Welcome to the Williams Sonoma Incorporated 4th Quarter and Fiscal Year 2013 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 Gabrielle Rabinovich, Director of Investor Relations, to discuss non GAAP financial measures and forward looking statements.
Please go ahead.
Thank you, Anne. 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 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 2014 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 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 Q4 fiscal 2013 results and our outlook for fiscal 2014.
Thanks, Gabrielle. Good afternoon, and thank you for joining us. On the call with me today are Julie Whalen, our Chief Financial Officer and Pat Conley, our Chief Marketing Officer. I am proud to announce Williams Sonoma, Inc. Results this afternoon.
Williams Sonoma, Inc. Outperformed the retail business holiday season, gaining market share and demonstrating the structural advantage of our multi brand, multi channel business. Comparable brand revenues grew 10.4% and EPS reached $1.38 for the Q4. Strength in our brands across the retail and direct channels with notable growth in our e commerce business in conjunction with disciplined execution allowed our team to drive record operating results. We achieved these results against the backdrop of a shortened and challenging holiday shopping season.
Our 4th quarter completed a year of strong performance for Williams Sonoma Inc. With record revenue of $4,388,000,000 record non GAAP operating income of 4 $55,000,000 and record non GAAP EPS of $2.84 At the beginning of last year, I outlined 4 key areas of focus. These priorities were to strengthen our brands, lay the foundation for global expansion and new business development, to invest in our supply chain to reduce cost and improve service and to invest in the technologies and infrastructure underlying
all of
these initiatives. In 2013, we executed well against these four areas of our strategic plan. Our investments resulted in profitable growth and increased market leadership. We've kept our focus on our customers, the products and services that we offer and the way that we interact with our customers across multiple channels. As such, we have created a differentiated and highly relevant experience.
Highlights of our 2013 achievements include: 1st, the growth in our brands. Comparable brand revenue growth across our businesses in 2013 was 8.8% on top of 6.1% growth in 2012. Our exclusive products, great design, lifestyle positioning and accessible price points are allowing us to lead the market. We love the entertaining cooking, home furnishings and furniture businesses. Our powerful brands offering exclusive products with high touch services make decorating and entertaining easy, fun and affordable.
We're investing in store and online to provide the best experiences in retail for our customers. 2nd, our global expansion in new business development. In addition to a multichannel mindset and an organizational culture geared to multichannel success, we are at our core entrepreneurs. Our global expansion and domestic new business opportunities are important growth vehicles. Our global vision is to serve our customers with the same high service, multichannel model that has differentiated us in the United States.
In 2013, we reached a significant milestone by setting up the global infrastructure for our geographic expansion. In 2013, we entered Australia and United Kingdom with company owned retail stores and fully enabled e commerce and distribution. We finished the year with 6 company owned retail stores, 5 in Australia and 1 in London. And we look forward to opening an additional 8 retail locations in Australia in 2014 and continuing to build our e commerce business. We also expanded our business in the Middle East with our franchise partner and secured a new franchise partner 2013, the global investments we made included capital expenditures to build out our stores, new store systems capable of handling international currencies and payment types and our new fully integrated e commerce platform that will allow us to have native sites in all the countries in which we will operate stores.
These are both capital expense related investments that we are incurring ahead of the revenues that they will generate. The work we did in 2013 is laying the foundation for future growth. We are committed to a disciplined approach to global expansion and believe it represents a sizable opportunity for the long term. Our new businesses continue to develop and we are bringing new customers to our brands. Mark and Graham completed its 1st full year of business in 2013.
We have continued to grow the offering introducing new categories and selling great high quality gifts. Ranging from the whimsical to the sublime, our best sellers are across multiple categories. And Rejuvenation serves as a general store of functional and beautiful goods for home improvement projects. In 2014, you will see continued expansion of Rejuvenation's product assortment and increased relevancy of its offerings. 3rd, the further regionalization of our domestic supply chain.
In 2013, we in sourced furniture delivery hubs in 3 geographies and we further regionalized our retail fulfillment capabilities. We also expanded our U. S. Upholstered furniture manufacturing operations, our personalization capabilities and we made progress in taking over our agent sourcing relations. By the end of this year, we expect to be directly sourcing almost all of our foreign purchases.
And 4th, we invest in the technology to support our multichannel business. This 4th area is something I'd like to spend a little more time on today. Our technology investments are fundamental to support our top line momentum and create shareholder value for the long term. The power of our brands in conjunction with our multichannel excellence provides us with a competitive advantage. In 2013, Williams Sonoma Inc.
