Earnings Call Transcript - WSM Q4 2023

Operator, Operator

Welcome to the Williams-Sonoma, Inc. Fourth Quarter 2023 Earnings Conference Call. I will now hand the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please proceed.

Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations

Good morning, and thank you for joining our fourth quarter earnings call. 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 guidance for fiscal '24 and our long-term outlook. We believe these statements reflect our best estimates. However, 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 detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measure 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.

Laura Alber, President and CEO

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. Before we get into our Q4 results, I'd like to acknowledge the accomplishments of the entire team at Williams-Sonoma, Inc. The results we are about to share with you today reflect their collaboration, innovation, and dedication, and I want to give everybody on this team a huge shout-out and a huge thank you. We are pleased with our strong finish to 2023. In Q4, our comp came in above expectations at negative 6.8%, with a 2-year comp at negative 7.4% and a 4-year comp at positive 29.1%. In the quarter, we exceeded profitability estimates with an operating margin of 20.1% and earnings per share of $5.44. Turning to the full year. Our comp went down 9.9% with a 2-year comp at negative 3.4% and a 4-year comp at positive 35.6%. We delivered an annual operating margin of 16.4% with full year earnings per share of $14.85 beating our 2023 comp guidance of negative 10% to negative 12% and hitting our operating margin range of 16% to 16.5%. I think it's worth putting these results in context. Four years ago, the global pandemic changed how we worked and lived as most of us began to spend an unprecedented amount of time in our homes and interest rates were at historical lows. As a result of these two dynamics, the demand for home furnishing surged. Our company was well positioned to meet this demand with its compelling product assortment, supply chain capabilities, and the experience of our tenured management team. But the demand of the pandemic came with complications, including supply chain inefficiencies and higher vendor costs. Despite these increased costs and complexities, we stayed focused on innovating our proprietary products, running a full-price business, and managing ad costs and employment expenses. As we came out of the record year in 2022, we started to see slowing in our sales trend as interest rates increased and home sales declined. Decreases in furniture demand continued to put pressure on our top line. But again, we stayed focused on transforming our operations, cutting costs, and improving supply chain inefficiencies, all of which drove us to nearly double our profitability compared to pre-pandemic. Our exceptional results in 2023 were driven by strong operational execution in a challenging environment for home furnishings. While the data suggested that consumers were resilient, they shifted away from home into experiences in entertainment, and they have been hesitant on furniture purchases. Nonetheless, we have continued to drive results. From pre-pandemic through the pandemic and to today, we have navigated, learned, optimized, and built all in preparation for our next chapter of growth. We have developed a strong omni-channel platform and have invested in a distribution network with additional capacity. Going forward, we see another growth opportunity on the horizon for our company, resulting from a more normalized interest rate environment, improved home sales, and our strategy. As we look to next year and beyond, we are focused on three key priorities: First, returning to growth; second, elevating our world-class customer service; and three, driving margins. Our growth will be driven by our business strategies in each of our core businesses, our B2B program, our emerging brands, and our global business. We will continue to improve our world-class customer service by driving supply chain improvements from reduced out-of-market and multiple shipments, fewer customer accommodations, lower returns and damages, and reduced replacements. These improvements will continue to contribute meaningfully to our profitability in 2024 and beyond. And we see opportunity to drive margin by continuing our focus on full-price selling and cost negotiations. As it relates to other cost efficiencies, we will maintain our employment cost savings that we achieved last year following our comprehensive review of our organization structure. Regarding marketing, we continue to increase our spend, and we are seeing very effective returns on our paid marketing and on our social strategy. This investment will both drive sales and help us acquire new customers. Our in-house marketing expertise and performance-driven approach continues to serve as a differentiator between us and our peers. Also, our ongoing investment in our proprietary e-commerce technology continues to improve our online experience. We are focused on offering customers inspiring content and dynamic tools to assist with design projects, and AI is accelerating these efforts. We see many opportunities for our business from developments in AI, and we believe our leadership in this area will be yet another competitive advantage. As focused as we are on our digital and e-commerce capabilities, we remain passionate about our best-in-class retail business. We continue to improve our in-store experiences with inspirational products and next-level design services. I truly believe our teams are the best in the industry. And our continued retail optimization efforts have transformed our fleet to be positioned in the most profitable, inspiring, and strategic locations. On the sustainability front, in Q4, we are proud to be the only home furnishings retailer included in the 2023 Dow Jones Sustainability North America Index. And we started 2024 by being named one of Barron's 100 most sustainable companies. Our commitment to value is embedded in our company strategy, and we are proud of our recognition as a leader in sustainable home furnishings. Now I'd like to spend a few minutes talking about our brands. Pottery Barn ran a negative 9.6% comp in Q4 and ran a negative 3.8% on a 2-year basis and positive 38.1% on a 4-year basis. The comp improved sequentially from Q3 but still ran negative due to the pullback in consumer spending and furniture. During the holiday season, we saw strength in seasonal decor, entertaining, and home textiles. The brand experienced a strong customer response over the Black Friday, Cyber Monday period, and we continue to reduce discounting and strengthen our merchandise margins. The brand benefited from a Q4 launch of the Pottery Barn mobile shopping and design app. This new app allows customers to shop full room designs, share their favorite products, and connect with a design expert all through the convenience of their phone or tablet. We anticipate the continued customer adoption of this app will drive conversion