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Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning and thank you for joining our third quarter earnings call. I'm here today with Laura Alber, our Chief Executive Officer, Jeff Howie, our Chief Financial Officer, and Sameer Hassan, our Chief Technology and Digital Officer. Before we get started, I would like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our updated guidance for fiscal 2025 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for, and should be read together with, our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now, I'd like to turn the call over to Laura.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our third quarter. First, I'd like to take a moment to thank our team for their continued hard work. Everyone at Williams-Sonoma, Inc. has been focused on our key three priorities this year, which are returning to growth, elevating customer service, and driving earnings. That focus continues to drive our results. We are proud to deliver strong results in 2025, with an accelerating positive top-line comp and continued outperformance in our profitability. In Q3, comp came in above expectations at 4%, driven by another quarter of positive comps across all of our brands. We continue to deliver on the bottom line despite the substantial tariff headwinds. Our operating margin came in at 17%, expanding 10 basis points with earnings per share of $1.96, growing 5% year over year. We are encouraged by our continued strong year-to-date performance through Q3 and are confident in our outlook for Q4. Therefore, we are reiterating our outlook for the full-year comparable brand revenue growth to be in the range of 2% to 5%. We are raising our bottom-line guidance 40 basis points to an operating margin of 17.8% to 18.1% versus 17.4% to 17.8%. We drove this improvement in performance despite continued geopolitical uncertainty and no substantive improvement in the housing market. We continue to gain market share and outperform the industry, which declined again in Q3. Our continued strong results reflect the power of our operating model, industry-leading channel experiences, and strong portfolio of brands. We continue to see exceptional performance in our retail channel, which ran a positive 8.5% comp in Q3. Retail continues to benefit from an improved in-store experience with more inventory availability, enhanced design services and events, and the opening of 14 beautiful newly remodeled or repositioned stores so far this year, with seven more to come in Q4. This investment is paying off with almost all of them beating the performance of the prior location. Our stores serve as brand billboards, and we believe a refreshed store improves customer perception of our brands. As we move into 2025, I want to highlight the specific progress we made on our three key priorities. Starting with growth, our core brands continue to deliver strong results from positive momentum in Furniture. Our focus on innovation has driven strong and improving Furniture comps. Additionally, we are focused on incremental growth categories like Pottery Barn dorm, and 9% quarter with strength in both trade and contract. Our emerging brands Rejuvenation, Mark and Graham, and Greenrow continue to perform exceptionally well. Together, they delivered a double-digit comp, and we're excited to have recently opened our thirteenth Rejuvenation store in Salt Lake City. This year, we're also very proud of our improvements in customer service. We are committed to flawless execution, delivering orders on time, damage-free every time. We're proud that this year we have record metrics. We're focusing on furthering our improvements through fewer split shipments and faster fulfillment. Finally, our third key priority, driving earnings. Focus on revenue growth, elevating customer service, and maintaining cost discipline has delivered strong earnings with our year-to-date earnings per share growing 5% in a very tough tariff environment. Also in Q3, we used AI as a key business driver to accelerate our strategy. Across our portfolio, AI-powered chat experiences are now live for all brands, providing customer service delivery support, and product guidance. These agents are improving speed, consistency, and satisfaction, and we are now resolving over 60% of chats without human assistance, reducing handle times from twenty-three minutes to just five. Another notable milestone this quarter was the launch of Olive, our new AI culinary and shopping companion for the Williams-Sonoma brand. Olive helps customers plan, cook, and shop with confidence, combining our culinary authority with cutting-edge technology to create a differentiated experience. What makes Williams-Sonoma, Inc. unique is how AI can amplify our differentiated foundation with our proprietary data, our vertical integration from design to delivery, our multichannel engagement, and our expertise in home design in the culinary space. Our strong balance sheet coupled with our tech capabilities allows us to apply AI in ways that can drive real scalable impact for our business that others cannot. Looking ahead, we see opportunities to drive down costs and drive up sales with AI, and our early results are reinforcing that confidence. We're using AI to enhance what we do best, guiding customers through shopping and design decisions. Additionally, AI is driving improvements in productivity and empowering associates with tools to amplify their creativity and expertise. Now I'd like to update you on tariffs. Since we last spoke, there have been notable changes in tariffs, such as a new tariff on some furniture, including imported upholstery, kitchen cabinets, and bath vanities. Now, the 20% additional China tariff is down from 30%. Net-net, these changes are a push to our current estimated impact. As we look forward to the future, predictability in the tariff environment and a reduction in the India tariff would certainly be a positive for us. In the meantime, we continue to be actively and aggressively mitigating what we can with our previously discussed six-point plan. To remind you, first, we are obtaining cost concessions from our vendors. Second, we are resourcing goods to get the best cost for our customers. Third, we're identifying further supply chain efficiency. Fourth, we are controlling costs. Fifth, we are expanding our Made in The USA assortment production and partnerships, and last, we are taking select price increases with a focus on maintaining competitive pricing. Now let's review our brands. Pottery Barn ran a positive 1.3% comp in Q3. We are pleased with the improvement we saw in large ticket items, including furniture, upholstery, and lighting. Our Pottery Barn stores continued to outperform, led by our standout design crew services and our increased Take It Home Today assortment. Our strategy of focusing on improving retail inventory availability, refreshing product assortments, and enhancing design services is working. We have opened six beautiful new remodeled or repositioned Pottery Barn stores so far this year, with three more to come in Q4. Finally, across the brand, we continue a major change that we have made all year, which is to substantially reduce promotions in Pottery Barn. Now I'd like to talk to you about our Pottery Barn children's business, which ran a 4.4% comp in Q3. We saw acceleration in furniture, fueled by successful new product launches, continued growth in collaborations, and back-to-school and dorm was a particular highlight in the quarter.

