Welcome to the Williams-Sonoma, Inc. First Quarter 2023 Earnings Conference Call. 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 first 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 fiscal '23 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measures appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I want to begin by thanking our strong team at Williams-Sonoma, Inc. for their talent and hard work in delivering another solid quarter of earnings despite a challenging macro backdrop. With our focus on compelling products, customer service, and profitability, we achieved our financial expectations. We continue to distinguish ourselves as the world's largest digital-first, design-led, sustainable home retailer. What are the things that distinguish us? No other home furnishings company offers our in-house design capabilities and vertically integrated sourcing organization. This allows us to deliver high-quality, sustainable products at the best value to market that cannot be found anywhere else. Most importantly, it allows us to lead with innovation, distinguishing us from our competition. We are always looking for new opportunities to inspire our customers through our in-house design. From the new summer block prints and exclusive heritage quilts in Pottery Barn to the Viv Swivel Chair in West Elm to the compelling new dorm assortment in Pottery Barn Teen and the exclusive electronics and ergonomic tools in the Williams-Sonoma brand, our company leads with innovation. And just last week, we launched the newest brand in the Williams-Sonoma, Inc. portfolio, GreenRow. This new brand has been internally designed and developed, utilizing sustainable materials and manufacturing practices to create powerful, vintage-inspired heirloom quality products. GreenRow addresses white space within our portfolio and in the market. It is this type of innovation that distinguishes us within the home furnishings industry and, most importantly, resonates with our customers. But not only are we innovators, we are operators. As you know, no other home furnishings company offers our digital-first but not digital-only channel strategy that's transforming the customer experience. With our proprietary e-commerce platform, we are one of the largest e-commerce players in the United States. And our in-house CRM and data analytics teams optimize our digital spend and customer connections. And we operate a world-class retail business, with our stores serving as billboards for our brands. They are beautifully designed and curated with aspirational assortments. Our retail optimization efforts have refocused our fleet on the most profitable, most inspiring, and most strategic locations. And our omni capabilities are a competitive advantage in the market. In Q1, examples of our operational excellence continued. We replatformed Rejuvenation's website, capturing new demand and driving higher conversions through enhanced imagery and an elevated customer experience. We managed our SG&A expense, leveraging our ad cost by limiting our spend to more proven efficient channels where customers show a higher level of intent to purchase. We made tough decisions to rightsize our organization to control costs and to drive focus and efficiency. We managed our receipts to control inventory levels. And we are making substantial progress on our customer service, which was affected by the pandemic. We have successfully improved customer metrics, including on-time delivery. We are working hard to rebalance inventory to reduce multiple and out-of-market shipments, both of which will improve service levels further and reduce costs. We are here to serve our customers. Without them, nothing else matters. Lastly, we lead the home furnishings industry with our sustainability efforts and values-based culture. In Q1, we were recognized as one of the top 10 companies on Forbes' list of America's Best Employers for Diversity in 2023. We were the highest ranking home furnishings retailer on the list. Turning to the quarter. While our top line comp ran down 6%, our 2-year comp was 3.5%, our 4-year comp to 2019 was plus 46.5%, and we delivered an operating margin of 12.9%, with earnings per share of $2.64, significantly above our prepandemic results. In terms of demand, our trend softened from negative mid-single digits in Q4 to down 10% in Q1. The softness in demand was most notable in our high-ticket furniture offerings, but we didn't see that same trend in our high-ticket electronics and kitchen offerings. These disparate trends tell that the customer is still spending. The diversification and durability within our portfolio of brands and product offerings positions us better than our competition with this shift in spending. Now let's turn to more details in the brands. Pottery Barn ran down slightly with a negative 0.4% net comp in Q1 but ran 14% on a 2-year basis and 54.4% on a 4-year basis. We are seeing subdued demand in our furniture business, with customers demonstrating more caution on high-ticket considered purchases. And in our outdoor business, we are seeing delayed purchasing until later in the summer season versus early spring. However, we are seeing strength in our exclusive decorating and textiles categories as customers choose to postpone bigger redesign projects to focus on easy updates, leveraging our beautiful print and pattern pillows, table linens, bedding and bath textiles, frames, and decorative lighting. In PB, summer seasonal newness is off to a good start with strong demand for block print quilts and heritage patchwork quilts. The customer response to our Americana and coastal decorating across tabletop, textile and decor has been strong ahead of the Memorial Day weekend and should extend into the summer season. As we look to the year ahead, the brand has a strong lineup of textiles, decorating and entertaining products at a great value, and we are increasing our marketing of these categories to drive performance. The Pottery Barn children's business ran a negative 3.3% comp in Q1. It was a negative 6.4% on a 2-year basis but ran positive 29.6% on