Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 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 proceed.

Good morning, and thank you for joining our third quarter earnings call. I'm here this morning with Laura Alber, our President and Chief Executive Officer; Jeff Howie, our Chief Financial Officer; Yasir Anwar, our Chief Digital and Technology Officer; and Felix Carbullido, our President of the Williams-Sonoma brand. Before we get started, 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 updated 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 is available on our Investor Relations website. Now I'd like to turn the call over to Laura.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q3 results, I would like to take a minute to thank the incredible team at Williams-Sonoma, Inc. for another quarter of great results. Without their hard work, dedication, and focus, none of the results we are reporting today would have been achievable. We are proud to deliver another quarter of strong earnings, significantly exceeding expectations despite a challenging economic backdrop for our industry. We beat profitability estimates with a record third quarter operating margin of 17%, with earnings per share of $3.66. Our comp sales, which reflect the larger macroeconomic backdrop, ran negative 14.6% in Q3, and our 2-year comp was negative 6.5%, while our 4-year comp to 2019 was positive 34.8%. These results were achieved in an environment filled with ongoing consumer hesitancy on high-ticket discretionary furniture and elevated levels of promotional activity. Despite this environment, we continue to drive results because of our unique proposition in the marketplace and our relentless focus on customer service. Our advantage is our portfolio of brands serving a wide range of categories, aesthetics, and life stages. While people are currently buying fewer large-ticket furniture pieces than last year, our portfolio of brands and product offerings has positioned us well for this shift into kitchen purchases, fashion textiles, dorm, baby, and seasonal holiday offerings. Our in-house design capabilities and vertically integrated supply chain are also key in producing proprietary products at the best quality-value relationship in the market. We remain firmly committed to reducing promotions despite elevated levels of discounting in the industry. In fact, our third quarter promotional levels were meaningfully lower than last year. Instead, we are meeting our customers' needs for value by introducing a larger offering of new products at mid-tier and lower price points. Not only is this strategy good for profits, but we have also reduced friction with our customers as we provide them better value without confusing them with short-term discounts. We strongly believe that this is the right way to run our business as it preserves the design-value price equation that we offer, which our customers appreciate. Moving on to customer service and the supply chain. We are seeing the year-over-year benefit of selling through inventories with lower supply chain costs. We continue to increase selling margins by reducing out-of-market multiple shipments. We have improved our customer service, returning to pre-pandemic and best-in-class levels. Investments in the final mile delivery experience have resulted in fewer customer accommodations, lower returns, lower damages, and lower replacements. Customer metrics like on-time delivery are at record highs, and backorder crate rates have substantially improved. The total benefit from these supply chain and customer service improvements is significant, and you can see it in our results today. Regarding marketing, we increased our spend from Q2 but are still leveraged in the quarter. We continue to ensure that our marketing investment gives us the ability to test new formats, connect with new customers, and showcase our offering to our existing customer base and our highly engaged brand loyalists. We've seen increasing success with our marketing and product collaborations, and we will continue to build upon them. Our ongoing investment in building our proprietary e-commerce technology continues to improve our online experience. We're focused on offering customers inspiring content and dynamic tools to assist with their design projects, and AI is accelerating these efforts. We see many opportunities for our business from developments in AI. As early adopters of integrating AI, we look forward to leading the retail industry in this area, focusing on quality, authenticity, and responsiveness to this new technology. As focused as we are on our e-commerce capabilities, we are also continuing to focus on delivering a best-in-class retail