, our digital-first channel strategy and our values. As we look into next year and beyond, we are optimistic about our business. And given the favorable long-term macro trends, including a strong housing market, the disruption of brick-and-mortar and an accelerating shift to e-commerce, the expected continuation of working from home in some capacity post pandemic and the increasing importance of sustainability and being a values-driven company, combined with our key differentiators, our growth initiatives, our double-digit growth in new customer counts and loyalty members, our strong operating cash flow and liquidity and a proven track record of strong financial discipline, we believe we are uniquely positioned to drive long-term growth and profitability, resulting in market share gains and strong financial returns for our shareholders. I would now like to open the call for questions. Thank you.

[Operator Instructions] And our first question today will come from Adrienne Yih with Barclays.

Congratulations. I mean it really is a nice cap into what was a difficult year, but you made it through extraordinarily well. Laura, so my first question is for you. It looks like the brands are all hitting sort of this accelerated sweet spot of growth here in the U.S. Can you talk a little bit about the foreign businesses? You haven't yet stepped into Europe. And so we're seeing some players in this space, obviously, launch into Europe kind of as their next phase of kind of TAM growth. So can you talk about that first and foremost? And then, Julie, really interesting on the occupancy line. I mean that is -- it's pretty incredible that your sales grew 24% and your occupancy is flat. So I really wanted to understand what the occupancy line trajectory looks like for 2021. Should we assume it's kind of flattish as we go through Q1 and then into the full year? And then on the flip side of that, on the merch margins, are you at historically low levels of clearance? And have you permanently changed the nature of the business such that we won't ever go -- we won't go back, we won't mean revert back to historical levels of promo? And congrats again.

Thank you. In terms of global, we recognize as we travel the world that no one else is doing what we're doing. And we've had great success in really bringing e-commerce to some of these markets, particularly the franchise partners who are very well established but didn't have a big e-commerce business. And so we have -- we partnered with great people. In the Middle East, we have a really sizable operation. In fact, this week, we just opened a brand-new flagship store in Dubai that is phenomenal with a Williams-Sonoma Home expression that is something you haven't ever seen before. 2 days in, we're off to a great start there. And that's just yet one example of the great stores that we're building together and the business we're building together with our franchise partners around the world. There's still a lot of growth there. West Elm is one that hasn't been as established in these franchise markets. And then also e-commerce continues to be a higher percent of sales in these global markets. We announced last year that we'd be going into India. We are still on track to do that. It's a little delayed, but it's a big market. Our forecast is that it's one of the most sizable for us, and we're very excited about that partnership. We want to do it really well. And so we put off China, and we don't have plans to enter China at this point. Similarly, we are in London with West Elm. We have some things in some of the department stores there. We also have a kids website, but we don't have further plans to expand other than in e-commerce. It's just -- there's a lot more easy places to go right now than Europe with the long leases and also just the difficulty of doing business there. So we're not doing a big push right now in Europe.

Fair enough.

So regarding occupancy and your questions there. So I think first of all, if you look back, you'll see that we have been holding occupancy dollar growth down for a while now, and we do expect that to continue. The important thing to remember is there's many things that go into occupancy, like depreciation from capital investments, also our distribution center rent. So there'll be ups and downs. But the reality is, as I said in my prepared remarks, if we're closing apparently about 25% of our fleet at least, that will lower our occupancy dollars and then potentially be offset by these other things that I just mentioned. But then you combine that with the higher sales volume, higher e-commerce volume, and all of that leverages that line. So I do expect both to have more muted dollar growth, but also the higher sales will drive that leverage going forward for the foreseeable future. As far as merchandise margins, yes, we do have some of the lowest levels of clearance inventory that we've had in the company. And at this point in time, we expect that to continue. But it's also the fact that we've made a decision to really pull off of site-wide promos and go after content-led relevant marketing. So instead of just doing a blanket e-mail where we give you 20% off, we're getting more and more fine-tuned about what we serve up to you to give you what you want. And if you want it, you can only get it from us. And that, combined with the fact that we are value engineering the product to get at the right price and the right quality and the right sustainability levels, and we'll never compromise on that, it puts us in a situation where if you want it, you got to buy it. It's a great price. So people are buying it. So that is -- we are going after that aggressively, and that's why we're so confident in merchandise margins continuing to expand going forward.

And our next question comes from Steven Forbes with Guggenheim Securities.

I just want to follow up on the selling margin or merchandise margin commentary you provided during the call, right? I think you said selling margins expanded 260 basis points during the fourth quarter. So can you remind us what that number was for the year? And then as we think about the path to a 15% EBIT margin, any commentary on the cadence, right, of the selling margin profile in the business as you think about potentially cycling something -- some of these transitory headwinds, whether it be clearance, as you just mentioned, or promotional activity? Do you see anything as it relates to cadence in the selling margin?

