WSM - NYSE

Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. 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 fourth quarter earnings call. 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 annual guidance for fiscal 2026 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that these statements will materialize. 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. I will now turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Laura, and good morning, everyone. We are proud to have delivered another quarter of growth with strong earnings, despite the headwinds from tariffs and anemic housing turnover. In fact, we have generated consistently strong earnings for several years, and now, top-line growth for five consecutive quarters. That execution and momentum gives us confidence as we transition into fiscal year 2026. Our ability to perform quarter after quarter reflects Williams-Sonoma, Inc.’s competitive advantages in the home furnishings industry, including a powerful multi-brand portfolio spanning categories, aesthetics, and price points to meet customers where they are; meaningful size and scale enabling us to capture market share and capitalize on attractive white space opportunities; a differentiated multichannel platform that serves customers seamlessly across e-commerce, stores, and business-to-business; our relentless focus on customer service, which drives efficiency and cost savings across our supply chain; and finally, a proven operating model that consistently delivers highly profitable earnings. Now let us turn to the numbers and see how our competitive advantages and strong execution produce results. I will begin with our fourth quarter performance, then review our full-year fiscal 2025 results, and finish with our outlook for fiscal 2026. As a reminder, fiscal 2024 was a fifty-three-week year for Williams-Sonoma, Inc. For Q4 fiscal 2025, we are reporting comps on a comparable thirteen-week versus thirteen-week basis. All other quarter-over-quarter comparisons are thirteen weeks versus fourteen weeks. We estimate the additional week in Q4 fiscal 2024 contributed 510 basis points to revenue growth and 60 basis points to operating margin. Q4 net revenues finished at $2.36 billion for a positive 3.2% comp. Positive comps in both our furniture and non-furniture categories drove our results, with our furniture trends accelerating from Q3. With the industry declining in the quarter, we gained market share even as we increased our penetration of full-price selling. From a channel perspective, both retail and e-commerce posted positive comps, with retail up 4.3% and e-commerce up 2.6%. Moving down the income statement, Q4 gross margin was 46.9%, down 40 basis points versus last year. The main driver of our lower gross margin was a 170 basis point decline in merchandise margins as the impact of higher tariffs flowed through our weighted average cost of goods sold. Occupancy costs contributed another 80 basis points to the deleverage, largely related to the fifty-third week. Partially offsetting these headwinds were shrink and supply chain efficiencies. Shrink added 160 basis points due to favorable year-end physical inventory results, and supply chain efficiencies added an additional 50 basis points. Our relentless focus on customer service continued to produce margin benefits from reduced returns, accommodations, damages, replacements, and shipping expense. Continuing down the income statement, Q4 SG&A was 26.6% of revenues, up 80 basis points versus last year. The main driver of the 80 basis points deleverage was general expense, which was up 120 basis points from last year. This increase was due to our lapping of an indirect tax resolution and a favorable insurance settlement in last year’s results. Employment and advertising expense leverage partially offset the impact from general expense. Employment expense leveraged 30 basis points, primarily due to lower variable labor costs across our distribution and customer care centers. Advertising expense was 10 basis points lower. Our in-house marketing team optimized spend while driving a quarter-over-quarter acceleration in e-commerce comps. On the bottom line, Q4 operating margin was 20.3%, down 120 basis points versus last year. Diluted earnings per share were $3.04 per share. Turning now to our full-year fiscal 2025 results, there are two items in fiscal 2024 that I want to remind you about. First, in 2024, we recorded a $49 million out-of-period adjustment related to freight accruals from prior years. This benefited fiscal 2024 operating margin by approximately 70 basis points. Second, the fifty-third week in fiscal 2024. For the full year, we are reporting comps on a comparable fifty-two-week versus fifty-two-week basis. All other year-over-year comparisons are fifty-two weeks versus fifty-three weeks. We estimate the additional week in fiscal 2024 contributed approximately 150 basis points to revenue growth and 20 basis points to operating margin on full-year results. Full-year 2025 net revenues were $7.8 billion at a positive 3.5% comp. All brands posted positive comps for the full year, driven by growth across both our furniture and non-furniture categories. From a channel perspective, both channels contributed to the strength, with retail up 6.4% and e-commerce up 2.2%. E-commerce was more than 65% of total revenues for the year. Full-year gross margin was 46.2%, a 30 basis point decline versus the prior year. The decrease was primarily driven by the 70 basis point impact from the prior-year out-of-period freight adjustment, a 40 basis point reduction in merchandise margins related to tariffs, and 20 basis points of occupancy deleverage. These pressures were partially offset by 50 basis points of supply chain efficiencies and 50 basis points of benefit from favorable shrink results. Full-year SG&A expense increased 10 basis points to 28%. Advertising expense leveraged by 30 basis points, partially offset by deleverage in employment and general expense. Employment deleveraged by 20 basis points due to higher performance-based incentive compensation, while general expense deleveraged by 20 basis points as we lapped the prior-year indirect tax resolution and the favorable insurance settlement mentioned previously. On the bottom line, full-year operating margin finished at 18.1%, 50 basis points lower year over year. Diluted earnings per share achieved a record $8.84, up 1% year over year. Turning to the balance sheet, we ended the quarter with over $1 billion in cash and no outstanding debt. Merchandise inventories were $1.5 billion, up 9.8% year over year. Included in year-end inventory is approximately $80 million of embedded incremental tariff costs. Excluding these tariff-related costs, inventories would have been in line with