In fact, back-to-school delivered double-digit growth, an acceleration from Q2. Our brands have become a destination for high-quality study solutions, durable backpacks, and on-trend dorm decor. Additionally, our enhanced dorm design tools and pick-up near campus options have been important for gaining share in a very fragmented market. Now let's review West Elm. West Elm ran a positive 3.3% comp in Q3. We continue to make progress against the brand's four key pillars: product, brand heat, channel excellence, and operational efficiencies. Throughout the year, West Elm has brought in new successful collections in both furniture and non-furniture where the brand was previously underdeveloped. West Elm has significantly shifted the composition of their sales towards new products. The cumulative effect of new introductions since the fall of last year continues to produce results. Retail in West Elm was also a highlight due to improved in-stocks and more new furniture and more new fabrics displayed on the retail floor. We've opened two beautiful new remodeled or repositioned West Elm stores so far this year, with one more to come in Q4. To remind everyone, we have 119 stores in West Elm, and based on results, we are looking forward to returning to retail unit growth in this brand. As you can hear, we are quite excited by the momentum at West Elm. Now let's review the Williams-Sonoma brand, which continues to fire on all fronts and ran a positive 7.3% comp in Q3. Williams-Sonoma remains focused on premium quality products that are expertly crafted, combining style and functionality. In Q3, we celebrated many successful culinary stories, from the food and flavors of Spain to authentic Indian flavors through a collaboration with Palak Patel, founder of the Chutney Life. We also recently launched a wicked collection featuring a limited edition Le Creuset Dutch oven inspired by Elphaba and Glinda. As we continue to connect our customers to the world's best chefs and products, we are seeing great traction with in-store events. Across the country, we hosted 42 in-store book signing events in Q3. We welcomed the fans of celebrities and celebrity chefs like Neil Patrick Harris, Dave Burkah, and Melissa King into our stores for amazing cooking demos and cookbook signings. Finally, we've opened six beautiful new remodeled or repositioned Williams-Sonoma stores so far this year, with two more to come in Q4. Now I'd like to update you on B2B, which grew 9% in Q3, with both trade and contract delivering strong comps. Leveraging our design expertise and commercial-grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator, and we are seeing continued momentum. Our biggest success story in Q3 was an increase in commercial workspace wins, including projects with Google, WeWork, TurboTax, and PayPal. Q4 brings the ramp-up of our growing corporate gifting program, including our leading assortment of quality giftables that can be customized with logos and company branding.

