Ladies and gentlemen, please stand by. We are about to begin. Welcome to this Williams-Sonoma Incorporated Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the presentation. This call is being recorded. I would now like to turn the call over to Ms. Gabrielle Rabinovitch, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.
Thank you, Shannon. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. This call may contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and our explanation of why these non-GAAP financial measures are useful, are discussed in our release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans, and prospects of the company in 2015 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
Please refer to the company's current press releases and SEC filings, including the most recent 10-K and 10-Q, for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer, to discuss our third quarter fiscal 2015 results.
Thank you, Gabrielle. Good afternoon, and thank you all for joining us today. On the call with me are Julie Whalen, our Chief Financial Officer, and Pat Connolly, our Chief Strategy and Business Officer. We are pleased to be discussing our third quarter results today. These results speak to the power of our brands and our ability to execute our customer-focused strategy. We delivered total net revenue growth of 8% and EPS growth of 13%. Looking ahead, while the retail landscape and consumer demand has been more volatile, we believe our balanced portfolio of differentiated brands and strong multi-channel platform positions us for ongoing market share gains. We are confident we will deliver strong performance by focusing on what we do best: bringing innovative, functional, and beautiful products to market, delivering exceptional customer service, developing our brands, and managing our business to ensure we create sustainable value for our shareholders.
Over the past few years, we've articulated our vision to double the revenue of our business by growing domestically and through global expansion. We have a very deliberate approach to building brands, and we are always investing for the long term. Over the past several years, we have incubated new concepts and entered new markets, and these initiatives are now contributing to our results. Our portfolio approach gives us a competitive advantage. We are not limited to a single look, and our range of tasteful aesthetics allows us to address a broad market. In our home furnishings brands, from Williams Sonoma Home to Pottery Barn, West Elm, and our developing Rejuvenation brand, we present a carefully edited range of aesthetics that stand for quality, good taste, and product innovation that addresses the lifestyles and life stages of today's consumer.
We are pursuing distinct strategies to grow each of our brands. We are relentlessly focused on our customer and on improving our execution. Everything we do is through this lens. It determines our strategy. It guides our priorities. In-house, at our San Francisco and Brooklyn studios, we design innovative, inspiring, high-quality products at a great value that reflects the way our customers live and entertain. Our products are developed with design, quality, and consciousness as our focus. We deeply believe that supply chain integrity and transparency is good business. Our customers continue to want a more engaging shopping experience and a deeper and more authentic connection with the brands to which they are loyal.
Our customers also want a more integrated and frictionless shopping experience. The purchase path is easy and intuitive, whether they're shopping in-store, online via mobile, tablet, or desktop, or at home with one of our design associates by their side. As a result, all of the investments we have been making are with these customer objectives in mind. On our last call, we told you about a few major technology enhancements we had identified to improve customer service. In the third quarter, we made significant progress as it relates to these initiatives. We have started the rollout of our next-generation customer order visibility tool, which allows us to have improved visibility as product moves through our supply chain from the manufacturer to the regional distribution hubs. The rollout on this project will continue through 2016. We also recently launched improvements to our demand planning systems.
We believe that this is a critical component for us to improve our in-stock levels, decrease transportation costs. Improve customer service by improving local market in-stock positions. We're excited to update you on the results of this program in future quarters. In e-commerce, we have advanced our ability to serve targeted content to customers on our websites. We are more relevant, timely, and engaging as a result. When we personalize content, we see measurable and material conversion lifts. Our custom-built platform provides us unique advantages that we'll continue to leverage with new and more robust campaigns in the quarters to come. We believe we are in the early stages and will continue to build on this foundation to drive incremental results. In on-site search, we are deploying a big data solution that leverages machine learning to better tune our search results.
The initial results are very encouraging, and we look forward to updating you as we roll out the technology to all of our brands. We're also continuously finding ways to make our sites quicker, more functional, more easily navigated, and more intuitive, especially as it relates to mobile. Providing a richer and more integrated shopping experience is a long-term priority, and we believe technology is central to enabling an outstanding customer experience. Heading into the holidays, we believe we are well-positioned with exciting new product launches and gift collections. Across all of our brands, we believe we have a strong holiday lineup, and we have refined our peak season execution plans from our store operations, to our marketing cadence, to our supply chain. In store, we are focused on executing the fundamentals flawlessly and delivering outstanding customer service to make holiday shopping easy and efficient.