E commerce revenue was $1,950,000,000 with a 3 year compounded annual growth rate approaching 18%. And overall in 2013, our direct channel represented 48% of net revenues. Consumers have embraced the convenience and flexibility of shopping online. The investments we have made in our brands and our user interface and our fulfillment infrastructure have enabled us to be one of the few retailers in our category to benefit from the shift online. Offering relevant differentiated products and inspiring lifestyle experience as well as developing a community is as important online as it is in a store.
Across channels, we are focused on innovative, personalized, highly relevant shopping. Technology is redefining the customer experience and retailing has evolved and increasingly customers interact across channels. The investments we are making are allowing us to provide the best level of services to our customers. As we look to 2014 and beyond, we are confident in the future of our company. All of our strategies are designed with a single-minded focus on our customers.
We'll offer innovative exclusive products, a high touch service model that helps our customers with every step of the process, multichannel excellence and an efficient vertically integrated supply chain. We believe that our proven execution and financial discipline will allow us to deliver sustainable returns and increased stakeholder value. Now I'd like to spend a few moments discussing our brands. I'll begin with Williams Sonoma. At about this time last year, we announced the appointment of Janet Hayes as President of the Williams Sonoma brand.
We are proud of the progress her team has made in such a short time and are excited about the opportunities ahead of us in 2014. In the Williams Sonoma brand for fiscal year 2013, comparable brand revenues increased 1.5%. For the Q4, comparable brand revenues increased 2.3%. The Williams Soma brand executed its holiday strategy in an intensely competitive and promotional market. Top performing categories this holiday season included cutlery, bakeware and cookware.
Our inspiring well designed relevant gift offerings and home entertaining ideas made us top of mind from Thanksgiving through Christmas. Everything from our exclusive branded pizza maker to our proprietary holiday foods fueled seasonal sales. The innovative products and newness we introduced in January supported by refreshed floor sets and a wellness focused early spring catalog were also highlights of the Q4. Inspired by the hardworking kitchens of real chefs, we designed a line of affordable, beautiful, everyday essentials. Our Open Kitchen lineup with more than 100 new SKUs features hardworking tableware, functional tools and durable cookware.
Open Kitchen is accessible and relevant and early results show that it's driving new customers to the brand. Excellence in retail execution also contributed to a successful holiday for the Williams Sonoma brand. Inspirational visual merchandising and a fresh approach to our store experience coupled with a better prepared and passionate field team drove meaningful improvement. Our online and catalog marketing drives retail traffic as well as direct sales and we saw continued strength in our direct channel as we provided a high touch open online store for us 24 hours a day during the compressed holiday season to complement our in store offering. We are pleased with our progress in the Williams Sonoma brand during holiday 2013 and the learnings that we are taking into 2014.
Another key area of growth for the Williams Sonoma brand in 2013 was the Williams Sonoma Home collection. In 2013, we introduced our new assortment of high quality home furnishings and furniture and presented these products in an easy to shop, high quality catalog format and an expanded assortment online. Williams Sonoma Home offers our customers exciting, beautiful, stylish and differentiated aesthetics and the catalog showed 3 distinct collections each season last year. The results of the 1st year of this new strategy exceeded our expectations and we are building our product line as well as the marketing to support it. We believe Williamson Home represents a meaningful opportunity for the company and we expect to expand this strategy significantly.
Next, I'd like to discuss Pottery Barn. 2013 was a very successful year for Pottery Barn as we executed against our strategy to be the leading specialty home furnishings retailer in the world. Key to this strategy is our accessible approach to decorating and our capabilities in product design and lifestyle merchandising. Across all channels, our mission is to make decorating easy and fun. Our in home service offerings are a competitive advantage.
In Pottery Barn, for fiscal year 2013, comparable brand revenues increased 10 point 4% on top of an increase of 8.5% for fiscal 2012 and 7.6% for fiscal 2011 for a 3 year stacked comp of more than 26%. For the Q4, comparable brand revenues increased 14.6%. The themes for Pottery Barn in the Q4 were decorating, entertaining and gift giving. Key merchandise categories that drove our success were dining furniture, lighting, holiday decorating and gifting collections. This season, our customers came to us to decorate their homes and to make gift purchases.
Our design and gift concierge services, both in home and in store, made celebrating the holidays easier. In 2014, we are excited to build on our momentum and the trends we saw in 2013. We're expanding our categories and our gift assortments. Refreshing and redecorating continues to be key priorities for our customers. And in 2014, we will take our in home services to the next level.
We believe that the Pottery Barn design point of view and value proposition has broad appeal and that there is significant runway for growth ahead of us. We plan to broaden our assortment, offer greater aesthetic variation to our customers and make the process of buying furniture and home furnishings easier. In the Pottery Barn Kids brand, comparable brand revenues increased 7.8% in 2013. And for the Q4, comparable brand revenues increased 11.2%, following an increase of 7.7% in the Q4 of 2012. 4th quarter strength was driven by our seasonal and gifting businesses as well as our furniture offerings.
