Please stand by. We're about to begin. Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2014 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, and I would now like to turn the call over to Gabrielle Rabinovitch, Vice President, Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.
Thank you, Matt. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today. Our earnings press release and this call may contain non-GAAP financial measures that exclude the impact of unusual business events. A reconciliation of any of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and our explanation of why these non-GAAP financial measures may be useful, are discussed in our release. In the fourth quarter of 2014, we recognized non-GAAP income associated with the Visa/Mastercard antitrust litigation settlement. This income was recognized as corporate unallocated income and did not impact the e-commerce and retail reportable segments. Additionally, as a reminder, when we discuss our fiscal year numbers, we recognize non-GAAP expense of $0.02 in the first quarter of fiscal 2013, which was also recognized in corporate unallocated.
The remainder of the discussion today will relate to results excluding these non-GAAP items. 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 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 Development Officer. I'm pleased to report today on our strong brand performance for the fourth quarter and the year and share our opportunities for the future. In 2014, we delivered EPS of $3.20 per share on top of $2.84 last year, exceeding guidance that we had raised twice during the year. We experienced growth in all of our brands and across our channels, highlighted by our highly profitable e-commerce business, which grew to over 50% of total revenue. We achieved these results while also continuing to invest in our strong brands and multi-channel platform. We implemented technology enhancements to improve customer service and advance the flexibility and capacity of our e-commerce platform.
We completed the insourcing of our foreign buying offices, which will not only reduce costs but improve quality and strengthen our supplier relationships. We continue to refine our domestic supply chain by insourcing more of our furniture delivery operations. We also made significant progress in automating aspects of our personalization capability. In the fourth quarter, we exceeded the high end of our expectations, despite challenges relating to the West Coast port disruption. The prolonged slowdown negatively impacted our results and will continue to impact us to an even greater degree in the beginning of this year. Mitigating this situation is a key priority, and we are intently focused on the strategies and tactics to ensure the availability of merchandise in our stores and on our websites. Julie will talk in more detail about the impact of the port disruption on our business later in the call.
Before I go through our holiday performance by brand, I want to tell you what our mindset was going into the holiday season. We knew it was going to be promotional, and it was, even more so than expected. We had strong performance because of our innovative exclusive products and our high-service multi-channel model. Serving our customer is the foundation of our operating strategy. In the fourth quarter, this meant expediting products that arrived late to ensure it reached our customers in time for the holidays. We also stepped up our retail execution this holiday season. Our in-store experiences further differentiated our brands. I'd like to give you some highlights of our brand performance during the quarter. The Williams Sonoma brand posted its sixth consecutive quarter of comparable brand revenue growth with a 2.8% comp. We are seeing momentum in the brand.
The strategies that we have outlined are working and allowing us to gain market share. Our cookware, food, and entertaining categories were strong performers. In the fourth quarter, we opened a new Costa Mesa store that represents a fresh experience at retail for the brand. The results of this store have exceeded our expectations, and we see opportunity to improve productivity at retail based on learnings from this model. Across our Pottery Barn brands, customer demand growth in the quarter was more than twice net revenue growth as delays in receipts created lost demand and increased back orders that were not filled during the quarter. Pottery Barn comparable brand net revenues increased 2.9%. Our nostalgic decorative accessories, textiles, and tabletop collections were met with a strong customer response. Throughout the quarter, we also saw significant demand for furniture across our upholstery and leather businesses.
Pottery Barn Kids Q4 comparable brand net revenues increased 2.7%. Our strategy to own seasonal decorating for children contributed to our performance and brought new customers to the brand. In PBteen, comparable brand net revenues grew 3%. Highlights in the PBteen business were our seasonal bedding assortments and textile assortments, including our girls' and guys' sleepover and gear collections. In West Elm, we once again delivered exceptional performance in the quarter, with 19.6% comparable brand net revenue growth on top of 18.3% last year. West Elm began to increase inventory levels during the summer and early fall to support new store openings, and as a result, while still impacted by the port disruption, net revenues were closer to demand. The brand drove positive results in both the core assortment as well as notable newness, with the biggest category growth coming from furniture, including line extensions and expanded aesthetics.
By flowing in a pre-spring assortment in late December, West Elm took advantage of continued high traffic during the holiday season, giving customers another reason to shop the brand. I will now turn the call over to Julie to review our financial results in detail and provide our guidance for 2015. I will then come back and outline the strategies we are implementing to achieve our objectives.
Thank you, Laura, good afternoon, everyone. Before I walk you through our results in more detail, I would like to begin with a few financial highlights for the year. For the full year, comparable brand revenues grew 7.1%, with 12.1% growth in our e-commerce business. This year, for the first time, e-commerce revenues surpassed 50% of our revenue, and Pottery Barn passed the $2 billion threshold for brand net revenues. Williams-Sonoma delivered 3.8% comparable brand revenue growth, the highest it has been since 2010 and more than double last year. West Elm delivered comparable brand revenue growth of 18.2%, the fifth year of double-digit increases. Operating margin reached a record 10.5%. The strength of our operating model gives us the ability to deliver this year-over-year operating margin expansion while continuing to invest in our infrastructure, develop new brands, and expand the reach of our brands globally.