In supply chain, we have implemented new processes and organized high-volume areas in our distribution complex to efficiently fulfill peak e-commerce volumes. This will be our 11th year partnering with St. Jude Children's Research Hospital on the Thanks and Giving campaign. Over the past 10 years, we have raised more than $30 million to help St. Jude continue leading the way the world treats and defeats childhood cancer and other life-threatening diseases. All of our brands are involved in this important cause. In summary, we are ready for the holidays. I would now like to update you on the global expansion of our brands, another significant long-term growth driver. During the third quarter, our international operations grew 46.5% and were meaningful contributors to our success.
In our franchise operations, eight stores were opened in Mexico City in the third quarter by our partner, Liverpool, a world-class retail operator in Mexico. The initial response has been outstanding, and by year-end, we expect there'll be 14 stores open, and we are excited about the total potential in the region. We're also continuing to see exceptional results with our partner, M.H. Alshaya. Our company-owned retail and e-commerce operations are also delivering strong growth in Australia and in the United Kingdom. We're gaining experience in these markets, and we're doing a better job of sorting to local tastes and preferences. We're also beginning to leverage our cost structure. In addition, I'd like to update you on our first shop-in-shop partnership with John Lewis in London. In September, we opened a West Elm boutique in the John Lewis store on Oxford Street.
Sales have exceeded expectations and have also driven increased traffic and sales to our West Elm London store and website. We had more than nine million media and social impressions in our first week. We'll be expanding this relationship with John Lewis in 2016, and we believe that there is significant potential for this type of partnership model across Europe and other areas of the world. We are aggressively pursuing franchise and shop-in-shop opportunities around the world and expect to announce more of these partnerships in various formats in the future. Now, I'd like to discuss the Pottery Barn brands. In the third quarter, Pottery Barn comparable brand revenues increased 2% on top of 7% in 2014. We had strong growth where we offered newness, and we saw strength across our living room, upholstery, and home furnishings offerings. However, we did see some softness in other categories.
We recognize that the Pottery Barn brand could be more impacted by the current retail environment, we are relentless in our focus on the things in our control. It is clear to us that we win when we deliver product category dominance and innovation. Pottery Barn has a unique positioning in the marketplace as the premier specialty casual home furnishings retailer. We deliver quality products, exceptional value, and outstanding service. Like any successful brand, innovation and continuous improvement is key, there are three areas where we are hyper-focused. First, product innovation. We have identified specific product initiatives to drive innovation. Second, marketing. We also believe that there is a greater potential to market the authentic story of our products and why they are higher quality and a better value than our competition. Lastly, customer experience.
All of the work that we have been doing in our supply chain will benefit Pottery Barn. We know that if we deliver the best experience in home delivery, this will further set us apart from the competition. As we head into the holidays, we believe our compelling seasonal product lineup, in conjunction with a more strategic marketing calendar, will enable us to drive performance in the fourth quarter in Pottery Barn. We also have the opportunity to deliver better service because we have better in-stock positions. Now I'd like to discuss Pottery Barn Kids. In the third quarter, Pottery Barn Kids delivered 4.7% comparable brand revenue growth. Strength in our furniture business and an outstanding back-to-school season drove this performance, We executed a successful Halloween strategy that contributed to our results in the quarter.
Our focus on product innovation and newness, in addition to our competitive marketing calendar, helped fuel our Q3 business. In the quarter, we launched our holiday assortments, We believe we have a strong lineup for the holiday season. We're featuring dream rooms with whimsical beds, like our new Millennium Falcon Star Wars bed, complete with bedding and decor, We have delivered new and innovative gifts for babies, toddlers, and kids, as well as an expanded playroom offering. Our gifts represent the unique design and lasting quality for which Pottery Barn Kids stands, We will be the destination for kid-friendly holiday decorating from stockings to ornaments, tabletop trimmings, and decor. As we turn our focus to 2016, we're excited about the momentum building with our collaboration strategies.
In January, our exclusive nursery collaboration with celebrity stylist and fashion designer, Emily Current and Meritt Elliott, launches with a fresh look for the brand that speaks to millennial moms. Earlier this week, we're also thrilled to announce our collaboration with Monique Lhuillier, one of the fashion industry's preeminent designers. Launched in the first quarter, the collaboration includes furniture, decorative accessories, and textiles. It captures her sophisticated and glamorous design aesthetic and is inspired by her experience as a mother and a designer. Moving to Pottery Barn Teen. In the third quarter, comparable brand revenue for Pottery Barn Teen declined 0.9%. Strength in our furniture business and decorative accessory categories was offset by weakness in our textile business. Our high-quality furniture offering delivered solid results for the brand. Softer trends in bedding, which we discussed in our second quarter earnings call, persisted throughout the quarter.