We're also a destination for seasonal favorites that make the perfect client and employee holiday gift. If any of you need help. Now I'd like to update you on our emerging brands. With our proven ability to incubate and scale brands in-house, we are confident in the continued growth of our concepts and their ability to deliver profitability to our results. Rejuvenation delivered strong double-digit comps in the quarter, continuing an upward trajectory fueled by product innovation and category expansion. Our high-quality product offer and proprietary designs are resonating with customers. Both channels are performing well, and we continue to open new retail locations to drive brand awareness. This quarter, we expanded our Rejuvenation store count to 13, with the opening of two new storefronts, one in Nashville and one in Salt Lake City. The brand also saw strong performance from its first-ever lighting collaboration. Mark and Graham delivered its best Q3 in brand history, driven by successful new categories M and G Kids, and Bark and Graham, as well as continued growth in personalized corporate gifting. As we head into the peak gifting season, the brand is well-positioned with thoughtful, personalized gifts for all occasions. I'm also excited to talk about our newest brand, Green Row, which delivered strong growth this quarter. In Q3, we launched the largest holiday collection to date with handcrafted decor and gifts made from upcycled and natural materials. The brand's colorful and unique products have had a great response, and the product line is incredibly beautiful in person. Therefore, we believe retail stores are the next leg of growth at Green Row and are looking to test a few store locations as soon as possible. Finally, I'd like to share one highlight in our global business. In the UK, we broadened our brand presence to launch a Pottery Barn online and the opening of a pop-up store in our West Elm Tottenham Court Road in London. So far, we're quite pleased with the performance of Pottery Barn in this new market. In summary, we're pleased with our execution and continued outperformance in Q3, marked by accelerating positive comps and strong profitability. Across the company, we remain dedicated to enhancing our channel experiences and strengthening our brand. Each and every day, we prioritize innovation, product design, and exceptional customer service. These are the qualities that set us apart in a fragmented industry and position us to capture additional market share. We see tremendous opportunity to continue to lead our industry as we execute on our vision to own the home and the places where our customers work, stay, and play. As we enter the final quarter of the year, we're filled with optimism for a strong finish. This holiday season, we're ready to showcase our best across our stores and online. From all of us, we wish you and your family a joyful Thanksgiving next week and a happy holiday season. Before I hand things over to Jeff, I want to take another minute to express our thanks to our team, our vendors, and all of our partners for their ongoing dedication and contribution to our company's success. We appreciate everything they do. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura. And good morning, everyone. Our results this quarter reflect Williams-Sonoma, Inc.'s competitive advantages in the home furnishings industry, including the following: the strength of our multi-brand portfolio across different categories, aesthetics, and price points; our size and scale providing the ability to drive market share gains as we maximize white space opportunities; the competitive advantage of our multichannel platform serving customers where they choose to shop, online, in-store, or business-to-business; our focus on customer service and full-price selling creating efficiency and cost savings across our supply chain; and finally, the power of our operating model to deliver highly profitable earnings. Our headlines for this quarter demonstrate these competitive advantages. We delivered positive comps for the fourth straight quarter. Furniture and non-furniture categories both ran positive comps, reflecting strength across all categories of our offering. White space opportunities, such as dorm, West Elm Kids, and Rejuvenation, grew double digits. Retail, e-commerce, and business-to-business all drove positive comps. Our supply chain team achieved best-ever results across nearly all customer service metrics while simultaneously improving efficiency and reducing costs. Despite the headwinds from tariffs, we drove operating margin expansion of 10 basis points to 17% and EPS growth of 5% to $1.96 per share. Our results this quarter would not be possible without the team we have at Williams-Sonoma, Inc. I'd like to thank our talented, dedicated team for delivering these outstanding results.

Now, let's dive into the numbers. I'll start with our Q3 results and then update guidance for fiscal year 2025. Q3 net revenue finished at $1.88 billion for a positive 4% comp. All brands delivered positive comps, driven by positive comps in both our furniture and non-furniture categories. We gained market share in the quarter, even as we increased our penetration of full-price selling. From a channel perspective, both channels delivered positive comps, with retail up 8.5% comp and e-commerce up 1.9% comp. Moving down the income statement, gross margin exceeded our expectations, coming in at 46.1%, seventy basis points higher than last year. Higher merchandise margins and supply chain efficiencies drove this gross margin improvement, offset by slightly higher occupancy costs. Merchandise margins delivered 60 basis points of our gross margin improvement, exceeding our expectations. Three factors contributed to this improvement in merchandise margins. First, the impact from tariffs is taking longer than anticipated to flow through to our gross margin. This is due to the delayed effective dates of the tariffs and our aggressive front-loading of inventory before tariff effective dates.

Second, we are seeing margin upside from our six-point tariff mitigation plan, including price increases as well as strong consumer response to our full-price product offering. Finally, lower inbound transportation costs are helping offset tariff costs. Supply chain efficiencies added 30 basis points to our gross margin. Our focus on customer service and in-stock ready-to-sell inventory is delivering tangible margin improvement from lower accommodations, damages, replacements, and out-of-market shipping expense. Occupancy costs were up 5.9% and were 20 basis points higher year over year. This was because of our retail outperformance and the higher occupancy costs in that channel. To recap, our gross margin results this quarter exceeded our expectations. Our tariff mitigation efforts more than offset the headwinds from tariffs in the third quarter. Turning now to SG&A, our Q3 SG&A ran at 29.1% of revenues, 60 basis points higher than last year. Employment expense deleveraged 50 basis points due to higher incentive compensation from our strong results year to date. We continue to manage variable employment costs across our stores, distribution centers, and customer care centers in line with top-line trends. Advertising expenses were 20 basis points higher year over year. Our in-house marketing team continues to test and optimize into different levels of spend. During the quarter, we increased our investment in digital advertising. After testing, and proprietary in-house analytics models indicated we could scale efficiently. The higher spend drove an acceleration in year-over-year site traffic and improved revenue per visit. Our in-house marketing team's ability to test, scale, and optimize across our portfolio of brands is a competitive advantage in the home furnishings industry. Finally, general expenses leveraged 10 basis points. On the bottom line, our earnings exceeded our expectations. Despite the tariff headwinds, our operating margin of 17% was 10 basis points above last year. Diluted earnings per share grew 5% year over year to $1.96. On the balance sheet, we ended the quarter with a cash balance of $885 million with no outstanding debt. We generated $316 million in operating cash flow during the quarter and invested $68 million in capital expenditures supporting our long-term growth. During the quarter, we returned $347 million to our shareholders. We did this through $267 million in stock repurchases and $80 million in dividends. Merchandise inventories stood at $1.5 billion, up 9.6% to last year. Our inventory includes $48 million of incremental tariff costs recorded in inventory as well as $30 million of a strategic pull forward of receipts and lower tariff rates than in effect today. Without this incremental $78 million, our inventory level would be in line with our sales trend.

