Williams-Sonoma, Inc. (WSM) Q1 2027 Earnings Report, Transcript and Summary

Welcome to the Williams-Sonoma, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our first quarter earnings call. Before we get started, I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our annual guidance for fiscal '26 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize. And actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of the call will be available on our Investor Relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. We are off to a strong start in fiscal 2026. In Q1, our comp came in at 4.8%, reflecting strong execution across our portfolio of brands, our channels and our teams. Thank you to everyone at the company for your hard work and dedication. We are pleased that our growth initiatives are working and every brand delivered a positive comp in Q1. We also saw strength in both our retail and DTC channels with improvements across the customer journey. Furniture and non-furniture trends were strong and collaborations, newness and innovation all performed well. From a profitability standpoint, we delivered an operating margin of 16.2%, ahead of expectations. We delivered this operating margin even while absorbing tariffs and higher fuel costs. Earnings per share was $1.93, up from $1.85 last year. We continue to outperform on both top and bottom lines in this uncertain environment, which includes, but is certainly not limited to, war, trade policy, including tariffs and interest rates. We are delivering compounding results year after year despite the cyclical swings of the housing market and other macroeconomic events. We believe our strong brands, our proven ability to execute our vision and our relentless focus on customer service will allow us to accomplish our goals in 2026 and beyond. First, on growth. In Q1, our 4.8% comp reflected our company-wide focus on growing our top line. Our quarter was driven by strong performance at all of our brands, growth from our B2B division and continued outperformance of our smaller but quickly growing and profitable emerging brands. Also, the product pipeline that we laid out this year is working. We are committed to delivering great customer service, and we continue to put the customer at the center of everything we do. We extended AI further into the customer journey. We scaled personalization across our portfolio of brands. And we continued to optimize the shopping and checkout experience. We also made progress using automation to improve customer care and strengthen product discovery while continuing to advance our design tools. And across operations, we delivered enhancements to support supply chain efficiency and enabled important brand initiatives this quarter. And we continue to make progress in supply chain performance with a focus on timely delivery and low returns and replacements. These improvements helped us offset higher year-on-year tariffs and higher fuel costs. We stayed lean and efficient throughout the organization and managed variable costs. And you can see those results in the P&L we shared with you today. Additionally, in the quarter, we returned $373 million to our investors through share buybacks and dividends. Our results demonstrate our discipline and commitment to delivering quality earnings and returning free cash flow to our stockholders. Now let's talk about guidance. We are reiterating the annual guidance we provided on our Q4 call. We are confident about our business, both because of our Q1 results and our strategies for the balance of 2026. However, despite our beat in the first quarter, we are not raising guidance as it is early in the year and there's a lot of uncertainty in the external environment. We are not building in a meaningful housing recovery and we are assuming continued volatility across geopolitics, war, fuel prices, trade policy and tariff and interest rates. Of course, you can never plan for extreme outlier events. But what we can do is give you our best estimate for 2026, which at this point reflects comp brand revenue growth of 2% to 6% with a midpoint of 4% and an operating margin in the range of 17.5% to 18.1% with a midpoint of 17.8%. Now let's review our brands. Pottery Barn delivered a positive 1% comp in Q1. And we were pleased to see the brand's results improve. We saw progress in key categories for Pottery Barn across furniture, lighting and textiles. Customers responded to both our spring and summer assortments. The quarter also reflected the actions we have been taking in marketing. We are focused on Pottery Barn's heritage aesthetic both in marketing and product design, and we are improving value across key categories. At the Pottery Barn channel level, DTC improved as we focused on the digital experience. Retail remained strong as customers continued to respond positively to our stores, design services and the in-person shopping experience, including take it home today. We remain focused on executing the Pottery Barn strategy quarter-by-quarter and are confident about the brand's trajectory in 2026 and beyond. Before I move on, I also want to share an update on leadership at Pottery Barn. This morning, we announced the promotion of Jennifer Kellor to the role of President of Pottery Barn. Over the course of her 29-year tenure, Jen has demonstrated an exceptional track record of driving growth and incubating brands. She brings deep expertise across merchandising, design, e-commerce and marketing and has helped drive significant growth for our company. We also have strong bench of talent in our Pottery Barn Children's businesses, and that team will continue to lead the brands and will report to me. And finally, today, we announced former Pottery Barn President, Monica Bhargava's departure from the company. I want to thank Monica for her significant accomplishments throughout her 26 years with