The moment we saw this weakness, we moved quickly to strengthen our product pipeline and improve our marketing. As we move into the holiday season, we shift into gift-giving, and we are excited about our proprietary and innovative gifting assortment, including our fourth quarter product collaborations. We are launching online in December and in-store in January, an exclusive collection of decorative accessories and textiles with lifestyle vlogger Meg DeAngelis. Known as MayBaby on YouTube, Meg DeAngelis is one of YouTube's rising stars with close to 4 million YouTube subscribers and more than 500,000 followers on Twitter. Each piece in the collection embodies Meg's mission to empower and build confidence, which is brought to life through vibrant colors and playful prints. Our limited edition Peanuts-inspired collection celebrating Charles M.
Schulz, the 65th anniversary of the Peanuts comic strip, and the release of "The Peanuts Movie" on November 6th, is also a highlight of our seasonal offering. In addition, our standout gifts this year include media chairs that are compatible with gaming consoles and incorporate a Bluetooth audio system, as well as the perfect bedroom seating options for teens. In addition to product innovation and quality, we are evolving PBteen to reflect the way teens live and interact, recognizing them for who they are and supporting them and their uniqueness. We'll speak to teens in a smart and empowering way that is authentic and inspire them with fresh decorating ideas and aspirational environments. We look forward to sharing our progress with you in the coming quarters. Next, I'd like to discuss Williams-Sonoma.
For the third quarter, the Williams-Sonoma brand delivered 1.2% comparable brand revenue growth, with outperformance in cookware, electrics, cutlery, and our growing Williams Sonoma Home business. Proprietary and exclusive launches, as well as key vendor product introductions drove success in the quarter. Strong introductions in electrics more than offset weaker than expected performance in our early autumn food assortments. We also saw great results in our proprietary entertaining and tabletop collections, which continue to become a more significant percentage of our mix. In Q3, we continue to see strong results both online and in-store in Williams Sonoma Home. A key initiative was to broaden the assortment in our best performing looks, and it's working. We're also pleased with the ongoing rollout of Williams Sonoma Home at retail. Williams Sonoma Home offers chic and timeless designs of the highest quality.
It's carving out a unique position in the marketplace with luxurious materials, sleek silhouettes, and a fearless use of prints, pattern, and color. Our success is indicative that this brand has a lot of room for growth, both online, at retail, and with the trade community. In addition, on October 2nd, we celebrated Chuck Williams' 100th birthday. To celebrate this milestone, Williams-Sonoma unveiled a limited edition collection of Chuck's favorite products featuring his signature, as well as a new cookbook, "Cooking at Home," that honors his legacy. The third quarter also marks Williams-Sonoma's fourth fundraising campaign benefiting Share Our Strength's No Kid Hungry program. Williams-Sonoma raised more than $650,000 during the campaign. Fundraising efforts included customer donations, both in-store and online, store events, limited edition products such as the incredibly popular celebrity design spatulas, and corporate fundraising.
Heading into the holiday season, we believe we are well positioned to deliver in the fourth quarter. In addition, we have new marketing strategies we believe will be effective. We have a strong seasonal line of gifts. We are ready to execute. Today, I wanted to take a little more time talking about West Elm. The West Elm brand continues to deliver exceptional results. Comparable brand revenue increased by 15.7% on top of 17.4% last year, marking 23 consecutive quarters of double-digit comparable brand revenue growth. In the third quarter, we successfully opened 6 company-owned West Elm stores, 2 franchise stores were opened in Mexico. We opened the West Elm shop-in-shop store in London.
By the end of the year, West Elm will have opened 18 new company stores, 4 new franchise locations across the globe, bringing our total global company store count to 87, our total franchise count to 9. West Elm's success is firmly rooted in a deep understanding of what millennial and millennial-minded customers feel is important in their purchasing decisions. West Elm is connecting with this customer like no other home furnishings brand. At the same time, West Elm continues to appeal to a broad demographic and psychographic customer base. The brand is also uniquely positioned with customers who are attracted to West Elm's aesthetic, relationship-driven community initiatives, authentic commitment to conscious business practices. Human connections still matter in the digital age. At West Elm, we are successfully laying our world-class customer insights with our innovative high-touch shopkeeper program, balancing the science and art of retail.
Data science will continue to provide invaluable insights on customer behavior and buying trends. By empowering our store managers to run their stores like small businesses and forge deep community connections through our West Elm Local program, we're essentially running the brand as a collection of unique small retailers linked with the powerful data and technology of a global enterprise. We have successfully reengineered our allocation strategy with tools that allow our store managers to handpick and create assortments that are reflective of their community and the customers where their stores are located. We are 1 of the first major brands to host in-retail pop-up shops, starting with Etsy back in 2010. We continue to host a regular cadence of events, workshops, classes, meetups, community-driven activities in all of our stores.