Our EPS for the full year grew 12.7%, consistent with our longer-term outlook. We also returned approximately $350 million to stockholders while investing in the long-term growth of our business. Now I would like to comment further on our fourth quarter performance. For the fourth quarter, net revenues grew to $1,542,000,000, or a year-over-year increase of 5.2%, with comparable brand revenues increasing 5.1%. Net revenues in our e-commerce channel represented 49.9% of total company net revenues, a mix increase of 170 basis points over last year, and grew 9% to $770 million. Net revenues in our retail channel grew 1.6% to $772 million. Gross margin for the fourth quarter was 40.1% versus 40.6% last year, including occupancy costs of $155 million in the fourth quarter of 2014 versus $149 million in the fourth quarter of 2013. We are pleased with our gross margin performance in Q4.
We had a very carefully planned promotional strategy. We saw benefits from the insourcing of our foreign agents. The pressure we saw in gross margins was substantially related to increased fulfillment costs as a result of actions we took to mitigate port disruptions to fulfill our customer demand. SG&A decreased to 25.2% of revenues from 25.8% in the fourth quarter of 2013. This 60 basis point improvement was primarily related to employment leverage and greater advertising efficiency. Operating margin for the fourth quarter was 14.9%, a 10 basis point improvement from the fourth quarter of last year. By channel, the operating margin in the e-commerce channel in the fourth quarter of 2014 was 23.6% versus 24.7% in the fourth quarter of 2013.
The 110 basis point decline was primarily driven by lower selling margins, which were significantly impacted by increased fulfillment costs as a result of our commitment to get our customers' holiday gifts to them in time, especially in light of the later peak in holiday demand, as well as the incremental cost of our port mitigation actions. This was partially offset by greater advertising efficiencies. In the retail channel, the operating margin was 17% versus 17.2% in 2013. An improvement in gross margin, primarily due to higher selling margins, was offset by employment cost leverage related to our global initiatives and new store openings, particularly in the West Elm brand. Corporate and unallocated operating expenses represented 5.4% of net revenues versus 6% of net revenues in 2013. The 60 basis point improvement was primarily driven by employment leverage.
These results generated $230 million in operating income and 10.1% growth in diluted earnings per share to $1.52 in the fourth quarter. For the fiscal year, net revenues increased to $4,699,000,000, or 7.1%, with comparable brand revenues increasing 7.1%. By channel, net revenues in our e-commerce channel grew 12.1% to $2,371,000,000, reaching a major milestone of representing over half of our annual revenues for the first time. Net revenues in our retail channel grew 2.4% to $2,328,000,000. Gross margin for the year was 38.3% versus 38.8% last year. Gross margin was primarily driven by lower selling margins. Fiscal 2014 occupancy costs were $603 million versus $562 million in 2013. SG&A decreased 70 basis points to 27.8% of net revenues from 28.5% in 2013. The 70 basis point improvement resulted from advertising efficiencies, the leverage of employment expenses, and lower general expenses from strong financial and operational discipline throughout the year.
In FY 2014 [audio distortion ] million from $326 million in FY 2013, resulting in 40 basis points of leverage and contributed to a $311 million increase in revenue in FY 2014. Our business generated $495 million in operating income in 2014, increasing 9% from 2013. Operating margin was 10.5%, a 10 basis point increase from 2013. Strong operating results allowed us to invest in our growth initiatives while still generating year-over-year operating margin expansion. By channel, the operating margin in the e-commerce channel for 2014 was 23.6% versus 23.7% in 2013. The 10 basis point difference resulted primarily from lower selling margins, which were almost completely offset by advertising efficiencies, allowing us to deliver another year of record operating income in the e-commerce channel. In the retail channel, 2014 operating margin was 10.7% versus 11% in 2013.
Higher selling margins and lower general expenses were offset by employment cost deleverage related to our global initiatives and new store openings, particularly in the West Elm brand, as well as higher occupancy costs related to our company-owned global expansion. Corporate and unallocated operating expenses represented 6.7% of net revenues, flat to 2013, with occupancy deleverage associated with our ongoing IT investments offset by the leverage of employment and general expenses. Diluted earnings per share for fiscal 2014 were $3.20, a 12.7% increase over 2013. Our business continues to generate strong financial returns and excellent cash flows. Cash at the end of the year was $223 million. Cash provided by operating activities of $462 million allowed us to invest in the business with $205 million in capital expenditures and to return $350 million to stockholders in the form of share repurchases of $224 million and dividends of $126 million.
Merchandise inventories at the end of the year increased 9.2% to $888 million, of which a significant portion of this inventory was in transit and not available for sale. Our inventory available for sale in total only grew 3% year-over-year. These lower inventory levels were particularly evident across the PB portfolio of brands. In the PB brand, our largest brand, inventory on hand and available for sale was 9% lower than last year, and their year-over-year inventory levels available for sale have continued to deteriorate into 2015 from the ongoing impact of the West Coast port disruption. We began implementing strategies earlier last summer to prioritize receipts and divert shipments to other ports on both the East and West Coasts. Given the size of our business and the type of merchandise we sell, there are limited options for mitigation.
