Williams-Sonoma, Inc. (WSM) Q2 2027 Earnings Report, Transcript and Summary

Welcome to the Williams-Sonoma, Inc. Second Quarter Fiscal 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 second 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 updated annual guidance for fiscal '26 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that 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 our Q2 results on a non-GAAP basis, which excludes the recognition of income from tariff refunds and other tariff-related adjustments. The amounts and detail of these adjustments, along with a reconciliation of our GAAP to non-GAAP results, appears in Exhibit 1 to the press release we issued earlier this morning. Our non-GAAP results 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 this 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 had a very strong second quarter. Our comp for Q2 came in at 6.2% with total revenue growth of 6.7%. This performance reflects strong execution by all of our brands across all of our channels and the hard work of our dedicated teams. I'd like to thank everyone at the company for their commitment to our continued success. We are pleased that our strategies are continuing to gain momentum. Every brand delivered strong results in Q2. We saw significant improvement in Pottery Barn, which had a 5.1% comp. Our Williams Sonoma brand had a 7.6% comp and West Elm continued its strong performance with a 6.4% comp. Our children's businesses delivered 3.5% and our powerful emerging brands contributed double-digit growth. And B2B grew 14.5% in Q2 with record-breaking demand in the quarter. As you can tell, these results were broad-based. We had strength in both DTC and retail and positive comps in both furniture and non-furniture with an even stronger furniture comp than in Q1. Newness and innovation delivered, supported by our product pipeline strategy. Collaborations were again a key contributor. And as a result, we gained market share in the quarter, and we continue to outperform the industry. Our strategies are driving our success, and they continue to differentiate us from the competition. Across all of our brands, we have prioritized incremental newness, innovative, higher-quality product lines and more inspiring photography, floor sets and storytelling, all of which drive full price selling. In terms of profitability, we delivered an operating margin of 17.3%. Earnings per share were $2.10. We delivered this profitability while continuing to manage through a volatile environment, which includes war, ever-changing tariffs, rising interest rates and broader macro uncertainty. We continue to compound results quarter after quarter despite the stagnant housing market and the other uncertain macroeconomic events of today. We believe our strong brands, our execution and our focus on customer service is why we are delivering and why we will continue to deliver in the balance of 2026 and over the long term. We have always been known for our high-touch customer service model. And we're excited that technology that we are using can take it to the next level. We are improving the customer journey. We are strengthening product discovery, and we are scaling personalization. We're also continuing to advance our design tools and improve the checkout experience to drive conversion. And we have recently launched our next AI-powered shopping assistant, Auto, across the Pottery Barn family. Auto begins to bring the agentic discovery experience we're building with Williams Sonoma's Olive to the furniture brands. Both Olive and Auto are helping our customers with product recommendations, and they are increasing consumer engagement with our content design tools and free design service offerings. AI is an accelerator to our strategy and our productivity. We're using it to drive sales, improve service and make our teams more effective. So many aspects of our tactile and taste-driven business cannot be replaced by AI, but our processes can certainly be enhanced by it, especially in supply chain and inventory management and therefore, customer service. On the supply chain front, we are pleased to see improvements in our metrics. Our transportation team has done a very good job at mitigating increasing supply chain costs. There is never a dull moment in the logistics world today, and the whole team has been committed to minimizing the cost of war and fuel pressures by finding offsets, all whilst maintaining our high level of service. Now before we turn to guidance, let's talk about tariff refunds. We're pleased to have received a refund of $200 million. I want to thank the Williams-Sonoma, Inc. team and our vendor community for all of their hard work navigating the tariff environment. The results that we have discussed so far exclude income of $174 million that we recognized in Q2 from tariff refunds. We are excited to be able to reimburse a total of $47 million to many of our vendors for the discounts they gave us to mitigate the tariff pressures and another $10 million to our associates to their 401(k)s for all their work during this difficult time. Now let's discuss guidance. We are proud to be raising our annual outlook on both the top and bottom lines. We now expect comparable brand revenue growth of 4% to 6.5% and an operating margin in the range of 17.8% to 18.2%. Our raised guidance reflects the success of our current initiatives and our confidence in our ability to execute and also what we know today about the environment. Now let's review our brands. Pottery Barn delivered another quarter of significant improvement with a 5.1% comp in Q2. We're encouraged by the continued acceleration in the brand. Customers are responding to our merchandising strategy and the brand saw strength across key categories, including furniture, lighting and textiles. The quarter reflected Pottery Barn's continued focus on newness, product innovation and improving the customer experience across channels. Customers responded