sales growth. Overall, we believe our ending inventory levels and composition are well positioned to support our fiscal 2026 guidance. Turning to cash flow and capital expenditures, we generated over $1.3 billion in operating cash flow in fiscal 2025. We reinvested $259 million in capital expenditures to support our long-term growth and delivered an industry-leading 51.6% return on invested capital on that spend. This resulted in $1.1 billion of free cash flow, and we returned nearly $1.2 billion to shareholders in fiscal 2025. That return included share repurchases of $854 million, or 4% of shares outstanding, at an average price of $174.70. Additionally, we delivered $316 million in dividends to our shareholders, reflecting a 13% year-over-year increase. Wrapping up my fiscal 2025 remarks, we are proud to have delivered growth and strong earnings for our shareholders despite the headwinds from tariff policy and anemic housing turnover. These results are a direct reflection of the exceptional talent and dedication of our team at Williams-Sonoma, Inc. I want to thank our team for their hard work and for delivering such strong performance. Now let us turn to fiscal 2026. The macroeconomic, geopolitical, and tariff environment remains uncertain. As we have demonstrated, we know how to navigate uncertainty and deliver consistently strong earnings. As we look ahead to fiscal 2026, we see significant opportunity to not only deliver strong earnings but, more importantly, accelerate top-line growth. Our guidance assumes no meaningful changes in the macroeconomic environment or housing turnover and does not include any benefit from the OB3 tax legislation. Our focus remains on what we can control: accelerating growth, delivering world-class customer service, and driving earnings. We expect fiscal 2026 net revenue comps to be in the range of 2% to 6%, with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. On the top line, our guidance reflects our confidence in our strategies. We remain focused on accelerating growth through our compelling product lineup, continued investment in collaborations, and disciplined execution across our growth initiatives, including dorm, Rejuvenation, and business-to-business. And if there are more favorable macro conditions, we see potential upside to that growth. On operating margin, our guidance reflects our best estimate of the tariff impact on fiscal 2026 results based on three key assumptions. First, it reflects our estimate of how tariffs already paid and those we expect to pay in fiscal 2026 will flow through our weighted average cost of goods sold. As higher tariff costs are embedded in our inventory, we expect the impact on operating margin to be front-half weighted and then moderate over the balance of the year. Second, our guidance assumes that all tariff rates currently in effect remain in place for the balance of fiscal 2026. This includes the Section 232 tariffs, the current Section 301 tariffs, and the Section 122 tariffs at the announced rate of 15%. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. Third, our guidance does not contemplate any refund of UFLPA tariffs, given the uncertainty around both timing and process. It is important to recognize that tariff policy has been volatile and subject to multiple revisions. Given the ongoing uncertainty, it is impossible to say where tariffs will ultimately land and difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance. Turning now to capital allocation, our fiscal 2026 plans prioritize funding our business operations while continuing to invest in long-term growth. We expect to spend approximately $275 million in capital expenditures in fiscal 2026. About 95% of that investment will be focused on strengthening our e-commerce capabilities, optimizing our retail fleet, and driving supply chain efficiency. A key shift in the plan is a near doubling of capital investment in retail, reflecting the meaningful opportunity we see to accelerate growth through retail stores. Our stores are a competitive advantage—powerful brand billboards—to drive profitable sales. Our free interior design services continue to differentiate us. More than half of retail sales involve a design appointment, helping drive the 6.4% retail comp we delivered in fiscal 2025. We will remain disciplined, continuing to close underperforming stores that do not meet our profitability thresholds. In fact, since 2019, we have closed about 18% of our fleet. Starting in fiscal 2026, we are investing to drive more retail growth in two ways. First, we will continue repositioning stores from older malls into more vibrant lifestyle centers. We expect to complete 19 repositions in fiscal 2026—more than we have done in any single prior year. Second, we expect to open 20 new stores in fiscal 2026, primarily across West Elm, Williams Sonoma, Pottery Barn Kids, Rejuvenation, and our first two GreenRow locations. These expected 20 store openings represent our most openings in a decade. Every project meets our strict profitability and return on investment criteria. We expect to end fiscal 2026 with approximately the same store count as we ended fiscal 2025 due to store closures. After fiscal 2026, we anticipate store count growth in the years that follow of approximately 1% to 3% per year. Embedded in our fiscal 2026 guidance is approximately 70 basis points of non-comp growth from this real estate activity. Turning now to our commitment to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases, on dividends, today we announced that our Board of Directors authorized a 15% increase in our quarterly dividend to $0.76 per share. Fiscal 2026 will mark our seventeenth consecutive year of dividend increases, an achievement we are proud of and remain committed to sustaining. On share repurchases, we have $1.3 billion remaining under our current authorizations, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns. Looking beyond fiscal 2026, we are reiterating our long-term outlook for mid- to high-single-digit revenue growth and operating margins in the mid- to high-teens. It is worth noting that the high end of our 2026 guidance falls within our long-term outlook. Wrapping up our comments, we are proud to deliver strong results for our shareholders. As we look ahead, we are focused on accelerating growth, delivering world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder returns for these five reasons that remain consistent: 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 resiliency of our fortress balance sheet. Before we open the line for questions, I would like to mention that our 2026 investor presentation has been released and is available on our Investor Relations website. I encourage everyone to have a look. With that, I will open the call for questions.