In addition, in Q4, our expanded nursery collections again exceeded our expectations. For 2014, we're focused on delivering inspirational home furnishings and gifts for our Pottery Barn Kids customers. And as we look towards 14, we see opportunity to grow the Pottery Barn Kids brand, most specifically in our core business from home furnishings to furniture. We'll continue to introduce new collections that are high quality and extremely well priced. We also believe we have a unique ability to create a differentiated customer service experience by offering our customers quicker and more consistent delivery on furniture.
We'll build the product line concentrating on core categories with great quality, great design and great prices. In the PBteen brand, comparable brand revenues increased 14.1% in 2013. And for the Q4, comparable brand revenues increased 9.6% following an increase of 6.4% in the Q4 of 2012. Our holiday season and TV Teen was fueled by gifts. Our big seasonal bets exceeded our expectations and our textiles and furniture collections also delivered solid performance throughout the Q4.
We're excited about the product lineup in 2014 for teen and we will continue to offer high quality, trend right products that are exclusive. Over the past several years, we've learned how to effectively use collaborations to drive traffic and sales and we have several new and impactful collaborations planned for 2014. Finally, we'll be extending our gifting programs to carry the momentum we felt coming out of holiday throughout the rest of the year. Finally, I would like to discuss West Elm. West Elm had a record year with comp brand revenue growth of 17.4% on top of an increase of 17.4% for fiscal 2012 30.3% for fiscal 2011 for a 3 year stacked comp of more than 65%.
West Elm exceeded the $500,000,000 milestone with $531,000,000 in revenue in fiscal 2013. In the Q4, Comp brand revenues increased 18.3 percent following an increase of 19.1% in the Q4 of 2012. West Elm continues its fleet expansion at retail. In 2013, we opened 10 net new stores with 3 openings occurring in the Q4. We are particularly pleased that our new stores are performing to our expectations and are driving new customers across channels.
Growth in the brand was broad based across categories, including furniture, textiles, decorative accessories and lighting. We continue to be confident in West Elm's ability to be a $1,000,000,000 plus brand. With a strong multichannel strategy that includes catalog stores, online and the emerging social channel, West Elm is poised for continued growth in 2014 and beyond. In 2014, West Elm has plans to open 12 new stores in 7 new markets. The brand remains focused on creating a personalized and differentiated experience with 3 key priorities: choice, community and consciousness.
Choice refers to the continued growth and evolution of West Elm's product assortment and menu of services. From an aesthetic perspective, we are seeing key trends in the mid century industrial and decorator looks, and we are achieving growth in all categories of business. Handcrafted products and limited edition collections created in collaboration with independent artists continue to be a key differentiator among competitors. In 2014, we will continue to expand our assortment, particularly in lighting, furniture and textiles. West Elm's commitment to community remains a priority as the brand continues to create engaging and brand enriching experiences with classes, events and partnerships that bridge the on and offline world.
Moving into 2014, West Elm is focused on working with partners of scale, continuing its successful partnership with Etsy and executing additional collaborations and partnerships as well. As a leader in social media, West Elm met major milestones with its social community in Q4 and is now one of the leading home furnishings brands in the space. More importantly, West Elm's fans and followers are engaged with the brand, driving content sharing, brand participation and sales via the social channels. Pinterest, in particular, continues to be the number one organic traffic driver to the West Elm website and Instagram photos from the West Elm community are now featured throughout the West Elm catalog and on westelm.com. In 2014, West Elm will continue fulfilling its commitment to conscious retail.
Working with artists and groups around the world, West Elm is sourcing products that differentiate the brand from other home furnishings retailers, particularly in their value market. In 2014, the brand will actively seek out additional ways to support and grow artisan businesses through projects such as adult literacy workshops and improved supply chain management. In January, West Elm successfully introduced its first entirely handcrafted collaboration with New York based fashion designer, Steven Allen. The collaboration was featured in publications including the Wall Street Journal, Elle Decor and New York Magazine. And in 2014, West Elm will make strides towards its Clinton Global Initiative Commitment to Action.
As we look forward to 2014 and beyond, West Elm has an exciting future ahead. Our strategy remains to profitably grow the brand and attract a broad base of customers by offering choice in our products and services that will help customers express their own individual style and create a home that will connect with their story. We will build community through connections with like minded strangers, our crafters, collaborators, customers and associates and consciousness in everything we do from handcrafted and local to supply chain transparency and sustainability. The successful combination of these three factors is differentiating West Elm from its competition and we remain confident in this brand's ability to be a 1,000,000,000 plus business. In summary, we're proud of the results we achieved in 2013 in all of our brands and across our business initiatives.
