Good day, and welcome to the Williams-Sonoma Third Quarter 2021 Earnings Conference Call. Operator provided instructions. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our third quarter earnings call. I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including guidance for the fourth quarter of 2021. Although we believe these statements reflect our best estimates and all available information, we cannot make any assurances that 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. A reconciliation of non-GAAP measures for the most directly comparable GAAP measures, along with an explanation of how and why we use these measures, appears in Exhibit 1 to the press release we issued earlier today. This call should also be considered in conjunction with our periodic and annual filings with the SEC. Finally, the call is being recorded, and a replay will be available on our investor relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you. Good afternoon, everyone, and thank you all for joining us. We're extremely proud to deliver yet another quarter of outperformance with comps of 16.9%, building to an accelerated 2-year stack of 41.3% and operating margin expansion of 60 basis points. These results are a function of both the advantages of our distinctive positioning in the market and our successful execution against our long-term growth strategy. Furthermore, our performance demonstrates that we continue to take share in a fractured market and deliver high-quality, sustainable earnings. As a result, we are raising our full year outlook to reflect revenue growth of 22% to 23% and operating margins of 16.9% to 17.1%. Customers are clearly responding to our products and channel strategies, and we expect to drive an outstanding finish to the year and beyond. On the macro front, the industry remains large and fragmented, with more than half of its sales generated from smaller brick-and-mortar retailers. We are one of the strongest market players and have incredible opportunity to capture more of an almost $1 trillion market opportunity. We are at a pivotal point of change, both in the way we live and work, and we will intensely focus on our unique ability to capitalize on this change and, in turn, capture market share. The housing market continues to hold strong with purchases of larger first and second homes. Additionally, hybrid work arrangements continue to gain traction as a permanent work model. Both of these trends result in a stronger need and desire to outfit the home for working, entertaining and cooking. In addition, another large point of disruption is the shift of the consumers to make purchases online. Certain factors continue to bolster the shift in behavior, including the lasting impact of the stay-at-home dynamic of the pandemic and the entrance of the millennial generation into their home formation years, a customer segment who naturally gravitates towards digital purchasing. In an industry occupied by market players who have not yet made significant investment in their e-commerce capabilities and pure e-commerce players without the service element of our retail business, we believe we are uniquely positioned to benefit from this trend as a digital-first, but not digital-only company. Our incredible store shopping experience satisfies our cross-channel customers who shop both online and in-store. Our customers continue to place importance on and in many instances, demand the prioritization of sustainability. In fact, almost 70% of consumers today want to support brands that are purpose driven and doing good in the world we share. Our company is committed to being a value-led, sustainable company and is proud to be a leader in the home furnishing industry. In short, the fragmented industry, the strong housing market, the shift of the consumer online and the consumer demand for sustainability provides specific unique and sizable opportunities for our company to continue to grow. And these macro trends are a perfect fit with our key differentiators. Our in-house design capabilities, along with our depth ability to value engineer our products, allows us to offer exclusive, relevant and high-quality products. Our channel strategy provides a competitive edge in scaling the business into the future compared to both the retail and marketplace-dominant players. And of course, our values, which are deeply rooted in sustainability, diversity, equity and inclusion, are embedded in our products and central in our actions. These principles have been and will continue to be fundamental and nonnegotiable to the customers and communities we serve. This, combined with our growth strategies, not only provide for sizable opportunities to grow our core businesses, but also to drive momentum in reaching new customers, geographies and industries. This expansion and diversification of our customer base presents many exciting opportunities to deliver solutions for underserved spaces and places, from B2B, which brings an exciting new customer profile, to our global business which drives expansion across new geographies, to our cross-brand and marketplace opportunities which expands the reach of our current base and the expansion of Williams-Sonoma Home, which attends to an underserved, high-end luxury market and has massive future potential for scaling. We have, in fact, many opportunities to drive our business forward into the next chapter of growth. Simply put, it's these macro shifts, combined with our key differentiators and our long-term growth prospects that result in us strongly believing in our ability to continue to take market share and deliver earnings well into the future. Before we talk about Q3, let's take a minute to review the supply chain, which I know is top of mind for all. It is no surprise that we have been intensely focused on the supply chain bottlenecks around the world. Like all companies, we are not immune to the ripple effect from these short-term and long-term delays. I want to share with you our status and the extraordinary accomplishments of the team. Our upholstery lead times continue to improve and are industry-leading as a result of our in-house domestic capabilities. Our immediate and decisive responsiveness, our strong long-term vendor relationships and our scale have all minimized production and delivery delays relative to our competition. And as a result, approximately 85% of our holiday receipts have already been received. And finally, when we have delays, customer service is our priority, which has resulted in declines in escalations, cancellations and calls into the care center. All that said, I do want to highlight some important challenges we are facing as a result of this supply chain disruption. First, as you know, we sourced a sizable amount of inventory out of Vietnam, which was recently shut down for three months. This country has since reopened, but is experiencing significant backlog across factories as they ramp up. As a result, we are experiencing some inventory delays, particularly in our children's home furnishings businesses. Second, given the ongoing strong demand we are seeing across our business and the impact of the Vietnam delays, we do not expect full recovery of our inventory levels until the middle of 2022. Now let's turn to the results of the third quarter, which clearly demonstrates the strength of our business and our ability to execute with all brands outperforming again this quarter. West Elm delivered a 22.5% comp, with all categories driving strong growth. The upholstery business was