Overall, our inventory level and composition are well-positioned to support our upcoming holiday season. Summing up our Q3, we're proud to have delivered strong results even as we navigated a challenging tariff environment and historically low housing turnover. Now let's turn to our guidance for fiscal year 2025. First, some housekeeping. In 2024, we recorded a $49 million out-of-period adjustment related to prior year's freight accrual. This benefited fiscal year 2024 operating margin results by approximately 70 basis points. Our guidance for fiscal year 2025 uses our fiscal year 2024 results without the out-of-period adjustment as a comparable basis. Additionally, fiscal year 2024 was a fifty-three-week year for Williams-Sonoma, Inc. In fiscal year 2025, we will report comps on a fifty-two-week versus fifty-two-week comparable basis. All other year-over-year compares will be fifty-two weeks versus fifty-three weeks. On full-year 2024 results, the additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin. The discrete impact of the additional week on just Q4 2024 was five to ten basis points to revenue growth and 60 basis points to operating margin.

Now our guidance. Given our strong Q3 results and our outlook for Q4, we are updating our fiscal year 2025 guidance. On the top line, we are reiterating our fiscal year 2025 net revenue guidance. We expect full-year 2025 comps to be in the range of positive 2% to positive 5%, with total net revenues in the range of positive 0.5% to positive 3.5% due to the fifty-third-week impact from last year. Our guidance continues to assume no meaningful changes in the macroeconomic environment, interest rates, or housing turnover. Our guide reflects the continued strength in our business, strong customer response to our product lineup, and continued traction across our growth initiatives. On the bottom line, we are raising our full-year operating margin guidance by forty basis points to a range of 17.8% to 18.1%. This means that despite the tariff headwinds, we are now guiding the midpoint of our fiscal year 2025 operating margin to be approximately 20 basis points above last year when excluding the fifty-third-week impact. Our higher operating margin guide reflects both the strong results we have delivered year to date and the expectation that tariffs will have a greater impact on our margins in Q4. Our updated guidance reflects all the tariffs in place as of this call. This includes the new Section 232 tariffs on furniture, the revised 20% additional China tariffs, the 50% India tariff, the 20% Vietnam tariff, and an average 18% tariff on the rest of the world, as well as the 50% steel and aluminum tariffs, and the 50% copper tariff. In fact, our incremental tariff rate has more than doubled from 14% earlier this year to 29% today, inclusive of all the tariffs I just mentioned. We believe the strength of our operating model combined with the six-point mitigation plan Laura outlined enables us to mitigate a large portion of these tariffs, which is embedded in our guidance. It's important to note the tariff policy has been volatile and subject to multiple revisions. It's hard to say where tariffs will ultimately land and what impact they will have on our business. Our guidance reflects our best estimates of the impact based upon the tariffs in place as of this call. Also today, we are providing some further inputs for modeling purposes. We now expect our full-year interest income to be approximately $35 million and our full-year effective tax rate to be approximately 26%. Turning now to capital allocation. Our plans for fiscal year 2025 continue to prioritize funding our business operations and investing in long-term growth. We expect to spend between $250 million and $275 million on capital expenditures in fiscal year 2025. We are investing 85% of this capital spend in our e-commerce channel, retail optimization, and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, we will continue to pay our quarterly dividend of $0.66 per share, which is a 16% increase year over year. We are proud to say that fiscal year 2025 is the sixteenth consecutive year of increased dividend payouts. For share repurchases, we announced today that our Board of Directors approved an additional $1 billion share repurchase authorization, bringing our total authorization to approximately $1.6 billion. We remain committed to opportunistically repurchasing our stock to provide returns to our shareholders. As we look forward to 2026, we will balance our long-term growth potential with the tariff and macroeconomic landscape, and we will provide guidance in March. As we look further into the future beyond 2026, we are reiterating our long-term guidance of mid to high single-digit revenue growth with operating margins in the mid to high teens. Wrapping up Laura's and my comments, we delivered another quarter of strong results despite the headwinds from tariff policy and historically low housing turnover. Our focus remains on our three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth for these five reasons: our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy, the ongoing strength of our growth initiatives, and the resilience of our fortress balance sheet. With that, I'll open the call for questions.

Thank you. We will now begin the question and answer session. Your first question comes from the line of Max Rakhlenko from TD Cowen. Your line is open.

Great. Thanks a lot and congrats on the nice quarter. So first, can you just discuss the elasticity that you're seeing in the business as you selectively increase prices? And how we should think about the impact to comps, from transactions versus ticket in 3Q?