As other retailers announce the introduction of local assortments into their stores, we are celebrating our network of more than 500 makers, building a pipeline for supporting our partners through expanded collaborations and manufacturing relationships. Our stores are running community-based Facebook pages and Instagram accounts. Part of the reason West Elm has had such a strong and authentic social media presence is that we've known all along that social media is not a data-driven platform. By definition, social is characteristic of living things, not machines. While our store social accounts allow for segmented and local marketing and communication, we remain focused on building our social communities as a platform for human interaction to connect our customers. In social, many of our customers choose to talk about West Elm because we reflect their values.
Building on our commitment to conscious business practices and impact sourcing, in the third quarter, we announced a new Clinton Global Initiative commitment to action and partnership with Fair Trade USA, taking Fair Trade from farm to factory. As an early adopter of the Fair Trade factory program, West Elm joined Fair Trade USA and 20 other partners to improve working conditions and enable sustainable livelihoods for factory workers. Specifically, West Elm committed to certify as Fair Trade more than 20% of the brand's assortment by 2017 and 40% by 2019. West Elm's investments include supporting certification of more than 10 new factories, contributing over $1 million in premiums that will improve the lives of over 10,000 workers during the course of the commitment.
These are big goals, we're confident we can reach them, our hope is that our leadership in the market will compel other retailers to improve working conditions and wages for artisans and factory workers around the world. Overall, we remain highly confident that the unique relationship that West Elm has with its customers will propel the brand's growth in our core business and into new areas of business around the world. I would now like to discuss the results of our two developing brands, Rejuvenation and Mark and Graham. Both of these brands are delivering strong performance and contributed to our third quarter results. Rejuvenation delivered a very strong and profitable third quarter. As Rejuvenation's transformation into a lifestyle brand rooted in craftsmanship and functional design continues, we have seen solid performance across both our emerging categories in addition to our core lighting and hardware businesses.
In the third quarter, we saw great response to the comprehensive introduction of our Northwest Modern assortment, an aesthetic inspired by modern design and the lushness of the Pacific Northwest. Throughout the balance of the year, we are layering new product launches on top of this successful foundation. Our marketing continues to be effective and profitable, we've seen new customer growth accelerate across our consumer, trade, and contract segments. We opened our sixth store in October at Ponce City Market in Atlanta, in addition to expanding our trade presence in the region, and see this location as the hub of our large and expanding base of sales in the Southeast. We believe that Rejuvenation has a very exciting road ahead, we look forward to keeping you updated on the progress in this brand.
Rejuvenation has the potential to be a significant multi-channel lifestyle brand and a meaningful contributor to future growth. Finally, I would like to discuss Mark and Graham. We're pleased with the development of Mark and Graham, which continues to see great sales momentum and profitability resulting from successful new product introductions and improved operations. In the third quarter, our personal accessories and home decor categories drove brand performance. We've also introduced new personalization techniques and expanded monogramming options across our assortments. In addition, our refined marketing approach has led to more productive email and catalog marketing. This holiday season, we're excited about our preppy chic assortment of thoughtful gifts. Our collection is inspired by rustic cabin style with plaid blankets and pillows, Fair Isle knits, faux fur accessories, and totes and travel gear.
In January, we'll kick off a year of celebrations with new tabletop and personal accessory introductions in fresh color palettes. I would now like to turn the call over to Julie to review our financial results in detail.
Thank you, Laura. Good afternoon, everyone. We are pleased with the results we are reporting today. During the quarter, we delivered revenue growth of 8% and earnings growth of 13%. Further demonstrating the power of our portfolio of high-performing brands and our multi-channel approach, as well as the continued success of our long-term growth initiatives. In the third quarter, net revenues exceeded our expectations, increasing 7.8% to $1,232 million, with comparable brand revenues increasing 4.5% on top of 8.7% last year. Revenue growth in the quarter once again far exceeded growth in the furniture and home furnishings industry. Net revenues in our e-commerce channel grew 7%, or 22.7% on a two-year basis, to $628 million and represented 51% of net revenues, with growth primarily resulting from the continued strength we are seeing in the West Elm brand.
Net revenues in our retail channel grew 8.6% to $604 million, which reflects the momentum we are seeing from our long-term growth initiatives, particularly in our international operations and West Elm. Excluding the growth of our international operations, our retail channel grew 4.3%. During the quarter, across both channels, our international operations saw revenue growth of 46.5%, reaching $80 million, and West Elm drove revenue growth of over 22.8%, including comparable brand revenue growth of 15.7%. Gross margin for the third quarter was 36.6% versus 37.7% last year, with pure merchandise margins only slightly down to last year and remaining essentially flat year-to-date.