a 4-year basis. We see pressure in some of our children's furniture categories, but we continue to see strength in many parts of the baby business. And we are focused on elevating the customer experience in these life stage businesses. For example, in our baby business, we saw strength in our GREENGUARD Gold nursery seating, personalized baby gifts, and our curated selection of baby gear, which positions us well as a destination for the registry business. And in our stores and across our mobile app, customers can register with Pottery Barn Kids and receive help from our nursery experts. In our Teen brand, we are excited to have launched a compelling new dorm assortment covering the needs of college-bound students with extra-long twin bedding and storage. Customers can shop online and ship products to any of our company stores near their college campus. Included in our dorm offer, we are excited to showcase our partnership with LoveShackFancy which has resonated with customers. Also, we are pleased with our first full quarter of results for our Pottery Barn Kids and Teen shopping apps. We are seeing customers respond to the easy-to-shop, thoughtfully designed experience, and both apps are outperforming the mobile web across all KPIs. The West Elm brand continues to be the most affected by the tough macro environment. In Q1, West Elm ran a negative 15.8% and was negative 3% on a 2-year basis, but 51.1% positive on a 4-year basis. We're excited that Day Kornbluth started with the team as the new Brand President on April 3. She'll lead West Elm through its next chapter of growth, most immediately with a focus on four areas: one, industry-leading design and value; two, increasing brand awareness and customer acquisition; three, expanding into product white space; and four, leveraging channel growth opportunities. West Elm is our brand with the highest percentage of its assortment in furniture. We see opportunity in West Elm as it expands into textiles, decorating, accessories, entertaining, and seasonal offerings. We continue to be very excited about the long-term growth trajectory of West Elm. The Williams-Sonoma brand ran a negative 4.4% comp in Q1. On a 2-year basis, the brand ran negative 6.7%, but positive 33.9% on a 4-year basis. The Williams-Sonoma team remains focused on increasing product exclusivity, innovation, relevant content, and full-price selling. We have a pipeline of innovative product launches and collaborations planned throughout the year, and we see new opportunities from the integration of the Williams-Sonoma Home furnishings assortment into our kitchen business. We remain confident in our ability to gain market share in the housewares industry. Now I'd like to update you on our growth initiatives, beginning with Business-to-Business. This business has two formats: trade and contract. The trade side of the business has been more impacted by the macro environment, but we continue to remain focused on the growth opportunity on the contract side. Contract grew mid-double digits in the quarter despite B2B running down 7% in total. We continue to win B2B accounts due to our design capabilities and a wide range of products offered in our multi-brand portfolio. And in fact, we have a stronger pipeline of projects currently out for bid compared to last year. Another growth initiative is our expansion into global markets. Our brand momentum continues to exceed expectations in the India market, and we are driving growth through retail expansion with the opening of our third West Elm store, our second Pottery Barn store, and our first Pottery Barn Kids store in Q3 2023. India is a strategic market as we expand globally, and we plan to open additional locations in 2024. Additionally, we are seeing strength across all of our brands in the Middle East led by strong design services. We'll be expanding in the region with the opening of an additional Pottery Barn and West Elm store in Saudi Arabia in Q2. Canada is also a highlight, with digital representing our biggest growth opportunity for the market. We launched B2B in Q1 in Canada, and we look forward to introducing the Canadian customer to Rejuvenation, Mark and Graham, and Williams-Sonoma Home with the launch of their websites later this year. In summary, we recognize that there is continued uncertainty with the environment and the consumer, but we operate in a highly fragmented market, and we will continue to gain share by inspiring customers with our portfolio of strong brands and by building trust with a return to world-class customer service. And we will continue to generate strong profits. On the guidance front, we are only one quarter into the fiscal year with a lot more volume to come. We have a lineup of opportunities in our brands which, considered with our 2-year and 4-year trends, supports our 2023 guidance. As we indicated in Q4, the first half of the year will be tougher with the strong comps we are up against and the declining macro. But in the back half, our compares get easier and our supply chain cost pressures start to roll off. Looking past the short term, we remain confident in our long-term guidance and our opportunity to furnish our customers everywhere. We have built a company of loved brands with a shared platform of competitive differentiators that lead the industry: in-house design, a digital-first but not digital-only platform, and our values. We have identified opportunities for growth through strategic initiatives like B2B, Emerging Brands, and Global, where we have the opportunities to disrupt. We have a culture of innovation and an experienced team who knows how to increase operational efficiency, control costs, deliver world-class customer service, and drive new growth opportunities. And finally, with our focus on compelling products and restoring world-class customer service, along with our financial discipline and our great team, we are confident that we will continue to deliver on our commitment to our customers, our employees, and our shareholders, all of whom I'd like to thank for their support. Now I will turn it over to Jeff.