We are so fortunate to have a portfolio of brands that provide significant opportunities for growth market share gains. We remain committed to customer service as our number one priority and we believe that there continues to be room for improvement. We believe we have an opportunity to further demystify the decorating experience and help a larger group of customers achieve the home of their dreams. From cooking to entertaining to furnishings, we combine our passions for the businesses that we are in with a focus on execution, disciplined decision making and state of the art data analytics. We are finding increasingly relevant ways to market and serve customers both domestically and around the world and we are very excited about the opportunity for the future.
No one loves these categories more than we do, but we are not just category lovers, we're supply chain experts and we are marketing maniacs. We apply data driven analytics to drive relevance across all channels and we are extremely disciplined. We accomplished what we said we're going to accomplish and achieved our objectives growing sales, delivering operating margin expansion, growing earnings per share and returning excess of cash to stockholders. We have made progress against our long term strategic growth initiatives across our portfolio of brands both domestically and globally and we continue to prioritize the areas in which we are investing to maximize returns and enhance our competitive positioning. Foundational to all of this, we have built one of the strongest teams in retail and I would like to take a moment to congratulate our entire team for another successful year and extend my sincere thanks to all of our customers and stockholders for their continued support.
And with that, I will turn the call over to Julie to review our financial results in detail.
Thank you, Laura, and good afternoon, everyone. Our results for Q4 and fiscal 2013 exceeded our expectations and reinforced the strength of our multi brand, multi channel model. Before I walk you through the results in more detail, let me remind you that 2013 was a 52 week year as compared to 2012, which was a 53 week year. The financial impact in 2013 of the loss of the 53rd week was approximately $70,000,000 of revenues and $0.07 of diluted earnings per share. All revenue and earnings per share growth will be discussed excluding this impact from the loss of the 53rd week.
For the Q4, net revenues grew to $1,466,000,000 or a year over year increase of 10% with comparable brand revenues increasing 10.4%. Net revenues in our direct to customer channel, of which approximately 92% came from e commerce, grew 19% to $706,000,000 or 48 percent of total company net revenues compared to 45% last year, a 300 basis point increase. Net revenues in our retail channel grew 2.7 percent to $760,000,000 Total company operating margin for the 4th quarter was 14.8%. The 20 basis point decline off a record operating margin last year was due to our continued investment in our global operations and the loss of the 53rd week. The operating margin in the direct to customer channel increased 180 basis points to a record 24.7%, primarily driven by advertising leverage and lower general expenses.
The retail channel operating margin decreased 170 basis points to 17.2%, primarily driven by occupancy deleverage from the loss of the 53rd week and the impact from our investments in global expansion, as well as lower selling margins and employment deleverage, including investments in our global initiatives. Corporate and allocated expenses increased 30 basis points to 6% of net revenues, primarily driven by higher employment costs and the deleverage from the loss of the 53rd week. Gross margin for the quarter was 40.6% versus 41.3% last year. The 70 basis point decline in gross margin resulted from lower selling margins and occupancy deleverage, primarily from the loss of the 53rd week and the investments in our global expansion. Occupancy costs were $149,000,000 in the Q4 of 2013 versus $137,000,000 in the Q4 of 2012.
SG and A decreased to 25.8 percent of revenues from 26.3 percent in the Q4 of 2012. Investments in our global expansion. These results drove diluted earnings per share growth of 8.7 percent to $1.38 in the 4th quarter. For the fiscal year, net revenues increased to 4,388,000,000 dollars or 10.5 percent with comparable brand revenues increasing 8.8%. By channel, net revenues in our direct to customer channel grew 15.6 percent to $3,000,000,000 or 48 percent of total company net revenues compared to 46% last year, a 200 basis point increase.
Net revenues in our retail channel grew 6.2 percent to 2 $273,000,000 Fiscal 2013 non GAAP operating income increased 9% to $455,000,000 This resulted in a non GAAP operating margin of 10.4%, a 10 basis point expansion versus last year, despite the financial impact from our continued investment in our global operations and the loss of the 53rd week. 130 basis point improvement in the direct to customer channel operating margin to 23.7% was partially offset by 110 basis point decrease in the retail channel operating margin to 11% and a 10 basis point increase in corporate and allocated expenses. The The 130 basis point improvement in the direct to customer channel operating margin was predominantly driven by advertising efficiencies. The 110 basis point decrease in the retail channel operating margin was primarily driven by lower selling margins and occupancy margin was primarily driven by lower selling margins and occupancy deleverage, primarily
from the capital investments in our
business, the investments in our company owned global expansion and the loss of the 53rd week in 2012. This was partially offset by the leverage of employment costs and lower general expenses. The 10 basis point increase in corporate and allocated expenses was primarily driven by higher employment costs and the deleverage from the loss of the 53rd week. Gross margin for the year was 38.8% versus 39.4% last year. Gross margin was primarily driven by lower selling margins.