The year-over-year gross margin decline reflects lower selling margins, particularly associated with higher franchise revenues, which are dilutive to gross margins but accretive to operating margins, as well as higher shipping and fulfillment-related costs, partially offset by occupancy costs, which leveraged 60 basis points to 12.9% of net revenues or $159 million. As mentioned on our last call, this quarter, we expected to incur higher shipping and fulfillment-related costs associated with out-of-market shipping and multiple deliveries on a single order to improve our customer service levels while we rebalanced our inventory between our regional distribution centers. SG&A improved 100 basis points in the third quarter to 27.6% versus 28.6% in 2014. The improvement in SG&A was primarily driven by advertising efficiencies, the leverage of employment, primarily related to higher franchise revenues, as well as the leverage of general expenses.
In the third quarter, total company operating margin was 9% versus 9.2% in 2014. By channel, the operating margin in the e-commerce channel was 21.9% versus 23.3% in 2014, primarily driven by higher shipping and fulfillment-related costs, partially offset by advertising efficiencies. In the retail channel, the operating margin was 8.1% versus 9% last year, primarily driven by lower selling margins from higher franchise revenues and higher shipping and fulfillment-related costs, partially offset by occupancy and employment leverage. Corporate unallocated expenses leveraged 100 basis points, primarily due to lower general expenses and the leverage of employment and occupancy costs. Our third quarter tax rate decreased from 37.9% to 36.1%, reflecting the favorable resolution of certain income tax matters within the quarter and our higher year-over-year earnings from international operations. These results drove a 13% increase in third-quarter earnings per share to $0.77.
Moving to the balance sheet, cash at the end of the quarter was $72 million. Given the seasonality of our business, our cash levels reached their lowest point at this time of the year as we fund our business ahead of the holiday selling season. In addition, year-to-date, we have returned nearly $300 million in cash to our shareholders, of which $103 million was in the third quarter, consisting of $71 million in stock repurchases and $32 million in dividends. Merchandise inventories increased 12.5% to $1.1 billion at the end of the third quarter, which includes a year-over-year increase of inventory on hand and available for sale of 10.7%. Entering our peak selling season, we believe our inventory levels position us well to execute our holiday plans. I would now like to discuss our fourth quarter and fiscal 2015 guidance.
We expect to deliver another year of strong results for our shareholders. For the fourth quarter, we expect to grow net revenues to a range of $1 billion to $1.63 billion, with comparable brand revenue growth in the range of 2%-5%. We expect our fourth quarter operating margin to be relatively in line with last year, and we are guiding our earnings per share to be in the range of $1.53-$1.62. For the full year, we have raised the low end of our revenue and earnings guidance. All other guidance remains the same. As such, we now expect to grow net revenues to a range of $4.965 billion-$5.020 billion. We now expect to grow diluted earnings per share to a range of $3.36-$3.45. The guidance we are providing today does not contemplate any material changes in the retail landscape or the broader economy.
In summary, as we head into this holiday selling season, we believe we are well-positioned to deliver for our customers and our shareholders. Our competitive advantages, including our portfolio of brands and our multi-channel business model, position us for success.
In addition, the continued momentum in our strategic growth initiatives gives us further confidence in our longer-term ability to more than double our revenues and deliver sustainable, profitable growth. I would now like to open the call for questions. Before that, I would like to wish all of you a very happy holiday.
Thank you. If you wish to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal time to reach our equipment. We would like to request that you ask one question. If you have additional follow-up questions, please return to the queue. Once again, that is a star one to ask a question, and we will pause for just a moment to allow everyone the opportunity to signal for questions. Our first question comes from Daniel Hofkin with William Blair.
Hi. Good afternoon. Just a couple questions regarding the environment, maybe to the degree that you're able to, parsing out the overall consumer spending pattern versus competitive factors, either brick and mortar or online, versus areas where you feel like maybe the execution could have been a little bit better. You talked about some areas within Pottery Barn. I'd be interested, as it relates to Pottery Barn and the Williams-Sonoma brands in particular, how you would divide up the performance, again, around just the overall consumer landscape, competition, and your own performance and opportunities to improve that. Then I just had one quick follow-up. Thanks.
Sure. Thanks, Daniel. It's Laura. I have to tell you, I'm optimistic about the holiday season. Yes, we've seen some retrenching this fall, retailers and even some really good retailers have given some mixed reports out there, but there's also a lot of good news out there, too. We know that our customers love their homes, the holiday season is a time to decorate, entertain, and also to be generous with gifts for your family and friends. I believe that consumers will shop at retailers who they trust and who have compelling product and in-store experiences. I think as you go to the stores, whether you go to a mall or a great street, we're going to be top of the list in terms of destination. It's really hard, I think, to resist going into our stores during the holiday season.