With our import levels amounting to approximately 30,000 containers each year, and with about 50% of these typically moving through the West Coast ports alone, we are one of the 25 largest container volume importers in the United States. Every day, we are continuing to assess all options to get merchandise to our customers more quickly. Our number 1 priority has always been to serve our customer. To this end, we ship merchandise across the country to our West Coast DC and incurred substantial incremental shipping expense to ensure that our customers' orders would arrive in time. Through the fourth quarter, we were able to offset missed sales and incremental costs with other operating efficiencies. However, the situation at the West Coast ports deteriorated in February, causing a material disruption in 2015 that is ongoing.
While an agreement has been reached, the slowdown has created a significant backlog, and the reality is we are still waiting for many containers to be unloaded at the port. As such, we have provided an estimate reflecting our best assessment of the short-term impact that the port disruption will have on our business, which includes the earnings impact of delayed receipts on backorder fill and lost customer demand, as well as increased fulfillment expenses. We are estimating the impact of the West Coast port slowdown to be approximately $30 million-$40 million in lost sales and $0.10-$0.12 in reduced EPS in fiscal 2015, which predominantly affects the first quarter. The underlying health of our brands and channels remains strong, and our long-term growth initiatives remain on track to allow us to more than double our business.
Our guidance on the year, excluding this short-term impact from the West Coast port disruption, reflects revenue and earnings guidance that is in line with our three-year outlook of mid to high single-digit revenue growth and low double-digit to mid-teens EPS growth. With revenues growing 8%, including comparable brand revenue growth of 5%-7%, and earnings growing 12% at the high end of the range. With this in consideration, I would now like to discuss our outlook for 2015, which includes the impact of the West Coast port disruption. For the year, we expect to grow net revenues to a range of $4.95 billion-$5.02 billion, with comparable brand revenue growth in the range of 4%-6%. Operating margin is expected to be in the range of 10.2%-10.5%. Diluted earnings per share are expected to be in the range of $3.35-$3.45 per share.
For the first quarter of 2015, we expect to grow net revenues to a range of $990 million to $1.01 billion , with comparable brand revenue growth of 2%-4%. We expect operating margin to be below last year's operating margin rate, and diluted earnings per share will be in the range of $0.40-$0.45 per share. In fiscal year 2015, there are also no changes to our capital allocation policy. We remain committed to our longer-term outlook of maintaining a balanced capital allocation strategy. We plan to utilize our operating cash flow to invest in the business, to support our ongoing growth initiatives, and to return cash to shareholders. In fiscal year 2015, consistent with our three-year outlook, we are planning capital spending in a range of $200 million-$220 million.
In addition to our required annual investments in our retail fleet and IT infrastructure, we will be investing in those areas where we see sustainable long-term returns for our shareholders. First, we'll be making investments in our e-commerce platform, which continues to demonstrate double-digit revenue growth year-over-year at an operating margin of 24%. Second, we'll be making investments in our supply chain initiatives that continue to materially reduce costs throughout our network, as well as provide value and service to our customers. Third, we'll be making investments in new stores, particularly in the West Elm brand, which has delivered profitable three-year revenue growth of 99% and comp growth of 53%. Finally, we will be making investments in our longer-term growth initiatives, including our newer businesses and global expansion, supporting our long-term growth targets to more than double the business.
We also remain committed to returning cash to our shareholders. In 2013, we announced a $750 million share repurchase authorization. We have $287 million remaining on the program and available for share repurchases during 2015. We also announced in 2013 a commitment to pay dividends targeted at 35%-40% of net income and in line with the S&P 500 dividend yield. Today, in support of this commitment, we announced a 6% increase in our quarterly dividend to $0.35 per share. This is the ninth dividend increase we have had since its inception in 2006 and represents a dividend increase of more than 100% over the last three years alone. These dividends and share repurchases combined will have us returning more than $1 billion to our shareholders over a three-year period.
In summary, we are confident in our ability to achieve these results. We have a team motivated to deliver on our long-term objectives. Looking ahead, we see many opportunities for continued growth. We believe we are well-positioned to deliver on all of our long-term strategic growth initiatives. I would now like to turn the call back to Laura to discuss our strategies in place to support these long-term initiatives.
Thank you, Julie. Before we move to Q&A, I'd like to discuss our key initiatives and objectives. Back in early October, I was in Sonoma, California, and we were opening, or should I say, reopening a Williams Sonoma store in the original location of Chuck Williams' first store, opened in 1956. We went to great lengths to replicate the original store, including much of the merchandise assortment. The look and feel and the customer experience was surprisingly relevant. The next morning, we cooked breakfast and invited the entire town of Sonoma to join us in the plaza. About 2,000 people showed up to show their appreciation of us returning to our roots, and of course, to eat the pancakes. This experience made me realize once again how far this company has come in its 58-year life and in the 20 years I've been with it.