I mean selling margins all year have been accelerating from an improvement standpoint and from an expansion standpoint. So again, we expect that to continue going forward. I don't have handy right now the exact amount on the year. But if you look back, you can see by quarter that they've continued to expand in this quarter, in particular, with the largest expansion. As far as puts and takes as to what could drive the selling margins, I mean, we've always said that the shipping costs are a part of selling margins. And so that obviously has become something that we've been focused on more recently, especially as our mix shifts to e-commerce, the more furniture we have. And there's been higher rates that have come through with our third-party shippers. But I think the combination of the fact that we can drive these merch margin expansion throughout and then you layer it with occupancy on top of it, is what's been able to give us this incredible gross margin expansion for the entire year. And so that is why we're confident going forward that will continue. We obviously also are working specifically on shipping costs and trying to minimize those increases as much as possible to help with the selling margins going forward in addition to the merch margins. And whether that's using more of our omni-fulfillment at our stores, which has been a huge win for us, obviously, during this time, and it's a differentiator of the fact that we have these stores as hubs around the country, to, obviously, trying to figure out ways to take these larger items and bring it into our own delivery network and lowering some of the costs with our third-party shippers. Now at the same time, we have great relationships with our third-party shippers. And so we're working with them to come to a great solution. But we are focused not only on offsetting shipping costs but also lowering them in an absolute sense to keep driving these selling margins to where they are.

Our next question will come from Oliver Wintermantel with Evercore.

I had a question regarding labor costs. You mentioned COVID pay in 2020 but then also bonuses and all of that. So I wanted to see how you plan for 2021 and beyond for -- on labor costs.

So our labor costs, as we spoke to during the year, have obviously gone up. You've heard that from many other retailers, especially the hourly rates. And so across the board, we have moved to a $14 per hour rate. So at least we were at $14 per hour, even higher, in our distribution centers, in particular, in certain areas. And so we've got a lot of that in our base. Obviously, there's always pressure, and we always look at the hourly wages on a market-by-market basis, and we want to be competitive. Our people have been the secret sauce, if you will, especially this year. And so we are making certain that we're taking care of them from an hourly rate perspective. But since we've made these moves in the past, we -- it's not as much of a headwind for us as it might be for others. On the flip side, I think you mentioned COVID costs. We obviously expect that there will be reduced or eliminated COVID costs, which is going to help us next year because those are fairly substantial. And so you've got some moving parts. Labor, you've got the annualization of these hourly wages and potentially a little more pressure on the labor line. You've got the fact that we may have some more advertising spend. But on the flip side, you've got COVID costs that are coming out. So it gives us a lot of confidence, combined with our merchandise margin expansion and our occupancy leverage and with higher sales, leveraging the entire P&L that we can drive operating margin expansion next year.

Our next question comes from Seth Basham with Wedbush Securities.

Congrats on a great quarter and year. My question is around the outlook. Very impressive in terms of the margin outlook, particularly for 2021. Just perhaps provide a little bit more color on the complexion of the margin expansion you're expecting in 2021, how much of it will be in gross margin, how much of it in SG&A. Do you expect both of those to provide expansion to your operating margins?

Yes, this is Julie. I'll answer that question. So we expect expansion on both. It's obviously going to depend by quarter. We're not giving quarterly line item guidance. But at the end of the day, we're very confident in our merchandise margin expansion. We're very confident in our occupancy leverage. And as I just mentioned on the last question that we have the, I guess, benefit of some of these COVID costs that are going to be flipping out. And yes, we will have some increased costs, but we will be able to more than cover that as a result of the higher COVID cost that will be coming out to cover it. And so that, combined with higher sales, will allow us to leverage any of those costs that are coming through and drive operating margin expansion on the bottom line. And remember, a lot of the sales that we're driving now with an expectation of 70% or higher are going to be e-commerce. And e-commerce, we have historically been one of the most profitable e-commerce companies out there. And so as we shift more and more to e-commerce, that completely leverages the P&L. So that's our expectation.

Understood. Just to follow up, if you're going to be expanding your operating margins seemingly materially in 2021, your goal is 15% in 2025. It seems like you don't have that much more expansion plan for 2022 through 2025. Is that just conservatism at this point in time?

I'd say there's some conservatism, but also, we want to make sure that our value proposition stays really compelling and that our service is the best in the industry. And so we're -- it's a bit of conservatism. It's also making sure we have the money set aside to invest back into the business to stay on top.

Understood. Congrats and best of luck.

And our next question comes from Cristina Fernández with Telsey Advisory Group.

