Earnings Call Transcript - WSM Q2 2021

Operator, Operator

Welcome to the Williams-Sonoma, Inc. Second Quarter 2021 Earnings Conference Call. The operator provided instructions. This call is being recorded.

Brian Yee, Senior Vice President, Corporate Finance and Treasury

Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, growth plans and prospects of the company in 2021 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press release and SEC filings, including the most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.

Laura Alber, President and Chief Executive Officer

Thank you, Brian. Good afternoon, everyone. Thank you all for joining us. We are proud to report another quarter of outperformance with a 30% comp, strong growth across all brands and channels and 360 basis points of operating margin expansion. These second quarter results demonstrate the success of our growth strategies and the earnings power of our company. We have an advantage in our industry due to our exclusive in-house design capability, our channel strategy, which is digital-first, but not digital only, and our values with sustainability and equity underlying all that we do. Our teams have proven their ability to move with agility and to execute against macro complexities while building for the future and improving the environment for our customers, our communities and our associates. The momentum we are seeing in our business and our winning positioning set us up to continue to take share in a fractured market. We do not see any evidence that growth trends are waning. And in fact, we see favorability in the macro environment as more people prioritize their homes and home decor. We believe we are at the intersection of a transformative change that will accelerate the growth of our industry and our market share within the industry. Home sales in 2021 are expected to grow more than 20%, the most sales recorded since 2005. The acceptance of remote work is gaining traction with a number of remote hybrid workers expected to nearly double in 5 years from pre-COVID metrics. In addition, our growth strategies are gaining traction faster than we predicted, and our key differentiators are further distancing us from our competition. Therefore, we see a clear path to beating our previous revenue and profitability targets, and we are raising our full year revenue outlook again with revenue growth now expected to be in the high teens to low 20s and operating margins now expected to be in the range of 16% to 17%. Given our increased optimism, we now expect to achieve our long-term goal of $10 billion in revenues in 2024, 1 year faster than previously expected and with higher profitability, which will now be at or above our increased FY '21 operating margins. Now I'd like to talk in more detail about why our model stands out from the competition. First, our positioning. Our customers shop with us because we design high-quality and sustainable products that are engineered for value. Our platform of loved brands allows us to serve customers who are looking for quality and sustainable products at a great value across a wide range of aesthetics and scale. The home furnishings market is extremely fragmented. Our addressable market is $780 billion, and we currently only own approximately 1%. As the disruption from brick-and-mortar to online continues, our digital-first advantage built from decades of investments into our technology, supply chain and digital marketing infrastructure will only further distinguish us from competitors that are retail dominant. And relative to the other strong online players in the market, our model is the only one with an exclusive product line and a high service model. Second, our growth strategies are working. And the new opportunities generated from these initiatives are incremental to our business today. From our existing brands, we have a long runway to expand our reach with existing and new customers. In West Elm, we are expanding into product white space and accelerating our presence both online and through new stores to drive our brand awareness from 20% to 60%. These growth initiatives will fuel our goal of growing this brand to $3 billion in revenues by 2024. In the Pottery Barn brands, we expect to reach nearly $5 billion by 2024 by driving incremental growth in categories such as upholstery, bath, baby and dorm. And our new updated aesthetic is resonating with both existing customers and a younger demographic of customers that are in the household formation mode. Williams-Sonoma is transforming their model to reach new customers with a higher penetration of e-commerce and a winning new store model supported with more product, exclusive products. And we have a substantial growth opportunity to take share in the high-end market with Williams-Sonoma Home. Rejuvenation, and Mark and Graham, with both having aggressive and profitable e-commerce growth in underserved categories, will further drive market share gains as they scale. Additionally, we have accelerators to our core business such as B2B, which is positioned to disrupt an underserved industry and further diversify our customer profile. B2B is now on track to reach almost $700 million by this year's end, which is well ahead of our growth goals to grow this business to at least $2 billion. Our global business, which is led by our capital-light franchise model, allows us to move into markets faster and more profitably and is targeted to become at least a $700 million business by 2024. Our cross-brand initiatives, which are supported by our best-in-class marketing effectiveness teams and loyalty programs like our new cross-brand credit card and growing key programs, are driving incremental growth within our brands. And finally, our design services, both online and in stores, we have built an ecosystem of design tools, which allow us to help furnish our customer spaces with 3D renderings created with our talented design staff or in a self-serve model online with virtual help. We already see the investments we have made in this technology paying off as large ticket orders and cross-brand orders continue to grow and as return rates continue to come down. The competitive advantage we are creating with our service model and tools will continue to grow into the future, led by our technology talent and digital-first and service mindset. In summary, the amplified power of all these factors, i.e., the macro, our winning positioning and our growth drivers, provides an overwhelming case for outsized returns into the future. Now as it relates to Q2, I would like to give you a few highlights, which foretell the opportunity I outlined above. Our growth this quarter was driven across all brands and channels. E-commerce grew 12% and retail drove a 98% comp with both channels growing at a two-year comp of over 50%. We delivered these sales more profitably with operating margins expanding another 360 basis points to 16.7% versus last year at 13.1%. In Pottery Barn, we drove an almost 30% comp in the second quarter. All categories are outperforming with notable strength in our indoor rustic modern casual point of view and in our outdoor business. We're also building momentum in our brand partnerships and our new business initiatives, including marketplace, apartment and bath renovation, which are all growing above 30%. Our early fall results are strong with inspiring collections across categories. In Pottery Barn Kids and Teen, we drove another quarter of double-digit comps at 18%, with strength across our proprietary 100% GREENGUARD Gold furniture, record-setting