Thanks,

Got it. Thanks a lot, Laura. And then, Jeff, you noted that it's taken longer for tariffs to flow through. Just how should we consider the impacts of tariffs over the next several quarters as it does sound like 4Q will see a pickup? And then just any guideposts on modeling for the next several quarters?

Yeah. Good morning, Matt. Thanks. Yes, let me explain why the tariffs are taking longer to flow through. I think it's important to unpack that. And first, it's really due to the delayed effective dates. For example, the August 7 reciprocal tariff, which applies in most countries like China and Vietnam, etcetera, had an exception for goods that were on the water that had to be received before October 5. Another example is with the India tariffs that were effective on August 27, there was an exception for goods in the water to be received before September 17. So this means that these tariffs will not start being applied to new receipts until mid to late third quarter. And then on top of that, we aggressively front-loaded receipts to bring in inventory at lower tariff rates than are in effect today. So the combination of these two really advantaged us in Q3. As we look to Q4, we've certainly said that the tariffs will have a larger impact upon our margin, and that is embedded in our guidance. As we look beyond Q4, it's a little early to talk about '26. There is a lot that could change between now and then, especially with the tariff landscape. So we'll save that conversation for March.

Your next question comes from the line of

Good morning. Could we start with your take on broader category performance from Q2 to Q3 and whether you saw underlying improvement there? And then just curious, stepping back, how you would frame the improvement we've seen in furnishings in your category relative to some of the broader macro and pressures that we've seen in home improvement and other bigger ticket categories?

Thanks,

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

Hi, good morning. So I want to follow up a little bit on that last comment on holiday. If you look at the implied Q4 revenue guidance, it's pretty wide. So could you comment on the low end versus high end and your ability to continue this comp trend as you face a more difficult year-over-year comparison?

Thank you, Cristina. Holiday is the last season, and then it includes January. We are really focused on very price solid. This has been an important part of our margin profile all year and the improvements that you've seen. Amazingly, we've had great success in our margin improvement even with the tariffs on top of everything. As we go into the holiday season, we continue to have opportunities from a year-over-year perspective in pulling back on promotions.

We're focused on right price selling, and hope to have fewer promotions than last year. Hence the wide range of comp performance. That's one piece of it. The second is when you look at the multiyear numbers, we're mindful of our strong holiday last year.

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

Hey guys. Thanks for taking the question. I guess two, one would be the market seems to be really concerned about how you're going to be able to digest these tariffs as they ultimately come through. Despite your ability to do so to date. I think expectations next year for operating margins to be lower in the first half of the year. But maybe Jeff, I'm not asking for specific guidance, but just how should we think about the ability of the business to just even maintain operating margins in the face of what you know about tariffs as they sit today. That's my first question. And then my second question would be around unit growth. Laura, it sounded like maybe a little bit more of an offensive posture. There, particularly around West Elm. We know that in aggregate, your units have been kind of coming down. Are you signaling a change there? Should we be thinking about I'm just thinking about the magnitude of unit growth we might expect as we look out on the horizon. Thank you.

Good morning, Peter. So where is the operating margin going? That's a great question. But if we look beyond our current guidance, that's not really a question we're going to answer today. It's too early to start discussing 2026 guidance. Our focus is on the holiday season delivering Q4. The real reason here is the tariff landscape has been incredibly volatile. Just look at what's happened over the past several quarters. Every quarter, there's been new tariffs, repeal tariffs, everything is changing. There's a lot of uncertainty on this front. I would point out that India is one of our largest sources of goods, and where that tariff is going, which is currently at 50%, is an open question. We also have the Supreme Court decision on I.E. EPA tariffs pending. We'll see where that goes. So it's a little hard to understand beyond our current guidance and beyond this year in Q4 where the tariff landscape is going to impact us. We believe that our six-point mitigation plan that Laura and I have been articulating all year combined with the power of our operating model, will allow us to offset a large portion of the tariffs. But the ultimate amount depends upon where the tariffs ultimately land. What we're really focused on is delivering the current quarter, and everything we know about our ability to offset the current tariffs is embedded within our guidance. In terms of your second question, Peter, where is unit growth going? Look, we've been saying all along that we have done an incredible job, and I want to complement our entire organization regarding our retail repositioning strategy. There's been multiple legs of the strategy. There's been closing underperforming stores, which I think everyone knows we've closed about 17% of our stores since 2019. About repositioning stores, from some of the tired indoor malls to more vibrant lifestyle centers. It's also been about opening new stores. We see opportunity for new store growth, particularly in the West Elm brand, with Rejuvenation, with Greenrow potentially. There's a lot of opportunity for us to continue to grow stores. In terms of where overall store count growth is going, as we've been saying all year, it will be mid-single-digit closures this year. I think we're not necessarily guiding 26%, but I don't think we'll see a substantial change in the overall store count as we look towards 2026. There's still more room to go on our repositioning strategy, but there's also white space opportunity to infill, and there's some great new locations that we're working on that will come online in 2026 and in 2027.