for Pottery Barn in 2024 and beyond. As we launch our exclusive spring product collections, we're seeing continued strength in fashion bedding, home furnishings, and botanicals. Customers are continuing to gravitate towards easy updates with color, prints, and patterns. The Pottery Barn children's business ran a negative 2.5% comp in Q4 and was 1.5% positive on a 2-year basis and 21.1% positive on a 4-year basis. We continue to be focused on delivering compelling innovation and evolving the customer experience, and we are pleased to see improvement in the comp. Our baby business continued to be very strong and represents a sizable opportunity. We have been delivering growth in registry with our curated assortment, easy-to-use mobile app, and in-store baby experts. We've also introduced new products that are both high in quality and innovation, such as our dream deluxe power swivel recliner with heat and massage. Also, we're proud of our collaborations, and we just launched a new line that features whimsical design and keepsake quality. Also in Q4, we saw a strong consumer response to our expanded seasonal offerings that range from baby's first Christmas to Grinch-themed bedding for teens. We saw customers return to us for Valentine's Day and Easter with a strong response to our new collaborations, including an expanded collection of Hello Kitty. We're also seeing a particularly strong trend with our NFL offering in teens. And finally, we're seeing strength in nursery furniture, a purchase that is less dependent on new home sales. Moving to West Elm. West Elm is the brand that has been the most impacted by the consumer pullback in furniture. In Q4, West Elm ran a negative 15.3% and was negative 26% on a 2-year basis and positive 17.5% on a 4-year basis. However, what I'm excited about are our new product sales from this year's holiday assortment, which has shown strong growth compared to last year across all categories. Customers responded positively to fresh designs in furniture, textiles, and decorative accessories. We also saw strong sales in holiday decor, and as we move into 2024, newness continues to accelerate and is performing well. Given these positive trends in newness, we continue to see a sizable opportunity in West Elm as it rebalances more inventory into these new products. The Williams-Sonoma brand ran a positive 1.6% comp in Q4. On a 2-year basis, the brand was negative 0.9% and positive 29.8% on a 4-year basis. In Q4, the Williams-Sonoma Kitchen business ran a positive comp for the third consecutive quarter, and our Williams-Sonoma home business meaningfully improved. Retail has been very strong, with inspiring in-store events and dramatically improved in-stocks. Our seasonal categories grew double digits, and we saw strength in core businesses like cookware and bakeware, as customers gravitated toward gifting and entertaining at home. Throughout the quarter, collaborations like our Cookware partnership with GreenPan and Stanley Tucci and the launch of a partnership with one of Netflix's most-watched shows, Bridgerton, continue to drive sales, buzz, and new customer acquisition. Now I would like to update you on our other initiatives. Business-to-business ended the year strong with Q4 at positive 5%, bringing the total year to a positive 1%, coming in just under $1 billion. The contract business exceeded expectations at positive 31% on the year, fueled by continued strength in the hospitality and residential sectors along with early traction in developing segments such as health care, gaming, and senior living. Flagship projects in the back half of the year range from providing furnishings from medical office providers across the country to entertainment venues like Dave & Buster's. Our B2B team also provided guest room furniture for the new Fontainebleau hotel that recently opened in Vegas. Now I'd like to talk about our global business. While macroeconomic pressures continue to affect our global business, we are pleased with our performance in India, Mexico, and Canada. In India, we are seeing growth from strong marketing and brand awareness campaigns across the brands with a high penetration of our Design Crew business. In Mexico, the market continues to show strength driven by improved in-stocks and a strong holiday season. The Canada business continues to build momentum, fueled by our commitment to enhance the customer experience, both online and in retail. Our digital initiatives in the Canadian market continue to gain new customers and drive results for our brands. And we are pleased with the initial positive response to the recent launches of Rejuvenation, Mark and Graham, and Williams-Sonoma Home in Canada. As we continue to expand our omni-channel presence around the globe, India, Mexico, and Canada remain our key strategic growth markets. Lastly, I'd like to update you on our emerging brands. Rejuvenation delivered a strong quarter with a double-digit positive comp driven by success in our remodel product categories and new growth initiatives. We continue to see strength in both consumer and B2B sales. Rejuvenation continues to establish itself as a destination for home projects by providing products with great function, high-quality, and timeless design details. We're excited about the momentum in the brand and the growth potential in 2024 and beyond and believe Rejuvenation can be our next billion-dollar brand. Mark and Graham, our high-quality gifting business, saw strong growth this year with a high single-digit positive comp in the quarter. Our monogramming capabilities, coupled with unique high-quality gifts and the brand's curated online gift shops, make it easy for customers to find the perfect gift. And finally, our startup GreenRow continues to gain momentum in this new brand, which utilizes sustainable materials and manufacturing practices to create colorful heirloom quality products. We remain optimistic about the potential of this brand and its aesthetic. In 2024, we are planning to grow GreenRow with substantial increases in product assortment. These successful and exciting emerging brands demonstrate our ability to develop new businesses that expand our portfolio and address white space in the market. In summary, we're extremely proud of our accomplishments and financial results this year. We outperformed in 2023 despite the slowest housing market in several decades and massive geopolitical unrest. Although this pressured our top line trend, we stayed focused on full-price selling, supply chain efficiencies, and best-in-class customer service. We have transformed our business model, and as a result, we delivered an operating margin well above our guidance and well ahead of pre-pandemic operating margin. We have a powerful portfolio of brands serving a range of categories, aesthetics, and life stages, and we have built a strong omnichannel platform and infrastructure, which positions us well for the next stage of growth. It is early, but our reads on Q1 are strong, and we are optimistic about the opportunities that exist ahead. With that, I'll turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Jeff Howie, CFO