results in our back-to-school business and over 30% growth in our baby business. We saw an exceptional customer response to our expansion of personalized backpacks, new recycled fabrications and reusable eco-friendly food storage and water bottles as well as our new baby registry app. We are also seeing a very strong response to our Halloween launch, which should indicate a strong back half of the year with all the seasonal celebrations and gifting to come. In West Elm, our momentum continues to build with a 51% comp for the second quarter, with strength across all categories and triple-digit growth in our upholstery and outdoor furniture businesses. We've expanded our year-round outdoor assortment and our new product collections and line extensions. New categories such as bath, kitchen and West Elm Kids are also fueling incremental growth for the brand. Our fall season is off to a strong start with continued strength across all categories and an exceptional response to our new opening price points, line extensions and new introductions. In the Williams-Sonoma brand, we drove another strong quarter with a 6.4% comp on top of last year's 29.4% comp, powered by our content-led marketing and a higher percentage of exclusive and Williams-Sonoma branded products, while at the same time substantially reducing promotional activity. We see strength across key categories and follow-ons to a strong start. We're also very excited to share that our new store model is working. In Q2, we opened three new stores with our newly designed inspiring store design. These stores are lighter and brighter with clear destinations, improving the shopping experience. These stores are exceeding our forecast, and they represent a material opportunity for us to strengthen the brand and drive more profitable retail results. As a reminder, we have nearly 50 of our Williams-Sonoma stores up for renewal this year, which provides us the opportunity to materially improve profitability or close. Our Williams-Sonoma Home business continues to scale with our strategic reposition of the brand as a premium online furniture destination. Our high-end sustainable casual aesthetic is resonating with our high-end customers in an underserved market. We saw triple-digit demand comp in outdoor furniture, further validating our belief that with the right assortment and digital presentation, the WS Home brand will be one of our biggest growth opportunities. Cross-brand, our B2B division continues to accelerate with another record-breaking quarter, up nearly 125% to over $180 million in revenue. We continue to expand our portfolio of customers, which range from Fortune 500 companies to small businesses. Year-to-date, 71% of our sales have come from repeat customers and 50% of the B2B customers have shopped from more than one brand in our portfolio. We are a go-to resource for our clients across a range of their purchasing needs from furniture to corporate gifting. In addition to the sales growth, we are continuing to make notable progress on our strategic initiatives to further accelerate the growth of this business. We continue to believe that our differentiators and our ability to tailor to our customers' unique needs will allow us to further disrupt this industry and gain market share. In addition to B2B, we are making progress migrating our customers across our brands. As a reminder, cross-brand customers spend over two times more than those who shop only one brand. And only 30% of our customers shop cross-brand today. We believe our brands offer an assortment that fulfills all rooms of the home with a product offering that is designed in-house, made from sustainable materials and of the highest quality. At the core of the cross-brand loyalty program is the Key, our free loyalty program that incents and rewards customers for shopping across our portfolio. We also recently announced our partnership with Capital One with a new cross-brand credit card, which just launched and should further incentivize this cross-shopping behavior. Now I'd like to discuss the power of our digital-first advantage. E-commerce continues to drive our growth and profitability. Our in-house tech platform and rapid experimentation program continue to differentiate our customer shopping experience by improving speed, visibility to orders, site personalization and selling capabilities. For example, as we mentioned last quarter, more customers are using our 3D design tool, the Design Crew Room Planner, where we typically see two times as many sales as we do with our average customer. In the second quarter, we saw even more usage. Plans created grew 35% over last year. This engagement with our customers extends with great service and presentation in our stores and omni services, which complement our digital platform. This operating model allowed us to generate strong e-commerce growth, maintaining at 65% of our revenue mix, while delivering some of the highest retail growth we have seen on both a one-year and two-year basis. The cohesiveness of our websites, stores and storytelling brings our products to life, improving our customers' ability to visualize and imagine our products in their home. And with the evolving nature of shopping behaviors, this synergy from our digital-first omni models has never felt more relevant. We are also proud to see quantifiable progress in our commitment to values, which is our third key differentiator. This quarter, we released our 2020 Impact Report, detailing progress on our ESG goals. We are proud to have already exceeded many of our goals, including our use of responsibly sourced wood, our commitment to pay fair trade premiums to our workers and our goal to invest in education and empowerment for workers. By the end of 2021, we intend to keep 75% of our waste from stores, distribution centers and offices out of landfill. This year, we have also set new long-term commitments, which includes selling 75% of our products with labels aligning with our social or environmental initiatives, significantly reducing our carbon footprint and sourcing 75% of our product purchases from suppliers with worker well-being programs. We believe our values of prioritizing the health of our planet, the well-being of our people and a shared sense of purpose to foster long-term sustainability, resonate with our customers and will drive positive change in our industry. As we look forward to the second half of the year, we remain confident in our ability to continue taking market share. Our upcoming product pipeline is strong, and we anticipate continued momentum across our entertaining and gifting-related categories as we move into the holiday seasons. Quarter to date, we continue to see strong top line growth and strong margins. As we look beyond this year, we have a clear path to drive top line and bottom line growth. Our operating models and our pricing power, resulting from our key differentiators, our in-house design, our digital-first channel, and our values, will set us apart from our competition and allow us to drive long-term growth and profitability. And this is why we have raised our full year and long-term outlook and have announced another quarterly dividend increase and a new increased share buyback program. Before I pass the call to Julie, I want to thank our team for their incredible commitment and hard work. Their energy, creativity and integrity are the pillars for the outstanding performance we continue to achieve. And with that, I would now like to pass the call over to Julie to discuss our financial results in more detail.