our company. Monica's visionary leadership and creative talent have made a lasting impact across our brands, and we are grateful for her many contributions. Now let's turn to our Pottery Barn Children's business, which delivered yet another strong quarter, running a positive 4.5% comp in Q1. Growth was driven by product innovation with strength in both furniture and non-furniture. Collaborations and licensing remain key drivers led by LoveShackFancy, Chris Loves Julia, and partners that keep the assortment fresh and bring in new customers. We also saw strong momentum in baby supported by high-quality furniture and expanded gifting assortments and improvements to the registry experience both in stores and online. And in dorm, we are entering the season well positioned with complete solutions that meet customers' needs and preferences. In the quarter, we also launched Dormify as our 10th brand, which expands our reach in dorm and small space living with functional, style-driven solutions for the next generation of customers. As we think about the future, we see meaningful growth ahead in our children's business. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited about the momentum as we move through the year. Now let's review West Elm. West Elm ran a positive 8.5% comp in Q1. And I'm proud to say again that West Elm is on a roll. The drivers at West Elm are consistent and the results are compounding. West Elm continued to make improvements across product, brand heat and channel excellence. New introductions in both furniture and non-furniture drove growth and both spring and summer newness performed particularly well. Retail at West Elm was a highlight in Q1. Customers came into our stores and saw more newness and better in-stock availability. And the strength in the brand gives us confidence to return store count growth with 5 West Elm openings planned in 2026. Collaborations also remain a key pillar of the growth strategy at West Elm. The Emma Chamberlain collection was a great example. It brought new energy to the brand and connected with a younger customer. It is another proof point that West Elm can create brand heat and drive growth through distinctive products and storytelling. Overall, we are thrilled with momentum at West Elm. The brand is executing well, and we feel good about the opportunity to build on this progress as we move through '26 and beyond. Now let's review the Williams-Sonoma brand. Williams-Sonoma continues its streak of strong performance with a positive 5% comp in Q1 on top of a 7.3% comp last year. As we spoke about on the last earnings call, 2026 marks Williams-Sonoma's 70th anniversary. And at 70 years old, this brand is not slowing down. In fact, it's gaining momentum. The kitchen business continues to accelerate, and our pipeline of proprietary in-house design products and market exclusives separate us from the competition. We also continue to strengthen the brand through collaborations and marketing partnerships. In Q1, we welcomed world-renowned interior designer Kelly Wearstler as a spokesperson for our exclusive Breville offering. We also launched the Stanley Tucci Pizza Oven from GreenPan and a food collaboration with Oakville Grocery, a Napa Valley culinary institution and the oldest continuously operating grocery store in California. In our Williams-Sonoma stores, we continue to bring the brand to life through experiences that deepen engagement. In Q1, skill series classes remains an important driver, and we also built momentum in the registry through events and concierge appointments. We also saw notable momentum in Williams-Sonoma Home in the quarter. Customers responded to newness and innovation in color, print and pattern. And while the business is small, we see opportunity to expand in the underserved high-end furniture and home furnishings market. Looking ahead, we are excited for the summer entertaining season. We have BottleRock this weekend, which is another great example of how we bring the brand to life through food, community and experiences that are uniquely Williams-Sonoma. And if you're going to be in Napa this weekend, please give me a call. Now I'd like to update you on B2B. B2B started the year strong with another record-breaking quarter delivering growth of 13.7%. We saw the strength across B2B with continued momentum in both trade, which grew 9%, and contracts, which grew 22%. Our B2B team continues to strengthen our position as a preferred partner. We're winning because of our deep relationships with designers, developers, procurement groups and brands, and because our design-to-deliver capabilities are difficult to replicate. We also delivered several marquee projects in the quarter, including hospitality work for Delano Miami, Bernardus Resort & Spa, multiple locations with national developers like Emaar and Greystar, and continued momentum in sports and entertainment with Capital One Arena, Live Nation Philadelphia, and upcoming work with the U.S. Open. And to start Q2, the team was recognized at the Hospitality Design Expo, winning the Best in Show Award. Overall, we are pleased with the start to the year in B2B, and we remain excited about the pipeline and the opportunity ahead. Now I'd like to update you on our emerging brands. With our proven ability to incubate and scale brands in-house, these concepts represent sizable growth opportunities for us. Starting with Rejuvenation, which had another strong quarter with double-digit comp growth. Performance was driven by continued momentum in project-led categories, including cabinet hardware, bath, lighting and mirrors. Rejuvenation also continued to see strong engagement from the trade, which reinforces the brand's position with design and renovation customers. And in DTC, growth is supported by continued engagement in our core categories. Product innovation continued to be a focus in