Thank you, Laura, and good morning, everyone. As Laura said, we're pleased to deliver a strong finish to fiscal year '23 with Q4 and full year '23 earnings significantly exceeding expectations. We delivered these earnings despite a challenging backdrop for home furnishings, pressing our top line. Our strong profitability in this environment demonstrates the durability of our operating margin. Our results once again reinforced the themes we consistently communicated in 2023. First, our steadfast commitment to maintain price integrity and not run site-wide promotions. Second, our first half supply chain cost pressures became tailwinds in the second half. And third, our discipline to control costs and manage inventory levels. Given the strength of our earnings through this challenging period for home furnishings, we're confident we can deliver long-term growth and even stronger earnings as the customer shifts back to home. Now let's dive into the numbers. I'll start with our Q4 results, followed by our full fiscal year '23 results, then provide guidance for '24. Q4 net revenues finished at $2.28 billion. Our revenues came in at the high end of our expectations, driven by strong holiday performance across our portfolio of brands, partially offset by ongoing customer hesitancy towards big-ticket expenditures. During the quarter, we continued our commitment to maintain price integrity and we reduced our overall level of promotions. Our Q4 comps came in at negative 6.8%, with our 2-year comp at negative 7.4% and our full year comp to 2019 at plus 29.1%. From a cadence perspective, our comps reflect a strong Black Friday to Christmas holiday period, bookended by inconsistent and choppy sales on both ends. Moving down the income statement, Q4 gross margin improved 480 basis points over last year to 46% as higher selling margins more than offset the impact of higher occupancy costs. Q4 selling margin at 55.1% was 560 basis points higher than last year, reflecting the full impact on our profitability of the supply chain tailwinds we've been guiding for several quarters. Our higher Q4 selling margins were driven by both higher merchandise margins and lower costs from supply chain efficiencies. Q4 merchandise margins contributed about half the increase in selling margins, driven by lower input costs and our focus on full-price selling. The balance sheet improvement came directly from supply chain efficiencies, which drove an improved customer experience and lower costs. We're proud to see our focus on execution and investment in supply chain paying off. 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. Our higher Q4 selling margins more than offset the 2% growth in Q4 occupancy costs to $208 million or 9.1% of net revenues, which is up 80 basis points from last year. Turning now to SG&A. Our Q4 SG&A expense of $591 million grew 13% and ran at 25.9% of revenues, deleveraging 460 basis points. As a reminder, our Q4 '22 SG&A results benefited from favorable items that we guided would not repeat in Q4 '23. Excluding the favorable items from last year, our SG&A dollars decreased 4%. Q4 employment was 300 basis points higher year-over-year, driven by higher performance-based incentive compensation in fiscal year '23 than last year. In Q4, we continued to manage variable employment costs in accordance with top line trends. Q4 advertising expense was 60 basis points higher year-over-year as we took advantage of opportunities to invest into higher levels of advertising spend. As Laura mentioned, we continue to increase our spend as we are seeing very effective returns on this investment. Our ability to invest in these opportunities is an example of 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. Q4 general expenses drove the balance of the increase as we lapped a favorable insurance settlement received in fiscal year '22. On the bottom line, our Q4 earnings significantly exceeded expectations. Q4 operating income came in at $458 million and operating margin at 20.1%, which is 20 basis points above last year, with Q4 diluted earnings per share of $5.44. Turning now to our full year results, which again exceeded expectations. Full year net revenues finished at $7.75 billion. Our full year revenues reflect a larger home furnishings backdrop and our commitment to maintain price integrity even if it meant forgoing some revenues in the short term. Our full year comp ran down 9.9% with our 2-year comp at negative 3.4% and our 4-year comp to 2019 at plus 35.6%. Full year gross margin ended at 42.7%, a 30 basis point improvement over last year as our first half supply chain headwinds turned into even stronger tailwinds in the back half. Full year selling margins at 53.2% were 170 basis points over last year and our highest ever selling margin rate driven by a nearly equal mix of higher