very strong, and customers responded well to new products, including best sellers in bedroom, dining and occasional categories. Additionally, new categories such as baths, kids and kitchens also contributed to incremental growth. Pottery Barn delivered another high-performance quarter, with a comp of 15.9%, driven by strong growth in all product categories, including our seasonal decorating business. In addition, we saw strength across our core lifestyle furniture category, our design services and our furniture advantage growth initiatives such as apartment and our curated marketplace assortments. Pottery Barn Kids and Teen grew with a comp of 16.9%. The demand for our GREENGUARD Gold-certified furniture remains strong, emphasizing the importance of both our proprietary design aesthetic and our commitment to sustainability in our customers' buying decisions. Our baby business continues to accelerate as our customers expand their families and the response to our holiday and gifting offerings was strong with Halloween products driving record results. The Williams-Sonoma brand accelerated to a 7.6% comp with growth across all key categories, driven by product innovation, edited and relevant assortments and high demand for Thanksgiving and holiday product. Both our exclusive products and Williams-Sonoma branded products continued to grow, and we saw strength in key entertaining items. Operationally, an intensified focus in our key vendor partnerships has allowed us to increase inventory positions in high demand categories, despite a supply chain-constrained environment. And we believe the improvements made to our online and store experience yielded momentum in the quarter. Finally, last week, the brand launched a new recipe app and a Reserve Membership program, both of which provide a new way for our customers to engage with the brand while supporting our ongoing strategic initiative to develop and deploy content distribution. Our Williams-Sonoma Home business is also accelerating as a result of our strategy to reposition the brand as a premium online furniture destination. We believe that with a refined curated assortment and an appealing digital presentation, Williams-Sonoma Home will be one of our biggest growth opportunities. Cross-brand, we're excited to share that our B2B growth initiative continues to produce record performance with our largest quarter ever, generating over $200 million of sales, nearly double that of last year. Significant accomplishments of the business include an increase of 44% in new clients over last year, an acceleration of our contract-grade lineup as businesses reopen and growth and diversification in our large project pipeline. The business is also building across industries, capturing additional market share. This growth initiative continues to outperform, and we see significant opportunity for this business to contribute long term. In our cross-brand global business, we are focused on expansion, but through a disciplined capital-light brand-enhancing franchise model. This quarter, we opened our first franchise store in India and rolled out e-commerce capabilities across that country to great success. As we look forward, we see additional opportunities to lead in digital around the world. Additionally, our initiatives to promote selling across our brands continue to yield results. Cross-selling metrics, including total customers and percent of total customers shopping across brands, are at record levels. Not surprisingly, the spend of a cross-brand customer is a multiple of that of a single-brand shopper, and increasing our share of spend with these customers will have a significant impact on incremental volume for the long term. We are excited about the many initiatives we have in place to capture this opportunity. Also in this quarter, we launched our new cross-brand credit card program, where customers can apply for credit, purchase and earn rewards with any of our brands. This new initiative complements our existing loyalty program for all other tenders. These two tiers of loyalty programs help us acquire and retain customers irrespective of their method of payment. The advantage of our loyalty program is twofold. First, as we previously shared, the multi-brand customers were two to three times the spend of the single-brand customer. We know we have an opportunity to increase our share of wallet with these customers. And with our portfolio of complementary brands, this is a tremendous competitive advantage few, if any, have in our industry. Second, our loyalty program dramatically enhances the richness of our first-party data. With almost 70% of our volume derived from e-commerce, we understand the importance of first-party data in the cookie-less future that is rapidly approaching. The loyalty program, along with hundreds of other attributes in our in-house file, is consolidated across our brands and channels, which allows us the ability to aggregate browsing behavior, transactions, demographics, channel preferences and many other attributes. This rich first-party data, along with our own in-house advertising expertise, allows us to be prepared and equipped as privacy rules evolve across the digital space. And finally, I'd like to spend a minute on our impact initiatives. We are proud to announce that in the third quarter, we raised minimum wages again to at least $15 an hour for all of our employees. Additionally, we also announced new goals to both expand our purchase of next ethically handcrafted products to $15 million and to nearly double our investments in Fair Trade certified products to $10 million by 2025. As the first home furnishings retailer to set significant ESG goals, we continue to lead the industry. These actions not only positively impact people and communities that make, source and distribute our products but also deliver value to our stakeholders, customers, vendors, shareholders and our communities. And our unwavering commitment to values is gaining further recognition. For example, our Pottery Barn renewed program was included in Fast Company's 2021 Innovation by Design Awards. We are rated top score by the Sustainable Furnishings Council for the fourth year running. And our MSCI ESG rating was upgraded to AA, driven by our strong commitment to ethical production and our newly announced climate goals, which further distinguishes our company as a leader in sustainability. As we enter the fourth quarter, we are seeing strong sales and margins continuing. We are thrilled with our customers' response to our holiday and gifting assortment, and we are ready to drive an outstanding finish to the year. Our teams are prepared to fulfill record orders leveraging our new technological capabilities and maximizing our digital-first omni advantage to meet the outsized demand we are seeing from our customers. In summary, with our strong results to date, our winning positioning in the industry and our outperforming growth strategies, we are more confident than ever in the long-term strength of our business into fiscal 2022 and beyond. We continue to be confident in our outlook of at least mid- to high single-digit comps, accelerating our revenues to $10 billion by 2024, with operating margins at least that of fiscal 2021. Before I pass the call to Julie, I want to thank our team for their outstanding work, creativity and relentless focus on driving the business. Their talent, energy and commitment underscores all of the success that we have had. And with that, I'd like to wish you all a happy holiday season.