to expanded assortments, new product introductions and compelling collaborations. At the channel level, DTC gained traction as we enhanced the digital shopping experience and made it easier for customers to discover and shop the assortment. Retail remains strong with customers continuing to engage with our stores, design services and the in-person shopping experience. Looking ahead, we're excited about Pottery Barn's fall collection and the pipeline of differentiated new products the brand will introduce throughout the back half of the year. We believe Pottery Barn's focus on compelling product, strong storytelling and disciplined execution positions the brand for growth. Now let's turn to our Pottery Barn Children's business, which delivered another strong quarter with a 3.5% comp in Q2. Growth was driven by product innovation, life stage leadership and differentiated collaborations. LoveShackFancy and Chris Loves Julia remain strong drivers and newer partnerships, including Pink Palm Puff and our exclusive Nuna and LoveShackFancy collection generated a very strong customer response. The brand also saw continued momentum in baby, supported by product innovation and expanded nursery assortments. Across categories, furniture built on its momentum from earlier in the year and textiles delivered continued strength. In dorm, the customer response has also been strong with complete room solutions, exclusive collaborations and enhanced shopping experience. And we are very pleased with our relaunch of Dormify. This new brand is extending our reach with differentiated functional style-driven solutions. Now let's review West Elm. West Elm delivered a positive 6.4% comp in quarter 2. The brand continued to make progress across product, brand heat and channel excellence and the results are compounding. New introductions in both furniture and non-furniture fueled growth with summer and fall newness each delivering double-digit comps. The strength of newness, combined with promotional discipline drove full price selling. And this strong performance was broad-based across both retail and direct-to-customer. Collaborations continue to be a big part of the West Elm strategy. In Q2, West Elm launched its second Pierce & Ward collection with an expanded assortment following the success of last year's debut. Strategic marketing targeted both repeat and new customers drove higher social engagement and earned strong press coverage. The Emma Chamberlain collection also continues to be one of the brand's most successful collaborations, exceeding expectations and attracting younger customers. Overall, we are thrilled with the momentum at West Elm. The brand is executing, and we feel good about the opportunity to build on this progress. Now let's review the Williams Sonoma brand. Williams Sonoma continued its strong performance, delivering a 7.6% comp in Q2. The brand saw strength throughout the assortment across categories and price points. Our summer assortment was strong with exciting exclusive collaborations, including AERIN, Sanderson and the newly launched collaboration with Hill House for both Williams Sonoma and Williams Sonoma Home. Beyond product, our team remains committed to bringing the Williams Sonoma brand to life through experiences that deepen customer engagement and extend our reach. We continue to engage customers through culinary events, book signings and our skill series classes, all of which create meaningful ways for customers to experience our brands and our products in person. Q2 also marked the launch of our 2026 No Kid Hungry campaign featuring celebrity designed spatulas from Cher, Shania Twain and leading food creators. The annual campaign increases awareness of Childhood Hunger in America. And together, our customers, vendors and associates have helped us raise almost $23 million in support of the cause from its inception of the program in 2010. The Williams Sonoma brand continues to demonstrate its strength and relevance with sustained momentum across the business through differentiated and exclusive products, compelling collaborations, engaging brand experience and continued investment in stores and marketing, we are creating more reasons for customers to shop with Williams Sonoma than ever before. Now I'd like to update you on B2B. B2B had another record-breaking quarter, growing 14.5% with strength in both contract and trade. The team had an active quarter, participating in many new marketing events and trade shows. We continue to expand into underserved but high-growth markets, including cruise ships, senior living and student housing. Notable projects that closed during the quarter included the Virgin Hotel in New York City, Signature Aviation's Miami Executive Airport, the Hardin House at the University of Texas at Austin, Napa's Carneros Inn, and a strong group of multifamily apartment and restaurant projects throughout the country. We're encouraged by the strength of our project pipeline across industry segments and remain confident in the momentum our B2B team is building as we head into the second half of the year. Now I'd like to update you on our emerging brands. Let's start with Rejuvenation. Rejuvenation delivered another outstanding quarter with a double-digit comp and strong profitability. We saw continued strength across project-led categories, including cabinet hardware, bath, lighting, utility and mirrors. Customer acquisition accelerated, and we had strong engagement from both consumer and trade customers, and we saw continued momentum across DTC and retail. High quality and product innovation continues to differentiate this brand. Cabinet hardware, bath and lighting all reached record levels in the quarter with customers responding to innovative finishes, expanded assortments and design forward collections across the home. Rejuvenation continues to strengthen its leadership in whole home renovation by combining premium craftsmanship, customizable solutions, timeless design and