Congratulations also on a good quarter. I had 2 questions. One, when you look at your demand trends, are they broad-based? Or are you seeing any notable differences in markets that -- where restrictions have been lifted or have higher vaccination rates versus those that don't? So that's one. And then my second question is on fulfillment. I wanted to see if you could talk more about the ship from store and how you can roll that further and help perhaps lower some of your order -- cost to fulfill the orders. And how do you see that evolving over the next couple of years?

Yes. So thank you. This is Laura. Let me just first take the shift from store, and then I'm going to pass it to Felix to answer what we're seeing or not seeing with the correlations. So in terms of ship from store, ship from store is great because it leverages inventory that would otherwise be trapped in stores and helps us better fulfill customers' demand. And we're getting better and better at it, in driving it and marketing it correctly, putting on filters to our sites. They can sort for things. And it's an area that has gone up a ton more this year. But there's still a lot more room for us to do more with that, and in particular, with Buy Online Pickup In Store. So we've been pushing that as well, not just because of COVID but because it's another great way to service the customer who wants to get in and out quickly. So you're going to see us continue to market them better, have better site experiences and put more power behind the infrastructure. I'm going to pass to Felix on what we're seeing with vaccination and states opening and all that good stuff.

Sure. Thanks for the question. We have -- what we've seen in our data is that demand for furniture is still very strong in states where vaccination rates are high. So there's no correlation between changes in state-level vaccination rates and our data and our growth in our furniture business. So what we're seeing is it's really not a zero-sum game here. As more people get vaccinated, as travel starts to open up, as schools start to open up, we have a substantial gear business, a luggage business. And as vaccination rates increase, we expect people to open up their homes more. So our dining and entertaining businesses are primed for that. So early indications are no correlation. In fact, it's a negative correlation is what we're seeing. We're seeing strong rates across the board regardless of vaccination rates.

And our next question comes from Jonathan Matuszewski with Jefferies.

Guys, great quarter. My first one was just on the Williams-Sonoma concept, another remarkable quarter there. Curious what you're seeing as far as repeat spending trends now that we're beginning to anniversary some of these cook and eat-at-home trends from last year. Any color there as far as kind of new and repeat customers would be helpful. That was my first question.

Sure. First, I'll say that, yes, Williams-Sonoma, we've made a lot of changes to that strategy, and it's paying off from the exclusives to shifting from what was predominantly a store business to an online business and really driving content again, which we're thrilled to continue to do. In terms of the Williams-Sonoma categories that are working, we are seeing great strength across the board, particularly the areas we're most dominant, cookware, cutlery, electrics. In terms of customer metrics, we have very favorable customer metrics. And it's interesting, we have very high orders per customer versus last year, repeat customers. And we -- when you compare it to someone like a Wayfair, you see that we have higher dollars in all those categories, particularly higher dollars per order. We have extremely productive online advertising and online profitability, as Julie mentioned earlier. Felix, did I miss anything there? Do you want to add anything to that?

No. I mean just to reiterate, we haven't -- we've seen our repeat rates be very strong. And as Laura mentioned, all those new customers we acquired during shelter-in-place are returning at record rates and actually shopping across our portfolios at record rates. So we think that our share of wallet within these new customers will continue to grow as we introduce them to not just the best of Williams-Sonoma but what our other brands have to offer and leveraging our loyalty program to encourage them to shop across our portfolio.

Great. That's super helpful. And then just a quick one, I'll squeeze in. Design Crew, I think you mentioned around half of in-store revenues. And I think you mentioned those customers are spending around 2x as much. So just curious. You've had a lot of success integrating kind of Outward with Room Planner and all that. How are you thinking about maybe capital for potentially other tech-related M&A options going forward? Any color there with your thoughts would be helpful.

I thought you're going to ask a different question. I was ready for the other one, which is I wanted to tell you that one of the most amazing things that happened during the shutdown is that the people who worked in-store who couldn't work did virtual design chat. And they have done such a phenomenal job that it's a whole new channel for us now. So we have the online design services where you don't need to do anything but use our tools. In fact, you can power yourself the 3D tool, which nobody has done that before. Other people allow you to pay and have their designers send you back 3D models. You can actually go on yourself as a customer and do it or you can call a store, go into the store or you can do it virtually. And so yes, we are continuing to shift capital dramatically from brick-and-mortar to online services, online e-commerce and infrastructure for supply chain and supports it all. And that shift is remarkable. Julie, do you want to give a few numbers?

Yes, yes. We used to spend less than 50% basically on e-commerce spend -- e-commerce-related spend, I should say. And now we're spending about 85% or expected to this year, and we expect that will hold to be higher. So our complete shift in capital is going to e-commerce now, and that's one of the examples that we'll be spending on as well.