Julie Whalen, Chief Financial Officer and Executive Vice President

Thank you, Laura, and good afternoon, everyone. The continuation of our strong top line growth at record profitability levels was validated again with another quarter of outperformance on top of elevated growth last year. Our second quarter results reflect the power of our operating model and our three key differentiators. We are one of the only companies with an exclusive in-house design capability combined with a channel strategy that is digital-first, but not digital only, and that leads with sustainability and values across our business and in the communities where we work. All of this is becoming increasingly more important to the consumer as evidenced by our strong second quarter results. Turning to our second quarter results in more detail. Net revenues grew over 30% to approximately $1.95 billion with comparable brand revenue growth of 29.8% and 40.3% on a two-year stack. Growth was broad-based starting with West Elm, with a record comp of 51.1%, which was an acceleration from the first quarter and an over 58% comp on a two-year basis. Pottery Barn, our largest brand, delivered almost $750 million of revenue with a 29.6% comp and an almost 38% two-year comp. Pottery Barn Kids and Teen drove another quarter of double-digit comps at 18% and an almost 23% comp on a two-year basis. In the Williams-Sonoma brand, comps were 6.4% on top of the highest prior year compare of a 29.4% comp, resulting in an almost 36% two-year comp. Our emerging brands, Rejuvenation and Mark and Graham combined, accelerated to a 42.3% comp and an almost 58% comp on a two-year basis. And our global business grew almost 50% to approximately $116 million. Moving down the income statement. We saw another quarter of substantial gross margin expansion of 710 basis points to 44%. Our selling margins drove 500 basis points of this expansion, which was an acceleration from the first quarter. It is evident our strategic decision to materially pull back on promotions is proving to be viable even with tougher compares. The fact that the products we sell are proprietary, high-quality and sustainable and are engineered for value enables us the pricing power to provide product at an initial great value in lieu of site-wide promotions. Occupancy costs also leveraged approximately 210 basis points, resulting from higher sales and low occupancy dollar growth. Occupancy costs were approximately $176 million or flat to the first quarter. Year-over-year occupancy costs grew 5.9%, primarily due to several rent abatements that were recorded last year during the second quarter. The occupancy benefits we are seeing from our rent renegotiations and the net closure of 33 stores at the end of 2020 has enabled us to minimize occupancy dollar growth and deliver this leverage. And we expect this benefit to continue based on our plan to close approximately 25% of our fleet over the next five years. SG&A in the second quarter was 27.3% of net revenues compared to 23.9% last year, deleveraging 340 basis points year-over-year. This rate held relatively in line with the first quarter and reflects the lowest second quarter SG&A rate we have had outside of last year, where we substantially reduced our spend across the business in response to COVID and particularly in advertising. As a result, the year-over-year deleverage is primarily in advertising, where we have made incremental investments to drive our profitable top line growth and market share gains. Given the strength in our business, we have made a strategic decision to incrementally invest in high-ROI advertising to drive new customer acquisition and to drive our growth in the back half and beyond. We see this as a competitive advantage as we are able to make these investments and still drive record profitability levels at a time where this may not be possible for others. And it is paying off with record new customer counts, including e-commerce customers growing almost 30% on a two-year basis, the highest growth we have seen. We are pleased to see that despite these incremental costs, our overall cost discipline throughout SG&A allowed us to hold our rates at a pre-COVID historically low level helping to deliver another quarter of record profitability. Operating income grew to a record $326 million, resulting in an operating margin of 16.7%, expanding 360 basis points over last year. This resulted in diluted earnings per share of $3.24, up 80% from last year's record second quarter earnings per share of $1.80. On the balance sheet, liquidity levels remain strong. With $476 million year-to-date in operating cash flow or more than double last year, we ended the quarter with $655 million in cash after funding the operations of the business, paying off our term loan of $300 million earlier this year and maximizing shareholder returns. During the second quarter, we invested another $36 million in capital expenditures and returned over $180 million to shareholders in the form of $45 million in dividends and $135 million in share repurchases. Year-to-date, we have repurchased over $450 million of our