business. Our stores are beautifully designed and curated with inspirational assortments, and our continued retail optimization efforts have refocused our fleet on the most profitable, inspiring, and strategic locations. On the sustainability front, we are proud to report that in Q3 we were named the top scorer on the Sustainable Furnishings Council's Wood Furniture Scorecard for the sixth consecutive year. Using sustainable wood has been a key focus of our strategy and a differentiator of our business. Now I'd like to spend a few minutes talking about our brands. Pottery Barn ran a negative 16.6% comp in Q3, but ran positive 3% on a 2-year basis and positive 43% on a 4-year basis. We have substantially reduced the promotional offerings in the brand and have successfully introduced new low- and mid-tier programs at great value. While furniture demand has been most impacted, we are seeing strength in textiles and seasonal decorating. We're excited for the holiday season given strong early reads on our innovative proprietary collections. Earlier this week, we announced the launch of a new mobile shopping and design app for Pottery Barn following the success of our Pottery Barn Kids and Pottery Barn Teen apps. The Pottery Barn mobile app delivers a convenient customer shopping experience and makes it easy to create and manage a registry on the go. Now, customers can explore and shop full rooms, easily share their favorite products, and connect with design experts, all through the convenience of their phone or tablet. The Pottery Barn children's business ran a negative 6.9% comp in Q3 and was negative 11.7% on a 2-year basis and positive 29% on a 4-year basis. Across these life stage brands, we are focused on delivering compelling innovation and elevating the customer experience. One key area of focus in the quarter has been the evolution of our back-to-school offering. Here, we saw standout growth in our dorm business as customers gravitated to higher design and quality. We offer a compelling, complete solution that is easy to shop on our Pottery Barn Teen app. Given the size of the dorm market, we believe this represents a significant opportunity for us for years to come. We also continue to focus on another key life stage offering, which is baby, the entry point to the children's home furnishings brand. Here, we are winning with our innovative nursery seating and a curated selection of high-quality baby gear. In our stores and across our mobile app, customers can register with Pottery Barn Kids and receive help from our nursery experts. We're really encouraged by the strength of our innovative product introductions and fresh product collaborations, with strong responses to recent Super Mario and LoveShackFancy launches. Looking to the quarter ahead, we believe we have a compelling pipeline of collaborations that our customers will love. Moving on to West Elm. West Elm is the brand that has been most impacted by the customer pullback in furniture. In Q3, West Elm ran negative 22.4% comp and was negative 18.2% on a 2-year basis, while running positive 26.1% on a 4-year basis. West Elm has the highest percentage of its assortment in furniture, and the most underdeveloped in other categories, with a customer base that's the most impacted by the current macro environment. Despite current challenging dynamics, West Elm saw a very strong reception to their new fall products, which marked a real evolution in the brand's modern design voice. Sales from this year's fall assortment are up compared to last year, with positive customer response to fresh furniture forms, mixed materials and new textures and innovations in textiles. Early holiday reads have also been positive in seasonal trim and tabletop, as well as hosting and entertaining categories. Given these positive reads, we see sizable opportunity in West Elm as it rebalances more into textiles, decorative accessories, entertainment, and seasonal offerings. We continue to be very optimistic about the long-term growth trajectory of West Elm with its industry-leading design and value. The Williams-Sonoma brand, which includes Williams-Sonoma Home, ran a negative 1.9% comp in Q3. On a 2-year basis, the brand ran negative 3.4% and was positive 34.6% on a 4-year basis. The Williams-Sonoma Kitchen business ran a positive comp for the second consecutive quarter this year, primarily driven by retail. Earlier this quarter, we launched a successful collaboration in cookware with Stanley Tucci, who designed an exclusive collection with GreenPan for Williams-Sonoma. Collaborations like Tucci's have been an excellent vehicle for growth and new customer acquisition. The kitchen continues to see strength in high-end electrics, particularly