the brand with high-quality, design-driven product, distinctive details and customizable options that matter in home project categories. With only 13 stores and great online growth, we are thrilled with the progress in Rejuvenation, and we continue to believe in the opportunity for Rejuvenation to be our next $1 billion brand. Mark and Graham also had a strong Q1 with a double-digit positive comp. The brand continued to build momentum across key categories, and it remains a distinctive destination for personalized gifts for life's meaningful moments. As we look ahead, we are leaning into major seasonal milestones like graduation, Father's Day, wedding season and summer entertaining. And we are doing that with compelling new products and elevated coastal point of view. And last but certainly not least, GreenRow. GreenRow continued to deliver growth in Q1. We opened our first store in March and is a great manifestation of the brand. And since we've last talked, I hope you have had an opportunity to stop by and see the store yourself in Soho. GreenRow focuses on sustainable, responsibly crafted, vintage-inspired design. The brand combines colorful, eclectic styling with heirloom quality materials and low-impact manufacturing practices. Finally, I'd like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico and the U.K., driven by differentiated products, ongoing omnichannel improvements and continued growth in our design and trade businesses. So in closing, as you can see, we are off to a strong start in fiscal 2026. I would summarize Q1 with 3 accomplishments. First, we delivered strong top line growth with every brand positive. Second, we drove operating margin that exceeded expectations. And third, we delivered earnings growth. And we did all of this in a dynamic and uncertain external environment. This quarter reflected what we set out to do in 2026. We are accelerating growth through strong execution across channels, strength in both furniture and non-furniture and continued momentum in collaborations, product newness and product innovation. We are continuing to invest in the customer experience and making progress in service and supply chain. And finally, we are staying disciplined on cost and productivity, which supports strong profitability and returns to our shareholders. We feel good about the start to the year, and we remain confident in our priorities and our strategies for 2026. And while the external environment can shift quickly, our model and our team are built to navigate volatility and keep delivering. And with that, I want to thank our teams again for their work and their commitment. And I also want to thank our vendors and our shareholders for their partnership and support. Now I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. We delivered another quarter of growth and strong earnings in Q1. Our results reflect the power of Williams-Sonoma, Inc.'s operating model and our team's strong execution on the priorities we laid out for fiscal year '26: accelerating growth, delivering world-class customer service and driving earnings. As I walk through the numbers, you'll see how we delivered on all 3 priorities this quarter. I'll start with our Q1 results and then review our guidance for fiscal year '26. Q1 net revenues finished at $1.81 billion with comp growth of 4.8%. Both our 1-year and 2-year comps accelerated from Q4 to Q1, reflecting the continued strength and momentum of our business. Both furniture and non-furniture categories posted positive comps in the quarter, and the trend in both categories accelerated significantly from Q4. From a channel perspective, both e-commerce and retail delivered strong comps, with e-commerce up 4.8% and retail up 4.7%. We accelerated our market share gains as the home furnishings market declined in the low single digits in Q1. We accomplished this even as we maintained our level of full price selling. Our strong results demonstrate the power of our portfolio of brands, which span different aesthetics, life stages and price points. Combined with our growth strategies, our portfolio sets Williams-Sonoma, Inc. apart in the home furnishings industry. Moving down the income statement. Q1 gross margin was 44%, down approximately 30 basis points versus last year. Our focus on growth, customer service and supply chain efficiency partially offset the headwinds from tariffs and higher fuel costs. Merchandise margins declined 100 basis points versus last year. Higher tariffs flowing through to our weighted average cost of goods sold drove this decline. Full price selling was essentially flat year-over-year. Ocean freight costs were also pressured by higher oil prices. However, our size and scale and our talented supply chain team helped mitigate the impact. Supply chain efficiencies, including a lower shrink accrual, delivered approximately 50 basis points of gross margin benefit in the quarter. Our focus and execution on customer service continued to drive efficiency across our supply chain, enabling us to offset the impact of higher fuel prices to domestic shipping costs. I'd like to acknowledge and thank our supply chain team for their relentless focus on service and efficiency that is helping us offset higher fuel prices. Occupancy costs leveraged approximately 20 basis points versus last year, with our strong top line growth more than offsetting the 3% increase in occupancy dollars. Overall, our gross margin came in ahead of our expectations. We are pleased with our ability to partially offset tariff-related merchandise margin pressure and higher fuel prices through supply chain efficiencies and occupancy leverage. Turning now to SG&A. Q1 SG&A ran at 27.8% of revenues, approximately 30 basis points higher than last year. Employment expense deleveraged 30 basis points. We continue to manage variable employment costs in line with top line trends while