shares or approximately three times our full year typical share buyback level which reflects our confidence in the sustainability of our strong growth and profitability and our commitment to maximizing returns for our shareholders. Moving down the balance sheet. Merchandise inventories, including inventory in transit, were $1.171 billion for an increase of 12% over last year. However, our inventory on hand and available for sale is still down year-over-year by 2.5%. Our inventory levels have sequentially improved. However, they are not at the levels we had expected at this time. We continue to be impacted by our stronger-than-expected demand across all brands as well as various supply chain disruptions, including industry-wide container shortages coming out of Asia, delays due to COVID surges in Vietnam and Indonesia, and a recent port closure in China. And it's hard to predict with certainty when these supply chain challenges will be fully resolved. As a result, at this point, we expect back order levels to remain elevated with moderate improvements in our inventory levels through the balance of the year. Now let me turn to our expectations for the rest of the year and longer term. As Laura said, we are raising our 2021 outlook from low double digit to mid-teen revenue growth to high teens to low 20s revenue growth, with operating margins now projected to be in the range of 16% to 17%. We are confident in our ability to deliver this higher outlook given the strength of our business year-to-date, the accelerating momentum in our growth initiatives and the macro trends that will fuel our business for years to come. As a result of our strong expectations for 2021 and beyond, we see an accelerated path to growth and profitability longer term. We now believe we will hit our target of $10 billion in revenues by 2024 or one year earlier and with higher profitability holding at least at our further raised fiscal year 2021 operating margin. I would now like to tell you why we are so confident in maintaining these operating margin levels. We believe we are best positioned to continue to deliver record level operating margins despite increased raw materials, freight costs and distribution center labor for the following reasons: ongoing overall sales leverage, including the additional accretion from our growth initiatives that have a higher operating margin; an accelerating shift online where the operating margin profile is higher; continued occupancy leverage from the renegotiation of our lease agreements and further store closures; the pricing power and our merchandise margins due to our differentiated product positioning with design-led, value-engineered and sustainable products; various supply chain efficiencies, including automation and in-stock inventory levels; and from a continued emphasis on overall strong financial discipline. As far as our capital allocation in 2021, we are maintaining our balanced approach of first investing in the business and then returning excess cash to shareholders. We are on track to invest towards the higher end of our range at approximately $250 million in the business this year, with spend prioritized on technology and supply chain initiatives that primarily support our e-commerce growth. Given the strength of our business and liquidity, we are taking this opportunity to aggressively pursue incremental investments in the business to support our long-term elevated growth. We also plan to return excess cash to our shareholders in the form of further increased quarterly dividend payouts and an increased level of share repurchases. Year-to-date, we have paid $91 million in dividends, a 15% increase and over $450 million in share repurchases compared to no repurchases last year. And today, given the strength in our business and our liquidity, we announced an additional quarterly dividend increase of 20% and a new share repurchase authorization to $1.025 billion, a $700 million increase to what is remaining on our existing share repurchase authorization. We are committed to maximizing shareholder returns and given our long-term growth and profitability outlook, we continue to believe that our stock is undervalued. As a result, we believe investing even more in our own stock will drive long-term financial returns for our shareholders. In summary, our results in the second quarter further validate our ability to deliver sustainable strong growth and profitability. We believe we are uniquely positioned with the favorable long-term macro trends, including a strong housing market driving ongoing investment in the home, the disruption of brick-and-mortar and an accelerating shift to e-commerce, the increasing importance of sustainability and being a values-driven company, combined with our key differentiators, our accelerating growth initiatives, our strong operating cash flow and liquidity and a proven track record of strong financial discipline. All of this will enable us to drive long-term growth and profitability and strong financial returns for our shareholders for years to come. I would now like to open the call for questions. Thank you.