Thank you, Laura, and good morning, everyone. As Laura said, we're proud that we've delivered a solid quarter of earnings in a challenging environment. On the top line, we continue to distinguish ourselves from the home furnishing industry through the strength of our proprietary in-house design, our family of strong and stable brands, and our culture of innovation. On the bottom line, our operating margin demonstrates the resiliency of our profitability despite softer top line results and illustrates how the structural changes in our operating model support our long-term 15% operating margin floor. Before I walk through our Q1 results and our fiscal year '23 guidance, I'll first touch on our non-GAAP adjustments. As Laura said, we continue to distinguish ourselves through innovation and good operations. Laura touched on the innovation across our brands that will continue to propel our market share gains and the newest member of our family of brands, GreenRow. On the operations side, we are committed to driving efficiency across all our operations. As part of this commitment, we undertook three key initiatives to drive efficiency in Q1 that resulted in our recording $26 million in non-GAAP expenses. First, we completed a company-wide reduction in force, rightsizing our teams domestically and internationally, primarily focused on corporate non-customer-facing positions. Second, we closed our Southern West Coast upholstery manufacturing facility, moving our production from California to our lower-cost Southeastern U.S. facilities. Third, we exited our non-core Aperture SaaS business. Combined, these changes will result not only in an estimated annualized savings of $40 million, but also increased focus and efficiency across our corporate, supply chain, and technology teams. For more details, please refer to the GAAP to non-GAAP schedule in our press release. Now let's dive into our Q1 results. As I do so, in addition to year-over-year results, I'll reference 2019 as it's helpful to compare our performance with prepandemic levels. Net revenues came in at $1.755 billion, slightly below our expectations. While comparable brand revenue growth on the 1-year stack came in at negative 6%, our 2-year stack grew 3.5%, and our full year stack against 2019 grew 46.5%. In demand, we were up against our toughest 1-year compare to the year, leading Q1 demand to come in at negative 10% on a 1-year stack. However, our demand was negative 1% on a 2-year stack and positive 46.7% on a 4-year stack. Our net revenues were driven by strong order fulfillment and timing of revenue recognition as we had less undelivered orders in Q1 than in Q4. For context, in a normalized environment, typically, there is a spread between demand and net comps. Moving down the income statement. Gross margin at 38.6% was in line with our expectations, coming in 520 basis points below last year, reflecting the impact of the short-term supply chain costs and inefficiencies flowing through our income statement that we've been discussing in the past several quarters. Merchandise margins decreased from last year as we experienced the full effect of the capitalized costs from higher product costs, ocean freight, detention, and demerge into our income statement. This was partially offset by the higher pricing power our proprietary products command and by our ongoing commitment to forgo site-wide promotions. Selling margin continues to be impacted by higher outbound customer shipping costs as well. We continue to incur these higher costs to best serve our customers by shipping from out-of-market distribution centers and, in some cases, shipping multiple times for multi-unit orders, which typically would have been fulfilled in a single shipment. We're working hard to rebalance our inventory composition and regional inventory location to improve our customer service. As Laura touched on, we are pleased with the improvements in customer service we are already seeing, and we expect customer service will continue to improve over the course of 2023. Altogether, our selling margins were 350 basis points lower than last year. We estimate more than 300 of the 350 basis points are attributable to the short-term supply chain costs and inefficiencies I just discussed. At 38.6%, our Q1 gross margin remains 270 basis points higher than 2019's 35.9%. And that's inclusive of absorbing these more than 300 basis points in supply chain-related costs and inefficiencies. Occupancy costs at 11.5% of net revenues were 170 basis points above last year, with occupancy dollars increasing 8.6% to approximately $202 million. Our ongoing retail store optimization initiatives partially offset incremental costs from our new distribution centers on both the East and West Coast. These new distribution centers will support our long-term growth, improve service time for our customers, and drive cost efficiencies over time. Our 250 basis points leverage versus 2019's 14% occupancy rate demonstrates the impact of our higher e-com mix and retail optimization has had on our gross margin. Our SG&A rate continues to be at a historic low for Q1 at 25.7%, leveraging 100 basis points over last year. This reflects our financial