We will now begin the question and answer session. To ask a question, press 1 on your telephone keypad. To withdraw your question, press 1 again. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Hey, thanks. Good morning. Congrats on a great year. Laura, can you talk about the opportunities for store growth in 2026 and beyond, particularly as you incubate new concepts, especially Rejuvenation? Also, how are you thinking about expanding B2B over the next few years? And then, Jeff, any hand-holding on margins and phasing throughout the year in addition to the tariff commentary?

Thanks, Chuck. I probably jammed—yeah. Good morning. Good morning. It is that coffee, Laura. Yeah. I have had coffee. Thank you. I love this store question because it is a big pivot for us. We have been talking about our optimization strategy at retail and focusing on, you know, more profitable stores and, you know, all the moves we have made. And we have been reducing our fleet, and now as we look forward, we do not see that as what our future holds. We see—actually, this year is an inflection point, and we are going to be net neutral at the end of the year. So we have the most new store openings that we have had in many years—over a decade. Over a decade. Yeah. So even better than that. And so we are opening this year 20 new stores, 18 repositions, net flat. And, you know, we see growth in West Elm. We have growth in Pottery Barn Kids. We have, you know, embedded opportunity in Rejuvenation. We shall see about GreenRow. You know, we opened our first store like two weeks—we will see how that works. We have another one on the docket that we will open later this year. And, you know, there are more kids’ stores open now. So we are excited about that change in trend and how profitable our stores are and how good they look. It is a big deal for us in terms of our growth algorithm. Second question on B2B. As you look at the macro and think about all the different opportunities, it is one that is continuing to be the outsized opportunity. And we had great growth last year, as you saw and you heard in our prepared remarks. And I think it is going to be better this year, frankly. You know, I love seeing the contract outpace the trade because it is more repeat business. And, you know, the combination of all the things that we do together gives us a competitive advantage. And I just think we have the best sales team in retail selling our B2B. Then I will hand it back to Jeff on margin. If you want to make a comment on the other two, that is great too.