They are, in my opinion, holiday wonderlands. Our Williams-Sonoma stores are, I think, part of people's holiday shopping traditions with their amazing taste and aroma and wonderful gifting assortments this year. Pottery Barn has incredible decorating and beautiful trees on display in their stores right now, and inspiring tablescapes. For Pottery Barn Kids and Teen, I can't help but think that those great nostalgic gift assortments will give our customers a great alternative to electronics. West Elm has its distinctive and chic entertaining and gift-giving options at a great value. The other thing that makes us different is that, small thing, but across all of our brands, we have free gift wrap in store. We're ready to offer that high-touch, one-on-one service that people are looking for. I believe our online experience and service offer there is equally compelling.
We've spent so much time looking at our gift assortments and the gift experience online, and also personalizing that digital experience based on our consumers' preferences. In summary, we're always looking for things we can do better. We have been preparing all year for this holiday season, and we're excited and ready to serve our customers.
Okay, great. Thinking about looking out over the-- I know you haven't given guidance for next year, but hearing you guys talk about some of the additional investments on a number of fronts. If you think about next year, does it make sense to think about maybe a lesser rate of operating margin expansion relative to what maybe a typical year might be, at this early stage?
Yeah, Dan, this is Julie. Obviously, you're right. We have not given guidance for 2016. We're not prepared to do that today. What we are excited about is investing in the future and our future growth. I think today's results is a great demonstration of some of the things we've been investing in that have actually come to life, like our international growth.
Okay, thanks. Best of luck in the holiday quarter.
Thanks, Dan.
Next question comes from Peter Benedict with Robert Baird.
Hey, guys. Thanks for taking the question. I guess first, just Julie, how are you thinking about capital allocation these days? Specifically, I'm curious, your view of buybacks, and how opportunistic you're willing to get when the stock is down.
Our approach for capital allocation has not changed. We're going to continue to be balanced. First and foremost, invest in the business because that's clearly where we get the biggest return. Then with excess cash, share it between buybacks and dividends. Our approach to that has not changed regardless.
Okay. One quick follow-up, just on the fourth quarter tax rate, it looks like it's implied north of 40%. Year to date, you've been more like 36%, 37%. Is that international playing a bigger role there, or are there other factors that we should be thinking about in terms of taxes for the fourth quarter? Thank you.
Sure. Look, our quarterly tax rate, it's always subject to variation. In the prior quarters, including this one, we did have some favorable tax resolutions. We also had, which is fantastic, some higher than expected earnings from our international operations, which has the double benefit of lowering our taxes. Going forward, given the size of our Q4 business and our expected mix of earnings in Q4, we looked at the sensitivities and believe at this time our tax guidance is appropriate.
Of course, it's possible on the year we could end up with a lower tax rate, it's really still early in our largest quarter to make that call. The good news is we do expect and have seen that over time, our tax rate will decrease as our international business becomes larger and more profitable.
Terrific. Thanks so much.
Next question comes from David Magee with SunTrust.
Yeah. Hi, good afternoon.
Hi. Can you just talk a little bit more about the inventories and did they meet your plan at quarter end and what your expectation would be at year-end?
Yeah. Our inventories, as we said on the call, grew about 12.5%. We feel good about the in-stock position at 10.7%. Of course, there's always pockets of under and overstocks, but we believe this level of inventory on hand leaves us well-positioned for the holiday selling season. I think we have to remember that from a guidance perspective, we don't necessarily guide inventory levels, except to say that we're focused on maintaining in-stock inventory levels to ensure great customer service. We think we're well-positioned for the holiday season as we enter the new year. We feel good about the inventory.
Okay. Just a quick follow-up. In the overseas sales international business, are you seeing gross margins that are comparable to domestic, above or below? Just sort of curious there.
We haven't provided or disclosed that. If you're referencing what I was alluding to in the script, that's associated with our franchise revenues. Our franchise revenues, obviously the details of our deals are confidential and competitive, but what I can say is that franchise sales have a different revenue model than a regular customer sale. Depending on the deal structure, these transactions can be dilutive to gross margin, but accretive to operating margin. The higher the franchise revenues in any given quarter, they put more pressure on the gross margin, but I would not make that conclusion per se with company-owned stores, but we haven't disclosed that.
Okay, great. Thank you, Julie.
Yep.
Next question comes from Christopher Horvers with JPMorgan.
Thanks. Good evening. Following up on the first question, thinking about the wider comp guide for the fourth quarter, 2%-5%, historically more of like a 3%-5%, 4%-6% kind of a range. Have you seen change in the momentum in the business? What's behind the wider guide for the fourth quarter? Was there a change in trend that you're seeing at the end of the quarter that you're trying to put into the guidance? Basically any thoughts there.