discipline and ability to control costs in a challenging environment. We held employment expenses as a rate of revenues flat to last year as we managed variable employment costs in accordance with our top line trends. Our advertising leverage continues to reflect the agile, performance-driven proficiency of our marketing team. Our in-house capabilities, first-party data, and multi-brand platform are an underappreciated competitive advantage that allow us to drive efficient advertising spend in near real time as we see trends evolve in the business. Overall, SG&A came in 320 basis points lower than 2019's SG&A rate of 28.9%. This once again highlights the impact of our higher e-com mix and retail optimization on our profitability. With regard to the bottom line, we are pleased with our results despite the quarter's declining macroeconomic backdrop. Q1 operating income came in at $226 million, and operating margin at 12.9%. While down 420 basis points below last year, 12.9% stands 590 basis points above 2019's 7%. These results reflect the durability of our profitability and underpin our 15% operating margin long-term guidance, in another quarter marked by significant macroeconomic headwinds, softer top line results and over 300 basis points in short-term supply chain-related cost pressures. Our diluted earnings per share of $2.64 was $0.86 or 25% below last year's record first quarter earnings per share of $3.50, but significantly above 2019's earnings per share of $0.81. On the balance sheet, we ended the quarter with a cash balance of $297 million with no debt outstanding. This is inclusive of investing $50 million in capital expenditures supporting our long-term growth, paying $58 million in quarterly dividends and opportunistically repurchasing $300 million or 3.8% of shares outstanding, congruent with our commitment to maximizing shareholder value. Merchandise inventories, which include in-transit inventory, at $1.402 billion were essentially flat year-over-year, while inventory on hand increased 28% over last year. Two important points to emphasize here once again. First, our inventory on hand increase continues to be skewed by last year's pandemic-related supply chain disruption, creating an artificially low base. An apples-to-apples comparison versus 2019 highlights how we've improved our inventory turnover as our on-hand inventory levels have increased only 19% against revenue growth of over 41% during that time. Second, our lower balance sheet inventory growth reflects a 46% reduction in merchandise in transit as we've aligned our future on order with cautious forward-looking demand given our Q1 trends and the macroeconomic outlook. Summing up our Q1, we are pleased to have delivered results in line with our expectations. We continue to distinguish ourselves within a fragmented home furnishings industry. Our operating margin demonstrates the resiliency of our profitability and our ability to maintain at least a 15% operating margin over the long term. I want to thank all our associates for their hard work and dedication in delivering these results in a challenging environment. Now let's turn to our guidance for 2023. As we look to the balance of the year, we are reiterating our fiscal '23 guidance. We recognize there is uncertainty in the macro, and the consumer is becoming increasingly cautious, but this is our best estimate based on the facts and trends we know today. On the top line, extrapolating our 2- and 4-year trends in Q1 to full year '23 revenues land us within our guidance range. Specifically, our Q1 2-year trend yields full-year revenues at the low end of guidance, while our Q1 4-year trend yields full year revenues between the midpoint and high end of guidance. On the bottom line, our Q1 results project our operating margin landing within our guidance, especially with the cost reductions we undertook this quarter. We continue to anticipate the first half of the year will be materially tougher. On the top line, our year-over-year demand comparisons and last year's high back order fill, coupled with the declining macro, will yield negative comps. On the bottom line, we continue to foresee gross margin pressures as the supply chain costs sitting on our balance sheet continue to amortize into our income statement as well as ongoing incremental shipping costs to service our customers. In the back half of the year, these headwinds should turn into tailwinds as our top line year-over-year comparisons get easier and our gross margin pressures become tailwinds that support our profitability. As we look beyond 2023, we remain confident in the long-term fundamentals of our business. We believe our long-term growth algorithm will continue to drive mid- to high single-digit top line growth with operating margins exceeding a floor of 15%. As the world's largest digital-first, design-led, sustainable home retailer, we're committed to furnishing our customers everywhere. And we're confident that we'll continue to outperform our peers and deliver profitable growth for these reasons: our ability to gain market share in a fractured 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. With that, I'll open the call for questions.