Your next question comes from the line of Christopher Horvers from JPMorgan. Your line is open.

Thanks. Good morning. So two quick ones. So I guess playing devil's advocate on the compare in the fourth quarter, Laura, furniture pull forwards behind you, there's a lot of momentum around self-help initiatives and obviously there's a tick of pricing coming through here. So you think about where we are in the cycle particularly with housing not helpful you know, why couldn't the growth rate just stay at the growth rate considering where we are? And then a quick one on gross margin, understanding there were some shifts on timing, but asking the question another way, did the drivers in terms of the fourth quarter in terms of the expected tariff headwind versus the expected benefit from the mitigation strategies? Did you change those at all in your outlook? Thanks very much.

Yeah. Hey. Go forward. First, I don't want to see that. I don't see any reason to believe we've seen pull forward of anything for that matter. We absolutely could be at the same cost, if not higher. We have a wide range. I was just explaining the differences of why you know, you might look at it and say it's a little bit lower than where you've been. It's very important that, you know, we don't play the promotional game. A key aspect of our strategy. At the same time, we're going to have great deals for Black Friday. We have great deals right now for early Black Friday. We bought into them. We have vendor partnerships on them. But we're not going to have as much. We hope we're not going to have as many needs to promote as we did last year. That's the only hesitation on the comp side. In terms of the tariff impact in Q4, it's sizably more than Q4 because the way that the cost flows through every single quarter. We did a fantastic job. Great success with everything planned in Q3 and throughout the year, and we will continue to do that. In fact, you know, it's amazing to see new opportunities that we're finding in supply chain. Supply chain has been just a tremendous positive this year in delivering up margins. What's great about it, as you know, is it means the customer is getting their product delivered more smoothly and on time and without damage. That's all good for the brand. It's fantastic for the P&L on the op margin side and the supply chain savings. There's still room, you know, if you look at Q4, there's more to go there. We're really optimistic about our ACDC, which is our new PC that came up last year and honestly, we're doing better than we have done with that, and that could be that could really help us, especially because, you know, the calendar this year for Christmas, similar to last year, pretty tight. So we want to be able to ship it late and ship perfectly and not disappoint anyone. That's why people come to us and shop online later with us like they do Amazon and others because they trust us to deliver before Christmas. There's a lot of really good things happening, but in terms of the impact of tariffs, you know, please don't get ahead of us on Q4. In terms of the margin. Because the tariffs are going to have a greater impact as you can see in our guidance and the implied Q4 guidance, than they did in Q3. If you look at our op margin ex-tariff, it's expanding. For all those that are, you know, worried about this, just realize that this goes into the base and we're done with it and we move forward. It's about outperforming our competition and continuing to deliver for our shareholders and most importantly, for our customers. Getting them incredibly beautiful, well-designed, high-quality products at the best price in the market.

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

Great. Good morning. I had one question, one follow-up. The first question was just on the consumer. You mentioned a better response to full-price selling. It seems like what you planned for. So just from like a strategy perspective here, how does that minimal elasticity kind of inform your customer targeting efforts going forward? Is what you're seeing giving you more confidence to target a higher-end consumer, a higher-income consumer more in the future than in the past? Are there strategies in place to do that? That's my first question.

That's a great question. You know, we're lucky where we sit. But we love all our customers. So we're going to give them the best price. You know, if it's the first apartment, first baby, or just their fifth house. We do see when we look at our two tax toes owning a home, that we haven't covered the real super high end at scale yet. It's not surprising to me that the origination is doing so well. Know, why we have this great growth? It's expensive. It's absolutely gorgeous. High-quality product, I hope that you've all visited a store, bought products, or seen it in someone's house because when you see it, you understand why you're really growing that business and why we believe so strongly it's their next billion-dollar brand. That sits at the high end. Green Brook sits at the high end. We haven't talked about Alexis Dining. But we're seeing that it's a new aesthetic. It's very, very original. That is not in the marketplace and it is entirely green product and people care about that. At least that customer cares about that. And so that's at the highest. We see that we can have retail stores in that brand, which tells me it's bigger than you might think. Then there's Lance on the home. Which we continue to see as an opportunity for us into the future. But don't, you know, mistake the importance of us also covering, you know, the upper middle customer, the Pottery Barn, the West Elm, and making sure that also those brands are so appealing people trade into them. You know, if I can decorate your house, more beautifully, and more affordably than the high end wouldn't you come to us? By the way, we'll do the whole thing for you. We'll set it up. I think you'll see that we can do it for a fraction of the price of what other people do and have it be super interesting and gorgeous. So we're going after all those pieces. There's opportunity right across that tic-tac-toe bar from what we define as our value customer, which is different than the market all the way to the high-end consumer.

Your next question comes from a line of Simeon Gutman from Morgan Stanley. Your line is open.