Operator, Operator

The operator provided instructions. And we'll take our first question from Adrienne Yih-Tennant from Barclays.

Adrienne Yih-Tennant, Analyst, Barclays

Well, another stunning quarter. So congratulations to the entire team. Julie: Thank you. You're welcome. So I guess, Julie, I'll start with you about this second quarter of 43% gross margin, last quarter 44% gross margin externally reported this quarter. If you can, can you help us—how does that kind of roll back up into merchandise margins relative to history? And how much more room is there to the upside on pure merchandise margins? And then secondarily, wanted to see AUC, right? So average unit cost. Any color on what that's up maybe this quarter? And did that get worse in the third and fourth quarters as we've heard from many people?

Julie Whalen, Chief Financial Officer and Executive Vice President

Thanks, Adrienne. As far as merchandise margin, first of all, I want to remind everybody that we saw merchandise margin expansion back even in 2018. So this is something we've been working on—obviously, not to this degree. We've had a fundamental shift in the company to substantially pull back on site-wide promotions. And the reason we can do that is because of our pricing power because of what we sell: it's in-house design, it's proprietary and it's engineered for value. And so we can then come out with an initial price that is relevant to the customer and a good value and allow us to not do as many site-wide promotions. That's a fundamental shift that we have now been pursuing pretty aggressively for a while now. So we think this can continue. Will it continue at the same degree? Probably not. I would not model that to the same degree. We're very pleased to see continuing strong selling margin expansion from, I think, it was $400 million last quarter to $500 million this quarter. Obviously, we also are going to have some raw material price increases and freight cost increases, so that's going to put pressure on that line. But I think the team has done an incredible job of managing through that and mitigating those costs. And because we're vertically integrated, we're better positioned than most to be able to do that. So we do think this is sustainable, but maybe not to the same level.

Operator, Operator

We'll now take our next question from Cristina Fernández from the Telsey Advisory Group.

Cristina Fernández, Analyst, Telsey Advisory Group

Congratulations also on a strong quarter. Can you think about how demand progressed through the quarter and any additional color that you can give us about the third quarter so far?