Cristina Fernández with Telsey Advisory Group.

I wanted to see if you could expand on the demand. You gave a good amount of color, but is the consumer still focused on, I mean, full-price selling? And how are you conveying value to the customer in this environment?

Thanks, Cristina. It's been since Labor Day last year where we've seen choppiness in our demand across brands, channels, categories. It's no wonder because of the housing, higher rates, job loss, it does make the customer more cautious. However, it is clear that the customer is still spending, and our portfolio of brands, our omni platform, and our positioning allows us to compete better than our competition. We can serve our customers across a wide range of price points, product categories, and aesthetics. And while we are seeing softness in our furniture business, we are also seeing quite a lot of strength in our high-end electrics and kitchen business. And so there's areas where we are shifting our focus, particularly on our marketing. Customers are interested in easy updates for their house. They are entertaining at home, they are cooking at home, and they are buying gifts. The recent news about some of the large-scale retailers like Bed Bath & Beyond going out of business gives us a wonderful opportunity to pick up even more market share. There's a lot out there that they served, whether it be dorm or baby and wedding registry that are areas of focus for us but are really going to be exaggerated now that we see the opportunity. So we are seeing some subdued areas, we also see that they are buying at full price the things that they are really looking for that are unique and that gives them the ability to update their home, which is so important to them without making that very large scale purchase.

As a follow-up on the revenue guidance for the year, if the environment remains unchanged, how are you planning to address specific brand merchandising initiatives or market share gains from Bed Bath that would help you achieve the guidance range you maintained today?

I'm going to start by letting Jeff talk about our approach to the guidance range.

Thank you, Laura. We understand that there is still uncertainty in the macro environment, and consumers are becoming more cautious. As mentioned in my prepared remarks, if we project our trends from the past two to four years into Q1, we fall within our guidance range. We've also indicated that the first half of the year will be significantly more challenging, particularly on the revenue side, as we are comparing against last year's higher demand. However, the second half will likely be different, as we experienced a decline in demand after Labor Day last year, which could turn our current challenges into advantages. Regarding Bed Bath & Beyond, we believe we are gaining market share in that space. It’s evident that we are capturing a portion of their volume. For instance, in the Williams-Sonoma brand, we are gaining share in kitchen electrics and registry. In Kids, we are taking market share from buybuy BABY, as those customers seek reliability when furnishing their nurseries, knowing the store they choose will still be operational in a few months. In the Teen segment, we are already seeing early gains in dorm supplies, which we expect to increase as we approach back-to-school season. Overall, we believe we are well positioned to increase our market share in this fragmented home furnishings market, thanks to our in-house design, a digital-first approach without being solely digital, and our robust and stable portfolio of brands.

Your next question will come from the line of Max Rakhlenko with TD Cowen.

All right. Great. So first, just staying on the reiterated guidance. For the top line, how much breathing room do you think that you're giving yourself for the second half of the year? Especially, I think, you said demand comps were down 10% in 1Q, and then B2B is also softening.

Max, like I spoke to in the last question in my prepared remarks, when we extrapolate our 2- and 4-year trends in Q1, it lands us pretty squarely in the guidance range. And so if you think about what that range could be, very specifically, our 2-year trend in Q1 lands us at the low end, but our 4-year trend, which has been very consistent over Q1, lands us between the midpoint and high end of guidance. So looking at that, combined with the opportunities we have in the brand, what's happening in the market with people exiting like Bed Bath & Beyond, some of the smaller players who don't have the balance sheet to withstand some of the current pressures, we see there's opportunity for us to gain market share.

Got it. Okay. Fair enough. And then can you speak specifically to product margins in 1Q, how they look compared to last year in prepandemic and the key drivers there? And then just how should we think about the gross margin cadence for the remainder of the year? And how much of the pressure from the second half of last year do you think that you can get back this year versus some of that continuing into next year?

Yes. I think if you take a look at it, we don't break out product margins separate from our selling margins. But if we look at it all together, selling margins were down 350 basis points, driven by lower merches margins and higher shipping costs. As we've been talking about for several quarters, our merch margins reflect the full impact of the capitalized cost in our balance sheet from higher product costs, ocean freight, the tension, and demerge that are now flowing through our income statement. On the selling margins, it continues to reflect the additional costs we've incurred shipping multiple items to customers as I've enumerated. When we think about it, in terms of the back half, it's really what we keep talking about in terms of headwinds and tailwinds. We quantified in the call that altogether, these incremental short-term costs accounted for over 300 basis points of the 350 basis points decline in our gross margin as well as our selling margin. So we see that in the back half, the main point is we've been guiding that we have near-term cost pressures that are a headwind, but in the back half, this will become a tailwind as we look to the back half of '23 and into '24.