How fortunate we've been to attract such outstanding associates and supplier partners that have accepted the responsibility of stewardship of a great brand while constantly seeking ways to be relevant to the needs and desires of today's consumer. The importance and rewards of staying true to your values. Of course, today, we're a strong portfolio of brands. We have 8 brands, 7 of which we have developed ourselves. In each brand, we have passionate stewards that are constantly responding to the customers' needs and desires with products and services that meet those needs. Our mission is to enhance our customers' lives at home. Our associates always put the customer first. They also deliver daily results while staying focused on the long-term goal of being the leading home furnishings and housewares retailer in the world.
We believe that the growth opportunities we see ahead of us are greater than any in our history. You may be asking, what makes us think that? Why do we believe that we will continue to produce growth in revenue and earnings while delivering greater value to our customers in an increasingly competitive and rapidly changing retail environment? The results that we have delivered over the past years are but one factor in giving us this confidence. We have big plans for the future. We are equally committed to delivering exceptional results along the way. Our brand strategies are the foundation for growth. In each of our brands, we believe we can take market share. Our portfolio of brands and our strength in brand development is a differentiator. I'd now like to provide more detail about our 2015 brand-specific initiatives.
In the Williams Sonoma brand, our strategies for the brand are further setting the brand apart as the destination for cooking and entertaining. While we still have work to do, our team has made great progress against their strategic initiatives, and the brand performance was the best in the last 4 years, with growth beating industry averages. We've refreshed the brand image and made significant progress attracting new customer demographics to the brand. We have a renewed presence in the food community with chefs and food and cooking enthusiasts. We've also delivered exclusive, inspiring products with increased penetration of Williams Sonoma-branded products. Our team has turned this brand into a vertical design center, allowing us to lead again in exclusive design.
As an example of our product strategy, this spring we are offering an Asian-inspired assortment with a new tabletop collection, sauces and spices to quickly bring meals to life, and innovative tools to make cooking easier. We are expanding our Open Kitchen assortment of cookware, cook tools, and dinnerware, which has been an important source of new customers to the brand. We're excited to celebrate Easter and Passover with our customers with new and exclusive entertaining and decor assortments. We'll also be building on the success of Williams-Sonoma Home in 2015 by giving our customers a broader offering. Williams-Sonoma Home represents a sizable opportunity. We will extend its reach throughout the year and beyond. I would now like to update you on our strategies for the Pottery Barn brands.
Together, the Pottery Barn brands approach $3 billion in revenue, having grown at approximately a 16% compounded aggregate growth rate over the past 20 years. We believe we are just getting going. We continue to see white space, areas that we believe are opportunities in each of the Pottery Barn brands. Product development has always made us a leader in design and sets us apart. We are expanding categories, expanding aesthetics. We are further regionalizing assortments. We are introducing exciting new collaborations. We are offering additional pricing tiers. We are increasing our speed to market. We are building on our personalization capabilities. Our biggest opportunity over the next several years may be our one home strategy, which pulls our customer across every life stage, lifestyle, and life size. We've placed all three brands under a leader who has worked on all three brands for more than 20 years.
The majority of our PBKids customers are also PB customers. The majority of our new PBteen customers were once PBKids customers. We've given each brand greater visibility on all three websites. This has increased cross-brand referral traffic by 25%. Our personalized clienteling and in-home interior design services are becoming more integrated and are a competitive advantage in the market. In the short term, our biggest opportunity across all three Pottery Barn brands is to improve our in-stock positions. We know that being in stock is critical. Out-of-stock situations not only create back orders, but increase lost demand and increase costs. A Pottery Barn Kids customer who wants to buy a crib may choose not to if the mattress and bedding for that crib are not available.
This is why we are so intently focused on resolving the receipt of our delayed shipments and increasing our in-stock positions for the remainder of the year. In the Pottery Barn brand specifically, we believe we have a strong product lineup for 2015. We have extensive new outdoor collections and new collaborations that we'll be introducing through the balance of the year. We're also continuing to build on our success with free in-home design services. In 2015, we'll expand the reach of our brand through social media. We have vast amounts of content that we will syndicate to generate earned media and attract new customers to the brands. We've already introduced a LIKEtoKNOW.it shoppable Instagram feature. We are also working more with our other user-generated content. We're testing ways to optimize our use of Pinterest.
In Pottery Barn Kids, we had strong new customer growth in 2014. For a brand serving the children's market, the ability to attract new customers profitably is especially important. We attracted almost 1 million new customers to the brand. We are planning on building on this momentum. We're excited about our spring collections, featuring a preppy and fresh color palette and vibrant patterns. Our looks combine core classics with designer-inspired accents. We continue to improve our quality while staying competitive on price. In 2015, we also expect to expand on our free interior design services across our Kids retail and in our direct business. In PBteen, we'll be introducing newness throughout the year in our trending categories at new and compelling opening price points. The brand has been especially successful in developing collaborations with key influencers in the teen market.
Examples include Burton Snowboards, Emily and Meritt, and most recently, Junk Gypsy. PBteen recently announced an exclusive collaboration with Kelly Slater, the 11-time world surfing champion. Inspired by Slater's genuine passion and commitment to global conservation, this home furnishings collection, available in April, is made with sustainable materials and recycled fabrics. I would like to talk about West Elm. Over the past 5 years, the West Elm brand has grown at a compounded annual growth rate of 26%. The customer response to our aesthetic and category introductions has been strong. This growth has been driven by exceptional performance in retail and e-commerce. In 2014, we opened 11 stores, all of which exceeded our pro forma expectations for revenue and profitability. We plan to open 19 stores in 2015. We look forward to updating you on these exciting developments.