And as it relates to innovation, we have a lot of great stuff that we're building in-house that is as good as anything I've seen. And of course, we're always looking at the landscape to see how we can get a jump on anything that we had already planned to do anyway.

Our next question comes from Marni Shapiro with Retail Tracker.

Congratulations, guys. Amazing quarter. Amazing year. And I love the way the stores look right now. Your transition to spring has been beautiful. So Laura and Julie, I guess kind of a bigger picture question here to start. The home space has become very popular, getting a little bit more crowded online. So you outlined some of your key differentiators. Would that also fit into like what are your differentiators online? What are your advantages that you have on e-commerce that differentiates you and separates you from the pack as it gets more crowded?

Great question, Marni. Thank you. So online, we really bring not just a single product to life but a lifestyle. And so we have spent a long time -- the PIP, product information page is the money shop. And everything that is on that page needs to help you make that decision, whether it's 3D or UGC, which we have really amped up online, and then different guided shopping paths, if you're interested in something. And we're seeing that really help us add on to an order, if you went on to look for one thing, to be able to show you and have you add something else and inspire you to buy things you didn't think you were looking for. And versus our competition, there's a lot of people selling many things, but sometimes it's about really helping the customer make a decision. And if they trust you with your quality and your sustainability and your value equation, the conversion is higher. So we know that the work that we've done to build the brands actually through our stores in a lot of cases and through our catalogs is now coming to fruition online. And so we continue to make the investments in the things that make it easier for the customer to make a decision, whether that's watches, color, accuracy, 3D modeling, in room, immersive experiences and just simply real-life photography, showing people how other customers that use something really makes a difference. I'd say the other thing that's really different about us is that with all these different brands run by separate people, it's such a wealth of ideas and innovation. And we can try something in one brand and then not bet the farm and push it across multiple brands once we know it works. And Yasir's team is very innovative in looking at A/B testing and always trying something new, and that's been a big part of our success with our key tech partners.

That actually makes a lot of sense. Can I just ask a quick follow-up to it also? I guess it's a 2-part follow-up even. The trends that you're seeing that emerge during COVID, which ones do you think will be stickiest post pandemic? And also, it sounds like in spite of the enormous growth online and all your work online, it sounds like in every turn, you're still talking about the stores, and it sounds like that's still an important part of the story. Is that how you're thinking about it going forward?

Yes. Let's talk about the trends that we see. When you think about it -- I mean first of all, we're so excited that the vaccine rollout is underway, and we're so hopeful for reopening of the economy once we reach herd immunity. The home has always been your biggest investment. Home values have gone up over time historically for Americans. They invest in their home. They know that they usually get it back. And this year, it's the centerpiece. Everything -- you were there too much. And you learn a lot of new things. And a lot of millennials and younger people learn to cook. Once you learn to cook, you never go back. You may go out to dinner, but you're going to cook better, and you're always going to be interested in the cooking trend. And that is key to the future of Williams-Sonoma. I would say secondly, entertaining. We haven't been able to entertain, right? I mean Easter, some people might actually be able to get together for Easter. July 4. Imagine the holidays. We are busy dreaming of the most inspiring Christmas parties that -- Hanukkah parties, New Year's parties that we can host in our homes and how we make that better for our customers, and we cannot wait to serve our customers. Also outdoor, we all got fresh air. Nobody got -- nobody even got the cold or the flu. I think you're going to stay outdoors a lot more than you did before. We are seeing -- I mentioned the strength in West Elm outdoor. Well, by the way, it's equally as good at Pottery Barn and Williams-Sonoma Home. And if you haven't seen the new Williams-Sonoma Home catalog, take a peek at that because it's a dominant display of luxury outdoor that I think you'll be extremely inspired by. The last big trend I just want to talk about is obviously hybrid work, work from home. I don't know about you, but I still haven't really accomplished the perfect work-from-home station. I still have a desk to buy. It's been so busy. You just don't get around to it. There's still a lot more room to make those work-from-home spaces better, and new home builds are going to include it. So that's a business we really play in, and we have that workspace business in West Elm. And we continue to grow it, and we have a lot on the horizon in innovation for work from home. So there's a lot of opportunity for us, Marni. And it's just whether it's product growth strategies or Business-to-Business or channel strategies. You take those growth strategies together and you put it with our 3 key differentiators and the macro, I'm telling you, we are going to have a great ride here, and it's a multiyear ride.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Laura Alber for any additional or closing remarks.

Well, thank you all for joining us, and I really wish you and your families the best. And we appreciate your interest and look forward to talking to you soon, hopefully in person.

Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.