Got it. And then just maybe more specifically on promos, curious how those look, both versus last year and then prepandemic levels.

We are maintaining our stance on not running site-wide promos and only marking down things where we have a little bit too much inventory. And we are comped in our current Memorial Day promotion that we're running this year. We do that, I'd say, quarterly to reduce our overstocks and keep our inventory as clean as possible, and you're going to just continue to see us take markdowns where we need to.

Your next question will come from the line of Simeon Gutman with Morgan Stanley.

Laura, Jeff, I wanted to ask first about the 14% to 15%. I know it said above 15% in the long-term guidance. Can you talk about the path and how much you'll protect that, especially if we see a weaker consumer continue through the back half of the year? Are you intent on protecting this number through cost efficiency, et cetera? Or could we see that dip below and then a return back to some of the longer-term ranges?

Simeon, thank you for the question. I love talking about operating margin. We are very confident in our guidance for fiscal year '23 at the 14% to 15%. If you take a look at where it's coming from in terms of our SG&A leverage, we are very focused on our cost control, managing our employment expenses, which we can flex with sales, and managing our advertising costs, which you can see in Q1, we leveraged to drive the SG&A leverage there. And if I think about the back half of the year and where we're headed, we've quantified that of the 350 basis points decline in selling margin year-over-year, 300 of that we attribute to the short-term supply chain costs and efficiencies we've been talking to. That gives us a lot of room and a lot of confidence to be able to hit the 14% to 15% guidance. And then we throw on top of that the restructuring charges we took in Q1, which should add $40 million annualized to fiscal year '23, which only a small portion of which actually hit in Q1. That adds another, say, 45, 50 basis points to our opportunity to hit the 14% to 15%. So bottom line is we feel confident in our 14% to 15% guidance for fiscal year '23. And we think longer term to the 15% operating margin floor, we think that our Q1 results provide the building blocks so everyone can see how we get there, especially when you take a look at the occupancy and SG&A leverage versus 2019, and that's evidence of our structural change because of our higher e-com mix and our retail optimization strategy.

If I may ask a follow-up, can you provide any details on the backlog? I believe you mentioned it last quarter. Can you help us understand the outlook for the year?

Yes, the backlog is now normalized. It is not a significant factor as it was in 2020, 2021, or 2022. As we mentioned in our Q4 call, the backlog has pretty much reached a normalized state at this point and does not impact our results.

Your next question will come from the line of Chuck Grom with Gordon Haskett.

Clearly, on the SGA side, you're doing a great job controlling what you can control. But the Home category in itself has really rebased much higher than 2019. And I guess I'm just curious what gives you the confidence that the category doesn't continue to mean revert. So when we get into, say, '24 or maybe even '25, some of these sales issues persist.

Thanks, Chuck. It's important to note that the market is quite fragmented and extensive, with no single company holding a significant share. Our position allows us to capture more market share and succeed. Customers continue to spend because they appreciate their homes. Since we last spoke, housing has improved slightly, going from a 37% decline last year to a 22% decline. While there’s been some progress, we are not heavily relying on that trend. The purchasing cycle occurs in stages. Many customers have been in their homes for about a year, but a good number have stayed for over three years, and a significant group has lived in their homes for more than a decade. This presents many opportunities for remodeling, updating, and decorating. Shopping with us doesn’t require a complete home renovation, as we offer a variety of products, from pillows to picture frames for graduation gifts, and showcase attractive tablescapes. Our business encompasses various life events like gift-giving and welcoming new babies, demonstrating that the appeal of home remains strong. While customers are cautious about making large purchases, they are still actively shopping. We can observe this in various categories, with customers drawn to our new offerings, whether it’s fashionable items from LoveShackFancy or fresh bedding collections from Pottery Barn. When we provide exclusive, high-fashion new products, customers do make purchases at regular prices.

Okay. Great. That's helpful. Thanks, Laura. And then just for Jeff, I mean, clearly, the math on the 2- and the 4-year stacks are correct, and you would be within your guidance. But I guess I'm curious on the demand comp, your comments about the consumer becoming increasingly cautious, if the trend line in that demand comp changed at all as we progressed throughout the past couple of months and into May?

Our demand trends have remained consistent. They did on the 1- and 2-year they did.

It's really choppy.