Online, West Elm is also delivering strong results with new marketing initiatives, testing new models for conversion and acquisition. Remaining highly focused on the mobile customer experience. West Elm remains focused on its differentiated product strategy, including filling out underserved categories and creating diverse assortments that reflect the local customer, as well as layering on West Elm LOCAL collections featuring artists and makers from the store areas. West Elm LOCAL will roll out to all stores this year, supporting more than 500 artists and designers. West Elm stores continue to embrace their role as community hubs, creating environments and relationships that foster creativity and empower customers to express their personal style. The brand continues to actively seek out new opportunities for growth and brand extensions, an example of which is West Elm Contract. West Elm announced a new contract division in Q3.
Q4, the brand announced a strategic partnership with Inscape, a leader in creating workspace solutions that make life at work better. Last month, the two companies gave dealers an exclusive preview of West Elm Workspace, a collection of more than 50 office products designed by West Elm's in-house team and available exclusively with Inscape. West Elm Workspace will offer office systems, private office products, lounge seating, and accessories. Will be featured in June at NeoCon, the commercial interior industry's largest design exposition. Like Pottery Barn's White Space strategy, West Elm Workspace will fill an identified need in the market. Workspace, together with other initiatives currently under development, give us great confidence in the future growth of West Elm. Today, we have 2 standalone brands that we would categorize as emerging brands, Rejuvenation and Mark and Graham. Both have excellent growth prospects. Are both profitable today.
We leverage Williams-Sonoma Inc.'s core competencies to drive business and practices in each of these brands. Together, Rejuvenation and Mark and Graham grew 30% last year. Both brands are examples of how we can leverage our extensive data analytics capabilities to identify prospective customers and build profitable brands quickly. In Rejuvenation, our product strategy is yielding great results. We are bringing the elements of our beautiful and utilitarian lighting and hardware to other rooms of the home. We're also introducing new aesthetics to grow our business within existing categories. This year, we are focused on aggressive customer acquisition, leveraging our database and prospecting models with digital marketing and email, as well as using social media. We'll also look for additional retail opportunities where we have strong direct sales to drive brand awareness and results.
Mark and Graham completed its second full year as a brand and offers an edited and timeless assortment of high-quality, thoughtful, personalized gift items. The collections are innovative, creative, and nostalgic. Personal accessories, key item apparel, as well as bar and entertaining categories, continue to drive results. Spring is off to a strong start with a new preppy-inspired assortment focused on wellness and travel. Our marketing messages will celebrate milestones and holidays with an emphasis on engagement through social media as well as strategic catalog mailings. Finally, I would like to discuss expanding the reach of our brands around the world. Our global expansion strategy consists of franchise and company-owned businesses. We'll employ these alternatives based on market potential, operational ease, and franchise partner strength in each country. We have great franchise partners, and currently they operate 28 stores in the Middle East and two stores in the Philippines.
We have signed a definitive franchise agreement with Liverpool, a 100-year-old department store company in Mexico. We believe that Mexico is a great market for our brands. We are also pursuing other franchise partners in a number of key regions. We are finding significant interest from high-quality partners. Our first major entry with company-owned stores has been in Australia. We've opened 13 stores to date. We plan to open six more this year. We are very pleased with the overall presentation of our brands, our in-store experiences, our teams, and our real estate. We're also focused on profitability. As we gain scale, we should see leverage against the operations. Our strategy with company-owned stores is to complement them with a strong e-commerce presence. Our goal is that we would have the same percentage of e-commerce in these markets as we do in the United States.
In closing, I would like to thank our associates for delivering a year in which we produced great results while continuing to invest in our future. As we look ahead, we see so many opportunities that our portfolio of brands and our unique multi-channel platform provide. We are committed to execution. With that, I would like to thank all of you for your support and open the call for questions.
Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're on a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is *1 for questions. Just a note, we'd like to request that you ask one question at a time. If you have additional follow-up questions, please return to the queue. At this time, we will take a question from Matthew Fassler with Goldman Sachs.
Thanks so much, and good afternoon. The question I want to focus on today is the impact that the port strike had on the fourth quarter. You sized the impact fairly precisely for the first half of the year.
You alluded directionally to some pressure on revenues and also to some degree on gross margin as you worked to expedite shipments that were otherwise delayed. Can you take a shot at the different line items of impact that you saw in Q4?
Sure, Matt, this is Julie. I'll take that. First of all, I want to make sure we're all grounded in the fact that this West Coast port disruption has impacted all retailers, all with varying impacts depending on the size of their container volume, the types of goods they sell, and their levels of in-stock and available-for-sale inventory, in particular, just prior to the disruption and during the disruption. Managing the flow of goods has been and still is our number one operational priority. Early on, we began redirecting shipments and prioritizing receipts and expediting, et cetera, to serve our customers. This is more expensive, unfortunately, in the short term, but it's the right thing to do for our customers. No one expected, including us, that the West Coast port disruption would last as long as it did.