Fiscal 2013 occupancy costs were $562,000,000 versus $517,000,000 in 2012. Non GAAP SG and A decreased 60 basis points to 28.5 percent of net revenues from 29.1% in 2012. This 60 basis point improvement was primarily related to greater advertising efficiency. In fiscal 20 13, advertising expenses were $326,000,000 or 7.4 percent of net revenues versus advertising expenses of $318,000,000 or 7.9 percent of net revenues in 2012, a 50 basis point reduction. This once again demonstrates the flexibility of our operating model as we use multiple levers such as advertising efficiency to drive revenue and operating profit growth.
Non GAAP diluted earnings per share for the fiscal year were $2.84 a 13.1 percent year over year increase. Overall, we are very pleased with both the strength in the top line as well as our ability to drive operating margin expansion and growth in earnings per share, while absorbing the impact of our future growth investments and the loss of the 53rd week. Moving to the balance sheet. Cash at the end of the year was $330,000,000 versus $425,000,000 last year. Cash provided by operating activities was $454,000,000 an increase of $90,000,000 over last year.
This cash flow allowed us to invest in the business by funding approximately $194,000,000 in capital expenditures and to return more than $350,000,000 to stockholders in the form of share repurchases of $239,000,000 and dividends of $112,000,000 We ended the year with 8 $1,000,000 in inventory. Excluding the impact of the additional inventory in transit due to taking ownership earlier in the supply chain in 2013 versus 2012, merchandise inventories increased by 108 $1,000,000 or 16.9 percent on a comparable basis. This inventory growth was predominantly in our strongest growing brands, Pottery Barn and West Elm, as well as to support our growth opportunities and was planned at this level to put us in a strong in stock inventory position as we enter 2014. Additionally, accounts payable increased by $146,000,000 in 2013 versus 2012 due to higher inventory levels as well as the overall timing of payments. Now I would like to discuss our guidance for Q1 fiscal year 2014.
We expect 2014 to be another year of record revenues and earnings while at the same time investing in our future growth. For the Q1 of 2014, we expect to grow net revenues to a range of $920,000,000 to $940,000,000 with comparable brand revenue growth in the range of 4% to 6%. Also in Q1, given the financial impact on the quarter of our capital investments in 2013, our continued investments in our global expansion as well as the investments in our supply chain infrastructure, including the opening of our new Dallas distribution center in the first half of twenty fourteen, we expect that our operating margin will be slightly below last year's operating margin rate and diluted earnings per share will be in the range of $0.41 to $0.44 per share. On the year, we expect to grow net revenues to a range of $4,630,000,000 to $4,710,000,000 with comparable brand revenue growth in the range of 5% to 7%. Operating margin is expected to be in the range of 10.2% to 10.4%, and diluted earnings per share are expected to be in the range of $3.05 to $3.15 per share.
We are also reiterating our 3 year outlook for revenue and EPS growth that we discussed last March, with revenue projected to grow in the mid to high single digits and EPS projected to grow in the low double digits to mid teens. From a capital perspective, we are maintaining a balanced capital allocation strategy, investing in the business and returning cash to our stockholders through share repurchases and dividends. We believe this will provide the best returns for our stockholders time. As such, we expect our 2014 capital investments in the business to be in the range of $200,000,000 to $220,000,000 In addition to our required annual investments in our retail fleet and IT infrastructure, we will be investing in our global expansion, constructing new stores predominantly in West Elm and the Pottery Barn brands, supporting our supply chain initiatives and further developing our e commerce platform. Last year, we announced a 7 $50,000,000 share repurchase program.
We are now in the 2nd year of this program with $511,000,000 remaining. We expect to repurchase shares throughout this coming year. In addition, today, we announced a $0.02 or 6 percent increase in our quarterly dividend of $0.33 per share. On a 2 year basis, this represents an increase of over 94%. This is the 9th dividend increase we have had since the inception of our dividend program in 2,006, further demonstrating our commitment to returning excess cash to stockholders.
We believe that our track record of disciplined capital allocation, together with our EPS growth of 46% over the past 3 years, demonstrates our ability to deliver returns to our stockholders. With the strength of our brands, our long term growth initiatives and a culture of financial discipline, we remain committed to continuing this performance. I would now like to open up the call for questions. Thank you.
Thank you. We'll take our first question from Daniel Hofkin from William Blair.
Hi, good afternoon and congrats on a very fine quarter. Just a couple of questions maybe about the flow of the quarter, December, let's say, versus January and what you're seeing so far in the beginning of this year, just from a business flow weather standpoint, if you will? And then just a clarification on your 3 year plan. Are you rolling that forward? Or are you saying that inclusive of what you did this past year as well as what you're expecting for 2014 and the 3 year EPS growth that you're targeting?