staying focused on investing in talent. Advertising expense as a percent of revenues leveraged 10 basis points. Our in-house marketing team continued to test, scale and optimize across our portfolio of brands, driving strong customer engagement while remaining disciplined on spend. We also invested in social media using compelling content, collaborations and influencer partnerships to increase relevance, expand reach and drive brand heat. Lastly, general expense deleveraged approximately 10 basis points, primarily from timing. On the bottom line, we delivered operating income of $292 million with operating margin at 16.2%. Diluted earnings per share were $1.93, up 4% versus last year. On the balance sheet, merchandise inventories were $1.46 billion, up 9% to last year. Included in our inventory is approximately $60 million of embedded incremental tariff costs. Excluding these tariff costs, inventories would have been in line with our top line growth. Our inventory levels and composition continue to be well positioned to support our sales growth and customer service goals. During the quarter, we invested $58 million in capital expenditures to support our long-term growth. We also returned $373 million to shareholders through share repurchases and dividends. We repurchased $288 million of stock or approximately 1.4% of shares outstanding. We also paid $85 million in dividends, a 15% increase year-over-year. Summing up our Q1 results, we are proud of the strong execution across the business. We accelerated our top line growth, continued to improve customer service and supply chain efficiency and grew earnings per share. These results speak to the power of our operating model, but none of it would be possible without the incredible team we have here at Williams-Sonoma, Inc. I'd like to thank our team for their outstanding execution this quarter. Now let's turn to our fiscal year '26 outlook. As Laura mentioned, we remain confident in our strategy and momentum. We are reiterating our guidance as it's still early in the year and the environment is uncertain. We expect fiscal year '26 net revenue comps to be in the range of 2% to 6%, with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. Our guidance continues to assume no material changes in the macroeconomic environment or housing turnover or interest rates. We remain focused on accelerating growth, delivering world-class customer service and driving earnings. As we discuss guidance, I'd like to address 3 topics top of mind for investors: higher oil prices, tariff refunds and tariffs. First, higher oil prices. Higher oil prices are pressuring transportation costs. With ocean freight, we believe our size and scale, combined with the outstanding work of our experienced transportation team, will allow us to continue to mitigate the impact. For domestic shipping expense, fuel prices near today's levels are embedded in our guidance. While the direction of oil prices is difficult to predict, our guidance reflects our best estimate of the impact of higher oil prices on our business. Second, tariff refunds. Our guidance does not contemplate recognizing any benefit from tariff refunds due to the uncertainty surrounding the timing and potential of recovery. Finally, tariffs. Our assumptions on tariffs remain unchanged as well. As discussed last quarter, we continue to expect the impact of tariffs to be front-half weighted and then moderate over the balance of the year. Our guidance continues to assume all tariffs currently in place remain in effect for the balance of the year, including the Section 232 tariffs, the current Section 301 tariffs and the Section 122 tariffs. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. With the ongoing uncertainty around tariffs, it is impossible to say where they will ultimately land, and it is difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance. Also today, we are providing some further inputs for modeling purposes. We expect our full year interest income to be approximately $25 million and our full year effective tax rate to be approximately 25.5%. Turning now to capital allocation. We will continue to prioritize funding our business operations and investing in long-term growth. Our capital expenditure guidance is unchanged. We expect to spend approximately $275 million in capital expenditures for the year. About 95% of that investment will be focused on e-commerce, retail and supply chain. With regards to our investment in retail, we continue to expect our year-end store count to be essentially flat to last year, after which we anticipate 1% to 3% growth in store count each year starting in fiscal year '27. Embedded in our fiscal year '26 guidance continues to be approximately 70 basis points of non-comp growth from our investment in retail. We remain committed to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases. On dividends, we will continue to pay our quarterly dividend of $0.76 per share, which is a 15% increase year-over-year. We are proud to say that fiscal year '26 is the 17th consecutive year of increased dividend payouts. On share repurchases, we have approximately $1.1 billion remaining under our current authorizations, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns. Looking beyond fiscal year '26, we are reiterating our long-term outlook for mid- to high single-digit revenue growth and operating margins in the mid- to high teens. Wrapping up our comments, we are proud to have delivered yet another strong quarter for our shareholders. We are confident we'll continue to outperform our peers and deliver shareholder returns for these 5 reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy, the ongoing strength of our growth initiatives and the resiliency of our fortress balance sheet. With that, I'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Kate McShane of Goldman Sachs.