As we started moving through the fourth quarter, those brands with the lowest inventory on-hand growth, primarily across the portfolio of PB brands, were the most impacted, as evidenced in Q4 by demand comps that Laura alluded to across the Pottery Barn brands that were more than double the net comps. Pottery Barn brands, our largest brand, of course, ended the year down 9% year-over-year on inventory on hand, and unfortunately, has since deteriorated to currently down approximately 14.5% year-over-year inventory on hand.
However, to your question of the impact on the fourth quarter, given the size of the fourth quarter as compared to, say, the first quarter or first half of 2015, and the mix of sales, including a higher mix of Williams-Sonoma sales, which gets the majority of their inventory from domestic vendors and were less impacted, the Q4 impact of the West Coast port slowdown was much less severe on the quarter. Also, given that Q4 includes the holiday time period with, as we all know, a lot of moving parts, it is much harder to disentangle with 100% accuracy how much was a direct result of the West Coast port slowdown. With that said, here is what we do know. One, across the Pottery Barn brands, we saw the lowest levels of inventory on-hand growth.
In the Pottery Barn brand, as I just mentioned, we had the negative 9% year-over-year growth of inventory on hand, which has since deteriorated. Second, across the Pottery Barn brands, the underlying health of the business is strong, with demand comps more than double the net comps. Third, we incurred incremental shipping costs to get our product, wherever it was sitting, to our customers to try to meet the strong customer demand. We were, however, able to offset this with strong sales in Williams-Sonoma and West Elm that were less impacted by the port during Q4 and with various operational efficiencies and still meet or beat our guidance. On the year, we drove comp brand revenue growth of 7.1%, which is well above the industry average. We drove operating margin expansion while investing in our future.
We drove 12.7% growth in EPS to $3.20, all in line with our longer-term outlook.
Just by way, a quick follow-up. I promise on the same topic. Acknowledging that you guys did everything you said you would do despite this, do you feel like the numbers would have been measurably better without the port strike?
They would have been better, for sure. Yeah.
Okay. Thanks so much.
At this time, we'll move to Peter Benedict with Robert W. Baird & Co.
Hey, guys. Thanks. I guess my question is on the store growth or the store outlooks that you're giving in West Elm and for Williams-Sonoma. On West Elm, the acceleration to 19 openings, glad to see that. Is that an opportunistic increase or something that we think should continue as we look beyond this year? Could it accelerate even further? Similarly on Williams-Sonoma, the closures, a net five closures the last couple of years. This next year looks like you're going to be closing eight net. Is that a new level that we should be thinking about? Thank you.
Thanks for the question, Peter. We've always had a very disciplined approach to retail, but we've also been innovators at retail. Our West Elm stores this year were very carefully chosen, and we were thrilled to see the results higher than we even had expected. When we started putting together our roadmap for retail openings, we had a long list of areas we should be, and sometimes the amount of stores that you get in any given year is dependent on landlord availability. We're so lucky to have such strong partners with very creative, forward-thinking landlords, and we have 19 wonderful stores opening this year. Beyond that, we do have other stores that we're working on.
Obviously, this is a particularly large number for this year, and we think it's a huge opportunity to continue to increase the awareness of the West Elm brand, which while it's done so well, so many people still don't know the brand. When they see a store come to their market, it really improves their perception, and then they also buy more online. That is a great opportunity for us. In terms of Williams-Sonoma, we've been closing in markets where we are either too heavy in the market with stores or where there is a better location. We have closed open in some areas, and then in other areas, we've decided to let the sales go to a store in the area. With that said, we see also a new era of growth for retail productivity in the Williams-Sonoma brand.
As I mentioned in my prepared remarks, we opened a store at South Coast Plaza.
Tried a lot of new things that we had carefully really discussed, we're seeing so many of those things work. It's not that we'll open a bunch of stores that look like South Coast Plaza necessarily, but there are pieces and parts of that model that we can roll out to a larger amount. Some of it is not fixture and remodel, but simply merchandising ideas. We're very excited about this new era for Williams-Sonoma at retail. Like West Elm, we have some very exciting projects going on this year that you'll see us really push the interactivity at the store level in the brand, also bring new merchandising ideas to the floor.
Okay, thanks very much.
We'll take a question from Daniel Hofkin with William Blair & Company.
Good afternoon.
Hey, Dan.
Just, I guess, putting the port issue to some degree aside and with regard to what you feel like you can control in that part of the business or just merchandising, marketing, et cetera. Anything that you would call out in terms of that you feel like executionally, you could have done better during the period? Then, I guess, I had a question about the potential margin benefit from the insourcing. How much do you think that could benefit margins? How much do you think you might reinvest, let's say, in traffic or transaction-driving initiatives, if you will? Thanks very much.
Dan, I'll take the second question, Laura will take the first question you had. On the second question on gross margins, I think that is actually one of the exciting moments that we're starting to see. We started to see it a little bit in Q3. We definitely saw it in Q4. We did have lower selling margins by 50 basis points, which was technically an improvement over the prior year, which was down 70. The lower selling margins this time, the pure product margin was essentially flat. Which in a very promotional time period, we know is pretty tricky to do. So clearly, it highly demonstrates both we had carefully planned promotions, but we also were starting to see the benefits from the insourcing of our foreign agents that are helping to offset that.