Thanks.
Thanks, Danielle. It's Laura. So on the Christmas season, the holiday season, it feels like a long time ago already. We're already actually working on holiday 14. But we had a strong holiday performance from the beginning of Black Friday, Cyber Monday, started off strong, gave us insight to what our customers are most focused on and carried through our January our brands, all of them in January bring in new product and they have been well received by our customers.
With that said, the weather is certainly real. I typically don't like talking about the weather because we're in retail and weather is a variable each season. But it did it was worse than it was last year. In February, we did have an unusual amount of our stores closed with more than 7 times the number of closures this year as last year. So it affects particularly the bricks and mortar channel.
We're fortunate to have a developed e commerce channel. And, at this point, we don't expect a lasting impact because of the weather. It usually evens out, but it certainly is real. As we look at the whole year, we see a lot of opportunities regardless of weather, and we are building on the successes we saw last Christmas and also areas where we know we can make improvements. And I'm going to give Julie, why don't you answer the question on EPS?
Sure. As far as the 3 year outlook, yes, that's reiterated what we already said for the existing 3 years. It's not rolling it out an additional year.
Okay. Thank you. We'll take our next question from Matthew Fassler from Goldman Sachs.
Thanks a lot. Good afternoon. My primary question relates to the comments you made on social as it relates to West Elm. I know that this is a business that reaches out to a somewhat younger demographic perhaps than your other channels and perhaps that's why you're focusing on it more for social. But can you talk about just how commercial social is for you because if so, it's you're one of the first to really speak about it as a meaningful driver.
And also then, talk about what kind of potential you might see for the other brands to capitalize on that channel as a revenue generator.
Matt, this is Pat. I'll comment on that. And thanks for the question. I think West Elm has really built social into the fabric of the brand from the very beginning. And they've won a lot of awards, particularly in their Pinterest category.
I think they were awarded 1 of the top 10 sites on And it's a great source of referral traffic, and it helps to expose the brand. And then we know that those people will come back when they're thinking of buying. So the initial conversion may not be as high as, say, a paid search term because the customer is really coming to the site to discover the brand and then they come back later when they're in the market. But it's a very important part of what we do, and we have a real working counsel among all the social media heads of the brands. They get together every month, and we share best practices.
So we're advancing social across all of our brands.
And is it accretive financially
you work on
this and whether it can be scaled profitably?
We believe it will be, yes.
Okay. Thanks so much.
We'll go next to Matt McGinley from ISI Group.
Hi, thanks for taking my question. My first question is on the supply chain and the additional inventory that you took on. Does that normalize as you cycle through the course of the year? You had a big spike in the Q3 or do you continue to take on more categories throughout the course of the year? How should I think about that from a free cash flow and a gross margin standpoint?
Does that inventory investment ultimately translate that to higher or help in gross margin?
Yes. There's a couple of things going on there. First, we have if you're looking at the balance there's sort of an artificial step up because beginning, I think, it was Q2 of last year, we started recording inventory earlier in the ownership process through the supply chain. We started consolidating all of our inventory purchases with our Singapore entity for our global procurement. So that then gets sold to 3rd party entities and to our internal entities around the world.
And as a result of that, that's just a timing change. We're taking ownership of that inventory earlier. So when we hit Q2 of this year, that will be anniversaried. As far as the level of inventory that we have on the books outside of that on a comparable basis, we believe that our inventory levels are strategic. They obviously help drive our Q4 results, and they position us well for entering into 2014.
I think you saw that
we had a step up Q3
and look at our Q4 results. So the biggest drivers of the inventory increase are primarily in our brands fueling our growth, which is Pottery Barn and West Elm with 15% 18% comps in the 4th quarter alone. And we also have additional inventory this year that we didn't have last year to support our global expansion and new brands. And across our core brands, the inventory increase is really in our top selling programs. Our inventory transit has grown substantially and therefore is driving part of this increase, but it's going to help to improve in stock levels for our future sales.
So we think it's very strategic and any sort of extra inventory that there's a concern about is already anticipated within our guidance for our gross margin.
Okay. And my second question here is on the margin progression you had over the course of this year. You had a very good year in terms of margin expansion in DTC driven by all the improvements that you talked about in the business. Then it was somewhat challenging in retail based on the promotion, international rollout and then I guess cycling that 53rd week. Would you expect 2014 to have such a profound bifurcation in the margin trends based on higher expense or does that margin gap between the two segments narrow in 2014?