Hey, Laura. Hey, Jeff. Can I ask on tariffs again? The six-point plan seems to be beneficial and it sounds like the elasticities aren't awful. What's the chance that we get to the fourth quarter or even the first quarter as this inventory turns? That the impacts are going to be a lot more minimal than we think. I'm just trying to size up the conviction that we haven't seen anything yet. If some of this Aipa stuff gets, I don't know, invalidated, do you suspect that industry prices go back down? Or do you think retail prices, especially ones that have already changed, they're just going to hold?

First of all, I just want to say that the last thing I want you to think is that we're immune to tariffs. We've done a really great job of offsetting them so far, but the amount that they hit us in Q4 is slightly different than it was in Q3. So just that's why look at our guidance, please. Understand the impact. I even, you know, there's other tariffs. I'm not focused on that. We're focused on how we get the current tariff environment the greatest value to our consumers. Where should we be pricing things and where should we be moving things? So I wouldn't spend a lot of time worrying about that. I think it's just one more thing that could change and be kind of distracting in the short term. You know, there's also really good things that like, the India tariff is repealed that or reduced by half, that would be great for us. You know, all that is backdrop that affects the entire industry. Once it's in, and it's rolled through on a yearly basis, we're done with it. So I just as I said, just to recap, please don't think that we are moving Q4 and beyond. We will offset as much as we possibly can. We've done a better job than anything we even thought we could do. In offsetting all of it this quarter. But we have a few things going on in Q4 that I want to make sure Jeff reminds you in his prepared remarks. I'll let him remind you again about the fifty-third week.

Yeah. I mean, a couple of other things that I want to highlight too, Simeon, is and as Laura said, don't get ahead of us there. We did have improvement in our merchandise margins, particularly against what we expected in Q3. But it goes back to the timing factor that I talked about I think, the first question. The effective dates were delayed for all the tariffs. As we get to Q4, there will be a substantially larger impact on our operating margin than there was in Q3. Our guidance embeds in there our best estimates of what that impact is, inclusive of all of our tariff mitigation efforts. So I can't say it any other way other than we do not expect a repeat of Q3 and Q4, which is what our guidance is. In terms of the fifty-third week, I do want to remind everyone that this is a fifty-third week for Williams. We are coming up against a fifty-third week for Williams-Sonoma, Inc. On the year, it was worth 150 basis points to revenue growth and 20 basis points to operating margin. But in Q4 where the fifty-third week comes into play, it had a pretty big impact at five to ten basis points of revenue growth and 60 basis points of operating margin growth. So just on that, the fifty-third week and those 60 basis points, we would be down normally on a year-over-year thirteen-week sorry, yeah, thirteen-week to thirteen-week comparison.

Your next question comes from the line of Steven

Great. Good morning. Thanks very much for taking my question. I wanted to ask on Pottery Barn. Because the business decelerated a little bit there on the two-year stack. It's actually lagging the rest of the segments of the business. You referenced some pullback in promotions. Can you just talk about what's new this year? Because I think that's been a strategy for the past couple of years. When you think about the performance of that business, what are you seeing from a competitive perspective? Any sort of kind of trade down from the consumer and do you have some of these earlier questions around pricing, is there anything to call out from a pricing perspective competitive-wise?

Pottery Barn's Furniture has improved. We haven't seen that yet. Pottery Barn's Furniture, this year, especially on the multi-year stack, and that's been good to see. They did have more promotions to reduce out of their base than you might have expected. So we continue to work on that, and there's still opportunity.

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

Hey, thanks very much. Just Laura, just bigger picture, a lot of people have asked about tariffs. I want to ask a little bit about category growth and how you see sustainability moving into 2026? Probably speaking, a lot of your peers are doing better. Do you think that continues? And then one more near term, just cadence throughout the quarter. Some of your peers have had a lot of volatility. Anything you want to highlight for us? Anything you want to speak to so far in November? Thank you.

Yeah, you know, we don't talk about the month. Sunday is I do want to talk about excitement we have as we look forward. We have not seen a house in regard. Like the worst housing market in the last four years. And, you know, and that is a big deal. Now there's really not a lot of great finds, but it's getting better quickly. But there are some green shoots. I personally am very optimistic about housing next year. That'd be a big change for us if that happens because we know that when you move, you buy a lot. When you refresh your house, and we've been very good at getting the remodeler and the redecorator to come to us, but we're excited to be ready with a much more powerful furniture supply chain than we ever had before. When those sales come to us. We know that when that turns and you see upside again, it's a really big deal. Some people don't think you're going to be ready for it. But the things we've done to really improve our supply chain are so strategic. I believe and I've always believed that the person that owns the furniture network is the one who wins the whole thing. That is where we've been focused and continue to build and have all sorts of tech projects in play to make that happen. You can see it in our numbers this year. How much improvement year on year. I read through last year's script, and it's funny when you read it because we were talking about all the supply chain improvements then. I think if you'd ask me, I wouldn't expect it that we would have this much more. Yet we still have more, and that's what's exciting when you think about the power of our operating model, and it's a multi-brand, multi-channel company. Where this could go in the future as for insured coverage.