meaningful product innovation. Mark & Graham also delivered another strong quarter of double-digit growth with momentum across their key categories. Our new product offerings and corporate gifting strategies were strong. The brand built upon its reputation for beautiful personalized gifts for important occasions, and we saw strong growth in wedding and a successful launch of Mark & Graham Dorm. And last but not least, GreenRow. We continue to be excited by the growth in GreenRow, which also delivered double-digit growth in the quarter. And in May, the brand launched its first collaboration with the New York Botanical Garden, a beautiful collection of textiles, decor and furniture, which was inspired by the archives of this historic garden. Finally, I'd like to talk about our global business. In Q2, we delivered growth across our priority markets led by Canada, Mexico and the U.K. Performance was supported by continued DTC momentum, expansion of our brands in the U.K. and further growth in our design and trade businesses abroad. In summary, we delivered a very strong second quarter. We drove strong top line growth, including 6.2% comp and total revenue growth of 6.7% with every brand positive comping. We gained market share, and we continue to outperform the industry. We delivered operating margin ahead of expectations while managing through a volatile environment. And finally, we raised our annual outlook. This quarter reflected the power of our strategy and execution. We saw strength across brands, channels, furniture and non-furniture, B2B and emerging brands. We saw significant improvement in Pottery Barn, continued strength in West Elm and the Williams Sonoma brand and strong momentum across our children's business. Our business is broad and diverse. A strong national real estate market with more turnover would certainly be a tailwind for us. But I believe that we have now proven that our business can succeed regardless of the housing market. Our goal is to continue to execute and build on the current strength of our business quarter after quarter and year after year. We're also continuing to invest in the customer experience using technology and AI to support our strong teams. We feel good about the first half of the year, and we remain confident in our priorities and strategies for the remainder of 2026. And while the external environment can shift quickly, we are prepared to navigate volatility and keep delivering. And with that, I want to thank our teams again for their hard work and their commitment. And I also want to thank our vendors and our shareholders for their partnership and support. And finally, a huge thank you to all of our customers for shopping our brands. And 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. Q2 was a quarter of acceleration. Our comp accelerated to 6.2%. We grew earnings per share through the peak of the tariff impact, and we are raising our outlook for the year on both the top and the bottom lines. I'll cover 3 things this morning: first, the IEEPA tariff refunds; second, our Q2 results; and third, our raised guidance. I'll start with the IEEPA tariff refunds because they are the largest driver in our GAAP results and need the most explanation. First, what we received. As disclosed in our first quarter 10-Q, we filed for $198 million of IEEPA tariff refunds. In the second quarter, we received $200 million, including interest. As of this call, we have received substantially all of our refunds. Second, we ran through the income statement this quarter. We recognized $174 million into income. $168 million of that was recorded as a reduction in cost of goods sold and $6 million was booked as interest income. Against that, we're using $47 million to reimburse many of our vendor partners for discounts they gave us to mitigate the IEEPA tariffs. We also recorded $10 million in SG&A for a onetime contribution to all eligible employees' 401(k) accounts in recognition of their efforts navigating the IEEPA tariffs. So net-net, approximately $117 million of benefit to second quarter GAAP pretax results. Third, what is still to come? An unrecognized benefit of $29 million was recorded as a reduction of inventory on the balance sheet and will flow through gross margin in the third quarter as the related inventory is sold. Finally, the presentation in our financial statements. These refunds are onetime and material. So we have excluded them from our second quarter non-GAAP results, and we plan to do the same in the third quarter. That will give investors a clean, comparable view of the operating business across fiscal '25, '26 and '27. The full GAAP to non-GAAP reconciliation is in our press release. The second quarter operating results and guidance I discuss from here are all on a non-GAAP basis. Turning now to our second quarter results. Second quarter net revenues were $1.96 billion, up 6.7% year-over-year. Comparable brand revenue accelerated to 6.2% from 4.8% in the first quarter. The growth was broad-based. Furniture led the quarter and both furniture and non-furniture posted positive comps. All brands posted positive comps, including double-digit comps across all our emerging brands as well as business-to-business. By channel, e-commerce comped up 6.5% and retail up 5.5%. Here's the thing I would highlight. The home furnishings industry was essentially flat in the quarter. So effectively, all our growth was market share gain, and we took that share while increasing our penetration of full price selling. We are driving growth and market share gains without discounting. Moving down the income statement. Q2 gross margin was 45.5%, down approximately 160 basis points versus last year. Merchandise margins declined approximately 230 basis points as tariffs impacted our weighted average cost of goods sold. As we've guided, Q2 was the peak of the tariff impact on our gross margin. From here, we expect the pressure to moderate. Offsetting this tariff pressure were 70 basis points of supply