We don't really provide that kind of guidance by channel, but we do know that the retail channel does drive sales to our direct channel. So depending on where the customer is shopping in any particular time, you're going to see fluctuation in our retail operating margin. And then as you mentioned, there's significant impact to retail operating margin from the upfront costs associated with our global expansion, which will continue into 2014. With that said, we're always after making that retail profitability stronger. So we have long term plans to improve that.
Retail profitability is a complex issue and the retail channel is integral to our strategy. So there's several things we're looking at. It's very, very important to our e commerce traffic and building brand equity and obviously gives customers confidence to shop online. So some of the factors that are working in our favor are our exclusive product design, of course, our cost advantages from in sourcing of our foreign agents and our regionalized supply chain that ensures quick fulfillment to our customers and retail stores while mitigating freight costs. On the flip side, what's working against us is a persistent promotional environment in retail and a high demand for desirable Class A mall space and of course the fact that we believe in paying our associates for their performance.
So we do believe that over time we can maintain our operating profitability in our retail channel and keep our stores great. They're really important to
us. Okay. Thank you very much.
We'll go next to Gary Balter with Credit Suisse.
Thank you. Great quarter, first of all.
Thank you, Gary.
The one if they were they're all good, the divisions, but the one that to us was surprising was the Williams Sonoma. And you talked, Laura, a little bit about kind of some of the steps you've taken. Could you go into a bit more detail about how that's turning around so well and kind of a bit of your outlook for 2014?
Sure. It was a successful holiday season, perhaps the most successful we've had in the 5 years. We know that our strategy to bring in more exclusive products and to improve our retail execution and to refine our marketing model is working and that we can build on it. And also importantly, we know now that our results are really a function of our execution and the things we do. It doesn't mean we can't ignore the competition.
There's a lot of it from the biggest online retailer, flash sale, entrance, traditional department stores and the like. We know that if we execute our strategies well, we're going to grow and we have a lot of exclusive products coming through the pipeline across categories, very competitive. So I'm sorry not to share all those exciting things to come with you. So it's both product, but also execution at every level and especially in our retail stores. I think the last thing I said I'll say about it is that we've had much more cohesive marketing, and that makes a big difference.
We took the approach of testing and rolling ideas and we know that not every test we knew that not every test would work, but we have had many of them work and we're building on those areas and we're moving forward in a disciplined way and analyzing our results as we progress. And it's an exciting time for the Williams Miller brand. The team is motivated and empowered and we are really fit about the future and believe that we are going to see gradual and sustained growth over time.
Thank you. That's great. Thank you.
We'll take our next question from Brad Thomas from KeyBanc Capital Markets.
Thanks. Good afternoon and let me add my congratulations as well.
Thank you.
Wanted to just follow-up about operating margin in general. I know as part of the 3 year plan that you outlined last year that as you moved further back into the plan that there would be an opportunity to generate some leverage and some margin expansion. I know in the first half of this year, there will be some unique investments. But how are you thinking about margins as we move through this year and as we look out to even 2015?
Okay, sure. So we've guided our operating margin for the year at the high end to be in line with last year's new record operating margin, and it represents record operating income for our business. Can it be higher? Sure, over time. But right now, we are continuing to invest in the business.
And it's important to remember that we do plan to drive continued long term profitable growth by investing in our businesses both domestically and globally. So we're maintaining significant earnings growth while investing the future to fulfill our vision to double the size of our revenues. There is absolutely no structural reason why we can't raise our operating margin as we did in 2013, but we are invested in our business and future growth, and we are focused on operating margin dollars, which is going to be growth that's gradual and incremental over time. We're always focused on expanding our operating margin when possible, and this will occur, which is factored within our 3 year outlook.
Thank you.
We'll go next to Aaron Robinson from Wolfe Research.
Thanks very much for taking the question. I've got 2, answer them both. If not, pick 1. Amazon was making a change to their Prime membership, whether it'd be taking prices up by some amount that we don't yet know. For a company that's historically gotten, let's say, maybe some flack for charging for shipping as much as you, do you think that relieves a lot of the pressure or shifts kind of the marketing message that you'll be offering?
And the second question has to do around customer metrics. For a lot of companies that are in e commerce, they talk about new customer growth, cost to acquire and lifetime value. I was wondering if there's any way you'd subjectively just give us a range around some of those measures.
Sure. We watch what everyone does. Our mantra on shipping is that it needs to be easy to understand and competitive, but also that you can't ignore the difference in our business shipping large scale furniture into people's homes versus shipping apparel. And we have never believed that free shipping was a good idea in furniture in particular because when 2 people come to deliver that sofa to your door, you know that it's not free. And also the customer is very smart in that they will add up the price of the product plus the shipping, and compare it to someone who embed the shipping into the price.