Yes. But the 1- and 2-year did decelerate across Q1, but the 4-year was remarkably consistent. So when we look at these trends and we extrapolate them forward, both on the demand side and the net side, we feel it supports our guidance that we've given, as I outlined in the call.

Your next question will come from the line of Anthony Chukumba with Loop Capital Markets.

Just had a question about GreenRow. Obviously, it's super, super early, just launched the brand next week, but I would love to just get some perspectives in terms of the way you think about positioning GreenRow. It looks like it's a lot of furniture. It looks like it's an heirloom, like more traditional furniture. But how are you sort of thinking about that? And obviously, once again, super early, but dream the dream in terms of the long-term opportunity there.

Thank you for your question, Anthony. We are very excited and proud of our progress with GreenRow. Sustainability is a priority for all our brands, and we decided to focus on it right from the start for this brand. We are leveraging our expertise to create a product line that is fully sustainable while also being beautiful and distinct in the marketplace. Often, sustainable products are associated with basic neutrals, but GreenRow is different. It features vibrant, optimistic designs inspired by vintage and European styles, offering a wide range of items from table linens to furniture, all carefully chosen to last. This is meant to be the last table you need to purchase, as our products are high quality, durable, and aesthetically pleasing. The overall style has a more feminine touch compared to our other brands. Just like the diversity in music and emerging hits, we recognize there’s always room for new brands, and we’ve been successful in launching them. Currently, most of our business comes from brands developed internally. While GreenRow will be small initially, we are optimistic about its potential and view it as a significant example of innovation at Williams-Sonoma, Inc.

Got it. That's helpful. And then a quick related follow-up. So you've talked in the past about the fact that as access to easy money has dried up a lot of these smaller DTC brands, these ankle biters, I believe is the term that you've used, you're seeing more like inbounds where they're trying to sell to you or maybe they're going away. I guess any change that you've seen over the last few months in terms of what's going on with the ankle biters?

Yes, they are definitely experiencing more difficulties. We are noticing this in various ways, such as companies seeking an exit or running site-wide promotions. Some of them are purchasing fewer ad terms than before and there isn't enough innovation happening. This innovation aspect is crucial for the future. They might have launched a strong product or idea a couple of years ago, but now they are struggling to keep pace and are falling behind. This presents a real opportunity for us. When you evaluate them collectively, they represent a portion of the market; while some may succeed, the majority likely will not.

I believe this situation presents a competitive advantage for us in the marketplace that may face some challenges. Our strong balance sheet will allow us to cope with these pressures, which many smaller competitors may not be able to do. As a result, we will continue to gain market share as they encounter difficulties.

Your next question will come from the line of Oliver Wintermantel with Evercore ISI.

I had a question regarding B2B. I think, Laura, you said it was down 7% in the quarter, but then contract was up mid-double digits. Can you explain the difference there? What drove that up mid-double digits? And then trading must have been down, obviously, a lot worse than the 7%.

Yes. Thank you. This continues to be an area that we're very excited about, and we've seen continued success in driving large project growth including it was our largest quarter in history to date for our brand standard and annuity programs. Our contract business has maintained an accelerated growth trajectory, most notably this quarter in hospitality, multi-residential mixed-use, along with increased engagement from the commercial sector. Although the trade business has softened over the last few months, we are starting to see signs of volume building back in our designer business, and we are confident in our ability to compete for this business, and we continue to take share while maintaining a very, very strong focus on growing our contract project pipeline, which is really where we want to increase the penetration over the future. Jeff, do you want to add anything to what I...

Yes. I think it's always helpful to dimensionalize with some of our notable wins in the last quarter. So with Marriott and Starbucks, both names everyone knows, we saw our best quarter ever. They both logged triple-digit growth. In our residential developer business, we continue to expand our portfolio with key industry names, such as Related, Pulte, and Lennar. We completed office projects with Salesforce, Dan's Corporation, and Republic Airways. In the stadium space, we helped Auburn University update their Gameday suites. And we're getting traction in some of our newer industry segments like cruise, where we partnered with Celebrity Cruises to furnish some of the departure lounges and continue to build out our book of business in the space. The key point here is B2B continues to be a winning strategy for us, and we continue to capture market share in this $80 billion fragmented market.

Got it. As a follow-up, based on your commentary about contracts and the mid-double digit growth, it seems like that should continue to grow nicely, but the trade should recover. Should we expect the negative 7% to improve throughout the year?