chain efficiencies and occupancy leverage. Supply chain efficiencies, including a lower shrink accrual, delivered approximately 30 basis points of benefit despite the headwinds from higher fuel prices on transportation costs and occupancy leveraged approximately 40 basis points with our top line growth more than offsetting a 3% increase in occupancy dollars. Overall, our gross margin landed in line with our expectations because our accelerating growth and supply chain efficiencies absorbed roughly 1/3 of the hit from tariffs. Turning to SG&A. Q2 SG&A ran at 28.2% of revenues, approximately 100 basis points of leverage versus last year. Employment expense leveraged 120 basis points. Roughly half of that is due to our disciplined payroll management and the balance from incentive compensation. Advertising expense was 7.4% of revenues, 10 basis points higher year-over-year. Strong returns on our advertising spend throughout the quarter gave us confidence to continue investing, especially in more content-led channels like social, collaborations and influencer partnerships. General expense deleveraged approximately 10 basis points. On the bottom line, operating income was $338 million, up 3% year-over-year, with operating margin at 17.3%. Diluted earnings per share was $2.10, up 5% year-over-year. I want to underline what that means. We grew operating income and we grew earnings per share through the peak quarter of tariff pressure. On the balance sheet, merchandise inventories were $1.45 billion, up 1% to last year. Revenue was up 6.7% on inventory up 1%. We are chasing inventory in our best sellers across both core and newness. During the quarter, we invested $58 million in capital expenditures to support our long-term growth, and we paid $90 million in dividends, a 15% increase year-over-year. We did not repurchase shares in the quarter. Year-to-date, we have repurchased $288 million of stock or approximately 1.4% of shares outstanding and we have approximately $1.1 billion remaining under our authorizations. Summing up the quarter, we accelerated the top line. We took share in a flat industry, and we grew earnings through peak tariff pressure. I want to thank our team for their execution this quarter. They are the ones making these results happen, and they deserve the credit. Now to our outlook. Based on our results and the momentum in our business, we are raising our full year guidance on both the top and the bottom lines. On the top line, we now expect comparable brand revenue growth of 4% to 6.5% with total net revenue growth of 4.7% to 7.2%. On the bottom line, we now expect operating margin of 17.8% to 18.2%. Note that with both the top line and bottom line guidance, we have raised both ends of the range. Our guidance continues to assume no material changes in the macroeconomic environment, housing turnover or interest rates. We are still not building in a housing recovery. Now I'd like to update you on 3 topics related to guidance that I know are top of mind: tariffs, oil, and the IEEPA refunds. First, tariffs. Our guidance reflects all tariffs in place as of this call, the Section 232 tariffs, the existing Section 301 tariffs, the new Section 301 tariffs announced on July 23 and the latest round of tariffs between Canada and the U.S. As I said earlier, Q2 was the peak. We continue to expect the impact to moderate across the back half as we begin to comp the tariffs we paid last year. Second, oil. Higher oil prices continue to pressure transportation and supplier costs. Fuel prices near today's levels are embedded in our guidance, and we continue to work with our suppliers to offset and reduce costs. The direction of oil prices is difficult to predict. Our guidance reflects our best estimate of the impact. And third, IEEPA refunds. To be explicit, our guidance is non-GAAP and does not contemplate any benefit from the IEEPA refunds or the related interest. The raise you see is operational. Below operating income, we are guiding full year interest income of approximately $25 million and a full year effective tax rate of approximately 26%. On capital expenditures, our guidance is unchanged. We expect to spend approximately $275 million on capital expenditures for the year. About 95% of that investment goes to retail, e-commerce and supply chain. We continue to expect year-end store count to be essentially flat to last year, after which we anticipate 1% to 3% store count growth each year beginning in fiscal '27. Embedded in our fiscal '26 guidance continues to be approximately 70 basis points of noncomp growth from our retail investment. On returning cash, we will continue to pay our quarterly dividend of $0.76 per share, a 15% increase year-over-year. That marks our 17th consecutive year of increased dividend payouts. And we plan to continue to repurchase shares opportunistically against the $1.1 billion remaining under our authorizations. Looking beyond fiscal '26, we are reiterating our long-term outlook, mid- to high-single-digit revenue growth with operating margins in the mid- to high teens. This quarter, we operated at that algorithm while absorbing the peak tariff impact. Wrapping up, the 5 reasons we are confident we will continue to outperform our peers have not changed, but this quarter gave you fresh evidence for each of them. One, our ability to gain share in a fragmented industry. The industry was flat, and we comped 6.2%. Two, the strength of our in-house proprietary design. Full price penetration went up with all brands driving positive comps. Three, the advantage of our digital-first but not digital-only channel strategy. E-commerce was up 6.5%, retail up 5.5%. Four, the ongoing strength of our growth initiatives. Business-to-business, emerging brands and our retail investment are driving growth. And five, the resiliency of our fortress balance sheet. No debt, inventory up 1% on revenue up 6.7% and $1.1 billion of repurchase capacity in reserve. With that, I'll open the call for questions.