We wanted to first ask about the health of the consumer. If you saw any change in behavior during the quarter, any differences between income cohorts? And if you've seen any change in May to date?

Sure. I can't really speak for others and what they're seeing, but the consumer -- our consumer is responding to our products and our strategies across our channels and across our brands as you can see by this morning's set of numbers. And it's from furniture to smaller items and collaborations across the board, really. I think that the truth is that we have put together a pipeline of products that is very appealing and distinctive in the market. And people trust us for our great prices and quality, and they're coming into our stores because of our engaging store experiences and service. And it seems like they are very interested in spending with us. And we believe that that's going to continue as we look through the year because the strategies that we built through the year that are going to come look like the ones we've been implementing. And so I think you're going to continue to see the momentum that we've seen in the first quarter.

And it does appear that you were able to offset a lot of the higher fuel costs with the efficiencies in the supply chain that you laid out on the call, but was wondering if this inflationary environment were to persist, do you think you will have to look to increasing prices at all?

I think it's too early to comment on that. And remember, we don't just compete on price. We're competing on the whole, which is the product itself and where it sits in the market versus other similar products. And we have incredible finishes and product design exclusives, exciting stuff in the works. And that's where we see the customer being less price sensitive. That said, we're careful to make sure that they feel really good about buying from us. And we want to continue to invest in our customer and give them the best value in the market.

And I'll just add, Kate, that as I said in our opening remarks, oil prices at today's levels are embedded in our guidance. And we are seeing ocean freight prices pressured, but given our size and scale, we're able to mitigate them. And then with domestic transportation, we are seeing higher costs, but our supply chain efficiencies are really offsetting them. And I want to take a moment just to acknowledge and recognize and thank our entire supply chain organization for their ongoing focus on just efficiency and driving customer service, which as everyone has seen is really producing phenomenal results for the company.

Your next question comes from the line of Seth Sigman of Barclays.

So with comps accelerating this quarter relative to prior quarters at a time when it seems like you've raised prices, but it seems like those price increases are maybe starting to stabilize, so it would imply that the composition of the business is maybe shifting, meaning more volume is improving. Is that right directionally? And if so, what do you think is changing that is driving that? And how do you think about the sustainability as you move through this year?

You are right. And so we're seeing broad-based comp lever improvements and we're very excited to see it across channels. It's based on our strategy, Seth, and execution of our strategies which are very competitive. We did lay out a bunch of them in the last conference call and in this one. And so we're thrilled to see furniture recovering. We had a good Easter. We're going into back-to-school. We've invested in the dorm experience, total customer experience, in-stock at retail. All these things are good for the comp levers. I always think of comp levers as the output of the strategy, not the thing to focus on. But just to tell you, it's not just price.

Okay. That's helpful. And then maybe for Jeff, on the merchandise margin, they were down this quarter, but a little bit better than I think expected. You're going to start to lap very healthy merchandise margins, particularly in the second and third quarter. Can you just remind us how you're thinking about that? How you would expect the cadence to play out throughout the year?

So margin was down about 100 basis points in the MMU in Q1, a little better than Q4 and a little better than we expected. But we still are guiding that the impact of tariffs will be heavily front-weighted and then moderate across the back half of the year, simply because the way the tariffs are flowing through on our weighted average cost accounting. Now Q1 had an easier compare because we were again up against some timing items in last year. Q2 won't have that benefit, so Q2 will probably be peak impact of the tariffs. But after that, we expect it to moderate for the balance of the year.

Your next question comes from the line of Chuck Grom of Gordon Haskett.

Great quarter. Can you help us think about the underlying demand curve in the business? I mean skeptics are going to say that this is tax refund driven, but I don't think that's the case. And I was hoping maybe you could opine on strength at West Elm and the recovery in PB specifically. But more importantly, just getting a better sense for the demand curve, the underlying demand curve in the business.