Well, I think, Laura, they are both Rejuvenation, retail, as well as B2B. They are all good examples of how we are really focused on accelerating growth. And we see a meaningful opportunity to do so in fiscal 2026 as we have guided. And I think Laura touched on those high points. I will say, Chuck, I am impressed—you got three questions in one. Diving right into the operating margin guidance for next year, regarding operating margins to be in the range of 17.5% to 18.1%. And, really, tariffs are the big story here. I think everyone knows that. And there are three things to consider when we think about how tariffs are going to impact our operating margin in 2026. The first is the tariffs we have already paid that are embedded in our inventory costs. Those will take a little while to flow through into our weighted average cost. The second thing to consider is the tariffs we are going to pay at the newer rates that have been announced. And then finally, it is just the uncertainty of the environment. So there are really three key assumptions that we have shared about how all these tariffs are going to flow through our operating margin. The first and most important thing to understand is it is not about a blended tariff rate. It is about how the tariffs flow through our weighted average cost of goods. And that is, you know, really a function of the costs that we ended the year with that are embedded in our inventory. And as we said in our prepared remarks, we expect the impact on our operating margin will be front-half weighted—heavily front-half weighted—and then moderate over the balance of the year as we start to comp the impact of tariffs in last year. And second, our guidance assumes all tariff rates currently in effect remain in place for the balance of fiscal 2026. Just to be clear, this includes the Section 232 tariffs, the current Section 301 tariffs, and Section 122 at what the administration has announced is 15%. And while we know the Section 122 tariffs expire in July, our guidance assumes it will be replaced with tariffs at a similar rate when they expire. And the third piece, and I will just say this—I think it is a given—but our guidance reflects our best estimates of the tariff impact based upon the tariffs in place as of this call. As we all know, tariffs have been subject to multiple revisions, and it is impossible to say where tariffs will ultimately land and what impact it will have on our business. Taking a step back, I think what we would observe is, you know, in 2025, we demonstrated we could navigate the tariff uncertainty and deliver consistently strong earnings. And regarding that, we believe we can do so again in fiscal 2026.

Our next question will come from the line of Peter Benedict with Baird. Please go ahead.

Hey, guys. Thanks for taking the question. So I guess one question would just be around, with the pivot to retail growth, you mentioned design services—you mentioned Design Service 3.0. I was curious if you could maybe expand on that. What is changing? What is different there? That is my first question.

So, you know, we have been really building our services in the percent charge almost, and we have told you how big that has been in part of our—the other brands that continue to have opportunity at that percent total. And in addition to purchasing homes with the big pieces, like furniture, we have been adding the second layer of accessories. And that was really two out of for us and all the accessories that go with, and then all the holidays that go with. The biggest option that we see in the future for design services is how we are going to use AI, and how we are going to put it in the hands of our sales associates to better decorate their homes. There is so much that we are doing with content and design services and Outward, and the combination of all that together with our people. And I will let Sameer Hassan mention a few things about that.

Yeah, thanks, Laura. It is just really exciting, the progress that we are seeing on the AI front. You heard Laura talk earlier in the prepared remarks about our strategies, and we are only starting to see it accelerate. And what is really exciting about what we are seeing with the evolution of AI and how customers are using it, how they are engaging with it, is that it really starts to play to our strengths as a business. AI works well when you have category authority. AI works well when you have expertise. And as customers are using it to find where there is value, where there is quality, where there are designs that meet their goals, both off our sites within these LLM engines, but also now on our site, as we are building these AI tools to help guide them through product discovery, to guide them through interior design—you have probably seen what we have launched with Olive on the Williams Sonoma site as a culinary authority to help customers with real problems and connect the dots between inspiration, between guidance, and ultimately towards shopping. So we are really excited about the progress we have made on the AI front, and we are really excited about what is yet to come.

Our next question will come from the line of Oliver Wintermantel with Evercore ISI. Please go ahead.

Yes, thanks, and good morning. Could you maybe talk a little about quarter-to-date trends—if you have seen any disruptions from the winter storms? We heard some other retailers said that there was a disruption. But, Laura, I think you said Pottery Barn is actually off to a good start quarter to date. So maybe some details on that, please.