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

Good morning. Thank you so much for taking my question. Laura, of the interpretations of some of your comments over the last hour is that Williams-Sonoma has gone through this significant change where it's reduced promotion, improved its profitability, while it's been able to drive consistent sales growth. Now it may be at the point at which it can no longer lower promotional activity without it having some impact on the sales. Is that the right interpretation of what has been said on this call? Second, was the magnitude of the benefit to your margin in the third quarter from selling older lower-cost inventory at new higher price equal to or greater than it might have been in the second quarter, such that we should think about these not repeating in 2026, understanding you're not providing any guidance on 2026 at this point. Thank you very much.

In terms of your first question, I mean, you took some liberty there going. I think, you know, what I'm saying is that key strategies for our company continue to work. Then a focus on innovative process design, high quality, high service, and a regular price business. Investing in our brands, investing in our tech staff, our supply chain, to deliver great operating margins. But I will remind you, our key, our first initiative this year was to return to growth. I kept joking. It's one, two, and three, return to growth. We are obsessed with where we can grow, what brands it is, which categories it is, and how we outperform. So do not mistake that that is where our head is and what we're driving towards. On the second question, I'll hand it to Jeff.

Yeah, Michael. Honestly, I'm not tracking with you on the question because actually, margin expansion year over year in Q2 was 200 gross margin was 220 points. There's only 70 basis points in Q3. With the difference of course being the impact of the tariffs. So not sure I understood your question but there was a greater impact of the tariffs in Q3. While certainly, we have our mitigation efforts the tariff impact will increase sequentially quarter over quarter every year this year. As we said on the call, it will have an impact on us in Q4 in a much more substantial way than it did in prior quarters this year.

Your next question, and this will be the final question, comes from the line of Oliver Wintermantel from Evercore ISI. Your line is open.

Thanks very much guys. Yes, I think the message on gross margin in 4Q came across. I just want to focus on SG&A. You guys have lowered general expenses for the last several quarters. Especially in 4Q, I think there was 80 basis points in incentive comp headwind and advertising was also up a headwind of 30 basis points in the fourth quarter. So maybe could you talk a little bit about SG&A moving parts into the fourth quarter, how you expect that to shake out? Thank you.

Yes, Oliver. I mean, as you know, we don't guide to specific lines. We guide the top line and the bottom line. Because it gives us the flexibility to pull different levers as we see results come in. In Q3, our higher employment expense was really almost entirely attributable to higher incentive compensation due to our strong performance year to date. Then as I explained in our prepared remarks, advertising deleveraged about 20 basis points because we saw some opportunities. During Q3 to spend some additional advertising in the digital space. One of our competitive advantages is our in-house marketing team that has the ability across our portfolio of brands to test, scale, and optimize our spend. They saw some opportunity to spend in Q3 that gave us great returns. Drove incremental traffic to the web and higher revenue per visit, and so we leaned into that. As we think about Q4, we don't guide the specific lines, but our approach is always the same as we're looking to control our SG&A, but where we see opportunities are going to give us a good return on investment, we will, of course, lean into those. But it all depends upon the overall macro.

I thought that it might be worth studying on a minute even though we're a couple of minutes past the hour. I'm talking about our SG&A reductions due to our AI initiatives. Because, you know, if you're joking earlier that we have a fixed point mitigation plan for tariffs, but I think maybe we should launch our seventh as AI because we're seeing some really exciting results both on the sales side and also on market time. Let me make a few comments about that before we close the call.

Sure. Thank you, Laura. Like Laura mentioned earlier, in Q3, we are seeing really, really impactful results. She shared a couple of the data points around our customer service automation, She shared our launch of Olive, our AI agent customer facing. If you haven't used that, I really encourage you to go on the Williams-Sonoma site. Today. It's super helpful for planning for the holidays and is driving sales, driving engagement, driving loyalty. It's really exciting. We're already just on the topic of SG&A, we're already seeing payroll costs where automation absorbs AI automation absorbs repeatable work. Reduced vendor costs when we streamline external spend, and we're also seeing the same tech grow the top line. In supply chain, we're cutting out-of-market shipments, improving routes, lowering damages replacements, trimming shipping costs, inventory, we're using AI to raise in-stock rates on key items, all the stuff supports conversion. It's driving down costs, but it's also driving the top line. Digital guided journeys, better content coverage, all of this is driving SG&A leverage, it's all of it's driving reduced costs, but it's also driving demand leverage, which is really exciting to see it impact both on the cost side as well as the top line side. So we really see this compounding benefit as we head into 2026. I'm really excited about the continued impact we're seeing from our roadmap.

And we have reached the end of our question and session. I will now turn the call back over to Laura Alber for closing remarks.

Yes. Thank you all for joining us today. As I said earlier, wish you all a very happy Thanksgiving. With your families. Hopefully, you get a chance to stop by our stores and do some shopping. Look forward to talking to you in the New Year. Thank you.