Yes, we're thrilled with the results in West Elm. We're not entirely surprised though. We've been building this foundation for growth. And remember, many quarters ago I mentioned that we started to see newness really working, but we were chasing the inventory. Now we have that back and we have confidence in building more newness, both on the core and then also in collaboration. And it is broad-based, so the categories always have, but we also have new categories that are really performing well for us. And then focusing on not just the furniture, but things that customers need to come more regularly and buy. And the combination of the 2 things is great. I also would just say that this is not promotionally led. We have a very, very strong regular price selling in West Elm. I don't give those numbers, but I would just say that it's very important to note that it is not promotionally driven at all. And we believe that this is sustainable. The brand is very well positioned versus the competition and our product pipeline is extremely exciting. As it relates to Pottery Barn, we continue to see improvements based on the strategy that I laid out. We're working quarter to quarter on multiple key strategies and measuring our results and have made a lot of changes, especially to our website, photography and our brand positioning, and getting back to what is a traditional Pottery Barn aesthetic, which is really resonating with the customer. And we've only begun to implement that strategy. And so I think you're going to see continuing improvements in the Pottery Barn comps as we go, not just this year, but next, and we're confident.

Okay. Great. And then just, Jeff, on the supply chain, another 50 basis -- 50 bps of improvement there to help offset some of the merchandise margin pressure. Can you walk through some of the KPIs across the metrics we follow and give us a sense of kind of where you are on that journey and the visibility you have to continue to gain on the supply chain side?

Absolutely, Chuck. So supply chain efficiencies continue to be a big benefit for us. And our goal remains the same. It's having a perfect order on time, damage-free every time. And those are really the key KPIs that we track. Is the order on time? Is it damage-free? Are there no issues with it? And is the customer satisfied? And at the end of the day, it's really about making sure that customer is satisfied. And we have an incredible supply chain team that really makes a difference in terms of our customer service. And as many of you have heard me say, we don't just compete on price. We also compete on service. We compete on service in our stores with our free interior design services, which is helping propel the strength of our retail division. And also, we compete on our in-home delivery. We make 2.4 million in-home deliveries a year. That's about 7,000 a day. And we do it better than just about anybody else out there. And we do it by focusing on making sure the customer is happy and that the order comes perfect every time. Is it on time? Did we hit the delivery window? Does it have all the pieces together? Did we put it where the customer wanted it? Are they happy with it? At the end of every order, they actually have to sign and acknowledge that they're happy with it. We take pictures of the order and we make sure that it's what they want. And that customer service is really what differentiates us. And the more we service our customer, the better our results are.

Your next question comes from the line of Jonathan Matuszewski of Jefferies.

My question was on the trade channel. It's promotional in the industry for consumers, but it's also increasingly promotional in the industry for the trade channel. Seems like many retailers are increasingly trying to court the interior design community. It looks like your trade channel business was strong this quarter, up around 9%, I believe. So my question is, what's on the horizon in terms of initiatives to maintain that momentum and neutralize maybe some of the higher promotions that some competitors are doing to court those designers?

We continue to believe in our B2B business. It had another really strong quarter of 14%. In fact, it was our largest quarter ever to date at B2B. Now trade is an important part of it. To your point, it was up 9% in the quarter. And that's not really being driven by price. We're not changing anything regarding the pricing we do with our trade consumers or promotional activity. We're competing on service. And it comes down to our local stores partnering with their local trade community, building those relationships and really executing on all the different strategies we have around product and service and delivery. And then the place we're really focused on B2B is on the contract side, which had a 22% increase on the quarter. We continue to have an incredibly robust pipeline and are making really big inroads here. I'll share that as many of you guys know, I manage B2B and earlier this month I joined our B2B team down in Las Vegas at the Hospitality Design Expo where we won Best Booth, which is a sign of how much attention you get in the industry. And I'll just share with you, it was an incredible business. I've never seen a team more motivated to drive results and so much activity in the booth with customers coming in. It left me incredibly excited about our ability to achieve our goal, which is to drive us $2 billion.

Your next question comes from the line of Christopher Horvers of JPM.

I feel like I'm at a Pink Floyd concert right now. Laura, can you maybe talk about the West Elm acceleration a bit more? There's a lot going on at the brand. You're running that PB playbook of category expansion, rooms, outdoor, kids. You have the B2B side, which I think is a big driver of the West Elm business. And then you have the Emma collaboration. So as we think about that sequential improvement, could you maybe qualitatively bucket how the drivers -- which one of these drivers have been more significant?