merchandise margins and supply chain efficiency. These higher selling margins more than offset the 4% increase in our full year occupancy costs to $814 million. Full year SG&A expense decreased 5.8% to $2.04 billion. This decrease was driven by employment reductions taken in Q1 and Q2, our management of variable employment in line with top line trends, and a 20 basis point reduction in advertising on the full year. Full year SG&A deleverage of 140 basis points was primarily driven by lapping the favorable items recognized in Q4 '22 that I discussed earlier. On the bottom line, full year operating income finished at $1.27 billion and operating margin at 16.4%, significantly above our pre-COVID levels and the 15% operating margin floor we established at the start of the year. Full year diluted earnings per share ended at $14.85. On the balance sheet, we ended the year with a cash balance of $1.26 billion with no debt outstanding. This was after we invested $188 million in capital expenditures supporting our long-term growth, and we returned over $545 million to our shareholders through share repurchases and quarterly dividends. Year-end merchandise inventories stood at $1.25 billion, down 14.4% from last year. At these levels, we are well positioned to maintain our price integrity as we proactively managed our inventory levels in line with our top line trends. We generated a record level of free cash flow in 2023 at $1.49 billion, driven by the strength of our earnings, proactive inventory management, and financial discipline. Speaking of financial discipline, a prime example is our fiscal year '23 return on invested capital of 45%. This is among the best in the retail industry. Summing up our '23 results, we're proud to have delivered earnings substantially exceeding expectations. As Laura said, these results reflect the efforts of the entire team at Williams-Sonoma Inc. And I'd like to thank our talented team for delivering these outstanding results in a challenging environment. Now let's turn to our '24 outlook. First, let me point out that 2024 is a 53-week year for Williams-Sonoma Inc. So the fourth quarter will consist of 14 weeks. We will report comps on a 53-week versus 53-week comparable basis. All other year-over-year compares will be 53 weeks versus 52 weeks. We anticipate the additional week will contribute 150 basis points to revenue growth and 10 basis points to operating margins, both of which are embedded in our guidance. We anticipate 2024 will be a year of continued macroeconomic uncertainty. Lower interest rates could spur the housing market and shift consumer spending back to home, but timing is hard to predict. And there is also the election and global geopolitical tension. With this in mind, we are providing a wide range of guidance for '24. '24 net revenues are expected to be in the range of down 3% to up 3% with comps between down 4.5% to up 1.5% and operating margins between 16.5% and 16.8%. On the top line, we anticipate sequential improvement across the year, with the first half tougher than the second half, as our top-line comparisons become easier. On the bottom line, we expect our supply chain tailwinds will continue through at least the first half of '24, but will be partially offset by higher advertising spend. In the back half, we anticipate our operating margins will be in line with '23 results. Our capital allocation plans for '24 prioritize funding our business operations and investing in long-term growth. We expect to spend $225 million in capital expenditures to invest in the long-term growth of our business. Seventy-five percent of this capital spend will be dedicated to driving our e-commerce leadership and supply chain efficiency. We expect to continue to return excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, today, we announced an increase in our quarterly dividend payout of 26% to $0.23 to $1.13 per share. Fiscal year '24 will be the 15th consecutive year of increased dividend payouts, which we are both proud of and remain committed to. For share repurchases, today, we also announced our Board has approved a new $1 billion share repurchase authorization, replacing previous authorizations and under which we will opportunistically repurchase our stock to deliver returns to our shareholders. Combined, our dividend increase and new share repurchase authorization continue our commitment to return excess cash to our shareholders. In fact, we've returned over $3.8 billion to our shareholders over the last six years. As we look further into the future beyond '24, we are reiterating our long-term top-line guidance of mid- to high single-digit revenue growth. In the long term, we now believe we can sustain operating margins in the mid- to high teens. We are confident that we will 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.