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

I think the theme that we heard from the prepared comments from both Laura and Jeff today is that newness and collaborations are really working to drive demand. So I wondered if you could talk a little bit about the pipeline of innovation that we could maybe see in the second half of this year. And I know you can't announce what collaborations might be coming out, but how does the cadence of those collaborations look versus the first half? And then finally, holiday, I know last year faced a little bit of headwind. How are you viewing the merchandising offering for holiday 2026 versus last year?

Great questions. Thanks, Kate. In terms of our brand strategies, we're very pleased to see all brands making progress and driving growth. And I really believe that's because we're approaching them similarly in terms of the initiatives to drive growth. So as you mentioned, one of the key ones is product. We're also going after the other things that I'll talk about in a second. But back to product, every category, every brand, we look at constantly and are looking at how do we improve vis-a-vis what we had last year and vis-a-vis the competition and bring innovative, relevant products to market. And we've really been focused on making sure that the quality is higher than our competition and that we are at better and competitive pricing to our competition. And that also is part of the strategy that we've been firing on all year and that has been working. But in terms of specifically innovation and newness, there's still a lot of opportunity, frankly. I mean we're happy with the numbers, but there's still a lot of categories that we think we can do a lot better in. We're very self-critical, and we can see the white space very clearly. So as much as we've done well, and we're thrilled to see the broad-based results across brands and particularly furniture coming around, there's still categories where I'm quite critical and the teams are working hard to improve and bring even better product to market. As we look at the back half, we get after some of those categories more than we did in the front half. And then also, we do have some very exciting collaborations coming that I can't talk about, as you said. But what we try to do is make sure by brand, we have exciting collaborations every season. We are quite aware of what we had last year. And also, it's interesting to watch some of the names that we've had for a long time continue to outperform. And those collaborators work hard with us to bring new and exciting things to the customers that they already attracted. And in many cases, with these collaborations, whether it's Emma Chamberlain or LoveShackFancy, we tend to sell out quickly. So it becomes an opportunity with the next season to bring in and have more stock again for those customers. But the other thing that's important is that the work that we're doing on the storytelling and the channel execution is helping not only -- it's not just the newness, it's the core. So the core product is being lifted by the newness strategy, but also by the channel strategies and the storytelling strategy. So we're seeing it not in just one category. We look at newness year-on-year. We look at non-comp newness that was not new this season, but new last season. We look at core, we age the core, and we call that our layer cake. And we're thrilled to see strength and improvements across the layer cake. And when you have newness like we do that's working, it's also exciting because in the home furnishings business, different than fashion business, you can really build on it. So you start to see a new trend. You run out of some of the key things that sold quickly. And then you can continue to chase the inventory, but also develop products in the aesthetic, the new aesthetic that's working. And I'm really excited to tell everybody that we're seeing that what we bet was going to work is working, and we're excited to build on it for years to come.

Your next question comes from the line of Peter Keith with Piper Sandler.

So the acceleration in Pottery Barn is quite impressive. And I know you've spoken to initiatives in the past around improving DTC and even some of the imaging. But maybe could you unpack what you saw in Q2 specifically that allowed for some of that healthy acceleration?

I'd love to. We are seeing improvement across both channels, but in particular, DTC, which was lagging a bit, as you mentioned. And we've been very focused on product discovery, inspiration and storytelling there. We've improved the photographic layer, both with AI and our own -- in real-life shots and have really -- if you've looked at the fall assortment in the fall photography, you can see a warmth to Pottery Barn that is very dreamy and very relevant and very much what you think about when you think of the best Pottery Barn in your mind's eye, what does it look like? And I think you start to see that in the film that we're showing the customers. The furniture category is -- has really improved, which is a big part of the business, and we're thrilled to see that. We have worked on multistep finishes on our woods and authentic materials and bringing back some more quirky dec acc and patterns. And I think when you go and you go to the stores right now and you go online, you see a brand that has incredible design and quality and the prices are better than the competition. It really, right now, in my opinion, you start to see what we've been talking about when we say going back to our heritage aesthetic. And the other thing that's exciting is that we mentioned the collaborations. We're launching them all the time. So we launched fall and then a couple of weeks later, we just launched our new Kravet. Please go look at it, especially if you look at it on social, you'll see the depth of color and fabrication across categories that the Kravet product offers. And then in terms of stores, the other thing that's exciting is our new stores are really performing. Our remodeled, our repositioned stores are really performing, and that's another part of the flywheel. So in total, between iconic product introductions and better storytelling and better DTC, I think that's why we're starting to see the better results. And as I said earlier, as much as we're pleased with it, there's a lot more work to do. When we look at the stack on a multiyear basis, we expect more. So that's what we're focused on. We are not doing round off saying we've hit it. We're saying we're on the right path, and we expect more.