Thank you, Laura, and good afternoon, everyone. We are pleased to report another quarter of record revenues and profitability. It is clear that our high-quality products and value proposition are resonating with our customers. Our growth strategies are outperforming, and our operating model is positioned well to continue to deliver revenue growth and profitability into the future. Our unique operating model has proven to be a competitive advantage and difficult to replicate. Ninety-five percent of our products are proprietary or exclusive to our brands. We have a vertically integrated digital-first, but not digital-only, operating model that is nearly 70% e-commerce in an industry that primarily consists of brick-and-mortar or pure e-commerce players, and we are a sustainable and values-led company. These advantages, along with the macro trends that favor our business, a strong housing market, the permanent adoption of hybrid work, a shift to online purchasing and the demand from customers for values and sustainability in their products are clearly driving our results and will fuel our growth and profitability for the long term. Turning to our third quarter results in more detail. Net revenues grew 16% to $2.048 billion, with comparable brand revenue growth of 16.9%, with comps accelerating to 41.3% on a 2-year basis. This strong performance was broad-based across all brands and both channels. In fact, against tougher compares, our e-commerce business accelerated to over 67% of our total revenues from the second quarter and was our highest 2-year comp ever at 64%. By brand, West Elm delivered a 22.5% comp, taking year-to-date revenues for the brand to over $1.5 billion. Pottery Barn, our largest brand, drove their fifth consecutive quarter of double-digit comps with a 15.9% comp. Pottery Barn Kids and Teen grew at a comp of 16.9% and had their highest 2-year comp ever. Williams-Sonoma drove a 7.6% comp accelerating from the second quarter and on top of 30.4% last year. And our emerging brands, Rejuvenation and Mark and Graham combined continue to drive significant growth at a 26.5% comp, and all brands grew nearly 40% or higher on a 2-year basis. Moving down the income statement. Gross margin expanded 370 basis points to 43.7%. Our selling margins drove 280 basis points of this expansion. And relative to 2019, our selling margins are up 430 basis points, in line with our first half results, despite higher ocean freight costs incurred during the quarter. These strong margin results reflect our pricing power from our proprietary design products and the advantage of our vertically integrated sourcing and production, which allows us to engineer our product for value and to best navigate through the various macro complexities. We are pleased to deliver another quarter of strong top line sales and merchandise margin expansion. Occupancy cost leverage was also a factor in our gross margin expansion, leveraging approximately 90 basis points, resulting from higher sales and low occupancy dollar growth. Occupancy costs were approximately $183 million, up 5.1% year-over-year and relatively in line with our second quarter growth. The year-over-year increase includes a one-time impact from rent true-ups and rent abatements last year as well as the incremental impact from our new East Coast distribution center, which gives us additional capacity to support our strong customer demand. We were pleased to see another quarter of occupancy leverage reflecting the strength of our top line and the ongoing success of our retail optimization efforts. SG&A in the third quarter was in line with the prior quarters at 27.5% of net revenue. Year-over-year, SG&A deleveraged 320 basis points, driven by higher advertising spend coming off of our substantially reduced costs in 2020 and our decision to incrementally invest in advertising. As we have said all year, given our record levels of profitability, we have been strategically and aggressively investing in high ROI advertising to drive new customer acquisition, retention and top line growth, which clearly is working. We continue to see record new customer counts and strong demand, which has benefited our business to date and will continue to drive growth well into the future. Furthermore, we view it as a competitive advantage to be in a position to increase spend today while the competition may need to pull back to offset incremental supply chain costs. And despite this expected deleverage, we still delivered SG&A rates near historically low pre-pandemic levels and another quarter of record profitability. Operating income grew to a record $333 million, resulting in an operating margin of 16.3%, expanding 60 basis points over last year. This resulted in diluted earnings per share of $3.32, up 30% from last year's record third quarter of $2.56 per diluted share. Put these results in context, we have not seen our performance waver all year despite any shifts in the consumer wallet as the