in coffee and espresso. The Williams-Sonoma Home business, while still negative, is beginning to see improved trends, with a refreshed, more editorial point of view that showcases updated textiles and decorative accessories. Looking to Q4, Williams-Sonoma becomes a bigger part of our business, and early reads on the holiday are positive, indicating a strong season of entertaining and gifting ahead. We have an impressive pipeline of new launches, with engaging content and corresponding events for our customers to experience both in-store and online. Now I'd like to update you on our other initiatives. We are pleased to report Business-to-Business delivered a positive quarter, running positive 1.5% in Q3, driven by 30% growth in the contract business. Exciting wins in the quarter included a brand standard program for Pottery Barn with Pendry Hotels for custom outdoor furniture and a new partnership with a premier developer partner, Jamestown, for two new properties, including a senior living tower and a new residential development. We're also excited by the success of specific B2B product developments, like the expansion of our restaurant furniture program, which has been key to gaining momentum in the food and beverage space with clients like Dave & Buster's, along with clients in the sports and entertainment space. The future remains bright for this business. Now I'd like to talk about our global business. Our global strategy has not changed, and we continue to focus on a franchise-first model. This business has, of course, been affected by the uncertain macro environment, particularly in the Middle East. We are excited to see our brands exceed expectations in other markets like India. We opened our third West Elm retail location in Pune and expanded our Pottery Barn brands into the world-famous Jio World Plaza now open in Mumbai. The Mexico market is also showing strength, driven by improved in-stocks in furniture and strong back-to-school and seasonal assortments. We continue to see momentum in our Canada business, fueled by our commitment to enhancing the customer experience both online and in retail. We have also grown the brand and service offerings available to Canadian customers by launching Rejuvenation and Mark and Graham online and relaunching Gift Registry in Canada. Lastly, I'd like to update you on our emerging brands. Rejuvenation delivered a positive quarter, driven by our remodel and refresh categories as well as new growth initiatives. Customers continue to update their homes, specifically in the spaces of kitchen and bath. We are continuing to grow the brand in new markets by opening a new store in the San Diego market and another new store opening this weekend in North Carolina. We continue to be excited by the opportunity we have for growth from the Rejuvenation brand. We are also pleased with our results in Mark and Graham, our gifting and personalization brand. We are optimistic for Q4 as we head into the key gift-giving holiday season. Customers will benefit from the brand's inspiring content and curated monogram gift guides organized by both recipients and price points. At GreenRow, we continue to gain momentum in this new brand, which utilizes sustainable materials and manufacturing practices to create colorful heirloom-quality products. While it's early, we remain optimistic about the potential of this brand and its aesthetic. These successful and exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio of brands and address white space in our product offerings, all with minimal investment and low cost of entry, leveraging our knowledge and infrastructure. In summary, our outperformance this quarter drove a record Q3 operating margin of 17%. Although customers are shifting their spending temporarily away from high-ticket furniture purchases, we have a powerful portfolio of brands serving a range of categories, aesthetics, and life stages to meet the demands of customers. Despite our sales running down this year, our execution and the strength of our operating model produced strong earnings again this quarter, driven by our full-price selling, supply chain efficiencies, and best-in-class customer service. Our early seasonal reads are strong, and we are optimistic about the holiday season. As we put this all together, we are raising our guidance for the year. We now expect the full-year revenues to come in at a range of down 10% to down 12%, and we are raising our outlook on operating margin to a range of 16% to 16.5%. It is important to note that the reduction in our revenues outlook is more than offset by our raised operating margin outlook. And with that, I will turn the call over to Jeff to walk you through the numbers in detail.