Operator, Operator

Our first question will come from Steven Zaccone with Citi.

Steven Zaccone, Analyst

Congrats on the strong margin execution here in a tough environment. So Jeff, first question for you. Can you talk a bit more about the margin assumptions in the 2024 guide in more detail? You gave the commentary about operating margin in the back half. Can you talk about gross margin in particular? How does that look on the cadence of the year?

Jeff Howie, CFO

Steve. Yes, on our gross margin outlook and our EBIT margin outlook, as you know, we don't guide the individual line items. We provide top line guidance and bottom line operating margin guidance. And the reason why is to give us the flexibility to react as we see trends evolve in the business and apply the different levers we can pull along the way. And as you've seen, as we did in '23, we know the levers to pull to deliver results. We see continued strength in our operating margin. And as we guided today, we see it landing between 16.5% to 16.8% on the year. We do see that the supply chain tailwinds that we've been seeing in the back half of '23 will continue into the front half of '24 but will be offset by some additional advertising expenditures as we talked about, we did in Q4 of '23. But overall, we're very confident in our operating margin and looking forward to delivering these results.

Steven Zaccone, Analyst

Okay, great. Then second question for you, Laura. I was hoping to get more detail on the West Elm turnaround. You talked about some newness, and that's doing well. But how long do you expect the turnaround to take? And if we think about the performance of that brand relative to the overall guidance for the company, would you expect West Elm to still underperform?

Laura Alber, President and CEO

Yes. I'm so excited about West Elm. I've had a chance to see all of the product that's coming in this year and their strategies. And I think it's a very clear, exciting growth story again for us. I think in terms of timing, it's always hard to predict exactly when things will go. But we are seeing, as I said, really strong results, not just in the holiday seasonal decor but the new product offering that's core. And the new design language that we've brought out, the new modern forms, we are building back our non-furniture business, which drives customer engagement and also new customer acquisition and is very relevant and important for UPTs and repeat purchases. So that is on its way. You're going to see that continue to grow through the year. And then also now that we have success on some of these furniture items, we know that the timeline on when a furniture bestseller will be relevant is a lot longer than if you're a fashion apparel company. So we can then buy into it with confidence versus now our newness, although very high compared to last year, is just not a big enough percent of the total. So as we buy back into these winners and they compound through the year, that's when we expect to see them hit the total top line in a meaningful way.

Operator, Operator

Your next question comes from the line of Seth Basham with Wedbush Securities.

Seth Basham, Analyst

Congrats on another strong quarter. My first question is just thinking about the 2024 outlook. Obviously, a lot of uncertainty with the environment and your revenue growth guidance reflects that. But you guys have been very good at managing costs. And if we were to see revenue come in a bit below your guidance, would you still be able to hit that 16.5% operating margin target?

Jeff Howie, CFO

Yes. So simply to answer your question, even if revenues were to come a little bit lower, we're confident in our operating margin guidance. There's additional levers that we can pull within the business if that were to be the case. But our outlook is a little bit more positive. We think we're closer to the end of the down cycle in home furnishings rather than the beginning. And we're focused on delivering results in our business. I really believe that we have opportunities to continue to improve what we're doing, and there are more things that we can do to drive earnings throughout the year.

Seth Basham, Analyst

That's helpful. And then secondly, it seems like there's been a little bit of a change in how you're approaching advertising. You're finding good opportunities to invest there. Can you give some more color there? And also, is that one of the levers you can pull if this top line doesn't play out the way you expect?