Okay. Hi, Chris. I'll take this. Julie. I think what's important to remember is that this quarter is always so difficult to read. Our revenue guidance reflects our best estimate 2.5 weeks into the largest quarter that we have, and it reflects our possible range of outcomes across all of our brands. It's also important to remember that the Williams Sonoma brand becomes a larger piece of the mix this quarter than in other quarters, and historically has had lower comps than our pure home furnishings brand. The other thing is that we've had great revenue contribution from our international businesses, and as we head into our peak season, our international business is expected to take on less importance relative to our domestic business.
That, plus with the customer always seeming to shop later and later each time for the holiday, the business is hard to read 2.5 weeks into the quarter. We felt that it was prudent to hold our guidance on the year, this is how the comps played out.
Oh, I got it. All right. Holding the guidance for the year, the 2%-5% fell out of that equation based on what you did year-to-date.
Absolutely.
Okay. Was the gross margin performance relative to your own expectations for the quarter in line with where you thought it was going to be? Was there any hangover from the returns and damages side that you saw in the second quarter? Thanks.
Yeah. From the shipping and fulfillment related cost side, it is where we thought it would be. The part that's a little bit of a surprise is the higher franchise revenues, which is a great surprise to have, which as I mentioned is dilutive to the gross margin, but it's accretive to the op margin. Optically it looks quote unquote "worse" on the gross margin line, but everything else was within our expectations.
We'll go ahead and move to our next question from Matt Fassler with Goldman Sachs.
Thanks a lot, good afternoon. My first question relates to the impact of the international business in Q4. Julie, you alluded to the notion that it would be smaller in the fourth quarter than any other quarters. It was 3 percentage points in Q. The delta between total and comp store sales, which I presume is or total and comp round sales, which I presume is largely international, was over 3 percentage points in Q3. It was over 2 percentage points in Q2. It's very small, less than 1% in the guidance when you look at the difference between your guided total sales growth and the 2-5 comp round growth. Is it really going to be that small during the fourth quarter, or is there room for that number to move around a bit?
That's what our expectations are today. Also in Q3, the new West Elm stores contributed to that delta between the comp and the revenue growth.
Obviously we'd love to see that not be the case, given the size of Q4, it's likely that the outperformance on the international revenue side will not be as pronounced relative to the comp.
If you think about the impact of the international business getting bigger within the mix on the gross margin rate and on the SG&A dollars, can you give us a sense of how much of that dynamic, I understand that it's accretive to earnings, but how much that dynamic would have impacted margin rate within the various factors that moved it around in Q3?
Yeah. We haven't quantified the exact basis points of how much of the gross margin was associated with the higher franchise revenues. I, however, did list it first. We do put things in order so you can tell it's very material. Also, when you look at the SG&A, there has been occupancy and employment leverage and a leverage across the board. Specifically, even in the retail channel, you see it materially from the other side of the franchise equation, because basically you have the hit to gross margin, and you have essentially no SG&A. The profit drops to the op margin.
Presumably, if international revenues are smaller in Q4, that could be a reason for gross margin to be down less.
Presumably, yes.
Got it. Thank you so much.
Next question comes from Greg Melich with Evercore ISI.
Hi, thanks. I want to follow up on gross margin as well, understand the shipping cost a little bit more and sort of where we are in that transition. I know that it was a pressure last quarter. Was it greater this quarter? If you look at it, I imagine that's showing up in the e-commerce business with the continued decline in margin there. Just talking through just maybe, is that still a profit center for you, shipping, and where are we now in that curve as the market changes?
Okay. We are not disclosing the incremental shipping and fulfillment related costs except to say, similar to what I said to Matt, that it's one of the main drivers of our lower gross margins, the second thing I listed. We did indicate in our call last time that we'd expect this would continue into the back half of the year. It did continue as we expected. We expect that it will continue into Q4. It's important that we're incurring these out-of-market shipping and multiple deliveries on a single order to ensure high customer service levels, and especially throughout the holidays, we think it's important to continue to do that.
Longer term, once we have completed the regionalization of our distribution centers and we have implemented the necessary technology, which includes inventory tools that will allow us to better forecast our inventory flow and space capacity requirements by DC, brand, and channel, as well as future system enhancements that will give us better customer order visibility, we will see a reduction in our supply chain costs. Even more importantly on this point, we believe further developing our supply chain today to be more agile and adaptable will enhance our sustainable competitive advantage. It's going to put an even greater distance between us and our competition and enable us to provide the best customer service experience in our industry, and we are excited about the future.