Thank you, Laura, and good morning, everyone. As Laura said, we're proud that, once again, we've delivered earnings substantially exceeding expectations. Our Q3 results reinforce the themes we've consistently communicated over the past several quarters: first, our steadfast commitment to maintain price integrity and not run site-wide promotions; second, how our earlier supply chain cost pressures will become tailwinds in the second half and beyond; and third, our ability to control costs and manage inventory levels. Our strong profitability this quarter, despite softer top line revenues, demonstrates the durability of our operating margin. Now let's dive into our Q3 results, followed by an update on our fiscal year guidance. In addition to year-over-year results, I'll reference 2019 as it's helpful to compare our performance with pre-pandemic levels. Net revenues came in at $1.854 billion. While below our expectations, our revenues reflect the larger home furnishing backdrop and our commitment to maintain price integrity, even if it means forgoing some revenues in the short term. Our revenue growth in Q3 came in at negative 14.6% comp. Our 2-year stack was negative 6.5%, and our 4-year stack against 2019 grew 34.8%. Our Q3 demand comp at negative 11.8% was materially unchanged from our Q2 trend. Our 2-year demand stack was negative 13.8%, and our 4-year demand stack was a positive 33.2%. Our revenue comps this quarter reflect a normalized spread between demand and net comps. Our improvement across returns and appeasements offsets the majority of last year's outsized backorder fill. From a cadence perspective, our demand trends continue to be inconsistent and choppy, especially after Labor Day. Moving down the income statement. Gross margin at 44.4% exceeded our expectations. The 290 basis point improvement over last year reflects the supply chain tailwinds we've been guiding for several quarters. Merchandise margins increased materially over last year, driven by lower ocean freight costs flowing into our income statement and our focus on full price selling and price integrity. In fact, merchandise margins were substantially higher than Q3 2019. Selling margin also improved materially over last year, driven by supply chain efficiencies. Through our improved execution and investment in supply chain, we substantially improved our customer experience. Key metrics, including out-of-market shipping, multiple deliveries per order, returns, accommodations, damages, and replacements are all performing at pre-pandemic levels, if not better. I'd like to congratulate and thank our supply chain organization for delivering these results. Altogether, our selling margins were 450 basis points higher than last year, reflecting the full impact to our profitability of the supply chain tailwinds. Occupancy costs of $200 million were 1% lower than last year and decreased 2% quarter-over-quarter. Coming in at 10.8% of net revenues, occupancy deleveraged 160 basis points compared to last year driven by the softer top line. Our Q3 gross margin at 44.4% is 840 basis points higher than 2019's 36%. Our SG&A expenses of $507 million were down 11% compared to last year, once again reflecting our ability to control costs. Our 27.4% rate deleveraged 140 basis points to last year, driven by general expenses offsetting variable expense savings. Employment expense decreased double digits versus last year, but deleveraged, primarily driven by favorability in last year's stock-based compensation. We continue to manage variable employment costs in accordance with top line trends. Our advertising expense slightly leveraged in Q3 despite increased funding quarter-over-quarter as we continue to test into higher levels of advertising spend. Our rate leverage reflects the competitive advantage of our agile performance-driven marketing organization. Our in-house capabilities, first-party data, and multi-brand platform continue to drive efficient advertising spend. General expenses drove the majority of the deleverage on the quarter, resulting from the timing of asset disposals and legal settlements. Overall, our year-to-date SG&A through 39 weeks is down 12% to last year and flat on a rate basis. It's 100 basis points lower than 2019's SG&A rate of 28.4%. Regarding the bottom line, our results speak for themselves. Q3 operating income came in at $315 million and operating margin at 17%, a record operating margin for our third quarter. 17% is 150 basis points above last year and 940 basis points above 2019's 7.6%. Our diluted earnings per share of $3.66 was slightly below last year's third quarter earnings per share of $3.72, but significantly above 2019 earnings per share of $1.02. On the balance sheet, we ended the quarter with a cash balance of $699 million with no debt outstanding. This was after we invested $42 million in capital expenditures supporting our long-term growth, and we returned over $61 million to our shareholders through quarterly dividends and share repurchases. Merchandise inventories at $1.4 billion were down 17.2% compared to last year. Three important points I'd like to emphasize once again: First, we are well positioned to maintain our price integrity as we proactively manage our inventory levels in line with our demand trends; second, going into the holiday season, our in-stock levels are near historical highs, and our regional inventory balance and composition is well positioned; third, our Q3 ending inventory levels are up only 11% versus the same period in 2019, and that's with revenue comps of 34.8% over the same time frame. This discipline highlights how we've improved both our inventory efficiency and turnover. Summing up our Q3 results, we're proud to have delivered earnings substantially exceeding expectations. I'd like to thank all our associates for delivering these outstanding results. Now let's turn to our outlook. Based on our Q3 results, we are updating our full-year outlook. Our new guidance reflects both the ongoing top-line uncertainty and the strength in our operating margin. We now expect full-year '23 net revenues to be in a range of down 10% comp to down 12% comp, and we are raising our operating margin outlook to a range of 16% to 16.5%. It's important to note that our lower sales outlook is more than offset by our increased operating margin, producing higher implied EPS guidance. On the top line, our updated guidance is based upon the facts and trends we know today from our Q3 results. Specifically, a conservative view of our 1-, 2-, and 4-year trends in Q3 connects with the implicit Q4 guide in our updated full-year '23 net revenue guidance. Given the macroeconomic environment, we believe this outlook is prudent. On the bottom line, our supply chain tailwinds will continue to bolster our profitability, producing full-year operating margin within our updated range of 16% to 16.5%, with implied Q4 operating margins in line with historical builds from Q3. We continue to expect our full-year income tax rate to be approximately 26%. Our 2023 capital expenditures are now anticipated to be $225 million due to the timing of project spend. As we have communicated quarterly, we are committed to returning excess cash to our shareholders through dividends and opportunistic stock repurchases. We will continue to pay our quarterly dividend of $0.90 per share, and we have almost $700 million remaining under our current $1 billion share repurchase authorization to repurchase our stock opportunistically. As we look forward to 2024, we will balance the macroeconomic uncertainty with our long-term growth potential and we'll provide guidance in March. As we look further into the future beyond '24, we are reiterating our long-term guidance of mid- to high single-digit top-line growth with operating margins exceeding 15%. We're confident we'll continue to outperform our peers and deliver shareholder growth for these reasons: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital-first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet. With that, I'll open the call for questions.