And so we look at total price offered and I think as people have to grow into a profit model, a lot of the online players are going to find that ship shipping free shipping on large items is a very difficult business model. So it doesn't surprise me. And at the same time, we're very different from Amazon in that we're offering exclusive products. That is offered elsewhere. And that's probably the best antidote to this issue of people undercutting prices.
I'm going to let Pat answer the customer metric question.
Sure. Thanks, Laura. Erin, great question. I think new customers are absolutely essential to any business. And so we're constantly acquiring new customers.
We acquire new customers at a profit. And I think, as you point out, some analysts are beginning to write about how e commerce pure plays are getting away with reporting rapid growth with little or no earnings. And we actually believe that ultimately, the greatest stockholder value will accrue to those companies that can demonstrate both growth and a high rate of earnings. And we've started 6 e commerce businesses here, and all of our e commerce websites have been profitable within a matter of months while growing rapidly. So we believe you can grow and be profitable at the same time.
And as far as we're one of the few retailers that actually breaks out and shows their e commerce operating contribution on their financial statements. So we can do both, we believe.
Thank you. And great job on that results.
Thank you. You're welcome. Thank you. We have time for one last question from Joel Feldman with Telsey Advisory Group.
Hi, guys. Thanks for taking my question. I wanted to ask about the store plans. I know it's more focused on West Elm and you mentioned Pottery Barn too. But how are you thinking about it in light of the strong e commerce sales?
Because my understanding was also that you because of the strong e commerce maybe you wouldn't need as many stores as once thought years ago. And maybe just if you could talk about the balance between the 2?
Sure. We believe our stores are billboards for our brands and they are the face of our brands and that the great service and in store the in store experience really supports our e commerce sales and makes our customer confident in ordering from us because they've been to our stores and they see our stores in their mind as they place the goods online, the orders online. We have said before, we have a very disciplined real estate process. It's a constant process of looking at each market as leases come up for renewal. And we in some cases, we expand, we move, in other cases, we close the store.
And we're constantly testing retail formats in all of our brands. We're always trying to take the experience to a new level. And so you're going to continue to see us do that and particularly where there's great landlords with exciting new projects, we want to be part of them because we believe it's key to the customer
experience. Got it. Thank you. And then, if I could ask another question. You mentioned on with the Pottery Barn brand expanding the in home decorating part of the business.
Could you give a little more color on that? Like what you guys are thinking and what might be required in terms of staffing and presumably it's more people to go into homes or just if you could give a little more color on that?
Sure. We have been so fortunate to have such a strong field team that has embraced this initiative and it's they're really driving it. They're really rolling out more trainings and more people are being certified. We brought more technology into the stores to help them serve the customers both in store and also in the customers' homes. And so we're going to continue to improve the tools we give them both the technology, but also, swatches.
You see in some of our stores, new design studios that we've put in. And then, we're also doing some pretty competitive things with our 1 on 1 interactions. We are actually we've always been very focused on the 1 on 1 interaction. It's incredibly difficult to do because it's a continuous feedback loop really between the database management, customer engagement strategy and execution. And we are really, I think, ahead of what most people can do because while they may have good intention, they don't have the data analytics to know what the customer wants.
Simply put, if we know who you are, we can market to you better and we know who you are.
Got it. Got it. And if I could maybe sneak one more in. Thank you for that color by the way. Same similar kind of question, the Williams Sonoma Home expansion, I guess what is giving you the confidence there?
And maybe you could give more color because I recall a few years ago you paired it back as separate stores and I know now it's not really stores, but has there been a change that or is it the way you're approaching it, the way you're marketing it, maybe what's helping to drive that the increase there?
Sure. We have a big aesthetic change. The goods are entirely different. High end goods, but a much more casual approach to it and really understanding who you're selling to. You're selling to a person who's buying a bigger home, not someone who's pairing back.
And that aesthetic is, very different than what we offered before. We're using our knowledge, from our other home furnishings brand to choose the products and also to put together compelling catalogs and then also to optimize the website. Of course, because it's an online business, it's easier to maneuver. And that is the way we've incubated most of our businesses here, I think all of them, is to start online first and to really build the customer base and test new things before we do anything at retail. The reason we believe in it, we know the market is there with the higher end goods and we can see through our response rates and our income per book that the customer is really responding.
And with every mailing, we are able to add more customers to our house file and expand our reach.
Got it. Got it. That's helpful. Thank you, guys, and good luck with this quarter.
Thank you. Thank you.
And that concludes our question and answer session for today. I will now turn the conference call back over to Ms. Alber for any additional or closing remarks.
Sure. Thank you all for joining us this afternoon. We really appreciate your time and your continued support and we'll speak with you again in May.
Thank you. And that does conclude our conference call for today. We thank you for your participation. You may now disconnect.