Laura Alber, President and CEO

It's not a difference in approach. It's that when we see more opportunity, we invest more. And so we want to invest in advertising if we're going to get paid back. So we are looking at this every day, every week, every brand, and we're so lucky to have a test-and-learn methodology where we can try something in one brand. And if it works, we roll it out. If it doesn't work, we shut it down. And so when we find something that works, we spend more, the ad cost then stays lower or goes up with sales in tandem, giving you more on the bottom line. We've done this for years. It's a little more complicated than it used to be when we just had the catalog because there are so many different things to invest in. We're seeing a lot of opportunity in organic social now. And that is not paid. Now it helps to have paid social go along with organic social, but we're getting really good at pushing our content not just through our own channels but into the whole social media world in a very effective way to get new customers into our brands. And so it's not just the ad cost spend, it's the creative spend that goes into building that incredible content like we did with Stanley Tucci, for example, which continues to be a really wonderful example of a successful collaboration that's working both in short-term sales but also in bringing new customers to the brand. So it's a great example of the kind of things that are changing, and they're really different from 10 years ago when those channels were not available to use.

Operator, Operator

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

Jonathan Matuszewski, Analyst

Nice results. The first one is on B2B. Just curious how you're thinking about B2B in the context of your 2024 guide in terms of sales or comp? And relatedly, maybe if you could just update us on what you're doing to make that channel more profitable. It seems like you're doing a lot of good things on the consumer side to take costs out of the business in terms of less accommodations and damages, but curious if there's anything to make B2B more profitable?

Jeff Howie, CFO

Jonathan, we see B2B contributing about 100 basis points to our comp in '24, which is embedded in our guidance. Here's what's exciting. We're really optimistic about B2B growth as we look forward to '24. The business was up 1% overall in '23 with contract up 31%. And while the trade business has been more impacted by the slowed housing market, we've seen some recent improvement in that trend. However, we remain focused on accelerating our contract business, and we're really pleased with the momentum we're seeing. And here for us, it's really a growth story. Overall, B2B is slightly accretive to our operating margins, and we just see continued growth as we disrupt this $80 billion piece of our total addressable market.

Jonathan Matuszewski, Analyst

That's really helpful. And then just a quick follow-up on your store fleet. Just maybe update us on the mindset regarding store closures. What's embedded in the 2024 guide? Obviously, a lot of leases are up for renewal.

Laura Alber, President and CEO

We are excited about the progress in our retail stores as we successfully relocate some of them to more vibrant centers. For instance, in Annapolis, we moved our store next to Whole Foods, adopting a unique strategy compared to traditional retail locations. This move has proven advantageous, with our new store's performance surpassing that of the previous one. We collaborated closely with the landlord to create an excellent store environment, which is cost-effective, and the financial results are very strong, benefiting our customers as well. As we approach lease renewals, we focus on staying in outstanding centers while reinvesting in our stores. This ensures that they remain fresh, appealing, and aligned with customer preferences, incorporating newer concepts that didn't exist a decade ago. We continuously evaluate our brands to understand what works and what doesn't, aiming to optimize the experience while maintaining an inspiring store atmosphere. Our sales team plays a crucial role in this, supported by user-friendly technology that enhances the shopping experience. Additionally, in a challenging period where furniture sales have dipped, we are prioritizing the enhancement of our design services, knowing that customer interest in new homes will eventually rise. When the market shifts, we will be ready with an advanced design service platform for both our stores and online, which we believe will be transformative.

Operator, Operator

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

Max Rakhlenko, Analyst

Great. So first, Laura, can you just provide any more color on your comment that 1Q reads are strong? What brands are you seeing that in? And then just how are you thinking about what brands will lead the return back to growth over the coming quarters?

Laura Alber, President and CEO

Sure, Max. We have a strong lineup of opportunities across our portfolio of brands, and we are confident in our outlook. Some examples of what's working include a color trend where print, pattern, and color are selling well. Easter sales are strong, which is promising, although we need to be cautious since early trends can change unexpectedly. We also saw strong sales in Christmas decor, and the positive performance in Easter is beneficial for our brands. There are few competitors who serve seasonal holidays with quality, and we believe those holidays offer wonderful opportunities for decorating and entertaining. West Elm has not focused much on this area, presenting growth potential for them. While people might not be buying new houses, we see that they are willing to update single rooms, which positively impacts our sales. The projects I mentioned earlier, like renovations in baths and kitchens, are ongoing, and we are gaining attention for our high-quality, unique products in those categories. New furniture is performing well at West Elm with exciting new forms. Additionally, our collaborations with brands like Tucci, Colin King, LoveShackFancy, and Sheila Bridges are attracting new customers and inspiring us with fresh design ideas. We are pushing certain product categories to represent a larger percentage of our total while also pulling back in some areas. While I don't want to share too much competitive information, we're identifying many opportunities for growth. It's also crucial to note that we are continuing to reduce our promotional offerings. While we are striving for growth this year, we are committed to decreasing promotions, which can be challenging. We successfully managed this last year and plan to continue the same approach this year while finding a balance. We firmly believe this strategy is the right long-term move for our business. We are open to markdowns and trying new initiatives, understanding that some might not succeed, but we aim to avoid fluctuating pricing in our brands.