Yes. Good morning, Oliver. So yes, of course, there have been some disruptions in the winter, but, you know, it did not really materially impact our results. And, you know, there is always some weather someplace—always impacts us in one way or another, particularly this time of year—but it is not a big factor. In terms of what we are seeing quarter to date, as you know, we do not provide a lot of quarter-to-date commentary. We are not seeing any big impacts from anything. You know, our consumer continues to be resilient, and it is hard to say exactly where we are going to be there. And, you know, Easter is ahead of us. There is another Easter shift this year. But everything that we know today is embedded in our guidance.

Our next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead.

We wanted to ask about the real estate strategy, just in terms of the two strategies of moving to more vibrant locations and the opening of 20 new doors. Just what it means for your occupancy costs in 2026, and will you be able to leverage a higher occupancy cost at that 4% comp at the midpoint?

Good morning, Kate. Good question. I think as you know, we do not guide individual lines like occupancy or even gross margin or SG&A. I think the story on retail is one really about growth, and we are seeing a meaningful opportunity to drive growth through our retail stores. And look, we delivered a 6.4% comp in retail in fiscal 2025, and we did so very profitably. And that is really because of what we talked about. First, our design services are a competitive advantage, and our customers are telling us that they love it and responding with opening up their pocketbooks. The second thing is the product we are delivering. We have really added the newness that we have been talking about in the past several calls to those stores, and we have improved the inventory position in those stores. They are really performing very well. And the third part of why we are delivering such strong comps and why we are confident in investing in the future is just the performance. I mean, the performance they have delivered, and it is really a function of the retail repositioning strategy that we have been through. So although this is a pivot, we are still going to be very disciplined. We will continue to close underperforming stores that do not meet our profitability thresholds. But we do see a meaningful opportunity to expand from here. Stores that we have repositioned from tired, older indoor malls to these more vibrant, high-traffic lifestyle centers have all seen substantial top-line comp improvements over their prior locations, as well as bottom-line improvements from less occupancy at that individual location. And that is why we are looking to do the most repositions this year that we have ever done. And then new stores—we are seeing meaningful opportunity there as well to go into white spaces in markets we are not in for certain stores, and there is a big opportunity there for us to continue that in the years ahead. Overall, we do not think it will have a major impact on our operating margin. It is embedded in our guidance that we have given today. But it is really a story about growth. And as we mentioned, you know, we will be flat at the end of this year in terms of store count. But as we look beyond 2026, we are guiding that we will increase our store count by 1% to 3% per year each year.

Great. Thank you. So Pottery Barn, as you know, is a very strong, profitable, loved brand. And as I said in my prepared remarks, we are really happy to see the tier comps improving, and, in particular, stabilization in the furniture trend. As you all know, Q4 has a higher percentage of décor in Pottery Barn—substantially—than other quarters. And let us remember that, you know, post-COVID and housing flow, we were focused on decorating as a growth vehicle instead of furniture because people were buying garage furniture. Probably over-rotated a bit, to be honest with you. It reached an all-time high and saw a little bit of a giveback. But we also, you know, in retrospect, are self-critical. We are always looking for places to improve, and we probably had too much reliance on best sellers from last year, and we were not in it. And as we go into the first quarter and into the year, obviously the complexion of the categories changes back to be more balanced, and that is what is driving the improvement, we believe.

All right. Now, transitioning to your second question on what we should think about in terms of operating margin in 2026. As you know, Cristina, we do not guide the individual quarters. But I will help you with the shape of the year. The big factor in the first half of the year is the embedded tariff cost we have already paid. We are on weighted average cost accounting, so it takes a little while for that to work through our operating margin. So as we have guided, the impact will be heavily weighted to the front half and then slowly moderate across the back half as the impact starts to wear off and we start to comp tariffs we paid last year.

Our next question will come from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Great. Good morning, and nice quarter. Laura, last quarter, you remarked that there were pockets of your assortment that remained underpriced. So how should we think about the magnitude of pricing that is embedded at the midpoint of 4% comps for the year? Thanks so much.