Okay. That's great. Second follow-up question for Jeff within the guidance. The EBIT margin guidance that you've raised both at the bottom end and the top end. Could you give us the puts and takes around that increase? Is it simply a function of the sales increase and the corresponding leverage? Or are there other good guys and bad guys factored in there?

Yes. We raised our operating margin guidance to 17.8% to 18.2%, reflecting the strength and momentum in our business. And it's not just about the top line. Like you said, there's a lot of puts and takes underneath. There's 3 points I want to make on gross margin for everybody to consider for the back half. One is Q2 was the peak impact of tariffs on our margins. We expect the pressure to moderate over the back half as we begin to comp the tariffs we paid last year. Remember, they go comp mid-Q3 and are essentially comp in Q4. Second thing is higher oil prices. Fuel costs are impacting our overall gross margin. We absorbed those in both Q1 and in Q2, and our guidance embeds those higher fuel costs all through the back half. And finally, I want to remind everyone of the impact of shrink accrual benefit from last year. So be a good guy in Q3, but we come up against about 150 basis points in Q4 that we have to anniversary that will eat up some of the good guy from lapping the tariffs. But here's the thing. We're not including any benefit from the IEEPA tariff refunds in our guidance. This is purely an operational guide -- purely an operational raise on our guide.

[Operator Instructions] Your next question comes from the line of Chris Nardone with Bank of America.

I just want to follow up on the tariff refunds. How are you thinking about deploying the residual refunds outside of what you already communicated in terms of reimbursing some of the vendors and increasing the 401(k) contributions. Are there other revenue-driving initiatives that you're planning on doing to deploy the residual funds?

Thank you for the question. No, I want to say, first of all, we're so appreciative to have the money back and to be able to reward our employees with part of it. They have done such an amazing job. It was a very chaotic year moving products all over the world and trying to resource them and teams did a great job also in supply chain, offsetting some of these costs that the tariffs forced upon us. So we're thrilled about that. It means a lot to the people who have done the work. The second piece is our vendor community has always been our -- they've been our key partners, and they have been there for us. We have known them for years. We've built our business together. And we thought it was really the right thing to do. They gave us discounts. And when we got the money back, we gave them their money back. And that is a big deal that I think is going to really just continue to further solidify the special partnership we have with them versus our competitors. In terms of the rest, we're always investing in our business. We look at ROI. You know we have a very high ROIC, and we're always investing where we see returns. And it's not as if we have felt starved in doing so. We have been able to fund the initiatives that we see are important. And so there's not like some big step-up thing that we haven't done already. It more gives us more flexibility. We love cash. So why not have some more? And who knows, we may decide to do something. But right now, there has been no other decisions made to deploy any of it in any other way than we would normally, which is just looking at the best returning initiatives that we have to address.

Your next question comes from the line of Michael Lasser with UBS.

It sounds like based on Jeff's comments that we should be modeling gross margin degradation in the back half of the year. So a, is that true? And b, as you look to 2027, presumably, you're going to be expecting that it's going to be an algorithm year. Where do you think the model can generate expansion in the year ahead, especially as you're going to be lapping some of these complicated gyrations of tariffs and other factors this year? And is it really coming from more full price selling, the operating costs or other areas?

I'm going to start with just the future. We are not here to give guidance next year. You know that. But I will tell you that we're very confident because our growth strategies are working and so our operational strategies, and there's still a lot of runway. When we think about the world of home furnishings and the TAM that's out there, the reality is that no one owns much share. We are not that big. There's a lot more room. If we have 2% point more market share gains, it's $16 billion more, right? We're $8 billion today. So imagine if we continue to gain share, which is what we're doing now, how much there is for us to gain out there with our amazing brands. I don't think anybody else has a better portfolio of brands aesthetically across price points and strength and multichannel. And we have enough new brands also that are growing double digit, as we said earlier, to keep fueling the growth. So we'll come back to you on what that growth number looks like for next year, but let's just hold off on a specific range. On the bottom line, as I said, there's still a lot of room in supply chain. We're seeing opportunity also with AI implementation and service. And when I think about maybe the biggest opportunity of all, it's something that we haven't really put enough -- we haven't really deployed much against at all, which is our inventory accuracy. So as we think about the future, there's -- we told you we're going to improve our customer metrics. We've been at it for years. We told you we are going to reduce our promotional selling. We have. That's really been a huge driver of margin. But as I look to the future, I see even -- I see very big buckets, including inventory accuracy, more supply chain, more reg price selling and then, of course, leverage on the base with sales. Okay. So Jeff, back to the back half.

The back half and the question about modeling the back half. As you know, Michael, we don't guide the specific lines, and we guide operating margin guidance, which we've raised both ends with our higher guidance today. And I think something I would point out is there's a lot of puts and takes between gross margin. Certainly, the tariff impact will lessen over the back half of the year. We still have fuel prices, we had a shrink benefit. But we also know the levers to pull in SG&A to make results happen. Thing I would point out is if you take a look at the midpoint of our higher guide, you'll notice it's actually slightly above last year's operating margin for the back half.