I'm assuming you're commenting about the echo, which we're very sorry for. Is it any better now?

It's a little better.

I mean it's our partner, Q4, and they're working on it as we speak. But I apologize, it's distracting for us, too. But I'm not so distracted that I won't tell you about the amazing West Elm business which is driven by multiple things. We laid out the strategies and we have been executing against them. And it's not one thing. Emma Chamberlain is amazing. She has got such a wonderful following and she continues to gain momentum in the world and people knowing her. And the team started working with her a while back and they put together a beautiful line of products that is really bringing in new customers, younger customers to the brand and bringing back that hip feeling and that surprise. I think when great retailers execute, it's not what you always expect. It's this new layer that makes you smile. And that's what Emma did. All her great products from pigeons to beautiful beds. I mean it's across the categories. And that's just one thing. There's a bunch of really exciting other collaborators coming. And you can imagine when you have one hit like that and people see it, a lot of people want to work with you. So we have a wonderful opportunity to continue to feed the collaboration pipeline with really interesting names. And then at the same time, we've been working on filling white space in the market with West Elm's unique designs, modern aesthetic and price point. And we're making progress against the categories of furniture. We've -- I would say we've added more looks. We've seen Pierce & Ward continue to do well. And then we have our core categories, textiles and rugs and decor and tabletop, and we have wins across the board. So it really isn't pointing to just one thing. But there's a lot of room to go. I mean there's still areas where we are underdeveloped versus Pottery Barn and areas where we haven't hit it, and that's what we're focused on. We're just going to keep driving it, and we're going to keep pushing for even higher comps. I think this brand has a lot of growth in it and its positioning, and we're going to go get it.

Excellent. And then, Jeff, as a follow-up, can you help us with the price/cost lap? You mentioned gross margin troughs year-over-year in the second quarter. How much of the -- how much did 2Q '25 have the price/cost benefit and does that $60 million of tariff costs that's hung up in inventory right now essentially flow through in the second quarter?

So not all of the $60 million flows through in the second quarter, but some of it does. And like I said earlier, Q2 will be the peak impact of the tariffs. As we go through the front half, we'll be heavily impacted as the tariffs do flow through. But as I said, this quarter and last quarter, the tariffs will moderate as we travel throughout the year. Now Q2, the tariffs are essentially still being non-comp. We did take some pricing action in Q2 last year, so we'll be up against that. And then in Q3, they're partially comp for part of the quarter and then in Q4 they're full comp. So when you think about that across the year, it goes back to Q2, we'll feel the pressure, and then it'll moderate across the back half. In terms of pricing overall, I think Laura touched on that is, we don't give out the specifics regarding [ pricing ] actions or AOS, but Q1 was not just price, it was broad-based across all levers across the board.

Your next question comes from the line of Peter Benedict of Baird.

I guess, Jeff, so the full year guide still embeds about a 70 basis point gap between your comp brand revenue growth and your total revenue growth. The first quarter it was a 40 basis point negative, I guess. So just help us understand the cadence and what's going to drive that as we think about over the balance of the year.

Yes. It really comes down to our store opening schedule. As we talked about on our last call, we did say that Q1 would have a benefit, the 70 basis point benefit we guide for the full year [ because all this retail activity that I discussed ], which includes opening 20 new stores and repositioning 19 stores, will all happen later in the year just based upon construction time lines. So we still anticipate a full year benefit of 70 basis points to revenues from all this retail activity, and it will accelerate as we go throughout the year.

Okay. Makes sense. And then my other question is just on the shrink accrual. I don't recall if you framed the size of that in the quarter or if that was just part of maybe one of the other buckets. But can you talk about the shrink accrual in the first quarter and if we should expect that to continue to be a good guy, I guess, over the balance of the next couple of quarters before we cycle the positive in the fourth quarter of last year?

Yes, happy to, Peter. As you may recall, year-end fiscal inventory results came in lower than our accrual in fiscal year '25. And for fiscal year '26, we trued up the accrual rates to reflect that outcome. As a result, we will see benefit in quarters 1 through 3 and then come up against the benefits you saw last year in Q4. In terms of how much it was in Q1, it was about half the benefit that we reported in supply chain benefits. And here's the thing, you never know what's going to happen until you take physical inventory and reconcile everything. We think we have the right accrual for this year. All of this is embedded in our guidance.