Julie Whalen, Chief Financial Officer and Executive Vice President

The demand was incredibly strong, but it's pretty much all quarter long. With these kinds of results we've had phenomenal top-line performance. And as we said in our prepared remarks, we have not seen that wane. So we are very optimistic, clearly and confident about the future of our business. Even on top of these elevated compares, we're seeing strong growth with 40% comps; both demand and net in Q1 and Q2 are holding and we have strong growth as we enter the third quarter.

Cristina Fernández, Analyst, Telsey Advisory Group

And if I could ask a second question, thinking about the 16% to 17% operating margin longer term, what does that imply for the mix of the business between e-commerce and retail? Does it need to stay at the current level?

Julie Whalen, Chief Financial Officer and Executive Vice President

We have assumed that e-commerce will continue to grow. We're pleased we're able to hold 65% despite the retail recovery this year, which makes that a little volatile, but we're still holding at 65%. We've said before we plan to at least grow it to 70%, and so that's assumed within our numbers. But we have many opportunities to drive operating margin expansion and to be able to at least hold where we plan to come out in 2021. First, we'll have ongoing sales leverage with additional accretion from our growth initiatives. It's important to understand that in B2B, in marketplace and in franchise, for example, they may have some pressure on the gross margin line, but they are incredibly accretive to the total company operating margin. So as those have outsized growth potential, they will help with operating margin expansion going forward. Then you have an accelerating shift to online, which has always been more profitable. As you may recall, we used to report that online was above a 20% operating margin, and it's even higher today with the top-line sales flow-through. As that shifts more and more online, we expect that to drive operating margin expansion. Continued occupancy leverage will drive that as well, given that we're optimizing our retail fleet, renegotiating leases, and closing less profitable stores. And then it's back to our pricing power. The fact that we design our own product and engineer it for value gives us a lot of leverage on the operating margin line, plus supply chain efficiencies and overall strong financial discipline. All of that gives us the confidence to believe that we can hold the 16% to 17% for this year and then go forward as the top line accelerates.

Operator, Operator

We'll take our next question from Curtis Nagle with Bank of America.

Curtis Nagle, Analyst, Bank of America

So two quick ones. One, thinking about registry rates, both for baby and weddings—those businesses probably weren't in great shape last year. How much has wedding in particular started to help? Is it helping given we finally are starting to see people get married again and actually celebrate? And second, could you give any clarity in terms of July? I think you'd mentioned that some incremental investments were being made in marketing or advertising dollars. How should we think about that relative to Q1 or year-over-year in Q2?

Laura Alber, President and Chief Executive Officer

With the question, I'm so glad you brought up wedding registry. I probably should have said it in my prepared remarks—it is phenomenal. As you can imagine, there weren't many weddings last year; now there are weddings. We're up 98% in wedding registry sales. Baby has been up the whole time. We have a new baby app, which is very successful. We're learning across all of our brands that the more time we spend on mobile, the better because it drives conversion; it's really the choice for our customers. So you'll see us do even more with mobile to help the selling proposition. In those two important life-stage buying opportunities, we're seeing tremendous growth, and we're continuing to support it with technology. Likewise, trends such as hybrid work and people learning how to cook continue to benefit Williams-Sonoma categories like coffee and food-at-home, which remain quite strong even though we had a big surge last year. Back-to-school—those backpacks are a big part of that tradition and a business we've seen really strong growth in. As we craft into the holiday season, Halloween is tremendous; we're seeing a very strong fast curve, and I imagine we'll see the same with Thanksgiving and Christmas. So there's a lot of natural upside in life-stage trends that we will meet with appropriate support and product.

Julie Whalen, Chief Financial Officer and Executive Vice President

As far as advertising, we have said that we're incrementally investing in advertising year-over-year. Last year that was a big lever for us to pull back—some of the lowest spend in SG&A—until we could read the business and make sure we were okay going forward. You're going to see year-over-year pressure on that line in SG&A because of it. But the key takeaway is that it's a competitive advantage right now. Most companies don't have the same kind of margin expansion that we have, where we can take that and reinvest back into advertising when others may not be able to do so. They may have to pull back because they're trying to pay for freight or raw material increases, and we don't have to do that right now. So we're taking that opportunity and investing to drive new customer acquisition and to fuel future growth. We think that's a real competitive advantage.