Our first question will come from Chuck Grom with Gordon Haskett.

The compression in your top line in the third quarter and the implied slowdown in the fourth quarter really isn't all that surprising given the backdrop today. But at what point do you run the risk of losing market share or mind share by not engaging? And then as a follow-up, gross margin control was actually more impressive. Can you talk about the drivers there and the sustainability into 2024, particularly on the supply chain front?

Chuck, why don't we start with the last one, and I'll talk about gross margin, and then I'll turn it over to Laura to talk about our promotional posture. Gross margin exceeded our expectations this quarter, really driven by the tailwinds I've been guiding for the past several quarters. There were three main drivers in order of magnitude: first, our lower ocean freight from rate normalization flowing into our income statement; second, supply chain efficiencies, including lower out-of-market shipping, fewer multiple deliveries per order, and decreased returns, accommodations, damages, and replacements; and third, reduced promotional activity as we focused on full-price selling and maintained our price integrity. Overall, the majority of the improvement came from ocean freight and supply chain efficiencies. We've made significant improvements in our customer service, and you can see it in our results. I want to once again thank our supply chain organization for really knocking the cover off the ball. Going to your question about how these will continue, here's what you need to remember. Our Q3 margins represent the start of the tailwinds we will see from supply chain efficiencies. While we don't guide specific lines, we anticipate similar tailwinds in Q4 and even into 2024.

Chuck, so I don't think we should think about gross margin as a trade for share. The two are not necessarily as correlated as one might think. In fact, it's not clear that people who are running more promotions are going to gain more share, especially long term. For our target customer, we are confident we are gaining share. The high-quality, regular price customer is the one that we best serve given what we do with brands. Trust me, we are very focused on returning to growth. In fact, we're very confident about our strategies and our ability to execute. It's the environment that is really the question mark for us as we look at the balance of the year in the short term. We continue to test different things to see what makes sense, whether it's pricing up, down, more marketing, or less marketing. Trust me, as we see things that do not just benefit short-term, we are definitely focused on pushing them and building upon them for the long term.

Okay. Great. And then can we just talk a little bit about like-for-like SKU pricing today relative to 2019? I know there's been a lot of improvements, but if you finance that are actually like-for-like, where do we stand today relative to back then?

That's a good question, Chuck. I didn't expect that one. So 2019, well, it was a long time ago, it's hard to remember. We took some price increases during the pandemic, as you know. A lot of them have stuck, and some we've backed off. We've also gotten a lot of vendor price reductions, which is a great thing to see, and we've used some of those to reduce prices to our consumers so that we are very competitive with our value quality relationship. The thing to remember also is that it's not just about reducing prices on existing products. We bring in a fair amount of exclusive, exciting newness. We've been building into both our mid-tier and low price points, and those things are full margins. It's a very good way to continue to build value into the business. But vis-a-vis 2019, I actually don't have that number on how we exactly stand with the entire assortment versus 2019 in pricing.

Congratulations on the profitability. I wanted to ask about promotions, Laura; you mentioned that you are less promotional than a year ago. I know you've reduced site-wide promotions for some time now. So where exactly are you lowering promotions? Is it in clearance or other items like rewards? It would be helpful to understand that trend.

Yes. Thank you for the question. We've, in fact, pulled back promotions both sequentially this year and versus last year. We've taken away all up-down pricing that was site-wide. The site-wide promotions have been gone. We've also removed e-mail overlay, all those hidden promo tactics that other people use, coupon matches, double points; we don't offer any of those. The level of clearance and promotions during our sale periods, which we call warehouse sales, is also lower.

I guess just maybe can you expand a little more on retail optimization, where you stand in that process, what's still to come. Jeff, you mentioned the occupancy cost down slightly year-over-year in the third quarter. Is flat to down something that's sustainable in that line as you think into 4Q and then into '24? That's my first question.

Peter, we continue to operate a world-class retail business, and our stores serve as billboards for the brand and operate as profit centers. They're beautifully designed and curated with aspirational assortments, and we believe we will continue to serve as a competitive advantage. We continue on our journey of retail optimization. Since 2019, we've closed about 15% of our store count. Over the next 3 to 5 years, about 50% of our leases come due, and we'll continue to guide that we anticipate about 20% will close over time. Multiple aspects to our retail optimization strategy will involve closing any of the least-performing stores from a profitability standpoint or a brand denigrating, and the second point is the repositioning of our retail fleet. Here, we're seeing not only better customer engagement but better economics as well. We will continue to look to reposition our fleet to right locations as leases come due. The key point here is we continue to improve our retail profitability.