Max Rakhlenko, Analyst

Got it. That's very helpful. And so the big update, I think, is the new long-term EBIT margin outlook. So I'm just curious, what are you seeing now that gives you confidence to raise it? And then as we think about post-2024, is that going to be more on gross margin or SG&A? Just curious where you see the big opportunities ahead to continue to march forward.

Jeff Howie, CFO

At the beginning of 2023, we set a 15% operating margin floor. By the end of the year, we achieved a 16.4% operating margin. For this year, we are projecting an operating margin of 16.5% to 16.8%. We are confident in the sustainability of our operating margins, particularly as we expect to see our growth trend of mid- to high single-digit growth over the long term. We believe that beyond 2024, we have the potential to maintain these operating margins for an extended period. While we do not provide guidance on specific margin components versus SG&A over the long term, we have demonstrated our ability to deliver these results and remain confident about 2024 and beyond.

Operator, Operator

Your next question will come from the line of Peter Benedict with Baird.

Peter Benedict, Analyst

So first one is just on the supply chain environment. You guys have obviously been doing a great job on what you can control. I'm curious about the things that are maybe out of your control, some of the events going on, some of the costs on ocean freight. Just kind of remind us maybe where you sit there, how you may have baked some of that into the outlook here for '24?

Laura Alber, President and CEO

Our supply chain team has been outstanding, consistently demonstrating their capabilities through our results. While we've seen a return to normalcy since the pandemic, there are still numerous areas where we can improve, which will enhance our margins. Our goal is to reduce returns, replacements, and any issues impacting customer experience. We aim for perfect deliveries and to eliminate any friction in that process. We're seeing excellent performance across the metrics I highlighted earlier. When challenges arise, like the disruption in the Red Sea, they are significant; however, they haven't increased our costs. Currently, it adds about 10 days to delivery times. As I mentioned previously, we adjusted our delivery schedules upon learning about the delay to avoid disappointing our customers. When we exceed expectations with faster delivery, customers are always more satisfied than if they receive their orders late, as most do not connect such delays to global events. Therefore, we must quickly manage our delivery commitments once we become aware of any disruptions. This is a recent example of our proactive approach. I firmly believe we will encounter additional challenges this year, and our team is consistently looking ahead to anticipate and address these issues. The silver lining is that when disruptions occur, they typically impact everyone, and we are usually able to respond more effectively than many others.

Peter Benedict, Analyst

Yes. No, very true. And then I guess my next question was around kind of the real estate optimization process that's been going on for a while here. A couple of years now, maybe 10 to 15 stores lower year-over-year. Is that the cadence we should be expecting kind of going forward? And I'm just curious maybe how the occupancy cost growth is assumed for 2024, another year, maybe mid-single-digit increases, Jeff? Is that the way to think about it?

Jeff Howie, CFO

Yes. I mean in terms of where we are in our journey of retail optimization, we're probably in the middle innings. As I've discussed in the past, we have about 50% of our leases come due in the next 5 years. So we look to continue to optimize the real estate. And usually, we target a higher number of store closures, but they just tend to net out through the way the process works to about where we've been in the past few years. So in terms of particular numbers, you can look to the past, say, 3 or 4 years as a good guidepost. And then in terms of where occupancy is going to go, I'll go back to we don't guide individual lines. We really guide the top and the bottom line. So that gives us more levers to pull throughout the year. And now there are fixed costs within occupancy; there are also a lot of variable costs, too. So there are things we can go do throughout the year if necessary. So it's all embedded within our full-year guidance.

Operator, Operator

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

Christopher Horvers, Analyst

I guess my first question is, as you talk about the optimism about the bottom of the market and the improvement quarter-to-date, I was just curious what you're seeing on the furniture side of the business. You mentioned some newness in West Elm resonating but it does sound like a lot of the decor categories are what's been driving the strength. On the other hand, the mix does shift back towards the furniture brands away from Williams-Sonoma into the first quarter. So does the implied sort of sequential improvement in the first quarter? Are you seeing like better furniture demand trends? Maybe how much of it is some of the deflation working through the system from ocean freight normalizing? So any comment there would be really helpful.