Well, I do not think about it like that. I mean, I think about the midpoint of range with the pricing. I would—I do not comment on the pricing, and then, Jeff, I do not know if you want to make a comment. But on the pricing, you know, whether it is, you know, because of tariffs or just all the time, we are constantly looking for the best price-value relationship and how to give our customers the winning combination that makes them buy from us. And the best thing we can ever do is give them a design they cannot resist at a fair price. Right? They can count on us for quality. They know that they are going to get great service. We have made such improvements with service, and we are also going to really help them because together with everything else in their house, which is a big deal because a lot of the other players, especially the online players, it is one-and-done, and you are not decorating. You are just buying an item—maybe for your garage. So in terms of pricing, there are pockets always where, gosh, we, because of something, blow it out, and we say, oh, it could have been a little higher, and, you know, think about that for next time and make adjustments. And there are some items and categories that are, we still think, undervalued. It is very competitive to open, so I do not really want to go through them all because I do not want to give that list of things to our competition to look at. But we do see some opportunity, and,you know, at the same time, look at the opposite too, which is, you know, where are we seeing an overpriced—as we get cost concessions, should we drive more units and take the price down slightly? So it is a pricing testing mindset in the company. We share it across brands and how pricing affects demand.

Yes. I would just say, Laura talked about, when we think about pricing, it is category by category, SKU by SKU—really looking at each one of those categories, each SKU, and how is it compared to its competition. It is, for us, a little divorced from how we think about growth and how we think about our guidance. And that, you know, from that standpoint, what we are really thinking about when we look at guidance is we are looking at our trends. And last year, we delivered a 3.5% comp. And in fact, if you look at our Q4 results, our two-year comp accelerated, which we see as a positive indicator. And then we look at the confidence we have, the momentum we have with our growth strategies—you know, things like our white space opportunities that you have heard us talk a lot about, things like West Elm Office, which we launched in January; things like dorm; things like baby. We have white space opportunities that are going to be additive to our results. Then we have emerging brands. And we talked a lot about Rejuvenation. It is a brand that has been double-digit comps for over two years, and we just see continued opportunity to grow that. We think, over the long term, that can be a billion-dollar brand. We touched on B2B. It just delivered another double-digit quarter. It was up 14% comp. It had its largest quarter of contract volume to date. We exited the quarter with a very, very strong book of business and leads going into fiscal 2026. And then there is retail. We have talked a lot on the call about retail—it delivered a 6.4% comp in 2025, and we see meaningful opportunity to expand that. So when we think about our comp range and the midpoint of our comp guidance, which is a 4.0, it is really about our strategy and how we think that we have momentum behind our business. And the fact of the matter is we are taking market share in this industry, and we see an advantage to and ability to leverage our competitive advantages and take even more market share.

Our next question will come from the line of Max Rakhlenko with TD Cowen. Please go ahead.

Great. Thanks a lot. So first, Laura, can you speak to the health of the consumer and their willingness to stomach tariffs in the category? And just what is your take on the industry’s ability to maintain higher prices if tariff pressure does end up easing? Then, Jeff, just quickly, any more color on the shrink benefit that you saw in the quarter? Should that continue into next year, and just how to think about that?

Makes sense. In terms of the consumer, I can only comment about what we are seeing. You know, I am reading and hearing that other people are saying very different things, and you can see a lot of stepped-up promos in the competition. And so a lot of, like, flight-wise with “20 off” here and “20 off” there. And that is typically for a lot of the kind of smaller companies that are trying to be sold or that are—they are trying to, you know, establish themselves. They are playing that promo game. There is no sizable new entrant that we are seeing in the market. But I can comment that our customers are responding to our aesthetic, our newness, our collabs. They love them. Do not know if you got a chance now to look at what we are doing with Emma Chamberlain and West Elm. That is the kind of thing that they are delighted by. I mean, she has 14,000,000 followers—so fun. She is such a great marketer, and the product is really, really easy to buy. And that is how we are making the weather happen in our brand—is stuff like that. Furniture is single to us. I said that. B2B is growing. So, you know, we are seeing nice response from our consumers. But, you know, it is something you take for granted. Right? Every corner, every brand, we have strategies to improve the product line, to improve the mix, to improve our value equation, to improve our service, and to drive brand heat. And that is a big part of who we are and why we continue to deliver. Second part of your question on shrink.

Simple. After completing physical inventory and reconciling all the inventory accounts, we had minimal shrink. And the thing is—and you have been doing retail for a long time—you simply never know until you take physical inventory and reconcile everything. And we attribute the favorable shrink results to ongoing supply chain improvements and fewer returns—fewer damages, fewer replacements, fewer last-mile shipping issues, better set-line inventory—and we think that is finally coming through in terms of physical inventory results. In terms of what it means for 2026, it is not a material driver, and any impact of shrink is embedded in our guidance.