world reopens and being up against accelerating tougher year-over-year compares. In fact, year-to-date, we are tracking to a 28% comp or 41% on a 2-year basis, with 400 basis points of operating margin expansion at a 16.3% operating margin and over 85% growth in earnings. Turning to the balance sheet. We ended the quarter with strong liquidity levels and a cash balance of almost $660 million. The strength of our business has generated operating cash flow of almost $790 million year-to-date, which is approximately $60 million over last year's elevated cash flow levels. This cash flow strength has allowed us to fund the operations of the business, to invest over $140 million in capital expenditures and to return almost $790 million to our shareholders in the form of over $135 million in dividends and over $650 million in share repurchases. These decisions reflect our confidence in the sustainability of our growth and our commitment to maximizing returns for our shareholders. Moving down the balance sheet, merchandise inventories, which includes inventory and transit, were $1.272 billion, representing an increase of 13% over last year. Inventory on hand and available for sale was up 3% year-over-year. While that is an improvement from where we were in the second quarter, our inventory levels are still not aligned with demand and are below optimal levels. Our back order levels continue to be at record highs, driven by our strong demand and the supply chain disruptions that unfortunately continue to delay our order fulfillment, including the most recent delays out of Vietnam. As Laura mentioned, our phenomenal team and their aggressive actions, combined with our scale, has enabled us to navigate through these challenges better than others. And given our ongoing strong demand, we expect a return to more normalized inventory levels by mid-2022, with back order levels remaining elevated into the first half of 2022. Now let's turn to our expectations for the rest of the year and longer term. We are raising our 2021 outlook to reflect revenue growth from high teens to low 20s to now 22% to 23%, and operating margins from 16% to 17% to now 16.9% to 17.1%. This is our third consecutive raise this year. Additionally, we are also reiterating our longer-term outlook of revenues accelerating to $10 billion by 2024, with operating margins at least in line with our raised fiscal year 2021 levels, which implies at least a mid- to high single-digit comp with margins at least holding over the next three-plus years. We, of course, will revisit our 2022 and longer-term outlook next quarter in more detail. We are very confident in the fundamentals of the business and our strategies to sustain our growth into the future. In addition to the macro trends, our key differentiators and our successful growth initiatives, as previously mentioned, we have several other factors that give us confidence. First, our results to date. We saw comps accelerating even before the pandemic as a result of our growth initiatives to hit the 10% comp in February 2020. Our results during the pandemic continued to accelerate despite our retail stores being closed. And our results every quarter this year have held at a 2-year comp of approximately 40%, despite accelerating tougher year-over-year compares. And we did this while pulling back on all site-wide promotions and with low levels of available inventory for sale. Second, our proprietary products and vertically integrated sourcing and production, which provide us pricing power and the ability to optimize and engineer our products for value, drive strong merchandise margins in an environment with rising costs and competition. Third, our operating model. In addition to our pricing power, our operating model provides several opportunities to drive strong operating margins. From leverage from higher sales, including the additional accretion from our growth initiatives that have a higher operating margin to an accelerating shift online, which is more profitable. The continued occupancy leverage from the renegotiation of our lease agreements and further store closures, the various supply chain efficiencies, including automation and in-stock inventory levels and the continued emphasis on overall strong financial discipline, holding costs below sales growth. And finally, our liquidity. We have maintained a very strong and disciplined balance sheet with ample cash and no debt, which provides dry powder for opportunistic investments and incremental shareholder returns. All of this is what gives us the confidence in our short- and long-term outlook and our ability to deliver sustainable long-term growth and profitability with strong financial returns for our shareholders in 2022 and beyond. I would now also like to thank our associates; without their unwavering commitment to driving these results, none of this would be possible. Happy holidays to all on the call. And now let's open the call for questions. Thank you.