We don't guide B2B specifically across the quarters, but we do continue to expect B2B will aid our comps throughout the quarter. And it's all baked into our annual guidance.

Your next question will come from the line of Seth Sigman with Barclays.

I wanted to follow up on the shape of demand. So there was clearly a step down in Q1, maybe even within Q1. But I wanted to confirm, based on an earlier comment that it sounds like you're seeing some stabilization. I don't know if that was late Q1 or a Q2 comment, but maybe you could just clarify that. And then the second part of the question, it's more about visibility into some of the specific operational drivers that you have that I think you've embedded in the sales outlook for the year. Maybe you could just elaborate on where you are with respect to some of those, thinking about rebalancing inventory, improving delivery accuracy, maybe reducing some of the concessions. I think you've built some of those into the sales outlook. So where are we with those today? And how important are those for the outlook?

Sure. It's Laura, and then I'll let Jeff add some more detail. So as I said, we've seen choppiness since Labor Day. So the consistency is the choppiness. And when we look at the balance of the year and we take into consideration our opportunities by brand and the fact that Williams-Sonoma becomes a bigger part of the mix in Q4. And then we run our 2- and 4- years, Jeff, when we get to our guidance range. There are many factors beyond just sales that are crucial. There are numerous short-term opportunities, with customer service being the most significant. During the pandemic, our supply chain faced significant disruptions, leading to delays in product deliveries. We often had to inform customers that their items were not arriving, which resulted in substantial losses in both revenue and trust with our customers. And during this time, we have been working so hard to improve our service levels and return to world-class service, which has always been a key tenet of who we are and why our customers come to us. And I'm pleased to tell you that we are already seeing significant improvements in on-time delivery, which is a key part of customer satisfaction. Customer service is also a profit driver. So Jeff went through some of the areas where we're going to see natural improvement just because we're lapping high costs from last year. But what we haven't quantified is all the costs that are embedded that were wastes, that will improve our operating margin. So while, yes, the top line is subdued, we have opportunity to build for the long term and ensure that we deliver a very profitable business while others really suffer. And over time, you're going to see us be one of the strongest players, I believe, in the industry.

That's really helpful. I have a follow-up regarding the sensitivity in the financial model. While the top line is facing pressure, it's not the only factor to consider. How much have you factored in this sensitivity? How much can sales potentially decrease while still achieving the margins and earnings per share you’ve outlined based on various drivers?

I believe Jeff has already addressed that. You may have noticed that we achieved a higher operating margin than anticipated in Q1, despite having lower sales than many expected. This is due to our consistent discipline. We are proactive in seeking efficiencies and reducing costs, but our platform and omni-channel strategy also provide us with greater flexibility than others. We have been navigating through challenges for some time and emerged stronger. Therefore, I would emphasize that our history demonstrates our capability to perform even when top-line growth is less robust.

Your next question will come from the line of Anna Andreeva with Needham.

Great. Two quick ones from us, keeping in mind that it's volatile out there, like you've said. Just curious on what are you seeing with demand so far in the second quarter? I think you mentioned the Memorial Day promos are being planned similar to last year's levels. Can you talk if you're still seeing the consumer come out for events? And then secondly, on the $40 million in cost reduction I think you said some of it affected the P&L already in the first quarter. Just any color on how we should think about those savings as we go through the year.

Thank you. We're just a couple of weeks into the quarter, so it's too early to draw significant conclusions. I did mention that we're experiencing softer sales in furniture, and the outdoor category is lagging compared to earlier in the pandemic when it saw earlier purchases. On a positive note, our textile decorating business, gift-giving, and kitchen sector are performing well. As we look ahead to the second half of the year, we plan to strengthen our marketing efforts, particularly for West Elm, by expanding our gift-giving and entertaining assortments for modern customers. You'll see new offerings in those categories this fall and holiday season, which aligns well with where our business strength lies.

And Anna, in respect to your question on the $40 million in savings, our cost-cutting measures happened in phases across the quarter, both domestically and internationally. And because of that timing, only a very small portion of the $40 million actually booked into Q1. So the majority of that savings will be recognized over the next three quarters. So that is factored into our guidance, but it gives us additional confidence in the operating margin guidance range we gave of 14% to 15% for 2023.

At this time, I will hand the call back over to management for closing remarks.

Well, thank you all for joining us. I really appreciate all the great questions, and I wish you all the best over the summer. Looking forward to talking to you soon.

That will conclude today's meeting. Thank you all for joining. You may now disconnect.