Well, good. Nice to see my recent visit to the Westport store showing up in the numbers there, I guess.

Thank you for your business, Peter.

Yes. Not exactly. So next question just would be around the cash balance; obviously, it continues to rise. You've slowed the buyback here of late. Just curious, is this just prudent caution given all the macro pressures, the risks that are out there? Or is there something more strategic that's maybe at play here in terms of building the cash balance?

Yes. Peter, as you know, we don't commit to a consistent cadence of share repurchases. We do remain committed to driving long-term shareholder returns and will opportunistically buy back stock and drive shareholder returns. In Q3, we had extremely strong performance in our stock price relative to the broader market. We exceeded all three major indexes, a collection of hardlines retail and softlines retail. So we outperformed. So it's not what we consider opportunistic.

Congrats on the nice quarter. So first, Laura, how are the brands performing against your own internal expectations? And which brands do you view to have the bigger opportunities to take market share from some of your struggling or closing peers?

It's a great question. We are disappointed in the top line performance. As you know, in most of our brands this year, except for our emerging brands, we've seen slower-than-expected furniture performance. That said, we've seen really strong seasonal performance, and these life stage businesses in certain categories are better than expected. The market, as you know, is very large and very fractured. There's huge opportunity for us to gain share with all of our brands. The Williams-Sonoma brand and the name are stronger than the volumes that they produce. With Bed Bath & Beyond closing its retail footprint and others going out of business, we can see what a tremendous opportunity we have. And as you know, Williams-Sonoma really spikes during the holiday season. So we are excited.

Sure. I don't want to give away too much of our winning formula, but it includes curating the best products out there, inspiring customers how to use it, and offering it in their channel of choice, whether it be online or in-store. I think some houseware brands offer products that don't inspire, and some inspire but don't have 150-plus stores and a great website to purchase from. Our beautiful stores, our well-trained and passionate store associates, our inspiring catalog, and our multidimensional website are competitive advantages I don't think anyone really has. As we head into the fourth quarter, this is the time that we celebrate the most. We have Thanksgiving, Hanukkah, Christmas, New Year's Eve; these are reasons for people to come visit our stores. I think we've pulled together the best assortment of gifts and holiday decor that we ever have had. So we're excited, and we want to continue to gain market share, and all indicators are that in the kitchen business, it appears we are.

As you look at our other brands, both the big ones, both West Elm and Pottery Barn, we have shown this year that there are areas within each brand that are very underdeveloped where there's sizable opportunity, particularly in accessible furniture for Pottery Barn and modern accessories, textiles, and decorative businesses within West Elm. We're excited about the possibility of picking up share in those two brands in specific categories. Our focus remains on delivering proprietary products and not just thinking about markdowns; we're focused on how to build better collaborations and product lines that the customer loves. We've talked about B2B across all brands; it's a driver of market share for us because nobody is doing what we're doing. We are still scratching the surface, and we can do much more as we continue to build this muscle. We recognize that it's been softer than expected this year, particularly in furniture, but we're focused on that growth posture looking out into the future.

When we think about the updated margin guidance, is there anything in it that makes you think that you can at least hold it as we think ahead, especially once you start to leverage fixed expenses on top line growth? As I said in the answer to Chuck's question on gross margin, we anticipate that the results we saw in Q4, the tailwinds I've been discussing will continue into Q4. These are pretty strong tailwinds. I talked about the impact of ocean freight, our supply chain efficiencies, and our full price selling. We don't guide specific lines, but our guidance reflects our reality.

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

This is Zach on for Simeon. On your view for the top line, do you think this year will be the bottom? Your updated guidance implies an underlying deceleration in the fourth quarter across stacks. So do you think that the trends could inflect in '24?

We'll talk more about next year after we get through the really important holiday season. Right now, that's where our focus is. As Laura just touched on, our primary objective in '24 will be to drive both growth and margin, and we'll balance the macroeconomic uncertainty with our long-term growth potential. But we'll talk more about that in March.

Let me add my congratulations as well on the strong profitability. So you talked about introducing a larger ordering of new products at mid-tier and lower price points. And then you talked specifically about Pottery Barn introducing some of those products. I guess just two questions related. Are there any other brands that have where you've introduced those mid- and lower-tier products? And how do the merchandise sales margins on those products compare to some of your higher price point offerings?