Operator provided instructions. Our first question comes from Seth Basham of Wedbush Securities.

Congrats on continued strong results. My first question is around the backlog that you mentioned. You said it's at record highs. Did it increase from the second quarter to the third quarter? And did your demand comps exceed your sales cost this quarter?

This is Laura. Thanks, Seth. Yes, unfortunately, the back orders did increase from where they were before.

And the demand comps are relatively in line with the net comps. There's really no big story there.

All right. And my follow-up is around your customer acquisition cost. As you lean into advertising, you talked about Apple's privacy changes. Are you seeing customer acquisition costs go up, down, sideways? And how should we think about those going forward?

It's Felix. Thanks for the question. The digital advertising environment has always been dynamic and competitive. But what I would say is that we have competitive advantages: we have invested over the years in our in-house measurement lab, which is staffed with our own data scientists and mathematicians. And we also have our own in-house campaign managers who work side-by-side on developing the right audience. We measure results across our spend, leveraging our proprietary tool set. So even as the prices fluctuate, we're able to quickly identify the high ROI programs. And secondly, we've always been performance marketers, which means our spend is primarily on marketing vehicles we can measure and tie directly to our top line and our bottom line. And then lastly, the advantage is that we essentially manage our marketing budgets centrally. Laura and I have the ability to look across our portfolio. We test and learn across our brands. And when we find best practices, we can roll it out to our brands. So despite the dynamics of the marketplace, we feel we're better suited than others in our space.

Our next question comes from Adrienne Yih of Barclays.

Can I just say that the consistency of what you've been able to accomplish is really remarkable, so congrats.

Thank you.

Thank you.

You're welcome. Laura, I'm interested in the comment that you made about Williams-Sonoma Home and how that's going to be a growth vehicle for the overall business. How does that fit into the $10 billion kind of longer-term target? How much of that number represents the Williams-Sonoma Home opportunity? Or is that upside to that? And then on the $15 an hour, that's also very much on the offense playing here. You're with Walmart, Target, and a lot of people are multiple dollars behind you. So is that entry level, obviously, at the stores? What does that look like at the DCs? And where was the average hourly rate before this? Kind of just curious how we should model that into the P&L? When did that get instituted? And what was it beforehand?

Okay. Let me see if I can get all that. So in our investor relations deck, which is online, you can see our path to $10 billion of revenues, which I think is a great thing to reference back to. And of course, we will update this next year. But my optimism in Williams-Sonoma Home is not reflected in the $10 billion. It is—if you just look at the growth, even the Williams-Sonoma brand has from 2020 to 2024, it's $300 million. So of course, that doesn't contemplate Williams-Sonoma Home becoming a big driver. We see a huge gap in the marketplace for proprietary high-end products at great values and that are sustainable. And so we are working hard to do that, but to do it really well. So we're going to have patience also in what we bring in and when. But so far, it's really—it's working. The changes we've made have already produced great results, and we're seeing momentum in that business. We're also very focused on improving our website so that you can really envision this product in your home without having to visit it in the store. And also using our stores to show wood samples and fabric samples and do design help in home even though we don't have stand-alone Williams-Sonoma Home stores. So there's a lot of exciting things happening there. In terms of the hourly wage minimum, minimum is different than average, of course. So the minimum, we've moved it over the last couple of years from $12 to $15; most recently, it was at $14, and we made that change when Julie—

$15 just recently—

No, the $14—when did we—

In July 2020.

Yes. Thank you. Good memory. And so— but our average hourly wage is higher, obviously. And we have stores all over. We have manufacturing all over the country. So we didn't have that many people in the under-$15 bucket to actually begin with. We're—our goal is to be competitive and hire the best in all these places. And so wage is one part of it, but there's a lot of other parts to the whole ecosystem of benefits and pay for our employees, and we're going to continue to really make sure we get the best and we reward them appropriately.

Our next question comes from Cristina Fernandez of Telsey Advisory Group.

Congratulations also on a good quarter and the continued momentum in the business. I wanted to ask about the inventory flow, particularly with the supply chain challenges and the Vietnam disruption. How should we think about inventories over the next six months until they normalize? Should we expect them to be stable? Should we expect them to get worse before getting better? Some color there would be helpful.

They get better per our plan unless sales demand gets better faster. It's always a relationship, but our predictions are pretty good. They should get marginally better. But to really get back to where we want to be on back orders, we see it moving out a bit because, of course, the very unfortunate unpredictable situation that happened in Vietnam. Remember, Vietnam really predominantly affects our kids business and teen business, although it has some impact on the others, it's relatively small financially. What we care about the most is the customer, right? And getting the customer the right date and then helping them substitute if need be and being really empathetic and helping them understand every way through this. And so we've been doing callouts, and I'm really pleased to say that our customers have really understood, and I was worried about that, but the customers appreciate the phone calls, and we are not seeing them cancel and they're willing to wait because everybody else is in the same spot, and they want the high quality and they want the GREENGUARD Gold-certified kids products.

And then my follow-up, I wanted to see if you could talk about the demographics of the new customers that are coming to the brand. With the promotions being lower, are you seeing just more affluent customers and perhaps a drop in moderate income customers? Or how has that changed over the past year, if any?

Yes. Thank you for the question. Our trends have been consistent. We're seeing growth across all generations and all income bands. And I know there's a lot of questions about geographic trends, too. The good news is it's positive across the board. I will tell you what is promising is that we are seeing a lot of our customers, obviously, come from the millennial generation. And wedding registries, baby registries are all up, not just over last year, but significantly over 2019. We also know that beyond registries, we're starting to see a lot of growth in people who have moved recently in the past two years. And those are some of our most valuable customers over time. And we know that they have a hyper spend curve of over 18 months. So we love that. And I guess lastly is that when we acquire these new customers, we are enrolling the majority of them in our two-tier loyalty program that Laura spoke about, which is great for future sales. As you know, as Laura said, the multiple there is two to three times. So we're thrilled with that performance.