You mentioned, I think, repositioning inventory as part of the cost of that. Is that unusually elevated right now because of what you are doing? Should we expect that to be an ongoing thing while we build this out?
Yeah. I think it's important to think about the higher levels of inventory required to be sufficiently in stock regionally. This is a competitive advantage, as longer term, it not only obviously minimizes being out of stock, but it lowers our delivery costs and improves our delivery times to the customer. Our primary objective has been to be in stock to serve the customer, and so we've been increasing inventory levels from a position that we thought was negatively impacting sales. We also want to get our merchandise, particularly our larger items, to our customers more quickly, and so we're accomplishing this through regional distribution. Over the immediate term, this increases our inventory levels. Longer term, once we have implemented the necessary demand planning tools that I mentioned, we'll be more effective at inventory allocation between the distribution centers, allowing our inventory levels to moderate over time.
All right. That's great. Thanks a lot. Good luck.
Thanks.
Next question comes from Neely Tamminga with Piper Jaffray.
Great. Thank you. This is Kayla Weser on for Neely today. My first question is, the amount of newness in the catalog for Core Williams Sonoma appears to have really stepped up as we begin getting ready for the holiday season here. Just wondering if you could speak to whether this strategy is helping you acquire new customers or re-engaging lapsed customers.
Thank you for the question. We have been really focused on our product pipeline. In the last call, I mentioned that we're going to have a lot of new introductions in Q3, and we did, and they're working. We have what I think is a very exciting holiday assortment, combination of great entertaining and also gift-giving ideas, across a wide range of categories where I think our customers have grown to love us for the nostalgic candies that we sell, but also always want to see the new things that we have. We've seen strength both in our proprietary product but also in our branded product. We've developed incredible relationships with a lot of these key brands and really are the place that people want to buy gifts for in the holidays.
We have equal optimism around branded as we do around proprietary products for this holiday season.
Thanks. A follow-up on Pottery Barn Teen. You mentioned some weakness in textiles in Q2 and Q3. I know that it shifts more towards gift-giving in Q4. Just wondering, though, as we think about your bedding and textiles business, do you feel like you've identified the issues and fixed them, or is there still some more room for improvement in holiday and even into Q1 and beyond?
I always think there's more room for improvement in everything. We're very self-critical. The assortments that we have coming, I think, are gorgeous and really differentiated. There's a lot of people watching what we do and getting into this business, and that competition makes us better and makes us differentiate. Also, there's not a lot of people that have our supply chain. We're vertical, so we can get better costs, and our scale allows us to deliver better value, cost, quality relationship. As we look at next year, we see some clear opportunities. It's highly competitive, so I don't want to go through the details of such, but we see some clear opportunities quarter to quarter for PBTeen.
Great. Thanks.
We have time for one last question from Cristina Fernandez, Telsey Advisory Group.
Well, hi, good evening. I wanted to ask about the customer satisfaction scores, particularly at Pottery Barn. I know those had deteriorated a little bit last quarter just given the inventory issues. Have you seen that improve, and also how much do you think that weighted on the Pottery Barn comp this quarter?
It's a great question. Thank you for that. Customer service is our primary objective. Our goal is to build a capability that delivers the most convenient and damage-free experience in the furniture industry. Over the past 3 years, our Pottery Barn Furniture sales have grown tremendously. We're going to deliver a ton of furniture into our customers' homes this year. We've always done this better than most, but we see opportunity to take our capability to the next level, much like we did in e-commerce 5 years ago. We've been investing, as we've talked about, to advance our delivery platform beyond the current state of the art. Every customer piece of feedback that we get, we not only fix with the customer, but we root cause it and learn from it and make sure that we don't have a bigger opportunity.
Customers are very demanding, and they are going to continue to expect more. That is why we're making this such a focus, because we believe we have the opportunity to totally disrupt the furniture business with our world-class delivery.
A follow-up. As far as promotions, you talked about the merchandise margin being slightly down versus last year, but fulfillment cost being higher, and I know a lot of it is related to the inventory issues, but how much did free shipping promotions were a factor this quarter?
It wasn't a factor at all. It's not an issue from more free ship or lower shipping income levels. It's 100% due to higher shipping costs from our decision to provide the best level of customer service by shipping out-of-market and having multiple deliveries on a single order.
Thank you, good luck this quarter.
Thank you.
Thank you.
That does conclude our question and answer session for today. I'll now turn the conference back over to Ms. Alber for any additional or closing remarks.
Thank you all for joining us today. We really appreciate your time and your continued support. We look forward to speaking with you again in March. Happy holidays, everyone.
Thank you. That does conclude our conference call for today. We thank you for your participation. You may now disconnect.