Jeff Howie, CFO

Yes, Chris. So furniture trends in Q4 were down but sequentially improved over Q3. And yes, we do see a benefit from the higher penetration of Sonoma in Q4. But overall, to Laura's comments earlier, we're very pleased with our quarter-to-date performance. But it's early. And as Laura mentioned, there's the Easter shift, the turnover at Easter, which sometimes has impacts on the curves. But I think the important thing is we're not just a furniture company. We only have about half of our assortment in furniture. So we have a powerful portfolio of brands with a wide range of product assortment, and we can really meet the trends as the consumer is shopping. And that gives us confidence in where we see our outlook and we can really service the customers to what they're shopping for today.

Christopher Horvers, Analyst

Certainly. Regarding the follow-up, I understand you’re not providing guidance on specific line items. However, could you help us consider the SG&A line? You’ve done an impressive job managing incentives and advertising, adjusting with demand, and you also had some headcount reductions last year. Should we expect this to be more variable as recovery occurs? Will you see rate leverage, or should we model it mainly from a dollar growth standpoint while placing less emphasis on rates? Any insights on how variable SG&A might be during a recovery as you begin reinvesting in the business with an improving top line would be appreciated.

Laura Alber, President and CEO

Yes, Chris. It's Laura. I wanted to emphasize that our focus this year is on three main areas: driving growth, enhancing customer service, and increasing margins. We believe we are capable of accomplishing all three objectives due to the numerous opportunities available within our model and our strong brands. As we look forward this year, I am confident that the necessary investments we make will positively impact our top line. While we may not be addressing specific line items, you have seen our performance even during downturns, achieving margin improvements. As I mentioned in the last call, you can envision the potential during an upturn. The investments we've made over the past decade have positioned us well for increased volume without requiring significant new infrastructure investment. While we discuss these aspects, they are relatively minor compared to distribution costs or major re-platforming expenses faced by others. We are prepared for increased volume this year and next, and we are excited about how it will not only flow through but also enhance our customer service efforts, which are critical as they contribute to better margins.

Operator, Operator

Your next question comes from the line of Kate McShane with Goldman Sachs.

Katharine McShane, Analyst

Question on pricing. We wondered where you were on an average price versus last year. I know you talked about adding more opening price points last quarter. I just wondered if we could get an update on how that trended in Q4 and what you expect to see in 2024.

Laura Alber, President and CEO

It's interesting, Kate. We try to glean every piece of information from sales, and then they change. So I don't think it's fair to say right now that there's a specific price point that's the magic price point. We're seeing success across all price ranges. The customer wants value. So we have some really expensive items that are selling well, and then we have some value price points that are also selling well. So there's not a pattern there that I'd hang a strategy on for now. In all of our brands, we've worked on creating great value for the consumer and also really new, fresh designs. You cannot underestimate how important it is. When we get it right on design, it's not that we take advantage of the price; it's that our price is generally a lot cheaper than other people making the same product, and our quality is better. So that's what we're focused on: delivering value to the customer; and I – we were talking about this before the call, I can't prove that low prices, mid prices, and high prices are soft or strong. It's the stuff they want, and it's the new, fresh product.

Katharine McShane, Analyst

And I just wanted to ask a follow-up question with regards to tariffs that if there were to be, I noticed it's a risk profile for your guidance, the election. But how are you thinking about managing through a scenario where there could be more tariffs?

Jeff Howie, CFO

Kate. Well, first, we're in an election year. A lot gets said on the campaign trail, and who knows where this conversation really goes in the end. Second, we've transformed our sourcing base since the last time the subject was top of mind 6 years ago. Today, only 25% of our goods are sourced from China, which is about half of what it was back then. And here's the most important thing. We have some real key competitive advantages that serve us well into these situations. First, 90% of our products are proprietary, designed and exclusively made for our brands. We operate our own in-house best-in-class global sourcing operation. With 12 overseas offices, it's our own boots on the ground, managing sourcing decisions, production, and shipping, and we're the 13th largest container importer into the United States. So we have scale and relationships that others do not. So the punchline being, if the landscape changes, we have the ability to respond that others do not.

Operator, Operator

I'll now hand the call back to Laura Alber for any closing remarks.

Laura Alber, President and CEO

Well, thank you all for joining us. We really appreciate your support and look forward to seeing some of you in New York and talking to you throughout the year.

Operator, Operator

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