As we continue to roll out through the year, we should expect to see those improvements continue to come through. It's nice to see these investments that we've speak to you guys about in the past, that we've invested in these things that are starting to come to fruition. Your first question, which is a great one, what could we have done better? We always have a mindset of continuous improvement, we are in the midst of a major multi-year technology transformation, which is focused largely on our supply chain. We know that our customer wants increased visibility of where their order is. We also know that there's a great opportunity to regionalize our assortments. We have put together our big, as we call them, rock projects for the year.
All of these help us remove blind spots in the supply chain, if you will. We have many of them focused on reducing costs and improving service through whether it's scheduling, routing systems, communication of delivery dates. We're focused on long-term inventory optimization as a key strategic initiative, as we know how important staying in stock but avoiding getting overstocked is to our business. We're thrilled. We started this project last year, and we're kicking it off now with a lot of great participation throughout the company. Similar to what we did with insourcing our Asian operations. I believe this is one of the biggest things we're going to do over the next couple of years. Of course, we're investing in e-commerce. You can always make it more intuitive for the customer to shop.
I think actually, Pat, could you comment a little bit on some of the exciting things that we're working on to improve the customer response?
Sure, Dan. Great question. I think what's exciting to me is really the investments we're continuing to make to enhance the platform and will allow us to continue to grow our revenues while maintaining our high e-commerce profitability. At the same time, enriching the customer experience. We're focused on mobile. Our mobile sales were up 100% year-over-year last year, and a big part of that was the improvements we made in the site experience. We're making great strides in site personalization, both in customer recognition and then delivering a personalized content, and also improving the post-purchase experience. In marketing, we've made, and you'll see more of it this year, some strategic decisions to drive customer acquisition across the entire conversion funnel.
We're shifting more of our marketing spend toward digital as we're implementing the results of all this marketing effectiveness work that we've talked to you about before and increasing marketing messages. We're really just continuing to strengthen the technology foundation and respond to the ways that customers now want to interact with us and without ever compromising a site experience that really enhances the lifestyle we project with each of our brands. It's pretty exciting.
Great. Thank you very much.
Then we'll move to Christopher Horvers with JPMorgan.
Thanks. Good evening, everyone. I wanted to follow up on a couple of prior questions. Is it fair to say that PB, given the mix-up in Sonoma, is, say, a third of revenues, and if comps are cut in half, that means you would've had an incremental point of comp brand revenue at the enterprise level. Also, you mentioned selling margins were down 50. Is it also fair to say that decline was wholly related to the port issue? Thanks.
We don't disclose how the exact breakout is for the quarter from a revenue perspective, but I think I'll reiterate the point that Williams-Sonoma is a significant piece of the operations during the holiday time period. Clearly, having comps, the demand comps that were more than double that didn't convert into net had a substantial impact on our top line. Regarding the gross margin, what the reality is, what I was saying is that it's lower selling margins, particularly in e-commerce, that drove that decline. The pure product margin was healthy. The lower selling margins were almost solely due to higher shipping costs, but there's two reasons for that. One is because we made a decision as a company to make sure to meet our customer demand and get them their product in time for the holidays.
Nothing is more important to us than making sure to keep our customers happy. We made the decision as the customer continues to order later and later in the peak, to ship things to them in whatever way possible to get it to them in time for the holidays. That's one. The second thing is, yes, the West Coast port slowdown, where unfortunately, again, to meet our customers' demand, we had to get product from the East Coast to, in some cases, customers on the West Coast. When you're shipping things like furniture, obviously that's much more expensive.
Would you care to break it down between those two factors?
We have not disclosed that.
Fair enough. Thanks.
Jessica Mace with Nomura Securities has the next question.
Hi, good afternoon. Thanks for taking the question.
Hi there.
My question is on the 2015 operating margin guidance, and I was wondering if you could help us think about, if you put aside the port issue and also the foreign insourcing, which you've already discussed, can you talk about some of the other moving pieces that should impact the operating margin? Specifically, what kind of assumptions you have for the promotional and competitive environment?
From the operating margin perspective, first from a guidance perspective, we're really pleased to be able, at the high end, to once again match our new record operating margin level of 10.5, and that includes the impact from the West Coast port disruption at the beginning of the year. It also includes our investments. Some of them, as we mentioned earlier on the insourcing of our foreign agents, are starting to leverage, and others will take longer to do that. For example, as we've said before, some of our global initiatives, particularly in company-owned global, where it's going to take about three to five years to get to scale and start to leverage that infrastructure, is something that keeps the operating margin not expanding as high as we'd like it to at this point. Excluding global, our operating margin expansion is strong with our domestic business.
Any assumptions on the promotional or competitive environment that go into that outlook?
We've said all along that we know that it will be promotional. Our goal is always to offer a very competitive price, but more importantly, exclusive, innovative product with a very high-touch service model.
We don't think there's anything different from last year from that perspective.
Great. Thank you so much.