Thanks, Anthony. The margin profile is the same as the rest of our products. So it's not that they're lower at all— in fact, they're great margins. We have done the same thing also in West Elm. You're going to see West Elm continue to have more and more newness sequentially. So for fall, you might have heard in my prepared remarks that we had superb winners in the furniture assortment. Many of them are sold out right now. We are thrilled, but we are also chasing those products, and we will be getting back in stock in Q1. That gives us confidence about where we want to take the brand aesthetically and how we think the modern customer wants to evolve.

So I wanted to also ask about how you're thinking about the trade-off between comps and margins. I'm curious if you think that you could have driven gross profit dollars higher this year if you had used more promotions. Or do you think that wouldn't have actually driven the gross profit dollars higher? My question is, obviously, if you could, but didn't, the reason would be that you don't want to destroy the pricing power over the long term.

Yes. Jeff and I are fighting over your question. I would say it's both short-term and long-term. It's not clear as reducing prices drives more. If you have fewer people buying furniture and you just reduce the price 20%, you get 20% more people buying it just to be even, right? So you might think you're doing something, and it's what retailers do—they mark stuff down when they want more sales, and it's not necessarily the case. We've done a lot of testing up and down to see where that sensitivity is. Secondly, it's certainly not good for the long term. You can see the race to the bottom with promotions; if you look at the history of retailers who've done that, it's a bad idea. We are not a low-price provider; we are quality, high-service, and high-design retailer. Pricing is not usually why you come to us, and we are not willing to sacrifice it in the short or long term to sustain a promotional strategy. There's no doubt that the metrics and makeup of the West Elm business make it more vulnerable to the external environment. The younger customer; the less-affluent customer; the higher furniture; the less-developed seasonal business; or the less-developed decorative and textile business are all factors in the West Elm underperformance. That said, we do not think about not being able to do anything about anything. We are focused on what we can do being served this set of circumstances. We have been working very diligently to give the customer other options other than just furniture and ensure our stores have those things ready to go for repeat traffic. That's a significant change to push that business into the stores, not just online. We've talked about developing those things but I want to make sure you understand too the way we're using the channel strategy to push lower ticket things that are more for easy updates for the home rather than the whole home. Also, we've been pushing collaborations. We've had really great success lately, and we have more confidence now to buy into those. That's a nice incremental change for us as well.

So first off, I too would like to add my congratulations on your continued profitability beats. So the question I want to ask, and I know it's a bit of a follow-up here, is just with respect to the overall promotional environment. So I'll ask maybe a couple of questions within this question. One, as you're monitoring the environment and the actions of your competitors, is it—if you look at the promotions that have accelerated—do you believe this is more temporary, driven by clearance? Or is this returning to levels we saw pre-pandemic?

There are still plenty of things on sale because we clear products. So you can find—if you're a promotional shopper—you can find sale prices on our websites for sure. It's just that the quantity of those is so much lower than it's been; it's lower than our competitors. But look at other websites—they're littered with promotions; in some cases, it's 80% red lines. I don't know what they're doing, but I can tell you what the customer sees. It's crucial to us that the customer can count on the price. If you buy a piece of furniture, it's likely not delivered for 4 to 5 weeks. If that price changes and it hasn't been delivered, you'll always wait for the sale, and you create this up-and-down cycle of customers waiting for a discount. We are focused on what's the first price; is that a great value; is it the best value in the marketplace? We're looking at the competition and assuming they're going to be 20% off, assuming they're going to be 30% off. We are saying is it the best versus their sale price, and that's the key driver here on creating value for the consumer, having them trust us.

That's very helpful. If I could ask just a follow-up, unrelated. But regarding gross margins, I mean, now we're seeing the benefit of moderating shipping costs. Recognizing there's a lot of accounting noise in how these costs are capitalized, but I guess, Jeff, maybe this is more for you, but how long will this dynamic prove a tailwind for gross margins for Williams-Sonoma?

Look, we've certainly said in the call that it will continue into Q4. Previously, I've said it will continue to be a tailwind into 2024. But we're starting to hinge on 2024 guidance, which we'll address in March. Meanwhile, we're really laser-focused on delivering our Q4 results with the all-important holiday season ahead of us.

Well, thank you all. We really appreciate your time, and I want to wish you all a wonderful Thanksgiving, and a great beginning to the exciting and beautiful holiday season with your family and friends. We look forward to talking to you again after the New Year, and take care.

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