Operator, Operator

We'll hear next from Seth Basham with Wedbush Securities.

Seth Basham, Analyst, Wedbush Securities

Congrats on the strong results. One bigger picture question and one specific question. Bigger picture: I'm intrigued by your thoughts on the transformational investment in the home and the drivers behind that. When you think about the trend towards hybrid work environment, is that the primary thing you're considering if you think about higher investment levels in home furnishings going forward? Or are there bigger things that you're thinking about?

Laura Alber, President and Chief Executive Officer

I think the time we've all spent more at home has made us realize the importance of home. It has always been people's primary investment, but the amount of time and the ability to improve that space is so real and valuable for happiness and productivity. It's not just hybrid work—it's everything: learning how to cook, families having kids move back, bringing in parents to live with them, people looking for second homes. Supply of houses is still too low, and many are seeking second homes or getaway properties. These are the topics people talk about now—kitchen remodels, second homes—and these are trends that I don't think are transient. They put us in a very good position to take advantage of the trend and gain share because no one has much share in this market and nobody is doing what we're doing.

Seth Basham, Analyst, Wedbush Securities

Got it. That's helpful perspective. Secondly, thinking about the outlook for the balance of the year, your guidance implies a deceleration in comparable store sales on a two-year basis from the first half despite a very strong start and expected strong holiday. Is that conservatism? Or is there something else we should be thinking about?

Julie Whalen, Chief Financial Officer and Executive Vice President

I wouldn't read anything more into that. We've had very strong success year-to-date and strong momentum going into the third quarter. On the high end, we're guiding to low 20s, which is still very high on a two-year basis. We are taking into consideration, like everybody else, the impacts from supply chain challenges. With our supply chain team, we are well-positioned to maneuver through that better than most, but we're being thoughtful of the uncertainty, and that's why we have the range that we have. With that said, there's no fundamental difference in our outlook for our business.

Operator, Operator

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

Charles (Chuck) Grom, Analyst, Gordon Haskett

Congrats on an awesome quarter. Laura, you're not seeing any signs of a slowdown, but I'm curious if you're seeing an acceleration with back-to-school here? And at the same time, you've sized up B2B as a $700 million long-term opportunity—can you remind us what you think Williams-Sonoma Home could be long term?

Laura Alber, President and Chief Executive Officer

The obvious business that gets the most bang from back-to-school is our kids and teen businesses because we really address that. If you go to our home pages right now, you'll see that. So those have the most upside relative to back-to-school. On B2B, let me ensure I correct any confusion: earlier I misspoke; Julie wrote me a note and reminded me. The correct number is that we were up nearly 125% to over $180 million in revenue this quarter for B2B. B2B is growing faster than we expected and remains a very large opportunity. We had originally thought about $1 billion over five years, but this year we're on track to be at $700 million. The reason I hesitate to put a strict long-term cap on B2B is that it feels much bigger as we scale—it’s a monster opportunity. As for Williams-Sonoma Home, we haven't put a specific long-term number out there yet. We've changed our strategy to be more online-focused, brought in a new leader, and so far the results have been very positive. It's too early to put a specific number around it, but we see it as a big growth driver in a large underserved market.

Charles (Chuck) Grom, Analyst, Gordon Haskett

Got it. And Julie, to get to the 16% to 17% EBIT margin guide for 2021 on, say, 20% revenue growth implies less flow-through in the second half. It sounds like incremental ad spend is part of it. Can you help us think about the puts and takes and any variability between Q3 and Q4?

Julie Whalen, Chief Financial Officer and Executive Vice President

Certainly, ad spend will come into play in the SG&A line, but we still believe we'll have gross margin expansion from merchandise margin expansion and occupancy leverage. The 16% to 17% range is almost double where we were in 2019, so we're being thoughtful. We're also keeping in mind increases in raw material and freight costs that everyone is maneuvering through. Could margin be higher? Sure. But right now we think this is the right target given the sizable back half we have to go, and we'll update you as we move through the year.

Operator, Operator

We'll take our next question from Simeon Gutman with Morgan Stanley.