At this time we'll move to Seth Sigman with Credit Suisse.
Great. Thanks very much. I wanted to follow up on the 2015 margin question, specifically focused on advertising. You guys have done a great job of improving the efficiency there. Can you just elaborate on what's been changing there, the future opportunity? What do you view as the optimal level for advertising? In that margin outlook, would you assume further benefits from advertising efficiency? Thanks.
We are constantly evaluating that. Every quarter, that's a decision that we make from an advertising efficiency perspective, whether we do an extra promotion that hits a gross margin or whether we send more emails or send out more catalogs, which hits SG&A. That's something that's ongoing. It's not something that comes to sort of a bottom, if you will, that we then no longer can have that opportunity to do it. It's always something that we take a look at and make the operational decision on a daily basis as to what the right move is. Obviously, any of that is already factored into the guidance within our operating margin at this time.
I'll take a question from Simeon Gutman with Morgan Stanley.
Thanks. Hi, everyone. One quick follow-up on EBIT margin, not to belabor this, then a strategic question. On operating margin, Julie, you mentioned that even with some of the port issues, you're still able to match the EBIT margin. I guess you said it's hard to disentangle the fourth quarter, but there was probably some drag. If you remove the first quarter drags, I guess, had we not even had any port issues, what would have been the midpoint or so of EBIT margin year-over-year increase embedded in the guidance? My follow-up or the strategic question was, you mentioned the life cycles in terms of thinking about the customer through different stages of your businesses. Can you shed some light on the profitability of the customer, where that customer is most profitable to you, at what stage?
Yeah. As far as the operating margin question, we're not disclosing, based on our earlier response, the Q4 impact to that. I guess my advice would be to take from the West Coast port impact perspective for 2015, take the amount that we've quantified from the EPS and back it out, so you'd be able to calculate what that gross margin on the high end would be excluding that.
It's an interesting question, which customer is most valuable. I think it depends on what they're doing. We know that our best customers shop multiple brands
Particularly when they're beginning to set up a home where they're moving, you see an initial spike. You have the cooking enthusiasts that are very specific to cooking or baking, and they can spend a lot of money frequently and may not shop other brands. The best customers, if you're asking me that question, are the ones that cross over all brands and all channels.
At this time, we'll take a question from Neely Tamminga with Piper Jaffray.
Oh, great. Good afternoon. Julie, just a point of clarification on this West Coast port situation. Obviously, there's a revenue impact because of how you guys count per revenue, and if you don't have product to ship, then that could be delayed. Are you seeing order cancellations? It sounded like your demand comps are actually quite strong, so you're not actually seeing cancellations. Should we see a snap back up in revenue in Q2? How should we be thinking about that?
We are. It's small, but we are seeing some order cancellations. The bigger issue is what is the lost customer demand that they never actually pushed the button to get it, because when they went through the chain, they were able to see that the backorder is going to be longer than what they wanted, and/or there's something in the category that they're buying. One item is backordered, they decided to not buy the whole category. We're starting to see some of those. I think from a Q2 perspective, we're not going to be in stock 100% until the end of Q2. Even if we have backorders that could roll in that are assumed in our guidance for Q1 and they get filled, you've got the new backorders that are created by inventory that's going to come subsequently and get filled.
It's going to take a period of time to really see some of that come through.
Okay. That's helpful. Good luck out there.
Thank you.
At this time, we'll go to David Magee with SunTrust Robinson Humphrey.
Yeah. Hi, everybody.
Hi, there.
Just a couple of questions about the promotional environment. I'm just sort of curious, which brand is maybe most impacted there? Is it more of an online phenomenon, or is it more in the stores or both? Do you think it's a longer-term issue from a structural headwind now that we have that has to be alleviated by some capacity being taken out at some point in time? Just any thoughts there would be helpful.
This is Laura. There's no question. All retail is still very promotional. We have said that we don't believe it's going to change. We have built some structural savings into our supply chain to offset it that make us more competitive. The first being the insourcing of our foreign agents, which is a big deal to us and allows us to both reduce costs, but also where we need to step up the competitive pricing to gain market share. It is across all brands. We're also working on in Williams Sonoma, as you know, the shift from a higher percentage of non-branded products to the Williams Sonoma branded products, which, because of their vertical designs, sourcing are higher margin, de facto.
While we tend to be very aware of the promotional cadence, we have worked on things to offset it that give us a competitive edge versus others, I think, who may think it's going to change in the short term.
Great. Thank you. Is it more being caused by online players, do you think, at this point?
No, I think it's widespread. When you walk the malls over Black Friday or the last week, it's the new norm to see the signs. Where we win is when we give our customers exclusive, innovative product at a great price with great service. That's what we have been focused on. That's what we are focused on. When those things come together, the customer buys from the retailer that has the best product at the end of the day, and they want the price to be fair. We're lucky to be in the business that we're in. Buying for your home is a considered purchase. It's very important. There's really nowhere to hide on quality, and our customers, there's some great facts in the economy that I think will allow them to continue to spend more on their homes.
It's always been very important to them, our particular customer base, I think there's some real benefits that are going to happen this year because of the strong economy.
Good. Thanks, Laura.