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

Great quarter. Like you said, gained a lot of market share in the quarter, but there's been a lot of volatility across your peer group. So I was hoping you could speak to the cadence of your comp throughout the quarter. And then when we think about the acceleration in unit growth next year to 1% to 3%, can we think about the banners you're going to look to lean into? And can you also double-click on when we'd expect to see more store growth at Rejuvenation, which you guys seem very excited about?

So on cadence, I think everyone knows that we don't provide specific cadence by month. The fact is our comps accelerated from Q1 to Q2 on both a 1- and 2-year basis. And if you zoom out, we've been positive comp for 6 years -- I mean, sorry, 6 straight quarters, and it's been pretty steady performance. So it's less about the month-to-month cadence of the comp and more about the consistency of the comps over time on both a 1- and 2-year basis. Pivoting to the store count question, the store count overall will end this year essentially flat. But we will see, as we mentioned in our prepared remarks, 70 basis points of growth from new stores throughout the year. Reminded everyone that most of our leases terminate at the end of every fiscal year. So there will be a number of closures at the end of this year. And then the store count starting in fiscal year '27 and for each year after that, we anticipate growing our store count by 1% to 3% per year in units. And we see this across all our banners. We have a lot of opportunity. There's opportunity in our big brands like Pottery Barn. There's still markets that we are not in as well as West Elm. There's places that we can infill stores, major markets that would be natural for these stores, even the Sonoma brand. And some of the smaller brands like Kids and Teen, there's still places that we're underrepresented. And in terms of Rejuvenation, we will slowly and methodically build out the Rejuvenation brand. It's important to us to get the right location and to build it over time. We still believe that, that brand can grow into a $1 billion opportunity, and we believe retail is one piece of that puzzle to get them to $1 billion, but we'll do so very strategically and methodically.

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

My question was on the Sonoma banner. Highest comp this quarter among the brands and also the hardest comparison. You mentioned some of the tactical things you're doing with collaborations and book signings and things like that. But maybe we could zoom out and bigger picture here. Are you seeing shifts in demand drivers for that kind of cookware industry category? And as you think about your outperformance versus the industry, any context in terms of it being driven by new customer acquisition? Or is this higher wallet share from existing shoppers? Just looking for more color in terms of the industry and share gains for Sonoma banner.

Yes. Thanks, Jonathan, for noticing the great results in Sonoma. Team has been really delivering really across all categories, all kitchen divisions, positive food showing some nice improvement from Q1. And then the other thing that is very small but exciting is we're finally seeing some fantastic results from Williams Sonoma Home, meaningful results this quarter with both furniture improving, but also the Littles improving, which drives customer acquisition. So in terms of product and innovation, we have a lot more exciting launches to come. We have some key launches that we're building upon. And we've had these collaborations. Hill House was great. We have Oakville Grocery. We've done some really great stuff with Le Creuset recently. And -- we've also been very involved with the community and showing up in places where the tastemakers are. And one of the collaborations that I love that's not new, but has a new layer on it is Sanderson that you should look at. It's really beautiful. And so as you look across the product and innovation, you see a lot of wins. And then when you look at the customer and brand initiatives, whether it was BottleRock or what we did at Nantucket by Design or No Kid Hungry, we're very involved in seeing where our customer is and where the chefs are. And there's a lot of good vibes going with the Williams Sonoma brand that I think you can't put a price on in terms of how people see the brand and their excitement in coming into our stores.

Your next question comes from the line of Cristina Fernández with Telsey.

Congratulations on a good quarter. I wanted to go back to the collaborations, which seem a big driver of market share gains along with everything else. But is there a way you could size for us the impact of collaborations in the business? I guess that how that has changed over the past couple of years or year-over-year, whether it's the number of collaborations you are doing or the percentage of sales? Just trying to get a sense of their importance to the business and the brands.

Yes. I would say it's the icing on the cake. It's not going to make the comp in and of itself, but it certainly brings -- it's a noticing value. It brings new customers in when done right. They get to -- we get to attract their customer base because the collaborators have their own following that may not necessarily be our following. So that's good both short term and long term. And Emma Chamberlain, for example, has brought younger customers to the West Elm brand, which is fantastic. And not to mention, she had such great clever product that sold at multiple price points from furniture to dec acc that everyone could come in and get a piece of it. And so you see it hit on new customer acquisition. You see it be a traffic driver and social buzz. And it is sales. I mean -- but it's not -- as I talked about that layer cake and the way it breaks down, it's not the bulk of the comp. It is in some businesses, bigger. So in kids and teen, which have been at it the longest, they have some mega collaborations that do very well. Roller Rabbit and LoveShackFancy and Harry Potter, which just came back. These are big long-term developed collaborations. But the other brands are just getting going. And it's so fun also for our internal teams to be able to think about a different aesthetic for the brand or something they might not have designed. It's just -- it's exactly what it sounds like it is, which is it's fun, fun for us, and it's fun for the customer and it's resulting in good numbers.