We'll take our next question from Chuck Grom of Gordon Haskett.

Great quarter. Julie, I just wanted to see if you could speak to the pathway, the build off of the sales trajectory going from the $8.3 billion it looks like you're going to do this year to the $10 billion in 2024. It sounds like back order levels are strong. So would you expect that high single—mid- to high single-digit pace to sort of be commensurate each year over the next three years to build that? Just wanted to think about how we get to that $10 billion?

Sure, Chuck. Yes, so the $10 billion that we put out there that now recently we accelerated, right, last quarter to 2024, the algorithm associated with that is effectively a mid- to high single-digit growth per year. And that's what we're saying is sort of where at least we think we'll be. Obviously, next quarter, we'll come out with more specific guidance for 2022 and see if there's any update to our longer-term outlook. But that is where the math comes into play as to where we think it will be for the $10 billion or better.

Okay. That's helpful. And then, Laura, I just wondered the $200 million in revenue for B2B is impressive. Just wanted to think about how we size up that opportunity longer term. I think you had, at one point, thrown out a $1 billion number, but it seems like that could move higher over time. Just an update there.

I think I've said one, I think I've said two, I think I've said that the two is too small. I mean the market is, what, an $80 billion B2B market. Nobody is doing it from soup to nuts. They have categories where they cover rugs, but then you have to get your beddings from somewhere else. And we've gotten so much more of our furniture and our products to be contract grade so we can actually sell them into these places. And there's so many projects going, and we have such a strong team, we're building the infrastructure. I think this one is the big deal, and I see at least two.

And Chuck, back to the algorithm for $10 billion, it was assumed it was $1 billion in five years. So for a 100 comp, $700 million this year, could it be $1 billion next year?

Yes. I would think that maybe we're being a little conservative on that when you do that math.

Yes, that's what I'm getting at. Okay, great. And then just on occupancy, $183 million, you addressed the increase. Is that a good run rate to use sort of quarterly going forward? Or should we expect that to come down as you renegotiate leases, close stores, etc.?

Yes. I mean that's always a tough one to nail with precision. I mean, yes, last quarter, it was relatively in line with this quarter. In Q4, there's a lot more variable occupancy that goes into play. And remember that we have a lot more of our capital projects that go in, and we're spending more on capital projects. So there's a depreciation play within occupancy. And we've put in place the new East Coast distribution, which is fantastic news because it supports our strong growth. On the flip side, which is fantastic, is that we've been really strong with our retail optimization efforts. And so we brought down the costs associated with rent on our stores. And so we're able to mute the growth of occupancy to be below sales growth, and that is what we expect to continue and why we can continue to drive leverage and occupancy. But to give you an exact growth rate is difficult. So because it's going to move around a little bit by quarter for those reasons.

We'll take our next question from Simeon Gutman of Morgan Stanley. Hannah Pittock is on for Simeon.

My first question, within selling margins, if we think about the year-over-year expansion, can you give us some qualitative color on how much of that was lower promotions, taking price, and to the extent that there was an offset there in higher product costs? Just some of the puts and takes within the selling margin.

I mean, obviously, as we've been saying all year, we've been very successful with merchandise margin expansion, and we saw that continue. So that is the biggest driver is us pulling off of our site-wide promotions. And we continued that all year, and yet we've been able to drive incredibly strong top line. So that's the biggest piece. Certainly, we did incur higher raw material costs like everybody else. But we've been able to navigate through it much better than everyone else, we believe, because of the fact that we design and house our product, and we can engineer it for value. And so we can make the necessary changes that we need to make to be able to still drive value for the customer and still drive profit to the company. The other thing I would say that is not reflective in there that is something new this quarter is we did incur a substantial ocean freight costs. And so I think you need to think about— but for those, our expansion from a product margin perspective would be in line with Q2. And so our merchandise margin expansion is still very strong. We have not seen that come back. We're still driving it. And in fact, if you take our selling margins and you look at them on a 2-year basis, we're in line with the first half of the year. And if you add back the ocean costs, we actually have the highest 2-year comp we've had in those selling margins. So we feel really great about the strength of our business.

Got it. And maybe a quick follow-up. Any issues raising prices within specific banners? Are there some that the customer tends to display a little bit more elasticity? Or is it consistent across the brands?

It's Laura. The most important change that we've made is to not run site-wide promotions. And that was a change that we started to test into before the pandemic and then got bolder after we saw the results. And it really speaks to the pricing power that we have because we are one of the only people who design and source their own products. We're not selling other people's things to the same extent that a lot of other people in the space are, so you can't compare the price. We are not looking to change our value equation though. At the same time, as we have stopped the promotions, we are giving our customers better value. It is so important to us that the customers see our product, they love it, the quality they know is great, they know it's sustainable, and we have the best price with shipping in the market. And it's really hard for them to find it anywhere else. And that's what we're doing more than thinking about it in terms of what can they stand and what can they not stand. It's about giving them the best value out there in the entire market.