Our next question will come from the line of Brian Nagel with Oppenheimer. Please go ahead.

Nice quarter. Congratulations. Nice year. Congratulations. I have two questions. I guess one is kind of short term and then maybe a longer-term one. So Jeff, on the short-term side, going back to prepared comments, there seemed like there were a lot of—if you look at gross margin—there were a lot of kind of one-off items here in the fourth quarter. I guess the question I want to ask is, how should we think about, as we look at fourth quarter gross margin—is there a way to frame if it was a normalized, I guess, year-over-year change? And then as we look into 2026, recognizing you do not give specific guidance, how should we think about kind of the puts and takes on the gross margin side?

Yes, Brian, it goes back to what I have been saying in the call and the prepared remarks. When we think about the drivers of operating margin—and it flows a little bit through the gross margin—it really comes down to how the tariffs are going to impact us in 2026. And like I said, there are three pieces here. One are the higher tariff costs we have already paid that are sitting on our balance sheet that have to work their way through our weighted average cost. Then there are the tariffs that we are going to pay in 2026. And then, you know, we do comp somehow later in the year—as we head into Q3, Q4, we start to comp the tariffs. When you put all that together, our guidance is that the impact of tariffs on operating margin will be heavily front-half weighted and then moderate over the balance of the year as we start to comp it and the impact of the embedded tariffs works their way through our weighted average cost.

Our final question will come from the line of

Hey, good morning. So just a couple more on the gross margin line. First of all, Jeff, what is the weighted average tariff rate today, and how has that changed over the last two quarters? And second, can you remind us how your freight contracts renew—how should we think about the impact of higher freight and oil today?

I will take the second one first. In the way higher oil costs are impacting our transportation costs, I would just simply say it is very early, and it is a little difficult to tell how this plays out. I think we would all agree there is a lot of uncertainty about what is happening geopolitically in the world and what that means for price of oil and how it trickles through transportation. We are seeing some noise out there of higher prices. But overall, it is—all what we know today is embedded in our guidance. And it is such an area of uncertainty that our estimates we are providing today are just what we understand is going to happen. In terms of gross margin, remind me what your question was.

Tariff rate today and how that has changed over the last two quarters?

You know, we are not going to provide the specific tariff rate. As everyone has heard me say, we are not going to go up and down on the basis points or specific tariff rates every single quarter simply because it has been changing so much that every time there is a change, every time there is a tweak, it is going to be virtually impossible to get on the phone with everyone explaining the latest permutation. Our guidance assumes that the higher tariff rates that we paid in fiscal 2025 that are remaining in our balance sheet flow through our weighted average cost. So from that standpoint, it is still pretty high because those costs are still embedded in our inventory. But they will work their way through our weighted average cost of goods, primarily in the front half of the year. And then, as we said, the impact on our operating margin will moderate as we get through the back half of the year.

And I would like to just comment a little bit on the cost of the war. Again, you know, as Jeff said, there has been no huge cost increase that we have seen as of yet. We have seen some transportation costs increase, you know, on air, for example, and we have seen some domestic rates increase as well. But that is not material yet. We have not put in our guidance a material cost increase over the year that would come from cost of goods going up substantially or transportation going up substantially. So remember that, you know, we are not sailing in the Suez support routes. Thank God. And we have not actually seen our shipping times affected yet. So we have not seen either supply chain delays as of yet. But as we all know, we cannot predict this. So we suggest what we think—we have done the best job we can putting into our guidance a reasonable estimate, and we do not have a crystal ball on what this could mean longer term. What we are focused on, as you guys know, in wrapping this up, is really how do we deliver in any environment. And you have seen us do this with the same experienced management team, you know, through COVID, post-COVID giveback, and now through all this geopolitical uncertainty and tariff chaos. And, you know, it is noisy out there, but we tend to be able to handle it better than most and be ahead of it. And so we will take it as it comes, and we will continue to update you.

This concludes the question and answer session. I will hand the call back over to Laura for any closing comments.

Thank you all. Hope it is getting warmer across the country. All of you—and some sunshine is out—and please go visit our stores and see what we are doing. We appreciate your support, and we cannot wait to update you throughout the year. Thank you.