Your next question comes from the line of Steven Zaccone with Citi.

Congrats on the strong results. Could you talk about the second half outlook a bit more? You clearly described the second quarter as an acceleration. It seems like the high end of the full year guide embeds an acceleration in the back half to get there. Maybe just talk through some of the puts and takes for the second half outlook from a sales perspective.

Yes. Sure, Steve. So we raised our top line guidance from comps of 2% to 6% to comps of 4% to 6% (sic) [ 6.5% ]. We have a strong product lineup, as Laura has been talking about, exciting collaborations to drive buzz and a lot of momentum in our growth initiatives. And as you know, we don't guide to specific quarters. I would just point to the framework as I usually do. The midpoint of our range reflects a continuation of our current 1- and 2-year trends. The high point of the range reflects some continued acceleration in those trends, driven by strong traction in our initiatives. And if we have a really strong holiday, we would wind up there. The low end of the guide contemplates just less traction on our initiatives and maybe a softer holiday. But overall, I think the punchline is our business is strong. It accelerated from Q1 to Q2. And as a result, we've raised our guide.

Your next question comes from the line of Max Rakhlenko with TD Cowen.

Congrats on all the success. So my question is on B2B. Given the very impressive growth in both contract and trade, are you internally moving up the target for when the channel can reach $2 billion in revenues? And if you're ready to share that publicly when you think that could occur? And then did I miss this, but did you provide growth in both contract as well as trade this quarter?

Nice try, Max. I think everyone knows, B2B has been one of our key initiatives. And I just want to recognize the B2B team for their outstanding contribution, particularly this quarter. They delivered overall double-digit growth of 14.5%. And in fact, it was our largest quarter -- largest volume quarter to date. To answer your question, contract grew 20% and trade grew 12%. So we're seeing both spectrums growing. I think everyone knows our focus is on the contract side of the business. It accounted for 36% of the B2B business, and we're just getting started. We continue to gain momentum across hotels, restaurants, multifamily, residential, education, sports and entertainment. We do continue to see a clear path to grow to $2 billion over the next several years. We haven't given a time line to that. We just continue to capture market share in the $80 billion fragmented B2B market.

Okay. Thank you. Before we end the call, I thought I'm going to ask a question to Sameer, who's in the room and because he's doing so many exciting things to support both the sales and the profits. What are you excited about in technology for Williams-Sonoma in the back half?

Yes. Thank you, Laura. Let's talk about AI because the acceleration in results that we saw this quarter, frankly, it's pretty incredible. And I think it's a testament and proof that our strategy is working. And we've talked about this before. But what we're doing is we're taking our advantages, category authority, decades of expertise, proprietary tech platforms and our secret sauce, which is rich first-party data that nobody else has. We're connecting it with AI, and we're starting to drive some really, really impactful results. I'll give you a few examples from the quarter. So Olive, our Williams Sonoma assistant is a great example. So we've expanded her capabilities. We brought her AI intelligence to customers while they're shopping. This is not just a chatbot. We're bringing this AI intelligence. We're connecting with the customers where they are in the shopping experience, and the results are starting to show. Since the beginning of the year, engagement with Olive is up 700%. Revenue is up 620% and customers who engage with Olive convert at 3x a higher rate. We took the same approach with the Pottery Barn brands with Auto, which we're very excited to say we launched this month. Auto will help you narrow down the right piece for your space. It will coordinate items that go together, sofa to rug, it works room by room. It knows rug sizing, outdoor materials the way that our associates do. And when the conversation calls for it, it will book you a design appointment or hand you straight to a Pottery Barn designer, exciting capabilities. And the -- it's early, but the early results are following the same patterns as Olive's. Almost -- or actually over 70% of engagements with Auto are able to be resolved without handing you over to a person. Similarly, e-commerce site personalization is accelerating. A visit where we personalize the experience now generates roughly 9x the revenue of the visit of an average visit. Last year, that was 2x. So you're seeing that acceleration again. And everything I've talked about so far is customer-facing. We're seeing similarly compelling results across supply chain, inventory, merchandising, corporate operations, really, really exciting stuff, and we'll keep building on all this in the back half of the year.

Thank you, Sameer. Okay. Well, we are now headed off to our favorite season, which is the holiday season, and we are looking forward to having a strong holiday and talking to you guys on the other side of it. Thank you so much for your continued support. It means the world to us, and please go shop our stores.

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