We'll take our next question from Jonathan Matuszewski of Jefferies.

Nice quarter. First one is just on industry-wide promotionality. Curious what you saw this quarter. I recall last quarter, you shared an observation that peers were increasing their promotional activity while your selling margins were up and your clearance activity was down a lot. So just kind of big picture, what were you seeing across the competitive landscape? And why do you think peers feel the need to mark down their product to sell in this environment? And then just a quick follow-up on the B2B side. You've obviously seen significant share gains on this side of the market in a fairly short time frame. Are you anticipating any incremental investment required to continue scaling this business going forward? Or is it just going to be a matter of leveraging the current infrastructure with new customer acquisition and being able to continue to grow without a significant uptick in expenses?

So remember that a large portion of our industry is still brick-and-mortar small retailers, many of whom are stuck with the wrong inventories. They have to clear, they have the cash flow issues. So there's a lot of liquidation going on in the streets. While that's not easy to find and compare to, it's a reality. In terms of the big players, you've, I'm sure, read the reports and seen who's performing and what they're doing and where their margins are. And you can just—if you sign up for their emails, you'll see a lot of promotions. You'll see 20% offs, you'll see couponing, you'll see site-wides, you'll see all sorts of different offers that they produce. And it is coming back. You also are seeing people have all their early Black Friday deals in great quantities compared to us. And so those are all factors in the marketplace. And as I said, we're going to continue to offer the customer great value, and we're going to work to design products that exceed their expectations and that they can't buy elsewhere.

Yes, that's helpful. Thanks for the color there. And then just a quick follow-up on the B2B side. You've obviously seen significant share gains on this side of the market in a fairly short time frame. Are you anticipating any incremental investment required to continue scaling this business going forward? Or is it just going to be a matter of leveraging the current infrastructure with new customer acquisition and being able to continue to grow without a significant uptick in expenses?

It's a really profitable business. We've hired a lot more people to sell for us, and that's really what we're doing, but they do a ton of volume each versus when you think about other models that we have or others have. These are big accounts and their annuities and that once they start doing business with us, they need to replace things. And so it's—yes, we give them a discount, but it's very accretive to our margins. And it's not a big step-up investment. We do have some things we're doing to automate the selling and make some investment there, but not like you've seen when we've done other initiatives in the past.

We'll take our next question from Brad Thomas of KeyBanc Capital Markets.

Let me add my congrats as well here. My question was about the outlook here for the holiday season. And obviously, you've given very explicit guidance for how we should think about sales and margins as it's implied for fourth quarter. But I was a little bit more curious about how you're thinking about seasonal merchandise and how it performs versus the core business. How you're thinking about perhaps some pull forward that may have occurred if consumers are anticipating shipping delays. And how confident you are in your ability to deliver this given I believe you said inventory on hand about 3%? Congrats on the great results, and I would love to hear some color on this.

It's so exciting to be able to get together with family and friends again for the holidays. Remember, Thanksgiving last year, it was like Thanksgiving turkey for two. And so this year, we're sold out of all the big turkeys. I mean they're gone, I'm so sorry. And that goes for a lot of other products, too, that we planned high and the exuberance of the customer to get together with their family and friends has just begun. We're in the entertaining stage of the holidays, the gift giving as much as we all want to move it early, they wait, they wait until later. But the entertaining and decorating stage is well underway. And as I said, I'm thrilled that we got our seasonal stuff in and stacked. It's in our stores, it looks gorgeous, and it's flying, flying. Core business is also super strong. I said in my prepared remarks how strong our core furniture franchise business is. And so that's something that we continue to see as an opportunity, particularly as we finally get back in stock because as we get more and more in stock, the customer lead times go down, they do buy more. So we're doing this well with a lot less inventory than we'd like. The inventory in transit is nice and stout. So we do see some recovery on its way, and we'll see some nice back order fill coming as well.

Great. And Laura, if I could ask a follow-up just about expansion of new brands. Obviously, the company has a history of making acquisitions and growing from within. I'd be curious if you could share any color on how you're thinking about new brands down the horizon and how you're thinking about that.

We are very focused on growth. And we've identified some very serious growth initiatives in our core brands. And within the core brands, there's very big businesses that are underserved. I think I've mentioned before how small the outdoor business is for West Elm or how small the Christmas decor business is for West Elm. And Pottery Barn, they just started to go after bath. And we have some that we haven't announced yet that are categorical and that are big opportunities in the market. We mentioned B2B. We're now designing into B2B. So for example, before we were just doing contract-grade versions of our stuff, now we're designing restaurant tables and benches and banquets and all those things that restaurants and hotels want. We actually design it for them and then it goes in our line just like we did for the workspace. So there's a lot of product extensions that we are bringing in. And of course, we're always looking at the landscape and thinking about new aesthetics and possibly new brands.