Your next question comes from the line of Cristina Fernandez of Telsey Advisory Group.

I wanted to ask about the accelerating trends in DTC. Can you talk perhaps what you're doing on the advertising? That's different in driving traffic to the website in an environment that has seemed more promotional to us, not from you, from the competition.

Well, I'd say that we're always looking at where we can make a tweak to our mix that drives incremental traffic and conversion. And we are using our brand heat to fuel social, organic and paid. And influencers are doing a great job for us. With our partners, we are continuing to invest in the high ROIC ad cost terms and programs. And we're doing a lot of testing with these groups to find what will matter in this new world and how we feed the LLMs. And I do have Sameer here with me, and I'm going to, before we run out of time, use your question to turn it to him to talk a little bit more about what we're doing with AI and how we're using that to accelerate really all of our strategies. And if you don't mind, I'm just -- I'm going to give him the chance to do that now. It's relevant to your question.

Yes. Appreciate it, Laura. So you've heard Laura talk about -- in her prepared remarks about how we're accelerating in AI and the impact it's having. You talked right now about digital marketing and how impactful the work that we're doing there. But I do want to take a minute and talk about more broadly the acceleration we're seeing, the impact we're seeing and how that's starting to come to light. In Q1, I can share a few examples of that. First, we've talked about Olive, our Williams-Sonoma culinary assistant, and Olive just continues to get smarter and smarter, handling more customer service questions, complex questions that [ relate to ] cooking. And now she's helping to sell. She's on our product pages. She's helping customers with questions, and she's driving customers into checkout at high multiple of other site averages. It's really just incredible results. Room Planner is another area. And so we're using generative AI in Room Planner to help customers visualize their actual room plan with photorealistic quality, giving them confidence and helping guide them through agentic tools, a very complex interior design experience. It's really impactful stuff that leverages our proprietary data, our proprietary expertise, and we're able to bring it together with AI in a way that nobody else can. Our AI image studio is producing lifestyle imagery at brand standard and scale like we've never seen before. Design recommendations is triangulating signals across everything that a customer is doing and not just providing them product recommendations, but helping them provide a complete look. Here's how you complete your interior design. Here's how it's all going to come together in a way that's personalized to a customer's style, to a customer's preference. We talk about supply chain. We're seeing massive efficiencies come through the AI, the supply chain, identifying opportunities in our order lifecycle and the supply chain lifecycle, taking cost out of transportation, taking cost out of the order delivery process. And productivity within our corporate associates, coding automation is accelerating quickly. We rolled out agentic training and workflow tools to every corporate function with champions embedded into every part of our company with people moving from being users of AI to really being company builders. It's just really exciting to see that we're just -- not just deploying AI tools, we're becoming an AI-fueled company.

And then as a second question, could you talk about Pottery Barn? I mean it was good to see the improvement this quarter, but what areas are you focused on as we look at the rest of the year to even accelerate growth in that brand?

Great. We continue to make improvements on our DTC channel and the way that the customer finds products and shops as Sameer just told you. And that is across the board, but in particular, we've been very focused in Pottery Barn and really having everyone study where we can make those improvements the fastest and also in the photography. So the photography, if you go on, you'll see just, I think, some of the best photography we've had, and it's going to get even better into the fall season. I've had the chance to look at the fall film with the new product, and I think it's going to really blow everybody's socks off. I mean it's great. It is appealing. It is fresh. And it's also what you would imagine when Pottery Barn says, when it's at its best, what it should look like. And multiple layers of different aesthetics that are all working well together. So creatively, I'm excited about how that feeds the brand. And the stores have looked great. We've done really well with the stores. And so focusing on the DTC channel is going to really help improve the performance because that has been where it's been lagging. And then from a product perspective, we are seeing -- and this is competitive. So I have to be careful not to tell too much, but we're seeing some new things work, and it was what we expected, and we're going to continue to develop more into those looks across the board, both in textiles and in furniture. Those are the big pieces. There's a lot of other things, too, that we're working on in the store experience. And all of it will be incremental, and we're very, very confident.

There are no further questions at this time. I would now like to pass the call back to Laura Alber, Chief Executive Officer, for closing remarks.

Okay. Well, thank you all for your patience on this call. I hope you could hear everything. And we appreciate your support. We're confident in our business, and we can't wait to talk to you next time.

This concludes today's call. Thank you for attending. You may now disconnect.