Simeon Gutman, Analyst, Morgan Stanley

Nice quarter. Two quick questions. I missed some prepared remarks—can you talk about freight, how you're navigating the environment, how your inventory position looks and even into next year? Second, on the advertising spend: can you talk about the timeframe for returns? Are you spending because you're seeing immediate returns or is this medium-to-longer-term branding?

Julie Whalen, Chief Financial Officer and Executive Vice President

From an inventory perspective, you'll see sequential improvement. Merchandise inventories including in-transit were up 12% year-over-year to $1.171 billion, but our inventory on hand available for sale is still down 2.5% year-over-year. We're not where we expected to be because our demand has remained very high and because of supply chain challenges—the industry-wide container shortages out of Asia, COVID surges in Vietnam and Indonesia, and a recent port closure in China. We are better positioned than most given our scale, long-term relationships, and a strong supply chain team, but we are not immune; we expect back order levels to remain elevated and for inventories to improve moderately through the balance of the year. Regarding advertising returns, we focus mostly on return on investment and target customers who are in-market. We're focused on customers in market for furniture, people moving, weddings, having a baby—high-value customers. In the short term we focus on in-market demand and near-term ROI; in the long term we think about lifetime value and high-value customer acquisition. So it's a mix of short-term ROI-driven spend and longer-term customer investment.

Laura Alber, President and Chief Executive Officer

I want to add a couple of competitive points. For example, in our upholstery business where we make a large percentage of our own upholstery, we were previously quoting about 100 days; we are now down to 80 days and are looking to drop that further as our upholster teams increase productivity. These are competitive advantages—improving lead times, better in-stock positions—and we're proud of the progress.

Felix Carbullido, Chief Marketing Officer

Simeon, on advertising, we focus on return on investment. In the short term we focus on in-market customers—those who are moving, getting married, having a baby—very high-value customers. Our acquisition strategies around those segments are strong across all our banners. From a long-term perspective, when we see an uptick in furniture demand, that signals higher lifetime value, so our investment supports both near-term acquisition and long-term value. We optimize for ROI and target high-value segments.

Operator, Operator

We'll take our next question from Zach Fadem with Wells Fargo. David Lantz is on for Zach.

David Lantz, Analyst, Wells Fargo (substituting)

To start within merchandise margins, can you unpack that a little in terms of price increases, mix and the absence of promotions and clearance? And follow-up: how did traffic and ticket trend in the quarter? What was the impact of inflation?

Laura Alber, President and Chief Executive Officer

On promotions, our strategy is to offer the customer great value in our products but not to run a promotional business. This quarter reflects that strategy. Our broader competitive set appears to be becoming more promotional based on our research, yet we were able to outperform top line and bottom line without running promotions. We're aggressive about inventory turns and slow movers—our clearance inventory is down 34% year-over-year due to aggressive clearing of slow movers, which is important with large cube furniture. As for traffic, in our retail stores traffic has improved but is still down relative to 2019, and we're running very strong comps despite that. Our stores are selling very well; customers are buying more from us, buying more furniture and more pieces as they look to furnish whole homes. Online, customers are shopping across brands and we are actively encouraging cross-brand purchases. We launched the new credit card this week to further drive cross-brand behavior.

Felix Carbullido, Chief Marketing Officer

This week we launched our new cross-brand credit card in partnership with Capital One as part of our expanding loyalty program. Cardholders get 5% back in rewards when shopping with any of our brands online or in-store, and 10% back in the first 30 days. When you shop at grocery stores and restaurants you receive 4% back, and when you shop anywhere else you get 1% back in rewards. All cardholders, regardless of which brand they sign up for, get free shipping at Williams-Sonoma. The card is designed to drive increased retention in each brand and to incent and reward shopping across our brands. Cross-brand customers have higher average spend, and we believe we can increase share of wallet by introducing sister brands across our portfolio to our customers.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Laura Alber, President and Chief Executive Officer

I just want to say thank you to you all for joining us and for your support, and I look forward to hopefully seeing you in person, and if not, talking to you again at the next quarter. Happy shopping.

Operator, Operator

Thank you. That concludes today's conference. We do thank you all for your participation, and you may now disconnect.