We'll take our next question from Oliver Wintermantel of Evercore ISI.

I had a question regarding your comp, the composition of that. If you could talk a little bit about transactions versus ticket? And maybe you can also talk a little bit about store traffic. I think that was down last quarter; if that improved? And how much of the ticket was pure inflation?

I can give you some of it. So in terms of store traffic, we are actually seeing better traffic comps than the national traffic. People love our stores. We tend to be the place to go. So we're better than national, but we're still negative to 2019. So I'm so excited about that number because can you imagine when the number comes up? So we have a lot of room to go. Stores are experiential. We have design services, we have omni services, and we're driving higher ticket conversions even though traffic is down. In terms of all the other metrics that you might think about, it depends. You can have a lot of traffic on the websites unqualified or you can have high conversions qualified. I mean, look, the metrics are great because we're selling a lot more in both channels. As you can see, we have really strong channel comps on both. But we are selling more units per order, and we're selling higher ticket because they're buying whole houses. And that's really a function of this cross-brand initiative that we've talked about, but also as we look to design whole houses and furnish their entire room and use our design services and our online 3D services, it really helps them feel more confident buying more for the room versus just maybe the bed that they set out to buy.

Thanks, Laura. And Julie, I think you said on SG&A growth, it was—did you say it was all advertising or most of it? Or if you could parse it out a little bit more, please.

It's really all advertising, the deleverage, but it did come down from the second quarter from a deleverage perspective. And again, the point of that is that we're coming off of low levels of 2020, and we're seeing this as a competitive advantage to invest in high ROI advertising. Many, many companies, as you've been reading and hearing, have been pulling back because they have to be able to hit the bottom line. And we see that as an opportunity for us with our record operating margins to be able to go in and really invest in it and drive growth for the future. So that's what we're doing.

We'll take our last question from Steven Zaccone of Citi.

I had a question on the supply chain. Could you talk a little about your ability to diversify the supply chain just as sourcing continues to be a pain point into next year, maybe a little bit worse than you're anticipating? And then I guess the other question related to supply chain is just you've probably been dealing with some elevated container costs and some elevated transportation costs. Is there opportunity to recoup some of those costs as we get into next year?

Thank you for the great question. We're vertically integrated. As I said earlier, we design, we source—we have, I think, 800 people in our Asia operations. We've been at this for a while. We have strong relationships with our vendors, and we are nimble. You watched us cover the really difficult tariff that people couldn't believe we could cover. I mean that was— that's no small situation. And so yes, there's always a new challenge around the corner. But the great news is our team is so strong, and they usually see it coming before anybody else and they work to mitigate it. We're already thinking about next year and what it might be on the horizon and how we get in front of some of those things. It's also an advantage that we have multiple distribution points in the United States, so we can bring goods into multiple ports, which a lot of people can't do without spending a lot of money on dray. And so that's something that will serve us well, I think, next year. And we're also opening up and sourcing in other parts of the world that we've never sourced in large quantity in. And so whether it's Mexico or Brazil, we're looking at those markets very strongly and see opportunity in those markets. So I see our supply chain as a competitive advantage that allows us to really bring in great product and to deliver great quality. In terms of next year and the cost pressure, as Laura mentioned, we did spend more money this quarter that we just announced with bringing in our goods so that they'd be ready for the holidays. And while we improved our operating margin better than anyone thought we would, that money was in there. And that is an opportunity for next year because we don't see that continuing even into Q4. We see that, going forward, we will not have the same amount of cost. We'll have higher costs in some cases for the general contract on transportation, but we won't see the spot rate be as big a percent of our total containers in as we did for Q3 and Q2.

No, that's fine, if you have comments, Julie. I guess the other question I had is just given the continued top line strength in the business, would you ever consider slowing your plans to close stores?

No, we're only closing stores where we can find a better opportunity where the mall is not a proud moment or the economics really don't work. And we've been really successful in opening bigger, better stores and driving the customer to a better experience. I think it's a really important part of a brand's development to keep improving your retail footprint because that's how the customer sees the brand. And so if your local store is not up to date, that's not good for your online sales. So it's a really important part of what we do. And we set pretty high numbers for our retail profitability. We're hitting them, but we will continue to consolidate where we have stores that are just lagging. And as I said, it can either be lagging in financials or lagging in the way the brand sits with you as you go into that store. But I'll tell you, on the flip side, we are so proud of our beautiful stores right now. And I really invite all of you to go visit, buy some things for Thanksgiving or the holidays. And you'll see what I'm talking about—those gorgeous stores are doing such an amazing job, selling and helping our customers right now, and we're just so proud of them.

At this time, I'd like to turn the call back to management for any additional or closing remarks.

Well, thank you all for joining us. It's been another great session talking to you all, and I appreciate all of your support. And I again wish you happy holidays, happy Thanksgiving and happy shopping.

This concludes today's call. Thank you for your participation. You may now disconnect.